Netflix (NFLX -0.66%) is due to report third-quarter earnings next Tuesday.
The streaming leader's quarterly report is closely watched, as the stock tends to move by several percentage points on the news. Most investors will be watching key metrics like subscriber additions, revenue growth, and free cash flow -- but as a long-term investor, there are a few things on my watch list besides the quarterly numbers.
1. Looking for more merchandising opportunities
Netflix's streaming business is maturing. It set a record last year with 36 million subscriber additions -- but it's unlikely to eclipse that figure in the future, as the company got significant tailwinds from the pandemic in the first half of 2020. Since Netflix now has more than 200 million subscribers and it's already signed up more than half of the broadband households in North America, it will be almost impossible for the company to grow its subscriber base by more than 20% from this point on.
The good news is that the company's profitability is ramping up as it matures. But Netflix should also be looking for other ways to make money besides selling subscriptions for its streaming service.
One of those ways is monetizing its intellectual property, and Netflix took a significant step in this direction by launching Netflix Hub on Walmart.com, selling products like plush toys, bed sheets, and t-shirts from popular shows like "Stranger Things," "CocoMelon," and "The Witcher." Licensing products this way has become a high-margin revenue stream for Disney, and Netflix has enough intellectual property at this point that it should be able to do something similar. Look for commentary from management on the Walmart partnership and what it sees in the future for licensing and merchandising.
2. A roadmap in video game expansion
Netflix said in its second-quarter earnings report that it was in the "early stages of further expanding into games," and that it sees video games as another content category. It's focused on mobile games in particular.
Management said it wasn't planning to make a separate revenue stream out of video games, seeing it as a way to add value for members, but video games represent the company's most significant expansion since it started making original content nearly a decade ago.
The company's strategy in gaming still isn't fully clear, but it got attention for its recent acquisition of Night School Studio, the maker of OxenFree. In that announcement, Netflix said, "We'll continue working with developers around the world and hiring the best talent in the industry to deliver a great collection of exclusive games."
Investors should look for details about management's plans to build out a video game catalog and if it expects to make more acquisitions or add gaming content more selectively.
3. Are more acquisitions in its future?
The week before Netflix said it was buying Night School, the company acquired the Roald Dahl Story Company, the owner of the popular children's book author's work. Together, those deals represent just the third and fourth acquisitions in the company's history -- the first two were also children's entertainment content.
Netflix finished the second quarter with $7.8 billion in cash and said it was done taking on debt as it can now self-fund its growth. That cash seems to be burning a hole in the company's pocket, as management surprised some investors by saying that it would strategically buy back shares even though the stock still trades at a price-to-earnings ratio above 60. That means that it's not a great time to do share repurchases.
A better approach for Netflix may be to use some of that cash on the balance sheet and its valuable stock to make more acquisitions. It would be able to grow its video game presence much faster, and fill any holes in its entertainment content. Making acquisitions also makes sense in an industry that has seen rampant consolidation in recent years as media companies have merged to beef up their content libraries to compete in the streaming era.
Netflix is expecting just 3.5 million new subscribers in the third quarter, a relatively weak forecast, but the bigger question for the company is how it plans to grow over the next decade. Answering some of the questions above will make its strategic direction clearer for investors at a pivotal moment.