Netflix's (NFLX -0.51%) earnings report is always closely watched on Wall Street. The subscription streaming video leader routinely wowed investors even before the pandemic put a new global premium on at-home entertainment.
But its upcoming fourth-quarter announcement, set for Jan. 20, will be followed for different reasons. Namely, investors are looking for evidence that Netflix can recover from a growth hangover and speed its sales growth rate back up above 20%. There's also concern about just how quickly the company can boost profit margins and cash flow now that the business is maturing.
Let's take a closer look at what could be reported on Thursday.
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Netflix could see strong subscriber gains
You wouldn't know it by following the sinking stock price in recent weeks, but Netflix is likely to report strong growth for the Q4 period that runs through late December. Management in October forecast adding 8.5 million new subscribers compared to 4.4 million in the third quarter and 8.5 million a year ago. That blockbuster result would be supported by a flood of new content releases, with hits like Don't Look Up and The Witcher likely to receive shout-outs from co-CEO Reed Hastings and his team.
Hitting that growth figure would keep Netflix below the 20% annual sales growth rate that management has highlighted as an important milestone. Still, we should get a better idea about the company's prospects for accelerating revenue gains again after sales trends soared by 24% in 2020 but slowed to about 19% in 2021.
Netflix investors are looking for margin updates
Investors looking for an inflation-proof stock have been attracted to Netflix for good reasons. Operating margin has been rising at almost exactly the 3 percentage-point annual target that management has outlined. It's on pace to cross 20% of sales this year compared to just 4% back in 2016.
NFLX Operating Margin (TTM) data by YCharts
Whether or not that metric keeps climbing toward 30% of sales depends on Netflix's growth rate, the competition, and its ability to boost the value -- and price -- of the service over time. Management's favorite way to describe the potential is the fact that Netflix still only accounts for less than 10% of total TV watching time in the U.S., its most mature market. Investors are hoping the company can boost that figure by broadening its content catalog to better rival cable networks.
Will Netflix's cash flow remain strong?
If its latest batch of movie and show releases worked, then Netflix will issue a short-term growth outlook for the first quarter that looks good compared to the prior-year's spike of 4 million new subscribers. Investors might get more positive news in the form of cash flow, which is now strong enough to handle all of Netflix's funding needs, plus aggressive stock buybacks, going forward.
Those financial wins all point to the potential for additional market-thumping returns for shareholders. But Wall Street is asking for more from growth stocks, even well-established market leaders like Netflix, right now.
The report on Thursday might give investors that certainty they've been chasing. It's more likely that the announcement answers some questions around earnings and profitability for 2022, while raising more about Netflix's global membership potential. In any case, it will be worth watching what the digital entertainment titan has to say about the industry as pandemic demand trends settle to a new normal.
