The big banks kicked off earnings season recently, and the FAANG stocks' reports are on deck over the next few weeks. As always among this group of popular stocks, Netflix (NFLX 2.72%) will go first. The streaming video giant is set to report its second-quarter results after market close on Tuesday.
That quarterly update will be watched closely by investors. Netflix is expected to report a sequential decline in paid subscribers, but management is also expected to provide more details about the upcoming launch of its ad-supported tier. Further, investors will be looking for signs that it can reaccelerate its revenue growth and get back to growing its subscriber count.
After total paid subscribers declined slightly in Q1 and management forecast that it would end Q2 with 2 million fewer subscribers than it had three months prior, investors had good reason to be concerned. Management also recently pointed out a few key headwinds for the business, including account sharing across households, intensifying competition, and high household penetration.
But management is trying to address those problems.
"Our plan is to reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix," management said in the first-quarter shareholder letter. Specifically, the company aims to improve its programming, recommendation engine, and monetization.
Its new ad-supported streaming tier, in particular, could be a driver of both account monetization and subscriber growth. Not only could it bring in more revenue per account in some developed countries than its subscription-supported tier does, it could also help bring in more price-conscious consumers in developing countries.
For Q2, investors and analysts are largely expecting to hear that total subscribers fell by about 2 million -- in line with management's guidance. But one key aspect of the report that investors will be focused on will be management's outlook for Q3.
It would be encouraging to see management guide for a return to subscriber growth in Q3. After all, one reason that Netflix has been facing a growth headwind recently was that a substantial amount of its subscriber growth was pulled forward earlier during the pandemic, when the amount of time people were spending in front of the TV surged. It stands to reason that as the point of peak lockdowns and social distancing falls farther into the past, the intensity of that headwind will diminish. Further, Netflix recently released season four of Stranger Things, one of its most popular shows and a key driver for new subscribers. This could be providing a meaningful boost to the company's subscriber growth.
But investors shouldn't get their hopes up about the company's Q3 guidance. It may take a few more quarters for management's initiatives to gain traction and help Netflix return to sequential subscriber growth and higher top-line growth rates.
Investors will get more insight into the quarter Tuesday, when the company will release its earnings report and host a conference call beginning at 4 p.m. ET.