Streaming service company Netflix (NFLX -8.44%) has had a rough year on Wall Street. Year to date, shares have cratered more than 60%. But the stock has gained steam over the last three months, with shares rising more than 22% during that period. Investors may be betting that the streaming platform specialist returned to sequential subscriber growth in the third quarter.
We'll find out exactly how Netflix fared in Q3 when the company reports earnings next week; it's scheduled to report its third-quarter results on Oct. 18.
Whether or not the company returned to subscriber growth in Q3, one key catalyst -- the launch of an ad-supported tier -- may do the trick for the company next year.
What management said
After reporting two consecutive quarters of declining subscribers, Netflix management said in its second-quarter update that it expected to return to sequential growth in Q3. Specifically, management guided for 221.7 million subscribers, up from 220.7 million at the end of Q2.
To help membership growth, management said it has been investing in product, content, and marketing. Of course, this isn't anything new. Management noted in its second-quarter letter to shareholders that these are the same areas the streaming-TV company has invested in to drive membership growth for the last 25 years. But with two quarters of sequential declines in membership behind it, investors will be watching closely for these investments to start paying off.
Netflix cites a maturing market for connected TV adoption, account sharing, competition, and a difficult macroeconomic backdrop as some of the reasons for the company's stalled subscriber growth recently. A return to growth in the face of these challenges would be encouraging news for investors. And based on the stock's gain over the last three months, investors are likely expecting the company to achieve its third-quarter outlook for subscriber growth.
Advertising: An important catalyst
There's good reason to believe sequential subscriber growth is on deck at some point in the upcoming few quarters, even if the company misses its forecast in Q3. One way Netflix aims to address concerns about its slowing subscriber growth is with the launch of an ad-supported tier. Launching ads on its platform could not only expand the company's addressable market of subscribers but also attract some of the big marketing budgets in traditional TV, as well as incremental ad spend from marketers already investing in the connected TV (CTV) channel.
Investors, however, will have to wait until next year to see what kind of boost advertising can give both Netflix's subscriber and revenue growth. For now, Wall Street is depending on the three areas management has historically invested in: product, content, and marketing. Of course, the volatile and unpredictable macroeconomic backdrop may also play a role in hurting or helping quarterly results.
Whatever Netflix reports, investors should zoom out beyond the single quarter and look to comments from management about the future, too. Is the advertising tier rollout still expected to launch early next year? Has the company worked its way through the pull-forward of subscribers that occurred during the pandemic, when many people were quarantined at home? Answers to these questions (and more) will help investors piece together a better picture of whether the stock is a compelling long-term investment or not.
Investors can tune into Netflix's third-quarter earnings report after market close on Tuesday, Oct. 18.
