Netflix Earnings: Why Subscriber Guidance Is Key

This may be the most telling metric Netflix management will share next week.

This article originally appears on The Motley Fool, written by Daniel Sparks.

One major theme investors have been watching in 2021 is how the companies that benefited from consumers sheltering at home last year will perform this year, as people return to work and life begins to resume some normalcy. For Netflix (NASDAQ:NFLX), specifically, the big question is how the company’s subscriber numbers will trend. After a surge in sign-ups in 2020, some investors may be worried that growth will slow significantly.

Investors will get meaningful insight into Netflix’s growth trends next week, when the streaming-TV company reports its first-quarter results. Netflix will also share its Q1 subscriber metrics and provide guidance for Q2 subscriber growth, giving investors a good idea of how subscriptions are trending in April.

What to expect

For Netflix’s first quarter, management guided for 6 million new subscribers — a far cry from the 16 million the company added in the year-ago period. This tough year-ago comparison, of course, is primarily due to the subscribers who joined as businesses around the world closed their doors and people began sheltering at home. With more time at home, they turned to streaming services like Netflix’s for entertainment.

While it will certainly be interesting to see whether Netflix achieved its forecast for 6 million new members in Q1, an even more telling metric may be the company’s guidance for Q2. Global economies have further reopened since the first quarter ended, putting the resilience of Netflix’s member base to the test. Could churn from some existing members weigh on subscriber growth in Q2 as the world gradually returns to normalcy?

Stay focused on the long term

It’s very difficult to predict what Netflix’s Q2 outlook will be. Management admitted in its fourth-quarter earnings call earlier this year that forecasting during these uncertain times is extremely difficult.

“[T]his is one of the more uniquely challenging times, not just for life but … in terms of trying to just forecast the growth trajectory of the business,” said Netflix CFO Spence Neumann during the call. “There’s just so much uncertainty right now.” However, Neumann also noted that the pandemic had accelerated the shift from traditional TV to streaming TV. “So the long-term growth trajectory is at least as strong as ever,” he explained. “There’s just more short-term noise and uncertainty right now but still very strong underlying growth metrics.”

Whatever the Q1 report brings — and whatever management guides for in Q2 — Netflix investors should keep in mind that this is just one small part of the company’s growth story. Notably, Netflix added an incredible 37 million new members last year — over 30% more than it had added in 2019. This is important context to consider when digesting the company’s update next week.

Netflix reports its first-quarter results after market close on Tuesday, April 20.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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