Here’s what you need to know before Netflix’s Q4 earnings

The stock has traded down to start the new year. Will the next financial release change things?

| More on:
netflix shares represented by an array of different netflix tv show ads

Image source: Netflix

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) reports 2021 fourth-quarter financial results on Thursday, Jan. 20, after the market close, and there's a lot that investors will need to pay attention to. After a remarkable 2020 when people spent more time than ever at home and increasingly turned to streaming video for entertainment, 2021 hasn't been that exciting thanks to a post-pandemic breather. And the stock performance shows this, rising just 11% during the year, trailing the S&P 500's 27% gain. 

Investors will get some key information about the company that will reveal important metrics and should help determine whether the stock is worth owning or not. Additionally, we'll have a better idea of what 2022 has in store for this leading streaming business. 

Here are three things to look out for when Netflix reports earnings. 

Subscriber additions 

Management expects Netflix to add 8.5 million new subscribers in Q4. This would be the highest total of any quarter in 2021, and it would be on par with the fourth quarter of 2020. If the company can hit this target, it would be the second straight quarter of accelerating membership growth, and it would bring Netflix's customer count to 222 million. The fourth-quarter projection "is essentially in line with the past few years, even pre-COVID, where we're kind of in that 8 million to 8.8 million-ish range," CFO Spence Neumann mentioned on the Q3 earnings call. 

The pandemic undoubtedly pulled forward the demand for Netflix services. And 2021's muted customer growth demonstrated this fact. With productions largely up and running across the globe, coupled with a more normalized content slate, Netflix should return to its pre-pandemic growth rate of 25 million to 30 million subscriber additions per year. Look for any commentary about this during the upcoming earnings call. 

In the first nine months of 2021, essentially all new members came from outside the mature markets of U.S. and Canada. I fully expect this trend to continue as Netflix aggressively penetrates overseas markets. But streaming plans in developing markets, like India and countries in Africa, cost much less than they do domestically. This will certainly pressure the company's average revenue per user, which was $11.68 in Q3. 

Margin profile 

Thanks to economies of scale, Netflix has been improving its operating margin over recent years. While management forecasts the Q4 figure to come in at 6.5%, they expect a 20% operating margin for the entirety of 2021. This is in line with the three-percentage-point annual increase that the leadership team looks for over the long term. 

The margin will be significantly lower in the fourth quarter than in prior quarters because of the huge content slate, including returning series such as Money Heist and new movies like Red Notice and Don't Look Up, which will result in greater expenses for Netflix during the given period. But as the content release schedule levels out in 2022, the operating margin should show less quarter-to-quarter variability. 

Because Netflix operates primarily with a fixed-cost structure (since serving additional subscribers really doesn't cost the business anything), as it continues gaining more customers, profitability is poised to soar. As a result, look for the operating margin to show expansion as sales expand in 2022. 

Financial position 

Followers of Netflix know that the biggest bear case against the company is that it has been burning cash year in and year out. But things are about to change. The business expects to break even in terms of free cash flow for 2021. And starting in 2022, Netflix should start producing positive cash flows. This is what proponents of the stock have been waiting for, and it could mark the start of a new and (financially) improved Netflix. 

The company no longer needs to raise external financing to run daily operations, demonstrating the leadership team's confidence in Netflix's financial position. During Q2 and Q3 of 2021, the business repurchased shares worth a total of $600 million. Keep an eye on continued progress towards the goal of being a sustainable cash-generating business, as well as any updates on share buybacks. Also, with Netflix showing a penchant for acquisitions in the gaming space, it'll be interesting to see how cash is deployed to further penetrate that industry. 

By now, shareholders should be well-equipped to dissect Netflix's fresh financial results on Jan. 20. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Should you invest $1,000 in Netflix right now?

Before you consider Netflix, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Netflix wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Neil Patel owns Netflix. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and recommends Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

An arrow representing a bounce up.
International Stock News

Why Ethereum and Dogecoin are recovering nicely today

Is a crypto market recovery underway, or is this a head fake?

Read more »

man looks up at apple on his head
International Stock News

Why Apple stock slipped on Thursday

Don't worry. This looks less like a disaster and more like a buying opportunity.

Read more »

Family of four enjoying the pool at airbnb holiday
International Stock News

Nasdaq bear market: Should you buy the dip on these 2 growth stocks?

These businesses are backed by compelling investment theses.

Read more »

Rede arrow on a stock market chart going down.
International Stock News

Why Bitcoin, Ethereum, and Dogecoin are falling today

Investors are trying to predict how the economy will fare in the coming months, and how fast the Federal Reserve…

Read more »

amazon prime truck on a road
International Stock News

2 reasons Amazon stock is slumping today

Inflation fears and recent quarterly results from its peers are driving the stock lower.

Read more »

Red arrow going down, symbolising a falling share price.
International Stock News

Why Apple Stock is falling today

The market as a whole is down, but the tech sector is doing worse.

Read more »

A stockmarket chart on a red background with an arrow going down, indicating falling share price
International Stock News

Why Tesla stock fell again today

A French bank just said Tesla isn't the best EV stock. Should you worry about that?

Read more »

a group of five people lie on the floor with their heads touching, each wearing hi tech goggles over their eyes as if in a metaverse workplace collaboration.
International Stock News

2 top metaverse stocks I think are ready for a bull run

The metaverse could give these fast-growing tech giants a big shot in the arm.

Read more »