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?

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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.

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.

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