Key Takeaways

  • EPS was $1.59 vs. the $1.80 analysts had expected
  • Revenue and paid streaming memberships beat expectations
  • Netflix's Q3 2020 guidance for subscriber growth was much lower than analysts expected.

What Happened

Netflix reported earnings that fell significantly short of what analysts had expected for this quarter. While it did manage to exceed expectations on subscriber growth and revenue, its guidance for subscriber growth in Q3 fell below what analysts had hoped for. It said that its production schedule had been significantly affected by COVID-19, especially in the U.S., and that it will have to push back some releases to 2021. Netflix's stock is down more than 9% in aftermarket trading.

Netflix also mentioned that chief content officer, Ted Sarandos, had been elected to the company's board and had been named co-chief executive. He will continue as chief content officer.

(Below is Investopedia's original earnings preview, published 7/9/2020)

What to Look for

Shares of Netflix Inc. (NFLX) have risen by more than 55% thus far in 2020, a striking contrast to a broader market that has declined amid the COVID-19 pandemic. A major factor in Netflix's success in recent months is that home-bound consumers globally have sharply increased their viewing of streaming TV and movie content on Netflix. Many consumers are expected to remain at home even amid governments' plans to re-open parts of the U.S. and global economy.

Investors will closely look at whether Netflix's gains are sustainable longterm when it reports earnings for Q2 FY 2020 on July 16 after the market close. Analysts expect robust gains in Netflix earnings per share (EPS) and subscribers for the quarter, and for all of FY 2020. Netflix revenue growth also is expected to be strong, though it will be slower than recent quarters.

A key metric investors will look at is total paid streaming subscribers for Netflix during Q2. In order to sustain growth in EPS and revenue, Netflix must continue to add to its subscriber base, especially in international markets where it sees the fastest growth. In Q2, analysts expect Netflix's total paid subscriber growth to be the strongest in the past five quarters.

This kind of performance has buoyed Netflix's stock. During the past 12 months, it has significantly outperformed the broader market, posting a total return of nearly 33.7% compared to the S&P 500's total return of 6.5%.

1-Year Total Return S&P 500 vs. TradingView
Source: TradingView.

Netflix's revenue has grown significantly in recent years, more than doubling from Q2 FY 2017 through Q1 FY 2020. Still, revenue growth slowed year-over-year (YOY) between Q2 FY 2018 and Q2 FY 2019. Analyst predict Q2 2020 revenue growth will be even slower, rising 23.3% to $6.1 billion. While Netflix is expected to increase revenue by 22.9% for all of FY 2020, that growth would be slowest in six years.

Netflix's earnings per share have seen significantly more volatility in recent years. Q2 FY 2019 was an outlier in recent quarters, as adjusted EPS declined by 29.4% YOY as U.S. users fell for the first time in almost a decade. Now, analysts are expecting EPS for Q2 2020 to triple from a year earlier, with a consensus estimate of $1.80. That also would be the highest quarterly EPS in at least three years.

Netflix Key Metrics
  Estimate for Q2 2020 (FY) Actual for Q2 2019 (FY) Actual for Q2 2018 (FY)
Earnings Per Share ($) 1.80 0.60 0.85
Revenue ($B) $6.1 $4.9 $3.9
Total Paid Subscribers (M) 190.6 151.6 124.4

Source: Visible Alpha and Netflix Investor Relations

As mentioned, paid subscriptions are a key indicator of Netflix's health. Increasing paid subscriptions globally, in the U.S. and abroad, is key to increasing profits. That's because the company's ability to raise prices has been constrained due to the growth of new streaming rivals. (Netflix still has subscribers who participate in its original DVD program, but this is a small portion of its business.)

The growth of the company's paid subscriptions has been strong, albeit slowing, in Q2 periods. Netflix increased paid streaming subscriptions by 25.6% YOY to 124.4 million in Q2 FY 2018, and by 21.9% YOY to 51.6 million in Q2 FY 2019. Consensus estimates place Q2 FY 2020 subscribers at 190.6 million, a 25.7%. In Q1 2020, Netflix reported a 22.8% gain to 182.9 million paid streaming subscribers. Netflix's decelerating revenue growth—as the number of subscribers accelerates —may reflect pricing pressure due to rising competition, which will remain a key challenge for Netflix.