Key Takeaways

  • Analysts estimate EPS of $3.14 vs. $1.59 in Q2 FY 2020.
  • The number of global paid streaming subscribers is expected to rise YOY at the slowest pace in at least 14 quarters.
  • Revenue growth is expected to decelerate as the streaming market shows signs of saturation.

Netflix Inc. (NFLX) is preparing for a major expansion into video games as subscriber growth slows in its core entertainment streaming business. The key drivers are an increasingly saturated streaming market and the easing of COVID-19 restrictions in many nations, causing consumers to spend less time at home. Netflix recently hired Facebook Inc. (FB) executive Mike Verdu, a video game industry veteran, to bolster the company's video game team.

Investors will closely watch for details about both Netflix's video game strategy and its financial performance when it reports earnings on July 20, 2021 for Q2 FY 2021. Analysts are forecasting a robust rise in earnings per share (EPS) as revenue growth is expected to decelerate to its slowest pace in at least 15 quarters.

Investors will also scrutinize another key metric in the earnings report: Netflix's global paid streaming subscribers, a key measure of the company's monetizable user base. That user base surpassed 200 million at the end of FY 2020, but growth has slowed significantly amid rising competition and the easing of pandemic-related restrictions that has made entertainment outside the home a viable option again. Analysts expect the growth in Q2 FY 2021 to rise at the slowest pace in 14 quarters.

Netflix's shares have significantly lagged the broader market over the past year. The stock's movement has been characterized by large swings, especially following the company's earnings reports. But despite the volatility, the overall trend has been sideways. Shares of Netflix have provided a total return of 0.6% over the past year, well below the S&P 500's total return of 34.6%.

One Year Total Return for S&P 500 and Netflix
Source: TradingView.

Netflix Earnings History

The stock plunged after Netflix reported Q1 FY 2021 earnings on April 20. While both EPS and revenue beat expectations, global paid streaming subscribers missed estimates by about 2.2 million. EPS rose 138.9% as revenue grew 24.2%, the fastest pace of growth for either metric since the second quarter of FY 2020. Earnings received a boost from lower spending on content amid pandemic-related production delays with the company's operating margin hitting an all-time high of 27.4%.

In the final quarter of FY 2020, Netflix's EPS missed expectations while revenue just met estimates. The stock, however, surged as global paid streaming subscribers beat the forecasts. EPS fell 8.5%, the first decline since Q2 FY 2019. Revenue rose 21.5%, marking the slowest pace of growth in at least 13 quarters. Netflix noted that its earnings were adversely impacted by a $258 million non-cash unrealized loss from foreign exchange remeasurement on its euro denominated debt.

Analysts estimate a robust rise in EPS in Q2 FY 2021 as revenue growth continues its long-term deceleration. EPS is expected to increase 97.8% from the year-ago quarter, slowing from Q1's rapid rise. Revenue is expected to expand 19.1%, which would be the slowest pace of growth in at least 15 quarters. For full-year FY 2020, analysts forecast EPS to rise 74.0%, which would be the fastest pace since FY 2018. Annual revenue is expected to grow 18.8%, which would be the slowest pace in at least eight years.

Netflix Key Stats
  Estimate for Q2 2021 (FY) Q2 2020 (FY) Q2 2019 (FY)
Earnings Per Share ($) 3.14 1.59 0.60
Revenue ($B) 7.3 6.1 4.9
Global Paid Streaming Subscribers (M) 208.7 192.9 151.6

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also focus on Netflix's global paid streaming subscribers, which the company refers to as "global streaming paid memberships". The metric indicates the number of global users that have signed up and paid for a subscription to receive streaming services. Currently, streaming memberships are Netflix's primary source of revenue. But video streaming has become increasingly competitive in recent years, and Netflix now faces threats from rivals like Apple Inc.'s (AAPL) Apple TV+, Walt Disney Co.'s (DIS) Disney+, Amazon.com Inc.'s (AMZN) Amazon Prime Video, and AT&T Inc.'s (T) HBO Max. The U.S. streaming market has become increasingly saturated: more than 80% of American consumers have at least one streaming-service subscription and the average subscriber pays for four separate streaming services.

Annual growth in Netflix's global paid streaming subscribers has been on a steady downtrend since at least FY 2015, with a brief acceleration in FY 2018 and again in FY 2020. The slight pickup in growth last year was at least partly driven by government-imposed stay-at-home orders amid the pandemic, thus limiting the range of entertainment options available to people. Streaming became a go-to option for many homebound consumers. Quarterly growth in global paid streaming subscribers accelerated to 22.8% year over year (YOY) in Q1 FY 2020. It accelerated further to 27.3% in Q2 before slowing to 23.3% and 21.9% in Q3 and Q4, respectively. It then slowed significantly to 13.6% in Q1 FY 2021. The company said it believed growth slowed because the pandemic pulled forward subscribers in the previous year and also because the company had less content to offer due to pandemic-related production delays. Analysts expect growth in global paid streaming subscribers to slow to 8.2% in Q2 FY 2021 and to 9.8% for full-year FY 2021.