Key Takeaways

  • EPS was $1.19 vs. the $1.37 analysts expected.
  • Global paid streaming memberships beat expectations.
  • Revenue matched expectations.
  • Netflix said it was "very close" to being sustainably free-cash-flow positive, and was considering buybacks.

What Happened

After a substantial disappointment last quarter, Netflix reported higher-than-expected subscriber growth on January 19, 2021. Its stock was up more than 10% in aftermarket trading despite reporting lower-than-expected EPS and only matching expectations on revenue. The big news from Netflix's press release was that it says it is "very close" to being sustainably free cash flow positive, and it believes it no longer needs to "raise external financing for our day-to-day operations," a big developmental step for any business. It is also considering stock buybacks.

(Below is Investopedia's original earnings preview published 1-18-21)

What to Look For

Netflix Inc. (NFLX) has prospered during the COVID-19 pandemic, enjoying sharp increases in earnings, revenue, and share prices. Demand for streaming and Internet-based services has soared and is likely to remain strong with consumers continuing to shelter at home as rising deaths reach new records due to the virus. Netflix's total return in the past year is triple that of the broader market.

Investors will look at whether the company's revenue and earnings can sustain further robust growth when it reports earnings on January 19, 2021 for Q4 2021. Analysts expect earnings to rise at the slowest pace in six quarters despite strong revenue growth compared to the same period a year earlier.

Investors will also look at another key metric: Netflix's global streaming paid memberships. Analysts estimate that global streaming paid memberships will continue to grow significantly year-over-year (YOY). That growth is estimated to be slightly faster than the same quarter a year ago, but it's expected to be markedly slower than recent quarters in 2020.

Since the pandemic-induced market crash early in 2020, Netflix shares have dramatically outperformed the broader market. While Netflix stock fell during the market plunge in March of 2020, it dipped less than the overall market, and it also rebounded significantly faster throughout 2020, as well. The company's shares have provided a total return of 46.9% over the past 12 months, far above the S&P 500's total return of 14.6% as of January 17, 2021.

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

Netflix has posted at least four years of strong YOY quarterly revenue growth leading up to Q4 2020. Quarterly revenue growth has ranged from 22.2% up to 40.4% for each quarter throughout this period. The consensus estimate for Q4 2020 is 21.1% growth. While that still signifies robust growth, it also would mark the slowest pace of revenue growth in at least 16 quarters.

Netflix's EPS performance has been less consistent. The past four years have been dominated largely by tremendous quarterly EPS growth YOY, including 566.8% on Q1 FY 2017 and 165.0% in Q2 FY 2020. There have also been 2 quarters of steep EPS declines, Q4 FY 2018 and Q2 FY 2019, followed by rebounds. Analysts expect Netflix to report a tepid 5.7% gain in EPS YOY for Q4 FY 2020, a dramatic slowdown from recent quarters.

Netflix Key Metrics
  Estimate for Q4 2020 (FY)  Actual for Q4 2019 (FY) Actual for Q4 2018 (FY)
Earnings Per Share ($)  1.37 1.30 0.30
Revenue ($B) 6.6 5.5 4.2
Global Paid Streaming Memberships (M) 201.2 167.1 139.3

Another key metric for Netflix, as mentioned above, is global streaming paid memberships. The metric measures the number of global users that have signed up and paid for a subscription to receive streaming services. Netflix's core strategy is to grow its streaming membership business globally as it is the company's primary source of revenue. Netflix's strategy is becoming increasingly challenging amid rising competition from new streaming services like Walt Disney Co.'s (DIS) Disney+, Apple Inc.'s (AAPL) Apple TV+, and NBCUniversal's Peacock.

Netflix has grown its global paid memberships at a rapid pace throughout the pandemic and at least since early 2017. In early 2020, Netflix's paid memberships jumped as the virus began to spread across the U.S. and globally in the second quarter. During that period, Netflix's paid memberships surged 27.3%, far faster than Q1 FY 2020 and also far faster than the same quarter a year earlier. It amounted to the fastest pace in at least 14 quarters. Analysts expect 20.4% growth in Q4 FY 2020. This would mark a slower rate of increase than previous quarters in 2020 quarters, but a slight uptick compared to Q4 FY 2019.