The company is abandoning one important metrics it gives to investors.
Netflix (NFLX 1.07%) has done it again. The video-streaming giant just reported strong Q3 earnings that sent its stock soaring more than 10% to all-time highs. The company is gaining subscribers while adding more arrows to its quiver, including gaming, advertising, and live events.
Earnings are important, and investors will keep focusing hard on revenue and profit as long as Netflix is a publicly traded company. However, Netflix will be making a little-discussed disclosure change in 2025 that could have a big impact on how investors look at the stock. Here’s what comes next for Netflix, and whether the stock is a buy after the latest surge.
Strong revenue growth, expanding margins
First, let’s talk about Netflix’s Q3 earnings. Revenue rose 15% year over year in the quarter to $9.8 billion, with operating margin expanding to 30% compared to 22.4% in the same period a year ago. This means Netflix’s revenue is rising without it spending much more on content. Free cash flow (what’s left of cash flow after capital spending) was solid at more than $2 billion in the period.
Other metrics looked great as well. The company added more than 5 million subscribers in the period, with subscriber count growing in every region except Latin America (which was little changed because of price increases). Average revenue per subscriber was up 5% in North America, which shows yet again the pricing power Netflix has with its streaming subscription service.
Watching hours, not subscribers
The big news for Netflix, and one that may shock some investors, is that the company is going to stop reporting its subscriber count. Beginning in 2025, management has decided to stop telling investors how many subscribers it has around the world and in different geographical regions. Wall Street pays close attention to this metric, which played a large role in determining the stock market’s reaction to every earnings report.
As the company matures, management believes that revenue, operating margin, and time spent on the Netflix platform are the most important key performance indicators (KPIs) for the company. Instead of increasing subscribers, the company wants to focus on increasing hours watched.Â
I find subscriber count useful and don’t like the planned change in reporting. But investors will still see how revenue and operating margin are developing each quarter.
NFLX Operating Margin (TTM) data by YCharts
What comes next for Netflix?
The change may irk some people, but it isn’t the end of the world. What Netflix investors should focus on is what the company is doing to continue increasing revenue during the next five to 10 years. It looks to have a few tricks up its sleeve.
First, it continues to add advertising-supported subscribers and build out its advertising revenue generation. Advertising revenue now is doubling year over year and should become material to topline growth within the next two to three years, according to management.
Second, Netflix is venturing into live events such as boxing matches, National Football League games on Christmas Day, and World Wrestling Entertainment offerings. Third, it is investing in mobile games and other forms of video games to boost engagement across the platform.
Offering more stuff to engage viewers will likely mean more subscribers and time spent on the platform, which should lead to more revenue and profits for Netflix. That means the company should continue to grow, even if Netflix stops giving precise subscriber numbers every quarter.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.