This Warning Signal Just Flashed Ahead of Netflix's Earnings -- Here's What It Means for the Stock

Before Netflix (NASDAQ: NFLX) reported its 2026 second-quarter earnings on July 16, there was an early hint that the quarter may be mediocre. On July 9,The Wall Street Journal released a report stating that declining subscriber engagement had "become a frequent topic of discussion at meetings."

When the earnings results came out, the reported metrics largely met expectations. Netflix beat forecasts for earnings per share but slightly missed for revenue, according to CNBC-tracked projections. That said, the streaming giant also announced it would reduce the frequency of its What We Watch report, which provides more insight into viewing times and subscriber engagement.

Instead of being published twice a year, this data would be published annually, starting again in the first quarter of 2027, which will offer less consistent insights into how shows and movies are performing. Investors showed their overall disappointment with the report for the second quarter; the stock closed at $74.35 ahead of the earnings report on July 16, but by the close the following day, July 17, it had dropped 7.2% to $68.95.

Fast-forward to today, and ahead of Netflix's third-quarter report (scheduled for Tuesday, Oct. 20), there appears to be yet another warning sign.

Image source: The Motley Fool.

The latest warning sign for Netflix

According to a memo obtained by CNBC, Netflix will lay off 6% of its workforce, approximately 1,000 workers. In the memo, Netflix co-CEOs Ted Sarandos and Greg Peters wrote the company needs to be "disciplined about where we prioritize our people and resources.

But there was another line that stood out more from an investing perspective: "Our business is strong and growing, and we remain on track to deliver our full-year forecast." Remaining on track isn't the same as exceeding original forecasts, which may indicate there won't be any surprise earnings beats or full-year forecast boosts announced on Oct. 20. Job cuts are a cost-saving measure that may also serve as a pre-emptive step to ease concerns if the upcoming quarter shows signs of weakness with revenue or profitability.

In addition, Sarandos said at the Bloomberg Screen Time conference in Los Angeles on Sept. 30 that, "Overall, we're not growing as fast as I want us to, and we're working on making that move faster." He also added, "We are, though, also doing things that create a lot of headwind to that number."

What to consider before investing in Netflix

I still like Netflix as a long-term investment. It has more opportunities for subscriber and revenue growth ahead, with live sports and video podcasting. It also has a gaming division it could monetize, and its entertainment complex, which can increase brand visibility and loyalty, Netflix House, is up and running in Philadelphia and Dallas, with one expected to open in Las Vegas in 2027.

That said, in the short term, there don't appear to be many catalysts that would reverse the 24.7% stock price loss thus far in 2026. That's why I'd be comfortable sitting on the sidelines, waiting to see some progress in keeping subscribers engaged, meaningful revenue growth, and a noticeable increase in both subscribers and revenue from its foray into live sports before investing, since this upcoming third-quarter earnings report is unlikely to show any of that.

Jack Delaney 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.