Netflix’s stock price sent reeling after Q3 earnings

Netflix’s stock fell 10% on Wednesday, extending losses from late trading Monday, when the shares began to slip in after-hours following the release of its third-quarter earnings.

The decline resulted from a one-time $619 million tax charge related to a Brazilian tax dispute, which impacted profits despite strong underlying growth.

The media streaming giant reported $11.51 billion in revenue, up 17% year-over-year, roughly in line with expectations. Meanwhile, operating income came in at $3.25 million with a 28.2% operating margin, which fell short of Netflix’s forecast of 31.5%.

Netflix said that its operating margin would have topped expectations if not for the unaccounted dispute with Brazilian authorities. However, executives are confident that this one-time expense will not have any future material implications.

CFO Spencer Adam Neumann detailed that the expense stemmed from a court decision upholding the “Contribution for Intervention and Economic Domain.”

Further explaining, “It’s not an income tax. It’s a cost of doing business in Brazil. It involves a 10% tax on certain payments made by Brazilian entities to streaming.”

This suggests that the expense is not specific to Netflix and will impact other companies.

Netflix updates future guidance

“We had a good Q3. We had revenue in line with expectations. Our operating income would have exceeded our forecast absent the Brazilian tax matter,” said Gregory K. Peters, Co-CEO, President and Director, Netflix.

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For the full year, the company reaffirmed its $45.1 billion revenue target and trimmed its operating margin forecast to 29% from 30%. Meanwhile, the company increased its forecast for free cash flow to $9 billion, up from its previous estimate of $8 billion to $8.5 billion, citing the timing of cash payments and lower content spending.

Peters said that engagement and ad sales are accelerating.

We achieved record share of TV time in Q3 in both the U.S. and the U.K. We recorded our best ad sales quarter ever. We are now on track to more than double ad revenue this year.

Gregory K Peters, Co-CEO, President & Director of Netflix

Netflix attributed its increased viewership in Q3, the “highest quarterly view share ever in the United States at 8.6%,” to a diverse range of programming content offered by Netflix.

From men’s boxing championship, to KPop Demon Hunters, their biggest film ever, had a “huge impact on the cultural zeitgeist,” said Peters.

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Yet, despite boasting of an otherwise successful quarter with increased viewership from various countries, Netflix’s stock saw a 5.5% decline this quarter. However, it has not impacted its year-over-year surge, which is 47% higher.

Breaking from past practice, Netflix did not issue a 2026 outlook. Executives explained that the change reflects the company’s shift away from reporting subscriber additions starting this year.

It will continue to focus on revenue, engagement, and profitability, and will issue a full-year 2026 guidance in January.

Needham, maintaining a Buy rating and price target of $1,500 on Netflix, noted that this decision to no longer disclose subscriber additions or average revenue per user contributed to its stock decline, as it exacerbates volatility when the company misses a metric it had previously disclosed.

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Dismissing YouTube as an “inferior competitor” may also have contributed to declining investor confidence. However, as reported by TheFly, analysts at Needham are confident in the company’s success in diversifying into podcasts and consumer products.

The company noted that in Q4, they are using AI to test new ad formats, “striving to create a better experience for members and help advertisers drive the best results.”

Analysts' react to Netflix results

Analysts are largely confident of increased revenue from ad sales, disregarding the $619 million as an accounting miss. 

Rosenblatt raised the firm’s price target to $1,530 from $1,515, maintaining a Buy rating, citing slightly higher 2026 estimates as the reason for the increase in the price target.

Bank of America, while reiterating a Buy rating and price target of $1,490, commented that it has not ruled out a potential M&A between Netflix and Warner Bros. Discovery, despite reports suggesting Netflix’s lack of interest in acquiring cable linear networks.

Meanwhile, analysts at Wedbush lowered their firm’s price target on Netflix, stating that while not overlooking significant growth in global advertising, there is still more to prove. It reduced their price target to $1,400 from $1,500, but maintained an Outperform rating, citing that after several quarters of phenomenal results, the Q3 results and Q4 guidance underwhelmed investors.

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