Netflix (NFLX) shares fell roughly 6% in after-hours trade Tuesday after the streaming giant’s Q3 earnings revealed healthy topline growth but a notable step back in profitability — with investors noting margin compression.
- Revenue: $11.51B vs $11.51B expected
- EPS: $5.87 vs $6.97 expected
Revenue rose 17% year-on-year to $11.51B, right in line with Netflix’s forecast, driven by steady membership gains, ad revenue momentum, a weaker US dollar and pricing adjustments. A drag was that operating income of $3.25B fell short of expectations, with margins compressing to 28.2% from 31.7% in the prior quarter and below the 31.5% guidance. The caveat is that there was a $619 million charge tied to a dispute with Brazilian tax authorities, which cut 5 percentage points from margins. Full-year operating margin guidance was trimmed to 29% from a prior 30% due to the same issue.
Happy Gilmore 2 and KPop Demon Hunters (a record 325m views on the platform) were hits in the quarter while the advertising business logged its best quarter ever in a sign of where things might be headed for viewers.
Free cash flow remained a highlight at $2.66B in Q3 — flat from Q2 and up from $2.19B a year ago. The company sees $9 billion in FCF against a market cap of $526 billion (pre drop), which is about a 1.7% FCF yield. The company is virtually debt free.
What investors are paying for is growth and the company guided for 17% revenue growth in Q4. What could be further hurting the stock though is that the company sees a 23.9% operating margin in Q4. That's been reeled back in after a rise starting in 2024.
Q1 2023: 16.8 %
Q2 2023: 17.5 %
Q3 2023: 18.4 %
Q4 2023: 20.6 %
Q1 2024: 22.5 %
Q2 2024: 23.8 %
Q3 2024: 25.7 %
Q4 2024: 26.7 %
Q1 2025: 31.7 %
Q2 2025: 34.1 %
Q3 2025 (actual): 28.2 %
Q4 2025 (forecast): 23.9 %
I assume that the combination of the collapse of Hollywood salaries and the use of generative AI will ultimately goose margins but the risk is that users (particularly young ones) tune out of Netflix and tune into YouTube and video games.
The company sees revenues at $44.8 billion to $45.2 billion and shares are trading at 11.6x that. Looking way, 2027 consensus revenue is $56 billion and EPS of $39.40 per share, which is still 29.5x earnings (after the 6% drop after hours).
In short, shares are rich and any signs of a slowdown in growth or profitability are a drag.
For Netflix watchers, the company touted a slate of returning favorites coming this quarter:
The final season of Stranger Things, The Diplomat S3, The Witcher S4, Nobody Wants This S2, Emily in Paris S5, Love is Blind S9, Squid Game: The Challenge S2, Selling Sunset S9, Culinary Class Wars S2 from South Korea, The Believers S2 from Thailand, The Accident S2 from Mexico, Envious S3 from Argentina, and Delhi Crime S3 from India.
There is also Death by Lightning from Game of Thrones producers David Benioff and D.B. Weiss.
On the film side we get Guillermo del Toro’s Frankenstein, Kathryn Bigelow’s A HOUSE OF DYNAMITE, Rian Johnson's Wake Up Dead Man: A Knives Out Mystery, documentary The Perfect Neighbor, Train Dreams, Noah Baumbach’s Jay Kelly starring George Clooney and Adam Sandler, Troll 2 from Norway, Edward Berger’s Ballad of a Small Player from the UK, and Raat Akeli Hai 2 from India.
I don't watch much TV but I'm looking forward to Frankenstein (Nov 7 release on NFLX)) and another Knives Out film (Dec 12).
