Netflix Shares Recover After $619M Tax Hit Masks Strong Growth
Q3 earnings miss expectations due to a one-time charge in Brazil, but surging ad-tier adoption and robust revenue growth signal underlying strength.
Netflix Inc. (NFLX) shares showed resilience in Tuesday trading, recovering from an initial dip after the streaming giant's third-quarter earnings appeared to miss analyst estimates. The headline miss was driven by a substantial one-time tax expense in Brazil, which overshadowed strong underlying revenue growth and continued momentum in its advertising-supported tier.
The company posted third-quarter revenue of that was largely in line with Wall Street expectations. However, reported earnings per share of $5.87 fell short of the consensus forecast. The discrepancy was caused by an unexpected charge of approximately $619 million related to a long-running tax dispute in Brazil.
In its quarterly letter to shareholders, Netflix executives clarified that the charge was classified as a cost of revenue and that without this expense, the company would have surpassed its operating margin forecast for the quarter. The company's operating margin stood at 28%, a figure that would have been above 33% without the Brazilian tax charge, .
After an initial negative reaction in after-hours trading, investors appeared to digest the nuance behind the earnings miss. The stock, which had a market capitalization of over $526 billion, recovered during Tuesday's session to trade around $1,241 per share, reflecting a slight gain for the day.
Ad-Tier Strategy Fuels Growth
The central pillar of Netflix's growth story remains the successful integration and expansion of its advertising-supported subscription plan. While the company announced a strategic shift away from reporting quarterly subscriber numbers to focus on metrics like revenue and engagement, the ad-tier's performance remains a key indicator of its future prospects.
The ad-supported plan now accounts for more than half of all new subscriber sign-ups in the markets where it is available. This rapid adoption is a crucial driver for expanding the company's total addressable market and boosting average revenue per member (ARPU) over the long term. Analysts are closely watching how this lower-priced, high-volume tier contributes to overall profitability, with some forecasts predicting ad revenue could nearly double in the coming year.
Financial Health and Forward Outlook
Beyond the headline numbers, Netflix demonstrated improving financial health. Free cash flow margin improved to 23.1% from 20.5% in the prior quarter, signaling greater efficiency and profitability. This strong cash generation provides the company with significant flexibility to invest in its content slate and explore new growth avenues.
Looking ahead, Netflix provided an optimistic forecast for the fourth quarter. It projects revenue of approximately $11.96 billion and GAAP earnings per share of $5.45, figures that align with current analyst expectations. The company also assured investors that it does not anticipate the Brazilian tax issue to have a material impact on future financial results.
The streaming landscape remains fiercely competitive, but Netflix's Q3 results suggest its strategic pivots—cracking down on password sharing and embracing advertising—are yielding significant returns. While the one-time tax hit created initial turbulence, investors appear to be focusing on the more durable trends of robust revenue growth and the undeniable success of the ad-supported model.