Netflix shares fall 6.5% after missing Q3 earnings estimates - what led to the drop?

Netflix Inc. shares dropped over 6% on Tuesday, 21 October, after the streaming platform missed Wall Street's third-quarter earnings estimates due to an unforeseen expense from a Brazilian tax dispute.

The shares of Netflix closed 6.5% down to $1,160 at 7:59 pm (EDT) on Tuesday, 21 October, according to data collected from Marketwatch.

The online streaming platform posted quarterly operating income of $3.24 billion, roughly $400 million less than its forecast and analyst estimates, Bloomberg reported.

What is Netflix's Brazilian tax dispute?

In 2022, Netflix paid approximately $619 million to resolve a multi-year tax dispute with Brazilian authorities. The company recognised the potential risk in earlier filings but did not include it in its earnings guidance. It stated that without this expense, it would have exceeded forecasts.

Will there be an impact of the Brazilian tax dispute in future?

“We don’t expect this matter to have a material impact on future results,” Netflix said.

However, in the quarter under review, Netflix gained from a strong lineup of programming that included its most popular movie, KPop Demon Hunters, the second season of the hit show Wednesday, and a sequel to the comedy Happy Gilmore. It also streamed a popular boxing match between Canelo Álvarez and Terence Crawford.

Worries over customer time and AI

Investors have been concerned that Netflix customers aren’t increasing the time they spend on the platform and about the potential threat of video content created by artificial intelligence. Most of the growth in streaming has been happening on free services such as YouTube, Roku, and Tubi, Bloomberg reported.

In its letter to shareholders, Netflix highlighted record subscriber engagement in the latest quarter. The company has a strong lineup of shows for the final three months of the year, featuring the last season of Stranger Things, a sequel to the mystery film Knives Out, and new movies from Guillermo del Toro and Kathryn Bigelow.

Netflix co-CEO Ted Sarandos said that its total global audience, which includes several individuals living in the same subscriber household, is approaching 1 billion.

“We have a better understanding of the streaming business than any of our competitors,” Greg Peters, Netflix's other co-CEO, said.

Meanwhile, Netflix generated $2.66 billion in free cash flow in the third quarter, surpassing Wall Street estimates, and raised its full-year forecast to around $9 billion.

What's next for Netflix?

The company plans to allocate some of that money for share repurchases and investment in programming. It also mentioned the potential for mergers and acquisitions. Netflix is interested in acquiring certain assets from Warner Bros. DiscoveryInc, Bloomberg reported.