Netflix Reports Missed Earnings Expectations, Shares Fall Over 10%
Netflix reported its third quarter earnings on Wednesday, revealing revenue of $11.51 billion, just shy of Bloomberg consensus estimates of $11.52 billion and slightly below the company's own guidance of $11.53 billion. This marks a significant decline from the same quarter last year, where Netflix reported revenue of $9.82 billion.
Earnings per share (EPS) came in at $5.87, missing analyst expectations of $6.94 and Netflix's internal forecast of $6.87. However, this still surpasses the EPS of $5.40 reported a year ago. The company's guidance for revenue in the current quarter has exceeded Wall Street expectations, with an estimated Q4 revenue of $11.96 billion.
Revenue Misses Expectations
Netflix's revenue missed analyst expectations on both fronts - revenue and profit. Although the company reported revenue of $11.51 billion, it fell short of Bloomberg consensus estimates of $11.52 billion. The discrepancy may be attributed to various reasons such as changes in consumer behavior, increased competition from AI-driven content platforms, or other unforeseen circumstances.
It is worth noting that Netflix's revenue growth has been a significant area of concern for investors and analysts alike. As the company continues to navigate the ever-changing landscape of streaming services, investors are growing increasingly cautious about the sustainability and potential risks associated with this growth trajectory.
Guidance Outlines Improved Expectations
The good news came from Netflix's guidance for revenue in the current quarter. Despite missing expectations with Q3 earnings, the company has provided a bright picture for Q4. With an estimated Q4 revenue of $11.96 billion, investors have more confidence in the streamer's ability to recover and potentially beat analyst predictions.
In terms of EPS, Netflix's outlook remains cautiously optimistic. The company expects to meet or exceed expectations in Q4 with an estimated earnings per share (EPS) of $5.45. This represents a moderate increase from the same quarter last year, while also outpacing analyst forecasts.
Operating Margin Below Targets
The operating margin for Q3 came in at 28%, below the company's target of 31.5%. However, this shortcoming may be attributed to an unexpected expense tied to an ongoing dispute with Brazilian tax authorities. As reported by Netflix, this unique charge had a small effect on their Q3 results and has no material impact on future projections.
As part of its guidance for 2025 revenue, the company expects a decline in operating margin from 29% to 28. However, despite these expected changes, the net impact is likely minimal.
A Strong Content Slate Keeps Engagement High
Despite these setbacks, Netflix maintains that engagement remains healthy due to a particularly strong content slate this quarter. The Canelo vs. Crawford fight drew over 41 million global viewers and was the most-watched men's championship boxing match of the century. This achievement adds credence to Netflix's ability to create massive hits from relatively unknown IP.
Also, animated breakout hit "KPop Demon Hunters" became Netflix's most-viewed film of all time with an astonishing 325 million views worldwide. Alongside this impressive slate, executives focus on their $7.99 ad-supported tier as a long-term driver for user growth.
Ad Spending Increases
As advertisers increasingly opt to purchase inventory directly on the platform through the company's direct-to-consumer (DTC) model, Netflix is witnessing significant traction in its advertising revenue strategy.
The new Amazon DSP integration has granted marketers more ways to buy and manage inventory across the platform. This partnership aims to support advertiser onboarding and provide flexible buying options while improving measurement capabilities.
According to JPMorgan analyst Doug Anmuth, Netflix's ad revenue is expected to explode from a still small base in 2024 - $1.4 billion projected for 2025, more than double and another massive leap up by +44% (to $4.2B).
Content Partnerships Expand Reach
Netflix has been expanding its service through various strategic partnerships to push the boundaries of engagement growth and expand their offerings beyond just linear streaming.
To bring select shows from Spotify Studios (and The Ringer), Netflix will introduce early 2026 "The Bill Simmons Podcast," among others such as "Serial Killers" in a comprehensive slate of podcast content for subscribers with this particular tier.
Valuation Concerns, M&A Rumors Weigh on Shares
Netflix shares have climbed almost 40% year-to-date but have trailed the broader market and its tech peers. As scrutiny over growth, valuation and heightened competition has risen, Wall Street remains closely watchful of the major player in streaming media.
Adding to investor uncertainty is the ongoing scrutiny by regulators for AI content creation as well new controversy that saw stocks fall roughly 5 percent.
Recent whispers about valuations reaching an unsustainable level due to what many view as steep multiples have left analysts questioning whether growth should justify its pricey valuation and sparked a debate across business communities worldwide with one analyst remarking - "If there’s anything the future holds, it’ll be an eye opening experience on this.