The streaming giant is seeing some pressure after revealing a foreign tax issue in its earnings report.
Tuesday afternoon. The closing bell had just stopped ringing. It didn't take long. There it is. Netflix (NFLX) earnings ran across the tape.
Yikes. What the heck is that? Revenue generation for the firm's third quarter was in line with expectations at $11.51 billion. That was good for year-over-year growth of 17.2%. Not a beat, but not a miss. GAAP EPS printed at $5.87. To call that a miss would be an understatement.
Wall Street was looking for something closer to $7.00. That print still compares well to the year-ago print of $5.40, but something better than this had been priced in. Down went Frazier and down went Netflix. As I work on this piece, I see NFLX trading down more than 7.5% well ahead of the opening bell on Wednesday morning, down almost a C-note. So, what gives?
According to the firm's press release:
"This was below our guidance forecast because we incurred an expense in Q3'25 of approximately $619 million related to an ongoing dispute with Brazilian tax authorities regarding certain non-income tax assessments. This expense was not included in our prior guidance forecast but was identified as a potential exposure in our prior 10-Q and 10-K filings."
This expense was recorded as a "cost of revenue" in the statement of operations and covers the period from 2022 through Q3 2025.
Geographic Sales Performance
* UCAN (U.S. and Canada) generated revenue of $5.072 billion (+17%)
* EMEA (Europe, Middle East, Africa) generated revenue of $3.699 billion (+18%, +15% in constant currency)
* LATAM (Latin America) generated revenue of $1.371 billion (+10%, +20% in constant currency)
* APAC (Asia, Pacific) generated revenue of $1.369 billion (+21%, +20% in constant currency)
Operations
As revenue generation grew 17.2% to $11.51 billion, the cost of that revenue increased 20.4% to $6.164 billion. That includes the issue in Brazil. After accounting for Sales and Marketing expenses, Research and Development costs and Administrative costs, operating income printed at $3.248 billion, up "just" 11.7%.
After factoring in interest, other income and expenses and taxes, GAAP net income landed at $2.547 billion, up a mere 7.7% from the year-ago period despite sales growth of more than 17%. That's why the shares are getting slapped around on Wednesday morning. This works out to $5.87 per fully diluted share, up from $5.40 for Q3 2024.
Guidance
For the current quarter, Netflix sees revenue of $11.96 billion, which would be good for year-over-year growth of 16.7%. This is better than the $11.9 billion that Wall Street had in mind. The firm is projecting an operating margin of 23.9% and a GAAP EPS of $5.42, three cents above consensus. For the full year, the firm is guiding revenue towards $45.1 billion. That's up from the $45.03 billion that Wall Street was looking for. The firm sees a full year operating margin of 29%.
Fundamentals
For the period reported, Netflix generated operating cash flow of $2.825 billion. Out of this number came capex spending of $164.7 million, leaving free cash flow of $2.66 billion, up from $2.194 billion for the year-ago comp. Out of that number, the firm repurchased $1.857 billion in common stock for the firm's treasury. Over the first nine months of the year, Netflix has generated free cash flow of $7.589 billion and repurchased $7.048 billion in common stock.
In what I see as a glaring embarrassment for the C-suite and for the board of directors, the firm puts almost all of its free cash into its buyback program while not having dished out a single penny in cash dividends to shareholders. Ever.
Looking at the balance sheet, Netflix ended the quarter with a cash position of $9.324 billion and current assets of $12.963 billion. Current liabilities add up to $9.732 billion. That number includes no short-term debt, but $1.725 billion in deferred revenue which is not a true financial obligation. That leaves the firm headline current ratio at a respectable 1.33. Once adjusted for those deferred revenues, that ratio rises to a more robust 1.62.
Total assets amount to $54.935 billion, which is mostly content. Nothing here is labeled intangible, but one has to think that the value of the content is probably not exactly as tangible as would be real estate or equipment. Total liabilities less equity comes to $28.98 billion including long-term debt of $14.463 billion. While that is a large number and it is up almost 5% year to date, this item does not diminish the quality of the balance sheet, which is above average.
My Thoughts
From the community of sell-side analysts, we have seen a plethora of reiterations, mostly of buy ratings since Tuesday night. We have seen three five-star rated (by TipRanks) analysts take their target prices lower. All in all, Wall Street has gone a little quieter than usual on this name. So, the firm has a tax issue in Brazil. This causes a dip in the share price. Growth is solid. Cash flows are excellent. I wish they would pay you a dividend, but that's not up to me. The balance sheet is in good shape. As most readers know, I am not really a fan of Netflix. I am not even a customer. That does not mean that it is not a good company or that this is not a strong business.
Readers will see that NFLX had developed a falling wedge pattern which is bullish and that the shares were trying to break out of that pattern to the upside when Tuesday night's selloff happened. Now, that little double top pattern at the end of the wedge will matter most. At least for now.
Though not a fan of Netflix, I fully intend to buy this dip. The stock is still a bit expensive. I am not a daredevil. I will bail if Netflix cracks its own 200-day SMA. There will be pressure, perhaps for a couple of days as the loss of the 50-day SMA will force some portfolio managers to act. I see this as a chance to initiate a name that I missed on the way up. Just respect your panic point. This is not a name to set and forget. This will be a project in risk management.
At the time of publication, Guilfoyle had no positions in any securities mentioned.