Program lineup unprecedented, but profits fell victim to an "ambush"! Netflix (NFLX.US) misses performance expectations due to a Brazilian tax case, causing after-hours stock prices to plummet.

Netflix (NFLX.US) said on Tuesday that a tax dispute in Brazil had impacted its third-quarter earnings, casting a shadow over what was originally a strong performance report that met Wall Street expectations. The global entertainment powerhouse's financial report showed quarterly operating profit of $3.24 billion, about $400 million lower than both the company's own forecast and analyst estimates. However, the company's outlook for the current quarter (Q4) is in line with Wall Street predictions. The dispute arose from Netflix's payment of approximately $619 million to resolve a longstanding tax dispute with Brazilian tax authorities dating back to 2022. While the company had hinted at the potential risks in previous filings (although not in earnings guidance), and had stated that if not for this expenditure, results could have exceeded expectations, it still had a negative impact on performance. Future related payments are expected to decrease. Netflix stated, "We do not expect this matter to have a significant impact on future earnings." After the financial report was released, Netflix's stock price fell by 7.5% in after-hours trading to $1147.64. The stock had reached a historical high of $1341.15 on June 30 (the last trading day of the previous quarter), but has been trending downward in recent months. This dispute has disappointed many investors who were expecting a strong quarterly performance from the streaming giant based in Los Gatos, California. However, Netflix continued to benefit from a strong content lineup this quarter. This included its all-time popular movie "K-POP: Hunt of the Witch Brigade," the second season of the hit series "Wednesday," and the sequel to the comedy film "Happy Gilmore." Additionally, the company also live-streamed the highly anticipated boxing match between Canelo Alvarez and Terence Crawford. With "K-POP: Hunt of the Witch Brigade" reaching 325 million views, becoming the platform's highest-grossing film, Netflix announced on Tuesday a dual-product line collaboration with toy giants Hasbro, Inc. (HAS.US), and Mattel, Inc. (MAT.US), with plans to launch related dolls, plush toys, role-play props, and themed games in the spring of 2026. The company is also exploring derivative businesses related to film such as experiential entertainment, publishing, beauty and lifestyle, and food and beverages. The film will return to the big screen for a special showing over the Halloween weekend. PP Foresight analyst Paolo Pescatore believes the tax dispute negatively affected Netflix's stock price. "Overall, despite the unexpected expenditure, this is still a strong quarter," Pescatore said. Investors' main concerns revolve around the lack of growth in Netflix users' time spent on the platform and the potential threat posed by AI-generated videos. The majority of growth in the streaming industry is currently being absorbed by free services such as YouTube, Roku (ROKU.US), and Tubi. In response to these concerns, Netflix addressed its shareholders, emphasizing record user engagement in the previous quarter. The company also revealed plans to launch a stronger content lineup in the last three months of the year, including the final season of "Stranger Things," the sequel to the suspense movie "Knives Out," and new works directed by Guillermo del Toro and Catherine Bigelo. Despite significant content investments, Netflix generated $2.66 billion in free cash flow in the third quarter, surpassing Wall Street expectations and raising its full-year outlook to around $9 billion as a result. Netflix plans to use some of the funds for share buybacks and content investments, while also mentioning the possibility of engaging in mergers and acquisitions. It has been reported that Netflix has expressed interest in acquiring some assets of Warner Bros. Discovery (WBD.US). Netflix Co-CEO Ted Sarandos stated in a conference call with analysts on Tuesday that achieving growth goals does not depend on M&A transactions, but the company will evaluate all opportunities and maintain interest in intellectual property that enhances service appeal. The management team explicitly stated that they have no intention of acquiring cable TV networks and will primarily use excess cash for other strategic initiatives. Sarandos said, "We believe that we have the ability and will be careful in our choices." Financial data shows that Netflix's third-quarter revenue increased by 17% to $11.5 billion, meeting Wall Street expectations. However, due to the impact of the tax expenditure in Brazil, earnings per share were $5.87, lower than analysts' estimate of $6.94. Looking ahead to the fourth quarter, Netflix expects revenue to reach $12 billion, with earnings per share of $5.45; while Wall Street's expectations for the quarter are revenue of $11.9 billion and earnings per share of $5.42. Due to the events in Brazil, Netflix has lowered its operating margin forecast for the year from 30% to 29%, expecting revenue of $45.1 billion, a 16% increase year-over-year, in line with previous expectations of 15% to 16% revenue growth. The company's Co-CEO Greg Peters added that ad revenue hit a historic high this quarter, with expectations for ad revenue to double for the year.