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Netflix slightly missed revenue estimates & slightly missed guidance. It posted 17% foreign exchange neutral (FXN) growth, which means the miss was driven by unfavorable currency movements – rather than anything related to core operations. As expected, view hours growth accelerated during Q3 vs. the first half of the year. This is reassuring, as it coincided with the content slate beefing up and shows customers responded positively to that added material.

Netflix incurred a $619M charge in Brazil due to a “gross tax on outbound payments.” The nation’s supreme court unexpectedly ruled this tax included Netflix’s operations, reversing a previous decision by lower courts. $619M covers nearly 3 years of back charges, which is why the number will not be remotely as large in the future. The expense lowered EBIT margin margin by a full 500 basis points (bps; 1 basis point = 0.01%).

For Q4, it raised revenue guidance by 0.9%, which beat estimates by 0.5%. This represents 16% Y/Y FXN growth. It also raised Q4 EBIT guidance by 2.9%, which met estimates. 23.9% EBIT margin guidance missed 24.2% estimates, but the modest revenue beat was enough to offset that and enable the small EBIT dollar raise. They lowered their 30% annual EBIT margin guidance to 29% due to the Brazil note above. Finally, Netflix raised their annual FCF guidance from $8.25B to $9B, which met estimates. This raise was due to content spend timing, which makes it less exciting.

Netflix trades for 42x forward EPS. Following 33% EPS growth expected this year, EPS is expected to compound at a 22% clip in 2026 and 2027. 2025 estimates will likely fall tomorrow due to the Brazil charge. I don't think 2026 or 2027 estimates will move much.

“While I'll refrain from offering any 2026 guidance, I would say we are feeling good about our growth trajectory.” – CFO Greg Peters

Scripted Content Bread & Butter:

It’s no secret. Streaming is competitive. New entrants are abundant. Switching costs are nonexistent. Netflix has built a world-class company despite this being their reality for years. They’ve done so with best-in-class retention metrics, constant content virality and while becoming a verb. How were they able to do that? With consistently great scripted entertainment that was fully on display once more this quarter. Wednesday Season 2 easily crossed 100M viewers, while Happy Gilmore 2 broke Nielsen’s opening weekend streaming record for films. The Thursday Murder Club was the first film in more than 25 years to place first on Barb’s UK TV rankings.

And while all of that is exciting, none of it is as exciting as continued “K-pop Demon Hunter” success. This is yet another powerhouse franchise in the making for Netflix. And I don’t think we should breeze through that point. Netflix didn’t enter the streaming business with generations of operating and dozens of hit franchises to leverage. It had to build its first-party library from scratch, unlike its legacy competitors. That may seem easy based on how frequently this company seems to strike entertainment gold… but it’s not. They’re just that good. 

Back to the K-pop hit. That title is now its biggest film ever, with the album reaching platinum status and characters among the most popular 2025 Halloween costumes. Once more, Netflix is pervasively inserting itself into culture because it’s making the things people love to watch. In a bid to optimally monetize all of this traction, Netflix signed deals with Mattel and Hasbro for those two iconic toy makers to license the lucrative IP.

“We're going to need them both to help meet the massive demand for fans to get closer to their characters off screen every day… When you have a hit the size of K-pop, Demon Hunters, it stirs the imagination of how big we could take this.” – Co-CEO Ted Sarandos

Content Breadth:

Netflix is the king of scripted general entertainment across the streaming landscape. That alone has been enough to give it churn dynamics that surpass other titans… despite really not matching the content breadth those alternatives provide. Netflix doesn’t have multi-billion-per-year deals with professional sports leagues. It doesn’t have hit news shows or live late-night entertainment. While it thrives within the content segments where it predominately plays, it does not appeal to as many of those segments as others. And that’s actually exciting. If they effectively broaden the menu, and they are, that will mean more cancellation objectors preventing households from cutting their plans. If a user really only cares about watching Wednesday Season 2 (great show) and the NFL, then the NFL games Netflix will host this year should keep them around for longer. Simple enough.

Along these lines, there are a few other signs of great progress. Its Canelo vs. Crawford boxing match was the most-viewed fight of the century. Just like the Jake Paul/Mike Tyson event, this drove a nice batch of signups. Furthermore, it was the #1 title on Netflix in 30 countries and earned nearly 1 billion social impressions. The success provides more evidence of Netflix greatly expanding reach for non-major 4 sporting leagues, just like it has done in WWE.

In other areas of content breadth expansion:

Market Share & Competition:

This part of the conversion goes hand in hand with content quality and breadth. Those are the inputs. Market share is the output. And market share trends do remain promising. It may not be taking as much of the pie as YouTube is, but it’s doing better than anyone else. Since Q4 2022, they’ve grown USA and UK market share by 15% and 22%, respectively. They also set new highs in both of those markets this quarter, which is great news following some weakness last quarter. Q4 releases like Stranger Things should help keep this positive momentum humming.

The landscape will remain fiercely competitive because it’s so large and quickly growing. Netflix is confident that the experience it has in this content delivery format gives it a leg up vs. others. It helps them better understand optimal spending levels and how to allocate that spend based on observed customer preferences. That should mean its cadence of hit titles remains more compelling than others, which should keep them in good shape. Alongside a perpetual focus on improving the content recommendation engine, that should be a winning recipe, just like it has been for a long time. Again… Netflix makes all of this look very easy. But? Their counterparts certainly don’t. And that’s no coincidence.

New Home Page & AI:

Netflix’s new homepage is 85% rolled out, with “results exceeding prelaunch expectations.” This should greatly help with content discovery, which will merely bolster its engagement and retention leads. They’re also testing AI-enabled and conversationally-based content search to keep things moving in the right direction.

Advertising:

As previously covered, the streaming giant doubled ad sales at this year’s upfronts as advertisers flocked to their scaled, data-enabled audience. The programmatic portion of their advertising bucket is growing even more quickly, and leadership is now confident in surpassing previous 100% Y/Y ad revenue growth guidance for 2025. A lot of this momentum is thanks to the newer Netflix Ads Suite. As a reminder, this is its in-house ad tech platform that connects its available impressions to advertisers and buy-side conduits like Yahoo. The product gives buyers more buying flexibility, better targeting and access to their favorite campaign operating software like Trade Desk. The enhanced access coming from buy-side integrations has been a big win for ad growth.

To build on this momentum, Netflix announced Amazon and AJA (big in Japan) ad platform integrations this quarter. I would expect it to partner with virtually every demand-side ad platform for this product. That’s the best way to maximize bids and price per impression, while enhanced programmatic targeting vs. other channels like linear makes advertisers eager to pay this premium. They’ll still get better returns thanks to the dramatic boost to marketing granularity that programmatic delivers. There’s a lot of remaining work to do on advertiser tools, targeting improvements, audience segmentation and everything else that will make Netflix a powerhouse publisher in advertising like it is in subscriptions. And while that road will be long, progress is clear.

“We feel like we've established the fundamentals of the business now. We've proven we know how to scale. We see plenty of room for growth ahead… If you use our beloved crawl, walk, run model, we're now squarely in that walking phase… We expect we're going to be able to move more quickly than other streamers as we leverage pre-existing tech and data science assets and expertise.” – CFO Greg Peters

Other Notes:

They’re not worried about Warner Brothers Discovery potentially selling to interested bidders. Leadership walked us through all of the other recent M&A from this industry and how none of it had any impact on Netflix’s growth. They’re also not worried about Sora or AI-generated content. Creating world-class titles requires world-class talent that AI cannot come close to emulating at this time.

Not a bad quarter. The sell-off seems like a combination of algorithms running with the Brazil-induced profit miss and the FX-powered revenue miss. Nothing about either item is alarming for the long-term investment case, as neither has anything to do with the core value drivers that have and will continue to make this company so successful. The market share weakness that did concern me a bit last quarter encouragingly reverted as their content schedule heated up. Content diversification is going very well and should extend the churn rate lead it has over every competitor besides maybe YouTube. Ads proliferation is encouraging and the new home page seems to be working wonders. I’m also excited to see the Spotify partnership develop, as that could be a wonderfully complementary addition to this content library over time. Those are the things that matter. Not if the Brazilian supreme court made a surprising interpretation on a piece of regulation.

It’s clear that Netflix is the best company and investment in streaming and I do not see that changing. Their habitual, data-driven approach to product optimization across every facet of the business is something other teams should study. The multiple may need to contract a few more turns to get closer to 5-year averages, but the company is entirely fine.