Netflix Stock Sinks After Surprise EPS Miss: Brazil Tax Row Blamed as Record Ad Sales Confuse Markets

Netflix just delivered record ad sales and strong subscriber growth, so why is its stock tumbling?

Investors were left reeling after a surprise earnings-per-share (EPS) miss, triggered by an unexpected and costly tax battle in Brazil.

The mixed signals—soaring ad revenue against shrinking profit margins—have left markets confused and questioning the streaming giant's stability.

Why the £2.13 Billion Profit Still Disappointed Wall Street

Netflix, Inc. reported a third-quarter net income of approximately £2.13 billion ($2.55 billion). While this was an increase from £1.97 billion ($2.36 billion) a year earlier, it fell significantly short of Wall Street's expectations.

The company's earnings per share (EPS) landed at $5.87 (£4.90), missing the consensus forecast of roughly $6.96 (£5.80).

Despite revenue climbing to £9.59 billion ($11.51 billion), a nearly 17 per cent jump, the profit miss sent the stock tumbling more than 5 per cent in after-hours trading.

The £516 Million 'One-Off' Hit Souring the Numbers

The primary culprit for the earnings disappointment was a massive £516 million ($619 million) charge. This expense, disclosed in the quarterly report, is tied to a long-running tax dispute with Brazilian authorities.

The charge decimated the company's operating margin, dragging it down to about 28 per cent, well below the 30–31 per cent range Netflix had previously guided.

Netflix described the hit as a 'one-off' event, reassuring investors it would not have a 'material impact' on future results. However, analysts noted the case highlights the growing tax and regulatory risks global streaming firms face in complex international markets.

A Silver Lining: Advertising and Subscriber Growth Surge

Away from the tax dispute, Netflix sought to shift focus to its operational victories. The company announced a record-breaking performance for its ad-supported subscription tier, which continues to gain significant traction.

This burgeoning advertising business is proving crucial in offsetting slower growth in more mature markets. The strong 17 per cent year-on-year revenue growth was fuelled by a healthy mix of price increases, higher membership numbers, and booming ad sales.

Despite the setback, Netflix reaffirmed its full-year revenue forecast of roughly £37.5 billion ($45 billion), signalling confidence in its core business.

Mixed Signals: Why Investors Remain Cautious

Even with positive momentum, investor sentiment remains fragile. The Brazilian tax expense has reignited concerns over Netflix's exposure to regulatory and legal challenges abroad.

Furthermore, the company's heavy investment in new verticals like gaming, live events, and sports broadcasting is drawing greater scrutiny. Investors are questioning whether these expensive ventures will ever yield returns that justify the company's high valuation.

Q3 by the Numbers

Netflix's third-quarter figures reveal a story of strong yet uneven performance. Revenue rose to £9.59 billion ($11.51 billion), while net income climbed to £2.13 billion ($2.55 billion).

The EPS miss at $5.87 (£4.90) compared unfavourably to analyst expectations of $6.96 (£5.80), largely due to the £516 million ($619 million) tax charge. Operating margins dropped to 28 per cent, and shares slipped between 5 and 6 per cent in extended trading.

A Temporary Stumble or a Sign of Tighter Margins Ahead?

Looking ahead, Netflix projects fourth-quarter revenue of about £9.97 billion ($11.96 billion) and an EPS of $5.45 (£4.54), slightly exceeding analyst expectations. The company maintains that without the Brazilian tax expense, its margins would have surpassed earlier forecasts.

While many analysts view the profit miss as a temporary setback, others caution that the episode underscores Netflix's delicate balance between growth spending and profit discipline.

For now, markets appear divided, unsure if this is a short-term stumble or an early warning sign of tightening profit margins to come.