Netflix Q3 - KPop Demon Hunters outperforms

On Tuesday night, Netflix posted numbers that missed market expectations, and it dropped 10%. The shares are about 15% off their all-time highs, reached in July.

They reported third-quarter revenue of $11.5 billion, a 17% year-over-year increase. Operating income climbed to $3.25 billion from $2.91 billion a year ago, but operating margins fell to 28.2% from 29.6%.

Margins were hurt by a one-time Brazil tax expense of $619 million, related to a "gross tax on outbound payments". The country's Supreme Court unexpectedly ruled that this tax applied to Netflix, reversing prior lower-court decisions, covering roughly three years of back charges.

Netflix's advertising business is growing nicely, with leadership confident of exceeding its previous 100% year-over-year ad revenue growth target for 2025. CFO Greg Peters emphasized that Netflix is now "in the walking phase" of its ad business, with further plans to launch interactive ad formats and strengthen AI-powered ad capabilities to sustain growth. This part of the business has the potential to be hugely profitable in the future.

I remember the earlier years, when any money that came in went straight out again in the form of content creation. Even though they spend around $20 billion a year on new shows, the company still had free cash flow of $9 billion over the last year, and is sitting on $9 billion in cash in its bank account.

As long as Netflix can stay relevant, it will continue to grow and print cash. In the previous quarter, their KPop Demon Hunters show, an animated film, stormed past 325 million views in just four months, highlighting how they still have the ability to create 'must-watch' content.

We are happy long-term holders of Netflix shares.