Why Netflix Stock Was Slumping Today
Key Points
Netflix matched top-line estimates with 17% growth in the third quarter.
The company had a large one-time expense related to a Brazilian tax dispute.
The ad tier continues to deliver strong growth.
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Shares of Netflix (NASDAQ: NFLX) were sliding today in spite of a solid third-quarter earnings report last night.
The streaming giant delivered strong revenue growth, meeting estimates, but its profits were dinged by a Brazilian tax issue. That and the stock's premium valuation seemed to lead to the sell-off, and the stock was down 10% as of 11:29 a.m. ET.
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Image source: Netflix.
Netflix takes a step back
Overall, Netflix delivered a solid quarter. Revenue was up 17.2% to $11.51 billion on broad-based growth across all four of its regions, which matched the analyst consensus.
Netflix no longer reports subscriber growth, so it's not as easy to see what's driving its revenue growth, but management did share a couple of highlights. It reported its best ad sales quarter ever and doubled commitments in the U.S. upfronts. The advertising business is becoming a significant growth driver and extends the company's long-term growth opportunity.
On the bottom line, the company reported an adjusted operating margin of 31.5%. However, that was just 28% after factoring in the expense related to the Brazilian tax dispute. Reported earnings per share, which included that charge, rose from $5.40 to $5.87, but missed estimates at $6.97.
What's next for Netflix?
Looking ahead to the fourth quarter, Netflix expects its growth to continue, calling for revenue to increase to 16.7% to $11.96 billion. It also sees $5.45 at EPS, reflecting higher content spend in the fourth quarter. Those figures compared favorably with the consensus at $11.9 billion in revenue and $5.43 in EPS.
A number of Wall Street analysts weighed in on the results, encouraging investors to buy the dip. Indeed, there are no fundamental problems in the results, and the company still has a long runway of growth ahead of it, thanks in part to the new advertising business.
Therefore, taking advantage of the sell-off to scoop up some shares makes sense.
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Jeremy Bowman has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
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