Netflix Isn’t Supposed to Miss Earnings Estimates. Here’s What Happened—and Why the Stock Is Dropping.

Stranger Things has been a hit for Netflix. (Courtesy Netflix)

Key Points

• Netflix reported third-quarter adjusted earnings of $5.87 a share, missing analyst estimates of $6.96 a share.
• Shares of Netflix dropped 5.6% in after-hours trading following the release of its third-quarter earnings report.
• Netflix’s stock has risen approximately 40% this year and 61% over the past 12 months despite recent declines.

Netflix stock was dropping Tuesday afternoon after the video streaming giant reported third-quarter earnings below Wall Street estimates.

Netflix reported third-quarter adjusted earnings of $5.87 a share on revenue of $11.51 billion. Analysts surveyed by FactSet were expecting earnings of $6.96 a share on revenue of $11.51 billion.

In the same period last year, Netflix reported earnings of $5.40 a share on revenue of $9.83 billion.

Netflix said in its earnings release that a continuing dispute with Brazilian tax authorities negatively impacted financial results in the quarter. However, membership growth, pricing adjustments, and increased advertising spend helped improve third-quarter revenue growth.

The company also said it expects fourth-quarter revenue to grow 17% from the previous year, which is just above Wall street estimates of 16% growth.

Netflix no longer reports its subscriber numbers, but the company said it hit its highest quarterly view share ever in the U.S. and U.K., which has grown 15% and 22%, respectively since the fourth quarter of 2022.

Shares dropped 6.7% to $1,158 in premarket trading on Wednesday. Futures tracking the S&P 500 were little changed

“Netflix’s earnings were definitely not what we wanted to see as the opener for this earnings season,” Thomas Monteiro, senior analyst at Investing.com, wrote. “Although the tax litigation issue certainly had an impact—particularly on margins—the truth is that the company failed to deliver the kind of growth we’ve grown used to over the past couple of years.”

Some Netflix investors have signaled concerns over the company’s growth following years of strong subscriber and revenue additions. In the last several years, Netflix has cracked down on password sharing between accounts in different households and introduced lower priced ad-tiers. These initiatives helped boost the company’s growth.

Netflix now has to find new ways to keep existing customers interested while bringing on new subscribers as it works to show growth can continue to accelerate.

The company has shifted its focus to bringing on new content, like live events, family games, video podcasts, and of course, Netflix originals, to help keep growth accelerating. So far, that seems to be working.

“Our goal is both simple and ambitious: to entertain the world,” Netflix said in the earnings release. “We achieve this by offering a diverse selection of series, films, and games that our members love. This in turn fuels engagement, and when people love what they watch and play, they stick around longer (retention), recommend Netflix to others (acquisition), and place a higher value on our service.”

The company also pointed to its coming content slate that could help retain and acquire customers, including Frankenstein, the live Christmas NFL games, and the final season of Stranger Things.

There are risks to Netflix that Wall is paying attention to as well. Competition is a major one, as fellow streamers like Paramount+, HBO Max, Disney +, Peacock, and more fight for viewership share. Alphabet’s YouTube continues to hold the top spot for total TV streaming time just ahead of Netflix, according to research done by Nielsen.

Concerns over competition and growth potential have recently taken a toll on the stock, which has declined about 10% from its record closing high of $1,339.13 on June 30. Still, shares have risen about 40% this year and 61% over the last 12 months.

Write to Angela Palumbo at angela.palumbo@dowjones.com