Morningstar

Netflix Earnings: Operating Momentum Remained Strong, but a Surprising Expense Leaves Some Questions

We think Netflix stock is significantly overvalued.

The Netflix logo can be seen on a building belonging to the video streaming provider.
Andrej Sokolow/picture alliance via Getty
Securities in This Article
Netflix Inc
(NFLX)

Key Morningstar Metrics for Netflix

What We Thought of Netflix’s Earnings

Netflix NFLX reported good third-quarter sales, encouraging underlying metrics, and a good fourth-quarter outlook. But a $619 million expense based on gross sales in Brazil for periods dating back to 2022 (“a cost of doing business tax”) weighed heavily on profits.

Why it matters: Management said the Brazilian issue—a 10% tax on some payments to foreign companies—would not have a material impact on future results, but unanswered questions remain. We believe this expense could cost $200 million annually and hamper operating margins by about 35 basis points.

  • Most encouraging to us was 3% sequential sales growth in the US and Canada (17% year over year). The firm has probably retained subscribers better than we anticipated after the huge influx at the end of 2024, while also increasing advertising sales without a negative mix shift in plans.
  • Excluding the Brazilian tax owed for prior periods, the operating margin easily surpassed guidance and cash flow was good. However, profitability is heavily influenced by the timing of content payments and expense recognition, so our view on margin expansion opportunities has not changed.

The bottom line: Our fair value estimate rises to $770 from $750 on the time value of money, with modest upward tweaks to our expense and revenue forecasts offsetting each other. Netflix remains overvalued, in our view, despite easily being best in breed and, unlike most peers, having a narrow moat.

Key stats: Netflix achieved record ad revenue in the third quarter and is set to double ad sales in 2025. We estimate this amounts to about $3 billion, or 6%-7% of total sales.

  • The firm doubled its upfront commitments for the 2025-26 TV season, outpaced that growth in programmatic sales, reached sufficient scale in all 12 of its ad markets, and seemingly hasn’t suffered any detrimental mix shift to the lower-price ad-supported tier.
  • Advertising success is critical, and the results bode well for meeting the rapid ad sales growth that we have projected.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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