Netflix Q3 2026: the ads miss is real, but the earnings engine is intact

The quarter in brief

Netflix reported third-quarter 2026 results on October 20. Revenue was $12.87 billion, up 12% year over year, or 11% at constant currency, and in line with the company's forecast^{Q3 results; statements of operations}. Operating income was $4.5 billion, up 37%, and the operating margin was 34.6%, against 28.2% a year earlier^{Q3 results}. The year-ago quarter included an expense of about $619 million from a Brazilian tax dispute, covering 2022 through Q3 2025^{Q3 results}; without it, operating income grew about 15% on our arithmetic. Diluted EPS was $0.87, compared with $0.59 a year ago^{Q3 results}. All per-share figures reflect the ten-for-one stock split of November 14, 2025^Statements.

Against the company's own July forecast, which called for revenue of $12,860 million, a 33.2% operating margin and EPS of $0.82^{Q2 letter p. 1}, this was a clean beat on profit. Netflix was candid that the margin upside came mainly from the timing of expenses, plus slight revenue upside^{Q3 results}, so some of it moves into the fourth quarter. Analysts polled by LSEG had expected EPS of 82 cents and revenue of $12.87 billion^CNBC.

Growth outside North America did the work. In local currency, Latin America grew 12% and Asia-Pacific 15%, with the U.S. and Canada at 11% reported^Regions. In India, view hours grew 24% and the company had its largest quarter ever of paid net additions^{p. 5}. Churn improved year over year globally and in the U.S., and was better than forecast^{Q3 results}.

Capital return stepped up again. Netflix bought back 63.9 million shares for $4.8 billion, its largest quarter of repurchases ever, and has $22.3 billion of authorization left^Capital. Diluted weighted-average shares were 4,195 million, against 4,340 million a year earlier^Statements. Free cash flow was $2.9 billion, against $2.7 billion a year earlier^{Cash flow and capital structure}.

What changed in the thesis

Advertising slipped. Netflix now expects 2026 ad revenue of about $2.7 billion instead of about $3 billion, because some ad product capabilities are rolling out more slowly than expected^{Q3 results}. In July, it had described a rough doubling of ads revenue to approximately $3 billion^{Q2 letter}. Co-CEO Greg Peters said the ads business is still growing over 80% this year^{Greg Peters, answer to Baird question on advertising}, and the ad tier launches in 15 new countries in 2027, starting in March^{p. 4}. Our read: this is an execution delay in a young business, not a demand problem. But ads are the lever that most bull cases lean on, so it matters.

The revenue guide edged down; the margin guide did not. Full-year revenue is now expected at $51.1 billion, up 13%, which is 0.2% below the midpoint of the prior range^Forecast. In July, Netflix had guided to a 31.5% operating margin for 2026^{Q2 letter, forecast}; the target is still 31.5% and now absorbs about 30 basis points from fourth-quarter headcount reductions, implying operating income growth of 20% or more^Forecast. The fourth-quarter guide is a 26.0% margin, including about 120 basis points of restructuring cost^Forecast.

Growth keeps slowing. Year-over-year revenue growth has gone from 17.6% in Q4 2025 to 16.2%, 13.4% and 11.8%, with 11.5% forecast for Q4 2026^{p. 1}. Management acknowledged the pressure point: co-CEO Ted Sarandos said of the U.S.: "It's just not growing as fast as it could or as fast as we'd like"^{Ted Sarandos, answer to Citizens Bank question on content strategy}, and the letter addressed investor concern about view-hour growth directly^{p. 4}.

No 2027 numbers until January. The CFO said it was premature to give 2027 guidance, but the objectives are unchanged: double-digit revenue growth, expanding margins and rising free cash flow^{Spence Neumann, answer on 2027 revenue growth}.

Bull and bear

Two points temper our enthusiasm. First, cash quality. Year-to-date cash spending on content was $14.9 billion, up from $12.0 billion a year earlier, while content amortization was $12.8 billion^{Cash flows}. That is a ratio of about 1.17x so far, and the company still expects about 1.1x for the full year^Capital. Second, the 2026 free cash flow forecast was cut to about $12.0 billion from $12.5 billion, mainly because of a real estate transaction expected to close in the fourth quarter^Capital, and that forecast had earlier been raised by the after-tax Warner Bros. termination fee^{Q1 letter}. Underlying free cash flow is therefore lower than the headline.

Valuation

Headline 2026 EPS is distorted. First-quarter EPS of $1.23 included the $2.8 billion Warner Bros. termination fee and was above the company's forecast of $0.76^{Q1 letter}. Using that $0.76, plus the second- and third-quarter EPS of $0.80 and $0.87^Statements and the $0.67 fourth-quarter guide^{p. 1}, gives a cleaner 2026 figure of roughly $3.10.

For 2027 we assume what management says it targets, not more. Revenue grows 10% to about $56 billion, the margin rises two points to 33.5%, net income converts at this quarter's ratio to operating income ($3,664 million of net income on $4,459 million of operating income^Statements, or 0.82), and the diluted share count falls to about 4.1 billion. That gives EPS of about $3.77. At 20x to 22x, around the 21x the shares traded at on clean 2026 EPS after the report, that is a value of roughly $75 to $83. The case needs no re-rating, only a year of delivered growth.

The call

Bullish on NFLX over 12 months, no price target, moderate conviction. The quarter showed a business still compounding operating income at about 20% a year with a shrinking share count, and the shares fell about 6% in extended trading^CNBC on a guide that moved full-year revenue by 0.2%. We hold conviction at three of five because the growth deceleration, the ad delay and the U.S. engagement question are all unresolved until the January guidance.

This is the author's opinion, not investment advice. Figures are from Netflix's Q3 2026 shareholder letter, prior letters, the earnings interview and CNBC; the 2027 estimate and valuation are our own.