Brazilian tax disputes weigh on Netflix (NFLX.US) Q3 performance, Wall Street majors maintain bullish stance: Long-term growth potential remains unaffected.

Although Netflix's (NFLX.US) lineup of programs in the third quarter was unprecedentedly strong, its profit performance was dragged down by a tax dispute with the Brazilian authorities. The financial report shows that Netflix's third-quarter revenue increased by 17% year-on-year to $11.5 billion, in line with market expectations, but operating profit was $3.24 billion, about $400 million lower than the company's own forecast and analyst estimates. In addition, the company's performance outlook for the fourth quarter is basically in line with Wall Street forecasts. The lower-than-expected profit in the third quarter was due to Netflix paying approximately $619 million to resolve a long-standing tax dispute with the Brazilian tax authorities since 2022, even though the company had previously warned of the potential risks in filings (but did not mention them in profit guidance) and stated that profit could have exceeded expectations without this expenditure. As a result of the lower-than-expected profit in the third quarter, Netflix's stock fell more than 10% on Wednesday to $1,116.37. However, Wall Street analysts still have a positive view of Netflix, believing that this tax expense will not affect the company's long-term growth potential. Investment bank Wedbush maintains an "outperform" rating on Netflix, with a target price lowered from $1500 to $1400. Wedbush points out that Netflix's third-quarter performance and fourth-quarter guidance disappointed investors after strong performances in several quarters. The lower-than-expected performance in the third quarter was mainly due to a special tax expense incurred in Brazil, which was included in revenue costs and covered the period from 2022 to the third quarter of 2025. Wedbush believes that Netflix is still in a layout stage for achieving substantial growth in its global advertising business, a potential that should not be overlooked. The bank estimates that the advertising business will become Netflix's main source of revenue starting in 2026, with significant opportunities in 2027. With increased investments in content such as movies, series, games, live broadcasts, and podcasts, the company's guidance for 2025 still has room for upside. Morgan Stanley maintains an "overweight" rating on Netflix, with a target price of $1500. Morgan Stanley said that Netflix's third-quarter performance was somewhat affected by the unexpected $619 million tax expense, and excluding the impact of this back tax, the overall performance was generally in line with expectations. Morgan Stanley added that Netflix's growth remains healthy, with full-year performance in line with guidance, but given the strong lineup of content in the third quarter, the market may have originally expected higher excess revenues. The trend in the advertising business is a highlight, and there is evidence emerging that Netflix is turning advertising into a billion-dollar growth engine. Bank of America Corp maintains a "buy" rating on Netflix, with a target price of $1490. Bank of America said that Netflix's third-quarter performance was overall steady, but lower-than-expected operating profit due to a one-time Brazilian tax expense (included in other revenue costs). The slightly lower-than-expected revenue in the third quarter was mainly attributed to the Latin American business, but membership growth, price adjustments, and advertising revenue growth provided support. Bank of America believes that Netflix's stock price will continue to benefit from the sustained growth of subscription numbers and profit momentum, as well as expansion opportunities in advertising and live broadcasting. With its globally leading brand, subscriber base, innovation capabilities, and visible growth DRIVE, Netflix is expected to continue outperforming the market.