Netflix reported third-quarter 2026 results on Tuesday, October 20, after the close. Revenue: $12.87 billion, up 11.8%, and operating income rose 37% to $4.46 billion. Operating margin reached 34.6%, versus 28.2% in the year-ago quarter. And still the stock closed the session after the report down 5.31%.
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What was reported
| Q3 2026 | Q3 2025 | Change | |
|---|---|---|---|
| Revenue (millions of dollars) | 12,874 | 11,510 | +11.8% |
| Operating income | 4,459 | 3,248 | +37.3% |
| Operating margin | 34.6% | 28.2% | +6.4 pts |
| Net income | 3,664 | 2,547 | +43.9% |
| Diluted earnings per share (dollars) | 0.87 | 0.59 | +47.5% |
| Cash flow from operating activities | 3,162 | 2,825 | +11.9% |
| Free cash flow | 2,884 | 2,660 | +8.4% |
| Diluted share count (millions) | 4,195 | 4,340 | -3.3% |
Source: Netflix's third-quarter 2026 shareholder letter, October 20, 2026, filed with the SEC on Form 8-K as Exhibit 99.1. The company states that earnings per share rose 49%; calculating from the rounded figures in the table gives 47.5%, and the gap comes from rounding.
The company notes in the letter that operating income and margin beat its forecast primarily because of the timing of expenses, and to a small degree because of revenue. That is a caveat the company itself places, and it matters for how the margin should be read: part of the improvement is expenses shifted into the next quarter, not a lasting change in structure.
On the revenue side: growth came mainly from memberships and pricing, from growth in advertising revenue, and from a favourable foreign exchange effect net of hedging. The company reports that churn improved year over year, globally and in the United States, and was better than its forecast.
The three lines that took the stock down
The report itself is strong on the profit line. What changed sits in the guidance and alongside it.
First, advertising. The company cut its 2026 advertising revenue guidance to about $2.7 billion, from about $3 billion previously. The explanation it gives: a slower than expected rollout of some advertising product capabilities. That is also what explains the full-year outlook sitting 0.2% below the midpoint of the prior range - while subscription revenue, according to the company, actually outperformed its expectations.
Second, headcount reductions. The company notes it recently announced them, and quantifies the cost: about 120 basis points of fourth-quarter margin, and about 30 basis points of full-year margin. It describes the change as enabling it to keep investing aggressively in high-impact areas.
Third, view hours. The company writes explicitly that it is aware of investor concern about growth in view hours. It argues that member response to the 2026 price increases is consistent with prior increases and with its expectations, and that this is a sign engagement is healthy - but also writes that it seeks to accelerate growth in view hours.
Guidance
| Q4 2026 (forecast) | Q4 2025 (actual) | |
|---|---|---|
| Revenue (millions of dollars) | 13,442 | 12,051 |
| Year-over-year growth | 11.5% | 17.6% |
| Operating income | 3,500 | 2,957 |
| Operating margin | 26.0% | 24.5% |
| Net income | 2,787 | 2,419 |
| Diluted earnings per share (dollars) | 0.67 | 0.56 |
The operating margin guided for the fourth quarter, 26.0%, is far below the 34.6% of the third quarter - but the fourth quarter is seasonally the company's weakest on margin: in the fourth quarter of 2025 it was 24.5%. So the guidance is 1.5 points above the year-ago quarter, and it already contains the hit from the reductions.
For the full year the company guides revenue of $51.1 billion, growth of 13% (12% excluding foreign exchange), and an operating margin of 31.5%, versus 29.5% in 2025. The forecast implies, according to the company, annual operating income growth of more than 20%.
The content and the advertising
The company reports that its audience is approaching one billion people. Viewing of non-English content has grown from under 10% of total viewing a decade ago to more than a third today.
Among the quarter's titles: The Last House with 91 million views, Facing El Chapo with 58 million, The Secret Woman with 47 million - on track to be the company's most-viewed Danish title - and Death of the Pastor's Wife with 45 million. Plastic Beauty, with 12 million views, is on track to be the company's most-viewed series in Japan.
On licensing: a partnership with TF1 in France, which the company says is generating incremental viewing there; a new licensing deal with Disney; and a sneak peek of Grand Theft Auto VI with Take-Two in August.
In advertising: the company extended programmatic access, signed partnerships with MercadoLibre in Latin America and AdForm in Europe and the Middle East, and is expanding measurement capabilities. The advertising tier will launch in 15 more countries in 2027, with the first tranche in March 2027 covering nine countries in Europe and the Middle East, Colombia, Peru and New Zealand.
The stock
The report was published after the close on Tuesday, so the trading reaction is Wednesday, October 21. The stock closed at $65.04, down 5.31% from the day-of-report close of $68.69. It opened at $64.15, fell as low as $64.10 and rose as high as $67.12.
Volume on the reaction day was 101.4 million shares, versus 67.0 million on the day of the report - 1.5 times as much. For context: on October 15 the stock closed at $72.61, so Wednesday's close is about 10% below it.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a clean example of the gap between the profit line and what the market reads. Operating margin rose 6.4 points in a year, operating income 37%, and the stock fell 5.31%.
Three possible reasons sit inside the report itself, and all three were worded by the company, not by the market.
One, the company itself said the margin beat its forecast because of the timing of expenses. That is a caveat that weakens the quality of the surprise: a deferred expense comes back next quarter.
Two, advertising was cut by a tenth - from about $3 billion to about $2.7 billion. That was the line meant to be the new growth engine, and while subscription revenue beat expectations, it lagged. The full-year forecast came down 0.2% because of it alone.
Three, the company pre-empted the question about view hours and answered it itself. When a company writes in its shareholder letter that it is aware of investor concern on a particular topic, it confirms the topic is on the table.
What has not changed: a mix in which more than a third of viewing is not in English, an audience approaching one billion, and a share count down 3.3% in a year. Both readings - "a company expanding margins" and "a company whose new growth engine is running late" - fit the same numbers.
What I will follow: advertising revenue in 2027, when the tier launches in 15 more countries, and fourth-quarter margin against the 26.0% guidance - which already contains the 120 basis points from the reductions.
(To be clear: this is my personal opinion only. Nothing here is a recommendation to take any action, and there is no forecast here of the price of any security.)
Ilan Abramov, the author, or anyone on his behalf may hold some of the securities or funds mentioned in this article.
