Should Investors Buy the Netflix Dip?

Netflix's (NASDAQ: NFLX) share prices sank after the video streaming company's results came up short of analyst estimates. While revenue came in line with the consensus, earnings per share (EPS) fell well short due to an unexpected Brazilian tax charge. The company had been in a dispute with Brazilian tax authorities, but took the expense after it felt it could not win in court. However, it was not in its prior guidance, leading the company to miss the EPS consensus by more than $1.

Despite the dip, the stock has still been a strong performer this year, up about 23% year to date. Let's take a closer look at its results and prospects to see if now is a good time to buy the stock on the dip.

Image source: Getty Images.

Solid growth continues

Despite the market's reaction, Netflix turned in another strong quarter of growth. During the quarter, the company said it introduced its most popular original film ever in KPop Demon Hunters. It's looking to branch out with the popular movie through licensing for Halloween costumes, toys, and other areas.

The company also has a big content slate scheduled for the fourth quarter, led by the final season of Stranger Things. It will also carry two NFL games on Christmas, as well as a live boxing match in mid-November.

These live events are also helping feed into Netflix's burgeoning ad business. It said it is on track to double its ad revenue this year and that it has achieved sufficient scale on its ad-tiered plans in the 12 markets it offers them. Netflix has also begun to use artificial intelligence (AI) within its adtech platform to test new ad formats and help with better placement.

Revenue growth was strong across geographies for Netflix in the quarter. Asia-Pacific once again led the way, with revenue jumping 21% year over year to $1.4 billion. EMEA (Europe, Middle East, and Africa) revenue climbed 18% to $3.7 billion, while Latin America revenue rose 10% to $1.4 billion, but was up 20% in constant currencies. U.S. and Canada revenue, meanwhile, climbed 17% to $5.1 billion.

Netflix's overall revenue grew 17% to $11.51 billion, which was in line with the analyst consensus, as compiled by LSEG. EPS rose 9% to $5.87, which was below the $6.97 analyst consensus due to the Brazilian tax expense.

Meanwhile, the company continues to generate a boatload of cash, despite its heavy content spending. During the quarter, it produced $2.7 billion in free cash flow. It's now looking for free cash flow between $8 billion and $8.5 billion for the full year.

Netflix forecast Q4 revenue to grow by 17% with a 23.9% operating margin. For the full year, it is expecting revenue of $45.1 billion, at the upper end of its prior guidance range of $44.8 billion to $45.2 billion. However, it did lower its operating margin expectations from 30% to 29% due to the tax issue.

Should investors buy the dip?

The Brazilian tax charge doesn't change Netflix's trajectory one bit, but the stock carries a premium valuation, trading at a forward price-to-earnings ratio (P/E) of 34.5 times analyst estimates for 2026, even after the pullback. As such, in-line revenue and an earnings miss (even though it appears to be more one-time in nature) not surprisingly sent the stock tumbling lower.

Netflix should be able to continue to grow strongly through the combination of raising prices, adding new subscribers, and increasing ad revenue. Right now, it is the dominant streaming service, and no one really comes close to the breadth that Netflix offers. Eventually, advertising should become the company's biggest growth driver as its ad-tiered plans and live content continue to gain more scale.

I think the stock looks moderately attractive on the dip, and investors can consider taking a starter position, while being ready to buy more shares if the stock continues to drift lower.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.