Earnings Preview | Netflix (NFLX.US) Q3 Earnings Highlights: Price increases push up profit margins How can advertising and live streaming make up for the slowdown in revenue?

The Zhitong Finance App learned that streaming giant Netflix (NFLX.US) will release financial results for the third quarter of 2026 after the US stock market this Tuesday. Since the company's stock price has fallen by more than 22% during the year, this results release has attracted much attention and is regarded by the market as a key point in testing its fundamental resilience. Judging from current expectations, Netflix is facing a kind of “rift”: the price increase dividend will drive a sharp jump in profit margins, but the downward trend in core revenue growth is difficult to reverse.

Price increase dividends have been implemented, and the profit side is expected to usher in a “bright moment”

Judging from profit expectations, Netflix is expected to hand over an impressive profit questionnaire this quarter. The company indicates that the operating margin for the third quarter will reach 33.2%, a significant increase from 28.2% in the same period last year; market consensus expects earnings per share (EPS) of $0.82.

The strong performance on the profit side was mainly due to the lag effect of the pricing strategy. Revenue in the US and Canada (UCAN) increased 10% in the second quarter, but the effects of price increases in the US, Mexico, and Spain were only partially reflected. This means that the full quarterly price increase proceeds will be concentrated in the third quarter. Furthermore, the company completed a share repurchase of 4.7 billion US dollars in the second quarter, which directly supported earnings per share.

However, the bright profits cannot hide the pressure on the revenue side. The company's third-quarter revenue was US$12.86 billion, and the Zacks consensus forecast was US$12.87 billion (up 11.84% year over year). This growth slowed further from 13.4% in the second quarter. Additionally, Netflix is retesting the free trial outside of the US and UK, which may disrupt monetization in the short term.

The advertising business has entered a monetization period, and the target of 3 billion US dollars is yet to be tested

Under a long-term trend where membership growth matures and room for price increases is gradually limited, the advertising business is the most critical incremental variable in Netflix's valuation narrative.

Judging from the latest developments, Netflix's advertising infrastructure has begun to take shape: the company revealed the results of pre-sales ads in August, and advertising commitments have nearly doubled; its advertising suite has been certified by the Media Rating Committee (MRC) for the first time; the Pause Ads (Pause Ads) function has implemented programmatic purchases on major platforms. Together, these measures support the company's 2026 advertising revenue target of around $3 billion.

For investors, the key to this financial report is not whether advertising revenue meets the standards, but whether management can provide a clearer pace of monetization. If the amount of advertising revenue can effectively hedge against rising content costs, it will become an important bargaining chip to support valuation.

The “ledger” of live streaming content: accounts for 5% of the budget and contributes only 1% of the time

In order to drive user growth and attract advertisers, Netflix placed a heavy emphasis on live sports broadcasts. For the third quarter, the lineup included MLB home run contests, Field of Dreams games, and the first week of the NFL season.

However, the input-output efficiency of live streaming is becoming the focus of market scrutiny. The company anticipates that live streaming content will consume a little more than 5% of the 2026 content budget, but will only contribute about 1% of the viewing time. This disparity ratio means that at this stage, live streaming is more of a customer acquisition and marketing tool than a core pillar of watch time.

Investors will focus on whether management can prove that the additional subscription and advertising revenue from live streaming is sufficient to cover its high unit costs. At the same time, weak data that the company's overall viewing time increased by only 2% in the first half of the year, as well as fierce competition from streaming peers such as Apple, Amazon, and Disney, also posed a short-term fundamental headwind.

Management Reorganization and Guidance to 2027: Market Seeks Mid-Term Anchors

A special background to this financial report is that Netflix announced two major adjustments a few days before the earnings report: laying off about 1,000 employees (accounting for about 6% of global employees) and replacing its Chief Content Officer, Bella Bajaria, the former content manager, leaving her job and being replaced by senior Disney executive Peter Rice.

According to Wedbush's analysis, personnel and cost adjustments at this point are intended to respond to market concerns about user engagement and tilt spending more towards more focused content; however, the pace of advertising business volume may be lengthened as a result. In other words, restructuring is logically beneficial to medium-term efficiency, but may increase uncertainty at the implementation level in the short term.

At the earnings call, management's outlook for 2027 will be more important than the data for the third quarter itself. Analysts will look for clues in three directions: the space for pricing strategies, the traction of advertising packages, and whether content spending discipline can support profit margin goals while maintaining competitiveness. Netflix's current guidance for the full year 2026 is revenue of 51 billion to 51.4 billion US dollars and an operating profit margin of 31.5%. Whether management will adjust the medium-term framework after the restructuring is a key variable in judging the direction of the stock price response.

Since this year, Netflix's stock price has fallen 22.6%, while Zacks's non-essential consumer goods sector fell 19.6% over the same period. Shares of Amazon and Apple rose 10.2% and 25.8%, respectively.