As Netflix drops on earnings miss, it’s investing just $0.40 into content for every $1 of revenue

Netflix investors bailed out of the company’s stock after the streamer posted its worst earnings miss in years.

Shares dropped as much as ~6.5% in trading after the bell on Tuesday, toward the $1,160 level, and have continued to languish there on Wednesday morning.

Netflix posted third-quarter earnings of $5.87 per share, below analyst expectations of $6.97, marking its biggest earnings miss since Q4 2022. It reported revenue of $11.51 billion, in line with the consensus estimate of analysts polled by FactSet and up 17% from last year.

While Netflix’s revenue base keeps growing, the streamer is reinvesting a lower percentage of that revenue back into content. When the first season of “Stranger Things” debuted on Netflix in the third quarter of 2016, the company was investing more money into content than it was making in revenue ($2.44 billion vs. $2.29 billion).

At the time, for every $1 of revenue, Netflix put $1.07 into creating or acquiring new shows or movies.

Nine years later, with the fifth and final season of Netflix’s premier franchise set to debut next month, the streamer’s strategy has shifted. In Tuesday’s earnings report, for every $1 of revenue Netflix made in Q3, it invested $0.40 into content.

That’s above the $0.35 it invested in the previous quarter, but significantly below the $0.73 it posted in the fourth quarter of 2021 before its “Black Tuesday” earnings report cratered the stock in 2022 and led to big shifts in the streamer’s content spending strategy. While it may be rough for Hollywood, Wall Street certainly enjoys the idea of spending less and making more.

Of course, the trend reflects a ratio of content spending to revenue. In absolute values, Netflix is spending more on content than it used to — it’s just making more. In 2016, the company spent about $8.7 billion on content. This year, it said it expects to spend about $18 billion.

For the latest quarter, Netflix reported an operating margin of 28.2%, below its outlook of 31.5% and the 29.6% in the same period last year. It attributed the miss to “an expense related to an ongoing dispute with Brazilian tax authorities” and said it doesn’t expect the matter to affect future results. On its ad-supported tier, which analysts expect to eventually generate a higher average revenue per user than the pricier ad-free subscription, Netflix said it’s “using AI to test new ad formats.”

Looking ahead, the company said it expects revenue to grow 17% in the fourth quarter for $45.1 billion in full-year revenue, slightly better than Wall Street’s estimate of $45 billion.

Netflix’s fourth-quarter slate has some notable entries, including, as mentioned, the series finale of “Stranger Things,” along with two Christmas Day NFL games. (The company paid $75 million per game for the slot last year.)