Netflix (NFLX) announced on Tuesday that a tax dispute with Brazil impacted its third-quarter earnings, casting a shadow over a report that would have otherwise met Wall Street expectations. The world's most valuable entertainment company reported a quarterly operating profit of $3.24 billion, approximately $400 million lower than both the company's forecast and analysts' estimates. However, the company's outlook for the current quarter (Q4) aligns closely with Wall Street predictions. The dispute originated from a payment of about $619 million made by Netflix to resolve an ongoing tax controversy with Brazilian authorities that has persisted since 2022. While the company had previously indicated the potential risks (though not mentioned in its earnings guidance) and stated that it could have exceeded expectations without this expenditure, the matter still weighed on its earnings. The amount anticipated for future payments is expected to decrease. Netflix stated, “We do not expect this matter to have a significant impact on future performance.” Following the earnings report, Netflix's stock fell 7.5% in after-hours trading to $1,147.64. The stock had reached a record high of $1,341.15 on June 30, the last trading day of the previous quarter, but has declined in recent months. This dispute has left many investors disappointed regarding what should have been a stellar quarterly performance for the streaming giant based in Los Gatos, California. Nonetheless, Netflix benefited this quarter from a strong content lineup, including its most popular film ever, "K-POP: The Demon-Hunting Girl Group," the second season of the hit series "Wednesday," and the sequel to the comedy "Happy Gilmore." Additionally, the company also streamed the highly anticipated boxing match between Canelo Alvarez and Terence Crawford. As “K-POP: The Demon-Hunting Girl Group” became the platform's highest-grossing film with 325 million views, Netflix announced a partnership with toy giants Hasbro (HAS) and Mattel (MAT) to launch related dolls, plush toys, role-playing props, and themed games in Spring 2026. The company is also exploring derivative businesses related to the film, including live entertainment, publishing, beauty, and food and beverage sectors. The film is set for a special re-screening over the Halloween weekend. Analyst Paolo Pescatore from PP Foresight believes this tax dispute has weighed on Netflix's stock price. “Overall, despite a minor hiccup due to unexpected expenditures, it remains a strong quarter,” Pescatore stated. Currently, investors are mainly concerned about two issues: the lack of growth in user engagement on the platform and the potential threats posed by AI-generated videos. Most of the growth in the streaming sector is being captured by free services like YouTube, Roku (ROKU), and Tubi. In response to these concerns, Netflix emphasized in a letter to shareholders that user engagement set a record last quarter. The company also revealed that a stronger content lineup would be launched in the last three months of this year, including the final season of "Stranger Things," a sequel to the mystery movie "Knives Out," and new works by Guillermo del Toro and Kathryn Bigelow. Despite massive investments in content, Netflix generated $2.66 billion in free cash flow in the third quarter, exceeding Wall Street expectations and raising its full-year outlook to around $9 billion. Netflix plans to use part of the funds for stock buybacks and content investment while also mentioning the possibility of pursuing acquisition activities. Reports indicate that Netflix has previously expressed interest in acquiring some assets of Warner Bros. Discovery (WBD). Co-CEO Ted Sarandos stated in a conference call with analysts on Tuesday that achieving growth goals does not rely on acquisitions, but the company will evaluate all opportunities and maintain interest in intellectual property that enhances service appeal. Management made it clear that they have no intention of acquiring cable networks and will primarily use excess cash for other strategic initiatives. Sarandos noted, “We believe we have the ability and will carefully choose our investment directions.” Earnings data revealed that Netflix's revenue grew 17% to $11.5 billion, meeting Wall Street expectations. However, impacted by the Brazilian tax expenditures, earnings per share came in at $5.87, below analysts' forecast of $6.94. For the fourth quarter, Netflix expects revenue to reach $12 billion with earnings per share of $5.45; Wall Street's expectations for the quarter stand at $11.9 billion in revenue and $5.42 in earnings per share. Citing the Brazilian tax issue, Netflix lowered its full-year operating margin outlook from 30% to 29%, expecting revenue of $45.1 billion, a 16% year-over-year increase, in line with the previous growth forecast of 15% to 16%. Co-CEO Greg Peters added that advertising revenue has hit a record high this quarter, with expectations for overall advertising revenue to double by the end of the year.