Netflix – Down 40%, Now a No-Brainer for Long-term Investors
A breakdown of what the latest results and Warner Bros. bid mean for long-term investors + an updated fair value estimate!
Netflix shares have been absolutely hammered over the past few weeks, losing 38% of their value from a late June 2025 peak. And to just jump straight to the conclusion, I strongly believe this sell-off is nothing more than a short-term overreaction and a reflection of negative sentiment, with the actual investment thesis not damaged at all, actually even strengthening.
In other words, I don’t see this 38% loss in value as a reflection of fundamentals or its growth prospects, suggesting that shares are now fundamentally much less expensive. And they most certainly are, as the title already suggests.
In my view, Netflix is further solidifying its dominant position in streaming by the day, and I still see this as one of the few long-term winners in this market, with eventual consolidation inevitable, as highlighted by the Warner Bros bid. As a result, I am quite confident in its prospects over the next 5-10 years, as TV viewership continues to move from linear to streaming, and Netflix is positioned to be the default in every household, especially as it continues to broaden its offering.
There are a couple of key factors in my Netflix thesis worth pointing out. 1) Industry consolidation will accelerate, and Netflix is structurally positioned to be one of the main beneficiaries. The economics of streaming increasingly favor scale, making consolidation not a question of if, but when. Content inflation, rising marketing costs, and the reality of consumer fatigue toward managing multiple subscriptions are putting pressure on sub-scale platforms that lack either global reach or a deep, evergreen content library. Over time, this naturally forces weaker players to merge, sell assets, or exit altogether. Warner Bros is an example – the economics just didn’t make sense.
Take the gradual move into live entertainment. Sports rights come with massive price tags, so only a handful can compete for them. These kinds of developments flush out smaller competitors.
Netflix sits on the right side of this dynamic. As the largest global streaming platform by some distance, it benefits from far superior operating leverage, the ability to amortize content across a massive international subscriber base, and the financial flexibility to invest through the cycle while others are forced to retrench. The recent bid for Warner Bros. is a clear signal of where the industry is heading: fewer, broader platforms with meaningful pricing power and diversified content ecosystems, able to offer a more complete and ever-entertaining package for subscribers.
Netflix is well-positioned to be a long-term winner.
2) Netflix still has ample room to expand over the coming years, both in terms of subscriber numbers and content, despite its already industry-leading global reach and extensive video catalog. While Netflix is often portrayed as a “mature” platform, this view underestimates both the size of the remaining addressable market and the company’s ability to deepen engagement within its existing footprint.
Today, Netflix still captures under 10% of U.S. TV time, and this percentage drops further when we look at it globally. The company still has hundreds of millions of households to capture globally, mainly through international penetration and differentiation, combined with entering new content catagories, such as live TV or live sports, which can help it address an entirely new user base.
In other words, Netflix is still nowhere near its subscriber ceiling, with plenty of room to maintain high-single-digit to low-double-digit growth for years to come. I believe this is broadly underestimated.
In simple terms, Netflix’s penetration remains extremely low, and as TV viewership gradually moves to streaming and Netflix enters new content catagories, it is poised for strong, organic user growth, which will drive strong financial results, especially as content additions can justify higher pricing tiers and higher ad prices.
In other words, the 5-10 year Netflix thesis remains incredibly strong, and these last few months haven’t even made a dent.
Yes, competition from larger peers is also intensifying, particularly from Amazon, YouTube, and Apple in live content, but Netflix remains the undisputed giant and is well-positioned to capture the most market share over time.
That is my core thesis. Let’s now shift our focus to recent events!
In this analysis today, I want to provide an update on Netflix following the events since my last coverage of the shares back in October, by delving into the Q4 earnings report and recent developments, and breaking down the Warner Bros bid (details, positives, negatives, considerations, etc), before updating my financial projections and fair value estimate.
In other words, this is my Netflix quarterly update!
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Netflix delivers a fairly strong Q4 report
Netflix released its Q4 financial results on January 20. And I have to be honest, the headline numbers failed to impress me, and investors seemed to share this view, with Netflix shares initially losing over 5% of their value, before taking back some of those losses on Friday.
At the same time, the company’s headline numbers were far from bad, and given how much shares had already dropped to date, I had a hard time justifying a sell-off. I mean, the company still beat consensus estimates on both the top and bottom lines, exceeded its 2025 financial objectives, and issued guidance ahead of Wall Street’s expectations. And as we delve deeper into the Q4 numbers and guidance, I honestly don’t think investors have much to complain about, especially given the current valuation, which isn’t pricing in much optimism.
Delving into the numbers, Netflix reported a Q4 revenue of $12.1 billion, surpassing consensus estimates by $80 million and reflecting excellent YoY growth of 18%, accelerating further from prior quarters and sitting at the highest level in over three years.
Safe to say Netflix’s growth engine is firing on all cylinders – even though FX was a 1 percentage headwind, this growth is 1 percentage point ahead of guidance.
According to management, Q4 growth was primarily driven by membership growth and increased ad revenue, with higher pricing also contributing. Starting with membership growth, Netflix reported that paid memberships exceeded 325 million as of January 1, suggesting the company continues to add subscribers at a fairly strong rate.
Now, management doesn’t disclose the exact number and does not report subscriber growth on a quarterly basis any longer, but this milestone suggests that the number of paid subscribers grew by at least another 8% in 2025, which is a fairly decent rate, and I expect this to be closer to 330 million, with growth more likely in the low teens, looking at revenue and industry data.
Besides strong membership growth, Netflix also reported resilient engagement metrics, a positive indicator of retention and churn. Netflix reported total viewing hours in the second half of the year, one of the best indicators of business health, grew by 2% YoY to 96 billion hours, suggesting that Netflix remains able to retain user attention and grow this number despite some YoY headwinds.
You see, due to the WGA strike, Netflix significantly increased licensed content on its platform in 2023-2024 to offset production delays – a lack of new content to draw attention was offset by adding a load of second-run content. However, this content is largely gone from the platform by now or has lost user attention, leading to a headwind in non-branded streaming hours – non-Netflix content viewing declined strongly YoY.
Positively, Netflix was able to offset this with a brilliant slate of Netflix Originals in the second half of the year, leading to a 9% rise in viewing of branded originals, including Stranger Things, Emily in Paris, and Frankenstein. This led to 2% growth in viewing hours, up from 1% in the first half, which is a strong performance, all things considered.
Crucially, this growth during a challenging period allowed Netflix to continue gaining market share, with its share of U.S. TV time reaching a new all-time high of 9%, up 50 bps YoY. These market share gains can’t be overstated.
Ultimately, the strong Q4 performance brought FY25 revenue to $45.2 billion, up 16% YoY and surpassing management’s financial targets, putting it on track to double revenue and triple profits by 2030.
Besides subscriber growth, a significant contributor to 2025 growth was ad revenue, which is off to a flying start since launching just a couple of years ago. Driven by an improving technological platform for advertisers, a growing user base, growth in engagement, and an expanding offering with live content, Netflix’s ad revenues continue to grow rapidly, hitting $1.5 billion in 2025, up 250% YoY.
This is remarkable growth and is gradually becoming a very solid contributor to Netflix’s revenue and growth. Though this should not come as a surprise. As consumer budgets are under pressure from inflation and rising debt, Netflix’s ad tier is seeing solid growth. And with over 325 million paid memberships and an estimated global audience approaching one billion, Netflix is becoming increasingly attractive to advertisers, especially with its prime-time live broadcasts, including the Netflix NFL games and the Jake Paul–Anthony Joshua fight.
Advertising remains a massive opportunity for Netflix. And while it might account for only 3% of revenue today, this will likely jump to 6% in 2026 and reach 10-15% before the end of the decade.
All in all, Netflix’s top-line momentum remains excellent, driven by multiple levers. Additionally, growth is driven across all regions, with the U.S., its largest region, also excellent at 18% YoY in Q4. EMEA grew 15% YoY, LATAM 20% YoY, and APAC 19% YoY.
I simply do not see any weakness in these numbers.
On that note, let’s shift our focus to the P&L.
Netflix reported an operating profit of $3 billion, up 30% YoY, driven by strong top-line growth and disciplined expense management. This fueled a 230 bps expansion in operating margin to 24.5%, up nearly 800 bps in two years. The Q4 operating margin was slightly ahead of guidance, primarily due to revenue upside.
When it comes to margins, Netflix has shown excellent progress in recent years, and management remains committed to expanding its operating margin each year by increasing operating leverage. For reference, sales and marketing expenses were up only 13% in 2025 and G&A only 11%, both growing more slowly than revenue, a trend we have seen over recent years.
Ultimately, the FY25 operating margin hit 29.5%, up 300 bps YoY.
Further down the line, this translated into a 31% YoY increase in EPS to $0.56, beating consensus estimates by $0.01 and also coming in ahead of guidance, even as it included a $60 million interest expense related to the Warner Bros.-related bridge loan and associated bridge reduction financings, which weren’t accounted for in guidance.
So, a healthy beat, all things considered.
Finally, Netflix reported Q4 FCF of $1.9 billion, with a 16% FCF margin. This brought the FY25 total to $9.5 billion, up 38% YoY, at a strong 21% FCF margin. Notably, FCF was about $500 million above guidance due to the timing of an expected deposit related to the ongoing dispute with the Brazilian tax authorities. Either way, these are strong cash flows.
This allowed Netflix to end the year with a healthy balance sheet despite continued share buybacks. The company repurchased $2.1 billion in shares in Q4 alone, not fully covered by FCF, and has reduced its share count by 1.3% over the last year, leaving $8 billion remaining under the current authorization.
Nevertheless, the balance sheet as of December 31 looked healthy, with $9 billion in cash and $14.5 billion in debt, leaving $5.4 billion in net debt. Obviously, I would much prefer a net cash position, but given the amount of FCF this business generates annually, any debt maturities seem well covered, and if management chooses to, it can pay down debt fairly quickly.
So, all in all, I would say Netflix remains in good financial health and is firing on all cylinders, with healthy, accelerating top-line growth, expanding margins, and excellent cash flows.
I am quite pleased with this quarter.
The $82.7 billion Warner Bros bid
Yes, it’s time to discuss the elephant in the room, the reason Netflix shares have tumbled further in recent months: The Warner Bros bid.
So, what is this deal on paper?
In December, Netflix announced a deal to acquire the Warner Bros. part of Warner Bros. Discovery, including its film and television studios, HBO Max, and HBO, for a total of $82.7 billion. Initially, Netflix intended to use a mix of cash and Netflix stock, but it has recently switched to an all-cash approach to speed up the Warner Bros. shareholder vote and provide greater certainty of value.
To be clear, Netflix is only acquiring the Warner Bros. side of the company, leaving the global networks operation to be spun out as a separate public company.
The deal has been approved by both the Netflix and Warner Bros. boards, leaving only the shareholder vote and regulatory approvals, which are expected to be completed in late 2026 or early 2027, depending on the timing of approvals.
That is the deal in a nutshell, on paper.
In terms of financing, Netflix intends to use a combination of cash on hand, credit facilities, and committed financing. In early December, the company obtained commitments for a $59 billion senior unsecured bridge facility, with the intention of replacing those commitments with a more permanent, cost-effective funding structure before closing. Later in December, it entered into a $5 billion senior unsecured revolving credit facility and a $20 billion senior unsecured delayed-draw term loan facility, and reduced its outstanding bridge facility commitments by a corresponding amount to $34 billion.
Then, in recent weeks, following the shift to all-cash, Netflix increased its bridge facility commitments by $8.2 billion, bringing the aggregate to $42.2 billion. The goal is still to reduce these bridge facility commitments between now and closing through a combination of future bond offerings and cash on hand.
In other words, Netflix has secured ample financing flexibility to close the transaction while retaining full control over its capital structure, with the bridge facilities serving as a temporary backstop rather than a permanent source of leverage.
When it comes to financial health considerations for investors, if the deal closes, the key point is that Netflix is not stretching its balance sheet to make this transaction work. Even in a fully debt-funded scenario at closing, Netflix would remain comfortably within investment-grade leverage levels, supported by strong, recurring free cash flow. Importantly, the company has been explicit that its priority post-closing will be to gradually refinance short-term bridge financing into longer-dated, lower-cost debt, while allowing leverage to trend down as cash flow grows.
As a result, while the acquisition would temporarily increase gross debt and pause share repurchases, it does not meaningfully impair Netflix’s financial flexibility. Instead, it represents a deliberate capital-allocation decision to invest in long-term strategic assets at a moment of industry stress, rather than a sign of balance-sheet strain or financial overreach.
So far, so good.
Now, what is the motivation behind the deal? How would this make sense for Netflix?
Well, there are two main areas of opportunity here, according to Netflix management. First, the Warner Bros. IP included in the deal will enable it to offer an even broader, higher-quality selection of content to members. Warner Bros. has over 100 years of IP that Netflix would gain the full rights to, allowing it not only to integrate it into the Netflix ecosystem but also to create spin-offs and new iterations of fan favorites. Besides, it reduces reliance on third-party licensing cycles.
In other words, the acquired IP alone significantly grows the streaming service’s appeal to consumers. And on top of that, it will allow Netflix to offer more personalized and flexible subscription options that better meet the diverse preferences of its global audience. For example, it can create higher-priced tiers for the full library or lower-priced tiers that exclude HBO content, allowing it to better meet customer preferences, target lower-income individuals, and generate greater value from its subscriber base.
Considering this opportunity, I think the deal makes quite a lot of sense.
Apart from the arguments made by management, I also think the size of the combined studio assets should not be underestimated, since one of the key elements in reducing churn and bolstering retention is the release of new content to keep people hooked. Increased Studio assets will allow Netflix to produce much more high-quality content. And it would give Netflix a new revenue stream from theatrical releases, which it doesn’t plan to change from Warner Bros.’ current approach.
Ultimately, the deal would give Netflix significant scale benefits, and, in the end, subscribers want to pay for the most complete offering, especially during economic scrutiny. I believe this deal strengthens Netflix’s position as the default option in every household, with the broadest permanent catalog and the most new releases.
In my view, this deal primarily strengthens Netflix’s moat and competitive position, so I really like it, and it reinforces my long-term thesis.
However, it isn’t all plain sailing. There are some negative considerations as well.
First, there is the opportunity cost. Netflix is taking on a significant debt load, and these large acquisitions are never without integration and synergetic risk. However, as just laid out, I am not too worried about the financials, and I don’t think integration is much of a risk here either.
Second, there is the Paramount fight. Paramount has been pitching a $ 30-per-share all-cash offer for the entire Warner Bros. Discovery company, which it claims is a better offer than Netflix’s, although Warner Bros. has been clear on the matter, favoring the Netflix deal.
Yet, the deal is still subject to the shareholder vote, and Paramount has extended its tender deadline to February 20, running a proxy/pressure campaign urging shareholders to reject the Netflix deal.
Now, I am not expecting shareholders to vote against the deal, especially since the Netflix deal is now all-cash as well, but it is a lingering consideration. Besides, Warner Bros. canceling the deal would trigger a $2.8B termination fee payable to Netflix.
Yet even if the vote comes through cleanly, there remains the largest risk: regulatory approval amid antitrust concerns. Regulators could easily argue that Netflix is already the dominant global SVOD player; adding a major studio and a premium network brand could increase its bargaining power with talent, distributors, the ad market (for the ad tier), and consumers.
So, it could hurt the competitive environment in Hollywood, and Netflix could restrict Warner content on rival services or raise licensing costs, further harming the competitive environment in streaming.
Even if the narrow “SVOD share” math doesn’t scream monopoly, the policy mood can still matter (and remedies—behavioral or structural—can be required). Netflix and WBD are already engaging the DOJ and European Commission, which tells you they’re preparing for a real fight.
Trump has also voiced his disapproval of the deal, as have several senators. Ted Sarandos, the co-chief executive of Netflix, has reassured that the theatrical industry will not be impacted by the deal, and the company seems ready to make concessions on licensing, which I think is reasonable and wouldn’t hurt the deal’s value too much. In my opinion, it is all about owning the IP and studio assets.
Does the deal have a chance of going through? I believe it does, but it will be a fight and will include several remedies related to theatrical releases and licensing.
But I definitely believe this deal has a good chance of closing, and so does Netflix management. Netflix has agreed to a termination fee of just under $6 billion, one of the largest ever in an M&A deal. This means that if the deal falls through due to regulatory issues, financing failures, or other major deal-blockers, Netflix is required to pay this amount to Warner Bros. The size of the fee signals Netflix’s willingness to shoulder regulatory uncertainty to close the deal.
Ultimately, this deal will continue to face a lot of scrutiny over the next few months, but most importantly, I think Netflix will be fine either way, with or without it. Netflix doesn’t need Warner to win, but it does meaningfully accelerate its transition from a hit-driven streamer to a global media utility.
I think those are the most important considerations for shareholders.
To round this up, what is the reason Netflix has shown significant weakness after the bid was announced?
Practically, the market just doesn’t like uncertainty, and so it doesn’t like acquisitions, especially large ones, bidding wars, and highly scrutinized acquisitions facing antitrust issues. It doesn’t reflect Netflix’s fundamental value.
On that note, let’s get to the outlook.
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Outlook & Valuation
As always, let’s start with management’s guidance.
Management now guides FY26 revenue between $50.7 billion and $51.7 billion, up 12-14% YoY, suggesting a minor slowdown from 16% growth in 2025 but still strong momentum. This includes the expectation that ad revenue will double to $3 billion and that memberships will continue to grow healthily.
This will be supported by a brilliant 2026 content slate, including:
Bridgerton S4
The Night Agent S3
Outer Banks S5
The Gentleman S2
3 body Problem S2
Lupin part 4
The Rip, starring Ben Affleck and Matt Damon
Peaky Blinders: The Immortal Man, starring Cillian Murphy
The Denzel Washington-Robert Pattinson heist caper Here Comes the Flood
Enola Holmes 3
And much more! Honestly, the number of hit series coming back for a new season on Netflix in 2026 is impressive - the amount of quality content Netflix is able to push out is second to none, and that gives it a massive edge.
In addition to a brilliant branded content slate, Netflix also intends to expand its licensed content offering. It has a new U.S. licensing partnership with Universal for live-action films, licenses 20 shows from Paramount, and recently announced an expanded pay-1 film pact with Sony Pictures Entertainment, moving from a prior U.S. deal to a global deal through 2029. The Sony deal is said to be worth $7 billion and includes all Sony feature films once their full theatrical and home-entertainment windows have closed.
Like I said, second to none.
On top of this, Netflix is also accelerating its live content efforts. These still account for a very small percentage of viewing hours but an outsized share of subscriber additions. Big events in late 2025, including Anthony Joshua’s sixth-round knockout of Jake Paul and the NFL Christmas Day games, were a massive success (the NFL game between the Detroit Lions and Minnesota Vikings on Christmas Day was the most-streamed NFL game in U.S. history).
For 2026, Netflix is adding the World Baseball Classic (WBC) in Japan (all 47 games) to its live content in the U.S., Skyscraper Live, and three Major League Baseball events, including an exclusive Opening Night game and the Home Run Derby.
Moving to the P&L, Netflix guides FY25 operating margin to 31.5%, up 200 bps YoY, despite $275 million in acquisition-related expenses, or about a 50 bps margin drag.
Furthermore, Netflix expects content amortization growth of ~10% in 2026, with higher growth in the first half than in the second half, driven by title launch timing. This means Netflix is slightly accelerating content investments compared to 2025, but its cash content spend-to-content amortization ratio of ~1.1x remains stable compared to recent years.
Long-term management continues to aim for revenue to outpace content spend, supporting consistent margin expansion. For reference, while the magnitude of margin expansion will vary year to year, Netflix aims to expand the operating margin each year, and content spend is a strong, adjustable lever.
Given these assumptions, Netflix projects a 2026 FCF of $11 billion, up from $9.5 billion in 2025, despite a $500 million headwind from tax expenses in Brazil, implying 50 bps of FCF margin expansion to 21.5%.
Finally, Netflix guides Q1 revenue of $12.16 billion, suggesting YoY growth of 16%, slightly down from 18% in Q4 and missing the consensus of $12.17 billion. Similarly, Netflix guides for a Q1 EPS of $0.76, short of a $0.81 consensus, so a slight disappointment for Wall Street.
Moving to my own forecast, I have slightly trimmed my FY26 financial estimate to reflect acquisition-related cost headwinds and a projected slowdown, reflecting greater caution. I have only slightly trimmed my revenue and EPS estimates, but cut my FCF forecast by a bit more due to the shift of costs from 2025 to 2026 and expected acquisition-related costs. Nevertheless, I foresee 13% revenue growth, accompanied by 26% EPS growth, reflecting healthy margin expansion.
Looking further ahead, I expect Netflix to maintain low-double-digit revenue growth, fueled by continued subscriber growth in the high-single to low-double digits and rapid advertising revenue growth, especially as Netflix continues to gain share and expands its live content. Do note that these estimates do not reflect any acquisition impact.
Meanwhile, I expect another big year of margin expansion in 2027, with Netflix continuing to expand margins in the following years, though to a lesser degree. Still, this should allow for a mid-to-high teens EPS CAGR. These expanding margins should also benefit FCF, which is expected to grow at an even more impressive low-20s CAGR, given room for capex and content efficiency, as well as easing headwinds that held back FCF in 2025 and are likely to do so again in 2026. The big wildcard in these projections, once again, is the Warner Bros. acquisition.
All these current assumptions are reflected in the financial forecast below.
That then brings us to valuation, where things get really interesting. Netflix shares have lost 11% YTD and 30% over the last 6 months, driven by factors that, in my opinion, do not reflect fundamentals. As I discussed, Netflix remains fundamentally very sound. Yes, I have slightly trimmed near-term estimates, but medium-term estimates are mostly unchanged, and Netflix’s outlook remains sublime. So, safe to say Netflix shares have become much more affordable. At a current share price of $83.50, Netflix shares trade at:
26x this year’s earnings, a 32% discount to its 5-year average.
A PEG of 1.3x
32x this year’s FCF
In my view, this materially understates the quality, durability, and long-term growth profile of the business. For a company that continues to grow revenue at a low-teens rate, expand margins meaningfully, generate over $10 billion in annual free cash flow, and dominate a structurally growing industry, these multiples look far from demanding. In fact, they imply a level of skepticism that is hard to reconcile with Netflix’s current operating momentum and competitive position.
Put differently, the market is currently valuing Netflix as if growth is set to decelerate sharply and margins are close to peaking, neither of which is supported by the data or management’s long-term framework. With operating leverage still unfolding, advertising in its early innings, and multiple monetization levers left to pull, I believe Netflix deserves to trade closer to its historical averages, if not at a premium, given its improved business quality and cash generation today compared to five years ago.
Even applying conservative assumptions, mid-teens EPS growth, and a modest multiple re-rating, the current valuation leaves ample room for attractive long-term returns. As a result, I view the recent share price weakness not as a warning sign, but as a rare opportunity to accumulate shares of a dominant, compounding business at a materially more reasonable price than we have seen in quite some time.
For reference, even assuming a 28x (earnings) 2028 exit multiple, which I deem fairly conservative for a business with room to maintain mid-teens EPS growth well into the 2030s, given its growth runway and a hugely dominant market position, I calculate an end-of-2028 target price of $129. From a current share price of $83.50, this reflects potential annualized returns of 16%.
In my view, this reflects a very favorable risk-reward, especially given that these decent returns are based on conservative financial estimates and a multiple that leaves plenty of upside.
In other words, at current price levels, I think Netflix shares represent excellent long-term value, with current negative sentiment creating an appealing long-term opportunity.
I am a buyer at these levels. I have already grown my Netflix position from 3.5% of my portfolio to nearly 6% in recent weeks, at prices below $90. Anything below $90 is a no-brainer.
Rating: Buy - Accumulate below $92
2028 Target Price: $129
Implied CAGR from current price: ~16%
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