Netflix

Netflix's results were good, with sales (up 13% year over year) and operating profit (up 11%) meeting its guidance. The firm maintained its full-year outlook. Netflix also released its first-half 2026 engagement report, but said that it will only release these reports annually beginning in 2027.

Why it matters: Netflix stopped releasing subscriber metrics last year, just as we anticipated subscriber additions would begin to wane. Now, after repeatedly highlighting the importance of engagement, the firm characterized engagement as nuanced and will offer less transparency. The prevailing narrative is that Netflix's business is deteriorating. Management's decision to pull back on its engagement report should only encourage this thinking. We believe this is the biggest reason for the high-single-digit stock decline after hours.

The bottom line: We maintain our $80 fair value estimate. The market has seemingly signed on to our view that Netflix will have difficulty maintaining double-digit sales growth in the long term—which the firm expects—and it has overcorrected, in our opinion. The stock is reasonably valued for the cash generation and growth it has. It is now trading below 20 times expected 2026 earnings, and we expect profits to continue growing at a faster pace than revenue each year.

Key stats: Year-over-year sales growth was in the double digits across all regions during the quarter, ranging from 10% in the US to 17% in Latin America and Europe, the Middle East, and Africa. We expect sales growth to slow further in the coming years, but the ongoing opportunity for international subscriber additions and expanding advertising revenue should keep sales growth from falling below the midsingle digits, even in down years. The operating margin contracted by 70 basis points year over year, but the recognition of content costs is more heavily weighted to the first half this year. Margins are still expected to expand by 2 percentage points in 2026.

Free cash flow declined to $1.5 billion from $2.3 billion a year ago, but that was due largely to a tax payment related to the $3 billion cash termination fee Netflix received from Warner Bros. Discovery in the previous quarter. The firm maintained its 2026 free cash flow guidance, which it raised last quarter to account for the Warner windfall, and after spending $5 billion on content in the quarter, it is tracking its $20 billion full-year spending projection.

The engagement report trend was similar to prior quarters. Total hours viewed grew by about 2%, a slightly faster clip than the same period last year. We suspect hours viewed per member continue declining at a mid-single-digit clip, and we wholeheartedly agree that the usefulness of this metric leaves much to be desired when assessing Netflix's importance to its subscribers. However, the firm's decision to suddenly deviate from the semiannual disclosures that it has heavily promoted is suspect.

Management was asked a number of different questions about alternatives it may pursue to ignite growth—from major acquisitions to incorporating live programming, free programming, or distribution for other streaming services. It did not offer substantive answers to any of these questions but ruled nothing out. We think each could be very beneficial to Netflix, and considering its industry-leading subscriber base, we think it's very well-positioned to take advantage of those options. We also think something beyond its core business—like these alternatives—will be necessary to re-accelerate growth, a catalyst the market is craving.

Our fair value estimate for Netflix is $80, implying a P/E multiple of 22 and an EV/EBITDA multiple of 19 times our 2026 projections.

We project a compound annual revenue growth rate of about 10% through 2030, followed by mid-single-digit growth for the past five years of our 10-year forecast. We expect international markets to lead this growth, given the opportunities they still have to add new members. In the mature, highly penetrated US and Canadian markets, we expect far less new member growth. The mid- to high-single-digit average revenue growth that we project throughout our forecast in UCAN is led by price increases and advertising revenue.

Penetration rates in Europe, the Middle East, and Africa, Latin America, and Asia-Pacific significantly trail those in the US, so we expect significant room for member growth. As Netflix continues to create more country-specific content and find the right pricing strategy, we believe penetration can go higher, though we don’t expect most countries to get close to the penetration rates in UCAN. We believe subscriber growth in APAC can average a low-double-digit rate through 2030, driven by India, while we project the Latin America and EMEA subscriber bases to grow in the midsingle digits annually. We don’t expect ARM growth to be as strong, mostly due to a greater mix from countries that feature lower pricing, but we still project a low-single-digit annual rate as subscription prices rise and advertising revenue takes hold. We project average revenue growth in EMEA and Latin America of about 10% annually through 2030 and 8% through 2035, while we project APAC to be the fastest-growing region, averaging more than 16% through 2030 and 11% through 2035.

Netflix’s biggest cost is content spending. We project almost $20 billion in spending in 2026 and mid- to high-single-digit growth each year thereafter. Content amortization, which is the figure reflected in the income statement, should grow at a similar rate. However, we believe there will be operating leverage on this spending and other costs, resulting in operating margins rising from 32% in 2025 to 36%-37% by the end of the decade. With sales growing faster than content spending and other costs, we expect free cash flow to grow from $9.5 billion in 2025 to almost $20 billion by 2030.

We assign Netflix a narrow moat rating based on intangible assets. Netflix has two advantages that set it apart from streaming-video peers. First, it has no legacy assets that are losing value as society transitions to new ways of consuming video entertainment at home, allowing it to put its full effort behind its core streaming offering. Second, it was the pioneer in its industry, providing it a big head start in accumulating subscribers and moving past the huge initial cash burn necessary to build a successful streaming service. This subscriber base was critical in creating a virtuous cycle for Netflix that we doubt can be attained by more than a small number of competitors.

Ultimately, having a successful streaming service is all about offering customers a continuing depth of appealing content at a price point that they deem reasonable. The streaming industry is not necessarily a zero-sum game, as customers can always add incremental subscriptions, but consumer budgets are finite, so, in practice, we expect only a handful of streaming services to consistently maintain very large customer bases, which we think will be necessary to continue funding content investments.

Securing content requires either tens of billions of dollars of cash every year or, to a lesser extent, existing ownership of content that is enduring and can continue to attract subscribers. With access to enough cash, any enterprise could compete for the best content, but it takes a continuing stream of cash for a provider to have the best odds of having attractive content at any given time. We assume that any rational competitor will eventually require sufficient revenue streams from its operations to continue funding content creation at scale.

Netflix had the luxury of overcoming its cash burn—and achieving excess economic returns—during a time when few competitors kept it from expanding its subscriber base. More recent and future competitors must attempt to reach scale while offering a compelling alternative to numerous other streaming choices. Before they’re earning much revenue, they’ll have to undertake the same or higher marketing and platform expenses Netflix had, but they’ll also need premier, first-run content—which wasn’t the case when Netflix began—requiring higher content spending. They’ll also be doing this while competing with Netflix.

Netflix now has the biggest subscriber base, by a wide margin relative to any competitor in the US and internationally. The subscriber base that Netflix began accumulating before competitors entered is the firm’s most important intangible asset, and we believe consumer habits and the data they continually provide through their viewing choices enable Netflix to feed them content they’re interested in, boosting engagement and keeping customers loyal. Cash generated from loyal Netflix subscribers then gives the company the means to continually invest heavily in content. Programming choices have yielded many very popular hits, which have then drawn even more subscribers. The additional subscribers have further increased profits, allowing an additional portion to go toward incrementally more content spending, allowing Netflix to attract premier talent and take many shots at creating hits. This is the virtuous cycle.

In addition, the eyeballs Netflix has attracted, along with inertia and satisfaction among customers, result in some shows becoming hits in large part because they’re on the Netflix platform. We believe many consumers go to Netflix to determine what they want to watch rather than go to Netflix as the destination for what they’re already seeking. Numerous examples exist of television shows that debuted elsewhere but were not particularly successful until they went to Netflix, where they became hits, often years after their initial broadcasts. We believe this is another aspect of the Netflix platform that creates an advantage in both drawing talent and programming and making customers reticent to cancel their Netflix subscriptions. While any given movie or television show has the potential to be a bust, the ability for Netflix to continue funding a large menu of options makes us think this is unlikely, as the firm has an extended dry run without any attractive new options for subscribers.

Netflix has already attracted a massive customer base and level of profitability. This advantage versus competitors makes it more likely a virtuous cycle can continue, with Netflix securing more content that attracts and holds more subscribers.

Advertising-supported subscriptions open Netflix to a wider pool of subscribers and a major new source of revenue.

Netflix has significant room to grow in international markets where it has already shown promise with local content.

Netflix faces competition that it has not had to deal with in the past. As consumers have more options for quality streaming services, it’s more likely that Netflix could get cut out of some consumer budgets.

Netflix’s US business is mature, with very high penetration of total households, meaning price increases may need to be a bigger component of future growth.

Netflix will need to spend more on content—through sports rights and local international investment—to increase membership and prices at rates it has historically, when it worked from a lower base and with less competition.