Key Points
Netflix’s continually slowing post-pandemic growth has chipped away at the stock’s value.
The measures by which the market has historically judged this company’s shares, however, aren’t as relevant as they used to be.
While likely to remain volatile, this stock’s recent dip may also be a capitulation that marks a pivot into a new way of valuing this company’s business.
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With its stock already down 44% from last June’s peak, shareholders clearly weren’t optimistic heading into Thursday evening’s release of its second-quarter numbers. Yet somehow, streaming giant Netflix (NASDAQ: NFLX) still managed to disappoint investors. Shares fell more than 8% in Thursday’s after-hours trading, in fact, not so much in response to its second-quarter results, but in response to the company’s Q3 2026 guidance. Further stoking the selling was the word that, going forward, Netflix will report its total viewing hours only once per year. The bears took that ball and ran with it, so to speak, deterring any would-be buyers waiting for a sign that it’s time to dive in.
This post-earnings stumble may well be the last of the sell-off, though. Indeed, if you can stomach the risk and the inevitable volatility, the stock is finally a buy.
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The quarter that was, and the one that won’t be
Netflix turned $12.56 billion worth of revenue into a per-share profit of $0.80 for the three months ending in June. That’s up 13.4% and 11.1%, respectively, and essentially in line with analysts’ expectations.
However, the quarter currently underway isn’t apt to be quite as healthy as initially expected. The company’s calling for a top line of $12.86 billion to turn into per-share earnings of $0.82. That’s better than the year-earlier comparisons of $11.51 billion and $0.59. But, those projections are also shy of analyst estimates of $13 billion and $0.84 per share. Following the company’s recent (and questionable) decision to reinstate free trials after a six-year hiatus, investors were quick to conclude that the streaming giant is really struggling.
And in some regards, it is struggling. For instance, growth is clearly slowing down, forcing investors to price in a factor they’ve never needed to before.
Image source: Getty Images.
What’s not being priced in, however, is how the entire dynamic surrounding Netflix — and for that matter, the entire streaming industry — has changed. This company remains the name to beat in this business, as well as the business’s best bet for investors even if it’s not evident in the most closely watched numbers.
Plenty of strategic options for the unexpectedly profitable outfit
The changes have been so slow that they’ve almost been forgotten. This includes the saturation of the once-uncontested market, the mainstreaming of advertisements before and even during programming, and the addition of select live events side-by-side with a library of on-demand content. These evolutions apply to most of the major names in the business, including Netflix, which expects its still-nascent advertising business to generate on the order of $3 billion in revenue this year.
That’s not a huge number, but this is high-margin revenue that might otherwise be foregone if an ad-supported option weren’t available.
Perhaps more than anything, though, Netflix’s streaming business has evolved from being an unprofitable growth engine to being a cash cow. A little over 27% of last quarter’s revenue was turned into net income despite industrywide challenges, while 12% of its sales turned into free cash flow, reaching profitability levels that, before the COVID-19 pandemic took hold, investors weren’t fully sure the company would ever achieve.
Notably, it’s more profitable than most of its competition, giving Netflix more operational options than its rivals.
And there are plenty of examples of such initiatives. For instance, the company is easing its way into the video gaming market, offering over 120 different free-to-play mobile games. It’s not a major profit center yet, but it could eventually become one, and is a retention tool in the meantime. Meanwhile, although management explicitly said it’s not happening yet, co-CEO Greg Peters did concede during Thursday’searnings callthat “free [free-to-watch ad-supported video] is something that we’re going to continue to consider,” perhaps providing it with another means of monetizing its home-grown entertainment content. Whispers also recently began circulating that the company is considering partnering with a traditional live/cable TV outlet to improve engagement. And, although the company ultimately dropped its bid to acquire rival Warner Bros. Discovery in February, it’s not ruling out all future dealmaking. Last month, it announced plans to acquire Radford Studio Center in Los Angeles, providing another venue for creating more of its own TV shows and films.
The fact that Netflix is considering ideas outside of its wheelhouse to leverage its brand name is encouraging. The fact that it isn’t blindly pouncing on all of them at any cost is equally encouraging.
Not yesteryear’s Netflix, not yesteryear’s stock
These are admittedly uncharted waters for investors that spent the past 24 years pricing Netflix shares largely based on reported metrics like revenue and subscriber growth. Now those numbers aren’t quite as impressive… if they’re reported at all. The market needs to find a new lens through which to judge the company’s (and the stock’s) value, like profits. The shift’s clearly been a tough one to digest.
With shares now halved over the course of the past year thanks to the post-earnings stumble, however, there’s a strong case to be made that the old paradigm and its supporters are now finally being flushed out. From here, profits could — and should — become the top focus, and Netflix hasn’t had any problem producing plenty of those of late.
That’s not apt to change in the foreseeable future, either. The company’s been pretty smart about spending on new initiatives like the introduction of ad-supported subscriptions, being careful not to create too much costly disruption too quickly. Or, in the case of its abandoned effort to acquire Warner, it wisely walked away when the total price tag started getting too big. Smart.
Analysts are optimistic anyway, even if most investors haven’t been. Before Thursday’s earnings report, the majority of them rated NFLX stock as a strong buy, with a consensus price target of $112.77, which is 65% above the ticker’s current price. Even if disappointing third-quarter guidance dials back some of that optimism, Wall Street still says Netflix shares are considerably undervalued.
Just remain braced for continued volatility and above-average risk if you dive in. People are still struggling to wrap their mind around how Netflix isn’t the numbers-focused kind of stock it used to be. Now the big number to watch is the bottom line, with more subjective-based factors like partnerships and innovation likely to push and pull on its share price.
Should you buy stock in Netflix right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
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