Netflix Earnings: Growth Fears Are Real, but Shares Look Attractive

Key Morningstar Metrics for Netflix

• Fair Value Estimate
  : $80
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of Netflix’s Earnings

Netflix’s NFLX third-quarter results were good, but management commentary reinforced the growth fears that have hit the stock. Engagement has been disappointing, advertising sales will fall short of the 2026 target; and management wouldn’t commit to 2027 sales meeting its double-digit growth target.

Why it matters: The negative sentiment has created the best buying opportunity for Netflix shares in years. Many of its markets are mature and won’t grow at the rate they did when they were rapidly adding new subscribers, but it still has growth drivers.

• The ad-supported tier will launch in 15 international markets in 2027, a catalyst that we expect to drive a surge in new members, as initially happened in markets where the ad tier was originally offered.
• Management said customer churn declined from last year to better levels than it anticipated in the US and internationally. We expect additional US price increases in 2027 and further advertising growth, as Netflix better fills inventory and narrows the revenue gap between ad-supported and ad-free users.

The bottom line: We maintain our $80 fair value estimate and narrow moat. A growth slowdown was inevitable, but Netflix remains far superior to its subscription streaming peers, and its valuation multiples are now very reasonable, as we still expect double-digit annual profit growth.

• For all the consternation, third-quarter revenue still rose 12.5% year over year; the operating margin was a record 34.6%—albeit helped by cost timing—and free cash flow rose 8.4%, after another $5 billion in content spending.
• Sales growth is decelerating, and guidance implies it will slow further, to 11% in the fourth quarter, leaving full-year sales below the midpoint of prior guidance. The third-quarter cost timing benefits should reverse in the fourth quarter, but management still expects 150 basis points of margin expansion versus last year, even with a 120-basis-point headwind from charges associated with recent headcount reductions.