Netflix Shares Are Down 9% Since Earnings. Is the Stock a Buy?

Netflix released its third-quarter earnings report on Oct. 21. Here’s Morningstar’s take on Netflix’s earnings and stock.

Key Morningstar Metrics for Netflix

• Fair Value Estimate
  : $80.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of Netflix’s Q3 Earnings

Netflix’s 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. As a result, shares fell more than 5% following the release.

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 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.

The following are excerpts from Morningstar’s company report on Netflix.

Fair Value Estimate for Netflix

With its 4-star rating, we believe Netflix’s stock is moderately undervalued compared with our long-term fair value estimate of $80 per share, which implies a P/E multiple of 22 and an EV/EBITDA multiple of 16.5 times our 2027 projections.

We project a compound annual revenue growth rate of about 10% through 2030, followed by mid-single-digit growth for the last 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.

Netflix’s highest cost is content spending. We project almost $20 billion in spending in 2026 and mid-to-high-single-digit growth each year thereafter. 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.

Read more about Netflix’s fair value estimate.

Economic Moat Rating

We assign Netflix a narrow moat 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.

Read more about Netflix’s economic moat.

Financial Strength

Netflix is in good financial shape. It ended September 2026 with a net debt/EBITDA ratio of 0.4, with the firm holding $8.2 billion in cash and $15.1 billion in total debt. Even after investing nearly $20 billion in content, we expect $11 billion in free cash flow in 2026 (adjusted down for the Warner Bros. termination fee windfall), with growth each year thereafter throughout our forecast.

Netflix has repurchased over $25 billion in shares since 2023, with the buyback accelerating after the Warner Bros. acquisition fell through. We now think Netflix is open to major acquisitions, and it has ample financial flexibility to do so. Until then, we expect the share repurchases to continue, as cash is piling up and it has few alternative uses.

Read more about Netflix’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Netflix is High. Our rating is largely based upon the evolving streaming media landscape and the growing competition Netflix faces, including from free streaming platforms.

In our view, Netflix’s tremendous success is due largely to it being a first mover in the streaming industry and successfully adapting its business model to where the industry was going, while its media peers were largely still focusing on their legacy businesses.

The landscape has changed, as nearly every major media company is promoting its own stand-alone streaming service. As the streaming businesses of competitors mature, they may bundle their services together—with or without Netflix—or they may offer their services as add-ons for pay TV subscribers who receive their linear channels, a foothold Netflix doesn’t currently have.

Read more about Netflix’s risk and uncertainty.

NFLX Bulls Say

• Netflix has already attracted a massive customer base and level of profitability. This advantage over 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.

NFLX Bears Say

• 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.

This article was compiled by Colin Laidley.