Profits up 37%, stock price nearly halved—what's going on with Netflix?

NEXT PICK · Market Insights

Profits up 37%, stock price nearly halved—what's going on with Netflix?

Friday, October 23, 2026

A company saw its operating profit surge 37% year-on-year last quarter, with earnings per share jumping from $0.59 to $0.87, yet its stock price kept falling over three trading days after the earnings report, closing at $65.85 on October 23, then dropping another 1.79% that day.

That company is Netflix. With a market value of $274.2 billion and a price-to-earnings ratio just over 19 times, it has dropped nearly half from its 52-week high of $124.86.

Profits are accelerating, revenue is slowing, and the market has chosen to trust the latter. Is this a misjudgment, or is the valuation shift for established giants just beginning?

Latest price $65.85 ▼ -1.79%

Q3 operating profit margin 34.6% ▲ +6.4pct

Above the 200-day moving average -20.1% ▼ Below $82.4

$45 billion in annual "global living room business"

What Netflix sells is simple: series, documentaries, movies, games, and live shows, covering multiple genres and languages, delivering content to the screens of subscribers worldwide through TV, players, set-top boxes, and mobile phones.

But this simple business is not simple. Fiscal year 2025 revenue is expected to reach $45.18 billion, a 15.8% increase from $39 billion in 2024; operating profit will rise from $10.42 billion to $13.33 billion, and net profit from $8.71 billion to $10.98 billion, with profit growth clearly outpacing revenue.

Entering 2026, Q3 revenue is $12.87 billion, up 11.9% year-on-year; Operating profit is $4.46 billion, with the operating margin rising from 28.2% to 34.6%; Net profit is $3.66 billion, up 43.5% year-on-year. The company's full-year guidance is revenue of $51.1 billion and an operating margin of 31.5%.

Its irreplaceability does not come from an unavoidable patent, but from a self-reinforcing flywheel: User scale dilutes content costs, enriches content to improve retention, and subscribes to cash flow to feed the next round of content investment. The research report rates its irreplaceability out of 7 out of 10.

Why not a perfect score? Because viewing history and recommendation algorithms drive more stickiness than contracts, allowing users to change plans or cancel subscriptions at any time. Rather than seeing Netflix as a castle, it's better to think of it as the largest mall in terms of foot traffic—tenants and foot traffic mutually support each other, but the cost of opening a new store next door is not infinitely high.

A 19x P/E ratio—is it cheap or just right?

At a closing price of $65.85, Netflix's P/E ratio is 19.03, corresponding to $3.46 per share over the past twelve months; The Enterprise Value Multiple (EV/EBITDA) is about 15x, and the PEG ratio is about 1.1. For a global platform with an operating margin above 30%, this number is no longer "outrageously expensive."

But another set of numbers reminds you not to jump to conclusions

The price-to-sales ratio (P/S) is 5.57 times, the price-to-book ratio (P/B) is 9.36 times, and the return on equity (ROE) is as high as 50.86%. The market still prices it based on the assumption that "high profit margins can be sustained long-term." Once this assumption is shaken, there is room for further compression of the multiple.

The research report uses two standards to cross-valuate

One is a P/E ratio of 15 to 20 times, and the other is a free cash flow yield of 5% to 6%. The scenario range drawn by the two rulers overlaps highly, and the current stock price is in the upper half of the range—meaning it's not a "bargain" without verification of growth, nor is it a bubble.

An important correction is needed regarding cash flow

Netflix's free cash flow for fiscal year 2025 is $9.5 billion, up about 38% from $6.9 billion in 2024; Operating cash flow rose from $7.36 billion to $10.15 billion during the same period. Free cash flow growth far outpaces revenue growth, and this machine can sustain itself without external financing.

However, the quarterly pace has not been smooth. Free cash flow for the first three quarters of 2026 is expected to be $5.09 billion, $1.53 billion, and $2.88 billion respectively. In the third quarter, a pending real estate deal led to a downward revision of the full-year free cash flow guidance from $12.5 billion to $12 billion.

Based on approximately $11.37 billion in free cash flow over the past four quarters, the current market capitalization corresponds to a free cash flow yield of about 4.1%.

If you are an investor seeking a 6% cash return, is the current price enough to make you a move?

Mature giants are being repriced by the market

Calling Netflix a "mature period" is almost undisputed: founded in 1997, with global business coverage, annual revenue of $45 billion, and annual free cash flow close to $10 billion, long past the experimental and explosive phase. But "maturity" only means the business model is mature, not that growth has disappeared.

What is truly intriguing is the market's attitude. The stock price has fallen below the 50-day moving average of $74.52, about 20.1% below the 200-day moving average of $82.4, with a 12-month return of -40.9% and a 30-day return of -18.0%. The 14-day Relative Strength Index (RSI) is 37.1—weak but not to the extreme.

Fundamentals are accelerating profits, but moving averages are steadily pushing down, indicating that capital is moving it out of the "growth premium" drawer. Whether the phase will continue depends on whether revenue, profit margins, and free cash flow can accelerate in sync again over the next two to four quarters.

A moat hunted by Disney+, Max, Prime Video, and Apple TV+

Disney+ plays the IP card, weaving animation, live-action films, merchandise, and theme parks into one network; Netflix responds with content breadth—series, documentaries, movies, games, live streaming, multiple languages, regions, serving a global audience with diverse tastes.

Warner Bros. Discovery, behind Max, was supposed to be the biggest variable this year. Netflix bid for Warner Bros. at $82.7 billion at the start of the year, but after Paramount made a higher offer, it chose to exit and received a $2.8 billion breakup fee. The competitor wasn't bought, but it switched to a bigger owner, and the industry's content price and supply landscape is still being reshaped.

Prime Video leverages Amazon's ecosystem for bundling and cross-selling, while Apple TV+ relies on device experience and ecosystem traffic generation; Netflix insists on independent subscription brands, rolling out across TVs, players, set-top boxes, and phones, without relying on any single hardware ecosystem.

Without industry peers' market share, per-user revenue (ARPU), and content budget data, it's hard to precisely quantify who leads by how much. What is confirmed is that an operating profit margin of 34.6% and ROE of 50.86% prove Netflix's scale efficiency; while revenue growth dropped from 16.2% in Q1 to 11.9% in Q3, indicating competitive pressure is not something to be ignored.

When all competitors are tied to you with the "ecosystem," what can a pure subscription brand rely on to retain users? The answer is to continuously prove that content investment can earn retention and price increases, not rely on the brand's legacy.

After annual revenue of $51.1 billion, where is the ceiling?

The report admits that without third-party industry data, it can only be used for scenario simulation: if global subscription streaming, free advertising video, paid on-demand, and some linear TV alternative demands are collectively called the Total Available Market (TAM), assuming the range is $120 billion to $180 billion, with the portion Netflix can effectively reach (SAM) between $60 billion and $90 billion.

Starting from the company's 2026 revenue guidance of $51.1 billion, the low-scenario with a three-year compound annual growth rate of 4% to 6% corresponds to approximately $57.5 billion to $60.9 billion, the baseline scenario of 7% to 9% to about $62.6 billion to $66.2 billion, and the high scenario of 10% to 12% to approximately $68 billion to $71.8 billion.

The profit side deserves even more attention. If revenue falls under the baseline scenario and operating margin stays at 30% to 34%, operating profit will be in the $18.8 to $22.5 billion range; If revenue only reaches the low scenario and profit margin drops to 25% to 29%, then only $14.4 billion to $17.7 billion. Even among mature platforms, the profit gap between the two outcomes is nearly 50%.

Advertising is the biggest incremental variable, but the company has just lowered its 2026 ad revenue forecast from about $3 billion to $2.7 billion, citing that some ad product features are launching later than planned. Starting next March, ad packages will be rolled out in batches to 15 new countries. Whether this curve steeps will determine the ceiling's height.

What the bulls saw was a machine that was running faster and more fuel-efficient

Bullish on Netflix isn't because "a big drop will always rebound," but because of several verifiable operating data:

▲ Bull Case

The bears are watching the downward slash in income

The logic of bears is also not "cheap when it drops," but rather several real contradictions:

▼ Bear Case

Four things will determine the direction for the next six months

The round of market sell-offs following the earnings report has put bad news on the table. Next, the narrative can be rewritten by the following events:

•	Q4 2027 earnings report: Validating whether the 26% profit margin guidance and revenue can stabilize again, with the greatest impact and uncertain direction
•	Advertising business: Whether the $2.7 billion annual target can be met and the pace of 15 new countries launching from March 2027 are neutral to slightly bullish
•	2026 Price Increase Effect: The company stated that member feedback met expectations, and subsequent retained data will determine the room for price increases, which is neutral
•	Repurchase Execution: Whether the record-breaking $4.8 billion buyback in Q3 can be continued, providing a solid foundation for earnings per share, is a mild positive factor
•	Industry consolidation after Paramount acquired Warner Bros.: Content pricing and competitive landscape may change, direction yet to be determined

On the capital side, there was a clear contrarian bet in the post-earnings decline: today's bullish large order was $7.55 million, which is 7.5 times the bearish side. But this is a prediction trade and has not yet been confirmed by the price. The key is whether the stock price can stabilize and absorb this batch of new bullish positions. **

Performance keeps rising, while stock prices keep falling

Looking back at the past two years, Netflix's fundamentals are almost flawless: fiscal year 2025 revenue growth of 15.8%, operating profit up 27.9%, net profit growth of 26.1%, diluted earnings per share rising from $1.98 to $2.53, and free cash flow growth of about 38%. The market's optimistic expectations at that time were almost entirely confirmed by earnings.

The turning point will come in 2026. At the beginning of the year, the company issued full-year guidance below expectations and announced a bid for Warner Bros. Investors worried about acquisition costs and integration risks, putting pressure on the stock price; Although it withdrew from the bidding in February and received a breakup fee, revenue growth slowed for three consecutive quarters.

The third-quarter report on October 20 was another concentrated release: profits exceeded expectations, but Q4 guidance, advertising revenue, and free cash flow expectations were all downgraded. The stock price briefly fell to around $64 the next day, with several investment banks lowering target prices but most maintaining buy ratings.

Profits are rising, stock prices are falling—how long can this divergence last? The lesson from history is that Netflix's medium-term direction ultimately depends on whether growth, profit margins, and cash flow can all meet their targets, not on any single metric.

⚠️ Risk Notice • If revenue growth drops to single digits, the high price-to-sales ratio and price-to-book ratio will be further compressed • The Q4 profit margin guidance fell to 26%, making it difficult to replicate the Q3 high of 34.6%. • Quarterly free cash flow fluctuated greatly, with full-year guidance lowered from $12.5 billion to $12 billion • Advertising business is progressing slower than planned, and the realization of new growth engines may be delayed • The stock price is about 20% below the 200-day moving average, and weak technical conditions may continue to suppress capital inflows

🟡 Neutral Profits and cash flow are strong, but revenue has not yet slowed, and valuations are above reasonable

💬 Discussion Now is not the time to blindly buy the dip and wait for income to stabilize; Post NFLX live buy/sell positions on the official WeChat account.

Data source

•	Source: NextPick real-time market snapshot + Netflix quarterly shareholder letter and SEC announcement + mainstream financial media coverage.