Netflix: halved, not broken

The shares sit 45% below their June 2025 high while revenue, operating income and margin sit at records. Nearly all growth now comes from price and advertising, not hours watched — this brief prices both readings of that fact.

TTM to Q2 FY26. P/E excludes the one-time $2.8B Warner Bros. Discovery termination fee. All figures from company filings; every claim links to its source in the full brief.

One product, four price points

Netflix reports a single operating segment, but the regional split matters: revenue per member differs by more than 2x across regions. FY2025 revenue with monthly ARM:

FY2025 10-K. Cost of revenues took $23.28B of the $45.18B — $16.42B of it content amortization on a $33.84B net content library. That one cost line dwarfs everything else.

Margin trajectory

11.7 points of operating margin added in three years — and incremental economics say it is not finished. Management has guided FY2026 to 31.5%.

Operating margin, %. Revenue rose 52% FY2021 to FY2025 while operating profit rose 115% — a 57% incremental margin. Roughly four fifths of the gain came at the gross line: gross margin went 41.6% to 48.5%.

Comfortable, and getting more so

Net debt has fallen every year while EBITDA compounds. About six and a half quarters of free cash flow would clear every note outstanding — Netflix keeps the debt because it is cheap fixed-rate paper and buys back stock instead.

Net debt, $B. Leverage is 0.35x net debt / TTM EBITDA with interest coverage of 16.9x in FY2025 and $9.1B of cash and short-term investments on hand.

The cash machine turned on in FY23

A decade of burning cash ended when the gap closed between cash spent on content and content expensed. Netflix now converts roughly 80 cents of every profit dollar into free cash flow.

Free cash flow, $B. TTM FCF is $8.81B ex-fee; content spend landed heavier in H1 2026. $9.10B went to buybacks in FY2025. Final bar is management guidance.

Two vectors matter, the rest round

Ads plus price gets to roughly 8–10% revenue growth before anything else contributes — consistent with FY2026 guidance of $51.0–51.4B, up ~13%.

The only line that changes the growth rate

Ad revenue roughly 2.5x'd to $1.5B in 2025, is guided to roughly double again to ~$3B in 2026, and is sized at ~$9B by 2030. The in-house Netflix Ads Suite replaced Microsoft's stack in 2025; Amazon DSP handles programmatic; 4,000+ advertisers are on the platform.

The audience is already built: ~250M monthly actives on the ad tier, 60%+ of new signups choose it, and 15 more ad markets open from 2027. In the 10% growth model ads contribute ~1.8pts — a quarter of all growth; strip ads out and the rest of the company compounds at 8.2%.

The risk is price, not audience: Amazon made ads the Prime default overnight and CTV ad prices have drifted down since 2024. The ~$3B print for 2026 is the number to watch.

Price, live, and the margin lever

Also absent from the growth stack: acquisitions. The WBD bet was the counterexample — see the risk list.

Cheapest vs itself in five years

De-rated to the 24th–36th percentile of its own five-year range on every multiple while every operating line sits at a record. Dot = today, tick = 5-yr median:

At the 7 Aug 2026 close. Forward P/E is ~23.2x on this report's FY2026 EPS estimate of $3.19 built from company guidance. The last time the stock traded here, in 2022, op margin was 17.8% and FCF was $1.6B.

Nobody else does both

The only company in the peer set that grows double digits and earns a high-twenties operating margin at the same time — at a smaller premium than you would expect.

TTM figures at 7 Aug 2026. The two most important competitors are absent because their financials are not separable: YouTube sits inside Alphabet and Prime Video inside Amazon. The next slide deals with that.

The structural one first: attention

The risk worth losing sleep over is not another streaming service — it is that the unit of television is becoming a free ten-minute video made without a $17B content budget.

Share of total US TV screen time, Nielsen H1 2026 — YouTube is roughly 70% larger on the screen both companies say matters most, and the gap widened. The asymmetry is cost: Netflix paid ~$17.1B for content to produce its 8%; YouTube pays creators a revenue share out of ads it has already sold. One business buys inventory, the other is given it.

Three steps down is a trend

Quarterly revenue growth has decelerated six points in three quarters — and it is happening while advertising is supposedly inflecting. A print below 10% removes the last argument for a premium multiple.

Y/y revenue growth by quarter; final bar is guidance. The deceleration is the headline risk — the next slide holds the rest of the list.

The company-specific list

The structural attention risk (YouTube) and the deceleration trend have their own slides — these four round out the register.

The best business at its cheapest in five years

Every operating record was set while the stock fell 45%: TTM revenue $48.37B, up 16.0%; operating income $14.35B at 29.7%; FCF $8.81B ex-fee. It is the only peer growing double digits above a 15% margin.

Spotify trades at 31.4x EV/EBITDA on 13.0% growth and a 13.0% margin; Netflix at 21.8x on 16.0% and 29.7% — same industry, better business, lower price. The bull case does not need the old 40.5x back, just a normal premium instead of a discount.

And there is a third engine with no assumptions required: buybacks — $9.10B in FY25, $5.90B in H1 FY26, the $4.70B Q2 repurchase the largest in company history. That is management's direct statement about the price.

The de-rating is not a mistake

Growth fell six points in three quarters while ads were supposedly inflecting — which means the subscription business underneath is slower than anyone modelled. The bear's downside map from $74.14:

Cash is also quietly going backwards: TTM operating cash flow $9.53B vs $10.15B for FY25, FCF $8.81B vs $9.46B ex-fee — a 6–7% decline while earnings grow. And the engagement report goes annual in 2027: companies rarely reduce disclosure of metrics that are improving.

The structural version: $17.1B of content spend holds ~8% of US TV time while YouTube takes 13.4% with content it is handed free. If attention keeps migrating, outspending is the losing move.

Your assumptions, live

Year-5 price = $2.65 TTM EPS (ex-fee) grown at your rate, times your exit multiple; discounted at 10%/yr; return measured from $74.14. The presets translate the bear and bull slides into numbers — start there, then argue with them. The full brief runs a two-lens DCF as well.

Claude's call: Buy

Buy, moderate conviction. A business compounding revenue at 16.0% with a 29.7% operating margin trades at the 29th percentile of its own five-year range — and the base case has to be cut well below the current run rate before the return stops being attractive.

1. Bottom-third multiple, best-ever business. Last time it traded here (2022) margin was 17.8% and FCF $1.6B; today 29.7% and $8.8B.

2. Ads are a real second engine. ~$3B guided for 2026, ~$9B sized by 2030, at higher incremental margin than subscription dollars.

3. The base case is already a haircut. Set growth below the delivered run rate and the stock still returns ~13%/yr on the exit lens.

Research, not investment advice. The full source list and data-quality notes are on the last slide.

Where every number comes from

Data quality: the $2.8B WBD termination fee ($2.24B after tax) is excluded from every operating figure — reported TTM EPS is $3.18, underlying $2.65, which is why this report says 28.0x where a screener shows 23.3x. EBITDA excludes content amortization deliberately.

All per-share figures reflect the Nov 2025 10-for-1 split. Guidance figures: FY2026 revenue $51.0–51.4B, 31.5% op margin, ~$12.5B FCF.