The streaming medium may one day replace cinema and all that stands for it, but Netflix investors are seeing a drama of a different sort, one where high margins collide with slow growth and critics do not approve. For the latest episode of Netflix’s earnings season, there was a stellar profit, but everyone wondered if the future expansion plots were just getting a tad too predictable.
Netflix’s recent earnings report appears to be good, however the truth is quite different. While margins and profit guidance have beaten expectations, the boost came largely from the timing of expenses and content releases, and not from sustainable improvements. Its sales growth was acceptable globally, however in the U.S, Netflix’s biggest earning market, they found disappointing growth. The company posted merely a 9% increase in revenues, suggesting either a decline in subscribers, drop in average revenue per member, or both.
Netflix seems to be losing strength on the growth front, and this quarter has just reconfirmed that. So while Netflix can, to some extent, buffer itself from tariff impacts and recession fears, any large-scale economic slowdown could impact its growth even more, making the stock’s expensive valuation even tougher to defend.
Valuation Remains Overpriced
After the results, analysts increased their fair value estimate for Netflix slightly higher to $720 per share from $700. However, even at this increased estimate, Netflix is still viewed with a 2-star rating as an overvalued stock. A new target indicates that the company would trade at 28x its expected earnings in 2025, rarely high for a company expected to deliver about 10% revenue growth annually over the next five years. Margin growth would follow as international markets mature, but U.S growth is sharply decelerating.
Gains in subscribers are likely to come predominantly from foreign markets, with Netflix perhaps seeing U.S and Canadian membership growth of just 2%-3% a year going forward. Price increases and advertising revenues should aid in boosting average revenue per member, but its dominant U.S market is clearly maturing.
Strengths & Weaknesses
Netflix’s major strengths stand in its name, originals, and first-mover advantages in streaming with a slender economic channel. Unlike several rival platforms, it has no legacy business standing in its way. The company also boasts significant financial wellness. While it finished 2024 with a net debt/EBITDA lower than 1.0, it is hoping to sustain free cash flow near $10 billion during the year 2025, even with excess content spent above that level.
Competition continues to loom as a chief risk. New streaming competition, the evolution of the ad-supported model, and a continuing need to bring hit shows online are all sources of uncertainty. More importantly, the growth of Netflix’s creative edge will determine how well it continues to dominate in the future, alongside its good performance in growing internationally.
Optimism & Caution
According to the optimism surrounding the stock, Netflix has long demonstrated its ability to develop unique hits, generate strong cash from operations for its own use, and grow in international markets and ad-supported subscription potential, which all combine to position the company quite well for long-term success. On the other hand, Netflix’s growth in the U.S is essentially flat, competition is getting hotter, plus blockbuster content creation has become synonymous with unpredictability. All of this has led to creating an environment in which the leadership is not as secure as it used to be.
On the surface, earnings do appear to be a win for Netflix, but delve deeper and it becomes apparent that the actual story is about a company dealing with the slowing momentum in the most relevant market it operates in. As competition intensifies, its U.S growth engine is compressing. With Netflix facing increasing competition and a compressing U.S growth engine, it will have to go beyond clever timing on costs to justify its bloated valuation. Investors might want to keep the remote handy because it looks like the next few quarters will have plenty of plot twists.
