NFLX — Netflix
I wanted a reason to pass. The math made that inconvenient.
Netflix is a global subscription entertainment business with advertising and live programming layered onto a streaming platform that finally has real scale economics. I went into the research expecting valuation to kill the idea. It did not. So now the more interesting question is whether double-digit revenue growth, margin expansion and buybacks can keep doing enough work from here.
I came into Netflix with a pretty simple prior: good business, stock I do not really want to own, probably too expensive anyway.
Why I care about this one
Netflix sells global entertainment subscriptions, with advertising layered onto lower-priced plans and a growing amount of live programming mixed into the content slate.
The economic engine is way better than the old “spend everything on content and pray for subscribers” version of Netflix. Scale is finally visible in margins and cash flow. So now the question is not whether Netflix can become a real business. It already is. The question is how long the double-digit revenue growth and per-share improvement can keep going.
Q2 2026 revenue was $12.56B, up 13% year over year, with $4.19B of operating income and a 33.4% operating margin. Full-year guidance calls for $51.0B–$51.4B of revenue and a 31.5% operating margin. (Q2 shareholder letter)
Advertising is no longer a side project. Management expects roughly $3B of ad revenue in 2026, about double 2025. Live programming is still small in viewing hours, but it has already produced several of Netflix’s strongest signup days.
The share count is helping too. Q2 diluted weighted-average shares were about 4.261B versus 4.349B a year earlier.
That is a pretty good starting recipe.
I expected Netflix to fail on valuation and it basically refused. Q2 revenue grew 13%, operating margin hit 33.4%, advertising is becoming meaningful and the share count is shrinking. The thing I am still not totally comfortable with is whether a 36% base-case margin is durable and whether management keeps capital allocation boring after showing it was willing to chase Warner Bros.
Q2 2026 / FY2026 guide
Primary sources: Q2 2026 shareholder letter — SEC ↗ · Q2 2026 10-Q — SEC ↗ · Q1 2026 shareholder letter — SEC ↗
Initial full research review. Netflix actually passed the business and expected-return screen at the $68.97 reference close, which was not what I expected going in. The model uses explicit revenue growth, endpoint margin, share-count change and terminal P/E. I still own zero shares.
Revenue stays around double-digit growth longer than I expect, advertising becomes a visible profit contributor, operating margin keeps expanding without hurting engagement, and buybacks keep shrinking the share count at sensible prices.
Revenue falls to mid-single digits early, content or live spending outruns the economics, margin expansion stalls, the ad tier scales without enough profit, or management goes hunting for another giant acquisition.
What gets this into the portfolio
Initial full research passed the operating and valuation screen at $68.97. No position yet; NFLX still has to beat existing portfolio alternatives for the next dollar.
Valuation & scenario math
The attempted Warner Bros. deal is my biggest capital-allocation objection.
Netflix ended up collecting a $2.8B termination fee, which is obviously better than writing the check. I still care that management was willing to pursue a transaction that large.
This company finally has the financial shape I want: high margins, strong cash generation, and a shrinking share count. I would much rather watch management compound that engine than decide the next act needs to be empire building.
Base case starts at $51.2B of 2026 revenue, grows it 10% for five years, reaches a 36% operating margin, assumes 1% annual share shrink and applies 25x to about $5.87 of 2031 EPS. That gets to roughly $147/share, or about 16.3% annualized from the Sep. 28 reference close. The live page updates the CAGR as the stock moves. The underwriting does not get to move with it.
“My current view” is the output of my dated valuation framework, not a magical buy instruction. A BUY still has to beat the expected return of what I already own and the index before it gets actual money.
12% / 15% / 18% required return to the base case
| Band | Buy price | 5Y base center | 5Y CAGR at entry |
|---|---|---|---|
| Starter | $83 | $147 | +12.1% |
| Normal | $73 | $147 | +15.0% |
| Aggressive | $64 | $147 | +18.1% |
The zone label uses the live quote when available; the model itself is anchored to the Sep 28, 2026 reference close at $69. The dollar bands come from the active five-year base case. Hitting one gets NFLX into the next-dollar conversation. It does not automatically earn a portfolio slot.
The model starts with the midpoint of 2026 revenue guidance and makes revenue growth, endpoint margin, share-count change and terminal P/E explicit. I use 79% operating-income-to-net-income conversion as a simplifying assumption. Nothing fancy. I just want to see which assumption is actually carrying the return.
| Revenue today | $51.2B |
| Annual revenue growth | 10% |
| Revenue by Sep 28, 2031 | ~$82.5B |
| Endpoint operating margin | 36% |
| Modeled net income | ~$23.5B |
| Share-count path | 1% annual shrink |
| Endpoint diluted shares | ~3.99B |
| Endpoint EPS | ~$5.87 |
| Terminal P/E | 25x |
| Implied base price | ~$147/share |
The bridge is revenue → operating margin → modeled after-interest/tax income → share count → EPS → terminal multiple. The 79% conversion from operating income to net income is my simplifying assumption, not company guidance.
| Case | What has to be true | Target range | Total return* | Annualized return* |
|---|---|---|---|---|
| Bear | 6% revenue growth · 30% endpoint operating margin · flat share count · 20x terminal P/E. Growth matures faster, operating leverage stalls and the market pays a lower multiple for a slower entertainment business. | $72–$83 center ~$77 | +12.1% | +2.3% |
| Base | 10% revenue growth · 36% endpoint operating margin · 1% annual share shrink · 25x terminal P/E. Revenue keeps compounding around double digits, margin expands gradually and buybacks keep reducing the denominator without a major strategic mistake. | $137–$157 center ~$147 | +112.8% | +16.3% |
| Bull | 12% revenue growth · 38% endpoint operating margin · 2% annual share shrink · 30x terminal P/E. Ads and the core service sustain stronger growth, operating leverage continues and disciplined repurchases create meaningful per-share lift. | $199–$229 center ~$214 | +210.4% | +25.4% |
*The static returns use the dated reference price. The annualized figure on the live page also refreshes from the current quote. For shorter model horizons, annualizing can make the number look ridiculous, so I care about total return and the underlying milestones at least as much.
Capital allocation
Strong operating reinvestment. The giant acquisition attempt is the bit I do not want to normalize.
Content, product, advertising and live investment are supporting double-digit growth and high margins, while buybacks are reducing diluted shares. I take points off for a merely adequate balance sheet and, much more importantly, management showing it was willing to pursue Warner Bros. at very large scale.
Stage-relative, not some objective rating-agency grade. The number is there to force the judgment into the open. See the rubric →
What management is actually doing with the cash
The core capital allocation is pretty easy to like: content, product, ads, live programming and buybacks while margins and cash stay strong. Then there is the Warner Bros. attempt. That matters because management has shown it is willing to contemplate a very large deal. So I am not giving the buyback a gold star and pretending the acquisition appetite does not exist.
What earns another dollar from me
I start with $51.2B of 2026 revenue, the midpoint of guidance.
From there the model explicitly moves revenue, operating margin, share count and the terminal multiple. I use a 79% conversion from operating income to modeled net income across the cases. That is my simplifying assumption.
The base case is:
- 10% annual revenue growth for five years;
- 36% operating margin in 2031;
- 1% annual share shrink;
- 25x terminal P/E.
That produces about $5.87 of 2031 EPS and roughly $147/share.
The bear is around $77. The bull is around $214.
From the Sep. 28 reference close of $68.97, those are roughly 2.3% / 16.3% / 25.4% annualized. On the live page, the CAGR refreshes with the quote while the underwriting stays fixed.
What can break this
Netflix expects roughly $12.5B of 2026 free cash flow, but that number includes the benefit of the Warner Bros. termination fee.
Management’s prior outlook was about $11B and it said the increase to $12.5B was primarily the after-tax impact of the fee. I use the old ~$11B level as the cleaner cash-flow reference. (Q1 shareholder letter)
At June 30, cash, restricted cash and short-term investments were about $9.1B against $14.3B of short- and long-term debt. (Q2 10-Q)
The balance sheet is fine. I am not buying Netflix because of the balance sheet.
The base case passes my return hurdle at the reference price.
Working backward from the ~$147 base endpoint gives rough entry bands of:
- starter: ~$83 for a 12% required return;
- normal: ~$73 for 15%;
- aggressive: ~$64 for 18%.
That means I lost the easy excuse of saying “too expensive, move on.”
I still need NFLX to beat the actual alternatives in the portfolio. There is no prize for finding another stock with a decent CAGR if an existing holding or the index offers a better expected use of the same dollar.
So the current status is simple: ready, no position yet.
That is my portfolio status, not a failed investment verdict. The standalone work passes. A different portfolio with different holdings, concentration and alternatives can rationally reach a different capital-allocation decision.