Netflix: A Descent into Valuation

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The flickering screen, a modern icon of our distracted age, casts its pall over Netflix, a company once hailed as a disruptor, now caught in the agonizing throes of expectation. The shares, as of this writing, have suffered a decline – a mere 19% year to date, yet a chilling harbinger of potential ruin, a loss of a third of their value over six months. One begins to wonder if the market, that fickle and merciless judge, is not merely correcting a temporary exuberance, but delivering a verdict upon the very soul of the streaming empire.

It is a curious paradox. The underlying business, by all accounts, flourishes. Revenue growth accelerates with each passing quarter, a defiant surge against the tide of skepticism. Yet, the question persists, a gnawing unease: can this momentum, this apparent vitality, truly justify the premium valuation the market has bestowed? To contemplate a stock’s potential is to confront the bear case, to stare into the abyss of doubt. How far might Netflix fall, should investors lose faith in its long-term pricing power, adrift in this increasingly crowded sea of entertainment?

A Business, Fraught with Promise

To critique Netflix’s business is, at first glance, a fool’s errand. The fourth-quarter revenue rose a respectable 17.6% year over year, reaching $12.1 billion – an acceleration, mind you, from the previous quarter’s 17.2%, and before that, 15.9%. They boast over 325 million paid memberships, a testament to their global reach. But numbers, like faces in a crowd, can be deceiving. They offer a surface-level truth, masking the deeper currents of competition and consumer whims.

Management, with that peculiar blend of optimism and desperation common to all those who steer vast enterprises, forecasts first-quarter 2026 revenue of $12.2 billion, implying 15.3% year-over-year growth. A comforting projection, perhaps, but one built upon assumptions as fragile as spun glass.

Profitability, thankfully, moves in the right direction. The operating margin expanded to 29.5% for the full year 2025, up from 26.7% in 2024. They foresee 31.5% in 2026. A commendable trajectory, certainly, but one that invites the question: how sustainable is this expansion in the face of relentless competition? And what sacrifices, what compromises, are being made to achieve it?

Cash generation remains strong, free cash flow totaling $9.5 billion in 2025, up from $6.9 billion in 2024. A healthy sign, to be sure, but does it truly reflect the underlying strength of the business, or merely a temporary respite before the storm gathers?

And then there is the advertising business, the latest beacon of hope. It is growing rapidly, and, crucially, lessening their dependence on steadily increasing subscription prices. A welcome development, no doubt, but is it a genuine revolution, or merely a palliative measure, a temporary reprieve from the inevitable?

Ad revenue rose over 150% in 2025 to over $1.5 billion. Management anticipates a doubling in 2026. This nascent business, this fragile bloom, is key to the bull case. It can lift average revenue per membership, even if Netflix chooses to moderate its price hikes. But what if the advertising market, that capricious mistress, turns its back on them?

The Shadow of Doubt: A Bear’s Contemplation

But what of the bear case, that grim specter that haunts every investor’s dreams? The biggest threat, naturally, is the intensifying competition from tech giants – Apple, with its deep pockets and unwavering ambition, and Alphabet, with its seemingly limitless resources. And then there is the transition of traditional media companies, scrambling to adapt to the streaming age. Netflix itself acknowledges the entertainment market is “intensely competitive.” A crowded landscape limits pricing power, raises churn. A grim prospect, indeed.

A market like this could manifest as slower revenue growth, narrowing profit margins. A gradual erosion of value, a slow descent into oblivion. The numbers, those cold, impartial judges, will reveal the truth, eventually.

Analysts currently estimate earnings per share of $3.12 for 2026. At $76 per share, that yields a forward price-to-earnings ratio of roughly 24 times. Fair, perhaps, for a company still growing revenue at a double-digit pace. But it leaves little margin for error, little cushion against the inevitable shocks of the market. It is a precarious perch, a delicate balancing act.

So, if investors begin to fret over the durability of Netflix’s pricing power, how far might the stock fall? I believe a fear-driven market could price Netflix at 18 to 20 times forward earnings. A valuation that still acknowledges significant earnings growth, but leaves more room for the uncertainties of intense competition. The implied share price at this valuation would be about $56 to $62. From the current price, that represents a decline of roughly 18% to 26%. A painful reckoning, to be sure.

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This is not a prediction, merely a theoretical exercise. A way to translate valuation risk into concrete numbers. The market, after all, is not governed by logic, but by emotion, by fear, by greed.

This may be an acceptable downside risk for shareholders of a company of Netflix’s caliber. Still, it shows how investors can reframe a stock’s valuation and rerate it lower if they start fretting over a particular concern. The human heart, after all, is a fickle thing.

Netflix’s business is doing fine, and the advertising ramp offers a second avenue for growth. But it is fair to wonder how sustainable its long-term pricing power is if streaming continues to become more crowded. The relentless march of progress, the insatiable appetite of the consumer – these are forces that cannot be ignored.

For that reason, I refrain from buying at this moment. I see a case for waiting for a price that reflects greater skepticism. While there is no guarantee I will obtain the desired price, I prefer to allocate my capital elsewhere, patiently observing the unfolding drama from a safe distance. Prudence, after all, is the better part of valor.

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2026-02-24 07:23