Why Netflix's "Bad" Quarter Might Be Good News

Hey, everybody, hope you had a good weekend. Kicking this week off with an update on Netflix. Kasey will do one on Intuitive Surgical here in a bit, covering two Chip Stock investor universe companies that have been hit pretty hard after Q2 2026 earnings. But Netflix, let's talk about this. The market was mighty displeased with the company, and I think there's a healthier way of looking at this than just, wow, the outlook is terrible, growth is decelerating, they're getting rid of some of the engagement data metrics once again. Let's break this down because I think it's much simpler than that, and potential opportunity has presented itself with this one after what's been a pretty wild 2026 for Netflix. Now, before we continue, shout out to our friends over at fiscal.ai, the sponsor of today's video. We'll be taking a look at a number of charts on Netflix. There are some fantastic tools at fiscal.ai to help you analyze a business as well as compare it to other companies in its peer group. So here for this chart, I used Fiscal's KPIs to show Netflix's paying subscriber count, paid members count, at least as of last report at the end of twenty twenty-five, they said it was over three hundred and twenty-five million. Comparing that to Walt Disney, there in the upper right, which of course no longer reports Geo Hotstar since that was divested a couple of years ago. Also excluding ESPN Plus at about six million subscribers the last time they reported that. So how does that stack up to Netflix? Two hundred million, roughly, let's say, paying subscribers compared to the three hundred and twenty-five million at Netflix's last count. Bottom left, Warner Brothers Discovery undergoing, potentially a merger with Paramount Plus. Paramount Plus had about 80 million paid subs. So if they do merge with Warner Brothers Discovery at 150 million, that would make them probably the number two standalone paid streaming platform. And on the bottom right, kind of the weird one, Amazon Prime Video, which doesn't really get its own standalone metric. They kind of report this within their overall subscription services as Amazon Prime Video is kind of an add-on to Amazon Prime, but estimated at 200, maybe a few more million monthly viewers on Amazon Prime Video. Not shown here, of course, mentioned Paramount Plus already at 80 million. Comcast's NBC Peacock at about 46 million paid subscribers. So on a standalone basis, Netflix, the number one paid streaming service worldwide and still growing. Make sure you check out fiscal.ai/csi where you can get 15% off any paid plan and start making financial visuals like that one we just showed you right there. Of course, Netflix, I said, is the leading paid streaming service, but the really big ones as far as actual face time, screen time, eyeballs glued to a digital screen is, of course, Alphabet, YouTube, north of two and a half billion global viewers is the estimate. So in red is YouTube ad revenue. They also have, of course, YouTube subscriptions that they lumped in to that big yellow segment that you can see there on the bottom of this chart. In total, those two segments combined, YouTube ads and the various subscriptions, platforms, device revenue, pushing towards $100 billion in annualized sales. And then the other big one, of course, would be Facebook, Meta, which comprises Facebook, Instagram, and WhatsApp, and so they have the short-term video content there. TikTok, also a non-paid, FaceTime, screen service, lots of video content consumed on it. So we're of course excluding that from this particular segment and just looking at the paid subscription services specifically. That's who Netflix stacks up against primarily. But we of course know Netflix is battling for those eyeballs as well against big tech, and that's why they have begun to introduce that ad-supported tier. So let's take a look at this next slide. This is just the revenue going through Q2 2026, which just wrapped up at the end of June. There's why investors, pretty unhappy. The slowest growth rate in revenue since roughly the middle of last year. So there is obviously some seasonality here, but the outlook for Q3 and Q4 this year is roughly 12%, so even less growth rate than what they just reported. So at a high level, that's what is weighing down the stock. Again, though, there is some seasonality here. Netflix does have these little spurts of growth when there's a new series that comes out, a popular new TV show or a new movie, so a bit of seasonality that is at play. But I think the big disappointment at this point is that the ad server that they've been building for the last few years, Netflix's own ad server, data center assets basically, servers installed in data centers that help manage that ad-supported tier, has not contributed to a re-acceleration in revenue growth yet, at least not yet. Now, important to point out here, you talked about the, the paying members, a bit of a mystery right now. We know it's north of three hundred and twenty-five million. That does represent probably about a billion eyeballs worldwide. And so that ad platform probably has a long runway of growth, probably only reaching about a quarter of those total individual users housed within the paying subscribers, paying households every year. So there is potentially, a long ramp up for Netflix where, let's say low to mid-teens revenue growth could possibly continue for quite a few years before they continue to decelerate more towards the media and paid TV average, which is not so great, lagging behind internet-connected TV. We do think that's a good thing, but overall, what's happening here is the market is coming to terms with the fact that Netflix is no longer a high-growth business. This is still probably outperforming its media peers on a revenue basis and will continue possibly for quite some time, but it's not a high-growth business anymore. It's much more steady growth. And this is an important chart I'm showing you here now, because if we are at that stage where the growth has slowed and is steadier, that's totally fine if profitability is high, is robust, and it is most definitely that. Even as they have ramped up that ad server, we haven't seen too significant of a dip in the operating profit margin. It came in at thirty-three percent in Q2 2026. That's a pretty good operating profit margin for a mature media business. As you probably know, if you follow some of those others we mentioned earlier, their profitability overall, not that great, which is why there has been so much interest in continuing to consolidate this industry to boost profit margins in the internet streaming business. But overall, both on a GAAP net income basis, there in green, and free cash flow, Netflix is doing pretty well. GAAP net income three point four billion in Q2, and free cash flow at one point five billion in Q2. Again, a little bit of cyclicality, seasonality there in the free cash flow due to timing of payments for content now that Netflix is vertically integrated. No surprise there. They, of course, had the big influx of free cash flow last quarter because Paramount and Warner Brothers paid them a couple billion bucks to terminate the merger that Netflix had proposed with Warner Brothers Discovery. So let's move on here to valuation. I'm sure first gonna show you the trailing 12-month valuation, both for price to earnings, that's the blue line, and price to free cash flow, the orange line. Mid to low 20X as of this recording. About 25, 26X price to free cash flow, 21, 22X price to earnings on a trailing 12-month basis. More meaningful than that, though, on a forward-looking basis, the forward price to earnings drops to just below 20X and price to free cash flow just below 23X. So at least as of right now, analyst consensus is in spite of the big influx of free cash flow from the terminated Warner Brothers Discovery acquisition, Wall Street thinks Netflix's profitability over the course of the next 12 months will actually continue to grow, and we can see that priced in there accordingly with the lower expected valuation multiple. So that is pretty good news. Looking at this further, if you compare, Netflix's valuation for the duration of this bull market the last three or four years, this is actually the cheapest it has been. It had dipped early this year because of the uncertainty represented in what was at the time, the pending acquisition of Warner Brothers Discovery. The valuation quickly rallied back higher after that got called off. Here we are again now plumbing new lows. So if you've been waiting for an entry point in Netflix because you believe this is essentially just now a value stock, not a high-growth stock, and if it's a value stock, buying at the right valuation is much, much more critical. Perhaps this is a good opportunity to now dip your toe in the water. The stock price is below seventy dollars per share as of this recording. Basically, what that price is into forward expectations is something like, about eight to ten percent GAAP earnings per share growth for the next five years, and then a terminal growth rate of about four percent thereafter. So the bar has definitely been lowered. If you think Netflix can continue growing revenue at a low- to mid-teens rate and, at the very least, its operating profit margin remains stable, this might be a decent time, again, to start nibbling. I don't think this is, the deal of the decade or anything, but that's essentially what's happening. The market is repricing this as a more of a value stock. And if you get a re-acceleration in growth, that would be a bonus that the market might decide to, at least perhaps in the future, temporarily anyways, award a higher valuation multiple as a result. That'll do it for this brief look at Netflix. It's been a crazy twenty twenty-six for all things software, Netflix included, especially with the pretty wild M&A talk with Warner Brothers Discovery walking away, getting a cash out. The business is in pretty good position. We're happy to have a small position in this one here at Chip Stock Investor. Remember to check out fiscal.ai/csi for that discount. And until next time, make sure you check out this video that we did on another digital advertising software company that we like, AppLovin.