Netflix's Q3 Earnings and Subscriber Growth: Does the Valuation Still Reflect Long-Term Dominance in Streaming?

In the third quarter of 2025, Netflix delivered a mixed performance that underscores both its enduring strengths and emerging challenges. Revenue climbed 17.2% year-over-year to $11.51 billion, driven by pricing adjustments, ad revenue growth, and the success of content like the animated musical KPop Demon Hunters, according to a TheWrap report. However, earnings per share (EPS) of $5.87 fell short of the $6.97 forecast, primarily due to a $619 million non-recurring expense from a tax dispute in Brazil, according to Variety. This raises critical questions: Is Netflix's stock valuation still justified by its long-term dominance in streaming, or are cracks forming in its once-unassailable position?

Revenue Growth and Margin Pressures

Netflix's revenue growth remains robust, with Q3 results aligning with expectations. The company's strategic shift toward higher-margin ad-supported subscriptions has proven effective, with U.S. upfront ad commitments more than doubling in Q3, per CapWolf. Management projects ad revenue to more than double in the next year, a metric that could bolster profitability. However, the operating margin of 28% in Q3-below the projected 31.5%-highlights vulnerabilities. Excluding the Brazilian tax dispute, Netflix claims it would have exceeded forecasts, but recurring margin pressures from content costs and international expansion remain a concern, Quartz reported.

The company's decision to stop reporting quarterly subscriber numbers-a practice it began in Q1 2025-has shifted focus to metrics like average revenue per user (ARPU) and engagement, as noted in an AdvisorAnalyst article. While this aligns with a more mature business model, it also obscures visibility into subscriber growth, a key driver of long-term value.

Valuation Metrics: Overpriced or Fairly Valued?

Netflix's stock currently trades at a trailing P/E ratio of 52.91 and a forward P/E of 42.52, according to StockAnalysis data. While these figures are lower than the peer average of 75.3x (with Walt Disney at 17.8x and Spotify at 151.5x), they remain significantly higher than the U.S. Entertainment industry average of 26.4x, per Simply Wall St. The PEG ratio of 1.75 suggests the stock is overvalued relative to its expected growth, while the EV/EBITDA ratio of 42.48 and EV/FCF of 63.08 further highlight valuation concerns, S&P Global noted.

Analysts project Netflix's operating margin to reach 34.4% by 2027, according to MarketPulse, but achieving this will require disciplined cost management. The company's ambitious 2030 targets-doubling revenue and tripling operating income-depend on sustaining current growth rates in a competitive landscape where YouTube's streaming market share has already surpassed Netflix's, Massive Moats reported.

Competitive Dynamics and Strategic Risks

Netflix's market share in streaming fluctuated between 7.5% and 8.5% in H1 2025, trailing YouTube's 13%, as shown in a Medium post from Equity Analyst Hub. While Ted Sarandos, Netflix's Co-CEO, has emphasized capturing traditional TV consumption, the rise of ad-supported platforms like YouTube and the fragmentation of the streaming market pose long-term risks. Additionally, the company's reliance on hit content-such as KPop Demon Hunters-introduces volatility. Sustaining such success requires continuous investment in original programming, which strains margins, per a Monexa analysis.

The stock's 35% surge in 2025 reflected investor confidence in Netflix's ability to innovate, according to a Seeking Alpha preview, but this optimism may not account for structural shifts. For instance, the ad-supported tier's growth is promising, yet it competes with free, ad-heavy platforms that could erode Netflix's premium subscriber base.

Conclusion: A Tenuous Balance

Netflix's Q3 results reaffirm its dominance in streaming revenue and content innovation but expose vulnerabilities in profitability and valuation. The stock's elevated multiples suggest investors are betting on its ability to maintain growth and expand margins, yet this optimism must be tempered by the realities of a maturing market. If Netflix can navigate margin pressures, sustain ad revenue growth, and outperform competitors in capturing traditional TV audiences, its valuation may still justify long-term dominance. However, any missteps in these areas could lead to a reassessment of its premium pricing.

For now, the stock remains a high-conviction bet, but one that demands close scrutiny of both financial execution and strategic adaptability.