Is Netflix's Current Valuation Sustainably Justified Despite Strong Earnings and Buybacks?

Netflix (NFLX) has become a poster child for high-growth tech investing, with a forward P/E ratio of 46.66 as of July 2025—a multiple that dwarfs both its historical averages and those of its peers. For contrarian value investors, the question is not whether Netflix has delivered impressive earnings or share repurchases but whether the market's exuberance has priced in unrealistic growth assumptions. Let's dissect this valuation through the lens of margin pressures, content spending, and the long-term sustainability of buybacks.

The Illusion of “Cheap” Growth

Netflix's 2025 earnings report showcased a 47% year-over-year jump in adjusted EPS to $7.19, driven by a 16% revenue increase and aggressive share repurchases. The company retired 1.5 million shares in Q2 alone, reducing its float by over 30 million shares since 2023. These buybacks have artificially inflated EPS, masking the true earnings power of the business. While a 46x forward P/E seems reasonable for a company growing revenue at 11% annually, it becomes questionable when viewed through the lens of content costs.

Netflix's cash content spending is projected to hit $18 billion in 2025—a 11% increase from 2024. This spending accounts for roughly 40% of total operating costs, based on its $44.5 billion revenue guidance. The company's operating margin of 33.3% in Q2 2025, while impressive, relies heavily on ad-tier monetization and price hikes in mature markets. But as content costs rise faster than revenue, the margin expansion may prove temporary. For instance, the return on content spend (ROCS) has declined from 2.5x in 2022 to 1.8x in 2025, suggesting diminishing returns on original programming.

The Content Arms Race: A Margin-Eating Sausage Machine

The streaming wars have turned content spending into a zero-sum game. Netflix's $18 billion budget for 2025 is not just to maintain its library but to outspend rivals like Disney+ and Amazon Prime Video. Yet, this strategy creates a vicious cycle: higher content costs force price hikes, which risk subscriber attrition, which in turn requires even more spending to acquire new users.

The company's operating margin expansion in Q2 2025 was partly a function of foreign exchange tailwinds and ad revenue growth, not structural efficiency. For example, ad-tier monetization carries 75% incremental margins, but this high-margin revenue stream is still small (under 3% of total revenue). Meanwhile, the cost of producing high-profile titles like Squid Game Season 3 or Wednesday Season 2 is rising due to talent demands and production complexity. If content costs outpace ARPU growth, Netflix's margins will face downward pressure—a risk the market is underestimating.

Buybacks: A Double-Edged Sword

Netflix's share repurchase program has been a tailwind for EPS, but it raises questions about capital allocation discipline. The company has spent over $10 billion on buybacks since 2023, yet its return on equity (ROE) of 10.54% lags behind the industry average of 15%. This suggests that while buybacks boost EPS, they are not translating into meaningful shareholder value creation.

Morningstar's fair value estimate of $750—a 38% discount to Netflix's July 2025 price of $1,218—reflects skepticism about the sustainability of these buybacks. If the company's free cash flow declines due to margin compression or content underperformance, the buyback program could become a drag on liquidity. Additionally, the high P/E multiple implies that investors are pricing in a 30%+ ROE for years to come—a hurdle Netflix has yet to clear.

Contrarian Take: Overreaction or Mispriced Opportunity?

The market's current valuation of Netflix hinges on three assumptions:
1. Ad revenue will scale rapidly (doubling in 2025).
2. Content costs will remain in check despite rising inflation in the entertainment sector.
3. Subscriber growth in mature markets will offset slowing international expansion.

While these assumptions are plausible, they are also fragile. For contrarian investors, the key is to differentiate between sustainable growth and engineered growth. Netflix's ad-tier success and AI-driven production efficiency offer real upside, but the 46x forward P/E assumes perfect execution on all fronts. History shows that even well-managed companies like Netflix can face margin shocks when content underperforms or pricing power erodes.

Investment Thesis: Wait for a Pullback

Despite Netflix's strong earnings and buybacks, the current valuation reflects a premium for growth rather than a discount for risk. For value investors, the stock is best approached as a “buy on weakness” opportunity. A pullback to the $800–$900 range would align the P/E with its five-year average of 32x and offer a margin of safety. Until then, the 46x multiple remains a bet on the company's ability to outperform in a crowded market—a bet that may not justify the price for those seeking downside protection.

In conclusion, Netflix's fundamentals are robust, but its valuation is a house of cards built on aggressive growth assumptions. For disciplined investors, patience and a contrarian lens are the best tools to navigate this high-stakes bet.