Netflix's Q2 Surge Masks Long-Term Valuation Headwinds: Caution Ahead

Netflix (NFLX) delivered a strong Q2 2025 earnings beat, with revenue surging 15.5% year-over-year to $11.04 billion and EPS jumping 45% to $7.08—results that underscore the power of its ad-supported model and live sports bets. Yet beneath the near-term momentum lies a critical question: Can these gains justify the stock's sky-high valuation? With the forward P/E now trading at 48x—far above the 33x fair value multiple analysts cite—the disconnect between short-term success and long-term sustainability is widening.

The Near-Term Triumph: Ads and Content Drive Growth

Netflix's Q2 performance was fueled by three pillars:
1. Ad Revenue Momentum: The ad-supported tier, now boasting 94 million monthly users, is on track to double its $2.15 billion 2024 revenue to nearly $5 billion by year-end. The company's proprietary Netflix Ads Suite has attracted major brands, with CPMs (cost per thousand impressions) rising steadily.
2. Content Diversification: Investments in live sports—like NFL games and WWE matches—are expanding its audience beyond traditional streaming subscribers. International hits, such as Baby Reindeer in Nordic markets and Squid Game globally, continue to drive subscriptions.
3. Free Cash Flow Growth: Netflix aims to generate $8 billion in free cash flow this year, up from $5.6 billion in 2024, signaling operational discipline.

The Long-Term Cloud: Slower Growth and Overvaluation

While Q2's results are impressive, the company's long-term targets reveal a stark reality. Netflix projects revenue growth to slow to just 12.3% annually through 2028, down from the 15.5% rate achieved in Q2. This deceleration reflects maturing markets and intensifying competition from Disney+, Amazon Prime, and regional players like Paramount+ and HBO Max.

The math is simple: At a 12.3% CAGR, revenue would reach $60 billion by 2028, far below the $78 billion target for 2030. To hit that ambitious 2030 goal, growth would need to rebound to 15.5% in the final two years—a stretch given the saturated global streaming market.

Valuation: The Elephant in the Room

The stock's 48x forward P/E multiple—nearly double its 5-year average—assumes flawless execution. Analysts at Morningstar and others argue that even if Netflix hits its 2030 targets, the stock is overvalued today. A 33x P/E multiple by 2028 (in line with historical averages) would imply a 42% downside from current prices, as earnings would need to grow by only 2% annually over the next three years to justify the valuation.

Risks That Could Derail the Narrative

• Margin Pressures: Live sports content costs are soaring, with NFL rights alone costing $1 billion annually. These expenses could squeeze operating margins below the 32.7% target.
• Ad Saturation: The ad-supported tier's growth may slow as Netflix nears the 100 million user mark. Competitors are now offering cheaper ad tiers, too.
• Regulatory Headwinds: Antitrust scrutiny in Europe and data privacy laws could limit ad revenue growth.

Investment Takeaway: Caution Ahead of Earnings

Netflix's Q2 results are a win, but investors must ask whether they're paying for the past or the future. The stock's 5-year CAGR of ~10% in revenue and ~18% in EPS already seems priced in. With the Q2 earnings call now behind us, the focus shifts to execution against the 2028 targets.

Recommendation: Hold or lighten positions unless the stock pulls back toward $1,000—a level that would bring the P/E closer to 35x. Aggressive investors might consider a small position with a strict stop-loss, but the risks of overvaluation and slowing growth warrant skepticism.

In short, Netflix's near-term wins are undeniable, but investors must weigh whether today's price pays for tomorrow's potential—or yesterday's achievements.