Netflix Stock: Is the 28% Selloff Already Priced In for a 'Beat and Raise'?

The market has already punished Netflix for its recent stumble. Since the third-quarter report in late October, shares have slid 28%. That's a classic "sell the news" reaction, where solid top-line growth was overshadowed by a miss on operating margin. The sell-off wasn't just about one quarter's profit; it was a preemptive discount for the uncertainty now clouding the company's path, particularly the potential acquisition of Warner Bros. Discovery assets. The question heading into next week's earnings is whether this steep drop has fully priced in the risk of another guidance reset.

Valuation now sits at a critical inflection point. Netflix trades at a forward price-to-earnings ratio of 32. For a company facing a clear deceleration in growth, that multiple looks stretched. Morningstar's analysis crystallizes this tension. The firm's fair value estimate of $770 implies roughly 10% downside from recent levels, arguing the stock is still moderately overvalued. This sets up a high-stakes test: the market needs to see a clear path from here to that fair value.

Wall Street's consensus for the upcoming report is a benchmark of current expectations. Analysts are looking for Q4 revenue of $11.97 billion (16.8% year-over-year growth) and EPS of $0.55 (28% year-over-year growth). These are solid numbers, but they represent the whisper number the stock must beat to spark a rally. The real focus, however, will be beyond the headline beats. With the stock already down 28% from its post-earnings peak, the market is primed for any sign that the growth trajectory is stalling or that the Warner Bros. Discovery deal introduces new financial pressure. A clean beat on revenue and EPS might not be enough; investors will demand a "raise" in guidance to justify the current price.

The Monetization Engine: Ad-Tier Growth vs. Subscriber Headwinds

The expected beat on revenue is being driven by a powerful shift in how Netflix monetizes its audience. The company's ad-supported tier is no longer a niche offering; it's becoming the core growth engine. In the third quarter, the share of active accounts using this plan jumped to 40%, a massive 14-percentage-point increase from just a year ago. This isn't just about subscriber count-it's about viewing power. That tier now accounts for 45% of total U.S. household viewing hours, up from 34% just a few months prior. In other words, the ad tier is capturing a disproportionate share of the total time people spend on Netflix.

This monetization shift is critical for two reasons. First, it directly offsets the slowing growth in paid subscriber adds, which has been a persistent headwind. As the company's core market matures, the ad tier provides a new avenue for revenue expansion without needing to add more expensive, high-margin premium subscribers. Second, and more importantly, this model is essential as the company looks to international markets for future growth. These markets are often more price-sensitive and have lower average revenue per user. The ad-supported tier offers a lower-cost entry point that can accelerate adoption and build a larger, more valuable user base in regions where the premium tier might struggle to gain traction.

The key question for investors is whether this powerful monetization story is already priced in. The stock's 28% selloff suggests the market is focused on the downside risks-slowing growth, margin pressure, and deal uncertainty. The explosive growth of the ad tier, however, represents a significant positive expectation gap. If the upcoming earnings show this trend continuing and accelerating, it could validate a new, more resilient growth trajectory. The market may have discounted the stock for subscriber stagnation, but it may not have fully priced in the earnings power of a platform where nearly half of all viewing is now ad-supported.

The Guidance Reset: What Could Break the Expectation

The real test for Netflix isn't just the numbers already in the rearview. It's the forward-looking commentary that will determine if the recent 28% selloff has fully priced in the risks. The market has already discounted the uncertainty around the Warner Bros. Discovery acquisition, which has been the primary headwind driving shares down. The key watchpoint is management's guidance for 2026, as that will set the new expectation for growth.

Analysts expect growth to slow next year as the company laps recent price hikes in the highly penetrated U.S. market. Morningstar's analysis points to this as a clear catalyst for a guidance reset. The firm projects UCAN member growth of only about 2% annually and ARM to rise at a mid-single-digit rate each year in the U.S. and Canada. If management's 2026 outlook aligns with this deceleration, it would confirm the market's worst fears about a growth plateau, potentially triggering another leg down.

Any commentary on another U.S. price increase is a critical, though not consensus, expectation. While Morningstar does not expect another hike, the market will be listening for any signal that Netflix is still aggressively monetizing its mature base. A reaffirmation of the current price structure could be seen as a positive, but it would also underscore the limited room for upside in the core market. Conversely, a hint of another increase could be interpreted as a desperate move to offset slowing growth, adding to the pressure.

The bottom line is that the stock's steep decline has likely priced in a worst-case scenario. For a "beat and raise" to spark a rally, the guidance must not only meet but exceed the lowered expectations for 2026. The market is braced for a reset, and the upcoming report will show whether Netflix can navigate the headwinds of a saturated U.S. market and deal uncertainty to set a new, credible path forward.

Catalysts and Risks: The Post-Earnings Playbook

The setup is clear. The stock has already sold off 28% on the fear of a guidance reset and deal uncertainty. For a relief rally to follow the report, Netflix must not just beat the whisper number but also overcome that deep-seated pessimism. The path forward hinges on three key scenarios and data points.

First, a clean "beat and raise" on guidance could spark a relief rally. The market consensus expects Q4 revenue of $11.9 billion and EPS of $5.45. A beat on those numbers, combined with a 2026 outlook that exceeds the cautious projections for a saturated U.S. market, would signal management sees a viable path through the current fog. Morningstar's analysis suggests the stock is no longer "grossly overvalued," and a credible growth plan could make the current valuation look reasonable. The rally would be fueled by the expectation that the worst-case scenario is now priced in.

Second, a "guidance reset" or weak international commentary would likely confirm the market's cautious stance. The primary headwind is the uncertainty around the Warner Bros. Discovery acquisition, which has been a catalyst in driving the stock down. Any negative update on that front would be a direct hit. More broadly, if management's 2026 outlook aligns with Morningstar's projection of only about 2% annual UCAN member growth, it would validate the sell-off and likely trigger another leg down. The market is braced for a reset, and confirmation would solidify that view.

Third, investors must monitor the ad-tier adoption rate and time spent metrics for evidence of sustained monetization traction. The explosive growth of the ad-supported tier is the most powerful positive expectation gap. The stock's selloff focused on subscriber stagnation and margin pressure, but the monetization story may not be fully priced in. A continued acceleration in the share of active accounts using the ad tier, and more importantly, a rise in the time spent on that plan, would demonstrate the model's resilience and its ability to drive revenue in a mature market. This data would be a critical signal that Netflix is successfully monetizing its existing audience, offsetting the need for more expensive premium adds.

The bottom line is a high-stakes gamble on expectations. The 28% selloff has priced in significant risk. A beat on the top line coupled with a raised forward view could spark a powerful relief rally. But if the guidance confirms a growth plateau or the deal uncertainty intensifies, the stock may face a deeper reset. The coming report is a pure test of whether reality can finally catch up to the market's pessimistic pricing.