Netflix Stock Valuation: A Closer Look at the Binge Continues

Netflix's shares have surged 42% so far this year, on top of an 83% gain in 2024, giving a total rally of about 160% since early 2024. The company's advertising business is expected to nearly double this year, and its operating margin has risen from 28.1% in Q2 2024 to 31.7% in Q1 this year. Netflix has proven it can raise subscription prices without causing massive churn, and its price hikes are already showing up in Q2 financials. The stock trades at a forward P/E ratio of about 60, which may sound high, but when factoring in its near-45% EPS growth, it starts to look less expensive.

As Netflix prepares to release its second-quarter earnings this week, investors are eagerly anticipating the results. The streaming service's stock has surged 42% so far this year, on top of an 83% gain in 2024, giving a total rally of about 160% since early 2024. The company's advertising business is expected to nearly double this year, and its operating margin has risen from 28.1% in Q2 2024 to 31.7% in Q1 this year. Netflix has proven it can raise subscription prices without causing massive churn, and its price hikes are already showing up in Q2 financials. The stock trades at a forward P/E ratio of about 60, which may sound high, but when factoring in its near-45% EPS growth, it starts to look less expensive [1].

Netflix's earnings report will be closely watched, as it will provide insights into the company's growth drivers and financial health. Key metrics to watch include revenue growth, ad-tier adoption, operating margins, and free cash flow. Analysts project Q2 revenue of $11.05 billion, a 15.6% year-over-year jump, driven by price hikes, ad-tier adoption, and live sports [2]. Operating margins are expected to hit 33.3%, up from 27.2% in 2024, reflecting cost discipline and higher ad revenue.

Despite the positives, risks lurk. First, valuation: At $1,275 per share, Netflix trades at nearly double Morningstar's $750 fair value estimate. Bulls argue that its moat—content library, global scale, and ad-tech innovation—warrants a premium. Bears counter that competition from Disney+, Apple TV+, and HBO Max is intensifying, while geopolitical risks could crimp margins [2].

Second, growth sustainability: Netflix's international revenue growth has slowed to low teens. In mature markets like the U.S., price hikes may hit limits, while emerging markets face affordability constraints [2].

Third, the ad model's limits: While ads boost revenue, they also reduce ARPU for lower-tier subscribers—a trade-off that could cap margin expansion unless ad pricing accelerates [2].

Earnings Day: The Crucible Q2 results will test these narratives. Key metrics to watch: 1. Revenue growth: Sustained mid-teens growth in the U.S./Canada and Europe will validate pricing power. 2. Ad-tier adoption: A 10%+ increase in monthly active users would signal scalability. 3. Operating margins: A 33.3% print would affirm cost controls, but a miss could spook investors. 4. Free cash flow: Guidance of $8 billion for 2025 may be revised higher if margins hold [2].

Investment Implications Netflix's stock is a bet on two things: its ability to monetize existing users through ads and live sports, and its capacity to defend its market share in an increasingly crowded space. For bulls, the earnings report could be a catalyst to push the stock toward its all-time high of $1,280—and beyond—if results exceed expectations. However, historically, Netflix's performance following earnings beats has been mixed: since 2022, the stock has shown a 30% win rate over three days, but a 70% win rate over ten days, with the maximum gain reaching 2.18% over 16 days [2].

This historical context adds nuance to the current optimism. While short-term gains are possible, the muted long-term returns suggest that the market may demand consistent outperformance to justify the stock's premium valuation. A miss on margins or ad revenue could trigger a sharp selloff, especially if competitors announce aggressive pricing or content deals [2].

For now, the earnings report is the proving ground. If Netflix delivers, the bull case holds. If not, this may be the moment the market recalibrates its optimism.

References:
[1] https://finance.yahoo.com/news/netflix-stock-soaring-buy-sell-074100467.html
[2] https://www.ainvest.com/news/netflix-earnings-crossroads-momentum-justify-premium-valuation-2507/