Netflix: Is the Warner Deal and Advertising Inflection Priced In?

The market has already priced in a lot of bad news. Since its last earnings report in October, Netflix shares have slid 28%, trading at a historically cheap valuation heading into its next earnings drop. This steep decline reflects a clear expectation gap: Wall Street consensus is looking for a solid, if not spectacular, quarter. Analysts expect Q4 EPS of $0.55 and revenue of $11.97 billion, representing year-over-year growth of 27.9% and 16.8%, respectively. That's a strong print on paper, but the stock's reaction shows investors are looking past the headline numbers. The real focus is on the company's expense and profitability profile, a concern that was highlighted last quarter when Netflix missed its operating margin target.

The primary source of this priced-in fear is uncertainty. The main headwind fueling the sell-off is uncertainty around the company's pursuit of acquiring certain assets from Warner Bros. Discovery. The bidding war with Paramount Skydance, combined with questions about financing and integration, has created a cloud over near-term growth. In this environment, the market is discounting Netflix's core streaming performance, waiting for a catalyst to reset expectations.

That catalyst could be the advertising revenue inflection. While the stock's slide prices in near-term risks, it may be overlooking a major, underappreciated growth vector. The potential for advertising to become a primary revenue driver starting in 2026 represents a new growth story that isn't fully reflected in current valuations. Evidence points to this being a key catalyst: the ad-supported tier already accounts for over 55% of new sign-ups in available markets, and the company is on track to double ad revenue in 2025. The full rollout of its proprietary ad tech stack could enable faster innovation and margin expansion, providing a powerful new engine beyond subscriber adds.

The setup is now a classic expectation arbitrage. The market has heavily discounted the stock on fears of deal uncertainty and margin pressure. The upcoming report will test whether those fears are justified. If the results confirm the consensus EPS and revenue targets, the stock could face a "sell the news" dynamic. However, any positive surprise on advertising momentum or a clearer path to navigating the Warner deal could force a re-rating, as the market recalibrates its view on Netflix's long-term growth trajectory.

The Guidance Reset: Slowing Growth and the Warner Overhang

The core of the expectation gap lies in a fundamental shift in growth drivers. For years, Netflix's expansion was powered by a highly penetrated US market. Now, that engine is expected to sputter. The main headwind is the lapping of the January 2026 US price increases, which will slow overall growth as the US market becomes highly saturated. Analysts project UCAN member growth of only about 2% annually over the long term, barely keeping pace with household formation. This creates a clear expectation: the market is looking for evidence that international markets will become the primary growth engine to offset this US saturation.

The setup for 2026 is a race between these two forces. On one side, the US market is maturing, with average revenue per member (ARM) expected to rise at a mid-single-digit rate. On the other, international markets are projected to drive the bulk of new member growth. The critical question for the upcoming report is how much contribution from these regions is already priced in. Any guidance that confirms a significant shift in contribution from international to the US mix would be a major positive signal, validating the market's hope for a new growth trajectory.

Yet, this growth reset is happening against a backdrop of massive strategic risk. The $82.7 billion Warner Bros. Discovery acquisition has created a new layer of analyst caution. The consensus remains a "Moderate Buy," but the average price target has been trimmed to $129.47. Firms like Goldman Sachs and CFRA have cut their targets, citing risks around integration and debt financing. This deal overhang means the market is not just discounting near-term growth slowdown; it is also pricing in significant execution uncertainty. The upcoming earnings report will be a test of whether management can navigate this dual challenge-managing a natural growth deceleration while simultaneously preparing the company for a transformative, high-debt acquisition.

Catalysts and Risks: The Post-Earnings Playbook

The upcoming report is a binary event for the stock. The market has priced in a slow-growth, high-risk setup. The real action will come from how management's print and guidance either confirm or contradict that narrative. There are clear signals to watch that could trigger a sharp re-rating or a deeper sell-off.

First, the path to a short squeeze and upward reset is a classic "beat and raise." A clean beat on the consensus Q4 EPS of $0.55 and revenue of $11.97 billion is table stakes. The real catalyst would be strong 2026 guidance that exceeds the current consensus. Monness, Crespi, Hardt projects first-quarter 2026 sales of $12.398 billion and EPS of $0.81, suggesting a growth trajectory that could surprise. If management provides a full-year 2026 outlook that signals international markets are accelerating and advertising is ramping faster than expected, it would force a re-rating. This would validate the underappreciated growth vector and signal that the stock's cheap valuation is no longer justified.

Conversely, any sign of margin pressure or a guidance reset would validate the current discount. The market is watching for a repeat of last quarter's operating margin miss, where Netflix delivered 28.2% versus a 31.5% expectation. If content spending or Warner deal integration costs begin to squeeze margins, it would confirm the fears that are already priced in. More broadly, any guidance that confirms a slower growth path-perhaps by downplaying the contribution from international markets or signaling a more cautious US price hike-would likely lead to further selling. The stock's 28% slide since October shows the market is primed to punish any deviation from the "slow growth" script.

The key watchpoint, however, is the Warner deal itself. This remains the single largest source of uncertainty and a potential overhang. The market needs clarity on the timeline and, critically, the financing. The fact that Netflix is now considering an all-cash offer to compete with Paramount Skydance adds a new layer of risk, potentially forcing a debt-heavy deal. Management must provide a clearer path forward. Vague commentary or a lack of detail on how this $82.7 billion acquisition will be funded and integrated would likely deepen the skepticism and keep the stock under pressure. In short, the report must either remove the deal overhang or confirm it, as the stock cannot trade on both hope and fear simultaneously.