# Netflix: down 44%, but still above fair value NFLX, Nasdaq. Published October 12, 2026. Price as of the October 9, 2026 regular session close. All figures are in US dollars. ## Verdict: HOLD at $70.30 Hold, do not add. After a 44% fall from its 52-week high of $124.86, Netflix trades 20.2% above my Base value of $58.50, so the market is still paying for more than my Base case of about 9% revenue growth a year and an operating margin that reaches 35% by 2030. The Bear value of $34.80 is 50.5% below the price and the Bull value of $81.81 is 16.4% above it. With a 45% required margin of safety the maximum buy price is $32.17. Red today: the Q2 operating margin fell to 33.4% from 34.1%, Q2 free cash flow fell 33%, and net debt rose from $2.1 billion to $5.2 billion in one quarter. - Bear value: $34.80 - Base value: $58.50 - Bull value: $81.81 - Downside to base value: -16.8% - Maximum buy price: $32.17 - Required margin of safety: 45% - Net debt (operating leases excluded): $5.2 billion - Net debt / 2026E operating income: 0.3x - Owner free cash flow yield, 2026E / 2027E: 3.5% / 4.1% - Diluted units: 4,235.9 million - Business quality: 74/100 - Valuation score: 33/100 - Confidence: 16/25, grade C Every stock screener shows Netflix at about 22 times earnings. That number includes a $2.8 billion check from Warner Bros. Discovery for a takeover that never happened. Take the check out and the multiple is closer to 27 (my estimate). The shares are still down 44% from their 52-week high of $124.86, and the business is still growing revenue 13% with a 33% operating margin. At the October 9, 2026 close of $70.30, the shares trade 20.2% above my triangulated Base value of $58.50. The Bear value is $34.80 and the Bull value is $81.81. The required margin of safety (MOS), the discount to fair value I need before buying, is 45%, so the maximum buy price is **$32.17**, 54% below the price. Route: SF-01 standard value (media with stable free cash flow). SF-07 does not apply: Netflix is a consumer subscription business with large positive free cash flow, not an ARR software story. Economic classification: Quality Growth, 8/12 on the generic scorecard, one point below the Compounder line, so the engine is GROWTH\_ADJUSTED\_MULTIPLE with an explicit multiple build. Primary method: owner free cash flow times a multiple. Secondary method: a ten-year DCF at 10% with a growth fade. Values are present fair-value estimates, not 12-month price targets. Owner free cash flow here is cash after interest, taxes, capex and stock pay, and it excludes the one-off Warner Bros. fee. ## What Netflix is Netflix sells subscription streaming of series, films, live events and games, plus an advertising-supported tier. It had revenue of $48.4 billion over the last twelve months. - Revenue grew 13.4% in Q2 (12% at constant currency), with double-digit growth in every region: Latin America +21% (16% at constant currency), Asia-Pacific +16% (18%), EMEA +14% (11%) and US and Canada +10%. - Advertising is on track for about $3 billion in 2026, roughly double 2025 and about 6% of revenue, so subscriptions are still about 94% of revenue (CALCULATED from guidance). - The letter gives view hours, up 2% in the first half to more than 97 billion, and no membership count. Revenue is growing more than six times faster than viewing, so price and advertising are doing the work, and the filings do not say how many people are paying. - Netflix had agreed to buy Warner Bros. Discovery. On February 27, 2026 WBD terminated that agreement to merge with Paramount Skydance, which paid Netflix a $2.8 billion termination fee on WBD's behalf. Co-founder Reed Hastings announced he would not stand for re-election to the board at the June meeting. ## The latest quarter | Netflix, second quarter 2026 | Q2 2026 | Q2 2025 | | --- | --- | --- | | Revenue | $12,560M (+13.4%; +12% constant currency) | $11,079M | | Operating income / margin | $4,193M / 33.4% | $3,775M / 34.1% | | Net income | $3,401M | $3,125M | | Diluted EPS | $0.80 | $0.72 | | Operating cash flow / free cash flow | $1,744M / $1,525M | $2,423M / $2,267M | | Stock-based compensation | $131M | $81M | | Share repurchases | $4,714M | $1,654M | | Interest expense | $176M | n/a | Free cash flow fell 33% to $1.5 billion, mainly because cash taxes were higher, partly tied to the Warner Bros. fee. Stock-based compensation rose 62% in the quarter and 78% in the first half, to $272 million (CALCULATED from the 10-Q). Q2 repurchases of $4.7 billion were the largest of any quarter in the company's history. | Guidance (Q2 letter, July 16, 2026) | Range | | --- | --- | | 2026 revenue | $51.0B to $51.4B (13% to 14%; narrowed from $50.7B to $51.7B) | | 2026 operating margin | 31.5% (unchanged; 29.5% in 2025) | | 2026 free cash flow | About $12.5B (raised from about $11B in April, mainly for the after-tax Warner Bros. fee) | | 2026 advertising revenue | About $3B (roughly double 2025) | | 2026 content amortization / cash content spend | About +10% / about 1.1x amortization | | Q3 2026 revenue | $12.86B (+11.7%) | | Q3 2026 operating income (margin) | $4.27B (33.2%, against 28.2% a year ago) | | Q3 2026 diluted EPS | $0.82 | The $12.5 billion free cash flow guidance includes the fee, net of tax. Before the fee the guidance was about $11 billion, and that is the number I use for 2026 (ESTIMATED: the company does not state the after-tax amount of the fee). In the first half cash content spend was 1.15 times amortization ($9.77 billion against $8.53 billion), above the 1.1 times target for the year. The Q3 report is due October 20, 2026. | Year, $ millions | 2021 | 2022 | 2023 | 2024 | 2025 | TTM Jun 2026 | | --- | --- | --- | --- | --- | --- | --- | | Revenue | 29,698 | 31,616 | 33,723 | 39,001 | 45,183 | 48,371 | | Operating margin | 20.9% | 17.8% | 20.6% | 26.7% | 29.5% | 29.7% | | Operating cash flow | 393 | 2,026 | 7,274 | 7,361 | 10,149 | 11,971 | | Capital expenditure | 525 | 408 | 349 | 440 | 688 | 819 | | Free cash flow | -132 | 1,619 | 6,926 | 6,922 | 9,461 | 11,152\* | | Stock-based compensation | 403 | 575 | 339 | 273 | 368 | 487 | | Free cash flow after stock pay | -535 | 1,044 | 6,587 | 6,649 | 9,093 | 10,665\* | | Share repurchases | 824 | n/a | 6,045 | 6,272 | 9,173 | 9,969 | | Shares outstanding (millions) | 4,440 | 4,453 | 4,328 | 4,278 | 4,222 | 4,164 | \*Includes the $2.8 billion Warner Bros. fee, so I do not use it as a run rate. Revenue grew 11.1% a year from 2021 to 2025. Free cash flow rose from $1.6 billion in 2022 to $9.5 billion in 2025, but the 2022 base is depressed, so I do not treat that growth rate as a quality signal (see the SM-20 paragraph below). The two-year view from 2023 is cleaner: free cash flow grew 16.9% a year and free cash flow per share 19.0% a year. The share count fell from 4,440 million in 2021 to 4,222 million in 2025 and 4,164 million at June 30, 2026. ## Owner free cash flow | Owner free cash flow, $ millions | FY2025 | 2026E, excluding the fee | | --- | --- | --- | | Revenue | 45,183 | 51,200 (guidance midpoint) | | Free cash flow (reported; 2026E before the Warner Bros. fee) | 9,461 | 11,000 (ESTIMATED) | | Less stock-based compensation | -368 | -560 (ESTIMATED) | | Owner free cash flow | 9,093 | 10,440 | | As a share of revenue | 20.1% | 20.4% | | Memo: 2026 free cash flow guidance including the fee, after tax | n/a | about 12,500 | My Base for 2026E is $10.44 billion, or 20.4% of the revenue midpoint of $51.2 billion. That is 68% of the $16.1 billion operating income implied by the 31.5% margin guidance, against 71% in 2025, because cash taxes and cash content spending run ahead of amortization. I hold that 68% conversion in Base and stock pay at about 1.1% of revenue. | Base case, $ billions | 2026E | 2027E | 2028E | 2029E | 2030E | 2031E | | --- | --- | --- | --- | --- | --- | --- | | Revenue | 51.19 | 56.82 | 62.51 | 68.13 | 73.58 | 78.73 | | Revenue growth | 13.3% (guidance midpoint) | 11.0% | 10.0% | 9.0% | 8.0% | 7.0% | | Operating margin | 31.5% | 33.0% | 34.0% | 34.5% | 35.0% | 35.0% | | Operating income | 16.13 | 18.75 | 21.25 | 23.51 | 25.75 | 27.56 | | Free cash flow before stock pay | 11.00 | 12.75 | 14.45 | 15.98 | 17.51 | 18.74 | | Stock-based compensation | 0.56 | 0.63 | 0.69 | 0.75 | 0.81 | 0.87 | | Owner free cash flow (after interest, taxes, capex and stock pay) | 10.44 | 12.13 | 13.76 | 15.23 | 16.70 | 17.87 | | Owner free cash flow margin | 20.4% | 21.3% | 22.0% | 22.4% | 22.7% | 22.7% | Base assumes revenue growth fading from 13% to 7% by 2031 (a compound rate of 9.0% from 2026E), an operating margin rising from 31.5% to 35% by 2030, and owner cash flow compounding at 11.4% a year. I assume no further buybacks, so the unit count stays at 4,235.9 million, and no acquisitions. ## Debt and shares | Capital structure at June 30, 2026 | $ billions | | --- | --- | | Senior notes at face value ($2.484B classified as current) | 14.372 | | Less cash | -9.099 | | Less short-term investments | -0.029 | | Net debt (company definition; operating leases of $2.33B excluded) | 5.244 | | Shares outstanding / dilutive awards | 4,163.9M / 72.0M (ESTIMATED) | | Diluted units used | 4,235.9M | | Market value at $70.30 | 297.79 | | Enterprise value | 303.03 | Net debt is about 0.3 times 2026E operating income, and Q2 operating income covers interest expense about 24 times. The $3 billion revolving credit facility matures in April 2029 and is undrawn. About $2.5 billion of notes are classified as current, and management says it plans to refinance about $1 billion that matures later this year. Net debt rose from $2.1 billion at March 31 to $5.2 billion at June 30, because Netflix spent $4.7 billion on buybacks in Q2, partly from cash that included the Warner Bros. fee. About $27.1 billion of authorization remains, 9.1% of the current market value. In Q1 Netflix bought 13.5 million shares for $1.3 billion, about $96 a share, which is 27% above today's price. There is no dividend. ## Primary valuation: owner free cash flow times a multiple Netflix is a Quality Growth company under the framework, so the multiple is built from a base and explicit premiums. The base is 12 times, between the average-stable and very-stable tiers: net debt is small, but the five-year beta is 1.61 in one source and 0.78 in another, so I do not claim the lowest-risk tier. I add premiums for per-unit growth, a return on capital of 28% to 32% and subscription revenue, and subtract a risk discount for slow viewing growth, industry consolidation (Paramount Skydance with Warner Bros. Discovery), rising content and live-event costs, and the lack of membership disclosure. | Multiple build (P/FCF on owner cash flow) | Bear | Base | Bull | | --- | --- | --- | --- | | Sector base: between average stable (11x) and very stable (13x) | 12.0x | 12.0x | 12.0x | | Growth premium (FCF per unit growth) | +1.0x | +4.0x | +6.0x | | Return on capital premium (ROIC about 28% to 32%) | +2.5x | +4.0x | +5.0x | | Balance sheet premium | +0.5x | +1.0x | +1.5x | | Repeat economics premium (about 94% subscription) | +1.5x | +2.0x | +3.0x | | Dilution penalty (share count falling, stock pay rising) | -0.5x | 0.0x | 0.0x | | Risk discount (slow viewing growth, consolidation, content costs, no membership data) | -5.0x | -3.0x | -1.5x | | Multiple used | 12.0x | 20.0x | 26.0x | The Base multiple of 20.0 times is 67% above the 12-times base, below the 75% line that triggers a mandatory DCF, though I run one as the secondary method. The price today is 28.5 times 2026E owner free cash flow. | Primary method | Bear | Base | Bull | | --- | --- | --- | --- | | FY2028E owner free cash flow | $11.50B | $13.76B | $15.52B | | Multiple (growth-adjusted) | 12x | 20x | 26x | | Equity value at end of 2027 | $137.99B | $275.28B | $403.55B | | Discounted to today at 10% | $122.84B | $245.06B | $359.25B | | Plus Q4 2026 and 2027 owner cash flow, discounted | $12.76B | $13.87B | $14.86B | | Value per diluted unit | $32.01 | $61.13 | $88.32 | The primary Base value is **$61.13**, 13.0% below the market price. ### Sensitivity: value per unit | Multiple \ FY2028E owner FCF | $11.00B | $12.40B | $13.76B (Base) | $15.10B | $16.50B | | --- | --- | --- | --- | --- | --- | | 12x | $31.02 | $34.55 | $37.99 | $41.36 | $44.89 | | 16x | $40.26 | $44.97 | $49.56 | $54.05 | $58.76 | | 20x | $49.51 | $55.39 | $61.13 | $66.74 | $72.63 | | 24x | $58.76 | $65.82 | $72.70 | $79.44 | $86.50 | | 26x | $63.38 | $71.03 | $78.48 | $85.78 | $93.43 | ## Secondary valuation: ten-year DCF | DCF of owner cash flow at 10% | Bear | Base | Bull | | --- | --- | --- | --- | | Terminal growth | 2.5% | 3.0% | 3.5% | | Owner cash flow growth 2032E to 2036E (fade) | 4.0% to 3.0% | 6.0% to 4.0% | 8.0% to 5.5% | | Present value of Q4 2026E to 2036E cash flow | $82.2B | $110.3B | $135.2B | | Present value of terminal value | $77.1B | $126.3B | $183.8B | | Terminal value share | 48% | 53% | 58% | | Value per diluted unit | $37.59 | $55.86 | $75.30 | The secondary Base value is **$55.86**. Terminal value is 53% of the Base DCF, below the 75% warning line. The DCF uses the same owner cash flow path for 2026 to 2031 as the primary method, so it is not fully independent. It differs by letting growth fade from 6.0% to 4.0% over 2032 to 2036 and then valuing the business at 3.0% growth forever, instead of applying a multiple. The Bull case uses a 3.5% terminal rate, above the framework's 3.0% guide for compounders, which is one reason it is a Bull. | Discount rate \ terminal growth | 2.5% | 3.0% | 3.5% | | --- | --- | --- | --- | | 9% | $62.34 | $65.45 | $69.13 | | 10% | $53.74 | $55.86 | $58.32 | | 11% | $47.19 | $48.70 | $50.41 | ## History and growth diagnostics **Valuation history.** The enterprise value is 18.8 times 2026E operating income and the price is 28.5 times 2026E owner free cash flow (32.7 times 2025). The reported trailing P/E is 22.2. Removing the fee ($0.53 a share after tax, CALCULATED at the 19.3% Q1 effective rate) gives trailing EPS of about $2.64 and a P/E of about 26.6 (ESTIMATED). Five to ten year multiple history is UNAVAILABLE from the sources I could read. **PEG (SM-19, diagnostic only).** The price is about 23.2 times my 2026E EPS excluding the fee of $3.03 (Q1 $0.70, Q2 $0.80, Q3 guidance $0.82, my Q4 estimate $0.71). My Base operating income grows 11.3% a year from 2026E to 2031E, so the PEG is about 2.1, with GAAP earnings on both sides. I treat it as a diagnostic only. Growth type: STRUCTURAL for pricing and advertising, NORMALIZING as growth fades from 13% to 7%. CYCLICAL\_DISTORTION: LOW, because there is no genuine cycle. The fee is an accounting distortion of the reported P/E (ACCOUNTING\_BASIS\_MISMATCH) and I remove it. **Free cash flow growth quality (SM-20, diagnostic only).** Free cash flow rose from $6,926 million in 2023 to $9,461 million in 2025, a compound growth of 16.9% a year and an absolute increase of $2.5 billion. Per share it grew from $1.54 to $2.18, or 19.0% a year, and the share count fell 1.3% a year from 2021 to 2025. A start in 2022 ($1,619 million) would give 80% a year, which is LOW\_BASE\_DISTORTION, so I reject it. FCF margin was 20.5% in 2023 and 20.9% in 2025, and free cash flow was 86% of net income in 2025. Forward, my Base owner cash flow compounds at 11.4% a year from $10.44 billion in 2026E to $17.87 billion in 2031E. The forward owner cash flow yield on market value is 3.5% for 2026E and 4.1% for 2027E. The growth bridge is revenue growth (about 13% to 11%), operating margin gains of about 2 points a year in 2026 and 2027, and a cash conversion that stays near 68% because cash content spend runs above amortization. Flags: ACCOUNTING\_CASHFLOW\_MISMATCH for the $2.8 billion fee (removed) and rising stock pay (up 78% in the first half). Estimate dispersion and revisions are UNAVAILABLE (consensus is behind a paywall), so forecast reliability is MEDIUM. Stress test: 2028E owner cash flow 20% lower gives a primary value of $49.56, and 40% lower gives $37.99. ## Valuation triangulation | Triangulation | Bear | Base | Bull | Weight | | --- | --- | --- | --- | --- | | Primary: growth-adjusted P/FCF | $32.01 | $61.13 | $88.32 | 50% | | Secondary: ten-year DCF | $37.59 | $55.86 | $75.30 | 50% | | Triangulated value | $34.80 | $58.50 | $81.81 | 100% | The two methods differ by 9.0% of their midpoint, inside the 20% line, so no divergence penalty applies. I weight them 50/50 because they use one cash flow path and the multiple, discount rate and terminal growth are judgments. The tests at the end show 70/30 and 30/70. ## What is the market already pricing in? Reverse valuation: at $70.30 the market value of $297.8 billion implies a multiple of 23.2 times on my Base 2028E owner cash flow of $13.76 billion, against my 20 times. Holding my multiple, the price needs 2028E owner cash flow of $15.95 billion, 15.9% above Base. That would take an operating margin of about 39% in 2028 on Base revenue, against 34% in Base, or revenue near $72.5 billion at my 22.0% cash margin, against $62.5 billion. The market is not pricing in a Bear case. It is paying for the ad business to scale and for margins to keep rising, and that is why a 44% fall does not make Netflix cheap. ## Bear, base and bull scenarios | Scenario drivers | Bear | Base | Bull | | --- | --- | --- | --- | | Revenue growth 2027E, then 2028E to 2031E | +9.0%, then +7.0% to +4.0% | +11.0%, then +10.0% to +7.0% | +13.0%, then +12.5% to +9.0% | | Operating margin 2027E to 2031E | 31.5% falling to 30.0% | 33.0% rising to 35.0% | 34.0% rising to 38.0% | | Cash conversion (free cash flow / operating income) | 66% | 68% | 70% | | 2028E revenue | $59.71B | $62.51B | $65.08B | | 2028E owner free cash flow | $11.50B | $13.76B | $15.52B | | Multiple of owner free cash flow | 12x | 20x | 26x | | Triangulated value per unit | $34.80 | $58.50 | $81.81 | **Bear:** viewing stays flat, price increases get harder as competitors consolidate, content and live-event costs outrun revenue and the operating margin slips to 30%. Revenue growth falls to 4% by 2031 and the multiple drops to 12 times. **Base:** pricing and advertising keep revenue growth near 10% for two years, then fade, and the margin gains continue at a slower pace. **Bull:** advertising scales well beyond $3 billion, price increases hold and the operating margin reaches 38%, so growth stays near 9% in 2031 and the multiple is 26 times. Bear and Bull use the same discount rate and net debt as Base, so each risk is counted once. The price of $70.30 is 102% above Bear and 14% below Bull, which is the wrong asymmetry for a buyer. ## How the buy price is set Confidence is C, which starts the margin of safety at 40%. I add 5 points for high operating leverage in content and live events and 5 for opacity, and subtract 5 for the balance sheet, the subscription base and the returns on capital. The result is 45% and the maximum buy price is $58.50 x 55% = **$32.17**. | Required margin of safety | Points | | --- | --- | | Confidence grade C starting point (range 35% to 50%) | 40% | | High operating leverage: content amortization up about 10% in 2026 and live-event costs | +5% | | Opacity: no membership counts, a $2.8B one-off inside earnings and cash flow | +5% | | Offset: net debt about 0.3x operating income, about 94% subscription revenue, ROIC 28% to 32% | -5% | | Required margin of safety | 45% | | Maximum buy price: $58.50 x (1 - 45%) | $32.17 | | If the required margin of safety were | Maximum buy price | | --- | --- | | 35% (bottom of Confidence C range) | $38.02 | | 40% (no add-ons) | $35.10 | | 45% (used) | $32.17 | Even with the lightest margin of safety in the Confidence C range, the buy price is $38.02, 46% below the price. Under the framework's verdict scale a price more than 30% above Base would be a Reduce, which is $83.56. The shares traded near that level on September 3 ($83.60 high). ## Dividend and capital return Netflix pays no dividend. It returned $10.0 billion through buybacks over the last twelve months, and the count of shares outstanding fell 2.0% in the year to June 2026. I do not count future buybacks in value per unit, and at today's price they would be buying shares that are still above my Base value. ## Reasons to own NFLX - **Cash generation.** Free cash flow was $9.5 billion in 2025 and the 2026 guidance excluding the fee is about $11 billion,, with cash content spend running above amortization. - **Pricing power.** Revenue grew 13.4% in Q2 while hours viewed grew 2% in the first half, so price and advertising are carrying growth. - **Advertising.** Ad revenue is on track to roughly double to about $3 billion in 2026, from a small base. - **Margins and returns.** The operating margin rose from 17.8% in 2022 to 29.5% in 2025 and is guided to 31.5%, with return on invested capital of 28% to 32%. - **Balance sheet and buybacks.** Net debt is about 0.3 times operating income and $27.1 billion of buyback authorization remains. ## What could go wrong? - **Viewing growth is 2%.** Hours viewed grew 2% in the first half. If price increases slow, revenue growth has little else under it. - **Competition is consolidating.** Warner Bros. Discovery is going to Paramount Skydance, and Netflix has lost the largest acquisition it had agreed to. - **Content and live costs.** Content amortization is guided up about 10% in 2026 and the Q2 operating margin fell 0.7 points year over year. - **Less disclosure.** There is no membership count, and the viewing report moves to an annual format from Q1 2027, so churn is harder to see. - **Buybacks and refinancing.** Net debt rose $3.1 billion in one quarter and about $2.5 billion of notes are classified as current. - **Leadership and M&A appetite.** The co-founder is leaving the board, and the company was willing to pursue a very large acquisition. It also bought a business for about $587 million in March. ## Management execution Management has held the 31.5% operating margin target through two quarters, raised free cash flow guidance in April and narrowed revenue guidance in July without moving the midpoint ($51.2 billion before and after). It also collected $2.8 billion on a deal it lost. Against that, Netflix no longer reports quarterly memberships, is moving its viewing report to annual, bought back stock at about $96 in Q1, and pursued a transformational acquisition that would have changed what the company is. Management credibility scores **13/20**. ## Stock Analyza scorecard | Business quality | Score | | --- | --- | | Moat and pricing power | 15/20 | | Return versus cost of capital | 18/20 | | Balance sheet | 11/15 | | Cash-flow quality | 10/15 | | Growth and runway | 11/15 | | Management and capital allocation | 6/10 | | Governance and alignment | 3/5 | | Total | 74/100 | Business quality is high because of scale, returns on capital and the cash conversion. Cash-flow quality is held down by rising stock pay, a fee-distorted trailing year and lumpy cash taxes, and management and capital allocation score 6/10 for the mixed record. | Valuation score | Score | | --- | --- | | Discount to Base value (price is 20.2% above Base) | 6/40 | | Protection against Bear (price is 102% above Bear) | 2/20 | | Agreement between methods (9.0% apart) | 13/15 | | Historical valuation context (history UNAVAILABLE, neutral score) | 5/10 | | Asymmetry of market expectations (23.2x paid against 20x in Base) | 4/10 | | Data and model penalty | 3/5 | | Total | 33/100 | The valuation score is low because the price is above Base and twice Bear, even though the methods agree. | Economic classification (generic scorecard) | Points | | --- | --- | | Normalized ROIC (28% to 32%) | 2/2 | | Revenue CAGR (2021 to 2025: 11.1%) | 1/2 | | FCF per share CAGR (2023 to 2025: 19.0%; earlier base distorted) | 1/2 | | Balance sheet | 1/1 | | Unit economics (gross margin rose from 39% to 49% in three years: expansion, not yet stability) | 0/1 | | Recurring or repeat economics (about 94% subscription) | 2/2 | | Reinvestment runway | 1/2 | | Total: Quality Growth | 8/12 | The generic scorecard puts Netflix at 8 of 12, the top of Quality Growth. One more point, for example on unit economics, would make it a Compounder and move the engine to a two-stage DCF. I run a ten-year DCF with a fade as the secondary method anyway, so the practical difference is small. ## Confidence score | Confidence | Score | | --- | --- | | Data quality | 3/5 | | Business predictability | 4/5 | | Valuation robustness | 3/5 | | Accounting transparency | 3/5 | | Scenario dispersion | 3/5 | | Total | 16/25, grade C | Confidence is C. Data quality is 3/5 because the free cash flow excluding the fee, the dilutive awards and the stock pay forecast are my estimates, the beta differs between sources, and I read the quarterly filing only in part. Accounting transparency is 3/5 because of the one-off fee in earnings and cash flow and the absence of membership data. Valuation robustness is 3/5 because the answer depends on a 10% discount rate and a 20 times multiple. ## What I would watch from here ### Green - Constant-currency revenue growth at or above 11% - Operating margin at or above the 33.2% guided for Q3 - Full-year free cash flow on track for about $12.5 billion including the fee - Net debt at or below 0.5 times operating income ### Yellow - Revenue growth between 9% and 11% - Operating margin between 30% and 32% - View hours growth at or below 2% - Stock-based compensation growth above 50% (it was 78% in the first half) ### Red today - Q2 operating margin: 33.4% against 34.1% a year earlier - Q2 free cash flow: -33% year over year on higher cash taxes - Net debt up $3.1 billion in one quarter, from $2.1 billion to $5.2 billion - No membership count disclosed Next review: the third quarter report on October 20, 2026. The company guided to revenue of $12.86 billion, a 33.2% operating margin and EPS of $0.82. ## The three most important thesis breakers 1. Constant-currency revenue growth falls to the Bear path of 9% or lower in 2027, which would show that price increases and advertising are not enough without more viewing. 2. The operating margin falls below 30% as content and live-event costs outrun revenue, against 31.5% guided for 2026 and 33% in Base for 2027. 3. Buybacks funded with debt push net debt above 1.0 times operating income, or a new large acquisition is announced. ## Adversarial review I recomputed every table from the listed inputs in a second, independent calculation and the arithmetic reconciles. Revenue, operating income, EPS, free cash flow, stock pay, buybacks, debt and cash come from the Q2 shareholder letter and the quarterly report, and the trailing totals reconcile to the sums of the quarters. The price comes from the October 9 close. The free cash flow excluding the fee, the stock pay forecast, the dilutive awards, the margin path, the multiples and the discount rate are my estimates. The strongest bullish counter-thesis is that Netflix is the scale winner in streaming, with pricing power, an advertising business that is only beginning and a cash flow that can fund $10 billion a year of buybacks, so the Bull value of $81.81 is a fair outcome if the margin reaches 38%. The strongest bearish counter-thesis is that viewing is growing 2%, a consolidated Paramount Skydance and Warner Bros. Discovery will compete harder for the same hours, and a company that stops reporting memberships may be hiding the churn behind price increases. | Test | Result | | --- | --- | | Base value as published | $58.50 | | Weights 70% primary / 30% DCF | $59.55 | | Weights 30% primary / 70% DCF | $57.44 | | Discount rate 9% in both methods | $63.62 | | Discount rate 11% in both methods | $54.59 | | Most generous combination: 9% discount, 22x multiple, 3.5% terminal growth | $68.39 | | FY2028E owner free cash flow 20% lower | $49.56 (primary) | | FY2028E owner free cash flow 40% lower | $37.99 (primary) | | Each 1 point of 2028E owner cash flow margin | about $2.63 a unit | | Operating leases of $2.33B counted as debt | about -$0.55 a unit | | Net debt of $5.24B deducted on top of a levered cash flow multiple | about -$1.24 a unit | The choices that lean generous are a 20 times multiple, margins that keep rising and no deduction for the buyback funding. The ones that lean conservative are deducting stock pay, removing the $2.8 billion fee from every cash flow, a 10% discount rate for a company with a mixed beta reading and leaving out future buybacks. Even the most generous combination I tested, a 9% discount rate, 22 times and 3.5% terminal growth, gives $68.39, which is 2.8% below the price. I did not tune any of them toward a verdict. Publication gate: PASS\_WITH\_WARNING, because the free cash flow excluding the fee is an estimate, consensus and a verified peer table were not available, I read the quarterly filing only in part, and Q3 results arrive on October 20. **Not available or estimated.** Unavailable: membership counts, the after-tax amount of the fee, cash taxes paid, off-balance-sheet content commitments, five to ten year valuation history, consensus, a verified peer table and Q3 buybacks. Estimated: free cash flow excluding the fee, stock pay for 2026E, dilutive awards, the forward paths, the multiples, the discount rate and the Q4 EPS. ## Final verdict: hold at $70.30 Netflix is an excellent business at a price that still asks more of it than my Base case does. The shares are 20.2% above my Base value of $58.50, and the market is paying 23.2 times my 2028E owner cash flow against my 20 times. I would want a price between about $38 and $32, or evidence that 2028E owner cash flow is nearer $16 billion than $13.8 billion, before treating it as a buy. Netflix bought $1.3 billion of its own stock in the first quarter at about $96 a share. At $70.30 the shares are 27% cheaper, and still 20% above my Base value. **VERDICT: HOLD at $70.30; Triangulated Base $58.50; downside to Base 16.8%; required MOS 45%; maximum buy price $32.17.** The main thesis breaker is constant-currency revenue growth falling to 9% or lower, which would show that price increases and advertising cannot make up for flat viewing. ## More analyses on Patreon This analysis is free. Premium members get every in-depth analysis, the full archive and a vote on which stocks get analyzed next: https://www.patreon.com/stockanalyza ## Sources Primary sources include Netflix's [second quarter 2026 shareholder letter](https://www.sec.gov/Archives/edgar/data/0001065280/000106528026000211/ex991_q226.htm) (revenue, margin, guidance, buybacks, net debt), its [quarterly report for the period ended June 30, 2026](https://www.sec.gov/Archives/edgar/data/0001065280/000106528026000212/nflx-20260630.htm) (cash flow, stock pay, debt, leases, the Warner Bros. termination), and the [first quarter 2026 letter](https://www.sec.gov/Archives/edgar/data/1065280/000106528026000137/ex991_q126.htm) (the fee, the earlier free cash flow guidance, board change). The financial statement history, price history and statistics are from [stockanalysis.com](https://stockanalysis.com/stocks/nflx/). The reference market price is the October 9, 2026 close of $70.30. Balance sheet items are as of June 30, 2026. Third quarter results were not yet available. The owner free cash flow path, the multiples, the discount rate and terminal growth are analytical estimates, not company guidance. **Disclaimer.** This analysis is a structured fundamental research output, not personalized investment advice. It is provided solely for research and educational purposes and is not financial, legal or tax advice. Netflix carries $14.4 billion of gross debt, spends heavily on content, does not disclose membership counts and competes with consolidating rivals. Its shares can lose value, and investors can lose part or all of their invested capital. Framework: SF-01 standard value. Economic class: Quality Growth (8/12). Engine: GROWTH\_ADJUSTED\_MULTIPLE with a DCF secondary. Confidence: C/16. Data status: PASS\_WITH\_WARNING. Adversarial gate: PASS\_WITH\_WARNING. Version: Master v3.3.