Netflix Earnings: Incredible Quarter, but Investors Fear Slowdown

Key Morningstar Metrics for Netflix

• Fair Value Estimate: $440.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Netflix’s Earnings

Netflix NFLX reported another quarter of incredible subscriber additions and revenue and profit growth. However, full-year sales guidance portends a deceleration in the second half. The firm’s decision to stop regularly reporting subscriber numbers in 2025 supports our belief that yearly additions will reset at a significantly lower rate than the previous six quarters.

With the stock selling off after the report, we see Netflix as a victim of its success. Its business continues to show incredible strength, but we think maintaining the recent level of success is unrealistic. We’re raising our fair value estimate to $440 per share from $425 on the back of the strong quarter but still see the stock as a bit expensive.

Netflix added 9.3 million net global subscribers in the quarter to bring its total to over 37 million net additions in the past year. The 16% growth in the subscriber base over that span led to 15% year-over-year sales growth despite a 3-percentage-point currency headwind. The operating margin exceeded 28%, up 7 percentage points year over year and about 6 percentage points better than any quarter in 2023. However, while second-quarter guidance implies an acceleration in revenue growth, full-year guidance of 13%-15% growth implies a deceleration in the second half. Management raised its full-year operating margin target by 1 percentage point to 25%, which also means some rationalization in the second half.

After adding 2.5 million US and Canadian subscribers in the quarter, Netflix has more than 81 million users in the region. With household penetration closing in on 60% and little remaining opportunity to transition nonpaying users to paid users with the password-sharing crackdown that was widely implemented in 2023, we expect UCAN additions will decline materially from recent levels, leaving the firm to rely on pricing and advertising to keep sales growth high in the region.