TLDR
- Netflix walked away from a potential Warner Bros. Discovery deal, removing a major debt risk from the table.
- NFLX fell about 16% from late January through February 23, then rebounded 25–30% from those lows.
- Ad revenue more than doubled in 2025 to $1.5 billion, with management targeting ~$3 billion in FY26.
- FY26 EPS consensus sits around $3.14, implying roughly 24% year-over-year growth.
- The stock trades at ~39x trailing earnings, still below its 45x three-year historical average.
Netflix has had a strong few months — and it has a failed acquisition to partially thank for that.
In late 2025, the company entered a competitive bid to acquire a large chunk of Warner Bros. Discovery’s assets, including studios, IP, and potentially its Max streaming service. The deal carried an estimated $72 billion equity valuation, which would have required heavy debt financing — a sharp contrast to Netflix’s current ~$14.5 billion debt load.
Netflix submitted an initial offer, WBD raised its terms, Netflix didn’t follow, and the deal died. CFO guidance on the exit was blunt: “once it didn’t make financial sense… we moved on.”
From late January through February 23, NFLX dropped about 16% as the acquisition uncertainty weighed on the stock. Once the deal fell apart, the market exhaled. The stock rebounded 25–30% from those lows, with the PE multiple climbing from around 30x to roughly 39x trailing earnings today. That’s still below the 45x three-year historical average, and well off the 62.5x peak hit last July.
Earnings Quality Is Improving
The more compelling story isn’t just the deal collapse — it’s what’s happening underneath the hood. In FY25, Netflix grew revenue 16% year-over-year while operating profit surged around 30%, a clear sign of operating leverage kicking in. Operating margins are guided to hit 31.5% in FY26, up from 29.5% over the past 12 months. For context, those margins were sitting around 7–8% back in 2018.
Heading into Q1 earnings, Netflix needs to deliver roughly $0.77 EPS and $12.17 billion in revenue — about 16% EPS growth and mid-teens revenue growth. It’s beaten expectations in seven of the last eight quarters.
Wall Street is generally onside. Of 41 analyst ratings over the past three months, 31 are Buys and 10 are Holds, with an average price target of $114.61 — about 15% above current levels.
The Ad Business Is the Wildcard
The biggest swing factor looking out five years is advertising. Netflix’s ad-supported tier hit 190 million subscribers in November 2025. Ad revenue grew more than 2.5x in 2025 to $1.5 billion — impressive growth, though still a fraction of the company’s $45 billion total revenue.
Management is targeting roughly $3 billion in ad revenue for FY26, essentially doubling again. If the ad infrastructure matures — better targeting, programmatic capabilities, strategic partnerships — margins on that revenue could run higher than the core subscription business.
FY26 consensus EPS sits at around $3.14, implying 24% growth. That’s a slight step down from the 27% growth seen in FY25, but not unexpected given the larger revenue base.
Technically, the short-term trend is pointed up. The 20-day moving average has turned higher and the 50-day is starting to follow. A breakout above the $107 level would confirm a more structural uptrend. The 200-day moving average is still declining, so the longer-term picture remains mixed.
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