Revisiting Netflix After the Post-Earnings Dip

Since our capital return thesis was published, three material developments have occurred. First, Netflix's advertising tier has scaled faster than consensus expected. The ad-supported plan now accounts for an estimated 40%+ of new sign-ups in markets where it is available. Ad revenue per member is lower than premium tier revenue, but the incremental margin is substantial because content costs are identical across tiers. The ad business is approaching a $5 billion annual revenue run rate, up from effectively zero three years ago.

Second, the password-sharing crackdown has moved from a one-time benefit to a sustained competitive advantage. Netflix's paid sharing programme created a permanent price mechanism that converts casual viewers into paying subscribers. The churn impact was less than bears feared, and the incremental subscribers added from converted shared accounts have higher engagement metrics than average.

Third, live events and sports have begun contributing to the content value proposition. The NFL games on Christmas Day demonstrated that Netflix can drive massive concurrent viewership without the technical failures that plagued earlier live events. The advertising revenue from live events commands premium CPMs, roughly 3-4x the rate of standard ad-tier inventory.

Revenue growth accelerated from 7% in 2022 to 16% in fiscal 2025. That acceleration came despite Netflix already being a $45 billion revenue business. Growing a revenue base that large at double-digit rates requires either significant price increases, substantial new subscriber additions, or new revenue streams. Netflix is executing on all three simultaneously.

Average revenue per membership has increased across most markets through a combination of plan price increases and mix shift toward higher-priced tiers. The ad tier is adding revenue that did not exist before. And subscriber growth in Asia-Pacific and Latin America continues to provide volume growth at lower price points but attractive incremental margins.

The historical parallel is Disney's ESPN business in its prime. ESPN grew revenue at double-digit rates for over a decade by combining price increases, subscriber growth, and advertising revenue. Netflix's current trajectory mirrors ESPN's best years, but with a global addressable market that is roughly 5x larger. ESPN peaked at approximately $12 billion in annual revenue. Netflix is already nearly 4x that level and still accelerating.

At 42x trailing earnings and 34.2x forward estimates, Netflix is not cheap. But the quality of the earnings has improved dramatically. Three years ago, Netflix was valued at a similar multiple but with lower margins, negative free cash flow, and no advertising revenue. Today, the 42x multiple applies to a business generating 29.5% operating margins, $9.5 billion in free cash flow, and diversified revenue streams across subscriptions, advertising, and live events.

The price-to-sales ratio of 10.1x looks expensive against traditional media peers (Disney trades at roughly 2x sales) but reasonable against software companies with similar margin trajectories. If Netflix reaches 35% operating margins by 2028 (management has guided toward this level), the business will generate roughly $20 billion in operating income on an estimated $57 billion revenue base. At 25x that operating income, which is conservative for a high-margin, high-growth business, the equity value approaches $500 billion, implying meaningful upside from the current $457 billion.

The consensus target of $114 (split-adjusted) implies roughly 25% upside. Analyst upgrades have been consistent, with Goldman's recent upgrade being the latest in a series. The target revisions lag the fundamental improvement, as they often do for companies in the middle of a margin expansion cycle.