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Netflix Earnings: Operating Momentum Remained Strong, but a Surprising Expense Leaves Some Questions

Morningstar Equity Report
Latest Report 10/28/2025

Analyst Note Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

Netflix reported good third-quarter sales, encouraging underlying metrics, and a good fourth-quarter
outlook. But a $619 million expense based on gross sales in Brazil for periods dating back to 2022 ("a
cost of doing business tax") weighed heavily on profits.

Why it matters: Management said the Brazilian issue — a 10% tax on some payments to foreign
companies — would not have a material impact on future results, but unanswered questions remain. We
believe this expense could cost $200 million annually and hamper operating margins by about 35 basis
points.

- Most encouraging to us was 3% sequential sales growth in the US and Canada (17% year over year).
The firm has probably retained subscribers better than we anticipated after the huge influx at the end
of 2024, while also increasing advertising sales without a negative mix shift in plans.

- Excluding the Brazilian tax owed for prior periods, the operating margin easily surpassed guidance
and cash flow was good. However, profitability is heavily influenced by the timing of content
payments and expense recognition, so our view on margin expansion opportunities has not changed.

The bottom line: Our fair value estimate rises to $770 from $750 on the time value of money, with
modest upward tweaks to our expense and revenue forecasts offsetting each other. Netflix remains
overvalued, in our view, despite easily being best in breed and, unlike most peers, having a narrow moat.

Key stats: Netflix achieved record ad revenue in the third quarter and is set to double ad sales in 2025.
We estimate this amounts to about $3 billion, or 6%-7% of total sales.

-The firm doubled its upfront commitments for the 2025-26 TV season, outpaced that growth in
programmatic sales, reached sufficient scale in all 12 of its ad markets, and seemingly hasn't
suffered any detrimental mix shift to the lower-price ad-supported tier.

- Advertising success is critical, and the results bode well for meeting the rapid ad sales growth that
we have projected.

Business Strategy & Outlook Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

Netflix is the leading streaming television platform globally and enjoys the economic benefits of
market-leading scale. We expect this position will persist.

Netflix has had a different strategy than its peers. It has avoided the temptation to bid for a regular slate
of major live sports programming, which has been wise, considering our view that it would ’ ve had to
overpay to attract major sports leagues. It has also chosen to grow organically from the ground up,
building its business with no head start in terms of content ownership or foothold in the traditional
media business. These decisions now give Netflix the advantage of not having to manage a declining
legacy business, and it isn ’ t burdened with expensive sports contracts or a subscriber base that is
dependent on retaining sports rights.

Netflix does face threats. Notably, it faces a much more robust streaming market than it did when it was
establishing its dominance while charging relatively low prices. With many subscription streaming
platforms offering popular content, we don ’ t believe consumers will have the financial willingness or
ability to subscribe to all, meaning Netflix will need to continue offering a robust amount of attractive
programming to maintain its position. This will require significant investment and careful consideration
of pricing changes. Despite our view that Netflix will remain at the top, it will have to compete to a
greater extent than it did historically.

We still expect an impressive growth trajectory. Assuming no huge misfires that result in a lack of
attractive programming over an extended period, we expect Netflix ’ s subscriber base to be sticky, and
we think the cash it generates will allow it the capacity to produce many new series and movies each
year, giving ample opportunity for customers to find something they like. We see further penetration
opportunity in international markets, and we believe the introduction of an ad-supported subscription
in the US will provide opportunities to reach new subscribers and a substantial source of revenue.

Bulls Say Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

Netflix has already attracted a massive customer base and level of profitability. This advantage versus
competitors makes it more likely a virtuous cycle can continue, with Netflix securing more content that
attracts and holds more subscribers.

-Advertising-supported subscriptions will open Netflix to a new base of subscribers and a major new
source of revenue.

- Netflix has significant room to grow in international markets where it has already shown promise with
local content.

Bears Say Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

- Netflix faces competition that it has not had to deal with in the past. As consumers have more options
for quality streaming services, it ’ s more likely that Netflix could get cut out of some consumer budgets.

-Netflix ’ s US business is mature, with very high penetration of total households, meaning price increases
may need to be a bigger component of future growth.

- Netflix will need to spend more on content — through sports rights and local international
investment—to increase membership and prices at rates it has historically, when it worked from a
lower base and with less competition.

Economic Moat Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

We assign Netflix a narrow moat rating based on intangible assets. Netflix has two advantages that set
it apart from streaming-video peers. First, it has no legacy assets that are losing value as society
transitions to new ways of consuming video entertainment at home, allowing it to put its full effort
behind its core streaming offering. Second, it was the pioneer in its industry, providing it a big head
start in accumulating subscribers and moving past the huge initial cash burn that we see as necessary
to build a successful streaming service. This subscriber base was critical in creating a virtuous cycle for
Netflix that we doubt can be attained by more than a small number of competitors, which is what we
think would be necessary to dampen Netflix’s ability to earn excess economic returns for the
foreseeable future.

Ultimately, having a successful streaming service is all about offering customers a continuing depth of
appealing content at a price point that they deem reasonable. The streaming industry is not necessarily
a zero-sum game, as customers can always add incremental subscriptions, but consumer budgets are
finite, so practically we expect only a handful of streaming services to consistently hold very large
customer bases, which we think will be necessary to continue funding content investments.

Securing content requires either tens of billions of dollars of cash every year or, to a lesser extent,
existing ownership of content that is enduring and can continue to attract subscribers. With access to
enough cash, any enterprise could compete for the best content, but it takes a continuing stream of
cash for a provider to have the best odds of having attractive content at any given time. We assume that
any rational competitor will eventually require sufficient revenue streams from its operations to
continue funding content creation at scale.

Netflix had the luxury of overcoming its cash burn—and achieving excess economic returns—during a
time when few competitors kept it from expanding its subscriber base and achieving the scale that is
critical for success. More recent and future competitors must attempt to reach scale while offering a
compelling alternative to numerous other streaming choices. Before they’re earning much revenue,
they’ll have to undertake the same or higher marketing and platform expenses Netflix had, but they’ll
also need premier, first-run content—which wasn’t the case when Netflix began—requiring higher
content spending. They’ll also be doing this while competing with Netflix.

Netflix now has the biggest subscriber base, by a wide margin relative to any competitor in the US and
internationally. The subscriber base that Netflix began accumulating before competitors entered is the
firm’s most important intangible asset, and we believe consumer habits and the data they continually
provide through their viewing choices allow Netflix to feed them content that they’re interested in, boosting engagement on Netflix and keeping customers loyal. Cash generated from loyal Netflix
subscribers then gives the company the means to continually invest heavily in content. Programming
choices have yielded many very popular hits, which have then drawn even more subscribers. The
additional subscribers have further increased profits, allowing an additional portion to go toward
incrementally more content spending, allowing Netflix to attract premier talent and take many shots at
creating hits. This is the virtuous cycle.

In addition, the eyeballs Netflix has attracted and inertia and satisfaction among customers seemingly
results in some shows becoming hits in large part because they’re on the Netflix platform. We believe
many consumers go to Netflix to determine what they want to watch rather than go to Netflix as the
destination for what they’re already looking to watch. A television show like Suits, which originally aired
a decade ago on the USA Network with relatively modest success, became a huge hit in 2023 after
Netflix began marketing it on its platform. Similarly, we suspect many sports documentaries, including
Formula 1: Drive to Survive, that track sports that are less mainstream and don’t have large existing fan
bases, become hits largely because they’re on Netflix. We believe this is another aspect of the Netflix
platform that creates an advantage in both drawing talent and making customers reticent to cancel a
Netflix. While any given movie or television show has the potential to be a bust, the ability for Netflix to
continue funding a large menu of options makes us think this is unlikely the firm has an extended dry
run without any attractive new options for subscribers.

Fair Value and Profit Drivers Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

Our fair value estimate for Netflix is $770, implying a multiple of 25 times on our 2026 earnings per
share forecast. After considering Netflix’s opportunity to widen its member base, raise prices, and
generate advertising revenue with subscribers who choose lower-priced ad-supported plans, we project
about 10% average annual revenue growth over our five-year forecast, and we believe there’s room for
substantial margin expansion, as international markets mature and benefit from greater scale.

We expect member growth to come mostly from international markets over the long term. After a jump
in household penetration that began in 2023, which we attribute mostly to the crackdown on password
sharing and ad-supported subscription alternatives, we expect new member growth in the US and
Canada to slow significantly in 2025. Over our forecast, we project UCAN member growth of only about
2% annually, only marginally exceeding the rate we expect for household formation. We project UCAN
average revenue per member, or ARM, to rise at a mid-single-digit rate each year. We expect the firm to
continue raising prices at least every two years, but we also expect a material bump from advertising
revenue. Netflix began selling ad-supported subscriptions in 2022, but it has not yet reached its
potential on selling ads within that service, leaving room for upside. However, the opportunity is
mitigated by a mix shift in the subscriber base to lower-priced ad-supported plans. Considering all the
puts and takes, we forecast a compound annual revenue growth rate in UCAN of 8.5% through 2030 and
about 7% through 2034.

Penetration rates in Europe, the Middle East, and Africa, Latin America, and Asia-Pacific significantly
trail those in the US, so we expect much more room for subscriber growth. As Netflix continues to create
more country-specific content and find the right pricing strategy, we believe penetration can go higher,
though we don ’ t expect most countries to get close to the penetration rates in UCAN. We believe
subscriber growth in APAC can average a low-double-digit growth rate through 2030, driven by growth
in India, while we project Latin America and EMEA subscriber bases to grow in the mid-single-digits
annually. We don ’ t expect ARM growth to be as strong, mostly due to a greater mix from countries that
feature lower pricing, but we still project a low-single-digit annual rate as subscription prices rise and
advertising revenue takes hold. We project average revenue growth in EMEA and Latin America of about
10% annually through 2030 and 8% through 2034, while we project APAC to be the fastest-growing
region, averaging more than 17% through 2030 and 12% through 2034.

Netflix’ s biggest cost is content spending. We project $18 billion in spending in 2025 and mid- to high-
single-digit growth each year thereafter. Content amortization, which is the figure reflected in the
income statement, should grow at a similar rate. However, we believe there will be operating leverage
on this spending and other costs, resulting in operating margins rising from below 27% in 2024 to over
36% by 2030. With sales growing faster than content spending and other costs, we expect free cash flow
to grow from $7 billion in 2024 to $19 billion by 2030.

Risk and Uncertainty Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

Our Morningstar Uncertainty Rating for Netflix is High. Our rating is largely based upon the evolving
streaming media landscape and the additional competition Netflix now faces.

In our view, Netflix ’ s tremendous success is due, in large part, to it being a first mover in the streaming
industry and successfully adapting its business model to where the industry was going, while its media
peers were largely still focusing on their legacy businesses.

The landscape has now changed, as nearly every major media company is promoting its own stand-
alone streaming service. Also, Netflix is more focused on profitability and cash generation that it was in
its infancy, meaning prices for consumers have risen substantially over the past several years.
Customers now have other choices for streaming subscriptions and the price they pay for Netflix is no
longer an afterthought. As the streaming businesses of competitors mature, they may bundle their
services together — with or without Netflix — or they may offer their services as add-ons for pay-TV
subscribers who receive their linear channels, a foothold Netflix doesn ’ t currently have. These factors
make it possible that Netflix will have a tougher time growing its subscriber base or generating as
much revenue per subscriber.

Other factors that bring greater uncertainty include the nascent ad-supported service, which will
require the firm to successfully build an advertising business that makes up for the lower price these
subscribers pay, and Netflix’s flirtation with major live sports and the potential for more regular-season
games, which may promote customer stickiness but typically come at a very high price.

From an ESG perspective, we believe potential social issues could carry the greatest risk. The
entertainment industry in general has a history of bad behavior regarding issues like sexual assault and
harassment and racial and gender discrimination.

Capital Allocation Matthew Dolgin, CFA, Senior Equity Analyst, 22 Oct 2025

We assign Netflix an Exemplary Morningstar Capital Allocation Rating. Our rating is based on our
assessment of Netflix’s ability to add value through investments in its business and takes into account
how the company has managed its balance sheet and capital return policies.

Management had the foresight to see that the success it found in the DVD-by-mail subscription
business would be fleeting, as technology and video consumption evolved, and it was willing to go all in
to move to an entirely different business model. At a time when capital was cheap and equity investors
were very willing to fund money-losing enterprises with hopes of a future payoff, Netflix management
took advantage. With a prudent mixture of equity and low-interest-rate debt, Netflix transitioned its
business, funding it through years of negative cash flow to build an industry-leading streaming
customer base, expand to numerous international markets, and rev up its production capabilities for
original content.

But even while cash losses were acceptable and the foremost priority was luring streaming subscribers,
we commend management for the judicious decisions it made regarding where to best allocate capital.
Notably, we think it has been smart to stay out of the race for major sports packages. Bidding obscene
amounts for sports rights would have certainly cemented Netflix’s place on the media map and drawn
subscribers, but we think it would’ve damped potential profitability. Similarly, the firm has avoided any
splashy acquisitions that could have accelerated its standing as a top media player but may have
gotten the firm into businesses that will be less lucrative in the future than the past. Instead, Netflix
built its streaming business gradually and organically while ultimately sunsetting the DVD-by-mail
business.

The choices Netflix made have paid off. Apart from having the most ubiquitous streaming platform, the
firm is far ahead of peers in its ability to generate significant cash through the streaming business
model. Management has now shifted to becoming more prudent regarding cash generation and
spending while still striking a balance and allocating large amounts of capital to procuring new content
each year.

We expect the maturing business to allow for improved financial footing from here, but Netflix already
stands in good financial shape. At the end of September 2025, the firm had $9 billion in cash versus $14
billion in debt and was poised to continue generating more cash each year despite growing content
costs. The firm should no longer need to raise additional capital as it deepens its subscriber base in
international markets and continues creating and licensing content.

Wisely, Netflix has never paid a dividend, but with the firm now being a significant cash generator, it
has had a share repurchase program in place since 2021. We believe management will regularly return
capital to shareholders via the buyback as long as it doesn’t see significant, compelling opportunities
outside what has become its normal course of operations.

Analyst Notes Archive

Netflix Earnings: Stellar Results Had Areas of Softness; Currency Tailwinds Drive Guidance Raise
Matthew Dolgin, CFA,Senior Equity Analyst,18 Jul 2025

Netflix again posted fantastic results, with second-quarter sales up 16% year over year and the
operating margin increasing by 7 percentage points, to 34%. However, sales would have missed
guidance if not for a currency tailwind, and lower content expenses, which won't persist, drove profits.
Why it matters: Robust sales growth is virtually certain throughout 2025. Netflix raised prices in several
major markets, including the US, early in the year, and the firm is fully realizing revenue from last year's
boom in member growth, particularly in the back half. Durability is the question. Second-quarter sales
in the US and Canada, or UCAN, grew 16% year over year, but considering the price increases, we think
the number of members has been roughly flat at best through the first half. Subscription prices in
UCAN rose 10%-16% in January, depending on the plan tier. If Netflix added no new UCAN members in
the first half, average revenue per member would've been up 7% in the second quarter and slightly
down in the first, plausible when factoring in plan mix and discounts. This portends poorly for 2026,
after Netflix laps the price hikes. The bottom line: We keep our $750 fair value estimate and narrow
moat. We believe Netflix remains best-in-class, but we expect the rapid growth to decelerate
substantially in 2026. As such, we think the stock is far too expensive, trading at 40 times FactSet
consensus 2026 earnings. We see room for long-term margin expansion, but the level this quarter was
deceiving. Second-quarter cash content spending, which largely flows to the income statement, was
down 8% year over year. This was simply a timing issue. Spending would pick up significantly in the
second half. Full-year operating margin guidance is now 30%, implying a 27% margin for the second
half. The 1-percentage-point increase in full-year margin guidance was driven mostly by more
favorable currency exchange rates, the same driver for an increase in full-year revenue guidance.

Netflix: A Deep Analysis Prompts FVE Boost to $750 From $720 but Hardens Our Belief of
Overvaluation Matthew Dolgin, CFA,Senior Equity Analyst,27 Jun 2025

In light of The Wall Street Journal's report on Netflix's 2030 operating targets, which include a doubling
of revenue, we took an in-depth look at each of Netflix's sales growth drivers and the potential
contribution each could make over the next six years. Why it matters: We believe the stock's current
levels assume that Netflix will reach its reported 2030 goals, but we still believe those targets will be
very difficult to achieve and should not constitute a base-case forecast. Recent sales growth has been
driven by strength in the US—mostly due to unprecedented net new-member additions—that will wane.
The firm's crackdown on password sharing and introduction of an ad-supported plan were catalysts
that no longer exist, and penetration rates are now high. International markets have room for strong
member additions, but most carry low prices, blunting the benefit to the top line. We question how
much prices can rise both domestically and internationally, and the lower prices on ad-supported plans
will mitigate budding advertising sales. The bottom line: We raise our fair value estimate to $750 from
$720 after building up our forecast by each revenue driver and the opportunity we believe it most
reasonably provides. We think advertising can generate as much as $12 billion by 2030 but add only
about 3 points to annual growth. We forecast impressive growth, an average of 10% annually through
2030 on the top line, but this still leaves the firm $9 billion short of its goal. We project the operating
margin to rise nearly 10 percentage points by 2030, to over 36%, but still short of the targeted 12 points
of expansion. We also built a bull case, where Netflix achieves its reported 2030 sales and profit targets
and continues growing rapidly beyond 2030. In this scenario, we arrived at a $1,225 fair value estimate,
meaning the stock would still be overvalued.

Netflix Earnings: Blowaway Profits and Strong Sales, but a Mixed Bag Underneath Matthew Dolgin,
CFA,Senior Equity Analyst,21 Apr 2025

Netflix posted an incredible 32% operating margin—350 basis points ahead of guidance—and 25%
earnings per share growth in the first quarter. It also exceeded its sales guidance. However, it only
maintained its full-year outlook, including for operating margins, and US sales were soft.Why it matters:
The stunning profit appears much more related to the timing of expenses rather than significant further
improvement in operating performance. Netflix expects even better second-quarter margins. However,
expenses will rise substantially in the second half, primarily due to the release of films and other
programming and associated marketing costs. Content spending grew only 1% year over year, but we
still expect a mid-single-digit increase for the full year. The firm maintained its 2025 guidance for $8
billion in free cash flow after generating $2.6 billion in the quarter. The bottom line: Our outlook is
generally unchanged after these results. We maintain our narrow moat and raise our fair value estimate
to $720 per share from $700 due to the time value of money. Our full-year estimate for earnings per
share is rising, but this is largely due to share repurchases, which we don't think add value at the
current stock price. We think management may now be conservative with 2025 margins, but we're not
adjusting our longer-term projections. Between the lines: Sales growth in the US was disappointing, at
only 9% year over year. Management downplayed the softness and said sales would reaccelerate in the
second quarter after price hikes took effect midway through the first quarter, but we're not reassured.
Netflix is no longer reporting member numbers, but 9% growth means either the firm lost US members
or average revenue per member declined. We think it's likely both. Shifts to the ad-supported plan can
weigh on ARM, and major broadcasts underpinned a surge of member additions last quarter. The firm
could've lost over a million US members and still seen ARM decline.

Netflix: Management's Ambitious Targets Are Already in the Stock and Will Be Tough to Achieve
Matthew Dolgin, CFA,Senior Equity Analyst,15 Apr 2025

The Wall Street Journal reported that Netflix management conveyed operating targets to senior staff
that included a doubling of revenue and tripling of operating profit by 2030. The targets include 36%
growth in global subscribers (members) and imply that advertising will make up 12% of total sales. Why
it matters: The stock rose more than 5% after the report, but these disclosures seem consistent with
management's previous, though less granular, commentary, and we believe the stock has already
priced in this type of growth. If Netflix achieves these targets and maintains consistent interest and tax
rates, the stock would still be trading at 17 times 2030 earnings. Netflix is currently trading at 40 times
2025 and 33 times 2026 FactSet consensus earnings, which include 22% earnings and 13% revenue
growth each year. If Netflix can achieve these targets, which would result in compounded annual
growth rates, or CAGRs, of 12% and 19% for revenue and operating profit, respectively, through 2030,
we'd currently see the stock as fairly valued. The bottom line: We believe these targets look more like a
stretch goal and will be difficult to achieve. We are maintaining our narrow moat rating and $700 fair
value estimate, which implies an earnings multiple of 24 times consensus 2026 earnings and 28 times
2026 free cash flow. Our forecast includes CAGRs of 10% and 15% for revenue and operating profit,
respectively, and 18% for free cash flow. We project a similar member base as management does but
see less room to grow revenue per member, or ARM, where we project CAGRs of 5% in the US and
Canada and 3% globally. US and Canada is easily the highest-priced market, and we expect this will see
the bulk of advertising revenue, leading to ARM growth. However, we expect member growth to slow
substantially, and a greater mix shift toward ad-support plans, which we expect, would mitigate the
boost from advertising.

Netflix Earnings: Member Additions Blow out and Sales and Profit Growth Stays High; FVE up by 27%
Matthew Dolgin, CFA,Senior Equity Analyst,22 Jan 2025

Netflix posted record quarterly and annual net member additions, with 19 million in the fourth quarter
and 41 million for the full year. Growth in sales (15% year over year) and operating profit (52%)
maintained their recent rapid pace. The firm also announced price increases. Why it matters: The
fourth-quarter member surge, combined with price increases in the US, Canada, Portugal, and
Argentina, extends the runway for Netflix to maintain midteens sales growth through 2025. While
growth will likely slow in 2025, we had expected a bigger slowdown, as we thought the firm had passed
its biggest new member opportunity brought on by the crackdown on password sharing. We still think
penetration opportunities in the US and Canada, and Europe, the Middle East, and Africa—the two
highest-priced regions—are modest. Price increases and advertising revenue should be the bigger
growth drivers, which should moderate. The bottom line: We're raising our fair value estimate to $700
from $550, based on higher sales projections over the next five years and slightly wider margin
expansion. We assign the firm a narrow moat and think it is leaps and bounds ahead of competitors,
but with the stock trading at 40 times our 2025 earnings projection and growth decelerating, we think
shares are overvalued. Our fair value estimate implies a 2025 earnings multiple of 30. Key stats:
Profitability remains impressive, but gains are slowing. Operating margin was 22% in the fourth quarter
and 27% for the full year, both up about six percentage points. 2024 free cash flow was $7 billion, the
same as 2023. We expect Netflix to gain operating leverage on many of its costs, but the need for
continually more content spending and marketing and production for major events will limit the
magnitude. 2025 guidance is for a 29% margin, $8 billion free cash flow, and about $18 billion in 2025
content spending, up from $16 billion. At that level, we think free cash flow can reach $10 billion.

Netflix Earnings: Signs of Subscriber Growth Normalization, but Sales and Margins Remain
Impressive Matthew Dolgin, CFA,Senior Equity Analyst,18 Oct 2024

Netflix’s very strong third-quarter sales growth was largely assured, considering the huge increase in
subscribers over the past few quarters. Still, we were impressed at how much further margins
expanded beyond the huge rise already this year. Netflix also offered an initial sales and margin outlook
for 2025 that portends less of a deceleration than we anticipated following a blockbuster 2024. The third
quarter showed the slowdown in subscriber growth that we’ve been expecting, but Netflix has other
areas of opportunity to continue boosting its financial performance.After adjusting our projections,
we’re raising our fair value estimate to $550 from $500. Still, while the firm’s persistent near-term
strength exceeds our expectations, and we expect Netflix to remain well ahead of competitors, we think
the market is extrapolating recent amazing results too far into the future. We think some markets are
approaching saturation, and although we see opportunities for Netflix to enhance revenue per
subscriber, we don’t think those are so big as to offset decelerating subscriber additions. We also
expect much more moderate margin expansion than has occurred in 2024 because we expect Netflix
will increase content spending at a similar rate as sales to help maintain its wide lead over competitors
and strengthen its moat, which we rate as narrow today.Third-quarter sales grew 15% year over year,
and the firm added another 5 million subscribers globally, including about 700,000 in the United States
and Canada. While solid, both figures were the fewest since the first quarter of 2023, and we think they
now put Netflix on more of a normalized pace after the firm added about 40 million global subscribers
and 9 million UCAN subscribers over the prior four quarters. We expect greater advertising
monetization and price increases to contribute more to growth over time, but in the third quarter,
average revenue per subscriber was flat globally.