Ten weeks ago, with the stock down ~25% for the year, I wrote that Netflix had more than doubled its operating profit since the end of 2021 while the stock had barely moved. Everything in between, including last year’s euphoria, was just Mr. Market feeling very differently about the same business.
Since then the stock hasn’t budged, and Netflix co-CEO Ted Sarandos has stood on stage at Bloomberg’s Screentime conference and said “we’re not growing as fast as I want us to”.
Netflix hasn’t reported horrendous numbers, and it isn’t the kind of business AI is about to upend. But with the company reporting less data and a bit of negativity floating around, I think Mr. Market has swung in the other direction, even though there isn’t a whole lot of evidence that the business itself has gotten worse.
These days, Mr. Market is often in an act first, think later mode, and the swings are bigger than they used to be. As long as there’s uncertainty, the stock will be clobbered.
I’ve covered the valuation swing before, from 48 times forward earnings in July last year to about 19 times now, so I won’t repeat it here. What I want to do instead is go through the three things Mr. Market is worried about, and ask whether any of them have actually got worse since July.
So what is Mr. Market worried about?
The worries come in three parts.
The first is growth. Revenue grew 18% in the fourth quarter of last year, then 16% in the first quarter of this year, then 13% in the second, and Netflix has guided to 12% for the quarter it reports on 20 October.
So obviously that’s a slowdown… and CFO Spencer Neumann’s explanation on the July call was that 2025 was back-half weighted, which just means most of its big releases landed between July and December, so the second half of this year is up against tough comparisons.
He gave an early heads up on this back in January, before the slowdown showed up, so I don’t see it as an excuse made after the fact.
But I suspect there’s an unspoken part. The password crackdown reached the US in May 2023. Netflix added about 30 million members that year and a record 41 million in 2024. Last year it added roughly around ~23 million (given that it said that it ended the year with more than 325 million).
With fewer new members coming in, more of the growth has to come from price and ads. That’s the part of the slowdown I think will linger, at least until the ads business, which Netflix expects to roughly double to about $3 billion this year, is big enough to pick up the slack.
The second is engagement. Greg Peters, the other co-CEO, said on the Q2 call that viewing hours grew 2% in the first half of the year, which isn’t much.
He made the case on the same call that “all hours are not created equal”, and live sports is the clearest example.
Live will take about 5% of the content budget this year but deliver only about 1% of viewing hours. Yet 6 of Netflix’s 10 biggest sign-up days in the past five years came from live events. Sarandos said on the April call that the World Baseball Classic in March gave Netflix its largest single sign-up day ever in Japan.
Peters gave another reason on the January call. Members in Japan “watch roughly 1/2 to 2/3 the amount of TV as American consumers”, and Japan led Netflix’s member growth in the first quarter, so the new members are pulling the average down.
The third is YouTube, which is competing hard with Netflix for viewing time. Nielsen says YouTube took a record 14.2% of US TV time in July, while Netflix had 7.8%, down from 8.8% a year earlier.
In July I wrote that nothing in the public data screamed share loss. Back then the latest reading was April’s, with Netflix at 7.8% and up 0.3 points on the year. It’s 7.8% again now, just that if we compare year-on-year, it’s down a full point on the year.
This was because July 2025 was a platform record for Netflix, the month Squid Game’s final season was the most watched title on US TV and KPop Demon Hunters was in the top 10, so the drop is measured against a peak.
So, should we be worried as well?
Not yet for me, because if engagement were falling apart in a way that mattered, it would show up in churn first and revenue second. Revenue growth has slowed, but I’ve put that down to tough comparisons and the password lift being lapped, which is a different thing from members leaving.
Netflix says churn improved in every region in the first quarter, Neumann said in July that it continues “to see healthy acquisition and retention trends on the membership side”, and revenue still grew 13% in the second quarter.
I’m waiting for the third-quarter earnings on 20 October and looking at the various data points in the meantime. Right now I think Netflix is still a very high-quality company, and at 19 times forward earnings, the air has come out of the valuation.
The studios keep licensing to Netflix
One of those data points came last week, when Disney agreed to license a batch of its shows and films to Netflix, according to Reuters. They include the first two seasons of Percy Jackson and all five Ice Age films, each on Netflix for three months.
And this is a win-win. Netflix gets more for its members to watch, and Disney has two releases coming up that it needs to generate hype for, namely the third season of Percy Jackson on Disney+ on 20 November and the next Ice Age film, which opens in cinemas early next year.
The timing of this deal isn’t a coincidence. A sequel’s success depends a lot on how many people have watched what came before, and if I had to guess, Disney was the one that picked up the phone.
That’s the strength of Netflix as a distribution platform. It’s the biggest subscription streaming service on the planet, with more than 325 million paid memberships at the end of last year.
A film or series costs a fortune to make and almost nothing to show to one more viewer, so every extra viewer is close to pure profit. If you want eyeballs, hype for the new releases and the most money out of what you’ve already made, you license it to the platform with the most paying viewers.
I suspect that there’ll be a lot more deals like this flowing from Paramount to Netflix as well, given how much debt Paramount has taken on to buy Warner Bros.
David Ellison, Paramount’s CEO, said as much about licensing content to other platforms on the company’s Q1 2026 earnings call:
“When it comes to content licensing, we do not believe in a one-size-fits-all approach to that. We actually think that’s an incredibly meaningful part of our business and intend for that to continue. There are certain series and shows that you’ll want to keep exclusively on your owned and operated platform, but there are other series that absolutely make sense to sell to third parties. And I think one of the things that is surprising is some of those series when they actually come back to your owned and operated platforms will actually increase in viewership.”
For Paramount, licensing to Netflix is more than collecting a fee and calling it a day. The eyeballs Netflix commands give a show viewership it would never have had, and when it comes back to Paramount+, more people watch it there too.
In fact, two of Netflix’s 10 most-watched original films came from Skydance, the company Ellison ran before he bought Paramount. He mentioned it on the Q2 2026 call while making the case for licensing.
“Recent success from Skydance Animation. Swapped just joined the top 10 of Netflix’s most-watched original films. We’ll actually be the #2 most-watched animated movie behind KPop Demon Hunters and really joins The Adam Project. So we’re proud that basically the legacy Skydance business now has 2 of Netflix’s top 10.”
The price Netflix wouldn’t pay
Sarandos also said at Screentime that Netflix had already offered the most it could justify for Warner Bros.
“At our scale, that was the top price point where I thought we could return value to our shareholders with that asset. Any more than that, I thought we’d be taking it into negative territory, even with our scale.”
Netflix had a signed deal at $27.75 a share for the studios and HBO Max, and it let that deal go rather than pay more. Paramount agreed to pay $31 a share in cash for the whole company, cable networks included, and it expects more than $6 billion of “synergies”. The deal closed on 6 October at $31.02 a share, and the combined company now goes by Skydance.
The thing is… Paramount+ had about 82 million subscribers at the end of June, roughly a quarter of Netflix’s base. It does make me wonder why the smaller player found that it made sense to pay such a high price for Warner Bros.
Ellison gave one of his reasons on Paramount’s Q2 call. The deal was about “really getting us to scale in streaming”. Even with over 200 million gross subscribers at close, he said the combined company would be “right around Disney, still obviously not at the scale of Amazon or Netflix.”
Netflix walked away because the price didn’t add up even at its scale. Paramount paid it because, without scale, I don’t think it stands a chance in streaming.
Compound steadily,
Thomas
P.S. If you want to learn how to break down an analysis on Netflix like this yourself, that’s what my book, The Lunch Break Investor, is about. Grab it here!
P.P.S. If you’re in KL, I’ll be at Tsutaya Books in Pavilion Bukit Jalil on Saturday 17 October, 2pm to 3pm, talking about the book with HY Tan and Guan from doitduit. Come say hi!
Disclaimer: This research report constitutes the author’s personal views only and is for educational purposes only. It is not to be construed as financial advice in any shape or form. From time to time, the author may hold positions in the below-mentioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a position in Netflix at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).