Under the Spotlight: Netflix ($NFLX)

ICYMI: Do your own research and make your own decisions. This article drills down on a specific company, however, it is not a recommendation to invest in the company and should not be taken as financial advice. Got a stock you want covered? Tell us here.

It's not every day that walking away from a deal puts money in your pocket. But when Netflix ($NFLX) bowed out of the bidding war for Warner Bros. Discovery ($WBD) assets in late February, it collected a US$2.8B breakup fee on the way out.

Investors cheered at the news and $NFLX soared over 17% in a week. It quickly became the most traded stock on Stake, surpassing even energy names amid the oil crisis.

The happy fallout from the non-deal helped turbocharge earnings this quarter, with both revenue and profit coming in ahead of what analysts were expecting overnight on Thursday.

The catch? Shares slid around 9% in after-hours trading, suggesting investors were hoping for more. It's a reminder that at Netflix's valuation, beating expectations isn't always enough.

The Warner deal

To recap, Netflix last year won a bid for Warner Bros. assets for around US$82.7B. Under the deal, Netflix would have absorbed Warner Bros.' film studios, television production arm, HBO and HBO Max. It was set to be one of the biggest media deals in history.

Then Paramount ($PSKY) gatecrashed, launching a hostile counter-bid and spending months ratcheting up its offer. By late February 2026, it had raised its proposal to around US$110B, valuing WBD shares at US$31 each, well above what Netflix had agreed to pay.

Netflix declined the chance to match it, ending weeks of steady stock price decline. Investors had been unconvinced by the logic of taking on a legacy media business loaded with complexity and debt. The stock recovered and then some.

Earnings update

The firm’s latest quarterly earnings this week were its first since walking away from the WBD deal, and the termination fee left a clear mark on the bottom line.

Revenue for the first quarter came in at US$12.25B, nudging past the US$12.18B analysts had pencilled in and running 16% ahead of the same period last year. Diluted earnings per share came in well above expectations at US$1.23, boosted by that breakup payment.

There was one notable piece of news beyond the financials: Reed Hastings, Netflix's co-founder and current board chair, will step down when his term concludes in June. It's the end of an era for the company he built from a DVD-by-mail service into the world's dominant streaming platform.

The after-hours share price drop of around 9% reflects a combination of high expectations already baked into the stock and uncertainty about what comes next. Forecast figures for Q2 also disappointed. Analysts had been predicting an EPS of U.S.$0.84 next quarter, against the firm’s expected US$0.78, alongside slightly higher revenue numbers.

Showbusiness

At its core, Netflix is a fairly simple business. It makes almost all of its money from monthly subscription fees for its streaming services.

That’s been a surprisingly resilient model. In 2025, full-year revenue was reported at US$45.2B, a jump of 80% from just five years earlier, with growth primarily coming from new memberships, higher fees – increasing again this year – and new subscription models.

In May last year, Netflix said its cheapest subscription tier, which includes ads and launched in 2022, had 94M active users as of May last year. That helped push total subscribers to over 325M worldwide at the end of last year, surpassing rivals Disney ($DIS) and Amazon Prime ($AMZN) Video in Q3. 

Unlike Disney and Warner Bros. Discovery, Netflix is not relying on theme parks, cable networks or box office to prop up the numbers. It is still, first and foremost, a streaming business.

But the company has been quietly adding new revenue lines that are starting to show up. Its advertising-supported tier has taken off faster than most analysts expected, with ad revenue 

on track to reach roughly US$3B for the full year, which would represent a doubling from 2025 levels.

New ventures

Beyond subscriptions and ads, Netflix has been pushing into areas that would have seemed unusual a few years ago, including live sport, interactive experiences and kids’ gaming. Its Netflix Playground app is a play for children’s screen time, blending video with games and interactive content.

It’s also backing live culinary events tied to its food programming and securing sports rights to bring live action into the mix.

The jury is still out on whether all of this adds up to a coherent strategy or a case of scope creep. Building out kids’ games and live events requires real investment, and there’s no guarantee the returns will justify the cost. But the core business is growing, and that gives Netflix a solid base to experiment from.

Netflix is also very much a global powerhouse. Regionally, Asia-Pacific was its fastest-growing market in 2025, with revenue up 21%, followed by EMEA at 17%. That global spread gives Netflix more room to grow than services whose economics are still more tied to local TV markets.

Is NFLX overvalued

Netflix doesn’t come cheap. Shares were trading at a trailing price-to-earnings ratio of about 49x before Thursday’s result, a significant premium to the broader market. The after-hours dip may prompt fresh debate about whether that multiple is justified.

That said, there’s clearly room to grow. The US$2.8B break fee gives Netflix meaningful extra firepower alongside US$6.8B in remaining buyback authorisation.

Membership growth has also lifted its operating margin from 17.8% in 2022 to a projected 31.5%, giving it room to invest in new content and other areas like live programming.

Analyst sentiment is also broadly positive. Analyst Ratings published on Stake Black show that 75% rate it a ‘buy’, with an average price target of US$117.42, above its last traded price.

But with Hastings’ departure adding a layer of leadership uncertainty, and the Paramount-Warner deal still in play, the bar for execution is high.

Is it a buy?

Netflix’s fundamentals remain solid. Revenue is growing at a healthy clip, the advertising business is scaling quickly, and the Warner saga ultimately demonstrated management discipline.

But the after-hours reaction is a useful reality check. At roughly 49x earnings, investors aren’t paying for what Netflix is today. They’re paying for what it’s expected to become. Any sign that the growth trajectory is softening, or that the post-Hastings leadership transition creates turbulence, could weigh on the stock.

For long-term investors, the core thesis remains intact. For those watching from the sidelines, the dip could open a more attractive entry point, though it’s worth waiting to see how the market digests the full earnings picture and what management says about the road ahead.

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. The author of this article and other employees of Stakeshop Pty Ltd may hold positions or have financial interests in the company (or companies) discussed above. As always, do your own research and consider seeking financial, legal and taxation advice before investing.