Netflix Q2 revenue misses estimate as content costs outpace viewing growth

Netflix reported second-quarter revenue of $12.56 billion, falling short of the $12.58 billion estimate, while free cash flow declined to $1.53 billion from $2.27 billion in the prior period. The stock, trading at $71.57, has dropped 41.06% over the past year, a decline that follows the collapse of the Warner Bros. deal, slower viewing growth, and the termination of the Paramount-Warner merger.

Investors remain divided on whether the current valuation reflects a buying opportunity or a justified discount. Netflix trades at a forward P/E of 19 and a PEG ratio of 1.219, multiples that appear low given management's guidance for fiscal year 2026 revenue of $51.0 billion to $51.4 billion and an operating margin of 31.5%. The company projects approximately $12.5 billion in free cash flow for the year and notes it reaches fewer than 45% of its roughly 800 million addressable households. With more than 325 million paid memberships, the ad business is expected to roughly double to about $3 billion in 2026.

However, rising content expenses threaten to erode margins as viewing growth remains sluggish. Content costs are set to rise by about 10% in 2026, while viewing hours grew only 2% in the first half of the year. This divergence limits the upside case despite strong profitability, with Q2 operating margin reaching 33.4% and revenue growing 13.4% across all four regions.

Wall Street analysts have mixed reactions to these dynamics. Deutsche Bank upgraded the stock to Buy with a $95 price target, arguing that concerns over U.S. viewing dominate international strength. Conversely, Goldman Sachs maintained its Buy rating but lowered its target to $90, citing softer engagement and competition from YouTube. The consensus target stands at $92.55, implying 29.3% upside from current levels, though targets have been trending downward among the 51 analysts covering the stock.

Capital returns provide some support for the share price. Netflix executed its largest quarterly buyback ever last quarter, repurchasing $4.7 billion of stock, and retains $27.1 billion in authorization remaining. Despite this, the stock sits below its 50-day average of $75.48 and its 200-day average of $83.80.

The upcoming earnings report will be the decisive factor for near-term direction. Management has guided Q3 revenue to $12.86 billion and diluted EPS to $0.82, with FX-neutral revenue growth expected at 11%. A clean beat accompanied by faster engagement growth would favor buyers, while another miss would likely reinforce the bearish case. With a beta of 1.613, the stock tends to swing more than the market when sentiment shifts.

Skeptics argue that the discount is earned because each content dollar buys less viewing growth than before. Two of the last four quarters produced EPS misses, including a 15.79% shortfall in Q3 FY25 and an 8.55% miss in Q1 FY26. The path forward remains uncertain as live sports and a consolidated Paramount-Warner entity compete for viewer attention while content costs continue to outpace engagement gains.