Netflix (NFLX): The Multiple Fell Faster Than the Margin

Operating margin came in at 33.4% last quarter. A year earlier, in the same three months, it was 34.1%. That is a small decline, not the acceleration most of the July headlines implied, and it is the number I keep returning to, because Netflix trades around $71.79 as I write this, 42.5% below its 52-week high of $125 and only 10% above its low of $65.

My thesis is simple: Netflix’s underlying economics held up fine this summer. The stock was priced as if they had cracked, and that gap is where the opportunity, and the risk, both live.

Netflix stopped reporting subscriber counts last year and investors mostly moved on without much fuss. What replaced subscribers as the number to watch was profitability, revenue growth multiplied by margin discipline, not who signed up last month. Judged on that basis, the July print was fine. Not spectacular. Fine.

Operating margin actually slipped this quarter

Second-quarter revenue was $12.6 billion, up 13% year over year and 3% sequentially, roughly in line with what Netflix had guided back in April, according to the results Netflix filed with the SEC. Operating margin was 33.4%, down from 34.1% in the same quarter of 2025. Full-year revenue guidance narrowed to $51.0 billion to $51.4 billion, and management held its full-year operating margin target at 31.5%, a point and a half below what the company actually delivered in the quarter itself.

I read that gap as ordinary seasonality rather than a warning. Content amortization tends to run heavier later in the calendar year, so a full-year average sitting below one strong quarter isn’t unusual on its own. It would turn into a real concern if the third and fourth quarters miss 31.5% by a wide margin instead of drifting toward it, which is the one number on my calendar for the next print.

Annual net income was $11.0 billion, against $8.7 billion the year before. That’s real growth. It just isn’t accelerating growth, and the stock has been priced this year as though it needed to be.

Why the market cut the multiple harder

Here is the part that doesn’t fit a simple “margin under pressure” story. Netflix trades at 22.6 times trailing earnings, against its own five-year average of 40.2, a discount of roughly 44%. Price to sales tells a gentler version of the same story, 6.9 now against a five-year average of 7.5, an 8% gap. Price to book is the most dramatic: 11.1 against 22.7, more than half off its own history.

None of those three multiples would make sense if Netflix’s business were actually breaking down. I made a related point about PayPal a few weeks back: a stock can trade cheaper than its results justify once investors stop trusting the number to hold, and that looks closer to what happened here than any real deterioration in the model. The forward EPS estimate of $3.11 sits below the trailing $3.18, implying a -2% decline next year. That’s a modest decline, and it is likely one reason the multiple compressed: the market is pricing in a plateau rather than a collapse.

Metric	Current	Context
P/E (TTM)	22.6	five-year average 40.2
P/S	6.9	five-year average 7.5
P/B	11.1	five-year average 22.7
Forward EPS	$3.11	trailing EPS $3.18
Analyst target (avg)	$97	range $75 to $135

What a $298.9 billion market cap assumes

Gross margin was 48.5% for the year, up from 46.1% the year before, and net margin was 24%. Those two lines, moving together, are the real evidence that Netflix’s cost discipline is structural rather than a one-quarter trick, because gross margin expansion of that size usually shows up when a company is negotiating better content deals and spreading fixed technology costs over more paying households, rather than when a company is cutting corners on the product. Ebit margin for the year was 29.9%, which lines up closely with the 29% operating margin figure and confirms the annual number isn’t being flattered by one-off items below the operating line.

At a $298.9 billion market cap, the stock is still priced for a company that keeps compounding double-digit revenue growth on top of high-20s margins for years, not one that plateaus at current levels. That’s a demanding assumption on its face, and it’s also roughly what the company has delivered for six straight quarters now. The disagreement in the market isn’t about whether Netflix can hit that bar again next quarter. It’s about whether ad-tier and international pricing have enough runway left to keep clearing it in 2027 and beyond, and that’s a question this quarter’s numbers don’t fully answer either way.

Where the growth is actually coming from

Netflix’s revenue climbed from $31.6 billion in 2022 to $33.7 billion in 2023, then to $39.0 billion in 2024 and $45.2 billion in 2025, a growth rate that stepped up from about 7% to roughly 16% and has held near there since. That inflection lines up with two changes: enforcement against password sharing, largely finished by now, and an ad-supported tier that is still adding members. International pricing had room to move too, since Netflix historically charged less abroad than the value it delivered relative to US pricing. Live events, boxing cards and NFL windows, remain a smaller lever, useful for a specific weekend’s attention more than for the underlying revenue line.

None of those three drivers alone explains 13% quarterly growth. Together, they’re enough to keep growth in the low-to-mid teens without straining credibility, and that’s a different claim than saying any single one of them is compounding on its own.

What I want from the next couple of quarters is a cleaner read on how much of that 13% is price versus volume. A subscriber base charged more per household looks identical to a growing subscriber base in the top-line number, but the two support very different multiples going forward. Netflix doesn’t break that out publicly anymore, which is part of why the market has to guess, and part of why the range between the low and high analyst targets is as wide as it is.

The quant grade slid from C to E

One data point complicates my read, and I want to be upfront about it rather than explain it away. Netflix’s quant rating, by the site’s own scoring, moved from a C to an E over the past several months. I don’t know exactly what’s driving that grade, whether it weights valuation, price momentum, or estimate revisions more heavily, and that’s the honest uncertainty in this piece: a quantitative score turned sharply bearish while the fundamentals I can check moved only slightly.

Short interest hasn’t followed the quant score down. At 2.2% of float, this isn’t a name where traders are betting heavily on a further leg lower. If short interest climbed toward 5% while the grade stayed at E, I’d take that as the market confirming something in the numbers I’m not weighting enough. For now it reads to me as a flag, not a verdict, closer to how I framed Apple’s own quant slide after a beat that still sent the shares down than to a company with a structural problem.

Analysts can’t agree on the price either

Thirty-two analysts cover the stock. 78% of them rate it a buy, and the average target of $97 implies 35% upside from here. But the spread is wide. The high target of $135 implies 88% upside, while the low target of $75 implies only 4%. That’s a bigger range than I’d expect for a company this large and this closely covered, and it tells me the disagreement isn’t about next quarter’s numbers. It’s about which multiple Netflix deserves going forward, the way I’ve argued Tesla’s premium multiple depends entirely on which future you believe.

The stock fell 7.3% the day after its last earnings report, on 2026-07-16, almost exactly its own average earnings-day move, just on the negative side of it. That symmetry says the market wasn’t shocked by anything in the print. It was recalibrating what the print was worth.

The threshold I would need before adding

A stock trading at a 44% discount to its own five-year earnings multiple, with margins still above 30% and revenue growing in the low teens, is not a broken business. It’s a business being priced for a plateau that hasn’t actually shown up in the numbers yet. I want to see the next quarterly operating margin land at 31% or higher, matching or beating the full-year target rather than drifting under it, before I’d treat this discount as more than a watch item. Below that line, the multiple would look less like an overreaction and more like the market seeing something early.

The case against me is straightforward: if the next print comes in under 30% operating margin, clearly below both the year-ago quarter and the full-year target, I’d have to admit the de-rating wasn’t excessive. It was accurate.

That single number, the next quarter’s operating margin, is doing more work in this thesis than the full-year averages I’ve leaned on above. Averages smooth over a bad quarter hiding inside a good year, and a subscriber business can look stable in aggregate while the marginal economics of new sign-ups quietly worsen. Watching one number closely is not a substitute for reading the whole income statement, but it is the fastest way to know within a day of the print whether the story above still holds or needs revising.

Analysis and opinion only, not investment advice. Figures come from Netflix’s second-quarter 2026 results, filed with the SEC on EDGAR and reported by TradingView News; valuation multiples and price targets are approximate and were checked on September 18, 2026.