#138 Netflix - Stock Valuation Update

Buy the dip?

🎬 Netflix – Stock Valuation Update

Netflix shares dropped noticeably after the Q3 earnings release. The numbers weren’t bad — in fact, they were quite strong — but the market’s reaction was clear: good isn’t always good enough when expectations are already sky-high. That’s the paradox of success on Wall Street. When a company performs well for years, the bar keeps rising until even strong results start to look like a letdown.

The recent pullback got me thinking. How much of Netflix’s long-term potential is already priced into the stock? And where does the fair value actually sit if we strip away the excitement and look at the numbers objectively?

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At the moment, Netflix trades around $1,095 per share, giving it a market capitalization of roughly $465 billion. After accounting for around $7.7 billion in net debt, the company’s enterprise value comes in close to $473 billion. Netflix generated about $6.9 billion in free cash flow (FCF) in 2024 — a clear sign of how far the company has come since its cash-burning years. The question for investors now is not whether Netflix is profitable, but how fast those profits can grow.

To get a clearer picture, I ran two complementary analyses: a classic Discounted Cash Flow (DCF) valuation and a Reverse DCF. Both use the same basic assumptions — an 8% discount rate (WACC) and a 3% terminal growth rate — which are fairly reasonable for a global media company with stable long-term prospects.

In the forward DCF, I applied moderate growth expectations similar to those in current analyst forecasts. Under this scenario, Netflix’s free cash flow would rise from roughly $6.9 billion in 2024 to about $14.6 billion in 2027. When I discount those future cash flows and include a 3% perpetual growth rate beyond 2027, the result is a fair value of around $623 per share. That’s a solid number, but noticeably below the current market price.

Of course, markets are forward-looking, and Netflix’s valuation isn’t determined by my base case. So I flipped the perspective and ran a Reverse DCF to see what kind of growth the market is implicitly expecting at today’s price. Using the same 8% WACC and 3% terminal growth, the math works out if Netflix’s free cash flow grows by about 29% per year between 2025 and 2028. In other words, investors are assuming that Netflix can almost triple its free cash flow in four years, from $6.9 billion in 2024 to roughly $19 billion by 2028, and then continue to grow steadily thereafter.

This is what makes Netflix so interesting right now: the market’s implied expectations are aggressive but not absurd. They suggest that investors see Netflix as more than just a streaming company — they’re betting on a platform that can expand margins, grow its ad-supported tier, monetize password sharing, and continue dominating globally. Still, that’s a lot to deliver.

When you compare both perspectives side by side, the contrast becomes clear. My base DCF assumes around 22% annual FCF growth, leading to a valuation near $623 per share. The market, by contrast, is assuming roughly 29% growth, which pushes the valuation up to today’s price of about $1,095. In simple terms, Netflix would need to grow its cash flow about one-third faster than the “realistic” forecast for its current valuation to make sense.

Think of it as a valuation bridge:
at 20% FCF growth, Netflix might be worth about $840 per share;
at 22%, around $900;
at 24%, just under $950;
and by the time you reach 28–29%, you arrive at the market’s level around $1,095.
Each small uptick in expected cash flow growth adds billions in value because so much of Netflix’s worth lies far out in the future — the terminal value.

This explains why the stock can fall sharply after an earnings report that’s “good but not great.” When a company is priced for perfection, any sign of slowing growth, tighter margins, or increased competition can shake investor confidence. At $1,095, Netflix isn’t being valued as a stable cash cow — it’s being priced as a compounder that can sustain 25–30% annual FCF growth for several years to come. That’s a high bar, even for Netflix.

Still, the company has a track record of defying skepticism. The ad tier is growing faster than expected, international penetration continues, and content spending has become more disciplined. If Netflix can deliver on those fronts, the market’s optimism might be justified. But if growth moderates toward the 20% range, the stock could simply be ahead of its fundamentals.

In short, the forward DCF reflects how strong Netflix already is; the reverse DCF reflects what investors are daring to believe. The truth probably lies somewhere in between — a business with excellent fundamentals, but a valuation that leaves little room for disappointment.

That’s the story behind Netflix’s post-earnings drop: not a crisis, just a recalibration of expectations.

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Disclaimer: This analysis is for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell securities. All data and assumptions are based on publicly available information as of October 2025 and reflect my own interpretation. Please do your own research or consult a financial professional before making investment decisions.