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Netflix (NFLX): Q2 2026 results, my verdict

2026-07-17 ·

Netflix: see the full analysis on Lubin Investment

Netflix posted revenue of 12.56 billion dollars in the second quarter of 2026, up 13.4% year over year, with earnings per share of 0.80 dollar above expectations. Despite the strong quarter, the stock fell nearly 10%, punished for guidance seen as cautious. Here is what these numbers change for how I read a very high quality but expensive stock.

A good quarter, and yet the stock dropped

Netflix reported revenue of 12.56 billion dollars for its second quarter on July 16, 2026, up 13.4% year over year and right in line with analyst expectations. Earnings per share came in at 0.80 dollar, just above the 0.79 expected, and the operating margin held at 33.4%, flat year over year. On paper, a clean quarter for the world's streaming leader.

And yet, in the hours after the release, the stock lost nearly 9.6%. This wide gap between good numbers and an immediate market punishment is exactly the kind of situation I find most instructive. It says almost nothing about the quality of the business, and everything about the price the market was paying before the release. When a stock is already expensive, matching expectations is not enough: you have to clearly beat them, or the smallest blemish gets punished hard.

Why a stock can fall on good results

The market never buys the quarter that just ended, it buys the quarters ahead. Past revenue and earnings are already largely anticipated by analysts: by the time they land, they are only a surprise if they diverge sharply from consensus. What really moves the price is what management says about what comes next. That is what we call guidance: the numerical targets a company sets for the coming quarters.

And that is precisely where Netflix disappointed. For the third quarter, the company expects revenue of 12.86 billion dollars and earnings per share of 0.82 dollar, both slightly below what the market hoped for (about 1% less on sales, a bit more than 2% on earnings). For an ordinary company, that would be a detail. For a highly priced growth stock, that small gap is enough to trigger a correction, because the price already assumed a perfect trajectory. Full year 2026 revenue guidance was held around 51.2 billion dollars.

How I judge Netflix's quality, without looking at the price

My method always starts by separating two questions most people blend together: is this a good business, and is this a good stock at this price. For the first, I do not trust accounting profit, too easy to dress up with depreciation and provisions. I look at free cash flow: the money that actually stays in the bank once the company has paid everything, including its content investments. For Netflix, this expected cash sits around 12.5 billion dollars for 2026, close to a quarter of its revenue ending up as available cash. That is the mark of a business that has reached maturity.

What matters most is not the snapshot, it is the trajectory. A few years ago, Netflix was burning cash: producing original series cost more than subscriptions brought in, and the company funded the gap with debt. That era is over. Free cash flow per share is now growing at more than 50% a year over the recent period, not because revenue is exploding, but because the company has passed the peak of its investment and now converts its scale into real profit. It is this shift, from a spending machine to a cash machine, that explains why my quality filter validates 9 of its 10 objective financial criteria (profitability, sales and cash growth, margins, low debt, buybacks).

One point deserves an honest nuance. For this single quarter, the free cash flow margin fell to 12.1%, well below its annual average. This is not a warning sign: content spending is not smooth from one quarter to the next (a large production, a season delivered, and the bill lands all at once). That is exactly why free cash flow should be read over the full year, not quarter by quarter, where the lumps of content spending blur the picture.

The real engines of tomorrow: advertising and engagement

Growth in classic subscriptions is slowing in the West, where almost everyone who wanted Netflix already has it. The next leg comes from elsewhere, and first of all from advertising. Two years ago Netflix launched a cheaper ad-supported plan (what we call AVOD, for advertising-based video on demand): the subscriber pays less, and Netflix makes it back by selling ad space. This lever is still young but climbing fast: advertising revenue is expected to roughly double this year toward 3 billion dollars. It is a high margin engine that was close to nothing three years ago.

The other indicator I watch closely is engagement: the time actually spent in front of the screen. For a subscription business, it is the best leading signal of the churn rate (the share of subscribers who cancel): the more people watch, the less they cancel the following month. Netflix reported more than 97 billion hours viewed in the first half of 2026, up 2% year over year. One less reassuring detail: the company will scale back its What We Watched engagement report from a quarterly to an annual cadence. Less transparency on the metric that matters most for judging the health of the service is something I keep in mind.

Price: why Netflix stays expensive, and whether it is justified

That leaves the second question, price. To measure it, I use the P/FCF (price-to-free-cash-flow): the share price divided by the cash the company generates each year. A P/FCF of 10 means you pay ten years of that cash. The higher it is, the more expensive the stock. Netflix trades around 28 times. That is high: most businesses of comparable quality trade closer to 15 to 20 times their cash. Netflix commands a clear premium, in the same high zone as when I wrote my in-depth analysis of the stock.

Where does that premium come from? The market is paying for three things: still double digit growth, expanding margins, and the optionality of advertising, a new engine whose ceiling nobody yet knows. Is it justified? For a dominant company, with real pricing power (Netflix has raised prices several times without triggering mass cancellations) and a credible growth relay, a premium is defensible. But at this price there is no room for error, and that is the whole lesson of the day: guidance barely below expectations was enough to erase nearly 10% of the value in a few hours. A high quality stock bought too expensively can stay a poor investment for a long time, until results catch up with the price.

What I am watching next

Three points will guide my reading over the coming quarters. First, the pace of deceleration: growth has slipped from more than 15% to about 13%, and the question is whether advertising takes over fast enough to offset the saturation of classic subscriptions. Second, the full year free cash flow margin, the only real way to read a company whose content spending is uneven. Third, transparency on engagement, now that the audience report moves to an annual cadence: it is the metric that will tell, before the others, whether the appeal of the service holds up.

How I read it

I never recommend a specific stock, but this quarter shows perfectly why I always separate quality from price. On quality, Netflix leaves little room for doubt: a now fully owned cash machine, a competitive advantage built on years of viewing data and a scale no one can replicate, real pricing power, and a rising advertising engine. On price, nothing reassuring today: the valuation stays stretched, and the near 10% drop on barely disappointing guidance shows how sensitive the market is to any misstep. It is exactly this kind of gap between a quality I admire and a price that holds me back that I wanted to be able to measure in seconds for any stock, which is what led me to build my analysis tool. You can find the full breakdown on the Netflix analysis page, the ranking of quality stocks, and my methodology.

FAQ

Why did Netflix stock drop when the results were good?

Because the market does not buy the past quarter, already anticipated, but the quarters ahead. Netflix's third quarter guidance (12.86 billion dollars of sales and 0.82 dollar of earnings per share) came in slightly below expectations. For an already expensive stock, that small gap was enough to trigger a near 10% drop.

What is guidance, and why does it matter more than the past quarter?

Guidance is the numerical targets management sets for the coming quarters. Since the share price reflects future profits, guidance below expectations weighs more than good past numbers, especially when the valuation is high and prices in no room for error.

Is Netflix stock expensive in 2026?

Yes, in valuation terms. Its P/FCF (the price relative to the cash generated each year) sits around 28 times, versus 15 to 20 times for many comparable quality companies. That premium is justified by growth, margin expansion and the advertising opportunity, but it leaves little room for error.

Why is advertising so important for Netflix now?

Because growth in classic subscriptions is slowing in the West. The ad-supported plan (AVOD) opens Netflix to more price sensitive subscribers while generating high margin ad revenue, expected to rise about 100% toward 3 billion dollars this year. It is the main growth relay.

Should I buy Netflix stock after these results?

The results confirm a very high quality but expensive company, with a valuation that forgives no misstep. The decision depends on your horizon and your tolerance for valuation risk. This is not personalized investment advice, do your own research.

Netflix: see the full analysis on Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).