Netflix Stock is Crashing - What You Need to Know
Summary
Daniel's main thesis is analyzing Netflix's Q1 2026 earnings report, which saw the stock drop over 8% in after-hours trading despite strong headline numbers. He attributes the sell-off primarily to a weaker Q2 2026 outlook, particularly decelerating revenue growth rates across international markets, and the stock's valuation not being cheap enough to warrant stellar long-term returns.
For the first quarter of 2026, Netflix reported revenue growth of 16% year-over-year (14% FX neutral), surpassing guidance. Operating income grew by 18%, and the operating margin expanded to 32.3%. Diluted earnings per share nearly doubled, representing an 86% year-over-year increase to $1.23, partly due to a $2.8 billion one-time termination fee from a Warner Brothers transaction; even without this, pre-tax income grew 16%.
The forecast for the second quarter of 2026, however, presents concerns, projecting revenue growth of only 13.5% (12% FX neutral) compared to 15.9% in Q2 2025. The operating margin is expected to contract to 32.6% versus 34.1% in Q2 2025, attributed to higher content amortization; however, Daniel considers this a non-factor as the full-year target of 31.5% is still expected to be met. EPS growth is projected to decelerate significantly to 8.3% year-over-year ($0.78 versus $0.72).
A further critical point highlighted is the deceleration in international market growth. Revenue growth rates declined in Europe (12% versus 16% last year), Latin America (18% versus 27% last year), and Asia-Pacific (19% versus 26% last year). Daniel labels this as a "red flag" because these markets are expected to be the primary long-term growth drivers.
In the United States and Canada market, while revenue grew 14% year-over-year, which was an acceleration from Q1 2025, Daniel noted that revenue slightly declined on a quarter-over-quarter basis. He points out that this is a historically unusual occurrence and warrants further investigation, as it is the company's largest market.
Regarding valuation, Daniel observed that prior to the earnings report, Netflix was trading at approximately 15.2 times EBITDA, which was above its historical average (12.7x) and median (12.6x). His Discounted Cash Flow (DCF) analysis, assuming 12% annual EBITDA growth and a 12.5x historical average price-to-EBITDA multiple, yielded a fair value of $104.60 per share. After the 8% drop, the stock is now trading slightly below this fair value.
Daniel concludes that while Netflix is a high-quality business with strong Q1 results, the decelerating revenue growth, especially in international markets, and a valuation that is not cheap enough (even at fair value after the drop) make the stock unattractive for "stellar long-term returns." He stressed that he found the stock to be "more undervalued around $77 per share."
Mentioned Stocks
Reasoning: Daniel notes that while Netflix delivered strong Q1 2026 results, the stock's after-hours sell-off is primarily due to a weaker Q2 2026 forecast, particularly decelerating revenue growth rates in international markets. He also points out a quarter-over-quarter revenue decline in the US and Canada market. From a valuation perspective, Daniel argues that even after an 8% drop, the stock is trading around its fair value (estimated $104.60 per share via DCF) but is not cheap enough to produce "stellar returns" given its projected 12% annual growth. He believes the stock was "more undervalued around $77 per share," indicating a lack of interest at the current price for new investments.