Hook & thesis
Netflix sits at a crossroads: a high-quality subscription business that produces roughly $9.46 billion in free cash flow now trades at $83.25 and a market cap of about $351 billion, but shares have been punished over the last six months amid uncertainty around an $82.7 billion acquisition of Warner Bros. Discovery and a broader tech pullback. That drop has pushed the stock into oversold territory (RSI ~26) while many of Netflix's operating metrics still point to durable growth and strong profitability.
My bottom-line: this is a buy for traders who can accept event risk. The company generates meaningful free cash flow, maintains a high return on equity (~41%), and trades at an EV/EBITDA multiple (~9.45x) that is reasonable for a market leader with valuable content IP. With the market pricing in a significant chance of deal execution problems, a disciplined long with a hard stop provides asymmetric upside both if the Warner deal closes and if Netflix stands on its own.
What Netflix does and why investors should care
Netflix is the largest pure-play streaming entertainment platform, operating a global direct-to-consumer service plus growing ad revenue and gaming initiatives. The business benefits from recurring subscription economics, high customer engagement, and an expanding advertising channel. Management has also been explicit about leveraging content IP — whether produced in-house or acquired — to expand monetization across streaming, advertising, and gaming.
Key fundamentals and where the thesis rests
| Metric | Value |
|---|---|
| Share price (current) | $83.25 |
| Market cap | $351 billion |
| Enterprise value | $356.5 billion |
| P/E | ~32x |
| EV/EBITDA | ~9.45x |
| Free cash flow (trailing) | $9.46 billion |
| ROE | ~41% |
| Debt to equity | 0.54 |
| 52-week range | $81.93 - $134.12 |
The basic bull case rests on three pillars: 1) continued subscriber strength and retention (news commentary points to a ~325 million subscriber base), 2) fast-growing advertising revenue that can materially expand monetization, and 3) strong free cash flow and profitability that support reinvestment in content and optionality. Even after the sell-off, Netflix's margins and cash generation give it flexibility to fund content and potential M&A without immediate dilution to operating economics.
Valuation framing
At a market cap of roughly $351 billion and EV of $356.5 billion, Netflix trades at approximately 9.45x EV/EBITDA and ~32x trailing earnings. For a dominant media platform with sizable growth potential in ads and gaming, those multiples look reasonable relative to the growth profile implied by recent guidance: management delivered ~16% revenue growth last year and ad revenues that are expected to accelerate. The 52-week high of $134 implies the market once priced a far richer growth/optional value; today's price reflects a meaningful discount driven by acquisition and execution risk rather than a deterioration in the unit economics.
Technical and sentiment backdrop
Technically, the stock is oversold: RSI is ~26 and the price sits below its 10-, 20-, and 50-day SMAs (SMA50 ~$94.83). MACD shows a slight bullish histogram after a sharp negative move, suggesting momentum may be stabilizing. Average daily volume over recent periods is elevated (~45.8M), indicating the move lower was accompanied by heavy participation — a sign that the price action reflects broad repricing rather than narrow illiquidity. Short activity has risen meaningfully in recent weeks, which can amplify rallies if sentiment turns.
Catalysts
- Regulatory and shareholder developments around the proposed Warner Bros. Discovery deal - any clarity (approval, revised terms, or abandonment) will be a major directional driver.
- Quarterly results and guidance that show continued subscriber resilience, faster ad revenue growth, or margin expansion - these would re-rate multiples higher.
- Macro tech rotation or a thaw in the recent sector-led correction (e.g., stabilization in cloud leaders) which would restore risk appetite for growth names.
- Content wins or franchise monetization announcements that demonstrate new revenue streams (e.g., gaming integrations or IP licensing).
Trade plan (actionable)
Trade direction: Long
Entry price: $83.00
Stop loss: $76.00
Target price: $110.00
Time horizon: mid term (45 trading days) - This horizon gives the trade enough runway for sentiment to normalize, for any near-term deal-related headlines to settle, and for operational catalysts (earnings, ad growth commentary) to emerge. If the Warner transaction progresses positively or the market rebounding in tech, the move toward $110 can occur within this window. If the acquisition is abandoned or materially re-priced, the combination of redeployed capital for content and improved sentiment can also push the stock toward the target.
Rationale: Entry near $83 captures much of the post-deal fear discount while the stop at $76 keeps risk defined below recent lows and provides space for headline noise. The $110 target implies ~32% upside from entry and aligns with a multiple expansion toward a more normalized EV/EBITDA for a high-quality media franchise plus modest growth realization.
Risks and counterarguments
Every trade has risks. Here are the main ones and a counterargument for the thesis:
- Deal execution and financing risk - The proposed acquisition requires significant cash and would add leverage (reports suggest ~$59 billion of additional debt financing in some scenarios). If financing terms worsen or regulators block the deal, market volatility could persist. Counter: the market has largely priced in a high probability of deal pain; if Netflix walks away, the company retains its cash flow profile and could reapply capital to share buybacks, content, or smaller M&A - all potentially positive for the stock.
- Macro / sector risk - A broader tech sell-off (example: the Microsoft-led pullback on 01/29/2026) can keep downward pressure on growth names. Counter: relative to peers, Netflix offers a clearer cash flow story and faster path to margin improvement through ad monetization; once macro pressure eases, it should recover faster.
- Content cost inflation - Rising content costs or costly flops could compress margins and FCF. Counter: Netflix's high ROE (~41%) and scale give it bargaining power; it can reallocate global content budgets to higher-return franchises and ramp ad monetization to offset rising content spend.
- Execution on ad/gaming monetization - If ad revenue growth disappoints, revenue guidance could miss and multiple compression could continue. Counter: ad revenue is already contributing meaningfully, and management has repeatedly pointed to it as a growth pillar; a single quarter of modest miss likely creates a short-term trading opportunity rather than a structural failure.
- High valuation expectation - Even after the decline, Netflix's price/sales and P/E imply continued growth; failure to deliver can keep shares depressed. Counter: valuation is attractive relative to the combination of content IP and cash flow; the risk/reward at entry is asymmetric once event risk is properly sized.
Counterargument summary: The primary bear case is that the Warner deal materially increases leverage and distracts management, resulting in execution failure. That is a credible risk and is the reason I size the trade conservatively. But the market already discounts a significant probability of that outcome; a defined-risk long captures upside if the deal works and limits downside if it doesn’t.
What would change my mind
I will reduce conviction or flip to neutral/short if: 1) Netflix announces a deal financing package that meaningfully weakens the balance sheet (e.g., immediate materially higher leverage ratios without clear deleveraging path), 2) subscriber trends deteriorate meaningfully (net subscriber losses or materially lower retention), or 3) management signals that ad/gaming monetization is structurally slower than current guidance. Conversely, a confirmed financing solution for Warner that preserves Netflix's liquidity or significantly better-than-expected ad revenue growth would materially increase my bullish conviction.
Conclusion
This is an event-driven, fundamentally supported trade. Netflix's core business remains profitable and cash generative, yet shares trade like a much weaker company because of the Warner deal overhang and a sector-wide pullback. A disciplined long entry at $83.00 with a stop at $76.00 and a target of $110.00 over ~45 trading days offers asymmetric upside while keeping downside capped. For traders who can stomach headline risk, this is an attractive tactical buy.