Netflix (NFLX)

Q2 2025 Results

We have written four previous notes on Netflix (NFLX). The first was an “Initiating Coverage” type note from 8 April 2024 and can be found here. Our second note was written on 26 July 2024 and can be found here. We also wrote in November 2024 on the Q3 results and that note can be found here. A note from Jan 2025 can be found here.

We made a 2% investment after the July 2024 note and the NFLX stock has advanced 90% since then. We added an additional 1% after the November 2024 note and the stock has advanced about 33% since then.

• Over the last 23 years it has given a CAGR return of 34.8%, much more than its weighted average cost of capital (WACC) which we estimate as 11.1%

• Over the last five years, the CAGR return on the stock has been 19.8%.

In the last five years, total revenue has grown at a CAGR of 14.1% while Operating Profits and Net Profits have grown at a CAGR of 32% and 36.1% respectively. The business model has significant operating leverage.

We will look at the Q2 Results to see if the momentum is maintained and consider whether it is still an attractive investment.

Q2 Results

Q2 revenue increased by 16% (y/y). The company said, the higher revenue growth was primarily a function of more members, higher subscription pricing and increased ad revenue.

Operating Profit and Net Profit by a CAGR of 45% suggesting continued strong operating leverage.

The company noted the role of FX (dollar weakness) in boosting the results. The revenue gain would have been more modest and in line with expectations, without the weaker dollar.

“Both revenue and operating income were slightly above our guidance due primarily to FX, net of hedging, and the timing of expenses.”

“Both operating income and operating margin were slightly ahead of our forecast given the revenue upside in the quarter and timing of expense spending. “

Margins increased consistently on a (y/y) basis. The Operating Margin was 34.1% which was up 690bps (y/y). As the chart below shows, this continues the steady growth in margins over the last decade. However, given the current high level, further progress will be difficult to achieve.

Geographically, there was above average revenue growth in APAC and EMEA.

The company noted : “All regions experienced healthy (y/y) revenue growth, with each region posting double-digit F/X neutral increases.”

55% of Netflix’s Revenues are outside North America and so it benefited from the decline of the US dollar against other major currencies in the quarter.

The company has stopped reporting Membership growth. The last data point we have is 301mn members at the end of December 2024. The scale means they are the dominant player in streaming entertainment. They have benefited, and will continue to benefit, from the shift from legacy linear TV to Streaming. 50% of viewing is still legacy linear and that will be a source of market share gain for Netflix over the next few years.

The company did make a positive comment on membership growth this year.

“Member growth was ahead of our forecast, although this occurred late in the quarter, limiting the impact on Q2 revenue.”

Diluted EPS continued to grow and rose $7.19 vs. $4.88 in the same quarter last year (+47% y/y).

“Our primary financial metrics are revenue for growth and operating margin for profitability. Our goal is to sustain healthy revenue growth, expand operating margin and deliver growing free cash flow.”

Outlook

The company is now forecasting 2025 revenues of $44.8bn -$45.2bn, raised up from $43.5bn-$44.5bn and an operating margin of 30%.

For the next quarter (Q3 2025) they expect revenue growth of 17% driven by growth in members, pricing hikes and advertising revenue. They project an operating margin of 31% which +200bps (y/y).

Like past years, they expect operating margin in 2025 second half will be lower due to higher content amortization and sales and marketing costs associated with the larger second half programming slate.

Highlights of the Earnings Conference Call

The company published some prepared remarks before the Q&A with analysts.

They emphasised

• The hits in their new content during the quarter.

• The completion of the rollout of the Netflix Ads Suite, a proprietary first-party ad tech platform, across all their ads markets.

• The launch of their redesigned TV homepage.

Netflix continue to produce a vast amount of content and some these proved to be a great hit with the audience in Q2.

“We had a wide variety of hit series like Squid Game S3, Sirens, Ginny & Georgia S3, The Eternaut and Secrets We Keep, and popular films like Tyler Perry’s STRAW and Exterritorial.”

Netflix introduced a lower cost subscription for customers who are willing to look at targeted advertisements. At the same time, they have developed technology which will help advertisers more accurately target their advertisements. In Q2, this AdTech stack was rolled out.

“We continue to make progress building our ads business and still expect to roughly double ads revenue in 2025. We completed the rollout of the Netflix Ads Suite, our in-house first-party ad tech platform, to all of our ads markets and early results are in-line with our expectations. We believe our ad tech platform is foundational to our long-term ads strategy and, over time, will enable us to offer better measurement, enhanced targeting, innovative ad
formats and expanded programmatic capabilities.”

“we have closed the vast majority of our deals with the major (advertising) agencies. Clients are excited about our growing scale, the successful rollout of our tech stack, as well as our upcoming programming slate.”

The most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix. We've seen an increased programmatic buying, consistent with what we are expecting both qualitatively and from a metrics perspective.

Long term, being on our own stack that improves the speed of our execution to deliver this pretty significant road map of features that we have in front of us. It's things like improved targeting and measurement. There's also leveraging advertiser and third-party data sources, which will ultimately allow us to improve the ad experience for our members, which is critically important. So that means better ads personalization. So the ads that I see are increasingly different from the ads that say, Ted would see, and they're more relevant for each of us, which is good for us as users and it's good for the brands. We're also going to be introducing interactivity in the second half of the year.

Transparency

Netflix analysts were disappointed that the company stopped publishing data on subscriber numbers at the end of December 2024. The company still claims to be model of transparency.

“We lead the industry in viewing transparency. In addition to the quarterly data we provide in our investor letter, we also publish weekly Top 10 and Most Popular lists, and in 2023, we began releasing a comprehensive report of what people watched on Netflix over a six-month period.”

When the announced they would no longer provide the subscriber numbers, they said they would instead produce an Engagement report twice a year. The idea is the instead of just the basic size of the audience, they would show how the audience is engaging with Netflix.

This report covers ~99% of what people watched on Netflix. The report was published with the Q2 Results and the company summarised it thus:

● Even with our 2025 slate being unusually second-half weighted, our members watched over 954bn hours on Netflix in the first half of the year, a 1% increase (y/y). (Comment: this is on the low side).

● Non-English language series and films are very popular and represented more than one-third of all Netflix viewing in the first half of the year.

● Our most-watched titles during this period reflect that great stories can come from anywhere and include Adolescence from the UK, all three seasons of Squid Game from Korea, Zero Day from the US and Secrets We Keep from Denmark.

● Our viewing is very broad and we’re not dependent on any one title to drive engagement—for instance, even our biggest titles that have tens of millions of views account for less than 1% of total viewing on Netflix in the reporting period.

● Our titles have staying power, with nearly half of the viewing of Netflix originals coming from titles launched in 2023 or earlier. Money Heist, Lucifer, Red Notice, Leo and We Can Be Heroes each had more than 20M views in the first half of 2025.

As noted in previous reports, Netflix creates content in many countries, often where production costs are lower than in the USA.

At Netflix, our content strategy is “local for local”—developing shows and films that deeply connect with audiences in their home countries. To achieve this, we have creative teams around the world collaborating with local talent to produce stories that reflect their cultures and interests.

In this call, they highlighted the success in Spain and South Korea.

This approach continues to deliver results. In Q2, Spanish series and films such as The Gardener (34M views), Bad Influence* (46M views) and A Widow’s Game* (43M views) were hits with Spanish-speaking audiences and also found fans internationally.

As we saw with Squid Game from South Korea, every so often a show becomes a true global phenomenon—captivating audiences not just in its home country, but around the world.

However given the political pressures to invest in the US, they also emphasised their commitment to US production.

Our most significant investment remains in the US, which accounts for the majority of our content spend, workforce and production infrastructure. From 2020-2024, we estimate that we contributed $125bn to the US economy. Our expansion in Albuquerque, New Mexico—adding four new soundstages to a 108-acre site—and our plan to invest roughly $1bn to develop a state-of-the-art production facility in Fort Monmouth, NJ, underscore our ongoing commitment to production in the US.

Their commitment to investing free cash flow in new programming continues. As always, there is heavy new programming in the second half of the year. This includes

1. returning hit series,

2. new series

3. feature films and

4. unscripted programming/reality TV.

Still to come in the back of the year are returning hit series including

• Second seasons of Wednesday and

• Emmy nominated Nobody Wants This,

• Season 3 of Alice in Borderland from Japan and

• The fifth and final season of Stranger Things.

We also have exciting new series including

• Billionaires’ Bunker, from Spain’s Money Heist creator Álex Pina;

• Black Rabbit, a thriller starring Jason Bateman and Jude Law;

• House of Guinness, from Peaky Blinders UK creator Steven Knight;

Our film slate includes

• French Lover starring Lupin’s Omar Sy;

• My Oxford Year starring Sofia Carson (The Life List) and Corey Mylchreest (Queen Charlotte);

• Our unscripted slate in 2H’25 includes

• Building the Band, which premiered last week,

• America’s Team:

• a new documentary about Victoria Beckham.

Live Programming

As we have noted before, Netflix has forayed into live programming events such as the Tyson/ Paul boxing fight, WWE wresting bouts and Christmas day American Football (NFL). They intend to continue with more live programming.

We continue to expand our live programming with big, can’t miss special events. We have two marquee boxing matches in Q3,.We also look forward to our NFL Christmas Day doubleheader.

Redesigned Home Page
They have redesigned their homepage. and this was introduced to their viewers during Q2. They seemed to be very excited about its capacity to offer a better more personalised service.

In Q2, we introduced our redesigned TV homepage which we expect will enhance the member experience. …our new TV experience is simpler, more intuitive and better represents the breadth of entertainment on Netflix today. The new design more intuitively displays key information such as each title’s trailer video, synopsis and other details (callouts like “#1 in TV Shows”).”

~50% of members have used the new experience. Early results are encouraging, outperforming pre-launch testing and demonstrating strong member interest in the new features.

Over time, we expect this redesigned experience—along with our new responsive recommendations that update rows of titles in real time—will help our members more easily find shows, movies, live events and games they want to watch and play.

The Netflix you get on a Tuesday night is different from the Netflix you get on a Sunday afternoon. From what we're seeing in terms of the performance of far, we're very confident that we've got a much better platform in this new user experience to build from to continue to improve, and that will help us meet the needs of the business over the years to come.

Games

Netflix has started investing in Gaming often based on the IP of successful programmes.

We continue to invest in immersive, narrative games based on our IP. For example, in Q2 in conjunction with Black Mirror S7, we launched Thronglets, the game at the center of the episode “Plaything.” The mobile game immersed fans in the world of Black Mirror like never before. And, alongside the series finale of Squid Game, we made significant updates to Squid Game: Unleashed, introducing new games, characters and Play Along rewards based on season 3.

We look at the near-term monetization opportunity with games very similar to how we've looked at other new content categories. Essentially, if we deliver more value to our offering, we get increased user acquisition, we get increased retention, we get increased willingness to pay. We've seen those positive effects, albeit in a small way relative to the size of our overall business when it comes to members playing games on the service. We're going to ramp our investment in this area, which is currently quite small compared to our overall content investment as we ramp the size of those positive effects.

(It is) worth restating the TAM for this market is very, very large. We remain convicted about our strategic opportunity and excited to make more progress.

Cash Flow and Capital Structure

Re-statement of Capital Allocation Policy

Our capital allocation approach is unchanged—we prioritize profitable growth by reinvesting in our business, maintaining ample liquidity and returning excess cash (beyond several billion dollars of minimum cash and any used for selective M&A) to shareholders through share repurchases.

Recent strong operating cash generated continued in Q2 was $2.4bn vs. $1.3bn in the prior year period. Free cash flow was $2.3bn vs. $1.2bn in Q2’24.

They are increasing the full year 2025 free cash flow forecast to $8bn-$8.5bn from approximately $8bn due to the increase in our revenue and operating margin
forecast.

During the quarter, they paid down $1bn of debt. As the chart above shows long-term debt declined to $13.8bn

They repurchased 1.5M shares for $1.6B. They still have $12.0B remaining under their existing share repurchase authorization.

The share repurchases are shown as negative bars in the above chart as they represent cash outflows.

They ended the quarter with cash and cash equivalents of $8bn. So Net debt is only $5.8bn.

Consumer Strength

NFLX management were asked if they see any weakness among consumers.

we're carefully watching consumer sentiment in the broader economy. But at this point, really nothing significant to note in the metrics and the indicators that we get directly through the business. There have been no significant shifts in plan mix or planned take rate and the price changes we've done since the last quarter have been in line with expectations.

Engagement also remains healthy, … in general, and Netflix specific have been historically pretty resilient and tougher economic times. We also think that we are an incredible entertainment value, not only compared to traditional entertainment, but if you think about other streaming competitors, when we start at $7.99 in the United States and you think about all of the entertainment you get, we have a belief and expectation that the demand for not only entertainment, but for us, specifically will remain strong.

On Market Share

Our goal continues to be to continue to grow our share over the long term. And over the past few years, we've been able to maintain our share even as we work through a growing number of TV-based streaming services, some free, some paid and the impact of paid sharing …But over the long term, we tend to keep growing as the other 50% of TV viewing migrates from linear to streaming. And we'll do that by doing what we've always done continuously improve the service.

Competing with YouTube

Netflix is second only to YouTube in US streaming as shown in the chart below. The chart data ends in mid 2O24, but the relative positions are the same today.

Netflix Management was asked about their response to YouTube.

We want to be in business with the best creatives on the planet,. Some of them are here in Hollywood, others are in Korea, some are in India and some are creators distribute only on social media platforms and most of them have not yet been discovered.

For those creators, we have phenomenal distribution, desirable monetization, brilliant discovery in our UI and a working with a wide set of content creators makes a lot of sense for us. Not everything on YouTube will fit on Netflix, there are some creators on YouTube like Ms. Rachel that are a great fit. She's had 53 million views in the first half of 2025 on Netflix.

We also see free services as a form of strong competition. Free is very powerful from a consumer perspective so it's not surprising that some free services are growing in engagement.

it's worth remembering there's about 80% of total TV view share that neither Netflix nor YouTube are winning right now. We think that represents a huge opportunity for which we are competing aggressively and we aim to grow our share. The vast majority of our money and attention is focused on that 80%.

Summary.

• This was another set of excellent set of numbers from Netflix. Revenue and Operating Profit grew more than expectations and Operating Margins expanded more than expected. Growth was boosted by the weakness of the US dollar.

• The crack down on password sharing has driven membership and revenue growth. Advertising and Games should the next long-term growth driver.

• Netflix has a strong moat. This is due to its content, vast scale and global production capability.

• Players such as Disney, Prime, Discovery, Paramount, and Comcast are much smaller. Netflix has been much successful than the others in its road to profitability and free cash flow growth.

• The company has turned strongly FCF positive in the last four years while continuing to invest in programming across the globe.

• The company continued to experiment with live sporting events. These have proved to be important in attracting new subscribers and advertising revenue.

• The company has used its impressive free cash flow to buy back shares, and this is expected to continue for the foreseeable future.

The consensus analysts’ forecasts for revenues are as follows:

The analysts are fading revenue growth to slow to 4.9% in FY2027.

The consensus analysts’ forecasts for EPS are as follows:

In FY 26 and 2027, analysts expect the EPS growth of 20% plus despite the slowing revenue growth.

The consensus analysts’ forecasts for Free Cash Flow (FCF) are as follows:

Analysts expect the company to generate US$14bn in free cash flow on FY27.

At the current price of $1178, the NFLX stock is trading at a two-year forward P/E Ratio of 36.5X.

At the current market cap of $505bn, the stock is trading at a two- year forward Price to Free Cash Flow Ratio of 43.5X.

These numbers imply a two-year forward Earnings yield of about 2.7% and a Free Cas Flow Yield of 2.3%. On the face of it, these are a little low and indicate the NFLX stock is quite expensive, despite the high forecast growth in revenues, profits and Free Cash Flow.

We conducted a Discounted Cash Flow (DCF) Calculation.

We used the prior revenue assumptions noted above.

We made the following additional assumptions.

We assumed FY 28 revenue growth at 5%.

We assume an increase in reported EBIT margins to 30% by FY 2028

We also assume a risk-free rate of 3.75% and a Market Risk premium of 4.75%. The Stock Beta is 1.6 These numbers result in a Weighted Average Cost of Capital (WACC) of 11.1%.

Finally, we assume that in FY 2028, the terminal exit multiple for EV/FCF is 38X. The current EV/FCF is 40X.

With these assumptions, we calculated a theoretical Netflix stock value of $813 – the current share prices of US$1178 is at a 45 % premium to fair value.

If the terminal exit multiple for EV/FCF is increased to an aggressive 55X, we get a theoretical share value equal to the current share value. An EV/FCF ratio of 55X is too high.

Conclusions

NNFLX shares at $1178 are at a significant premium over our estimated fair value. Our best guess is that the company will make a CAGR return of 6% to 8% over the next few years. This quite low. The stock has risen 33.5% in 2025 and further advances will be challenging.

We will continue to hold out position which accounts for 2.4% of our portfolio. We will not add to our position at this price. We will look to sell if the portfolio does not have cash (currently cash is at 10%) and more compelling opportunities appear.