Netflix shares tumbled 9% on Friday after a weaker-than-expected forecast during its first quarter earnings.
The streamer’s Q1 profit grew 82% to $5.23 billion, or $1.23 per share — helped by a $2.8 billion break-up fee from abandoning its Warner Bros. deal — as revenue climbed 16% to $12.3 billion, driven by higher pricing, ad revenue and subscriber growth. Netflix, which no longer discloses its subscribers on a quarterly basis, last reported a total of 325 million users globally.
While acknowledging that first quarter sales and margins exceeded guidance, MorningStar Research analyst Matthew Dolgin said that the market was hoping for an increase in full-year guidance after Netflix surprisingly raised prices across its U.S. plans after the WBD deal fell through. Instead, Netflix maintained guidance of $50.7 billion to $51.7 billion in revenue, an operating margin of 31.5% in 2026.
“We believe shares have been priced for mid-teens annual sales growth. The 2026 outlook of 11%- 13% organic growth was fine when it seemed the next U.S. price increase would occur around year-end, consistent with the historical cadence. Growth acceleration in 2027 now seems less likely,” Dolgin said. “Generating more revenue per user must be the primary growth driver, in our view, because Netflix has largely saturated the subscriber market in the U.S. and many of the highest-priced international countries.”
In addition to pricing, Netflix said it would focus on scaling its ads business — which remains on track to hit $3 billion in 2026. In order to reach that goal, JP Morgan analyst Doug Anmuth said it will need to account for about 6% of total revenue. The firm projects it will become more than 10% of total revenue in 2027 or 2028 by continuing to grow its advertiser base and improving targeting and measurement.
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“The U.S. price increase came only 14 months after the previous one and exceeded 10%,” Dolgin added. “We don’t think Netflix can raise prices at these rates annually, but think that’s what it will take to maintain low-teens growth. The advertising business remains small, and its contribution must offset any subscriber mix shift to lower-priced plans.”
Pivotal Reseach Group analyst Jeffrey Wlodarczak said Netflix is “properly valued” at its current levels and expects growth to be driven by price increases and gains in advertising. However, he believes the company’s story is “lacking excitement relative to a rich valuation” and expressed concern around Netflix’s engagement.
“While engagement held around +2%, we remain concerned that short-form entertainment (such as TikTok, Instagram, X, YouTube shorts and Snap) is doing to streaming what streaming has done to traditional TV as, especially younger, consumers spend an ever-increasing time on these social media platforms amidst plummeting attention spans, which is fundamentally negative for long-form content,” Wlodarczak said. “This is exacerbated by free ad-supported (FAST) TV channels that appear particularly attractive to increasingly challenged lower per-capita income households.”
But Piper Sandler analyst Thomas Champion said Netflix’s business “seems to be progressing fine, if offering limited surprises.”
In addition to its price increase and continued growth in the ads business, Netflix is enhancing its technology through the acquisition of Ben Affleck’s InterPositive to expand its generative AI-powered tools, with plans to launch a vertical video feed on its mobile app at the end of the month in addition to the upcoming Netflix Playground and video podcast offerings.
“We suspect [Netflix] can retool and return to a mid to high teens topline, perhaps through the ads business or new initiatives like gaming, mobile, sports or more efficient content production via AI,” Champion said. “We expect a strong capital return.”
“We do see a valuation up to $138/share making sense,” Seaport Research’s David Joyce added. “But that will require execution toward the back-half acceleration, and beyond — with a view toward advertising outperformance, and higher engagement levels supported by live experience and gaming initiatives.”
William Blair analyst Ralph Schackart believes that Netflix’s stock price will rebound once investors “digest the positive growth in the quarter, expanding margins, and the company’s ability to continue to post manageable growth in low- to mid-teens.”
“There was nothing thesis changing in this quarter to warrant a sell-off, in our view, besides expectations being high going into the quarter,” he noted. “Netflix remains well positioned to remain a secular streaming winner, in our view, and we believe it will retain pricing power over the long term and will continue to grow its members.”
Netflix shares, which are trading at $98.06 per share as of Friday morning, are up 7.76% year to date and 3.9% in the past month, though down 18% in the past six months.
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