Netflix stock plunges 9% after earnings: why more downside may be ahead

Netflix stock NASDAQ:NFLX plunged nearly 9% in after-hours trading after the streaming company issued a weaker-than-expected third-quarter forecast, reviving doubts about whether slowing growth can support a premium valuation.

The company projected revenue of USD 12.9 billion (approx. $18.7 billion) and diluted earnings of $0.82 per share, below Wall Street estimates of USD 13 billion (approx. $18.9 billion) and $0.84 per share.

Second-quarter sales narrowly missed expectations, while free cash flow fell.

The results did not suggest Netflix’s business is breaking down. They did show that respectable execution may no longer satisfy investors accustomed to exceptional performance.

Netflix stock: Soft guidance exposes a tougher phase of growth

Netflix’s second-quarter revenue increased 13.4% to USD 12.6 billion (approx. $18.3 billion), while diluted earnings rose 11% to $0.80 a share.

Operating income reached USD 4.2 billion (approx. $6.1 billion) and the operating margin came in at 33.4%, ahead of the company’s forecast.

The problem was the direction of travel. Netflix expects third-quarter revenue growth to slow to 11.7%, from 16.2% in the first quarter and 13.4% in the second.

That would be its weakest quarterly growth rate since late 2023.

PP Foresight analyst Paolo Pescatore told Reuters that the forecast appeared to reflect management caution and a naturally maturing growth profile, rather than sudden deterioration.

Even so, he said Netflix was entering a steadier phase with “considerably less room for error given the always-high expectations”.

Netflix narrowed its full-year revenue range to $51 billion-$51.4 billion from $50.7 billion-$51.7 billion.

The midpoint remained unchanged at USD 51.2 billion (approx. $74.6 billion), meaning management did not cut its forecast.

The company still expects 13%-14% annual sales growth, a 31.5% operating margin and more than 20% growth in operating income.

Cash flow miss gives bears fresh ammunition

The clearest disappointment was cash generation.

Netflix produced second-quarter free cash flow of USD 1.5 billion (approx. $2.2 billion), down from USD 2.3 billion (approx. $3.3 billion) a year earlier and well below the roughly USD 2.9 billion (approx. $4.3 billion) expected by Wall Street.

The pseudonymous TipRanks investor Long Player argued that “the stock price is anticipating way too much growth”.

He viewed the one-cent earnings beat as insufficient for a company valued as a high-growth platform and said the lack of free-cash-flow growth deserved more attention than the profit surprise.

That argument highlights the danger of multiple compression.

Netflix can continue increasing revenue and earnings while its shares decline if investors decide that a mature entertainment business growing in the low teens deserves a lower valuation.

Engagement concerns leave less room for error

Engagement adds another layer of uncertainty. Netflix said members watched more than 97 billion hours in the first half, up 2% from a year earlier.

From 2027, it will publish its viewing report annually rather than twice yearly, following its decision to stop reporting subscriber totals in 2025.

Forrester Research director Mike Proulx told Business Insider that it remained unclear whether consumers wanted Netflix to become more like YouTube.

As per analysts, Netflix’s business remains healthy, but the stock’s risk lies in the gap between respectable growth and an exceptional valuation.

If advertising, pricing and live programming fail to reaccelerate revenue, investors may continue reducing the earnings multiple they are willing to pay.

That means further downside does not require Netflix’s profits to collapse.

The shares could keep falling simply because the market begins valuing the company as a mature entertainment group rather than a high-growth technology platform.