The broader market is seeing a sea of green on Friday as sentiment grows for a prolonged truce between the U.S. and Iran, but the most notable stock sitting out the rally is Netflix NFLX).
Reporting weaker-than-expected Q1 earnings and guidance yesterday evening, Netflix stock has fallen as much as 11% in today’s trading session.
Previously benefiting from the market’s rebound, Netflix stock is still up 3% year to date and has produced stellar gains of nearly 200% in the last three years, begging the question of whether the post-earnings selloff is a buying opportunity.
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Analysts Expected Stronger Q1 Operating Performance
Notably, Netflix received a $2.8 billion termination fee after Warner Bros. Discovery WBD) ended their merger agreement in favor of a more competitive offer from Paramount Skydance PSKY).
While this inflated Netflix’s GAAP income, it didn’t bolster the higher operating income and net profitability that analysts were looking for, with Q1 adjusted EPS coming in at $0.70, compared to expectations of $0.76. Year over year, Netflix’s adjusted Q1 EPS was slightly up from $0.66 in the comparative quarter.
Quarterly sales of $12.24 billion did surpass estimates of $12.17 billion, increasing 16% from $10.54 billion a year ago. Offsetting the stellar sales expansion, Netflix noted that higher content costs are being front-loaded in the first half of the year, pressuring margins.
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Lackluster Guidance & Leadership Transition
Optimistically, Netflix maintained its full-year revenue guidance range of $50.7-$51.7 billion, which falls in line with the current Zacks Consensus of $51.41 billion and nearly 14% growth. However, investors were likely hoping for an upgrade, not a reiteration.
Raising concerns about profitability, Netflix projected a 1.5% decline in operating margins during Q2, citing the rising content amortization costs that it expects to peak in early 2026.
Correlating with such and adding to the selloff, Netflix’s Q2 adjusted EPS and sales guidance of $0.78 and $12.57 billion came in below expectations of $0.84 and $13.06 billion. Netflix's Q2 guidance figures would still represent 37% EPS growth and 13% sales growth from the prior year quarter.
That said, Netflix announced that its co-founder and longtime leader, Reed Hastings, will be leaving the company’s board of directors, adding to investor uncertainty. Reed has served as chairman of the board since stepping down as CEO in 2023.
Monitoring Netflix’s P/E Valuation
What may draw long-term investors amid the selloff in Netflix stock is that NFLX is already trading at a discount to its five-year price to forward earnings median of 36X and is well below the high of 65X during this period.
Netflix still trades at a notable premium to the benchmark S&P 500’s 22X forward earnings multiple, but is near its Zacks Broadcast Radio and Television Industry average of roughly 30X.
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Bottom Line
Although there are concerns about Netflix’s near-term profitability, NFLX currently sports a Zacks Rank #2 (Buy). Retaining this favorable rating will depend on Netflix hopefully avoiding a steep decline in its lofty EPS expectations for FY26 and FY27, which call for over 20% growth, respectively. Ultimately, a steep decline in Netflix stock can usually lead to a long-term buying opportunity.
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Netflix, Inc. (NFLX): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).