Should you invest in Netflix?

Shares in Netflix (NASDAQ:NFLX) fell 1.6% in after-hours trading yesterday (17 July) despite the company reporting a strong set of Q2 results.

Netflix shares were once counted among the world’s top stocks during the ‘FAANG’ days, but in recent years it has played second fiddle to the new formulation of the Magnificent Seven. Netflix stock fell out of favour during the post-pandemic era as the end of lockdown conditions posed a headwind for businesses associated with the stay-home economy.

But Netflix has been gaining ground ever since, and its share price has nearly doubled over the last 12 months.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Its latest results have underscored Netflix’s return to form. Revenue increased 16% year-on-year to $11.08 billion, beating analysts’ expectations of $11.04 billion. Diluted earnings per share (EPS) of $7.19 was ahead of analysts’ expected $7.07, and marked a 47.3% year-on-year increase.

“More importantly, operating expenses remained flat, allowing top-line growth to flow through to margins,” said Lale Akoner, global market analyst at eToro.

While Netflix beat analysts’ expectations, many investors may have set their sights even higher for Netflix, leading to a deflated market after the results. Before the announcement, Alicia Reese, SVP Media & Entertainment equity research at Wedbush Securities, said “investors looking to get constructive on Netflix [expected] revenue in the range of $11.2-11.3 billion… Expectations are rather high given various positive data points throughout the quarter.”

Netflix’s results precede the start of Magnificent Seven earnings season, with Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) both set to announce results on Wednesday 23 July.

AI boosts Netflix’s targeting and bottom line

Netflix raised its full year margin guidance to 30%, a reflection of its increasing cost efficiency.

This is driven in part by increasing use of artificial intelligence (AI), both in content generation and recommendations.

“AI represents an incredible opportunity to help creators make films and series better, not just cheaper,” said Netflix co-CEO Ted Sarandos during the earnings call. “There are AI powered creator tools... Our creators are already seeing the benefits in production through previsualisation and shot-planning work, and certainly visual effects.”

This shows that AI is starting to matter to Netflix’s business, according to Akoner. AI applied to visual effects can cut delivery times by 90%, and real-time recommendation engineers can improve viewer targeting and ad personalisation.

“Long term, this can be a material driver of both margin and scalability,” said Akoner.

What about Netflix’s subscriber numbers?

Last quarter (April 2025), Netflix announced that it will no longer announce its subscriber numbers when it releases its results.

That came as something of a surprise to markets given that subscriber growth had traditionally been the bellwether for Netflix’s business success.

Cynically, one could argue that Netflix doesn’t want to report the numbers anymore because they don’t paint it in a positive light.

“Subscriber growth in the US is stalling, and engagement per user isn’t increasing,” said Akoner.

But Netflix is aware of this, and seems to instead be highlighting the areas of its business where it is strongest.

“The focus on quarterly [subscriber] targets has diminished, shifting attention to broader financial performance and strategic outlook,” said Reese.

In some respects, this represents a maturation of Netflix’s business from one that focuses on user growth to one that focuses on profitability. Akoner points out that ad revenue is set to double this year, making advertising “a credible new revenue stream” for the business.

Is Netflix stock a buy?

Some analysts believe Netflix is set to grow well over the coming years and deliver value for shareholders.

“It currently offers shareholders a strong combination of both subscriber growth and high advertising growth, along with both further margin and return on capital expansion, through its scale and increasing operational efficiencies,” said Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity fund. Further use of generative AI across its platform could further support this, leading in Smit’s view to “strong double-digit earnings and free cash flow growth over the next few years”.

Following the results, Wedbush raised its price target from $1,400 to $1,500, representing 17.7% gains from yesterday’s close (before the results were announced).

But the stock is expensive. As of close on 17 July it trades at over 54 times trailing earnings and over 44 times forecast earnings for the next 12 months. It will have to keep consistently growing its earnings and profitability if it is to justify this valuation.

Investors considering investing in Netflix should conduct thorough research and consider the risks involved carefully before doing so.