Netflix Stock’s Powerful Profit Engine Is Hiding in Plain Sight

AI-generated source summary

The analysis focuses on Netflix (NFLX) following a significant price drop. The stock fell from over $130 to a low of $65.08, a 51% decline. Despite this, the company's fundamentals are seen as strong, with revenue growth at 13% year-over-year and operating margins expanding to 33.2% this quarter, up from 28.2% a year ago. This margin expansion is driven by revenue growing faster than content costs. Management is guiding for full-year revenue of $51.2 billion and operating profit of $16.1 billion, with a target operating margin of 31.5%. Free cash flow is projected at $12.5 billion for the year, though this quarter's free cash flow of $1.53 billion was lower than the previous year's $2.27 billion due to increased tax payments. However, the key bullish thesis is that profit growth (around 20%) combined with a shrinking share count (potentially accelerating to 4% annually) could lead to mid-20s EPS growth even if revenue growth slows to 11%. The stock is trading at approximately 25x earnings, which is considered attractive if these growth drivers materialize. Key risks include content costs outgrowing revenue or advertising revenue missing its $3 billion target. The next major check on this thesis will be the Q3 earnings report.

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