After Earnings, Is Netflix Stock a Buy, a Sell, or Fairly Valued?

Netflix released its third-quarter earnings report on Tuesday, Oct. 21. Here’s Morningstar’s take on Netflix’s earnings and stock.

Key Morningstar Metrics for Netflix

• Fair Value Estimate: $770.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Netflix’s Q3 Earnings

Netflix reported good third-quarter sales, encouraging underlying metrics, and a good fourth-quarter outlook. But a $619 million expense based on gross sales in Brazil for periods dating back to 2022 (“a cost of doing business tax”) weighed heavily on profits.

Why it matters: Management said the Brazilian issue—a 10% tax on some payments to foreign companies—would not have a material impact on future results, but unanswered questions remain. We believe this expense could cost $200 million annually and hamper operating margins by about 35 basis points.

• Most encouraging to us was 3% sequential sales growth in the US and Canada (17% year over year). The firm has probably retained subscribers better than we anticipated after the huge influx at the end of 2024, while also increasing advertising sales without a negative mix shift in plans.
• Excluding the Brazilian tax owed for prior periods, the operating margin easily surpassed guidance and cash flow was good. However, profitability is heavily influenced by the timing of content payments and expense recognition, so our view on margin expansion opportunities has not changed.

The bottom line: Our fair value estimate rises to $770 from $750 on the time value of money, with modest upward tweaks to our expense and revenue forecasts offsetting each other. Netflix remains overvalued, in our view, despite easily being best in breed and, unlike most peers, having a narrow moat.

Key stats: Netflix achieved record ad revenue in the third quarter and is set to double ad sales in 2025. We estimate this amounts to about $3 billion, or 6%-7% of total sales.

• The firm doubled its upfront commitments for the 2025-26 TV season, outpaced that growth in programmatic sales, reached sufficient scale in all 12 of its ad markets, and seemingly hasn’t suffered any detrimental mix shift to the lower-price ad-supported tier.
• Advertising success is critical, and the results bode well for meeting the rapid ad sales growth that we have projected.

Fair Value Estimate for Netflix Stock

With its 2-star rating, we believe Netflix’s stock is moderately overvalued compared with our long-term fair value estimate of $770, which implies a multiple of 25 times on our 2026 earnings per share forecast. After considering Netflix’s opportunity to widen its member base, raise prices, and generate advertising revenue with subscribers who choose lower-priced ad-supported plans, we project about 10% average annual revenue growth over our five-year forecast, and we believe there’s room for substantial margin expansion, as international markets mature and benefit from greater scale.

Read more about Netflix’s fair value estimate.

Economic Moat Rating

We assign Netflix a narrow moat rating based on intangible assets. Netflix has two advantages that set it apart from streaming video peers. First, it has no legacy assets that are losing value as society transitions to new ways of consuming video entertainment at home, allowing it to put its full effort behind its core streaming offering. Second, it was the pioneer in its industry, providing it a big head start in accumulating subscribers and moving past the huge initial cash burn that we see as necessary to build a successful streaming service. This subscriber base was critical in creating a virtuous cycle for Netflix that we doubt can be attained by more than a small number of competitors, which is what we think would be necessary to dampen Netflix’s ability to earn excess economic returns for the foreseeable future.

Read more about Netflix’s economic moat.

Financial Strength

Netflix is in good financial shape. The firm ended September 2025 with a net debt/EBITDA ratio under 1.0, with the firm holding $9.3 billion in cash and $14.5 billion in total debt. More importantly, the years of cash burn are long behind Netflix, giving the firm a good cash cushion after funding its content budget. Even after funding nearly $18 billion in content costs, we expect $9 billion in free cash flow in 2025. We expect free cash flow to grow each year throughout our forecast.

Read more about Netflix’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Netflix is High. Our rating is largely based upon the evolving streaming media landscape and the additional competition Netflix now faces. In our view, Netflix’s tremendous success is due largely to it being a first mover in the streaming industry and successfully adapting its business model to where that industry was going while its media peers were largely still focusing on their legacy businesses.

Read more about Netflix’s risk and uncertainty.

NFLX Bulls Say

• Netflix has already attracted a massive customer base and profitability. This advantage makes it more likely a virtuous cycle can continue, with the company securing more content that attracts and holds more subscribers.
• Advertising-supported subscriptions will open Netflix to a new base of subscribers and a major new source of revenue.
• Netflix has significant room to grow in international markets where it has already shown promise with local content.

NFLX Bears Say

• Netflix faces competition that it has not had to deal with in the past. As consumers have more options for quality streaming services, it’s more likely that Netflix could get cut out of some consumer budgets.
• Netflix’s US business is mature, with very high penetration of total households, meaning price increases may need to be a bigger component of future growth.
• Netflix will need to spend more on content—through sports rights and local international investment—to increase membership and prices at rates it has historically, when it worked from a lower base and with less competition.

This article was compiled by Frank Lee.