Shares of Netflix (NFLX 0.73%) are down about 29% from the end of June. Part of the growth stock's slide was driven by a post third-quarter earnings sell-off largely tied to a one-time Brazilian tax charge, but a good portion of it has come more recently, fueled by merger drama that is now spilling into a bidding war.
At the same time, the streaming specialist's underlying business has been firing on all cylinders, featuring double-digit revenue growth and soaring free cash flow. And the company's 3-year-old advertising business is also growing quickly.
So, the pullback's timing -- during a period of business strength for the company -- makes the stock more interesting again. But are shares cheap enough to make them a buy, or should investors wait for a lower price?
Image source: Getty Images.
A merger-sized distraction
Netflix surprised the market in early December when it agreed to acquire Warner Bros. Discovery's (WBD 1.33%) film and television studios, including its namesake Warner Bros.' studios and its film and television studios HBO and HBO Max. The massive deal is valued at about $72 billion.
Investors have not had much time to digest it, because the story has already shifted. Paramount Skydance (PSKY 1.36%) escalated things with a hostile, all-cash tender offer for Warner Bros. Discovery at $30 per share -- a bid it valued at about $108.4 billion. Paramount described the offer as "superior" and suggested it would have an easier path with regulators.
Paramount's competing bid highlights the uncertainty of the deal and the intense competition in streaming. And a competing bid is not the only risk to the deal. There's regulatory risk, too. Further, Netflix has agreed to pay Warner Bros. Discovery a $5.8 billion termination fee, under certain conditions, if the deal is not completed. Finally, a drawn-out fight could also distract management.
Impressive business momentum
The irony is that Netflix was doing exceptionally well without this acquisition.
Netflix's third-quarter revenue rose 17.2% year over year -- an acceleration from 15.9% in the second quarter of 2025. Third-quarter operating margin was 28.2%, held back by a roughly $619 million expense tied to a dispute with Brazilian tax authorities. Free cash flow, however, soared 21% to about $2.7 billion in Q3.
While growth in membership fee revenue was the primary driver of the quarter, advertising is playing a small but increasingly important role in Netflix's business as well.
"We recorded our best ad sales quarter ever," said Netflix co-CEO Gregory Peters in the company's third-quarter earnings call. "We are now on track to more than double ad revenue this year."
In short, Netflix is doing exceptionally well. Even its near-term hiccup in operating income due to a one-time tax charge isn't worth sweating over; the company is still aiming for its full-year operating margin to be higher than last year's, even with this massive charge included in the calculation.
NASDAQ: NFLX
Key Data Points
Still, has the valuation reset enough to make the stock a clear bargain?
Not quite.
The stock currently commands a price-to-earnings ratio of about 40. At this level, investors are still paying for continued double-digit revenue growth and rapid earnings growth. Additionally, the risk profile has changed since June. The core business still faces fierce competition for viewer time, and a mega-deal introduces integration risk and regulatory uncertainty that could add complexity to the business, distract management, and ultimately weigh on the stock.
Overall, a lower stock price, combined with the risks associated with this pending acquisition, makes Netflix look attractive again but not quite safe enough for anything more than a small position.
