When it comes to streaming video, there's Netflix (NFLX 0.73%), and there's everybody else. The company is a dominant force in the space it pioneered, and its operating and financial results are the envy of the industry.
When Netflix reported its financial results after the market close on Tuesday, investors had high hopes the company would continue its track record of growth, and they weren't disappointed. Unfortunately, that wasn't enough to arrest the decline in the stock price, which has fallen nearly 38% from its peak (as of this writing).
Let's take a look at the results, what's pushing the stock lower, and why I think the sell-off is simply overdone.
Image source: Netflix.
Important milestones
In the fourth quarter, Netflix delivered revenue that grew 17.6% year over year to $12.05 billion, driving diluted earnings per share (EPS) of $0.56, up 30%. It's always good to see profits growing faster than sales, as it's a sign that management is controlling costs, which ultimately leads to expanding profit margins.
To give the results context, analysts' consensus estimates were calling for revenue of $11.97 billion and EPS of $0.55, so Netflix cleared both hurdles.
The company surpassed a couple of important milestones that should be of interest to investors. Netflix noted that it surpassed 325 million paid memberships in the fourth quarter, up from 302 million at the end of 2024.
Another important development was the company's burgeoning ad revenue. Netflix's "basic with ads" tier has become an important growth engine for the company, as ad revenue grew 250% year over year to more than $1.5 billion.
Management also noted that engagement continued to rise, as viewing hours increased 2%, driven by a 9% increase in viewing of Netflix Originals, as viewers flocked to the final season of Stranger Things, Guillermo del Toro's Frankenstein, and returning series Emily in Paris and Nobody Wants This.
The company expects its robust growth to continue. Its full-year forecast calls for revenue growth of roughly 13% to $51.2 billion at the midpoint of its guidance, while ad revenue is expected to double. Netflix is also forecasting operating income of roughly $16.1 billion, resulting in an operating margin of 31.5%. While growth might be slightly below investor expectations, management has always been conservative with its estimates, so the results -- like those in 2025 -- will likely be higher.
Given the robust results and solid guidance, why is the stock falling? Therein lies a tale.
NASDAQ: NFLX
Key Data Points
The fly in the ointment
You only need to look at recent events to understand what has investors spooked. In December, the streaming pioneer announced plans to buy certain assets from Warner Bros. Discovery -- including its film and television studios, content library, and HBO and HBO Max -- for $72 billion. This announcement was quickly met by a counteroffer and hostile takeover bid by Paramount Skydance.
The hostile takeover bid was ultimately unsuccessful, and Paramount has since filed a lawsuit seeking full financial disclosure surrounding the deal, asking the court to fast-track the case -- a request the judge denied. The company has also launched a proxy fight against Warner Bros. Through it all, Warner Bros.' board has sided with Netflix.
Wall Street dislikes uncertainty, and any acquisition adds an element of risk. The biggest fear among most investors is that this acquisition could devolve into a protracted bidding war, leading Netflix to pay too much for Warner Bros., thereby negating any positive outcome from owning its assets.
I believe these fears are overblown. Netflix has one of the greatest treasure troves of user data in the industry. It has detailed information regarding the viewing habits of hundreds of millions of users and sophisticated algorithms that help the company value each piece of content it acquires with a high degree of accuracy. This data, gathered over decades, has given Netflix a competitive moat that is nearly impossible for competitors to replicate.
The company has no doubt used this information to value the assets it is acquiring from Warner Bros. -- again with a high degree of accuracy. With that information at its disposal, it's doubtful that Netflix would overpay for these assets.
Netflix recently amended its bid to make it an all-cash deal to fend off Paramount's offer, and the proxy battle will ultimately be decided by Paramount shareholders -- who have already scuttled the hostile takeover attempt.
Time to buy?
While the uncertainty caused by the pending acquisition is certainly understandable, Netflix management has shown itself to be a good steward of shareholder value. Given the company's track record, it's hard to envision any scenario in which Netflix squanders years of investor goodwill in a protracted, ill-advised bidding war for Warner Bros. The more likely outcome is that the company will simply walk away from the deal before it overpays -- as it has previously done with overpriced content.
Furthermore, at 26 times forward earnings, Netflix stock is trading at a significant discount to its three-year average of a multiple of 36. This gives investors with a long-term investing horizon the opportunity to pick up shares of this industry leader at a discount.
