Shares of streaming leader Netflix (NFLX 0.73%) have gotten off to a rough start in 2026. As of this writing, the stock has fallen about 19% year to date and lost more than a third of its value over the last six months.
Interestingly, however, the underlying business is doing quite well, with its year-over-year revenue growth rate accelerating for three quarters in a row. The question, however, is whether the underlying business can live up to the stock's premium valuation. One way to think through a stock's potential is to carefully consider the bear case. How far could the stock fall if investors get more skeptical about long-term pricing power in a crowded streaming market?
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A fast-growing business
It's difficult to critique Netflix's business. Its fourth-quarter revenue rose 17.6% year over year to $12.1 billion -- an acceleration from 17.2% growth in Q3 and 15.9% growth in Q2. The company also said it crossed 325 million paid memberships during the quarter, capturing the global reach of its brand.
Further, Netflix expects more strong momentum. Management forecast first-quarter 2026 revenue of $12.2 billion, which implies 15.3% year-over-year growth.
Profitability is also moving in the right direction, as Netflix's operating margin continues to expand. Its full-year 2025 operating margin was 29.5%, up from 26.7% in 2024. Even more, Netflix guided for its 2026 operating margin to hit 31.5%.
Additionally, cash generation was strong. Netflix's free cash flow, which represents operating cash flow less capital expenditures, totaled $9.5 billion in 2025 -- up from $6.9 billion in 2024.
And probably the most exciting growth driver for Netflix right now is its advertising business. Not only is it growing fast, but it's helping the company become less dependent on steadily increasing subscription prices and membership growth.
In its fourth-quarter shareholder letter, the company said ad revenue rose more than 150% in 2025 to over $1.5 billion. Management also said it expects ad revenue to "roughly double" in 2026.
This still nascent but increasingly important advertising business is key to the bull case, as it can lift average revenue per membership even if Netflix chooses to lean less aggressively on membership price hikes in the future.
The bear case
But what about the bear case?
The biggest threat to Netflix's bull case is intensifying competition from deep-pocketed tech giants like Apple (via Apple TV) and Alphabet (via YouTube), as well as the ongoing transition of traditional media companies away from linear television to streaming. Netflix itself describes the entertainment market as "intensely competitive." Over time, a more crowded streaming landscape can limit pricing power and raise churn, especially if competing services bundle content with other offerings or discount more heavily.
A competitive market like this could eventually show up in the numbers as slower revenue growth or narrowing profit margins.
Analysts' consensus estimates currently point to about $3.12 in earnings per share for 2026. At about $76 per share, that works out to roughly 24 times forward earnings -- a pretty fair valuation for a business still growing revenue at a double-digit pace. Still, it leaves very little cushion if investors decide the long-term competitive environment is intensifying faster than expected.
So, if investors begin fretting more over the durability of Netflix's pricing power in an intensely competitive environment, how far could the stock fall? I believe a fear-driven market could price Netflix stock at 18 to 20 times forward earnings. A valuation like this still prices in significant earnings growth over time but leaves more room for the uncertainties associated with intense competition. The implied share price at this valuation would be about $56 to $62. From the stock's price as of this writing, that would represent a decline of roughly 18% to 26%.
NASDAQ: NFLX
Key Data Points
This isn't a prediction. Instead, it's just a theoretical way to translate the valuation risk into plain numbers.
The reality is that this may be an acceptable downside risk for shareholders of a company of Netflix's caliber. Still, it does show how investors can reframe a stock's valuation and rerate it lower if they start fretting over a particular concern.
Netflix's business is doing fine, and the advertising ramp gives the company a second way to grow. But it's also fair for investors to wonder how sustainable Netflix's long-term pricing power is if streaming keeps getting more crowded.
For that reason, I'm not buying here. I can see a case for waiting for a price that bakes in more skepticism. While there's no guarantee I'll get the price I need to feel that risks are more appropriately baked into the stock, I don't mind waiting patiently and allocating my capital elsewhere in the meantime.
