It is hard to find flaws in Netflix's (NFLX 0.10%) recent business performance. The streaming service giant's latest quarterly results showed a company firing on all cylinders, with accelerating revenue growth and expanding profit margins.
But the hard part about investing is that a great business and a great stock are not the same thing -- especially once the market has already priced in years of strong growth.
While Netflix's underlying business momentum is undeniably impressive today, the stock's premium valuation leaves very little room for error. If competition intensifies and top-line growth slows, the multiple investors are willing to pay for the company's earnings could contract. On the other hand, Netflix's operating margin is likely to expand meaningfully over the next five years, providing a tailwind to earnings growth.
So, if we assume the business continues to grow profits but its valuation multiple comes back down to earth, where exactly could Netflix stock realistically end up in five years?
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Impressive financial momentum
Netflix's fourth-quarter update showed why investors are willing to pay a premium valuation for the stock. Its fourth-quarter revenue rose 17.6% year over year to $12.1 billion. This marked 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.
Profitability is moving in the right direction, too. 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%.
And then there is the company's advertising business. In its fourth-quarter shareholder letter, the company said ad revenue rose more than 150% in 2025 to over $1.5 billion. This new revenue stream is scaling quickly, helping the company become less dependent on steadily rising subscription prices and subscriber growth.
Thanks to this powerful combination of top-line growth and operating margin expansion, I believe Netflix can deliver meaningful earnings-per-share growth of about 18% annually over the next five years.
A 5-year forecast for Netflix stock
The longer-term question, however, is not whether Netflix can grow its bottom line substantially over the next five years. Its recent financial momentum makes that look virtually inevitable. I believe the more pertinent question is what happens to the stock's valuation as the streaming landscape matures.
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.
And management's outlook already points to slower growth. Netflix forecast 12% to 14% year-over-year revenue growth in 2026. That represents a meaningful step-down from the 17.6% growth it reported in Q4.
If top-line growth continues to slow over the next half-decade, it is highly unlikely that the market will continue to award Netflix stock its current price-to-earnings ratio of about 38.5 at the time of this writing. In fact, I wouldn't be surprised to see the multiple compress to a much more normal level of about 20.
NASDAQ: NFLX
Key Data Points
How does that work out for the stock?
The math is simple: Starting from a stock price of about $97.50 today, a price-to-earnings ratio of 38.5 implies trailing earnings of about $2.53 per share. If Netflix successfully grows that earnings per share by 18% annually over the next five years, its earnings per share will reach approximately $5.79.
If we apply a normalized price-to-earnings multiple of 20 to that future earnings per share of $5.79, we get a five-year price target of about $116.
A jump from $97.50 to $116 over five years translates to a cumulative return of roughly 19%, or an annualized return of less than 4%. That is a severely underwhelming outcome -- especially for a stock carrying the risks of an intensely competitive market.
Of course, I could be wrong. Netflix could easily exceed that 18% earnings growth rate, or the broader market could remain euphoric and refuse to let the stock's premium multiple contract. But at today's valuation, investors are paying a steep premium that requires near-flawless execution just to achieve ordinary returns. For now, I would rather stay on the sidelines and allocate my capital to opportunities with a more attractive risk-reward profile.
