Shares of streaming pioneer Netflix (NFLX 0.04%) sank in after-hours trading on Thursday, falling to about $98 after the company released its first-quarter earnings report.
While the business is still expanding, the market's negative reaction makes sense. A closer look at the results and management's outlook reveals a company that is undeniably maturing.
Of course, Netflix's business isn't doing poorly. On the contrary, it's thriving. But in the context of the stock's high valuation, there are some things to be concerned about. In fact, I'd argue that a case can be made for the stock falling as much as 30% more from here.
Image source: Netflix.
Decelerating growth
There were certainly some positives in Netflix's latest update. The company's first-quarter revenue reached $12.3 billion -- up 16.2% from about $10.5 billion in the year-ago quarter. Even better, profitability surged, with earnings per share jumping to $1.23 from $0.66 in the year-ago period.
But the company's top-line momentum is cooling.
Netflix's 16.2% revenue growth rate in the first quarter of 2026 actually represents a deceleration from the 17.6% growth rate Netflix posted in the fourth quarter of 2025.
And where things get more complicated is the company's near-term outlook. Management's guidance for the second quarter implies a further step down in momentum, with the company forecasting year-over-year revenue growth of just 13.5%. Worse yet, the midpoint of management's full-year revenue guidance calls for even slower growth.
The company reiterated its guidance for full-year top-line growth of 12% to 14%, or 11% to 13% when adjusted for foreign exchange.
For a stock with a very high valuation, this clear deceleration is arguably a cause for concern.
A valuation that demands perfection
Even after the recent after-hours slide to $98, the stock looks pricey. The stock currently trades at about 32 times earnings -- and that's with the company's first-quarter earnings surge already factored into the denominator.
A valuation like that arguably prices in years of robust, uninterrupted double-digit top- and bottom-line growth. In other words, it assumes Netflix will comfortably maintain its dominant position without sacrificing its profit margins to fend off rivals.
But that is a risky bet in today's fiercely competitive streaming landscape. Well-capitalized technology giants are aggressively pushing into live sports and premium content to build their own subscriber bases. Apple, for instance, recently secured a major exclusive streaming partnership with Formula 1. And this is on top of Apple offering Apple TV as part of bundles with other Apple services or even with rival streaming service Peacock.
As deep-pocketed competitors increasingly bid up the price of must-have content, Netflix's ability to simultaneously grow its subscriber base and expand its margins could be tested.
Even Netflix called out the intensely competitive environment in its first-quarter update.
"The entertainment business remains extraordinarily dynamic and competitive," management said.
Ultimately, I believe the company's decelerating growth is a natural consequence of a maturing business operating in a crowded market.
NASDAQ: NFLX
Key Data Points
Wait for a better entry point
Overall, Netflix's business remains exceptional. But the stock simply does not offer a sufficient margin of safety at its current price.
In fact, it wouldn't be out of the question for shares to fall significantly from here if top-line growth slowed to the low double-digits. Think about it: If Netflix's price-to-earnings ratio were to contract to a more reasonable multiple of around 22 -- a figure that better reflects its maturing profile -- the stock would trade closer to $68. That implies a downside of roughly 30% from the $98 after-hours price.
Yes, this may be somewhat of a worst-case scenario, but it provides useful context. Given the valuation risk inherent in the stock's high multiple today, I don't mind staying on the sidelines for now and waiting for a more attractive entry point.
Sure, it's possible that Netflix's growth reaccelerates in the near term back to high-teens year-over-year growth rates. But even if that happens, it doesn't eliminate the long-term risk of growth slowing to low double-digit rates or even single-digit rates. And since the market is forward-looking, it's possible it prices in a maturation like this at the first signs, rather than after it's in full swing.
This bearish exercise isn't necessarily a call to sell Netflix stock. I wouldn't rule out the possibility that the company will grow at impressive rates for much longer than investors expect, eventually justifying the stock's current price. This exercise, rather, is to remind investors that price matters, so exercise caution.
