Netflix (NFLX) – Platform Momentum and the Case for Re-Rating
Netflix has pulled back 18% over the past six months while the broader S&P 500 has gained 2%, and we think that divergence has created a compelling entry point. With a prior M&A overhang now behind it, sustained double-digit revenue growth ahead, and a return to normalised share buybacks that could retire 20 to 25% of the market cap over the next three to five years, the setup for re-rating is strong. We have upgraded NFLX to Buy with a price target raised from US$100 to US$120, representing 21.6% upside from the current price of US$98.66.
Research published 5 April 2026. Price target and upside based on prices at time of publication.
About Netflix
Netflix is the world’s leading streaming entertainment service, with 301.6 million paid subscribers as of FY25 across more than 190 countries. The company operates across four geographic segments: United States and Canada (UCAN), Europe, Middle East, and Africa (EMEA), Latin America (LATAM), and Asia-Pacific (APAC). Revenue is generated primarily through monthly subscription fees, with a growing contribution from its advertising-supported tier launched in late 2022. Netflix produces and licenses a broad range of content including series, films, documentaries, and games. The company has a market capitalisation of approximately US$425.9 billion and an enterprise value of US$425.7 billion.
Why the Pullback Is an Opportunity
Netflix stock is down 18% over the past six months against a backdrop of S&P 500 gains of 2%. The underperformance has been driven primarily by an M&A-related overhang that weighed on sentiment and created uncertainty around capital allocation priorities. With that overhang now resolved, including a US$2.8 billion PSKY merger termination fee received, the path is clear for Netflix to return to its core strategy of content investment, subscriber growth, and aggressive capital returns.
We think the market has not yet fully adjusted to the improved outlook, and the current price represents an attractive entry point. The upgrade from Neutral to Buy reflects our conviction that three structural drivers will sustain double-digit revenue growth while simultaneously expanding margins and enabling significant share buybacks.
Three Pillars of the Investment Thesis
The case for Netflix rests on three pillars that we believe are underappreciated at the current valuation.
The first pillar is sustained double-digit revenue growth. This is driven by the combination of paid subscriber growth, subscription average revenue per member (ARM) increases, and advertising revenue scaling. Paid subscribers are forecast to grow from 301.6 million in FY25 to 434.6 million by FY30E, with LATAM and APAC contributing approximately 57% of five-year net subscriber additions. Subscription ARM growth is expected to run at steady mid-single digit percentages as Netflix continues to implement price increases and plan mix normalisation across markets.
The second pillar is continued operating leverage. Netflix has been expanding GAAP operating margins by approximately 250 basis points annually, and we expect that trajectory to continue as the business scales. Content spending growth is moderating relative to revenue growth, and the fixed cost base is being spread across a larger subscriber base. Free cash flow conversion of 70 to 75% provides a clean earnings quality profile.
The third pillar is the return to normalised share buybacks. With the M&A overhang cleared, Netflix is positioned to retire 20 to 25% of its outstanding market capitalisation over the next three to five years through buybacks. At current valuations, that level of buyback activity would be meaningfully accretive to per-share earnings and represents a powerful compounding mechanism that the market is not giving full credit for.
Advertising Revenue Is the Growth Accelerant
The advertising tier is scaling rapidly and represents one of the most significant incremental revenue opportunities in media. Netflix’s ad-supported tier is growing at approximately mid-teens percentage CAGR over five years, and advertising revenue is forecast to scale from approximately US$1.5 billion in 2025 to US$4.5 billion in 2027E and approximately US$9.5 billion by 2030E.
Several factors support this trajectory:
- Netflix’s scale provides advertisers with unmatched reach among streaming platforms, with 301.6 million paid subscribers and growing
- The shift from linear television to streaming continues to accelerate, and advertising budgets are following audiences to digital platforms
- Netflix’s content library and engagement data give it a significant advantage in ad targeting and measurement versus traditional TV
- The ad-supported tier expands Netflix’s addressable market by attracting price-sensitive subscribers who might not pay for premium plans
- International markets, particularly LATAM and APAC, represent large untapped advertising markets where Netflix has a growing subscriber base
The advertising business is still in its early innings, and as Netflix builds out its ad tech infrastructure and sales capabilities, we expect advertising margins to improve over time. This is a high-incremental-margin revenue stream that enhances the overall profitability profile of the business.
Subscriber Growth Has More Room to Run
At 301.6 million paid subscribers, Netflix is already the largest streaming platform globally by a significant margin. But the growth story is far from over. The company is forecast to reach 434.6 million subscribers by FY30E, driven primarily by expansion in emerging markets.
LATAM and APAC are expected to contribute approximately 57% of net subscriber additions over the next five years. These regions have large populations, growing middle classes, improving broadband penetration, and relatively low streaming penetration compared to UCAN and EMEA. Netflix’s investment in local language content for these markets has proven effective at driving subscriber acquisition and retention.
In more mature markets like UCAN and EMEA, subscriber growth moderates to low single digits, but ARM growth takes over as the primary revenue driver. Price increases have been well absorbed historically, and the combination of premium content, live events, and an improving product experience supports continued pricing power. Plan mix normalisation, as password-sharing enforcement converts free riders to paid subscribers, provides an additional tailwind that is still playing out.
Financial Summary
The financial profile shows a business that is growing revenue at double digits while simultaneously expanding margins and generating substantial free cash flow:
- Revenue: 12/25 US$45,183m, 12/26E US$51,684m, 12/27E US$58,565m, 12/28E US$65,816m
- EPS (post-split): 12/25 US$2.53, 12/26E US$3.24, 12/27E US$4.08, 12/28E US$5.00
- PE ratio: 12/25 43.4x, 12/26E 30.4x, 12/27E 24.2x, 12/28E 19.7x
- EBITDA margin: 12/25 30.2%, 12/26E 32.7%, 12/27E 34.4%, 12/28E 37.6%
- Free cash flow: 12/25 US$9.5bn, 12/26E US$11.7bn, 12/27E US$15.2bn, 12/28E US$18.3bn
Revenue growth from US$45.2 billion in 2025 to US$65.8 billion by 2028 represents a compound annual growth rate of approximately 13%. EPS growth is faster at approximately 25% CAGR over the same period, reflecting both operating leverage and the accretive impact of share buybacks. The PE multiple compresses from 43.4x on 2025 earnings to 19.7x on 2028 estimates, which we think is attractive for a business with this growth profile and cash flow generation.
Free cash flow is particularly compelling. The ramp from US$9.5 billion in 2025 to US$18.3 billion by 2028 gives Netflix enormous capital allocation flexibility. At 70 to 75% FCF conversion, the cash flow statement validates the quality of reported earnings and supports the aggressive buyback program that we expect to be a key driver of per-share value creation.
Valuation and Price Target
The US$120 price target is based on approximately 29x 2027 GAAP EPS, or roughly 1.1x price-to-earnings-to-growth. That is a reasonable multiple for a company growing EPS at 25% annually with expanding margins and substantial free cash flow generation. Goldman Sachs research supports the upgrade to Buy, citing the combination of structural revenue growth, margin expansion, and capital returns as justification for re-rating.
At US$98.66, the stock trades at 30.4x FY26E earnings and 24.2x FY27E earnings. For a business of this quality and growth trajectory, we think those multiples are undemanding. The 18% pullback over the past six months has compressed the valuation to levels not seen since the early stages of the advertising tier launch, and we think that discount is unjustified given the improved fundamental outlook.
The PSKY Termination Fee and Capital Returns
The US$2.8 billion PSKY merger termination fee is a meaningful one-time cash inflow that adds to Netflix’s already strong balance sheet. More importantly, the termination of the PSKY deal removes the uncertainty that had been weighing on the stock. Investors had been concerned about capital allocation discipline, and the resolution of this situation clears the path for Netflix to focus on what it does best.
We expect the bulk of Netflix’s excess free cash flow to be directed toward share buybacks over the next several years. At a potential 20 to 25% of market cap retired over three to five years, the buyback program represents a powerful compounding mechanism. Each dollar spent on buybacks at current valuations is being deployed at what we consider an attractive price, which enhances the return on capital for remaining shareholders.
Risks to Consider
Competition in streaming remains intense. Disney, Amazon, Apple, and Warner Bros. Discovery all have significant content budgets and global ambitions. While Netflix has the largest subscriber base and the most diversified content library, competition for subscriber attention and content talent is unlikely to diminish.
Content cost inflation is a persistent risk. While Netflix has been disciplined about content spending relative to revenue growth, the bidding environment for premium content and talent remains competitive. Any material increase in content costs could slow margin expansion.
Advertising revenue scaling depends on execution. Building an advertising business from scratch requires investment in technology, sales infrastructure, and advertiser relationships. If advertising revenue growth falls short of expectations, the overall revenue growth trajectory would be lower than forecast. Macroeconomic weakness could also weigh on advertising demand, particularly in discretionary advertising categories.
Regulatory risk is present across multiple jurisdictions. Content regulation, data privacy requirements, and potential digital services taxes could impact Netflix’s operations in various markets. Currency headwinds from emerging market exposure can also create volatility in reported results.
Our View
Netflix is a rare business that combines scale, growth, and improving profitability. The 18% pullback over the past six months has created a valuation disconnect that we think will close as the market recognises the strength of the three-pillar thesis: sustained revenue growth, operating leverage, and significant share buybacks. The advertising tier is a genuine growth accelerant that is still in its early innings, and the return to normalised capital allocation removes the overhang that had been suppressing the multiple. At approximately 24x FY27E earnings with 25% EPS growth and US$15 billion in annual free cash flow, we think the risk-reward is attractive.
If you would like to discuss Netflix or how US equities might fit within your portfolio, request a callback or call us on 1300 889 603.
