Ahead of Netflix Q2: Maintain Outperform, but lower target price to USD 100

Overview

This report focuses on the key debates surrounding Netflix Inc ahead of its Q2 earnings release. Bernstein notes that NFLX has significantly underperformed the market since the beginning of 2026, mainly due to uncertainty surrounding the WBD merger, weak full-year guidance, World Cup-related disruption to engagement and subscriber growth, and concerns about long-term changes in viewing behavior. Nevertheless, the report maintains its Outperform rating, believing that the stock is already at depressed levels and could react positively if management reinforces FY26 guidance through advertising revenue, content-cost timing, or a margin upgrade.

Core views

The core view is that the biggest short-term risk is whether first-half subscriber growth falls below the pace required to support the high end of FY26 revenue guidance; however, strong advertising revenue, expanding AVOD scale, and content amortization costs below budget could provide important offsets. The report believes that the high end of 12% to 14% year-over-year FY26 revenue growth depends on subscriber growth, price increases, and advertising revenue approximately doubling to USD 3B. If full-year net adds fall below the high-teens millions to approximately 20 million to 23 million range, FY26 revenue and EPS expectations would face downside pressure. At the same time, Netflix has raised its full-year margin guidance in Q2 in each of the past two years, and a margin upgrade of more than 50bps remains feasible if advertising contribution is strong and content spending is below the USD 20B budget.

Analysis framework

The report uses a pre-earnings framework, breaking down the investment debate ahead of Q2 into six dimensions: subscriber growth, advertising revenue, margin guidance, content costs, engagement disclosure, and long-term changes in viewing behavior. It combines stock performance, consensus expectations, company guidance, revenue contribution analysis, content amortization timing, and valuation-multiple adjustments to assess risks and offsets.

Methodology notes

• Pre-earnings outlookKey debate decomposition

  Break down the main areas of disagreement ahead of Q2 earnings into subscriber growth, advertising revenue, margins, content costs, engagement disclosure, and the long-term competitive landscape.

  This method is used to identify the variables most likely to drive the stock-price reaction at the earnings release and distinguish short-term downside risks from offsetting factors.

• Valuation methodsPrice-to-earnings multiple method

  Multiply FY27 EPS of USD 3.83 by an approximately 26x valuation multiple to derive a USD 100 target price.

  The report lowers the valuation multiple from 29x to 26x to reflect pressure from engagement, subscriber growth, and investor sentiment.

• Operating breakdownRevenue growth contribution analysis

  FY26 revenue growth is jointly driven by subscriber growth, price increases, and advertising revenue growth.

  The report estimates that reaching the high end of FY26 revenue guidance requires approximately 7% membership growth, or approximately 20 million to 23 million net additions for the full year.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Netflix Inc (NFLX.O)

  Core covered asset

  Strengths

  Leading global streaming scale, improving advertising-tier user momentum, effective price increases, and advertising revenue and content-cost timing that could support margins.

  Weaknesses

  First-half subscriber growth may fall below the pace required to achieve the high end of FY26 revenue guidance, while changes in engagement and viewing behavior are concerning investors.

  Comparison

  The report says NFLX is down approximately 19% since the beginning of 2026, underperforming the broader market by approximately 30%, and currently trades at approximately 20x FY27 consensus EPS.

  Risks

  World Cup disruption, insufficient net subscriber additions, advertising revenue below approximately USD 3B, higher-than-expected content costs, intensifying competition, and diversion to short-video platforms.

• S&P 500

  Relative-performance benchmark for the rating

  Strengths

  Used to measure Bernstein's 12-month relative-performance rating for US-listed equities.

  Weaknesses

  Not the report's core investment asset.

  Comparison

  Outperform is defined as expected to outperform the market index by more than 15 percentage points over the next 12 months.

  Risks

  A broad market re-rating or changes in risk appetite could affect the assessment of NFLX's relative performance.

Key data

• RatingOutperformBernstein maintains its Outperform rating on Netflix Inc.
• Target priceUSD 100.00Lowered from USD 110 to USD 100.
• Current priceUSD 76.18Closing date: 2026-07-07.
• Implied upside31%Based on the current price of USD 76.18 and target price of USD 100.
• FY26 revenue forecastUSD 51,329MAs shown in the report's financial forecast table.
• FY27 revenue forecastUSD 57,434MAs shown in the report's financial forecast table.
• FY26 adjusted EPSUSD 3.15As shown in the target price/estimate change table; lowered from the previous forecast of USD 3.20.
• FY27 adjusted EPSUSD 3.83The valuation methodology uses FY27 EPS of USD 3.83.
• Valuation multiple26x FY27 EPSLowered from the previous 29x to approximately 26x.
• Advertising revenue targetApproximately USD 3BThe report believes that advertising revenue above this target could offset some subscriber-growth pressure.
• FY26 revenue guidance12%–14% YoYThe high end of 14% is considered at risk if net subscriber additions are weak.
• 2026 stock performanceApproximately -19% YTD, underperforming the market by approximately 30%The report says NFLX has performed weakly in 2026 and reached a 52-week low in late June.

Impact & implications

The investment implication is that NFLX's short-term trading direction depends heavily on management's commentary on subscriber growth, advertising revenue, content costs, and margins in the Q2 results. If subscriber trends are materially weaker than the pace needed to support the high end of full-year guidance, the market may react negatively; however, stronger-than-expected advertising revenue or content costs below budget, resulting in a margin upgrade, could allow the stock to rebound from its already pressured valuation. Over the long term, engagement, short-video competition, changes in user viewing behavior, and whether Netflix continues to publish the What We Watched report will affect the company's ability to sustain a premium valuation multiple.

Risks

• If subscriber growth falls below the full-year pace of approximately 20 million to 23 million net additions, FY26 revenue guidance at the high end and EPS expectations could come under pressure.
• The FIFA World Cup 2026 could depress Q2 engagement and subscriber growth and exacerbate seasonal weakness.
• If advertising revenue fails to reach or exceed approximately USD 3B, its ability to offset subscriber-growth pressure will decline.
• If management does not raise margin guidance in Q2, the market may interpret this as evidence of greater subscriber-growth pressure, requiring investors to wait until Q3 for clearer visibility.
• If Netflix stops publishing its semiannual What We Watched engagement report, short-term investor confidence could weaken further.
• Streaming competition, Big Tech investment, and diversion of user attention to social and short-video platforms could affect engagement and valuation multiples over the long term.
• If AVOD fails to materially improve ARM in the UCAN region, or if the recovery in digital advertising is weaker than assumed in the model, revenue and margins could fall below expectations.

What to watch

• Whether Q2 net subscriber additions fall below the full-year pace required to support the high end of FY26 revenue guidance.
• Whether management reiterates its 12%–14% FY26 revenue-growth guidance and how it characterizes the achievability of the high-end target.
• Whether advertising revenue approaches or exceeds the approximately USD 3B target and the progress of advertising-tier expansion.
• Whether full-year margin guidance is raised by more than 50bps and whether the increase is driven by advertising contribution or content costs below budget.
• Whether Q2 content amortization-cost growth remains in the low-to-mid teens and whether a faster deceleration occurs in the second half.
• Whether Netflix continues to publish the What We Watched engagement report.
• Whether subscriber growth reaccelerates after the advertising tier expands into 15 new markets in 2027.