Why Netflix Tanked Despite Big EPS Beat, Outlook Ahead

Entertainment giant Netflix (NASDAQ: NFLX) just released one of its more anticipated earnings reports in some time. The firm’s latest report is its first since losing the battle against Paramount Skydance (NASDAQ: PSKY) to acquire Warner Bros. Discovery (NASDAQ: WBD). To Netflix’s dismay, the market did not react kindly to the results. However, understanding why requires looking beyond the firm’s headline numbers during the quarter. Looking ahead, considering Netflix’s ability to drive long-term growth, yet underwhelming near-term guidance, the stock’s risk-reward setup looks relatively balanced.

Netflix’s Huge EPS Beat Doesn’t Tell the Full Story

In its Q4 fiscal 2025 (FY2025), Netflix posted revenue of $12.25 billion, an increase of approximately 16% year-over-year (YOY). (Note that Netflix’s fiscal year reporting period is around one quarter ahead of the calendar period.) With this, the company inched out a beat versus expectations of $12.17 billion.

Netflix posted an even more hefty bottom-line beat. Diluted earnings per share rose to $1.23, a huge 86% YOY increase. This figure was greatly above expectations of 76 cents. However, this number benefited from a key outlier.

Upon losing the WBD deal, Paramount paid Netflix a $2.8 billion termination fee. This payout had a huge positive impact on Netflix’s net income, and thus its EPS. Removing this one-time benefit, the company’s EPS would have fallen below expectations.

This was likely a contributing factor to the firm’s nearly 10% post-earnings drop in after-hours trading, as the breakup fee benefit was already known.

Another contributor was Netflix’s lower-than-expected guidance for the next quarter. It forecasted revenue of $12.57 billion, or growth of 13.5% YOY. This was a slight miss compared to estimates of $12.64 billion. Furthermore, the company sees its operating margin falling by 150 basis points YOY to 32.6%. However, this would be a 30 basis point improvement over Q4 FY2025.

Netflix maintained its full-year guidance of $50.7 billion to $51.7 billion, or $51.2 billion at the midpoint. This was also just below expectations of $51.37 billion.

Hasting’s Departure Causes Jitters

It may have also spooked investors to see that Reed Hastings will not seek re-election to the company’s Board of Directors. This comes as Hastings was arguably the most important person behind Netflix’s rise to success. He co-founded the company in 1997 and served as its CEO for 25 years. Hastings is currently the company’s Board Chairman. He will continue in that role until June, moving to focus on philanthropy and other ventures afterward. This is worth noting for several reasons.

Interestingly, one analyst on Netflix’s earnings call asked whether the pursuit of WBD influenced Hastings's decision to leave. Hastings embraces a “build over buy” mentality, focusing on organically growing a company instead of pursuing acquisitions. If the WBD deal influenced his decision, it would signal a level of misalignment among Netflix’s top leadership. However, current co-CEO Ted Sarandos firmly pushed back against this idea. Sarandos said, “Reed was a big champion for that deal," adding that the Board unanimously supported it, and that it had “absolutely nothing to do” with Hastings's decision.

Still, the timing is a bit curious. Netflix has made smaller acquisitions in the past, but has never targeted a company close to the scale of WBD. Then, months after pursuing one of the largest merger and acquisition deals in media history, Hastings decided to depart.

Either way, Hasting’s departure signals somewhat of an end to an era for Netflix, as its long-time leader will no longer be directly involved with the company. This raises questions about the future of Netflix’s board leadership.

Live Sports and Ads: Critical Levers for Netflix’s Future Growth

Looking forward, driving sustained growth is key to NFLX stock’s ability to ride higher long-term. Live sports remain one of the key ways Netflix can accomplish this. For example, the company was very successful in its broadcasting of the World Baseball Classic (WBC) during the quarter. Netflix notes that the WBC was its most-watched program ever in Japan. The event drove the largest single-day sign-ups ever in the country, with Japan leading Netflix’s total Q1 membership growth.

This builds on the massive views Netflix previously generated from broadcasting NFL games and the Mike Tyson versus Jake Paul boxing match. Notably, the WBC marked the company’s first large live event outside of the United States. These events provide a playbook that the company can follow going forward in both U.S. and international markets to increase membership.

The firm’s advertising push also remains on track, with Netflix expecting to double its advertising sales to $3 billion in 2026. Importantly, the company saw its advertiser base grow by 70% YOY to 4,000 companies. As advertisers increase, the company should be able to drive better ad targeting. By extension, it can generate more revenue per advertisement over time, as marketers generate more value from the platform.

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