Netflix Tanks on Lower Margins and Flat Outlook - Time to Buy NFLX?

Netflix Inc (NFLX) stock closed down over 7% on Friday after Thursday's Q2 earnings release. Netflix projected lower Q3 revenue growth than in Q2 but maintained its 2026 projection. Netflix's operating margins were lower YoY but higher than last quarter and its own projections. Much of the bad news is already in NFLX stock. Is it too cheap here?

Bummer Numbers

There were plenty of reasons for the market to be negative on NFLX, which closed at a new 6-month low of $68.95 on Friday, July 17. That's down from its 3-month peak of $107.79 on April 16 and even lower than a recent June 25 trough price ($70.90). 

For example, free cash flow (FCF) was lower (see the table below from the Shareholder Letter), mainly due to extra payments from its withdrawn Warner Bros. Discovery (WBD) bid.

It came in at just $1.525 billion, 33% below last year's $2.267 billion and last quarter's adjusted FCF of $2.294 billion (i.e., after deducting a one-time $2.8 billion bid termination fee).

Moreover, the FCF margin was just 12.1% compared to 20.5% last year and 20.39% in Q1 (adjusted), according to Stock Analysis figures.

The Wall Street Journal said in an article on July 16 that the company “expects growth to slow”. That was not completely accurate. 

Not All is Lost

True, management is now projecting just 11.7% growth in Q3 (lower than the 13.4% Q2 revenue YoY growth rate). But its 2026 revenue forecast is $51 billion to $51.4 billion (the same $51.2 billion midpoint as in the Q1 shareholder letter). 

Moreover, that represents a 13.3% growth rate over the $45.18 billion in 2025 revenue. That is higher than the projected 11.7% Q3 rate. This implies that management expects Q4 revenue to rise.

Moreover, operating margins, although slightly lower in Q2 compared to last year, are expected to remain strong in Q3 (i.e., 33.2% forecast vs. 28.2% last year).

Both of these imply that Netflix could make reasonably strong operating cash flow and free cash flow over the next 12 months.

FCF Projections

I discussed this in a recent Barchart article, “Netflix Stock is at New Lows, But Its FCF Is Strong - Is NFLX Too Cheap?” (July 13).

Since then, analysts' revenue forecasts have dropped a bit. For example, now analysts are projecting revenue of $51.23 billion for 2026 and $57.05 billion for 2027. That results in a midpoint next 12 months NTM) average of $54.14 billion. That's down slightly from the prior $54.4 billion NTM revenue forecast (i.e., down just -0.5% after the Q2 results).

So, even if we assume that the company will make just a 20% FCF margin (lower than the 20.25% margin used in my prior article), Netflix's FCF will still be strong:

  $54.14 billion x 0.20 = $10.828 billion FCF (NTM)

That is higher than the $9.461 billion in FCF Netflix made in 2025, although lower than the Q1 and Q2 trailing 12-month (TTM) FCF figures, according to Stock Analysis.

Higher Fair Market Value and Price Targets

In fact, even if Netflix averages just 18% in FCF margin, its NTM FCF would still be higher than in 2025: $9.745 billion vs. $9.461 billion in 2025

So, assuming a 3.0% FCF yield metric, its fair market value (FMV) would be at least 12% higher than its market cap on Friday ($290.3 billion):

  $9.745b / 0.03 = $325b FMV

  $325b / $290.3b = 1.12 = +12% upside

That means the minimum price target (PT) is at least $77.22 (i.e., $68.95 x 1.12).

And, if the company were to average 20% FCF margins, as it has done over the last year (not including Q2), its FMV would be $360.9 billion, or 24%.3% higher than Friday's close. That would imply a price target of $85.70.

Moreover, Wall Street analysts are more positive than my analysis. For example, the average PT from 50 analysts at Yahoo! Finance is $111.03. That's 61% higher than Friday's close. Similarly, Barchart's mean survey PT is $110.64, up 60.5%. In fact, AnaChart's survey of 33 analysts is $118.69, over 71% higher.

One way to play this is to set a lower potential buy-in by shorting out-of-the-money (OTM) put options.

Shorting OTM NFLX Puts

I discussed shorting the $70.00 and $67.00 put option strike prices expiring August 14 in my last Barchart article on July 13. That is now less than one month away (27 days to expiry or DTE).

The $70.00 put contract is now in the money (it's over the trading price), so a new investor might want to choose a lower strike price. Existing investors may want to average down.

For example, the $70.00 put has a midpoint premium now of $3.18, giving a short-seller a one-month yield of 4.54% (i.e., $3.18/$70.00), if NFLX rises over $70.00 by August 14. 

But, even if it doesn't, the short-seller still earns a net breakeven buy-in of $66.82 (i.e., $70-$3.18), which is 3% below Friday's close.

In addition, a new investor may want to look at the August 21 expiration contract, 34 days DTE. It shows that the $65.00 put strike price, 5.73% lower than Friday's close (i.e., out-of-the-money), has a midpoint premium of $1.28. That represents a short-put yield of almost 2.0% (i.e., $1.28/$65.00 = 0.0197 = 1.97%).

Moreover, the breakeven point, if NFLX drops to $65.00, is $63.72 (i.e., $65.00 - $1.28), or 7.6% lower than Friday's close. Moreover, there is only a 26.6% chance that this will occur, based on the delta ratio.

Summary and Conclusion

The bottom line is that NFLX is worth between 12% and 24% more ($77 to $86 per share) based on my FCF projections. Other analysts have much higher price targets. 

One way to conservatively play NFLX is to short puts over the next month. That way, an investor can make monthly income while also setting a potentially lower buy-in point.