Netflix: Are You Not Entertained? Reiterate Overweight, Buy the Dip
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Morgan Stanley reiterates an Overweight rating on Netflix with a price target of $115, based on 30 times 2027 EPS estimates, advising investors to buy the recent post-earnings pullback. Following first-quarter results, shares declined in after-hours trading after the company's second-quarter operating profit guidance slightly missed consensus and full-year guidance was held steady. However, the firm argues that fundamental changes were minimal and current valuations remain highly attractive for a compound growth company possessing strong pricing power.
First-quarter revenue of $12.25 billion exceeded estimates by 0.6%, representing 16.2% year-over-year growth. While second-quarter operating profit guidance of $4.105 billion fell slightly below expectations, analysts note that pricing actions typically require two to three months to fully reflect in the income statement. The second quarter also faces difficult year-over-year comparisons from prior price hikes, but growth is expected to accelerate starting in the third quarter.
The advertising business continues to gain traction, with 2026 ad revenue potentially doubling to $3 billion and accounting for roughly 6% of total revenue. Engagement metrics remain strong, with watch time growing in the low single digits despite Winter Olympics competition, while quality metrics hit all-time highs. Free cash flow guidance was raised by $1.5 billion to $12.5 billion. Penetration remains remarkably low, with smart TV household penetration under 45% and global TV viewing share below 5%, providing substantial runway for sustained double-digit revenue growth and margin expansion.