Editor's Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Key Morningstar Metrics for Netflix
• Fair Value Estimate: $720.00
• Star Rating: ★★
• Economic Moat Rating: Narrow
• Uncertainty Rating: High
What We Thought of Netflix’s Earnings
Netflix NFLX posted an incredible 32% operating margin—350 basis points ahead of guidance—and 25% EPS growth in the first quarter. The firm also exceeded its sales guidance. However, it only maintained its full-year outlook, including for operating margins, and US sales were soft.
Why it matters: The stunning profit appears much more related to the timing of expenses rather than significant further improvement in operating performance.
• Netflix expects even better second-quarter margins. However, expenses will rise substantially in the second half of 2025, primarily due to the release of films and other programming and associated marketing costs.
• Content spending grew only 1% year over year, but we still expect a mid-single-digit increase for the full year. The firm maintained its 2025 guidance for $8 billion in free cash flow after generating $2.6 billion in the quarter.
The bottom line: Our outlook is generally unchanged after these results. We maintain our narrow moat and raise our fair value estimate to $720 per share from $700 due to the time value of money.
• Our full-year estimate for earnings per share is rising, but this is largely due to share repurchases, which we don’t think add value at the current stock price.
• We think management may now be conservative with 2025 margins, but we’re not adjusting our longer-term projections.
Between the lines: Sales growth in the United States was disappointing at only 9% year over year. Management downplayed the softness and said sales would reaccelerate in the second quarter after price hikes took effect midway through the first, but we’re not reassured.
• Netflix is no longer reporting member numbers, but 9% growth means either the firm lost US members or average revenue per member declined. We think it’s likely both. Shifts to the ad-supported plan can weigh on ARM, and major broadcasts underpinned a surge of member additions last quarter.
• The firm could’ve lost over a million US members and still seen ARM decline.
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