Does Netflix make sense as an investment?

Although Netflix's earnings grew by almost 50% annually, the share price has decreased

Is this the right moment to purchase Netflix stock?

Despite the company's impressive Q2 results, Netflix's stock (NASDAQ:NFLX) dropped 1 point 6 percent during after-hours trading yesterday, July 17.

During the FAANG era, Netflix shares were among the top stocks in the world. However, in recent years, the new Magnificent Seven formula has overtaken them. You can track all markets on TradingView. As the end of lockdown conditions presented a challenge for companies involved in the stay-at-home economy, Netflix's stock lost value in the post-pandemic period.

However, Netflix has been making progress ever since, and in the past 12 months, its share price has almost doubled.

Netflix's return to form has been highlighted by its recent results. Revenue surpassed analysts' projections of £11.04 billion, rising 16 percent year over year to £11.08 billion. In comparison to analysts' expectations of £7.07, diluted earnings per share (EPS) of £7.19 represented a 47.3 percent increase year over year.

"More importantly, operating expenses remained flat, allowing top-line growth to flow through to margins," eToro global market analyst Lale Akoner stated.

Even though Netflix exceeded analysts' projections, many investors might have had even higher expectations for the company, which caused the market to deflate following the results. SVP of Media and Entertainment equity research at Wedbush Securities, Alicia Reese, stated prior to the announcement that "investors looking to get constructive on Netflix expected revenue in the range of £111-21-3 billion Expectations are rather high given various positive data points throughout the quarter."

Netflixs results precede the start of Magnificent Seven earnings season, with Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) both set to announce results on Wednesday 23 July.

AI improves Netflix's targeting and revenue.

As its cost efficiency increased, Netflix increased its full-year margin guidance to 30%.

The growing use of artificial intelligence (AI) in recommendations and content creation is one factor contributing to this.

At the earnings call, Netflix co-CEO Ted Sarandos stated, "AI represents an incredible opportunity to help creators make films and series better, not just cheaper." "Creator tools with AI capabilities are available. The advantages in production are already being felt by our creators thanks to previsualization, shot planning, and undoubtedly visual effects.

According to Akoner, this demonstrates how AI is beginning to affect Netflix's operations. In addition to improving viewer targeting and ad personalization, real-time recommendation engineers can reduce delivery times by 90% when AI is used in visual effects.

"This can be a significant driver of both margin and scalability in the long run," Akoner stated.

What about the number of Netflix subscribers?

When it released its results for the most recent quarter (April 2025), Netflix declared that it would no longer reveal its subscriber count.

Given that subscriber growth has historically been a predictor of Netflix's commercial success, that surprised markets.

Cynically, one could claim that Netflix no longer wants to release the figures since they don't present them in a favorable manner.

Akoner stated that "engagement per user isn't increasing, and subscriber growth in the US is stalling."

However, Netflix appears to be focusing on its strongest business segments because it is aware of this.

Reese stated that the emphasis on quarterly subscriber targets has shifted to the company's overall financial performance and strategic outlook.

In some respects, this represents a maturation of Netflixs business from one that focuses on user growth to one that focuses on profitability. This year, ad revenue is expected to double, according to Akoner, making advertising "a credible new revenue stream" for the company.

Do you want to buy Netflix stock?

According to some analysts, Netflix will continue to expand and provide value for its shareholders in the years to come.

According to Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity fund, "it currently offers shareholders a strong combination of both subscriber growth and high advertising growth, along with both further margin and return on capital expansion, through its scale and increasing operational efficiencies." Smits believes that "strong double-digit earnings and free cash flow growth over the next few years" could result from further use of generative AI across its platform.

After the results were revealed, Wedbush increased its price target from £1,400 to £1,500, which is a 17-point 7 percent increase from yesterday's close (prior to the results being revealed).

However, the stock is pricey. It is currently trading at more than 54 times trailing earnings and more than 44 times projected earnings for the upcoming 12 months as of the close on July 17. For its profitability and earnings to support this valuation, it must continue to grow steadily.

Those who are thinking about investing in Netflix should carefully weigh the risks and perform in-depth research.

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