Is this a buying opportunity?
The sluggish economy has not impacted streaming leader Netflix (NASDAQ:) much at all, as the company continues to churn out strong results, like it did in the second quarter.
Yet, the stock price dropped nearly 5% on Friday following the release of Q2 earnings on Thursday after the market closed.
Should investors be concerned or view this as a buying opportunity? Let’s take a look at the numbers.
Squid Game a Massive Hit
Netflix had an excellent second quarter, which is why the selloff is a bit of a mystery. Revenue grew 16% to $11.08 billion, which squeaked past estimates of $11.07 billion and beat the company’s own guidance.
Net income spiked 45% to $3.12 billion, or $7.19 per share. This topped estimates of $7.08 per share. Further, the company improved its operating margin to a hearty 34.1%, up from 27.2% in Q2 of 2024 and 31.7% in the previous quarter.
“Year-over-year revenue growth was primarily a function of more members, higher subscription pricing and increased ad revenue. All regions experienced healthy year-over-year revenue growth, with each region posting double-digit F/X neutral increases. UCAN (United States and Canada) revenue growth accelerated year over year to 15% vs. 9% in Q1’25 due to the full quarter impact of price changes,” the shareholder letter stated.
Viewership was driven by some big hits, including Squid Game, season 3, which already has 122 million views, sixth most all-time. Other series hits include Ginny & Georgia, season 3, with 53 million views and The Four Seasons with 40 million views.
Among films, the top draws were Exterritorial from Germany, which had 89 million views, Tyler Perry’s STRAW with 109 million views, KPop Demon Hunters with 80 million views, and Nonnas with 60 million views.
Updated Revenue Guidance
Netflix also raised its revenue guidance for fiscal 2025. The company now expects revenue of $44.8 billion to $45.2 billion, up from the previous guidance of $43.5 billion to $44.5 billion. The raise reflects the weakening of the US dollar versus most other currencies, along with healthy member growth and ad sales.
“We’ve got healthy member growth, and that even picked up nicely at the end of Q2, a bit more than we expected,” CFO Spencer Adam Neumann said on the earnings call. “And we think that will carry through with our strong back half slate. So we’re reflecting that in our latest forecast. And we’re also seeing nice momentum in ad sales. Still off a pretty small base, but good growth, and it’s on pace to roughly double our revenue in the year, and it’s a bit ahead of beginning of year expectations.”
The reason, perhaps, that the stock plummeted may be the projections for the operating margin of 30%, which would be down from 34.1% in Q2. Also, in Q3, Netflix anticipates $11.53 billion in revenue, which is up 4% from Q2, but would be slightly slower sequential growth than in Q1. Further, net income is projected to be 4% lower in Q3 at $2.98 billion, or $6.87 per share, while the operating margin will be 31.5% — again lower than Q2.
“We project operating margin of 31%, a two percentage point year-over-year improvement. Similar to past years, we expect our operating margin in the second half of 2025 will be lower than the first half due to higher content amortization and sales and marketing costs associated with our larger second half slate,” the shareholder letter said.
Buy the Dip?
So, the slightly lower projections for Q3 and the lower operating margins likely caused investors to sell. It could be a bit of profit-taking as investors might expect to see Netflix stock take a short-term dip. But I don’t see any long-term concerns.
Netflix stock has been on quite a roll, up 35% year-to-date and 88% over the past one year period. It has a 10-year annualized return of 26% and a five-year annualized return of 20%, so it has been a top performer for a long time.
That said, the valuation has crept up, as it is trading at 59 times earnings. It is likely that investors saw this as an opportunity to take some profit. But, despite the elevated valuation, Netflix is a great stock and if you can get in at a decent valuation, it is a stock well worth owning.