Netflix (NFLX) Heads into Q1 with Stronger Earnings Quality as Deal Risk Fades

Netflix (NFLX) heads into Q1 with Warner Bros. Discovery (WBD) deal risk off the table, earnings momentum still building, and a return of bullish sentiment in the stock. I believe the market’s removal of uncertainty around the WBD deal has helped reignite bullish momentum in NFLX shares. Not expecting Q1 to be an obstacle to this momentum, I maintain a constructive view on the stock. In this article, I will dive deeper into the key reasons supporting my Buy rating.

The challenge is still meaningful, as Netflix will need to deliver earnings per share (EPS) of roughly $0.77 and revenue of about $12.17 billion — representing roughly 16% EPS growth, and mid‑teens revenue growth — to beat expectations across the board, something it has managed to do in seven of the last eight quarters. Even though shares have already rallied significantly from the February lows, Netflix now appears to be approaching a potential inflection point while still trading well below its historical averages.

Netflix’s Earnings Are Getting Better, Not Just Bigger

The primary driver behind the bullish thesis on Netflix is quite simple: its earnings momentum is improving. The caveat is that this improvement isn’t purely quantitative; it reflects a shift in the quality of these earnings. The model is becoming less dependent on subscribers, generating more revenue per user, and delivering greater operating leverage.

In FY25, Netflix saw revenue grow 16% year-over-year while operating profits surged by about 30% — a clear case of operating leverage. The ads business was the main driver, delivering 2.5x growth in 2025 and generating roughly $1.5 billion. Management is guiding FY26 revenue growth slightly more conservatively at 12%–14% year-over-year, while expecting the ads business to roughly double again to approximately $3 billion.

Netflix also guides operating (EBIT) margins for FY26 at 31.5%, a meaningful increase from the 29.5% reported over the past 12 months. To put the scale of this structural margin expansion into perspective, operating margins were just around 7%–8% back in 2018.

This has led consensus estimates to point to FY26 EPS of around $3.14, implying roughly 24% year-over-year growth. While this represents a slight slowdown compared to the nearly 27% growth in FY25, it is perfectly reasonable given the already much larger revenue base.

The Deal Overhang Is Gone

Late last year, Netflix got investors a bit nervous after it revealed the potential purchase of a significant portion of Warner Bros. Discovery’s assets — studios, intellectual property (IP), and potentially its streaming business, Max. Netflix participated in what was a competitive acquisition process by submitting an initial offer. There was competition for these assets, WBD’s terms moved higher, Netflix refused to raise its bid, and ultimately, no deal was made.

According to Netflix’s CFO, the decision to walk away came down to valuation — “once it didn’t make financial sense… we moved on” — with the company only interested in acquiring those assets at the right price. From late January through February 23, NFLX shares fell by roughly 16%. However, shortly after hitting that bottom, shares began a strong rebound, eventually rallying about 25%–30% from those lows.

The market clearly breathed a sigh of relief, as the deal would have likely involved a significant amount of debt. While the deal carried a $72 billion equity valuation, its scale makes it clear that it would have required a heavily leveraged financing structure. By contrast, Netflix remains relatively light on debt, with a total of around $14.5 billion. In other words, the deal would have materially changed the company’s financial profile, and quite frankly, the market didn’t view it as necessary given Netflix’s solid organic growth trajectory.

The Re-Rating May Just Be Starting

The mere elimination of this uncertainty has helped drive the stock from the nearly 30x trailing earnings lows it reached in late February to around 39x today. That is still well below the 62.5x peak seen in July of last year, but also below its roughly 45x historical average over the past three years.

Turning to technicals, the short-term bullish trend is quite clear. The 20-day simple moving average (SMA) has turned upward, and the 50-day SMA is beginning to follow. More importantly, the strong reversal from the February lows — within a pattern of higher lows and higher highs — suggests the early stages of an uptrend that has yet to fully consolidate. This stands in contrast to the longer-term trend, where the 200-day SMA is still declining.

That being said, a breakout above the $107 level would signal a more structurally bullish trend. Put simply, failing to break above that level wouldn’t be surprising given the magnitude of the recent rally in such a short period of time. Still, with momentum building and deal risk off the table, I lean toward the stock testing $107 in the near term.

Is NFLX a Buy, According to Wall Street Analysts?

Analysts seem quite confident that NFLX shares can sustain their current strong momentum. Of the 41 ratings issued over the past three months, 31 are Buy recommendations, while only 10 are Holds. The average price target stands at $114.61, implying an upside of 15.31% from current levels.

Still a Buy Heading into Q1

The market is once again breathing a sigh of relief on the Netflix thesis, as the company sticks to its core business rather than pursuing large-scale mergers and acquisitions. The company heads into another strong quarter led by ads, the primary driver of incremental operating leverage. The stock is by no means cheap, but even after rebounding from the February lows, it still trades at multiples well below its historical average over the past three years.

While I don’t expect Netflix to return to the hyper-growth multiples seen in prior years, I do believe that FY26 is shaping up to be a “high earnings quality” story — one that arguably deserves a multiple at least in line with its historical average. With Q1 potentially serving as the first step toward that re-rating, I maintain a Buy rating on NFLX.