Netflix Beat Estimates Again; Why Did the Stock Drop 12% Anyway?
Key Points
Netflix reported Q2 revenue and earnings in line with or slightly ahead of estimates, continuing a long streak of solid execution.
The stock dropped as much as 12% after Netflix announced it would report engagement data annually instead of twice a year.
Long-term investors may see today's selloff as an opportunity to buy a dominant streaming franchise at a discounted valuation.
Shares of Netflix (NASDAQ: NFLX) fell as much as 12.2% on Friday morning before recovering to a 9.1% decline as of 11:20 a.m. ET. The video-streaming giant delivered a perfectly cromulent Q2 2026 report on Thursday evening, but investors still found reasons to drop the stock price.
Revenue hit $12.56 billion, matching estimates. EPS of $0.80 beat the Street by a penny. Netflix has missed bottom-line estimates about once a year since 2023, and this wasn't one of those misses. Full-year guidance? Unchanged at the midpoint. Operating income growth tracking north of 20%. Every figure fell well within management's Q2 guidance.
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So what spooked investors?
Netflix announced it will publish its "What We Watched" engagement report annually instead of twice a year, starting in 2027. In other words, engagement hawks will have fewer data points to obsess over.
Management argues that this change keeps the focus on the metrics that matter most (revenue, profit, and free cash flow, as most mature businesses do). Furthermore, most streamers never report detailed viewing data. However, some investors clearly interpreted it as the company hiding something.
That wasn't the whole story, of course. Viewing hours grew 2% in the first half, which is positive but probably below the increase in subscriber numbers. Q3 guidance also landed a hair below Wall Street's consensus, which didn't help the mood.
Image source: The Motley Fool.
The bigger picture
Here's the thing: Netflix stock has already been beaten up pretty badly. Shares are down 46% from their 52-week high, trading at about 21 times trailing earnings and 18 times forward estimates. The PEG ratio is 0.82, which arguably undervalues Netflix's stock given its growth rates.
For a company that's been hitting or beating estimates for years, still growing revenue in the low teens, and expanding margins, that valuation already seems to be pricing in a fair amount of skepticism. Long-term investors might view today's panic as an opportunity to own a dominant streaming franchise at a more reasonable price than it's commanded in years. The crushed multiples should eventually expand again if growth continues at these rates. Netflix certainly has enough irons in the fire to make it happen.
Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.