Equity Research · Earnings Update
Netflix, Inc. (NFLX)
Summary and key takeaways
Netflix reported Q2 2026 revenue of $12.56 billion, up 13% year over year (12% foreign-exchange neutral), with an operating margin of 33.4% against 34.1% a year earlier and diluted EPS of $0.80, up from $0.72 and a cent above the $0.79 consensus. Revenue landed just under the $12.58 billion estimate. It was an in-line quarter that got sold for its outlook: Q3 guidance of $12.86 billion implies 11.7% growth, the slowest pace in three years, and the stock fell −7.26% to $68.95 on July 17. It has since recovered +10.27% to $76.03.
Results snapshot
| Metric | This quarter | Change / comparison |
|---|---|---|
| Revenue | $12.56B | +13% (+12% FX-neutral); consensus $12.58B |
| Operating income | $4.19B | Margin 33.4% vs 34.1% a year ago |
| Net income | $3.40B | — |
| Diluted EPS | $0.80 | vs $0.72 a year ago; consensus $0.79 |
| Free cash flow | $1.53B | — |
| Share repurchases | $4.7B | In the quarter |
| Cash / gross debt | $9.10B / $14.31B | At June 30, 2026 |
Analysis
Nothing in the quarter itself was wrong. Revenue grew 13%, EPS grew 11%, and management narrowed the full-year revenue range to $51.0–51.4 billion while reiterating a 31.5% operating margin — two points above FY2025’s 29.5%. The problem was the shape of the year. A 33.4% margin in Q2 that is below last year’s, and a Q3 guide of 33.2%, mean the full-year expansion has to arrive in the fourth quarter. Growth slowing to 11.7% in Q3 is the number the market traded.
Figure 1 · Annual revenue
Growth is holding near 13%, but the step up each year is getting smaller in percentage terms
Annual revenue in $ billions. FY2023A–FY2025A from Netflix’s 10-K filings (SEC XBRL); FY2026E is the midpoint of the $51.0–51.4 billion guide in the Q2 2026 letter.
Advertising is the part of the story that is still accelerating: management expects about $3 billion of ad revenue in 2026. And capital return is aggressive — $4.7 billion of buybacks in a single quarter, against $1.53 billion of free cash flow — so the buyback is running well ahead of cash generation, funded from the balance sheet.
Guidance
- Q3 2026 revenue of $12.86 billion (about 11.7% growth), operating margin 33.2%, diluted EPS $0.82
- Full-year 2026 revenue narrowed to $51.0–51.4 billion; operating margin of 31.5% reiterated
- About $3 billion of advertising revenue expected in 2026
What the rebuilt model says
I rebuilt the rebuilt three-statement model (.xlsx) on September 10. Growth now starts at the 13.3% guide midpoint. Gross margin is calibrated so FY2026E operating margin equals the 31.5% guide. The actual-year cash flow now reconciles to reported cash — the previous version held financing at zero, which put its FY2025A cash check off by $11.1 billion. Revenue and operating income, $ millions:
| $ millions | FY2025A | FY2026E | FY2027E | FY2028E | FY2029E | FY2030E |
|---|---|---|---|---|---|---|
| Revenue | 45,183 | 51,192 | 57,335 | 63,642 | 70,006 | 76,307 |
| Operating income | 13,327 | 16,126 | 18,061 | 20,047 | 22,052 | 24,037 |
| Operating margin | 29.5% | 31.5% | 31.5% | 31.5% | 31.5% | 31.5% |
| Net income | 10,981 | 13,038 | 14,664 | 16,332 | 18,016 | 19,684 |
The one input that moves the answer most is gross margin, because content amortization sits in cost of revenue. FY2027E operating income at three gross-margin settings:
| Gross margin | FY2027E operating income | FY2027E operating margin |
|---|---|---|
| 48.5% | $17.20B | 30.0% |
| 50.0% | $18.06B | 31.5% |
| 51.5% | $18.92B | 33.0% |
Assumptions, stated plainly. Growth after FY2026E steps down a point a year (12%, 11%, 10%, 9%) — my assumption, not guidance. SG&A (11%) and R&D (7.5%) are held as fixed shares of revenue. The model carries content assets flat and does not model cash content spending above amortization, so forecast cash is overstated; I do not publish a forecast cash figure or a valuation from it. This is a sensitivity on a simple percent-of-revenue model, not a forecast of Netflix’s results.
Updated investment thesis
NFLX is a Core holding and still sits below my cost basis, at −4.04%. This quarter didn’t change why I own it — a subscription engine that is adding an advertising business and still expanding margins over the full year — but it sharpened the question I flagged in Q1: whether low-teens growth is a floor or a waypoint. Q3’s 11.7% guide is the first answer, and it points the wrong way.
No position change. The +10.27% recovery since the post-print low means the market has partly looked through the guide; a second quarter of decelerating growth would not be looked through as easily.
Risks to this position
- Growth decay: Q3 guidance implies 11.7% growth, the slowest in three years; another step down would challenge the multiple.
- Back-end-loaded margins: the 31.5% full-year margin requires Q4 expansion after two quarters at or below last year’s level.
- Capital return outrunning cash: $4.7 billion of Q2 buybacks against $1.53 billion of free cash flow cannot continue indefinitely without leverage.
- Advertising execution: the ~$3 billion 2026 ad target is the main new growth leg, and it is not yet proven at scale.
Sources & references
- Netflix Q2 2026 shareholder letter (SEC Exhibit 99.1), July 16, 2026
- Netflix (NFLX) Surpasses Q2 Earnings Estimates — Zacks via Yahoo Finance (consensus)
- Market reaction: July 17 News writeup
- FY2023A–FY2025A revenue: Netflix 10-K filings via SEC XBRL company facts
- Price data: Massive Market Data daily closes