Netflix: A sell at $92?

The Setup

Netflix beat on Q1, raised FCF guide to $12.5 billion, and sold off 13%. The tape was right.

Rating at SELL with an $83 PT, 10% downside. The reverse DCF on $92.44 backs into 6.0% perpetual FCF growth and a 20x terminal EV/EBITDA. Comp median is 14x. The 31.5% full year operating margin target leaves zero slippage room after Q2's guided 150 bps compression. And the merged Paramount Skydance / Warner Bros. is a structurally bigger competitor than NFLX has faced in five years.

The business is fine. The price isn't.

Numbers

FY26E adj. NI/EPS ex the $2.8B WBD termination fee. Sources: 10-K (FY25), 10-Q (Q1'26), Q1 letter (4/16/26), DCF model.

Live Events: Real, But Priced

The bull case the Street is underwriting, sized in dollars

The most interesting data point in Q1 wasn't ads or pricing. It was Japan. The World Baseball Classic pulled 31.4M viewers, became the most watched program in NFLX history in Japan, and triggered the country's largest single sign up day ever. APAC posted 19% FX neutral revenue growth, ahead of every other region.

The playbook is repeatable. India (cricket), Korea (KBO), Brazil (Serie A), Mexico (Liga MX) all fit the same shape: domestic event, native rights at a fraction of NFL or Premier League cost, one to two day acquisition spike that retains. CONCACAF deal in Mexico is already announced. Women's World Cup rights in US/Canada secured. Tyson vs Joshua in the UK on the docket.

Here's the math the Street isn't running. Five regional events at half the Japan magnitude over the next 24 months adds 8 to 12 million net adds. At ~$12 monthly ARM and 60% incremental EBITDA margin, that's roughly $700M to $1.0B of incremental EBITDA by 2028. Discount it at WACC and you get $5 to $7 per share.

Even if you give NFLX full credit for that, the stock is still expensive. $92 + $7 of unmodeled live event upside = $99 fair value, well below the $105 to $110 levels needed to justify owning here. The bull case isn't wrong. It just doesn't get you to a return.

ARM Math

Netflix stopped quarterly subscriber disclosure in 2025, but ARM (average revenue per member) is what the buyside still uses. Members and ARM below are triangulated from disclosed regional revenue and the Q1 letter ("more than 325M paid members" at YE25), grown forward at the implied regional pace.

ARM growth went from negative 1.3% in 2023 (paid sharing crackdown) to 6.5% in 2026, driven by the March US price hike (~11% blended), the Spain price action announced in Q1, and ad tier mix (60%+ of new sign ups in ad markets). EBITDA per member doubles 2022 to 2026E. That's the operating leverage thesis. It's also fully reflected in consensus.

Margin Math

FY25 to FY26E EBIT walk in dollars

The line that breaks: the ad revenue +$1.5B at 80% incremental margin. If incremental margin is 60% (more consistent with the cost ramp NFLX is running on ad sales headcount and DSP integration), that line drops to +$1,125M and the bridge falls $375M short. That's enough to take FY26 margin to 30.8%, below the 31.5% target. I'm not saying it happens. I'm saying the cushion is thin and the market hasn't priced for the miss.

FX Is the Risk Nobody's Discussing

58% of Q1 revenue was non USD. EMEA grew 12% FX neutral versus 17% reported. LATAM grew 18% FX neutral versus 19% reported. The hedging book sits at $20.9B notional, which mitigates but does not eliminate the exposure.

If the dollar strengthens 5% from current levels (a real possibility given the Fed's positioning relative to ECB and BoJ), FY26 reported revenue takes a $400M to $500M hit before hedge offset. At the 31.5% margin target, that drops $125M to $160M of EBIT and pushes the print closer to 31.0%. For a stock priced for margin precision, this is the kind of variable that should be in the model. It usually isn't.

Two Bears Worth Pricing

Bear 1: Paramount Skydance / WBD changes the bidding economics. Warner shareholders approved the merger April 22. The combined entity owns HBO Max, Paramount and WB studios, CBS, Showtime, plus a real sports portfolio (Champions League, March Madness, NFL inventory). Netflix is a customer of this competitor (it licenses Paramount and WB content) and a bidder against it for talent and rights. Content costs go up. NFLX has $12.3B of cash to fight with, but the marginal dollar of premium series and live rights just got more expensive across the industry. I model this as 50 to 100 bps of medium term margin pressure that isn't in consensus.

Bear 2: The reverse DCF is the stock's own gravity. At $92.44, the implied terminal EV/EBITDA is 20x and the implied perpetual FCF growth is 6.0%. The terminal multiple sits at the 90th percentile of the comp set. The growth rate sits above NFLX's own 5 year revenue CAGR. There is no asymmetric path to a higher multiple from here. There are several paths to a lower one (margin slip, FX drag, content cost inflation, slower programmatic ramp). The math is just unfavorable.

Capital Allocation

April 22 buyback authorization adds $25B on top of $6.8B remaining from December 2024. Combined $31.8B = roughly 8% of float at current prices, executable over 18 to 24 months. Q1 saw $1.3B of repurchases, paused during WBD, now resumed. No dividend. Capital returns sit behind organic reinvestment and selective M&A in the priority stack per management.

InterPositive (~$587M cash) is the only material 2026 M&A. Net debt of $2.1B against $17B EBITDA means NFLX is essentially unlevered. One share one vote. Insider ownership low. Only meaningful insider trading plan is the CLO's 10b5-1 covering 368K shares through Feb 2027. Governance is clean. The buyback puts a floor under the stock but doesn't change the multiple math.

FCF

$12.5B FY26 FCF guide includes the after tax WBD termination fee. Underlying FCF is closer to $9.7B, or 19% of revenue. At $92.44 that's a 3.0% FY26 FCF yield (2.3% ex termination). For a name growing FCF in the high single digits, that yield is thin. Capex stays at ~1.4% of revenue, so EBIT to FCF conversion is high. By YE26 NFLX should be net cash $8B+ assuming buyback runs at announced pace. The pivot point is mechanical, not narrative.

What Q1 Actually Changed

Three things from the April 16 call moved the model. First, the FY26 margin guide held at 31.5% despite WBD cost reversal not flowing through; Neumann attributed to pull forward of M&A expense from 2027. No tailwind from the deal break. Second, NFL talks are active but management was explicit the strategy stays on big events (Christmas Day, Tyson vs Joshua), not regular season packages. Caps the rights exposure. Third, podcasts are framed as 'incremental' (daytime, mobile) which is the language needed to defend continued investment without diluting ARM.

What didn't change: sports strategy, content budget ($20B), pricing philosophy, capital allocation. Hastings transition is real but operationally a non event; Sarandos and Peters have been running the company for 18 months.

Valuation

$83 PT comes out of the model directly. I made four changes to the base case from the original 4/24 build: (1) lowered the DCF exit EV/EBITDA multiple from 19x to 16x to reflect comp set compression and the new Paramount Skydance / WBD competitive overhang, (2) lowered perpetuity g from 2.5% to 2.0% to reflect maturing TAM penetration, (3) repointed the comp methodologies (EV/EBITDA, EV/EBIT, P/E) in the base case from midpoint of Median–High to Median only since the Median–High midpoint is heavily skewed by Spotify (30x EBITDA) and ad tech comps that aren't directly NFLX peers, and (4) shifted probability weights from 25/50/25 to 20/55/25 to lean modestly bearish.

Sensitivity: if the exit multiple holds at 19x and I use Median–High midpoint comps (the original model build), the weighted PT moves back to $97 (+5%). The shift to 16x exit multiple alone moves the base case from $94.86 to $87.45. The shift to comp Median for base case multiples moves it further to $75.63. The probability shift to 20/55/25 from 25/50/25 takes ~$1 off the weighted PT. The single biggest swing factor is the comp basis (Median vs Median–High midpoint), which is a $12 PT delta.

Comps

NFLX trades at a 60% premium to comp median EV/EBITDA. Justified by margin and growth, but the room for further multiple expansion is gone.

Catalysts & Risks

Catalyst: Q3 print on July 17 confirming 2H margin acceleration. If Q3 op margin clears 28.2% (last year's print) by 200 bps+, the 31.5% full year math becomes credible and the stock holds. Also watch incremental ad revenue beats; NFLX has sandbagged ad guidance four quarters running. Either path keeps the stock in the $90s.

Risk: Q3 content amort growth above mid single digits (the high end of company guide). Pushes margin below 30% in Q3 and forces a model reset. Secondary risk is competitive content cost inflation from the Paramount Skydance / Warner Bros. entity, especially in international markets where NFLX has been the price setter. Tertiary is FX.

Recommendation

SELL, $83 PT. We can become buyers at $73 where the implied terminal EV/EBITDA normalizes to 14x against a comp median of 14x. We can trim further above $105 where the bull case ad ramp is fully priced.

Disclaimer: Informational only. Not investment advice. Author may hold positions. Sources: NFLX 10-K filed 1/23/26, 10-Q filed 4/17/26, Q1'26 letter dated 4/16/26, proprietary DCF model dated 4/24/26. Closing price as of April 24, 2026.