Escalating Content Costs And Regulatory Burdens Will Weigh On Margins

Key Takeaways

• Escalating content costs and competition threaten profit margins, while regulatory and operational pressures are set to further erode Netflix's long-term earnings potential.
  
• Slowing subscriber growth and rising consumer price sensitivity, amid fierce competition and alternative entertainment, increase churn risk and undermine future revenue expansion.
  
• Strong subscriber growth, ad revenue expansion, innovative tech investment, premium content, and diversification into new entertainment areas position Netflix for sustained profit and revenue scalability.

Catalysts

Provides entertainment services.

• Surging content costs required to maintain and expand Netflix's global slate, coupled with intensifying competition for premium intellectual property, are likely to consistently outpace revenue growth; this will exert downward pressure on long-term operating margins as Netflix is forced to spend even more aggressively to preserve its current subscriber base.
  
• Mounting global regulatory hurdles around digital content, privacy, and emerging antitrust scrutiny threaten to limit market expansion and drive up compliance and operational costs, directly reducing Netflix's future net profit growth and eroding margin resilience.
  
• Slowing broadband adoption and persistent digital divides in key emerging markets will cap future international subscriber growth, sharply constraining the company's ability to expand its total addressable market and risking an eventual stagnation in top-line revenue growth.
  
• The accelerating proliferation of alternative entertainment-such as short-form user-generated video, social media, and immersive gaming-is fragmenting consumer attention, increasing churn risk, and undermining Netflix's pricing power, all of which are likely to lead to lower average revenue per user and weaker retention metrics in the long run.
  
• Rising consumer price sensitivity in both mature and developing markets, combined with streaming subscription fatigue, will dampen demand for premium streaming services, boost churn rates, and ultimately compress both subscriber growth and earnings potential, particularly as competitors increasingly bundle or offer free ad-supported models.

Netflix Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Netflix compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Netflix's revenue will grow by 11.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 24.6% today to 26.6% in 3 years time.
• The bearish analysts expect earnings to reach $15.2 billion (and earnings per share of $36.74) by about July 2028, up from $10.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.7x on those 2028 earnings, down from 48.8x today. This future PE is greater than the current PE for the US Entertainment industry at 26.9x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Netflix Future Earnings Per Share Growth

Risks

• The steady growth in both member numbers and healthy engagement, combined with successful price changes that have matched expectations, indicate resilience and an ability to drive revenue higher even during uncertain macroeconomic times, which can benefit both top-line revenue and net margins over the long term.
  
• Momentum in ad sales, the successful global rollout of Netflix's proprietary ad tech stack, and strong feedback from advertisers suggest Netflix can double ad revenue and unlock a new, high-margin revenue stream from price-sensitive segments, supporting long-term growth in average revenue per user and increasing operating profits.
  
• The robust global content slate, with a pipeline of high-profile originals, local language hits, animated successes, and partnerships like TF1, points to unique brand differentiation and deeper regional penetration, which underpins user retention and allows for continued premium pricing, positively impacting recurring revenues and profit margins.
  
• Strategic investments in advanced UI/UX, personalized recommendations, and generative AI for both creation and user experience are enabling Netflix to improve cost efficiencies, content discovery, and user satisfaction-these innovations support engagement, reduce churn, and enhance both revenue scalability and operating leverage.
  
• Expansion into new entertainment verticals such as live events, interactive content, and gaming (paired with disciplined allocation and a measured build-up) positions Netflix to diversify earnings, tap additional markets beyond traditional streaming, and create additional cross-sell opportunities, all of which collectively strengthen long-term revenue growth and profit resiliency.

Valuation

• The assumed bearish price target for Netflix is $918.39, which represents two standard deviations below the consensus price target of $1330.97. This valuation is based on what can be assumed as the expectations of Netflix's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1600.0, and the most bearish reporting a price target of just $750.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $57.2 billion, earnings will come to $15.2 billion, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $1176.78, the bearish analyst price target of $918.39 is 28.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.