Netflix’s recent share price pressure looks counterintuitive at first glance. Fundamentals remain solid, revenue growth is still double-digit, and profitability continues to improve. Yet the market appears unwilling to reward the stock without a clearer next chapter.
Wedbush argues that chapter is advertising. The firm believes the market is materially underestimating how quickly Netflix’s ad tier can scale, potentially doubling ad revenue by 2026 and turning it into a meaningful valuation driver rather than a side business. If that thesis plays out, the debate shifts from subscriber growth to monetization depth.
Why Netflix stock is falling even though the business is working
The current weakness in Netflix $NFLX stock isn't the result of deteriorating fundamentals. On the contrary - the company is still growing faster than most of the media sector. The problem lies in a combination of high expectations and changing investor optics. Netflix has built a reputation over the past few years as a company that almost never disappoints, and the market has grown accustomed to this "flawlessness."
As soon as management indicated that the rate of cost growth in the coming year may be slightly higher than the previous year, some investors began to question the near-term evolution of margins. This led to sell-offs, even though the long-term strategy - cost discipline and gradual margin expansion - remains unchanged. Wedbush sees this reaction as more of a correction of exaggerated expectations than a warning signal.
Advertising: Netflix's biggest untapped opportunity
Netflix's advertising model is still in its early stages, but the momentum is strong. In 2025, the company generated more than $1.5 billion from advertising, representing more than 2.5 times year-on-year growth. What's important is not just the rate of growth, but the quality of that revenue.
Netflix combines several key advantages:
Global reach across 190 countries
detailed data on user behaviour
premium content with a high level of attention
minimal advertising overload compared to traditional TV
All of this allows the company to sell advertising at a higher cost per view than most digital platforms. In addition, the ad plan does not cannibalize fully paid subscriptions to the extent that the market initially feared - it acts as a gateway into the ecosystem for some users.
The results confirm that the strategy is starting to work
Financial results show that Netflix is maintaining a healthy mix of growth and profitability. Revenues for the most recent quarter were up nearly 18% year-over-year, operating profit was up more than 30%, and net income approached $2.4 billion. Free cash flow grew at a rate of over 35%, which is key to long-term stability.
Equally important is the development of engagement. Users watched tens of billions of hours of content in the second half of the year, confirming that Netflix is retaining audience attention even in the face of strong competition. This is a crucial prerequisite for further advertising development - without high viewership, the advertising model would not have a chance to scale.
Don't overlook: Netflix | Q4 2025: Why did the share price fall despite strong results?
Valuation: an expensive streamer, or a high-quality business with misunderstood potential?
At first glance, Netflix may seem like an expensive stock, especially when an investor compares it to traditional media houses or telecom companies. With a market capitalization of about $385 billion and an enterprise value of about $391 billion, Netflix ranks among the most valuable media companies in the world. But the key is not the absolute number, but the quality of the profits and the return on capital that the company generates over the long term.
The P/E ratio of 14.6 is surprisingly moderate in the context of the tech-media sector. By comparison, both Alphabet and Amazon trade above 30 times earnings, even though their return on capital is lower or comparable. Thus, Netflix is now valued not as a growth "story stock" but rather as a mature, highly profitable business. That's a major shift from years past, and a reason why a portion of the market may be underestimating its potential.
From a profitability perspective, Netflix exhibits parameters that are exceptional in the media industry. Operating margins in excess of 29% and net margins of around 24% are closer to software companies than traditional studios. Even more impressive is the return on capital: an ROIC of 24% and an ROE of almost 42% show that Netflix can very effectively translate its investments in content and technology into real economic profit. In this respect, it matches Alphabet and significantly outperforms Disney, Comcast and Warner Bros. Discovery.
A frequently cited argument against Netflix is its relatively low free cash flow yield of around 2.3%. This is a fair criticism, but it needs to be put into context. Netflix is still in a phase where it is consciously reinvesting large amounts of cash - not just in content, but more recently in advertising infrastructure and data capacity. If the scenario of rapid growth in advertising revenue comes to fruition, FCF yields could improve significantly over the next few years without the need for major cost increases.
How to think about Netflix as an investor
The Netflix $NFLX investment story is shifting. It's no longer just about fighting for new subscribers, but monetizing an existing audience. Advertising plays a key role here - it has the potential to increase revenue without having to dramatically increase content or prices.
In the short term, the stock may remain volatile, especially if the market continues to focus on costs. In the long term, however, it is the advertising segment that can significantly change the perception of the value of the entire company. If Wedbush is right, today's stock price may in retrospect act more as a stepping stone than a warning.
Wedbush's view: advertising as Netflix's second growth engine
Investment bank Wedbush Securities is one of the most optimistic voices around Netflix at the moment, precisely because of the advertising segment, which it says the market still significantly undervalues. Wedbush argues that the stock's current weakness is not a reflection of deteriorating fundamentals, but rather the result of overblown expectations from investors who have become accustomed to "flawless execution" in every quarter.
Wedbush's key thesis is that Netflix's advertising business is only at the beginning of the monetization curve. They estimate that the advertising segment could at least double revenues to about $3 billion in 2026, with further significant growth expected in 2027. That's a major difference from the market consensus, which still sees advertising as an add-on rather than a full-fledged pillar of the business.
Wedbush also points out that the advertising model has significantly better operating leverage than traditional subscriptions. Content costs don't increase linearly as ad revenue grows, meaning that every additional dollar of advertising has an above-average impact on margins and cash flow. This is where Wedbush sees room for positive surprises in the coming years - not necessarily in the number of subscribers, but in the quality of monetization of the existing user base.
Another point Wedbush sees as key is the potential deepening of partnerships and consolidation in the media space, including a speculated deepening of the collaboration with Warner Bros. Discovery. Any move in that direction could further accelerate ad inventory growth and improve Netflix's negotiating position with global advertisers, according to analysts.