Greetings everyone 👋
I know I'm coming to this with a slight delay, but I'd still like to comment on Netflix's results. Netflix $NFLX has just finished another quarter, and I rate it as strictly neutral – no miracle, but certainly not a disaster. The market reacted nervously, with shares dropping about 8% to an annual low after the results, but when I dig through the shareholder letter, I see a company that is still performing – it's just increasingly guarding what it reveals about itself.
I'll start with what I disliked. Revenue growth is slowing. For the second quarter, Netflix reported $12.6 billion, up 13% year-over-year, which is still not bad, but the Q3 outlook expects growth of only around 11.7%, and that was below market expectations. Additionally, operating margin decreased – 33.4% versus 34.1% a year ago. It's not dramatic, and to be fair, I'd add that the Q3 outlook shows margin rising significantly (to 33.2% from last year's 28.2%), which is clearly positive. But I'm still noting that year-over-year decline.
What bothers me more than the numbers is the declining transparency. Netflix announced that it will only publish its "What We Watched" engagement report once a year starting in 2027. This adds to the list of things the company has gradually stopped reporting – we haven't seen subscriber numbers for a while either. Officially, it's supposedly to keep the focus on revenue and profit. To me, it feels more like a convenient narrowing of the window through which we view the company. And in the shareholder letter, I sense a similar obfuscation – on the trickier questions, management likes to respond in the vein of "we're focused on the full year." That's easy to say when the quarter isn't flawless.
Now to the outlook, because that's important and nicely balances the overall picture. Even though revenue growth is expected to slow, the company as a whole isn't slowing down. For the full year 2026, Netflix expects revenue of $51.0 to $51.4 billion (+13 to 14%) and, most importantly, an operating margin of around 31.5% compared to 29.5% last year. In practice, this means that operating profit is set to grow by more than 20% year-over-year – thus faster than revenue. Margin and operating profit are simply growing, even as the pace of revenue growth eases, and that's exactly the kind of leverage effect I want to see in a more mature company.
And I deliberately checked one thing that would otherwise nag me: is this jump in profitability just a trick from a one-off payment? In Q1, Netflix received $2.8 billion from Paramount as a termination fee for the failed Warner deal. The answer is reassuring: this amount sits in non-operating income, so it inflated net income and cash flow in Q1, but it didn't affect the operating margin at all. The profitability growth I'm describing above is therefore "clean," driven by the core business, not a one-time bonus. I like that.
And there are more positives. Even though Netflix is growing "slower," it's still double-digit growth – and for a company of this size, I consider that a solid performance. What excites me the most is the ramping-up advertising business: ad revenue is expected to roughly double this year to about $3 billion, there are over 4,000 advertisers on the platform, and in ad-supported markets, more than 60% of new customers are choosing the cheaper ad tier. That's exactly the second engine Netflix needed.
I also like where the company is pushing its content. It's deploying artificial intelligence across the entire advertising process, from planning to creative production, expanding into live events, sports, video podcasts, and games (its gaming debut with the FIFA World Cup was one of its most successful). And then there's the new deal in France with TF1 – French subscribers are getting linear channels and TF1 content, including live sports, at no extra cost right inside Netflix. That's a smart model for cheaply bundling value and keeping people glued to the screen.
How I see it now: Netflix is transforming from a pure streaming company into a broader entertainment and advertising platform, and I like this transformation. What I like less is that it goes hand in hand with increasing opacity about what it shows us regarding its business. Netflix currently makes up about five percent of my portfolio, and I'm not reacting to the post-earnings market reaction for now – to be honest, I might even add to the position. I'm keeping an eye on that gradual loss of data, though, because what I can't see, I can't verify.
How do you see it – is slowing growth and less transparency a reason to be on alert, or is the ramping-up advertising and sports a strong enough story to outweigh that?
