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Should You Buy Netflix at 40.8x P/E? 3 Reasons Despite the Premium
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Key Takeaways
Netflix stock justifies its 40.8x P/E ratio with strong fundamentals and long-term growth potential.
NFLX plans to double advertising revenues in 2025 with 94 million ad-tier users driving growth.
Strong operating leverage boosted margins to 34.1%, while free cash flow guidance reached $8.5B.
Netflix (NFLX - Free Report) stock may trade at a premium valuation that makes some investors pause, but the streaming giant's fundamentals paint a compelling picture for long-term growth that justifies current price levels. The company's second-quarter 2025 results demonstrated remarkable financial momentum, with revenues of $11.08 billion growing 16% year over year, while operating margins expanded to 34.1%.
Netflix raised its full-year revenue guidance to $44.8-$45.2 billion, up from the previous range of $43.5-$44.5 billion, signaling management's confidence in sustained growth momentum.
The Zacks Consensus Estimate for NFLX’s 2025 revenues is pegged at $45.03 billion, indicating 15.47% year-over-year growth. The consensus mark for earnings is pegged at $26.06 per share, indicating a 31.42% increase from the previous year.
Netflix has delivered impressive returns for shareholders so far in 2025, with the streaming giant's shares surging 25% in six months, significantly outpacing other streaming competitors like Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , and Disney (DIS - Free Report) , as well as the broader Zacks Consumer Discretionary sector and the S&P 500. Shares of Apple have lost 5.2%, while Disney and Amazon have returned 3.5% and 7.7%, respectively, in the same time frame.
NFLX Outperforms Sector, Competition
Image Source: Zacks Investment Research
The Advertising Revolution Creates Massive Revenue Opportunity
The most compelling reason to buy Netflix stock lies in its rapidly expanding advertising business, which represents a fundamental transformation in the company's revenue model. Netflix plans to double its advertising revenues in 2025 after already doubling ad revenues year over year in 2024. This growth trajectory is particularly impressive given that ad-supported plans accounted for more than 55% of signups in the fourth quarter across the 12 countries where the tier is available.
The advertising opportunity extends far beyond current performance metrics. Netflix's ad-supported tier now boasts greater than 94 million global monthly active users, more than doubling from 40 million the year before, while analysts forecast 43% growth for 2025, reaching $2.07 billion in advertising revenues.
Netflix's competitive advantage in advertising stems from its proprietary technology infrastructure. The company successfully launched its in-house Netflix Ads Suite platform in the United States and Canada, with plans to expand to the remaining markets. This technological control enables better targeting capabilities, improved advertiser experience, and higher monetization rates. The platform is eyeing a growing piece of the $25 billion connected TV advertising spend, positioning Netflix to capture significant market share in this rapidly expanding sector.
Netflix's content strategy continues to demonstrate its ability to create global phenomena that drive subscriber acquisition and retention. The fifth and final season of Stranger Things headlines the offering, alongside the second season of Wednesday and the third season of Alice in Borderland. These established properties have demonstrated significant global appeal and engagement metrics.
Film offerings include prestige projects from Academy Award winners, including Kathryn Bigelow's A House of Dynamite and Guillermo del Toro's Frankenstein. The diverse slate positions Netflix to capture engagement across demographic segments and viewing preferences.
The strategic content investments extend beyond traditional programming into live events and sports, creating additional advertising revenue opportunities. Netflix's 2025 slate includes major live events, such as WWE programming under a 10-year $5 billion deal, NFL Christmas Day games, and TUDUM fan event streaming live globally. These live programming initiatives drive subscriber engagement and command premium advertising rates, creating multiple revenue streams from single content investments.
Netflix's content creation capabilities provide sustainable competitive advantages in an increasingly crowded streaming marketplace. The company maintains content production in more than 50 countries with annual content spending exceeding $18 billion, enabling local market penetration while maintaining global scale efficiencies.
Operating Leverage and Cash Generation Excellence
Netflix's financial performance demonstrates exceptional operating leverage as the business scales. Operating margin reached 34.1% in second-quarter 2025, an improvement of nearly 3 percentage points from the prior quarter and nearly 7 percentage points year over year. This margin expansion occurred despite continued significant content investments, highlighting the company's ability to grow revenues faster than costs.
Cash generation metrics provide additional confidence in Netflix's financial strength. Free cash flow reached $2.3 billion in second-quarter 2025, representing a 91% increase, with Netflix raising full-year free cash flow guidance to $8-$8.5 billion. This robust cash generation provides flexibility for continued content investments, potential acquisitions, and shareholder returns while maintaining balance sheet strength.
The combination of advertising revenue acceleration, content pipeline strength, and operational excellence creates a compelling investment thesis that justifies Netflix's premium valuation. The company's execution across growth vectors positions it for sustained outperformance in 2025 and beyond.
Investment Outlook
Investors should buy Netflix stock now despite the elevated forward 12-month P/E ratio of 40.8x compared to the broader Zacks Broadcast Radio and Television industry's forward earnings multiple of 30.69x.
NFLX's P/E F12M Ratio
Image Source: Zacks Investment Research
The streaming giant's advertising transformation, robust content investments, and exceptional cash generation capabilities position the company for sustained multi-year outperformance. Netflix represents a rare combination of market leadership and explosive growth potential in the rapidly expanding digital entertainment landscape. NFLX currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Should You Buy Netflix at 40.8x P/E? 3 Reasons Despite the Premium
Key Takeaways
Netflix (NFLX - Free Report) stock may trade at a premium valuation that makes some investors pause, but the streaming giant's fundamentals paint a compelling picture for long-term growth that justifies current price levels. The company's second-quarter 2025 results demonstrated remarkable financial momentum, with revenues of $11.08 billion growing 16% year over year, while operating margins expanded to 34.1%.
Netflix raised its full-year revenue guidance to $44.8-$45.2 billion, up from the previous range of $43.5-$44.5 billion, signaling management's confidence in sustained growth momentum.
The Zacks Consensus Estimate for NFLX’s 2025 revenues is pegged at $45.03 billion, indicating 15.47% year-over-year growth. The consensus mark for earnings is pegged at $26.06 per share, indicating a 31.42% increase from the previous year.
Netflix, Inc. Price and Consensus
Netflix, Inc. price-consensus-chart | Netflix, Inc. Quote
Netflix has delivered impressive returns for shareholders so far in 2025, with the streaming giant's shares surging 25% in six months, significantly outpacing other streaming competitors like Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , and Disney (DIS - Free Report) , as well as the broader Zacks Consumer Discretionary sector and the S&P 500. Shares of Apple have lost 5.2%, while Disney and Amazon have returned 3.5% and 7.7%, respectively, in the same time frame.
NFLX Outperforms Sector, Competition
Image Source: Zacks Investment Research
The Advertising Revolution Creates Massive Revenue Opportunity
The most compelling reason to buy Netflix stock lies in its rapidly expanding advertising business, which represents a fundamental transformation in the company's revenue model. Netflix plans to double its advertising revenues in 2025 after already doubling ad revenues year over year in 2024. This growth trajectory is particularly impressive given that ad-supported plans accounted for more than 55% of signups in the fourth quarter across the 12 countries where the tier is available.
The advertising opportunity extends far beyond current performance metrics. Netflix's ad-supported tier now boasts greater than 94 million global monthly active users, more than doubling from 40 million the year before, while analysts forecast 43% growth for 2025, reaching $2.07 billion in advertising revenues.
Netflix's competitive advantage in advertising stems from its proprietary technology infrastructure. The company successfully launched its in-house Netflix Ads Suite platform in the United States and Canada, with plans to expand to the remaining markets. This technological control enables better targeting capabilities, improved advertiser experience, and higher monetization rates. The platform is eyeing a growing piece of the $25 billion connected TV advertising spend, positioning Netflix to capture significant market share in this rapidly expanding sector.
Content Pipeline Strength Drives Subscriber Growth & Engagement
Netflix's content strategy continues to demonstrate its ability to create global phenomena that drive subscriber acquisition and retention. The fifth and final season of Stranger Things headlines the offering, alongside the second season of Wednesday and the third season of Alice in Borderland. These established properties have demonstrated significant global appeal and engagement metrics.
Film offerings include prestige projects from Academy Award winners, including Kathryn Bigelow's A House of Dynamite and Guillermo del Toro's Frankenstein. The diverse slate positions Netflix to capture engagement across demographic segments and viewing preferences.
The strategic content investments extend beyond traditional programming into live events and sports, creating additional advertising revenue opportunities. Netflix's 2025 slate includes major live events, such as WWE programming under a 10-year $5 billion deal, NFL Christmas Day games, and TUDUM fan event streaming live globally. These live programming initiatives drive subscriber engagement and command premium advertising rates, creating multiple revenue streams from single content investments.
Netflix's content creation capabilities provide sustainable competitive advantages in an increasingly crowded streaming marketplace. The company maintains content production in more than 50 countries with annual content spending exceeding $18 billion, enabling local market penetration while maintaining global scale efficiencies.
Operating Leverage and Cash Generation Excellence
Netflix's financial performance demonstrates exceptional operating leverage as the business scales. Operating margin reached 34.1% in second-quarter 2025, an improvement of nearly 3 percentage points from the prior quarter and nearly 7 percentage points year over year. This margin expansion occurred despite continued significant content investments, highlighting the company's ability to grow revenues faster than costs.
Cash generation metrics provide additional confidence in Netflix's financial strength. Free cash flow reached $2.3 billion in second-quarter 2025, representing a 91% increase, with Netflix raising full-year free cash flow guidance to $8-$8.5 billion. This robust cash generation provides flexibility for continued content investments, potential acquisitions, and shareholder returns while maintaining balance sheet strength.
The combination of advertising revenue acceleration, content pipeline strength, and operational excellence creates a compelling investment thesis that justifies Netflix's premium valuation. The company's execution across growth vectors positions it for sustained outperformance in 2025 and beyond.
Investment Outlook
Investors should buy Netflix stock now despite the elevated forward 12-month P/E ratio of 40.8x compared to the broader Zacks Broadcast Radio and Television industry's forward earnings multiple of 30.69x.
NFLX's P/E F12M Ratio
Image Source: Zacks Investment Research
The streaming giant's advertising transformation, robust content investments, and exceptional cash generation capabilities position the company for sustained multi-year outperformance. Netflix represents a rare combination of market leadership and explosive growth potential in the rapidly expanding digital entertainment landscape. NFLX currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.