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3 Reasons to Avoid Netflix Stock Despite Its 28% Surge in 6 Months
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Key Takeaways
NFLX stock surged 28.2% in 6 months but trades at premium P/E above 40, raising valuation concerns.
Netflix warns operating margins will decline in second-half 2025 due to higher content costs.
Streaming competition intensifies as Amazon Prime Video holds 26% US market share vs Netflix 27%.
Netflix (NFLX - Free Report) has emerged as a dominant force in the entertainment industry, raising its revenue forecast for 2025 to $44.8-$45.2 billion, up from $43.5-$44.5 billion, reflecting management's confidence in sustained growth momentum. The stock has returned 28.2% in the past 6-month period. Yet beneath these headline numbers lie structural concerns that warrant a more cautious investment approach, particularly for those seeking optimal entry points in the evolving streaming landscape.
Operating Margin Pressures Signal Near-Term Headwinds
While Netflix achieved an impressive operating margin of 34.1% in the second quarter of 2025, an improvement of nearly 7 percentage points from the year-earlier period, management has warned investors about forthcoming profitability challenges. The company cautioned that operating margin in the second half of 2025 will be lower than in the first half due to higher content amortization and sales and marketing costs associated with the larger second half slate. This guidance suggests that the company's margin expansion story may face temporary setbacks as content investment accelerates.
The deteriorating margin trajectory reflects Netflix's strategic imperative to maintain content leadership amid intensifying competition. With major releases scheduled for late 2025, including high-budget original productions and licensed content acquisitions, the company faces mounting pressure to balance growth investments with profitability targets. These elevated content costs, combined with increased marketing expenditures to defend market share, create a challenging operating environment that could constrain earnings growth despite revenue expansion. Management's warning about second-half margin compression indicates that profitability improvements may stall, potentially disappointing investors expecting continued operational leverage.
The streaming wars have evolved from Netflix's monopolistic advantage to a fiercely contested battlefield where deep-pocketed rivals continue gaining ground. In the United States, Netflix leads the streaming market with 27% of the share, but Amazon (AMZN - Free Report) -owned Prime Video follows closely, holding 26%, demonstrating how quickly competitors have closed the gap. Disney (DIS - Free Report) -owned Disney+ and Apple (AAPL - Free Report) -owned Apple TV+ continue expanding their content libraries and technological capabilities, while leveraging unique ecosystem advantages unavailable to Netflix.
Disney+ maintains aggressive expansion strategies across international markets, particularly in Asia, through its Hotstar platform, while investing heavily in franchise content that resonates globally. The platform benefits from decades of intellectual property development, enabling content creation at lower marginal costs than Netflix's original production model. Amazon Prime Video leverages its Prime membership ecosystem, creating stickier customer relationships and lower acquisition costs while offering bundled value propositions. Apple TV+ focuses on prestige programming and seamless hardware integration, attracting premium subscribers willing to pay for quality over quantity.
These competitive dynamics pressure Netflix to increase content spending while potentially limiting pricing power, creating a challenging environment for margin expansion and return on invested capital.
Share Price Performance and Premium Valuation
Netflix has delivered impressive returns for shareholders so far in 2025, with the streaming giant's shares surging approximately 28.2% in the past 6-month period, significantly outpacing other streaming competitors like Apple, Amazon and Disney, as well as the broader Zacks Consumer Discretionary sector and the S&P 500. Shares of Apple, Disney and Amazon have returned 10.5%, 15.4% and 18.2% in the same time frame, respectively.
NFLX Outperforms Sector, Competition
Image Source: Zacks Investment Research
However, this outperformance has pushed valuations to concerning levels, with the stock trading at a P/E ratio exceeding 40.39, significantly above historical averages and sector benchmarks.
The premium multiple reflects market optimism about Netflix's advertising initiatives and password-sharing monetization, but execution risks remain substantial. Disney+'s established franchises and theme park synergies create durable competitive moats that are difficult for Netflix to replicate. Amazon Prime Video's bundled offering and logistics advantages enable superior customer lifetime values. Apple TV+'s hardware ecosystem integration drives services revenue growth beyond pure content monetization, highlighting structural advantages Netflix cannot match.
NFLX’s P/E F12M Ratio Depicts Premium Valuation
Image Source: Zacks Investment Research
Investment Recommendation
While Netflix remains the streaming industry leader with impressive financial metrics and global scale advantages, current valuations fail to adequately compensate investors for mounting operational challenges and competitive threats. The combination of margin pressure warnings, reduced disclosure transparency, and intensifying competition from well-capitalized rivals suggests prudent investors should await more attractive entry points before establishing or expanding positions. A correction toward the low $1,000 range would provide better risk-reward dynamics for long-term investors seeking exposure to streaming entertainment trends. Until valuations normalize or growth reaccelerates beyond current expectations, maintaining a cautious stance appears warranted despite the company's undeniable market leadership and execution capabilities. NFLX currently carries a Zacks Rank #4 (Sell).
Image: Bigstock
3 Reasons to Avoid Netflix Stock Despite Its 28% Surge in 6 Months
Key Takeaways
Netflix (NFLX - Free Report) has emerged as a dominant force in the entertainment industry, raising its revenue forecast for 2025 to $44.8-$45.2 billion, up from $43.5-$44.5 billion, reflecting management's confidence in sustained growth momentum. The stock has returned 28.2% in the past 6-month period. Yet beneath these headline numbers lie structural concerns that warrant a more cautious investment approach, particularly for those seeking optimal entry points in the evolving streaming landscape.
Netflix, Inc. Price and Consensus
Netflix, Inc. price-consensus-chart | Netflix, Inc. Quote
Operating Margin Pressures Signal Near-Term Headwinds
While Netflix achieved an impressive operating margin of 34.1% in the second quarter of 2025, an improvement of nearly 7 percentage points from the year-earlier period, management has warned investors about forthcoming profitability challenges. The company cautioned that operating margin in the second half of 2025 will be lower than in the first half due to higher content amortization and sales and marketing costs associated with the larger second half slate. This guidance suggests that the company's margin expansion story may face temporary setbacks as content investment accelerates.
The deteriorating margin trajectory reflects Netflix's strategic imperative to maintain content leadership amid intensifying competition. With major releases scheduled for late 2025, including high-budget original productions and licensed content acquisitions, the company faces mounting pressure to balance growth investments with profitability targets. These elevated content costs, combined with increased marketing expenditures to defend market share, create a challenging operating environment that could constrain earnings growth despite revenue expansion. Management's warning about second-half margin compression indicates that profitability improvements may stall, potentially disappointing investors expecting continued operational leverage.
Intensifying Competitive Landscape Threatens Market Dominance
The streaming wars have evolved from Netflix's monopolistic advantage to a fiercely contested battlefield where deep-pocketed rivals continue gaining ground. In the United States, Netflix leads the streaming market with 27% of the share, but Amazon (AMZN - Free Report) -owned Prime Video follows closely, holding 26%, demonstrating how quickly competitors have closed the gap. Disney (DIS - Free Report) -owned Disney+ and Apple (AAPL - Free Report) -owned Apple TV+ continue expanding their content libraries and technological capabilities, while leveraging unique ecosystem advantages unavailable to Netflix.
Disney+ maintains aggressive expansion strategies across international markets, particularly in Asia, through its Hotstar platform, while investing heavily in franchise content that resonates globally. The platform benefits from decades of intellectual property development, enabling content creation at lower marginal costs than Netflix's original production model. Amazon Prime Video leverages its Prime membership ecosystem, creating stickier customer relationships and lower acquisition costs while offering bundled value propositions. Apple TV+ focuses on prestige programming and seamless hardware integration, attracting premium subscribers willing to pay for quality over quantity.
These competitive dynamics pressure Netflix to increase content spending while potentially limiting pricing power, creating a challenging environment for margin expansion and return on invested capital.
Share Price Performance and Premium Valuation
Netflix has delivered impressive returns for shareholders so far in 2025, with the streaming giant's shares surging approximately 28.2% in the past 6-month period, significantly outpacing other streaming competitors like Apple, Amazon and Disney, as well as the broader Zacks Consumer Discretionary sector and the S&P 500. Shares of Apple, Disney and Amazon have returned 10.5%, 15.4% and 18.2% in the same time frame, respectively.
NFLX Outperforms Sector, Competition
Image Source: Zacks Investment Research
However, this outperformance has pushed valuations to concerning levels, with the stock trading at a P/E ratio exceeding 40.39, significantly above historical averages and sector benchmarks.
The premium multiple reflects market optimism about Netflix's advertising initiatives and password-sharing monetization, but execution risks remain substantial. Disney+'s established franchises and theme park synergies create durable competitive moats that are difficult for Netflix to replicate. Amazon Prime Video's bundled offering and logistics advantages enable superior customer lifetime values. Apple TV+'s hardware ecosystem integration drives services revenue growth beyond pure content monetization, highlighting structural advantages Netflix cannot match.
NFLX’s P/E F12M Ratio Depicts Premium Valuation
Image Source: Zacks Investment Research
Investment Recommendation
While Netflix remains the streaming industry leader with impressive financial metrics and global scale advantages, current valuations fail to adequately compensate investors for mounting operational challenges and competitive threats. The combination of margin pressure warnings, reduced disclosure transparency, and intensifying competition from well-capitalized rivals suggests prudent investors should await more attractive entry points before establishing or expanding positions. A correction toward the low $1,000 range would provide better risk-reward dynamics for long-term investors seeking exposure to streaming entertainment trends. Until valuations normalize or growth reaccelerates beyond current expectations, maintaining a cautious stance appears warranted despite the company's undeniable market leadership and execution capabilities. NFLX currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.