Shares of streaming leader Netflix (NFLX +1.15%) have soared recently, and for a good reason: management walked away from a massive, risky acquisition.
When the company officially abandoned its pursuit of Warner Bros. Discovery‘s studio assets — a deal previously valued at $82.7 billion — the stock jumped; Wall Street cheered the move, viewing it as a clear sign of capital discipline.
Walking away meant avoiding a complex integration and dodging a massive financial commitment. More importantly, it meant Netflix could immediately resume its share repurchase program, supported by the impressive $9.5 billion in free cash flow it generated in 2025.
Combined with the company’s strong underlying business performance, the canceled deal bolstered the bull case.
But is the stock a buy today?
Image source: The Motley Fool.
The hidden warning in the deal
It is easy to celebrate Netflix for walking away from an $82.7 billion megadeal. But investors need to ask a more fundamental question: Why was the company considering a transaction of that scale in the first place?
The answer points directly to the stock’s biggest risk: intense competition.
The fact that the company even considered the Warner Bros. deal suggests how important Netflix believes it is to continue aggressively spending on content to defend its turf.
And Netflix has always been open about this environment.
“We have long stated that we compete against all activities people engage with during their leisure time, including, but not limited to, other streaming services, linear television, social media, open content platforms, video gaming, and concerts to name just a few,” Netflix explained during its fourth-quarter shareholder letter. “As a result, the entertainment business has always been and remains fiercely competitive with strong players like the US media conglomerates, large technology companies, and local broadcasters and media companies outside the US.”
It is competing for absolute share of screen time against anyone vying for consumer attention, including scrolling on social media and viewing user-generated content on Alphabet‘s YouTube.
In a landscape where attention is increasingly fragmented, acquiring and retaining subscribers requires a constant, expensive drumbeat of massive global hits. A sprawling content library is not a luxury; it is a baseline requirement for survival. And Netflix’s flirtation with the Warner Bros. studio assets reveals just how hungry the company is for established intellectual property to feed that machine.
Indeed, in the same press release in which Netflix announced its decision to walk away from Warner Bros., the company said it plans to invest $20 billion in films and series this year.
Today’s Change
(1.15%) $1.08
Current Price
$95.39
Key Data Points
Market Cap
$402B
Day’s Range
$94.24 – $95.67
52wk Range
$75.01 – $134.12
Volume
1.4M
Avg Vol
49M
Gross Margin
48.59%
Priced for perfection
With the stock’s recent rally, the valuation leaves very little cushion if that competitive pressure starts to weigh on growth.
As of this writing, Netflix trades at a price-to-earnings ratio of about 37. At this multiple, investors are not just paying for a strong business today; they are pricing in the assumption that Netflix will continue to compound its revenue at a double-digit rate while simultaneously expanding its profit margins for years to come.
Of course, Netflix is currently delivering on those high expectations. The company expects its operating margin to expand from 29.5% in 2025 to 31.5% in 2026.
There is also a secondary catalyst to consider: the company’s fast-growing advertising business. Management noted that ad revenue rose more than 150% in 2025 to over $1.5 billion, and the company expects this to roughly double in 2026. While promising, however, this segment is still a relatively small slice of the overall revenue pie; Netflix’s total 2025 revenue was $45.2 billion.
And there are already signs that overall growth could moderate. Management’s guidance for the first quarter of 2026 calls for revenue of $12.2 billion. That 15.3% year-over-year growth — a clear deceleration from the 17.6% top-line growth it posted in the fourth quarter. And, for the full year, the company is guiding for revenue to increase 12% to 14% — or just 11% to 13% in constant currency.
If competition forces Netflix to keep content spending elevated, or if pricing power softens as consumers consolidate their streaming subscriptions, the price-to-earnings multiple the market is willing to assign the company could come down over time.
Ultimately, Netflix is an exceptional business with a highly disciplined management team. The decision to walk away from the Warner Bros. deal and continue share repurchases was probably the right one.
But given the intense competition for consumer attention and the high expectations built into the stock’s current valuation, I think Netflix is more of a hold than a buy right now.
