The upcoming Netflix earnings report on Thursday is set to be a pivotal moment for the streaming giant, with analysts and investors closely watching for insights into the company's future trajectory. The key question on everyone's mind is whether Netflix's narrative is one of engagement challenges or potential advertising growth. The recent decline in the company's stock price, hitting a 52-week low in June, has only heightened concerns about engagement, especially with the addition of live TV channels and subscription streamers like Peacock, which could further impact user retention.
However, amidst these concerns, there's a growing belief that Netflix's ad business is poised for significant growth. John Blackledge, an analyst at TD Cowen, argues that the ad tier, with over 250 million monthly active users, will drive member growth and support margin expansion. He estimates that Netflix's advertising business is already accretive to overall operating margins and predicts a steady rise in ad segment operating margins, reaching 40% in 2026 and 66% in 2031. This perspective challenges the prevailing narrative, suggesting that the ad business could be a key driver of success.
Alicia Reese, from Wedbush Securities, echoes this sentiment, emphasizing that the ad business is outperforming engagement concerns. She highlights the potential for ad revenue to double in 2026, reaching $3 billion, and notes that ad-tier subscribers show higher intent to stay with Netflix compared to premium subscribers. This shift in subscriber behavior indicates a strong potential for ad-supported tiers to become a significant revenue stream.
Despite the engagement challenges, the World Cup is expected to impact second-quarter engagement negatively, creating a headwind for subscriber growth. However, analysts like Laurent Yoon from Bernstein argue that the ad business can mitigate this pressure. With ad revenue potentially exceeding $3 billion, it could provide support to both revenue and earnings per share. This perspective suggests that Netflix's ad strategy may be a more significant factor in its financial success than initially thought.
Peter Supino, from Wolfe Research, also highlights the attractive valuation of Netflix's stock, noting that it is currently trading at a 19 times 2027 earnings per share multiple, which is lower than its historical range. This valuation makes Netflix an attractive investment, especially considering its growth strategies, superior scale, and rich cash flow. The analyst believes that Netflix's focus on content investment and scale advantage will extend its lead in long-form video streaming.
Kutgun Maral, from Evercore ISI, takes a more cautious approach, acknowledging the concerns about competition, market maturity, and engagement plateauing. However, he remains bullish, expecting Netflix to address these challenges through its content strategy, live events, and short-form content. Maral emphasizes the importance of margins in the second half of 2026, but remains confident in Netflix's ability to maintain or modestly raise its revenue and margin framework.
In conclusion, the Netflix earnings report is likely to reveal a complex story, with engagement challenges and advertising growth presenting two sides of the same coin. While the company faces near-term headwinds, the potential for ad-supported tiers to drive member growth and revenue suggests that Netflix's ad business may be a key differentiator in the highly competitive streaming market.
