Netflix Q2 2026 earnings: Is the company’s reduced transparency a red flag?

• Q2 2026 results were broadly in line with expectations, with revenue rising 13% YoY to USD 12.56bn and EPS of USD 0.80. Netflix also narrowed its full-year 2026 revenue guidance to USD 51.0–51.4bn while maintaining the midpoint of its outlook.

• Shares sold off following the earnings release as weaker-than-expected 3Q guidance coincided with management's decision to reduce engagement disclosures, raising concerns over the sustainability of future growth.

• We believe the weaker 3Q outlook does not materially alter Netflix's long-term investment case, as it largely reflects tougher year-over-year comparisons, while the company's pricing power, expanding entertainment ecosystem and growing advertising business remain firmly intact.

• While management pushed back against concerns over weakening engagement, we believe its decision to reduce the frequency of the What We Watched report to an annual release undermines confidence in that narrative. Although we agree viewership alone is not a comprehensive measure of engagement, greater transparency would have strengthened investor confidence.

• We lowered our target price for Netflix from USD 150 to USD 148 to reflect higher expected content spending to fend off rising competition. Nevertheless, our revised target price still implies an attractive 118% upside from the 20 July closing price, supporting our maintained Buy recommendation.

Q2 2026 Earnings Highlights

Netflix’s Q2 2026 results were broadly in line with market expectations. Revenue rose 13% year over year (YoY) to USD 12.56 billion, marginally below the consensus estimate of USD 12.58 billion, driven primarily by membership growth, higher subscription prices, and continued growth in advertising revenue.

Operating income increased 11% YoY to USD 4.2 billion, modestly ahead of the consensus estimate of USD 3.94 billion. Operating margin declined to 33.4% from 34.1% a year earlier, largely due to the front-loading of content amortisation in the first half of the year, a timing effect that management had already flagged during its first-quarter earnings call.

Diluted earnings per share (EPS) came in at USD 0.80, slightly above the consensus estimate of USD 0.79.

Table 1: Netflix Q2 earnings

	2Q26	2Q25	Beat/Miss vs Estimate	YoY change
Revenue	12,560	11,079	-0.1%	13.4%
Operating Income	4,192.6	3,774.7	1.5%	11.1%
Net Income	3,401.4	3125.4	0.3%	8.8%
Diluted EPS	0.80	0.72	1.4%	11.1%
Source: Netflix 2Q26 Shareholder Letter, Bloomberg Finance L.P. Data as of 17 July 2026. Figures are in USD millions except percentages and per share amounts.

Looking ahead, Netflix narrowed its full-year 2026 revenue guidance to USD 51.0–51.4 billion from its previous range of USD 50.7–51.7 billion, maintaining the midpoint of its outlook. The company also reiterated its expectation for advertising revenue to roughly double year over year to approximately USD 3 billion and maintained its full-year operating margin guidance of 31.5%.

The weaker aspect of the earnings release was management's outlook for the third quarter. Netflix guided for revenue of USD 12.86 billion (13.4% YoY vs 17.2% in 3Q25) and diluted EPS of USD 0.82, both below consensus expectations of USD 12.99 billion and USD 0.84, respectively.

Adding to investor concerns, the company also announced that it will reduce the publication frequency of its What We Watched engagement report from twice a year to once a year beginning in January 2027. Management said the change is intended to keep investors focused on the company's primary financial metrics of revenue and operating profit. However, the decision comes at a time when investors have become increasingly focused on engagement trends amid signs of softer viewing hours.

Taken together, the weaker third-quarter guidance and the reduction in engagement disclosures were the primary catalysts behind the post-earnings selloff. The market's reaction raises two key questions: Should investors be concerned about the softer near-term guidance? And does the reduced transparency around engagement metrics signal that Netflix's long-term growth story is beginning to lose momentum?

Quarterly volatility does not change Netflix's long-term growth story

While Netflix's third-quarter guidance disappointed investors, we do not believe it materially changes the company's longer-term investment case. Importantly, management maintained the midpoint of its full-year 2026 revenue guidance. The softer third-quarter outlook largely reflects tougher year-over-year comparisons, as growth in 2025 was more heavily weighted towards the second half of the year. Quarterly results can inevitably be volatile, and a single weaker quarter does little to alter our assessment of Netflix's long-term fundamentals.

More importantly, the key drivers underpinning Netflix's long-term growth story remain firmly intact. One of the clearest examples is the company's continued pricing power. Earlier this year, Netflix raised subscription prices across several markets, including the US, Mexico and Spain. Management noted that "the results of our recent price changes are consistent with prior changes and our expectations," reinforcing our view that Netflix can continue increasing prices without meaningfully impacting subscriber retention.

This ultimately reflects the value that Netflix continues to deliver to its members. The company continues to enjoy one of the lowest churn rates in the streaming industry, while US subscribers still pay the lowest cost per hour of viewing among comparable subscription video-on-demand (SVOD) platforms. We believe this gives Netflix ample room to continue monetising its growing content ecosystem through future price increases.

Crucially, Netflix is no longer just a provider of films and television series. The company has steadily broadened its entertainment offering to include live events, games, video podcasts and, soon, short-form content. Management highlighted that cloud-based TV games continue to gain traction, with monthly active players increasing eleven-fold since October 2025. Meanwhile, video podcasts are generating incremental engagement, particularly during daytime hours and on mobile devices—periods that have traditionally seen lower engagement for long-form video. Live events have also proven to be an effective acquisition tool. According to management, they have generated "disproportionate sign-ups" and, more importantly, delivered an outsized contribution to net subscriber additions.

The latest addition to this ecosystem is short-form content. In July, Netflix signed licensing agreements with several media publishers, including BuzzFeed Studios and People Inc., as it seeks to compete for consumer attention against platforms such as TikTok, YouTube and Instagram. Beginning 3 August, subscribers across the US, Canada, the UK, Ireland, Australia and New Zealand will have access to videos as short as two minutes. While still in its early stages, we view this as a logical move to capture viewing time that has increasingly shifted towards short-form platforms and further strengthen Netflix's value proposition.

Beyond subscriptions, advertising remains another meaningful long-term growth opportunity. Netflix continues to expect advertising revenue to roughly double to approximately USD 3 billion in 2026, supported by the ongoing rollout of its in-house advertising technology platform. The company is also expanding programmatic buying capabilities to include Pause Ads and live inventory, reducing friction for advertisers while opening the platform to a broader pool of smaller businesses. Even then, advertising would account for only around 6% of Netflix's projected 2026 revenue. Importantly, USD 3 billion represents less than 1% of the estimated USD 660 billion global advertising market, highlighting the substantial runway that remains as Netflix continues to build out its advertising capabilities.

International markets also continue to provide another important avenue for growth. While the UCAN (US and Canada) region delivered healthy foreign exchange-neutral revenue growth of 10% in the second quarter, growth was even stronger across EMEA (11%), Latin America (16%) and Asia-Pacific (18%). This suggests that although Netflix's North American business is relatively mature, international markets continue to offer meaningful opportunities for both subscriber growth and monetisation.

Overall, we continue to believe Netflix has considerable room for growth despite its scale. The company has penetrated less than 45% of its estimated 800 million addressable households globally and still accounts for only around 5% of worldwide TV viewing. Combined with its proven pricing power, expanding content ecosystem and early-stage advertising business, we believe the company's long-term growth drivers remain firmly intact despite near-term quarterly volatility.

Engagement remains a key uncertainty  

While we remain positive on Netflix's long-term outlook, engagement is likely to remain an overhang on the stock in the near to medium term. Ahead of the earnings release, Bloomberg reported that viewers were increasingly dropping Netflix originals after their first season, citing titles such as The Night Agent, One Piece, The Four Seasons, Running Point and Beef. At the same time, Nielsen data showed Netflix's share of US TV viewing declining from a one-year high of 9.0% in December 2025 to 7.8% in April 2026.

Management firmly pushed back against these concerns. Co-CEO Ted Sarandos said there had not been "any material change" in second-season viewership relative to first seasons, adding that "our season two falloff is actually slightly improved this year relative to last year." The company also reported that viewing hours increased 2% in the first half of 2026, compared with 1.5% growth over the same period last year, suggesting that overall engagement remains healthy.

Figure 1: Netflix’s share of US TV viewing has declined in recent months

However, we believe the bigger concern was Netflix's decision to reduce the frequency of its "What We Watched" report from twice a year to once annually starting in 2027. We agree with management that engagement cannot be measured solely by viewing hours. As Netflix expands beyond films and TV series into games, podcasts, live events and short-form content, engagement increasingly reflects a combination of the quality, variety and quantity of entertainment rather than a single metric.  

That said, the timing of the decision is unfortunate given the recent scrutiny around engagement. While viewership is not the only measure of Netflix's health, it remains an important indicator of the strength of its user proposition. Members who watch Netflix more frequently are generally less likely to churn and more receptive to future price increases. Strong engagement is also important to the advertising business, as advertisers place greater value on platforms that consistently attract and retain viewers. If engagement remains healthy, greater transparency—not less—would have helped reinforce management's narrative.

Maintain buy despite lowering our valuation assumptions

In our view, the post-earnings selloff reflects heightened uncertainty rather than any deterioration in Netflix's underlying fundamentals. While reduced engagement disclosures do make it harder for investors to independently assess the sustainability of Netflix's growth, they do not undermine the key structural drivers underpinning Netflix's long-term growth.

That said, we do expect content spending to increase in the coming years as Netflix competes more aggressively for viewers' attention. Although we expect the company to remain the global streaming leader, maintaining that position will likely require greater investment in content, resulting in modest margin pressure over the medium term.

Accordingly, we have reduced our 2027 and 2028 earnings forecasts to reflect our expectation of higher content spending, while leaving our 2026 estimates unchanged. As a result, we have lowered our 2028 target price from USD 150 to USD 148. Nonetheless, our revised target price still implies an attractive upside of 118% from Netflix's closing price of USD 67.60 on 20 July.

Despite the uncertain near-term outlook, we believe the recent share price decline has more than priced in these growth concerns. Furthermore, the company's record share repurchases of approximately USD 4.7 billion during the quarter—the largest quarterly buyback in its history—signals management's confidence in the company's long-term value at current share prices.

While Netflix currently lacks a clear near-term catalyst and investors may need to be patient as management executes on its newer growth initiatives, we believe the recent pullback has created an attractive entry point and favourable risk-reward profile for long-term investors. We therefore maintain our Buy recommendation for Netflix.

Table 2: Projections for Netflix’s earnings

Netflix	2025	2026E	2027E	2028E
Earnings Per Share (EPS)	2.5	3.2	3.8	4.5
Earnings Growth YoY	29.7%	26.8%	17.4%	18.3%
PE Ratio (X)	36.9	21.0	17.9	15.1
Target Price (based on a fair PE of 33X)				148
Upside Potential				118%
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 20 July 2026

Figure 2: Share prices are driven by earnings growth in the long run

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Netflix Inc.