The last six months have been brutal for Netflix (NASDAQ: NFLX) investors. As of this writing (Feb. 13), Netflix shares have plummeted 43% from all-time highs.
The main culprit behind the Netflix sell-off revolves around one thing: A potential acquisition of the television and film assets of Warner Bros. Discovery.
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While most continue to panic over how Netflix may finance this transaction — should the deal go through — and integrate Warner Bros.’ content with its existing content, smart investors are looking past these distractions and thinking longer term.
The key performance indicator that most investors care about for Netflix is its subscriber count. At the end of the fourth quarter, the company boasted 325 million paid memberships — up from 302 million subscribers at the end of 2024.
Increasing subscriber count is critical as it provides Netflix with recurring, predictable revenue. However, over the last couple of years, Netflix has quietly introduced some new operating levers that I think are going overlooked.
Last year, Netflix’s advertising segment grew 2.5x compared to 2024 — generating $1.5 billion in sales. In just three years, Netflix has been able to turn its advertising division into a billion-dollar business that complements the subscription service.
What I mean by that is the low-cost ad tier helps insulate Netflix from higher churn rates, while also maintaining some degree of premium pricing from audiences who choose to bypass marketing and pay full price.
The combination of recurring streaming fees and high-margin advertising is helping Netflix expand its profit margins. For 2026, management is guiding for a 31.5% operating margin — up from 29.5% last year. Widening profit margins should flow to Netflix’s bottom line — fueling additional free cash flow that the company can use to reinvest in new content creation.
Thanks to the ongoing sell-off, Netflix is now trading at its cheapest valuation in three years based on trends in the price-to-earnings (P/E) multiple. The question now is whether this is a savvy opportunity to buy the dip or if this streaming stock is swiftly turning into a value trap.
Given the company’s accelerating subscriber base, growing advertising segment, and the company’s ability to command positive unit economics on these businesses, I see little reason for Netflix to experience a meaningful decline in revenue or earnings.
