New Netflix Price Target Amid Mobile-First Transition

We are downgrading our rating on Netflix (NFLX) shares to a Three from One, and cutting our price target on the shares to $85 from $115.

Others across Wall Street are dialing back their price targets following Thursday night’s quarterly earnings report that was a combination of being mostly in line with market expectations and a bit disappointing. In case you missed it, Netflix reported June quarter EPS of $0.80, $0.01 better than the market consensus on revenues that rose 13.4% year over year to $12.56 billion, a hair short of the $12.58 billion consensus. For the current quarter, the company telegraphed EPS of $0.82 on revenue of $12.86 billion versus the $0.84 and $13 billion consensus.

The question to be asked, however, is whether the ensuing fall in the shares is warranted or overdone.

As we’ll get to, the answer is most likely overdone, but it will likely also depend on what Netflix has to say in the coming weeks about its advertising revenue stream. On Thursday night, Netflix shared that it still expects to roughly double its ad revenue year over year to $3 billion. Management added, however, that it is in “advanced stages” of discussions with advertisers in the U.S. as part of its Upfront negotiations, with the expectation that commitments will close in the coming weeks. To the extent that Netflix ups its advertising revenue forecast for this year, or paints a picture for that revenue becoming an even larger piece of the pie next year, it would be a potential catalyst to kickstart a rebound in the shares.

Where the advertising revenue angle gets interesting in our view is the push into other content formats that is already underway at the company with video podcasts and vertical video clips. With that in mind, Netflix is partnering with major digital publishers to feature short-form videos on its platform. Starting August 3, subscribers can directly access curated clips and series from Conde Nast — including brands like Vogue, Vanity Fair, Architectural Digest and Wired — ranging from 3 to 20 minutes in length. In terms of podcasts, Netflix is looking to tap the global ad revenue for video podcasts that will hit $38.5 billion around 2030.

We see this as Netflix aiming to drive engagement, while competing with the likes of Google’s (GOOGL) YouTube and the various platforms at Meta (META) that have leaned into video, like Instagram. On the one hand, some folks will pose the question about greater competition for those advertising dollars, but for the next few years, our thinking is these digital formats will continue to take ad dollars from print, radio and TV. Globally, TV accounts for approximately 20% to 23% of total ad spending, while radio claims roughly 4%, and print media (newspapers and magazines) accounts for 5% to 6%.

While folks are understandably focused on subscription growth metrics, we would say that, yes, those figures are important, but they also have the potential to become less so as Netlfix taps the advertising market to an even greater extend. On the topic of subscribers, during the earnings call on Thursday night, management shared that its household penetration is less than 45% of the 880 million addressable household market. That implies a figure around 350 million or so, and argues in favor of continued growth as the company leans more into live events and country-specific content.

On the content front, what should stand out is that view hours grew 2% in H1 2026, up from 1.5% growth in 2025, a year that included the final season of “Stranger Things,” a series that logged more than 1.5 billion total views. Here’s the thing: that view hour growth of 2% in H1 2026 equates to 1.5 billion hours and that explains why Netflix is able to double its advertising revenue this year to around 6% of total revenue.

So far, we’ve been upbeat on what we heard on Thursday night, but we can’t bury our head in the sand and only focus on the positives and opportunities. The fact that Netflix only posted arguably in-line Q2 2026 results is a bit of a disappointment following the price target increase in the U.S. in late March. Guidance for the current quarter outlined above also isn’t helping, given that it was a tad short of what the market was looking for despite the expected improvement in the company’s operating margin to more than 33% compared to 28.2% in the year-ago quarter.

As we reflect on that margin, it serves as a reminder that while Netflix’s $0.82 EPS forecast for the current quarter is $0.02 shy of what the market was looking for, on a year-over-year basis, it’s up about 39%.

What’s not clear in that guidance is the degree to which Netflix will use its share buyback program. During Q2 2026, the company made its largest repurchase to date at $4.7 billion. That leaves some $27 billion remaining under the current authorization. With NFLX shares trading at their lowest level since H2 2024, our thinking is the buyback activity in the current quarter is likely to be as big if not bigger.

Finally, there is the elephant in the room that is Netflix shifting its “What We Watched” report from being published every six months to annual starting in 2027. The company’s argument is that it wants investors to focus more on the financials and related metrics, but we’re not fans of less transparency.

Putting it All Together

There is a lot to digest in Netflix’s results and comments across its business. When we distill it down, what we see is that Netflix is aiming to evolve its business to match the changing landscape of video consumption. That means continuing to invest in series and movies, but adding video podcasts, vertical video clips, live events and continuing to improve its gaming platform as consumption becomes increasingly mobile in nature.

As it layers in a growing advertising business, which should help lift margins over time, the metrics to focus on should become more balanced between implied subscriber count and view hours. That also means that, should we see a view hour growth turn negative, it will be a warning signal for us to heed.

Getting back to the question about if Friday’s drop in the shares is overdone, our thinking is yes. At the same time, however, the lack of near-term upside in Netflix’s performance, despite the strong year-over-year EPS growth, has to be accounted for. That explains our price target cut as well as the others we are seeing across Wall Street.

We’ve talked many times before about a valuation reset for the market and individual stocks, and that is what we’re seeing with Netflix shares now. In those discussions we’ve had with you, we’ve pointed out that those resets can take time, and when it comes to individual stocks it often means they are a show me story. That is where Netflix is today.

The big question we have to ask ourselves as owners of NFLX shares is one that speaks to the position’s $86.30 cost basis: whether we can claw back the losses we’ve sustained thus far, and how long that might take. As we’re seeing with the current market pullback, other opportunities are going on sale, and they are ones with clear-cut growth drivers and trackable data points.

That brings us back to what Netflix could say as it concludes its advertising upfronts. It could jumpstart the shares, but the degree to which that accelerates a re-think on the shares and price targets will hinge on the size of what’s announced. It will help us determine if we are cutting our price target too aggressively.

Until we have that greater clarity, we’re in a holding pattern with NFLX shares, hence the move to a Three rating. To be clear, that does not guarantee the next move is to exit NFLX shares. Remember back to a time with our position in United Rentals (URI), where excessive wet winter weather introduced more than some uncertainty into the mix. As that uncertainty cleared, we were able to pick up URI shares in March 2025 near $613 and upgrade the shares. On Friday, they are trading at $1,071.

Let’s let calmer heads prevail, see how things develop and go from there.

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At the time of publication, TheStreet Pro was long GOOGL, META, NFLX and URI.