Netflix: Operating Leverage Is Doing the Heavy Lifting — A Long Trade for Patient Bulls

Hook & Thesis

Netflix is delivering a textbook example of operating leverage: revenue growth is accelerating while margins expand and the advertising segment is scaling rapidly. The market has punished the stock since the Warner Bros. Discovery acquisition announcement, creating a chance to buy a high-quality cash generator trading at multiples that look reasonable given the company's profitability.

My trade idea: take a long position with a clearly defined entry, stop and targets and plan to hold for the long term (180 trading days). This is not a momentum punt — it’s a play on durable margin expansion and FCF generation that should re-rate as the integration risks around the Warner Bros. transaction resolve.

What Netflix Does and Why the Market Should Care

Netflix operates a global streaming entertainment platform and increasingly monetizes through two engines: subscription revenue and advertising. The company’s core strengths are content scale, global distribution, and a product that drives heavy consumption across demographics. As linear TV declines and streaming viewing rises, Netflix sits in a favorable spot to convert viewing time into growing ARPU through ads while protecting subscription revenue growth.

Key Fundamental Drivers

• Revenue growth: Analysts referenced accelerating revenue growth around 17.6% year-over-year, indicating the top line has regained meaningful momentum.
• Operating margins: Operating margins near 29.5% show that content and fixed-cost leverage are working in Netflix’s favor — more revenue drops to the bottom line.
• Advertising growth: The ad tier has been reported to grow ~150% in 2025, an important variable for incremental margin expansion because ads sell at much higher incremental margin than content-heavy subscription revenue.
• Free cash flow: Netflix generated approximately $9.46 billion in free cash flow most recently, converting profitability into cash that can be used for content investment, buybacks or to support strategic M&A.

Supporting Data Snapshot

Valuation Framing

At a market cap near $349B and an enterprise value around $335B, Netflix is trading at roughly 8.9x EV/EBITDA and an EV/FCF multiple in the mid-30s given recent free cash flow of $9.46B. Those multiples look reasonable when you remember two things: (1) Netflix is posting operating margins close to 30% and ROE above 40%, and (2) its ad business is adding a high-margin revenue stream that should lift overall incremental margins. The valuation is not a deep-value bargain, but it does allow for upside if growth and margins continue to improve and the market gives a higher multiple for predictable cash flow.

By comparison to its own history, the stock has traded materially higher — the 52-week high is $134.12 — but that peak was driven in part by acquisition-related expectations. Today’s level trades at a discount to that optimism while still reflecting a profitable, cash-generative enterprise. Given free cash flow and margin strength, a re-rating to a mid-teens EV/EBITDA multiple or simply continued growth could drive meaningful upside.

Technicals & Market Structure

Technicals are neutral-to-constructive. The 10-day SMA (~$77.98) sits below the current price and the 50-day SMA (~$86.51) is above it, implying a pullback within a broader uptrend. RSI ~52 suggests the stock is not overbought. Short interest is meaningful but manageable (~82.9M shares as of 02/13/2026 with days-to-cover ~1.74), which can amplify moves but also limits sustained downside from forced covering alone.

Trade Plan (Actionable)

Entry: Buy at $83.00.
Stop loss: $72.00 (cuts position if the setup breaks and the stock revisits the recent low near $75).
Target: $110.00 over a long-term horizon.

This trade is intended to be held for the long term (180 trading days). The thesis requires time for the advertising business to scale further, for operating leverage to compound, and for deal-related uncertainty around the Warner Bros. transaction to dissipate. If market sentiment normalizes and the market assigns a higher multiple to durable cash flows, $110 becomes an attainable objective within 6-9 months.

Catalysts

• Resolution of the Warner Bros. Discovery transaction and any matching/auction dynamics by 03/20/2026 - clarity on the deal could remove a primary source of headline volatility.
• Continued ad business acceleration and quarterly updates showing sustained high-teens revenue growth and margin expansion.
• Quarterly results that beat on revenue and FCF, reinforcing operating-leverage narrative.
• Positive guidance or commentary on ARPU improvement across tiers (ads + subscriptions) during earnings calls.

Risks and Counterarguments

Below are the primary risks that could invalidate this trade.

• Regulatory or deal risk: The Warner Bros. Discovery acquisition process remains contested; a failed deal, regulatory restrictions, or an extended matching auction could increase uncertainty and keep a valuation discount in place.
• Competition and pricing pressure: Large tech platforms and legacy media companies continue to invest heavily in streaming; intensified competition could limit pricing power or force higher content spend that constrains margins.
• Ad market cyclicality: Advertising revenues can be volatile and tied to macro strength. A macro slowdown could meaningfully slow ad growth, which is central to margin upside expectations.
• Execution risk on content spend: Maintaining subscriber growth and engagement requires continued investment in content. If ramped-up content expense outpaces revenue gains, margins could compress.
• Valuation compression risk: Even with solid fundamentals, multiples can fall if risk aversion rises or if investors demand lower growth multiple for media companies post-acquisition.

Counterargument: Critics argue the stock is too rich relative to peers and that the Warner Bros. deal creates strategic distraction and regulatory scrutiny. They point to potential consolidation in the industry and believe Netflix may have to increase content spend or accept slower ARPU gains. Those are fair points — if advertising growth disappoints or the acquisition saga drags on, the re-rating I expect may not materialize and downside to the mid-$50s is conceivable under a more pessimistic multiple contraction scenario.

What Would Change My Mind

I would abandon this long stance if any of the following occur: (1) quarterly revenue growth slips materially below the mid-teens while margins contract, (2) ad revenue growth decelerates sharply from the ~150% trajectory reported through 2025, or (3) the Warner Bros. transaction is blocked or materially restructured in a way that creates prolonged integration risk and large dilutive obligations. Conversely, a clean regulatory path and consistent beats on ad monetization metrics would make me more aggressive on targets.

Conclusion

Netflix looks like a classic operating-leverage story that has been punished by deal-related headline risk. With strong free cash flow ($9.46B), high operating margins (~29.5%), and rapid ad growth, the stock offers a measured long opportunity at $83.00 with a $72.00 stop and $110.00 target over a 180-trading-day horizon. This trade balances upside from margin and multiple expansion against clear deal and macro risks. If the company continues to convert revenue growth into cash and the Warner Bros. situation resolves without crippling concessions, the risk/reward works in favor of a disciplined long position.

Trade at-a-glance

• Ticker: NFLX
• Entry: $83.00
• Stop: $72.00
• Target: $110.00
• Horizon: long term (180 trading days)
• Risk level: medium