Netflix (NFLX)

Streaming video giant Netflix (NASDAQ: NFLX) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 17.2% year on year to $11.51 billion. The company expects next quarter’s revenue to be around $11.96 billion, close to analysts’ estimates. Its GAAP profit of $5.87 per share was 15.8% below analysts’ consensus estimates.

Company Overview

Launched by Reed Hastings as a DVD mail rental company until its famous pivot to streaming in 2007, Netflix (NASDAQ: NFLX) is a pioneering streaming content platform.

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Netflix’s sales grew at a decent 11.3% compounded annual growth rate over the last three years. Its growth was slightly above the average consumer internet company and shows its offerings resonate with customers.

This quarter, Netflix’s year-on-year revenue growth was 17.2%, and its $11.51 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 16.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.2% over the next 12 months, an acceleration versus the last three years. This projection is particularly noteworthy for a company of its scale and implies its newer products and services will catalyze better top-line performance.

User Growth

As a subscription-based app, Netflix generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Netflix’s global streaming paid memberships, a key performance metric for the company, increased by 14.1% annually to 317.1 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.

In Q3, Netflix added 34.41 million global streaming paid memberships, leading to 12.2% year-on-year growth. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t accelerating user growth just yet.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time).

Netflix’s ARPU has been roughly flat over the last two years. This isn’t great, but the increase in global streaming paid memberships is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Netflix tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.

This quarter, Netflix’s ARPU clocked in at $36.30. It grew by 4.4% year on year, slower than its user growth.

For internet subscription businesses like Netflix, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer service, data center and infrastructure expenses, royalties, and other content-related costs if the company’s offerings include features such as video or music.

Netflix’s gross margin is below the broader consumer internet industry, giving it less room to hire engineering talent that can develop new products and services. As you can see below, it averaged a 46.8% gross margin over the last two years. Said differently, Netflix had to pay a chunky $53.23 to its service providers for every $100 in revenue.

In Q3, Netflix produced a 46.4% gross profit margin, marking a 1.4 percentage point decrease from 47.9% in the same quarter last year. Zooming out, however, Netflix’s full-year margin has been trending up over the past 12 months, increasing by 2.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Netflix grow from a combination of product virality, paid advertisement, and incentives.

Netflix is extremely efficient at acquiring new users, spending only 15.5% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and strong brand reputation from scale, giving Netflix the freedom to invest its resources into new growth initiatives while maintaining optionality.

Investors regularly analyze operating income to understand a company’s profitability. Similarly, EBITDA is a common profitability metric for consumer internet companies because it excludes various one-time or non-cash expenses, offering a better perspective of the business’s profit potential.

Netflix has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 29%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Netflix’s EBITDA margin rose by 10.6 percentage points over the last few years, as its sales growth gave it operating leverage.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

We can take a deeper look into Netflix’s earnings to better understand the drivers of its performance. As we mentioned earlier, Netflix’s EBITDA margin expanded by 10.6 percentage points over the last three years. On top of that, its share count shrank by 3.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q3, Netflix reported EPS of $5.87, up from $5.40 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Netflix’s full-year EPS of $23.94 to grow 28.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Netflix has shown robust cash profitability, driven by its cost-effective customer acquisition strategy that enables it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 19.9% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that Netflix’s margin expanded by 18.4 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Netflix’s free cash flow clocked in at $2.66 billion in Q3, equivalent to a 23.1% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

Netflix reported $9.29 billion of cash and $14.46 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $13.27 billion of EBITDA over the last 12 months, we view Netflix’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $438.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

This was a noisy quarter. While revenue was in line, reported operating margin and EPS were below expectations. However, a major headwind was a $619 million expense related to "an ongoing dispute with Brazilian tax authorities" that will not impact future results. Absent this expense, operating margin in the quarter would have been roughly five percentage points higher. The stock traded down 6.2% to $1,165 immediately following the results.

Updated: December 4, 2025 at 9:29 PM EST

Are you wondering whether to buy Netflix or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There’s plenty to admire about Netflix. First off, its revenue growth was decent over the last three years and is expected to accelerate over the next 12 months. And while its projected EPS for the next year is lacking, its impressive EBITDA margins show it has a highly efficient business model. On top of that, its rising cash profitability gives it more optionality.

Netflix’s EV/EBITDA ratio based on the next 12 months is 2.7x. When scanning the consumer internet space, Netflix trades at a fair valuation. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $134.44 on the company (compared to the current share price of $103.07), implying they see 30.4% upside in buying Netflix in the short term.