Key Points
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Netflix has underperformed the S&P 500 by a substantial margin since the company announced a 10-for-1 stock split last October, but most analysts think the stock is undervalued.
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The market is worried about Netflix’s $83 billion bid to buy Warner Bros. Discovery’s streaming and studio assets, but the deal would give the company rights to several popular franchises.
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There are undoubtedly risks associated with the potential merger, but the Netflix brand is synonymous with streaming, and the stock price is attractive compared to forward earnings estimates.
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Since 1980, stocks that split have beaten the S&P 500 (SNPINDEX: ^GSPC) by nearly 14 percentage points during the year following the stock-split announcement. But Netflix (NASDAQ: NFLX) shares have dropped 28% since the company announced a 10-for-1 split on Oct. 30, while the S&P 500 has advanced about 1%.
However, virtually every Wall Street analyst who follows Netflix thinks the stock is undervalued at its current price of $79 per share, according to LSEG. The lowest target price of $79 per share implies no change. But the highest target price of $150 per share (from Vikram Kesavabhotla at Baird) implies 90% upside.
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Netflix stock currently trades 41% below its record, primarily because investors are concerned about its bid to acquire Warner Bros. Discovery. I think that creates an attractive buying opportunity. Here’s why.
Images source: Getty Images.
Netflix is the most popular streaming service by several metrics
Netflix has parlayed its first-mover advantage into a streaming empire. While competition has increased in recent years, it remains the most popular streaming service by multiple metrics: It has more subscribers, more monthly active users, and it accounts for a larger percentage of television viewing time (excluding Alphabet‘s YouTube) than any competitor in the streaming space.
That scale means Netflix has a data advantage, and that data informs machine learning models that drive content creation decisions. In turn, Netflix originals regularly top the charts. Last year, the three most popular original streaming series — Stranger Things, Squid Game, and Wednesday — were produced by Netflix. In fact, Netflix made seven of the top 10 original streaming series in 2025, per analytics company Nielsen.
Netflix reported strong fourth-quarter financial results. Sales increased 18% to $12 billion, the third straight acceleration, driven by membership growth, higher pricing, and increased advertising revenue. And GAAP (generally accepted accounting principles) net income increased 30% to $0.59 per diluted share.
Investors are nervous about the potential merger with Warner Bros. Discovery
Netflix has made an all-cash bid to acquire Warner Bros. Discovery’s streaming and studio businesses for $27.75 per share, which works out to $72 billion. However, Netflix would also inherit the nearly $11 billion in debt those business segments carry, bringing the total purchase price to about $83 billion.
The deal is risky for several reasons. Netflix will reportedly take on as much as $50 billion in debt to finance the acquisition, which would reduce cash flow available to fund content creation. That could create a drag on future earnings growth. Also, by combining the most popular and fourth-most popular streaming services (by subscribers), the merger invites regulatory scrutiny.
However, the deal would also come with compelling benefits. Most importantly, Netflix would own the rights to major franchises like DC Universe (Batman, Superman), Dune, Friends, Game of Thrones, Harry Potter, and The Wizard of Oz. Netflix could spin that intellectual property into original content that could accelerate the business for decades to come, according to co-CEO Greg Peters.
It is impossible to know how the chips would fall, but Morgan Stanley analyst Benjamin Swinburne said risks associated with the transaction were discounted when Netflix traded at $87 per share. The stock now trades at $79 per share. Additionally, he estimates Netflix’s earnings post-acquisition would reach $6.50 per share in 2030. That implies growth of 21% annually over the next five years.
Swinburne’s estimate roughly matches what most Wall Street analysts expect from Netflix. The consensus forecast currently says earnings will grow at 22% annually over the next three years. That makes the current valuation of 31 times earnings look reasonable. Those numbers give Netflix a price/earnings-to-growth (PEG) ratio of 1.4, which is a discount to the three-year average of 1.7.
I think the market is too bearish on Netflix, and that creates a buying opportunity for patient investors.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
