u/beerion ·
Reddit — r/ValueInvesting
· July 24, 2026 at 19:12
· ⬆ 20 pts
· 💬 15 comments
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Summary
The post analyzes Netflix's slowing user growth and the one-time benefit from password sharing crackdown, then argues that even modest revenue growth (from price hikes, ads, international) can drive strong earnings growth via operating leverage.
The author uses a reverse DCF to show that only 4% annual earnings growth is needed to justify the current 26x P/E, and presents a bullish scenario with 23% CAGR over 5 years.
Quality: Reasonably well-researched DD with specific assumptions and a Substack source, though it acknowledges the transition point and contains some speculation about future content strategy.
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# Sputtering Growth Engine
Netflix's glory days are behind them, I think. Through all of the 2010's, they had a dual engine growth machine in that they could raise prices and grow membership, simultaneously.
Member ship growth engine started sputtering in 2021 and in 2022, they only grew user count by 4%. Their answer was to crack down on password sharing...and it worked. In the following 3 years, they saw a 41% bump to their membership.
[IMAGE](https://preview.redd.it/netflixs-growth-engine-is-stalling-v0-ihpzavaqroeh1.png?width=1080&crop=smart&auto=webp&s=16aa5e55b18cc0a335f000c45b4460818af4b09c)
But that's a lever you can only pull once. User growth has since continued to decelerate.
# But it's still 26x earnings
Doing a reverse DCF, in order to justify today's price, earnings only have to grow at a mere 4% clip. I think that's a pretty easy target to hit. Price hikes alone can probably carry between 3-5% revenue growth for the foreseeable future. Membership growth is slowing, but it hasn't stopped completely. There's international expansion, ad revenue, and potential AI related cost saving measures that can all help as well.
And then there's operating leverage. You can get a dynamic where 3% revenue growth can power 8-10% earnings growth as long as revenue outpaces content creation expenses.
I didn't perform a full DCF for this one because Netflix is kind of at a transition point with their business. What will their content creation strategy be going forward - will they level off their content budget as their member counts stall? Or will they keep growing with pace?
One bullish scenario that I ran had a fair value around $130, and assumed the following:
* 4% subscriber growth for the next 10 years
* 4% ARPU growth
* 1% Content growth cost per user (so 1% on top of the 4% user growth)
* 2% opex growth per user
For that particular scenario, I estimated a ***5-year expected return CAGR of 23%***.
In general, I think even modest expectations could see 15% returns over the next handful of years.
[Substack Source](https://riskpremiumresearch.substack.com/p/netflix)
Reverse DCF implies only 4% earnings growth needed to justify current price; price hikes alone can deliver 3-5% revenue growth, and operating leverage can amplify to 8-10% earnings growth. Market may be discounting Netflix’s ability to sustain mid-single-digit revenue growth through price increases, ad revenue, international expansion, and AI cost savings, creating a margin of safety. Even if user growth stalls, moderate revenue growth combined with flat-to-slightly-rising content costs can produce double-digit annualized returns over the next few years. Subscriber growth decelerates faster than expected; ad revenue disappoints; content cost inflation outpaces revenue; competitive pressures from streaming rivals.