Shares of Netflix (NASDAQ:NFLX) took a dip in after-hours trading on Thursday, dropping to around $98 following the release of its first-quarter earnings report.
Even though the company continues to grow, the market’s negative reaction makes sense. A closer inspection of the earnings alongside management’s outlook clearly indicates it’s a maturing business.
Of course, the Netflix business isn’t struggling. Quite the opposite, it’s actually doing well. Yet, concerns linger, especially regarding the high valuation of its stock. One might even say it could drop another 30% from this point.
Netflix’s latest update highlighted some positives. For instance, first-quarter sales hit $12.3 billion, marking a 16.2% increase from roughly $10.5 billion during the same quarter last year. The earnings per share saw an impressive rise as well, jumping to $1.23 from $0.66 a year ago.
But there’s a catch—the company’s growth momentum seems to be slowing.
Netflix’s growth rate of 16.2% for Q1 2026 is actually a deceleration from the 17.6% growth in Q4 2025.
To complicate matters further, the guidance for the second quarter hints at a continuing decline in momentum. Management is projecting year-over-year sales growth of only 13.5%. Adding to that, their full-year earnings outlook indicates a potential further slowdown.
The company has reaffirmed its full-year sales growth guidance of 12% to 14%, or 11% to 13% after currency adjustments.
For a stock valued so highly, this decline does raise some red flags.
The stock seems pricey even after its recent drop to $98. Currently, it trades at a P/E ratio of about 32, meaning the substantial profit increase in the first quarter is already reflected in that figure.
Such a high valuation likely hinges on years of consistent, solid double-digit sales and profit growth, implying that Netflix must maintain its dominant position without compromising margins against competitors.
However, given today’s intense competition in streaming, this assumption is quite a gamble. Major tech players are aggressively entering live sports and premium content to grow their own subscriber bases. Take Apple, for instance; they recently formed a significant exclusive streaming partnership with F1. Plus, they’re bundling Apple TV with other services or rival options like Peacock.
Netflix’s ability to expand its subscriber base while also increasing profits is likely to face challenges as competitors with deeper pockets raise prices for essential content.
Even in its first-quarter update, Netflix acknowledged the fierce competition it faces.
Management stated, “The entertainment business remains very dynamic and competitive.”
Ultimately, the company’s slow growth seems like a natural outcome of maturing in such a crowded market.
Overall, while Netflix’s business is still impressive, the stock doesn’t offer sufficient safety at its current valuation.
If sales growth settles into low double digits, the stock price could potentially drop significantly. Just imagine—if Netflix’s price-to-earnings ratio shifted to a more reasonable 22 times, more reflective of its mature status, the stock might hover around $68, showing a possible 30% decline from the after-hours price of $98.
Sure, this might be a worst-case scenario, but it gives you something to think about. Considering the valuation risks tied to the stock’s high multiple, I’m inclined to hold off for now and wait for a more favorable buying opportunity.
It’s definitely possible that Netflix’s growth could pick up in the short term, maybe hitting low teens again. But even in that case, it doesn’t eliminate the long-term threat of growth tapering off into lower rates. And as the market looks ahead, it’s likely to factor in such maturity at the first hint rather than when it’s fully evident.
This cautious stance doesn’t necessarily mean selling Netflix stock. I wouldn’t completely dismiss the chance that the company keeps up remarkable growth longer than investors might anticipate, which could eventually justify its current stock price. Rather, this is a reminder to investors that price is important.
Before considering Netflix stock, keep these points in mind.
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Daniel Sparks and his client has a job at Apple. The Motley Fool has positions in and recommends Apple and Netflix, while being short on Apple stock. The Motley Fool adheres to a disclosure policy.
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