Netflix: Can the acknowledged good student still create surprises?

$Netflix(NFLX.US) released its Q2 2025 financial report after the market closed on July 17, Eastern Time. The overall performance was decent, as stable as ever, but perhaps not as "stunning" as in the past, with the market reaction being somewhat muted. However, Dolphin Research still believes that Netflix is one of the few options in the current volatile environment that combines "growth" and "risk resistance," making it a choice that can advance or retreat strategically.

Specifically:

1. Price increase driving growth: Revenue grew by 16% in the second quarter, exceeding guidance and meeting expectations, mainly reflecting the impact of price increases in core regions at the beginning of the year.

2. Squid Game reignites popularity: User numbers are no longer disclosed starting last quarter, but Dolphin Research estimates a net increase of over 8 million, slightly higher than last year. As the content highlight of the second quarter and even the entire year, the third season of "Squid Game" performed well. Although as the finale, it received mixed reviews, the viewing time indicates that the third season's popularity surpassed the second season. Since it aired at the end of the quarter, Q2 results do not fully reflect the positive impact of the show.

3. Q3 guidance exceeds expectations: Due to the popularity of "Squid Game S3" and other strong content like the second season of "Wednesday," management's revenue guidance for the third quarter is a 17.3% year-over-year increase, exceeding market expectations.

4. Raising full-year growth target: Management also took the opportunity to raise the full-year guidance for 2025, increasing revenue by about 2% to the range of $44.8 to $45.2 billion. The operating profit margin was raised from 29% to 29.5% (at the beginning of the year exchange rate), and it was mentioned that due to the current favorable exchange rate, the profit margin could actually reach 30%.

According to the Q3 and full-year guidance, it implies a 17% revenue growth in Q4, which is also impressive and exceeds expectations. But what might cause dissatisfaction among investors is: 1) The guidance was expected to be raised in advance, and raising it does not necessarily bring rewards, but not raising it would certainly bring penalties; 2) Management attributed the upward adjustment mainly to the depreciation of the US dollar (with 55% of Netflix's revenue coming from international markets), followed by user growth and advertising, making the above-expectation growth rely on external factors rather than the business's inherent growth potential, thus diminishing the "surprise" factor of exceeding expectations.

5. Confidence in doubling advertising remains unchanged: In the last quarter's review, Dolphin Research mentioned that the current macro environment is turbulent, and Netflix's advertising development pace might be adjusted. However, in this shareholder letter, management expressed confidence in doubling this year's advertising revenue (expected to be $1.5 to $2 billion, accounting for about 4% of total revenue), so let's look forward to it.

6. Investment continues to slow: Content investment in the second quarter was $4 billion, roughly flat quarter-over-quarter, and down 8% year-over-year. Not only is investment continuing to slow, but the progress in the first half of the year is also relatively slow according to the full-year investment plan. In the last quarter's review, Dolphin Research speculated that due to environmental factors (the turmoil delaying a new round of competition), Netflix might not even use up its $18 billion budget this year.

In this situation, a well-prepared leader is always more advantageous. It not only benefits Netflix's own cash flow improvement, leaving more room for buybacks (the scale of buybacks decreased quarter-over-quarter) and external investments, but also increases opportunities for content licensing among peers, leading to reduced content production costs or increased licensing revenue across the industry.

7. Performance indicators at a glance

Dolphin Research's View

There is basically no doubt about this year's growth. But whether it's the logic of price increases or advertising, the essence is that this round of content cycle is driving Netflix. As long as the content is strong enough, monetization is just a matter of time and method.

So, from a content perspective, can Netflix maintain this high growth trend next year?

We believe there is pressure but not without opportunities.

It is undeniable that the content cycle in the past two years has been very strong, a rare peak period. The classic IPs that rank in the top 10 in viewing time in history have all released sequels in the past two years. The advantage of making series for classic IPs is that there is a guaranteed base of users, while also attracting new and old users to revisit old episodes. For example, when the third season of "Squid Game" aired, the first and second seasons also ranked in the top ten of non-English film viewing time weekly charts.

Therefore, the downhill path after the peak is quite concerning, which is the pressure. Meanwhile, the growth opportunity lies in the accelerating decline of cable TV, relaxed industry competition (outside the industry, attention needs to be paid to the time competition from short videos like TikTok and Reels), and Netflix's layout in new content tracks such as sports, short videos, and games. However, the latter is still a shortcoming for Netflix and will require a more distant future to show a strong contribution to performance growth.

Growth is "attack," risk resistance is "defense." Although the impact of tariff threats on the capital market has gradually become immune, tariffs will inevitably have some impact on the economic environment. If the macro environment continues to be turbulent, Netflix's entertainment attributes and content cycle are expected to show more resilience when everyone faces the risk of performance decline.

Netflix's valuation premium (after adjusting for new guidance, the current GAAP P/E for 2025 and 2026 is 45x and 38x, respectively) is reflected in this "advance and retreat" scarce advantage. As a $500 billion large-cap, it indeed requires more stunning results to drive a significant short-term increase.

Therefore, we believe it is more appropriate to understand Netflix's valuation premium or belief from the perspective of long-term stable growth, exchanging time for space. By stepping out of short-term expectation fluctuations, recognizing the normal state of Netflix's 35x forward valuation, and cherishing every opportunity to fall back to 30x.

Here are the details:

1. Squid Game Reignites Subscription Momentum

Starting last quarter, the company stopped disclosing subscriber numbers. Therefore, Dolphin Research estimates the approximate growth in subscribers based on subscription revenue and recent price increases.

In Q2, we estimate that Netflix added nearly 8.5 million global subscribers, slightly higher year-on-year, continuing the strong growth trend seen in Q1. This increase was primarily driven by compelling content offerings. In particular, the release of Squid Game Season 3 near the end of the quarter boosted engagement. Based on total viewing hours in the two weeks post-release, Season 3 outperformed Season 2. While Season 1 was a breakout global phenomenon and remains difficult to surpass, the third season has clearly built strong momentum.

Beyond the Squid Game trilogy, other notable content included:

Series: Sirens, Ginny & Georgia Season 3, and the new U.S. drama The For Seasons

Films: German movie Exterritorial (now the fourth most-watched non-English title in Netflix history), the record-breaking animated film K-Pop Demon Hunters, and Tyler Perry’s SRTAW.

Regional Breakdown:

The core growth in Q2 came from North America, followed by Asia and Europe. Despite earlier price increases in North America at the start of the year, those effects seem to have been absorbed. In fact, strong content helped accelerate subscriber conversions, not hinder them.

Latin America continued to lag behind, likely due to regional economic conditions. Price hikes over the past two quarters didn’t result in the same stable subscriber response as in North America, and content alone hasn’t been enough to offset weaker spending power.

Looking ahead to Q3 2025, based on revenue guidance, Dolphin Research estimates net subscriber additions of over 6 million. This projection is supported by anticipated hits like Wednesday, the Emmy-nominated Nobody Wants This, and two major boxing events (Taylor vs. Serrano and Canelo vs. Crawford).

As for Q4, with the final season of Stranger Things on the horizon, Dolphin Research remains optimistic about sustained user growth.

2. Slower Spending, Steady Competition—But Watch Short-Form Video

The pace of content investment by industry leaders often reflects the overall intensity of market competition. For this reason, Dolphin Research closely tracks trends in content spending by Netflix and Disney.

In Q2, Netflix continued to slow down its content investment, spending $8 billion in the first half of the year, against a full-year budget of $18 billion. While spending typically increases in the second half, the pace this year is still slower than last year. As a result, total content assets remained roughly flat quarter-on-quarter.

Despite this, industry competition remains stable among major players—but short-form video platforms continue to pose a growing threat and warrant close attention.

In last quarter’s commentary, Dolphin Research raised a hypothesis regarding the slowdown in content investment: under a volatile macroeconomic environment, many of Netflix’s strongest competitors have core businesses that are more sensitive to macro conditions. As a result, they may be shifting more focus toward stabilizing their core operations, and temporarily diverting attention and resources away from their streaming businesses.

This competitive dynamic actually benefits Netflix. It gives the company room to moderate its own content spending, allowing it to free up cash flow for shareholder returns, external investments, and other strategic moves. In Q2, we saw no signs of a "content arms race" among the giants. Instead, there was an increase in cross-licensing agreements, which helps lower overall content costs across the industry.

However, there are some potential long-term concerns that Netflix may need to address sooner rather than later. According to Nielsen’s viewership share data, Netflix still benefits from the ongoing cord-cutting trend, which remains a solid mid-to-long-term narrative. Traditional media giants are scaling back their cable TV operations or moving linear TV content to streaming. For example, this quarter, Netflix announced a deal with France’s TF1, whose channel content will debut on Netflix in summer 2026.

In terms of competition, legacy media companies’ viewership shares have remained stable, including Netflix’s. In fact, Netflix’s share has plateaued at 7.5% for three consecutive months, while YouTube continues to grow and maintain a leading position.

This means Netflix’s real competition is increasingly coming from platforms like YouTube, and from short-form video apps such as TikTok and Instagram Reels, which don’t show up in traditional viewership metrics but are aggressively capturing user time and attention.

According to U.S. Bureau of Labor Statistics data, average daily TV watching time in the U.S. has been steadily declining since 2015, especially among users under 45. The younger the demographic, the faster the decline in traditional TV viewing time.

3. Profit Margin Target “Improves as Expected”

In Q2, Netflix achieved an operating profit of $3.78 billion, with an operating margin of 34%, up 7 percentage points year-over-year, and representing a 45% increase in profit, exceeding market expectations.

According to Dolphin Research, this strong performance was not only driven by continued success of hit shows, but also by the full-quarter impact of recent price hikes and the growth of high-margin advertising revenue, both of which helped lift gross margins.

On the cost side, R&D expenses likely remained elevated due to continued investment in the advertising platform. Sales and marketing costs increased as well, in part due to the promotion of major content releases. Meanwhile, general and administrative expenses grew at a more modest pace, remaining disciplined.

Looking ahead, profit margins in the second half of the year are expected to face pressure, primarily due to a ramp-up in content releases, which will lead to higher short-term content and marketing costs.

For the full year, Netflix raised its operating margin guidance from 29% to 29.5%, a modest increase that’s largely in line with expectations. This figure also reflects some tailwinds from favorable exchange rates, leaving about 0.5 percentage points of potential upside.

In Q2, free cash flow reached nearly $2.3 billion, slightly above market expectations. This marks the second consecutive quarter of exceeding guidance. Riding this momentum, management raised full-year free cash flow guidance from $8 billion to $8–8.5 billion. We believe this revised target is still somewhat conservative, likely leaving room for flexibility in future content investment.

During the quarter, Netflix spent $1.65 billion on share buybacks, about half the amount of the previous quarter, leaving $12 billion in remaining authorization. Given Netflix’s current market cap of around $540 billion, the scale of these buybacks has limited short-term impact on the stock price. Unless the company suddenly announces a substantial new buyback plan in the tens of billions, the quarter-to-quarter impact is expected to remain modest and not a major focus.