Netflix buybacks hit $5B as engagement fears weigh on stock
Netflix reported surging cash flow and a record $5 billion buyback program, but a 50% stock plunge from its highs highlights Wall Street's growing skepticism over its growth trajectory and engagement transparency.
Netflix shares dropped 8% on July 16 following its second-quarter report, extending a slump that has erased roughly half of the stock’s value since last year’s peak. The selloff contrasts sharply with the company's underlying financial performance. The streaming giant is on pace for its most profitable year ever.
Management spent nearly $5 billion on stock buybacks, a quarterly record, and replenished its authorization to $27 billion. Free cash flow is now projected to exceed $12.5 billion this year, a more than 30% jump upgraded from previous $11 billion guidance. Operating margins are forecasted to reach 31.5%, representing 1,000 basis points of expansion over three years.
Despite these metrics, the market is applying a strict valuation rerating. Shares now change hands for less than 20 times earnings. Management maintained a full-year revenue growth target of 13% to 14% and noted that recent price hikes in the U.S. and Mexico have "gone well."
Yet the stock's decline underscores a deeper anxiety among institutional investors. They are increasingly concerned that Netflix is losing the broader battle for consumer attention to short-form video, gaming, and podcasts. Executives pushed back on these engagement fears during the earnings call, arguing that viewing improved slightly in the first half of the year. They contend that raw viewing hours are a flawed metric.
However, the company simultaneously reduced its transparency by shifting its detailed engagement report from a semi-annual to an annual schedule. This move follows last year's decision to stop disclosing subscriber counts entirely. Reduced disclosure typically makes it harder for the market to track the health of the user base.
Management is betting that advertising will provide a new lever for margin expansion. The $8.99 ad-supported tier is acting as an affordable entry point. Ad revenue is expected to roughly double to $3 billion by 2026.
While this will only account for 6% of total revenue, the ad business carries higher incremental margins than the core subscription model. For now, investors must decide whether peak cash generation and massive buybacks can compensate for a maturing growth profile.
