Netflix Is on Track for Its Worst Year Since 2022. Is the Investment Thesis Still Intact After Its Latest Earnings Report?

Netflix (NASDAQ: NFLX) stock is down more than 26% year to date, putting it on pace for its worst annual performance since 2022. The company released its second-quarter earnings report after the closing bell on July 16, and in response, the market sent the stock down by 7.3% on July 17. Revenue marginally missed analysts' consensus expectations, while management's guidance was consistent with its previous outlook.

Wall Street's negative reaction was more about the expectations game than the health of the business. Here's why Netflix is still in a solid competitive position in streaming.

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Member engagement and growing profits are what matter

The Q2 report showed key metrics still pointing to healthy member engagement. Netflix reported that viewing hours grew by 2% in the first half of 2026, a slight acceleration from the 1.5% increase in 2025. What's notable about that improvement is that during the first half of this year, Netflix was at times competing for audience attention with the Winter Olympics and the FIFA World Cup.

Advertising growth is another revealing indicator of Netflix's reach and member engagement. It's on track to deliver $3 billion in ad revenue this year, doubling its 2025 total. Netflix is seeing strong advertiser interest in its live sports content. Investments in artificial intelligence-powered tools should support growth in this lucrative new revenue stream.

Full-year guidance was within management's previous range. The company did narrow its revenue forecast to $51 billion to $51.4 billion, which would amount to a 13% to 14% increase over 2025.

Netflix is one of the most profitable businesses in the entertainment industry. Its operating margin reached 33.4% in Q2, and the company expects a 31.5% margin for 2026, with year-over-year operating income growth of more than 20%. Growth in advertising could be a catalyst for further improvements on this front over the long term.

The company's profitability is extremely valuable, as it enables it to keep producing quality entertainment and expand its content variety, including video podcasts, creator content, games, and live events. This helps it retain its existing subscribers and attract new ones, supporting its long-term growth.

Nothing has changed with the investment thesis

The sharp sell-off in the stock may be frustrating for shareholders, but it's important to remember it was driven by a minuscule revenue miss of just $22.6 million. Wall Street analysts were expecting Q2 revenue to be $12.58 billion, but Netflix reported $12.56 billion. That doesn't mean the business is worth 7.3% less than it was the day before.

This seems to be an overreaction by traders rather than anything wrong with the business itself. Netflix simply can't do anything to please Wall Street right now. Last year, it posted two consecutive quarters of 17% revenue growth in Q3 and Q4, yet the stock continued to slide through the end of the year.

What hasn't changed is that Netflix is a highly profitable streaming leader that is expected to generate $12.5 billion in free cash flow this year. A lower stock price means investors who buy in now are getting more value per share. The stock entered the quarter trading at a price-to-free-cash-flow multiple of 27, and now trades at a multiple of roughly 25.

Moreover, analysts are still modeling for the company's earnings to grow at an annualized rate of over 20% in the next several years. This obviously reflects management's long-term outlook for improving margins, particularly as it continues to build its advertising revenue stream.

Nothing has changed the long-term investment case for Netflix. It is still generating solid viewer engagement, churning out high margins and free cash flow, and reinvesting in content to deliver more value to subscribers. This positive cycle is why Netflix remains a solid investment.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.