Netflix Just Posted a Record Margin. So Why Is Wall Street Panicking?

Netflix's (NASDAQ: NFLX) heyday may be over. At least, that is what you might think after reading the barrage of news about the streaming video provider's content struggles in 2026. Various content heads have been let go, and a rare round of layoffs has been implemented across the business.

Financial performance looks good, but CEO Ted Sarandos is reportedly frustrated that the company cannot produce new hit shows, leading to stagnation in watch hours in the key United States market. Shares are now down 50% from highs, even though it just posted record earnings.

That could make it a great buy-the-dip candidate. Here's why.

Revenue growth, but stagnant market share

In the third quarter, Netflix's financial performance looked rock solid. Revenue was up 12% year over year to $12.9 billion, with a record operating margin of 34.6%. Free cash flow was $2.88 billion, which the company continues to use to repurchase its outstanding shares.

Despite this, the stock fell after the earnings report and is now in a roughly 50% drawdown. The culprit is fear over watch hours and total subscribers in the United States and globally. Netflix has been able to raise its revenue by increasing subscription prices for members, along with adding new advertising tiers.

However, it failed to report any growth in watch hours this quarter (management declined to provide a figure). Third-party sources say its market share of TV viewing in the United States has stagnated at around 8%, with YouTube pushing toward 15%. This has investors fearful that Netflix is losing its lead in the streaming wars. If viewers are not watching as much Netflix as before, it will be difficult for the company to implement more price hikes.

Image source: Netflix.

Embracing new content form factors

To try to get its mojo back, Netflix has reshaped its executive team for its core TV series and movie production studios. It is also moving heavily toward becoming a more comprehensive streaming service that can provide value to users of all types. These include additional sports investments, such as NFL games, live events, and reality TV series. More broadly, it is getting into casual content such as podcast talk shows and shorter series that can compete with TikTok for viewing hours.

The key for Netflix is to retain its position versus YouTube on full-screen TVs and to convince customers to spend more time on Netflix rather than scrolling on their phones. This is a tall task, but one Netflix has been adept at in the past.

Long-term, there is still a steady tailwind for Netflix as the world shifts from traditional TV to streaming, especially within live sports. Despite these competitive threats, it should help lift Netflix's overall business in the years ahead.

NFLX P/E Ratio data by YCharts.

Is Netflix stock a cheap buy here?

Right now, Netflix stock trades at a price-to-earnings ratio (P/E) of 19, which is one of its lowest valuations in years. The company continues to grow its revenue and earnings at an impressive clip, while boosting its earnings-per-share (EPS) growth through repurchases. At lower share prices, repurchases become much more attractive, as Netflix can use its cash flow more efficiently.

Anyone who believes Netflix will retain a leadership role in streaming TV will likely do well to buy the stock here. It is expanding into new content factors and has likely just hit a temporary speed bump with a rough production year in TV and movies. Revenue keeps compounding higher, and the buyback just got much more attractive with this stock dip. At a low P/E of 19, it is likely that Netflix stock will do well for investors if it can grow EPS in the high teens in the years ahead.

Brett Schafer 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.