Netflix Stock Is Down Nearly 40%. What's Going On?

Netflix (NASDAQ: NFLX) has become one of the more interesting stocks in the market right now. Its shares have fallen sharply from their highs, leaving many investors wondering whether something has gone seriously wrong with the business.

But here's the surprising part: Netflix's business is still growing. In its latest quarter, Netflix generated $12.6 billion of revenue, up 13% year over year . So why has the stock fallen so much?

The answer is more complicated than a "weak" quarter.

Image source: Getty Images.

Netflix became a victim of its own success.

For years, Netflix was one of the market's favorite growth stocks.

The company transformed entertainment, expanded globally, and built a streaming platform with hundreds of millions of members. Investors rewarded that success with a premium valuation because they expected Netflix to keep growing rapidly for years.

But Netflix is no longer the same company it was a decade ago. It already operates at an enormous scale -- more than 300 million subscribers. Adding another 100 million members becomes increasingly difficult when the company already serves a massive global audience.

That doesn't mean Netflix has stopped growing. Its Q2 results prove otherwise. The issue is that investors have started asking a different question: How much growth is realistically left?

That question matters because a stock price reflects expectations about the future, not just today's results. A company can grow its profits and still see its stock fall if investors decide those profits are worth a lower price.

The business is healthy, but the bar is higher.

Netflix's latest numbers make it difficult to argue that the underlying business is in trouble.

Revenue increased 13% year over year in Q2, while operating income increased 11%. More importantly, management expects operating income to grow by more than 20% in 2026, with the operating margin reaching 31.5%, up from 29.5% in 2025.

Engagement also remains healthy. Netflix said members watched more than 97 billion hours during the first half of 2026, up 2% from the same period last year, despite competition from major events such as the Winter Olympics and the World Cup.

That is hardly a broken business. But investors now expect Netflix to do more than simply grow.

The company needs to show that it can continue raising prices without hurting engagement, expand margins, and create new revenue streams from its enormous audience.

That brings us to advertising.

Advertising could determine what happens next.

Netflix's advertising business has become increasingly important to the investment story.

Management expects advertising revenue to roughly double in 2026 to about $3 billion. That would still represent only a small portion of Netflix's overall revenue, but the opportunity is set to grow much larger over time.

The company is expanding its advertising technology, improving targeting and measurement, and opening more of its inventory to programmatic buyers. If Netflix succeeds, advertising could give the company a powerful new way to monetize its existing audience.

That matters because Netflix no longer needs to rely entirely on adding subscribers. It can raise prices. It can increase advertising revenue. It can improve margins. The more money Netflix earns per member, the less explosive subscriber growth it needs to generate strong earnings growth.

What does it mean for investors?

Netflix stock has fallen sharply, trading down about 38% from its 52-week high, but investors should be careful not to confuse a falling stock price with a deteriorating business.

The latest numbers tell a different story. Netflix is still growing. Profitability remains strong. Engagement is healthy. Advertising is gaining momentum.

The real issue is a change in investors' expectations. Investors once paid a premium for Netflix because they believed exceptional growth would continue for years. Today, they are demanding more proof that Netflix can maintain strong growth at its enormous scale.

That makes the next phase particularly important. If Netflix can sustain double-digit revenue growth, expand margins, and turn advertising into a meaningful profit engine, the recent sell-off could eventually look more like a valuation reset than a fundamental breakdown.

But if growth slows materially and advertising fails to meet expectations, the market's caution may prove justified.

All that said, investors should pay attention to execution in the coming quarters.

Lawrence Nga 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.