Netflix (NFLX) shares closed 5.4% higher on Aug. 13 after Bill Ackman's Pershing Square Holdings (PSHZF) disclosed a new stake in the streaming giant. The move added a vote of confidence at a time when NFLX stock is trading well below its peak. The investment case is straightforward: Netflix has experienced a sharp valuation reset, but its underlying growth and profitability outlook remain strong.
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If that operating leverage continues, expanding margins could provide a meaningful boost to earnings. Combined with Netflix's aggressive share-repurchase program, Pershing Square expects Netflix's earnings to compound at close to 20% annually. NFLX stock is down about 17% year-to-date (YTD).
Moreover, the recent weakness is due to two primary reasons: an expected moderation in the growth rate and a change in its engagement reporting practices. Netflix's management is projecting 11.7% year-over-year (YoY) revenue growth in Q3, below Wall Street expectations. The guidance has raised concerns that the company's recent pace of revenue and earnings expansion may begin to moderate, especially amid heightened competition in the streaming market.
Investors are assessing whether the platform can maintain strong engagement levels and continue expanding its user base at the same pace. Further, Netflix faces a more demanding comparison period in the second half of the year. The company will be comparing its results against a particularly strong performance in the prior-year period, creating tougher YoY comparisons.
As a result, even continued underlying growth could translate into slower reported growth rates. Investor sentiment also weakened after Netflix announced a planned change to its engagement reporting practices. Starting in 2027, the company intends to publish engagement data annually rather than twice a year.
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