Netflix's 36% Plunge Highlights Warner Deal Risks Over Strong Fundamentals

What happened

Netflix's stock has plunged approximately 36%, as highlighted in recent media, despite the company announcing a major acquisition of a top competitor and reporting booming advertising revenue with expectations to double again in 2026. The DeepValue report confirms strong operational fundamentals, including 2025 revenue growth of 16% to $45.2B, a 29.5% operating margin, and advertising revenue exceeding $1.5B, more than doubling from 2024. However, investor concerns have shifted to the $82.7B all-cash Warner Bros. Discovery acquisition, which introduces substantial leverage, regulatory risks, and a $5.8B reverse break fee, compressing the stock's valuation multiple. Market sentiment now focuses on uncertainties around deal execution and potential margin pressure from increased content spend and live rights costs, overshadowing positive ad-tier momentum. Consequently, the stock at $86 trades with premium multiples but limited margin of safety, awaiting evidence on 2026 guidance and regulatory outcomes.

Implication

The stock's decline signals heightened risk perception, requiring close monitoring of regulatory updates and quarterly results for deal progression and ad monetization success. DeepValue's base case implies a $95 value, but downside to $65 exists if regulators block the deal or margins fall, highlighting asymmetric risk that favors waiting. Netflix's high valuation multiples (33x P/E, 13x EV/EBITDA) leave little room for error, making it vulnerable to any misses in ad growth or integration costs. Positive catalysts could include smooth regulatory approval, strong ad revenue doubling in 2026, and maintenance of 30%+ margins, which might justify higher prices. Therefore, prudent investors should adopt a wait-and-see approach, considering entry near the $75 attractive level only after confirmatory data on 2026 guidance and deal conditions.

Thesis delta

The recent stock plunge has not materially altered the investment thesis to WAIT for evidence on 2026 delivery and Warner deal de-risking, as key risks persist. A shift to a more bullish stance would require confirmed ad revenue doubling and clean deal closure within the expected timeline. Conversely, downside risks remain elevated if regulators impose harsh conditions or margin guidance is cut below 28%.