Netflix (NFLX.US) reported its first-quarter 2026 financial results on April 16, which were met with a negative reaction from Wall Street. Despite delivering a relatively solid performance for the quarter, cautious forward guidance overshadowed the earnings report, putting pressure on the stock price. However, analysts at Morgan Stanley remain steadfast in their bullish outlook on the streaming giant. The firm reaffirmed its "overweight" rating on Netflix and maintained a $115 price target. Based on Netflix's closing price of $107.79 on the day of the earnings release, this target implies a potential upside of 6.7%. It is worth noting that the stock has since declined significantly from post-earnings levels and is currently trading slightly below $100.
While Netflix's near-term challenges are evident in its tempered guidance, Morgan Stanley believes the long-term investment thesis remains intact. The company's pricing power remains healthy, user retention has improved, and its advertising business continues to expand, laying the foundation for building a high-quality asset with compounding growth potential. Morgan Stanley attributes the post-earnings stock decline more to short-term factors rather than a fundamental shift in Netflix's compelling long-term story.
Netflix's first-quarter revenue surpassed expectations, reaching $12.25 billion, a 16% year-over-year increase, and beating the forecast of $12.17 billion. Operating profit rose to $4.08 billion, up 18% year-over-year and exceeding the $3.94 billion expectation, although the operating profit margin of 31.7% fell short of the projected 32.5%. Free cash flow surged to $5.1 billion from $2.7 billion in the same period last year, significantly surpassing the expectation of $2.87 billion.
Market attention, however, was focused on Netflix's softer guidance. The company's mid-point revenue guidance for full-year 2026 is $51.2 billion, below the expected $51.38 billion. Its profit margin guidance of 31.5% also lagged behind the forecast of 32%. Additionally, Netflix announced that Reed Hastings will not seek re-election as chairman, contributing to a decline in the stock price in after-hours trading.
Morgan Stanley views the post-earnings pullback as primarily a timing issue. While Netflix's Q1 revenue beat expectations significantly, the larger concern was its second-quarter guidance falling short of market consensus. The analysts believe this relates more to the timing of price increase effects flowing through the business rather than a demand issue. Price increases in the U.S. typically take two to three months to be fully reflected in financial results, meaning the March price hike might have a greater impact in Q3 than in Q2. Furthermore, the company is facing tough year-over-year comparisons due to significant price increases implemented last year.
Other data supports this view. Netflix reaffirmed its expectation for 12%-14% sales growth in 2026, maintained its target for a 31.5% EBIT margin, and raised its free cash flow guidance from $11 billion to $12.5 billion.
According to market data, the consensus price target for Netflix shares among Wall Street analysts is $114.46, implying a potential upside of 17.62% from current levels. Analyst targets range from a low of $80 to a high of $151.40, indicating significant divergence in expectations for the stock's prospects. Key analyst targets include: Oppenheimer at $120, Seaport Research at $119, JPMorgan at $118, Piper Sandler at $115, Morgan Stanley at $115, and Barclays at $110.
Morgan Stanley analysts also believe Netflix still has substantial room for growth. They project Netflix will have over 325 million paid subscribers by the end of 2025, with a total audience approaching 1 billion. Despite these impressive figures, Morgan Stanley suggests Netflix is still in the early stages of its journey to "entertain the world." Data supports this: Netflix's penetration of addressable smart TV households is below 45%, it has captured only 7% of its $670 billion total addressable market opportunity, and it accounts for less than 5% of global TV viewing time.
Advertising is another major reason for Morgan Stanley's bullish stance. The firm believes Netflix's advertising revenue could double year-over-year in 2026, reaching $3 billion, accounting for approximately 6% of total sales and setting the stage for future growth beyond 10%. In the 12 countries where the ad-supported plan is available, it now constitutes over 60% of new sign-ups, up from a previous 50%. The advertiser base has surpassed 4,000, representing a year-over-year increase of about 70%.
Pricing power, advertising advantages, and a significant long-term growth runway are the fundamental reasons behind Morgan Stanley's reaffirmed $115 price target.
Key risks for Netflix to monitor include: - Lingering questions about user engagement: Concerns regarding user engagement and viewing time persist. Although Q1 saw record viewing hours and high-quality engagement, a reversal of this trend would make it harder to justify the company's pricing power and user retention logic. - AI investments need to prove their value: Netflix is making substantial investments in technology and development, including AI, advertising, and gaming. The risk is that rising capital expenditures may outpace visible short-term returns. - Execution in the second half of 2026 is critical: The bullish thesis relies on price increases, advertising growth, and stronger momentum in the latter half of the year. If these positive drivers fade, maintaining a bullish stance will become extremely difficult.