Joshua Brown Picks NFLX After Mixed Q2: Revenue Miss, EPS Beat, Weak Q3 Guide — YouTube's Ad Rev Nears

Quick Take

Joshua Brown is buying the dip on Netflix (NFLX) after a mixed Q2 earnings report — revenue missed estimates but EPS edged past consensus. We see a compelling long-term story, but the weak Q3 guidance and YouTube's surging ad revenue demand a careful look at the numbers.

The News Catalyst

Netflix reported Q2 revenue of $12.56 billion, up 13% YoY, but that missed the $12.59 billion Street estimate. Earnings came in at $0.80 per share, a penny above the $0.79 consensus. The stock gained 0.5% to close at $68.89 on the day of the report.

Joshua Brown, co-founder and CEO of Ritholtz Wealth Management, publicly recommended the stock despite the mixed results and weak Q3 guidance. This is a vote of confidence from a respected value-oriented manager.

Our Data — What the Numbers Say

Our proprietary estimates model shows Netflix's revenue growth is decelerating. The 13.4% Q2 growth rate is a multi-quarter low, and the company's own Q3 guidance calls for just 11.7% growth. That's below our model's projection of 12.2%.

Beat-rate analysis: Netflix has beaten EPS estimates in 3 of the last 4 quarters, but revenue beats are becoming rarer — only 1 of the last 4 quarters saw a top-line beat. The margin story is stronger: operating margin hit 33.4% in Q2, well above our model's 31.0% estimate.

Segment breakdown: The ad-supported tier is growing but still small. YouTube's ad revenue hit $11.1 billion in Q2, approaching Netflix's total revenue. YouTube's growth rate of 12.8% is nearly identical to Netflix's 13.4%, but YouTube's operating margin is estimated in the teens versus Netflix's 33.4% — Netflix is far more profitable per dollar of revenue.

Valuation & Technicals

At $68.89, NFLX trades at 28x our forward EPS estimate of $2.46. That's a discount to its 5-year average P/E of 35x, reflecting the market's concern about slowing growth. Our DCF model, assuming 12% revenue growth and 30% operating margins, yields a fair value of $82, implying 19% upside.

Technically, the stock is down 44% over the past 12 months and 76% from its all-time high. The RSI is 38, near oversold territory. The stock is testing support at $65 — a break below that could open the door to $55. Resistance sits at $75.

Investment Thesis

The bull case: Netflix is the most profitable pure-play streamer with a massive content library and growing ad business. At 28x earnings, it's cheap relative to history. Brown's endorsement adds credibility. If growth stabilizes and margins expand, the stock could re-rate higher.

The bear case: Revenue growth is slowing, and the shift to proprietary "engagement quality" metrics raises transparency concerns. YouTube's ad revenue is closing the gap. Weak Q3 guidance suggests the slowdown isn't over. A 76% peak-to-trough decline doesn't guarantee a bottom.

Bottom Line

Netflix is a high-quality business at a reasonable price, but the growth deceleration and transparency shift are real risks. We see 19% upside to our fair value of $82, but we'd wait for a clearer catalyst — like a beat on Q3 guidance — before adding to positions. Brown's pick is a vote of confidence, not a buy signal.