Netflix Stock Took a Nosedive Last Week. A Buy on the Dip, or a Sign to Shut Off the Screen?

Streaming giant Netflix (NASDAQ: NFLX) reported financial results for the third quarter of 2025 on Oct. 21 and the stock promptly plunged by 10%. As of this writing, the stock is now down about 17% from its all-time high, which is one of its larger pullbacks over the last three years.

Investors are looking at Netflix's profits. Management had said that its Q3 operating margin would be 31.5%, which would have been a nice increase from the prior-year period. But unfortunately, the operating margin was only 28%.

Moreover, investors are looking at an expected deceleration in Netflix's growth rate. The company's revenue grew by 17.2% in Q3, which was slightly ahead of expectations. But in the upcoming fourth quarter, management expects growth of 16.7%. Some investors undoubtedly fear that Netflix's growth has peaked.

Image source: Netflix.

Here's why these fears regarding Netflix stock are likely overblown.

Two reasons why fears are overblown

First, Netflix can easily explain the shortfall in its Q3 profits. During the quarter, it spent over $600 million resolving a tax dispute in Brazil. Without this expense, management says it would have done better than planned.

The issue in Brazil wasn't factored into the forecast. But it's something that's unlikely to repeat in the future, which makes it a frustrating event but not one that long-term investors should fret over.

Regarding its growth rate, I believe that Netflix investors need to zoom out and see the bigger picture. It has more growth levers that are likely underappreciated.

One such growth lever is Netflix's foray into merchandise. The company is licensing its popular animated film KPop Demon Hunters to toy companies Mattel and Hasbro. The move is straight from the playbook of fellow entertainment giant Walt Disney and could provide many incremental revenue opportunities for years to come as more of its intellectual property is licensed.

However, the bigger growth lever for Netflix, in my opinion, is advertising. In late 2022, Netflix launched an ad-supported subscription tier to its streaming platform. And management rolled this tier out using what it calls a crawl-walk-run approach -- start slow and pick up speed as the kinks are worked out.

In 2025, Netflix is on pace to double its advertising revenue from 2024. Investors don't know how big this revenue stream is exactly but that's incredible growth. And the exciting thing is that management says it's only in the "walk" phase of its plan. In other words, it's still figuring some things out before really turning on the growth for this portion of its business.

Therefore, concerns regarding slowing growth for Netflix are likely overblown -- after all, a 16.7% growth rate forecast is still stellar for a company of this size and future growth levers could speed things back up. Moreover, the profit problem appears temporary. For these reasons, I wouldn't be concerned with Netflix's business.

Is Netflix stock a buy?

I believe that fears regarding the health of Netflix's business are overblown. That's not the same as believing the stock is a timely buying opportunity today. The health of the business is important but there's a little more to the discussion regarding buying the stock.

Netflix generates a lot of free cash flow, which is great. But the stock currently trades at 57 times its free cash flow, even after the pullback, which is quite pricey.

NFLX Price to Free Cash Flow data by YCharts

In short, there is some valuation risk with Netflix stock today -- it's possible that the high stock price today can diminish the returns in coming years even if it continues to grow at a double-digit rate.

However, Netflix stock also has some execution risk. The two aforementioned growth drivers -- merchandise and advertising -- are newer territories for the company. It's possible that there could be missteps when stepping beyond its core competency. And any missteps would exacerbate the valuation risk.

My best guess for the future is that Netflix continues to find good growth and executes well but its current valuation brings the future stock performance more in line with the average for the stock market. That wouldn't be a bad outcome for investors and could make it a buy for some.

For me, however, Netflix isn't one I'm looking to buy today. I believe there are some more timely opportunities for my portfolio. That said, I could potentially change my mind with a more attractive stock price because Netflix has proven that it's a strong business for the long haul.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Hasbro. The Motley Fool has a disclosure policy.