Netflix Q2 EPS Beat But Engagement Concerns Linger: Ackman Stake, Ads $3B Target, $80 Support

Netflix's Q2 revenue was $12.56 billion, a 13% growth year over year, but a slight miss at $12.58 billion. The miss is a fairly small, yet notable, sign of Netflix's continued momentum in expanding its subscription and ad revenue streams.

Geographically, revenue growth remained broad based. Specifically, revenue in the U.S. and Canada was $5.43 billion, up 10% year over year; Europe, Middle East, and Africa was $4.03 billion, up 14%; Latin America was $1.58 billion, up 21%, the strongest of all four regions; and Asia-Pacific was $1.51 billion, up 16%.

Operating income was up 11% to $4.19 billion and operating margin was at 33.4%, which is just slightly better than the targeted internal number of 32.6%.

Netflix's diluted EPS came in at $0.80, which was a beat from the $0.79 that was expected, by $0.01. For the quarter, net income was $3.401 billion, which was a 9% YoY increase. The favorable expense timing drove a modest beat; however, three quarters of 2026 have content amortization that will grow, which will be front-loaded.

The largest concern of the skeptics: Engagement is still soft. Netflix's subscribers watched 97 billion hours in the first half of 2026, which is just 2% growth YoY, signifying a sharp deceleration of engagement in the historical hockey stick growth and demand. Management noted some competitive pressures (YouTube, TikTok, other streaming), and noted that there is viewership of a series that peaks on the debut week and falls precipitously.

In response, Netflix modified their strategy as follows: after publishing their semi-annual “What We Watched” reports for H1 2026, they will begin publishing these reports on an annual basis, starting in 2027. They will now shift their focus to operating profit and revenue rather than engagement metrics. This annual update shifts focus away from a troublesome metric.

At $12.86 billion, Netflix projected at most 12% revenue growth in Q3 2026, lower than the $13 billion analyst estimate. This guidance miss has prompted investors, who thought revenue growth would accelerate, to become concerned. Netflix attributed this slow Q3 growth to content amortization and compared this to a strong Q3 2025.

Still, Netflix reaffirmed the revenue growth of 13-14% of $51.0 billion to $51.4 billion for the full year 2026. As a result, the company’s management believes the back half of the year will be better.

In Q2, Netflix dropped to $1.53 billion in free cash flow, compared to the previous year's $2.27 billion, in part due to higher cash tax payments related to the $2.8 billion Warner Bros. termination fee Netflix received in Q1 2026. Netflix still held its full-year 2026 free cash flow guidance at $12.5 billion, which shows management's confidence in cash flow realization in the latter half of the year.

Though Netflix has not started selling ads sufficient to achieve the full 2025 goal, which was roughly $1.5 billion dollars, management has said it will roughly double that to $3 billion for the full 2026. The company added AI to the entirety of its ad tech stack, and supported the automation of ad buying and selling for its “Pause Ads” and live ad inventory. Management said these changes would target advertisers of all sizes.

Management saw a spike in interest in live programming (2027 FIFA Women's World Cup, NFL, WWE, MLB) although live programming only accounts for 1% of total viewing hours. 6 of the top 10 days of member sign ups in the last five years have come from live events.

On August 13, Pershing Square Capital Management, led by the billionaire investor Bill Ackman, bought into Netflix once again. Ackman argued that Netflix has strong earnings growth potential in the future, and he believes that is the most important factor in evaluating an investment. The store also rose by 4%, indicating that some of Wall Street's investors see the stock as undervalued.

NFLX recovered from July's crash and is now facing a major resistance level. First, NFLX is currently facing the $80.91 level which is its 200 day moving average, and where its current price stands at $80.22. A daily close above $80.91 would confirm the recovery and would bring $83.23, $89.19 and $94.72 into focus.

Netflix Price Chart - Source: Tradingview

In the other direction, $78.15 is also resistance. Below $78.15, the $76.47 level provides support. If $76.47 breaks, then $72.35 would come into focus.

Key Technical Levels (Into Jackson Hole & Beyond)

• Immediate resistance: $80.91 (200-day moving average)
• Target zone: $83.23, $89.19, $94.72 (recovery targets)
• Critical support: $78.15 (first layer), $76.47 (50-EMA)
• Breakdown level: $72.35 (if $76.47 fails)
• 52-week range: $65.08 - $126.71 (down 36% from peak)

The bull case for NFLX relies on the following: the potential for an advertising revenue business of over $3B; improvement in content amortization timing; and an expected free cash flow of $12.5B. The bear case relies on the following: stalled user engagement (+2% hours, decelerating); possible slowing revenue growth (miss on Q3 guidance); and increasing competitive pressure from YouTube and TikTok and from the launch of Disney+.

Management's reporting change to annual from quarterly and their downplaying of user engagement metrics suggests management is trying to shift focus from user engagement to cash generation.

Netflix's Q2 revenue surpassed analyst predictions coming in at $12.56 billion, yet still came in below first quarter predictions at 13%. The company also beat analyst expectations on EPS at 80 cents versus the predicted 79 cents. Profits grew at the expense of margins with some analysts concerned about falling subscriber growth. Netflix has guided for Q3 revenue to grow 12% to $12.86 billion, which has analysts worried it will miss the predicted 13 billion. 

Despite this guidance, Netflix has strong indicators for the rest of the year with 12.5 billion expected full-year free cash flow and a goal to reach $3 billion in ad revenue for 2026, with ads already having been introduced on Netflix. Pershing Square acquired a stake on August 13.

Judging by the activity of the stock, at $80.22, the price is currently testing the $80.91 level which is resistance. Ramifications for the price could range from $83 to $90. The support level at $78.15 is new and important for price holding. RSI at 64 suggests that the momentum for the stock is building. The downward trend of the stock by 46% this year has been met with great interest. Ackman’s stake has brought hope for recovery to the stock. 

The targets for Q3 and the guidance for it have lessened the stress for the stock being overvalued, though the ad revenue goal and the expected free cash flow for the year have been seen as positive. Resistance for the price of stock has been tested at $80.91. The Jackson Hole meeting this week is seeing the most focus and catalysts next for the stock will be the earnings reports in October. This is analysis, not investment advice.