Netflix expected a ‘KPop’ rally. Elon Musk and tariffs got in the way
The company’s valuation is high at about 37 times estimated earnings
[CHICAGO] Netflix shares romped through the first half of the year on strong earnings and ambitious growth plans. But that rally is now stalled as a pair of unusual risks has investors questioning the company’s elevated valuation.
The streaming pioneer’s stock was the fourth-best performer in the Nasdaq 100 Index in the first six months of 2025, soaring 50 per cent, and the second half of the year seemed to get off to a good start with the June 20 release of the animated musical KPop Demon Hunters. The movie has been a huge hit, becoming Netflix’s most-watched original film. However, the shares are down 9 per cent since the end of June, while the Nasdaq 100 Index is up almost 11 per cent over the same period.
The first-half gains would be reason enough for investors to think twice about buying Netflix shares. Then US President Donald Trump threatened to impose a 100 per cent tariff “on any and all movies that are made outside of the US,” and Elon Musk urged his social-media followers to cancel their subscriptions after taking issue with comments made by the creator of a now cancelled Netflix show.
The developments brought a new level of uncertainty, with the stock falling for five straight days, before rebounding with a three-day rally.
“We can’t know what the ultimate outcome of tariffs is going to be, and it’s impossible to tell whether there’s been a big sudden drop-off in subscribers as a result of Musk,” said Cotton Swindell, who helps oversee about US$2.8 billion as senior portfolio manager for the Adams Diversified Equity Fund, which holds the stock. “But these issues are out there, and any change in sentiment can have an impact.”
A Netflix spokesperson did not respond to a Bloomberg News request for comment.
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While the implications of both developments are hazy, it had made it more difficult for Netflix to find a direction. Still, they remain up 36 per cent this year, more than three times the 8.6 per cent gain in Musk’s Tesla and well above the Nasdaq 100’s 20 per cent rise.
The company’s valuation is high as well at about 37 times estimated earnings, compared with 27.6 for the tech-heavy index.
“Netflix is a core subscription for most people, and there are few substitutes for the value consumers get,” said John Cervantes, senior investment adviser at Prime Capital Financial. “I’d be surprised if these issues represent much of a headwind.”
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That probably explains why Wall Street doesn’t seem too concerned. Seaport Global Securities upgraded the stock to buy earlier this week, touting ongoing market-share gains compared with linear television, “but also the continued professional, curated content that is driving engagement leadership.”
Analyst David Joyce does not cite politics as a reason for the recent stock weakness. Instead, he attributes it to Netflix digesting its year-to-date gains and expects revenue improvement from its advertising business in the coming months.
Content remains a bright spot. In addition to KPop Demon Hunters, the company said it drew over 41 million viewers for a boxing match. Netflix also released the second season of its popular show last month, and the final episodes of its hit Stranger Things will be released this holiday season.
Download data from Sensor Tower last month showed a slight increase from the third quarter of 2024, putting “the streaming service in a strong position to deliver on Q3 revenue guidance of 17 per cent growth,” according to Bloomberg Intelligence.
Meanwhile, Trump’s tariff announcement echoed a similar one from May, when he called films produced overseas a national security threat. Netflix shares shrugged off the issue at the time, and nothing meaningful came of the threat.
As for Musk’s boycott, it is difficult to assess how widespread it is, unlike the controversy surrounding Cracker Barrel Old Country Stores or the recent push to cancel streaming services from Walt Disney, which contributed to the company reversing a decision to briefly remove late night talk show host Jimmy Kimmel from the air.
The Tesla CEO’s issue with Netflix appears to stem from comments made by the creator of Dead End: Paranormal Park about the killing of political activist Charlie Kirk.
“We’ve seen that premature selling on initial tariff headlines isn’t a good strategy,” Prime Capital’s Cervantes said. “We’ve also seen so many of these culture-war trading issues that I suspect we’ll be moving onto something else soon.”
Earnings estimates have basically held for Netflix’s third-quarter results, which will be released later this month, and the full year. The company no longer reports subscriber figures, but according to Bloomberg consensus estimates, analysts see more than 5.8 million subscriber additions in the quarter, bringing its global subscribers to over 315.5 million.
Netflix co-chief executive officer Greg Peters, speaking at the Bloomberg Screentime conference on Wednesday (Oct 8), said the company is making its video games available for play on TVs for the first time as part of its ongoing push to extend its reach beyond just films and TV shows.
Netflix’s hold on audiences is clear beyond its major titles. Streaming viewership for its The Wrong Paris “dwarfed” the debut of Superman on HBO Max, even though the Netflix film did not play in theatres or have a meaningful marketing campaign, according to Richard Greenfield, an analyst at the technology, media and telecommunications research firm Lightshed Partners.
All of which is why bulls have a strong long-term belief in the company. As for Netflix shares, the valuation is clearly giving investors pause, which opens the door for selling based on threats from Trump and Musk.
“I’d characterise both as short-term issues and headline risks,” Adams Funds’ Swindell said. “But the valuation means there’s not as much room for missteps, and clearly the market is either seeing added risk or added concern about Netflix’s ability to execute.” BLOOMBERG
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