For years, Netflix (NASDAQ: NFLX) stock has felt impenetrable. From their lows in 2022, shares kept marching higher, showing no signs of slowing. That is, until the last few months. Netflix stock is now in a 40% drawdown, driven by fears over its proposed acquisition of Warner Bros. Discovery, which could load the business with debt.
Are investors overreacting to this potential deal? Let’s look into the details of Netflix’s business right now and see whether it is time to buy the dip on this storied compounder.
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A surprise announcement hit the entertainment industry in December last year when Netflix announced it intended to acquire Warner Bros. from Warner Bros. Discovery, giving it intellectual property (IP) from the likes of HBO and the storied namesake movie studio.
It has faced competition from Paramount Skydance to acquire Warner Bros., which has attempted a somewhat hostile takeover to try to convince Warner Bros. management to choose it over Netflix. In January, Netflix sweetened the deal by changing it to an all-cash offer of $82.7 billion. To finance the deal, Netflix will need to take on massive debt, which has investors nervous about the transaction. Plus, HBO and Warner Bros. are much slower-growing businesses than Netflix and will need to be integrated into the core Netflix application to drive value creation.
This is an expensive deal at a time when Netflix is facing increased competition from an unlikely source in the United States: YouTube. YouTube is now the most popular application for TV viewing in the United States, growing its share significantly over the last five years. Netflix viewing hours are still growing, but not nearly as fast as the global video creator platform.
Despite these fears, Netflix’s core business is doing just fine. Revenue grew 16% in 2025 and is expected to grow at 12% to 14% in 2026. Earnings and free cash flow are strong, with operating earnings now at $13.4 billion and free cash flow at $9.5 billion. This growing cash flow — along with the acquired earnings from Warner Bros. — will help Netflix deleverage its balance sheet after making the acquisition (if it is closed).
In all likelihood, this proposed acquisition just gave Wall Street an excuse to sell Netflix at its premium valuation. Netflix traded at a price-to-earnings ratio (P/E) of 60 earlier in 2025. It now has a P/E ratio of 31. This is a much more palatable earnings ratio, and could make Netflix stock a buy today despite the risks associated with acquiring Warner Bros.
