Netflix's Profits Jumped 37%. So Why Is Its Stock Down 40%?

If you only looked at Netflix's report card, you would think the company is crushing it.

Revenue is growing, profits are surging and fewer people are canceling.

But if you looked at its stock, you would think something went badly wrong. Both things are true at the same time, and the reason why is one of the most useful lessons in investing.

What Happened

On October 20, Netflix reported its third-quarter results. Revenue grew 12 percent from a year earlier to roughly 12.9 billion dollars, right in line with its forecast. Operating income, the profit from running the business, jumped 37 percent to about 4.5 billion dollars, and its operating margin rose to 34.6 percent from 28.2 percent a year ago. Netflix said cancellations improved in every region.

It expects about 13.4 billion dollars in revenue next quarter and 51.1 billion for the full year. There was one soft spot: Netflix now expects about 2.7 billion dollars in ad revenue this year, below the roughly 3 billion it had been aiming for.

The report came after a rough stretch. A week earlier, Netflix announced it was cutting about 6 percent of its staff, its biggest layoffs in four years, and its longtime content chief is leaving. Heading into earnings, the stock traded around 70 dollars, down about 20 percent this year and roughly 40 percent over the past twelve months.

Why It Matters

Netflix is a reminder that a stock price is not a grade on how a company did last quarter. It is a bet on the future. Investors are worried that Netflix's best growth years are behind it. Revenue growth has slowed from the mid-teens to about 12 percent. Viewers have more choices than ever, from YouTube to TikTok. And Netflix has been sharing less data, like quarterly subscriber counts and, starting in 2027, only one viewing-hours report a year, which makes some investors nervous.

When people expect slower growth ahead, they are willing to pay less for each dollar of profit today, even if those profits are growing.

The Concept: The P/E Ratio

The price-to-earnings ratio, or P/E, tells you how much investors pay for each dollar a company earns. If a stock costs 50 dollars and the company earns 2 dollars per share, the P/E is 25. Investors pay a high P/E when they expect fast growth, and a lower one when they expect growth to cool.

At its 2025 peak, Netflix traded around 54 times its expected earnings. By mid-October, analysts put it closer to 19 times. That shrinking multiple is the whole story. Netflix's earnings went up, but the price investors are willing to pay for those earnings fell even faster, so the stock dropped. Some analysts now argue that makes Netflix cheap, and Deutsche Bank upgraded it to Buy partly for that reason. Others think the lower price is deserved until growth picks back up.

Why Teens Should Care

Netflix is probably one of the apps on your phone right now, which makes it a perfect case study. The lesson is simple but powerful: a great company is not always a great stock at any price. If you ever start investing, do not just ask whether a company is good. Ask what you are paying for it.

A wonderful business bought at a sky-high price can still lose you money, while an unloved company bought cheap can surprise you. Learning to look at a P/E ratio before buying is one of the easiest ways to avoid paying too much for hype.