If Netflix, Inc. (NFLX) produces strong Q3 results on Oct. 21 with at least a 20% free cash flow (FCF) margin, NFLX stock could still be almost 15% undervalued. This article will explain this strategy and its rationale. I will highlight why buying in-the-money, longer-dated (ITM) calls and shorting near-expiry, out-of-the-money (OTM) puts is a sound approach.
NFLX closed at $1,220.08 on Friday, Oct. 10, down less than 1% in a down market. It’s off from a recent peak of $1,263.25 on Sept. 9, but still up from a recent low of $1,143.22 on Oct. 3.
NFLX stock – last 3 months – Barchart – Oct. 10, 2025
I discussed Netflix’s strong FCF, FCF margins, and a target price of $1,382.56 after its Q2 results on July 18 (“Netflix Produces Strong Q2 FCF, But NFLX Stock Dips – Is It a Buy Here?).
This article will update that analysis and my new price target of $1,400, or +14.7% higher than Friday’s close.
Last quarter, Netflix’s revenue rose by +15.9% YoY to $11.079 billion, and management forecasted a+17.3% increase for Q3 to $11.526 billion.
Analysts have been raising their revenue forecasts. For example, the average of 44 analysts surveyed by Seeking Alpha for the 2025 full-year revenue forecast is $45.05 billion (up from $44.84 billion shown in my July 18 Barchart article). For 2026, their average is $50.87 billion (up from $50.37 billion), i.e., up +11.8% for 2026.
The bottom line is that Netflix’s subscription and ad revenue is expected to stay strong. Moreover, its free cash flow (FCF) and FCF margins are also likely to be consistently high.
For example, last quarter, the FCF margin was 20.5% and in Q1 it was 25.2%, for a H1 average of 22.85%. And for the past year, it has been 20.39%, according to Stock Analysis.
As a result, and to be conservative, let’s assume that the next 12 months (NTM) FCF margin will be at least 20.4%. What is the expected FCF?
To project the NTM FCF, let’s use a weighted average revenue forecast since the Q3 numbers are already likely discounted in the stock price:
(0.25 x $45.05 billion 2025…
..
