Netflix, Disney, and Lowe’s: Same Selloff, Three Different Reasons

Netflix -21%, Disney -15%, Lowe's -13%. What these three have in common is that none of them fell because the business broke.

Run them through my ten-year model, though, and the expected returns from today's prices split apart: roughly 8%, 13%, and 10.5%. Same category of "undeserved" decline, three very different levels of attractiveness. After taking apart two software names, I wanted to put three completely different businesses through the identical process.

1. Netflix at -21% — the business is winning, the price isn't there

Most people react to Netflix the same way: isn't it doing great? Everyone I know has it. And they're right, which is exactly what makes a 20%-plus decline an interesting question.

Start with the bull case. Netflix is turning into a cash machine, and I don't mean that loosely. The company expects roughly $12.5 billion of free cash flow this year — real money left over after content spend and every other expense.

Then there's the part people underweight: the ad tier. In its biggest markets, more than 60% of new signups are choosing the cheaper ad-supported plan, and ad revenue is on track to double this year to around $3 billion. Netflix isn't only a subscription company anymore. That's an entirely new revenue stream that didn't exist a couple of years ago.

On top of that, they keep raising prices and people keep paying. Increases have rolled out across multiple countries and subscribers aren't leaving. When a company can charge more without losing you, that tells you something about the product. Revenue this year should come in above $52 billion.

The bear case. First is what people aren't watching. Netflix hasn't had a genuine breakout — the kind of show everyone discusses at work the next day — in a while. That matters because when people watch less, they start reconsidering the charge. Viewing per user is slipping and their share of total TV time is drifting down. And nobody knows yet whether ad-tier subscribers stick around as long as full-price ones. There simply hasn't been time for that data.

Second, the competition isn't easing. Disney, Apple, and Amazon are each spending billions on streaming, which forces Netflix to keep spending to stay ahead. That content bill doesn't shrink; it grows every year.

Third, Netflix is past 300 million subscribers worldwide. That's remarkable — and it's precisely why the question "where does the next leg of growth come from?" gets asked. Some argue the easy growth is over, and if growth slows, justifying a premium multiple gets hard fast. I find that argument pretty compelling.

The numbers. Market cap $316 billion, enterprise value $333 billion, a $17 billion gap — against $12 billion of free cash flow last year. That's a reasonable debt load. I also like that last year's free cash flow was more than double the five-year average.

One quirk: net income runs above free cash flow. At one point net income was ten times free cash flow, and back then I honestly didn't understand it well enough to spend time on it. That gap has closed considerably, which is why the name is workable for me now.

Returns on capital improved to nearly 20% last year. Gross margin is only 49%, much lower than the software names above, but net margin keeps climbing: 17% over ten years, 20% over five, 28% last year. Revenue growth is 13% over three years, 12% over five, 21% over ten, with almost nothing spent on acquisitions. My own opinion is that Netflix is still the number one streaming service.

On my checklist, the earnings and free cash flow multiples screen as expensive. But that's distorted by last year's jump versus the five-year average, so I don't take that flag at face value. The real question is whether they can keep growing profit.

Analysts see profit roughly doubling over seven years from 366 to 720 — about 10% a year — with revenue going from $52 billion to $96 billion. In my view there's still runway.

My ten-year assumptions: revenue growth of 4% / 7% / 10%, net and free cash flow margins of 20% / 23% / 26%, an exit multiple of 20 / 23 / 26, and a 9% required return. Those margin assumptions are genuinely conservative — last year's actual result exceeded not just my midpoint but my high case. I gave a generous multiple because I'm granting that Netflix is still the leading streamer a decade from now, and because returns on capital keep improving.

Output: low $43, midpoint $68, high $108, against a current price of $73. The midpoint implies about an 8% expected return. It screens red, but I don't read that as "rejected." I read it as "not yet."

So I set an alert at $55. When it gets there, I get notified and I look again. There's no reason to fall in love with something that isn't near your price. I've broken this name down further in my bull case versus bear case piece and my intrinsic value walkthrough.

2. Disney at -15% — best-in-class moat, heavy capital structure

Disney is a stock where everyone has an opinion, which is exactly why I go to the numbers first.

The bull case. Nobody on the planet has the characters and stories Disney has. Not just the classics — Marvel, Star Wars, Pixar, Frozen. And this isn't a movie business. Release a big film and they make money at the box office, then on toys, then it goes to Disney Plus, then it shows up at the theme parks. One franchise feeds the entire machine, and that machine still works. Toy Story 5's global opening in June proved it again.

Here's the part that surprised a lot of people: Disney's streaming business is now profitable. For years it burned billions competing with Netflix, and that was the central knock on the stock. They raised prices, added a cheaper ad-supported plan, grew subscribers, and turned the corner.

And the company is backing its view with money rather than words: at least $8 billion of buybacks planned this year, with double-digit earnings growth expected.

The bear case. First, one of Wall Street's largest banks — Wells Fargo — made a genuinely provocative call: Disney stock could rise 40% if the company exited streaming entirely and went back to licensing its content to other platforms. The argument is that Disney can't win a volume war against Netflix's 300 million subscribers or YouTube, which basically everyone uses. It's a bold claim, and it tells you not everyone believes the streaming turnaround holds.

Second, Disney is spending roughly $60 billion on theme parks and cruise ships. That sounds exciting, but the returns on that money may be worse than what they earn from film and television. You're locking $60 billion into buildings, ships, and rides, and betting people keep showing up. That's a big wager.

Third — and this is the one that sneaks up on people — parks and cruises are not needs. They're wants, and they're expensive. When groceries rise, when rent rises, when a recession hits, a family trip to Disney World is among the first things cut. Which means a slowing economy hits Disney harder than most, because its largest business depends on people having discretionary money.

The numbers. A $170 billion market cap against a $250 billion enterprise value. That's $85 billion of net debt. Free cash flow is rebuilding, but that's a lot of leverage for a company like this. In their defense, the asset quality is excellent — theme parks are extremely valuable real estate, and the character and film library is too. I still don't love the debt level, and I suspect they took on more of it recently than they'd have preferred.

Earnings run above free cash flow, returns on capital are low, and revenue growth is low. Net margin is recovering post-COVID and sits at 11.5% now, against an 8.45% ten-year average and a 6.44% five-year average. My read from that history is that this is roughly a 10-12% margin business.

The checklist was less ugly than I expected: they bought back some shares, and net income, revenue, and cash flow are all up. But the debt item fails and so does return on capital. The low returns on capital are the part I like least.

Analysts see earnings per share going from $7 to $11.38 over seven years. Put a 20 multiple on that and you get roughly a $230 company. Revenue goes from $102 billion to $128 billion — not much growth, low single digits. For a low-growth business you have to pay a genuinely good price.

My ten-year assumptions: revenue growth of 3% / 5% / 7%, margins of 8% / 10% / 12% (even that 10% midpoint is below the pre-COVID average), an exit multiple of 20 / 23 / 26, and a 9% required return. The reason I gave a generous multiple is simple: hand someone $200 billion today and tell them to compete with Disney, and they can't. That is a moat that earns a premium.

Output: low $80, midpoint $130, high $200. From $95, the midpoint implies about 13%.

One thing to hold onto here. This stock traded as high as $180 after COVID. Disney at $180 and Disney at $95 are the same company and completely different investments. If you attach yourself to the story, you can't see that difference. I went deeper on the valuation itself in my Disney DCF analysis.

3. Lowe's at -13% — not a company problem, a rate problem

Thirteen percent looks small next to the others. But Lowe's is a fundamentally different kind of business — it makes money when people fix up their homes — so the question changes. Is this decline telling us something about the company or about the economy?

The bull case. Start with what most people miss: Lowe's has been buying companies that serve professional contractors. Not the weekend DIY customer fixing a faucet — the contractor who shows up with a crew and spends tens of thousands of dollars on materials. That's a far bigger customer, and Lowe's has been quietly positioning to take more of that market. Smart long-term move.

Here's the big one. The housing market is essentially frozen. Mortgage rates are high and people aren't moving, and when people don't move, they don't renovate. But that demand doesn't disappear — it gets pushed out. The moment rates start coming down, there's a wave of buying, fixing, and spending in places like Lowe's. And rates don't even have to fall. People just have to get accustomed to them.

Even with business slow, Lowe's is still printing cash, using it to buy back stock and pay a dividend. This isn't new either — Lowe's has raised its dividend for decades, which is what earns it dividend king status. You get paid roughly 2.5% a year just to hold it.

The bear case comes down to one word: timing. The entire bull case depends on housing thawing, and it hasn't. Mortgage rates are still high and people haven't adjusted. If rates stay here through 2027, this stock could go flat or lower for a long stretch on fundamentals alone. That's a real risk and you have to be honest about it.

Second, those contractor businesses cost money to integrate, and right now that's eating into margins. It isn't permanent, but the near-term numbers look worse for it.

Third, this is the same issue as Disney. When budgets tighten, a kitchen remodel isn't near the top of the list — groceries, mortgage, and the car payment come first. Lowe's has already felt this: their Memorial Day sale this year came in softer than expected.

But here's what's interesting inside that bear case. Through flat sales, a frozen housing market, and tighter consumer wallets, Lowe's still grew earnings per share by almost 5% a year, via buybacks and running the business efficiently. Headlines said the business was struggling; underneath, the thing that matters to shareholders kept growing.

The numbers. Market cap $117 billion, enterprise value $180 billion. That looks like a lot of debt, though a substantial portion is store leases. Free cash flow was $7.65 billion last year against a $7.3 billion five-year average, running slightly above net income — a good sign.

Returns on capital are very high, which matters a great deal for a business that keeps opening stores. Acquisition spend is minimal, and revenue growth has clearly rolled over, for the housing reasons above. Net margin has held firmly in the 7-8% range. The stock trades at 15 times free cash flow, and the roughly 2.25% dividend consumes about $2.5 billion of that cash flow annually.

The checklist has a lot of failures: revenue down, net income down, cash flow down. Not encouraging on the surface. But you have to pull up the long-run revenue chart. Through the Great Recession, Lowe's revenue was stagnant for several years. Then it skyrocketed right after COVID — rates plummeted, people bought homes, and they poured money into those homes. Strip out that abnormal surge and revenue is rebuilding. That's where I put the weight.

I do have one complaint. Lowe's retired about 15% of its shares over five years, but the pace has slowed noticeably — and it slowed while the stock came back down to roughly where it traded three years ago. That's the exact opposite of Adobe's pattern, and this is precisely where I grade a management team's capital allocation instincts.

Analysts see earnings per share doubling from $12 to $24 over seven years, about 10% a year, while revenue goes from $87 billion to $120 billion over eight years — low-to-mid single digits. Most of that gap is buybacks.

My ten-year assumptions: revenue growth of 2.5% / 4% / 5.5%. I think inflation actually helps a business like this — higher prices mean higher real estate values and more room to pass costs through. Margins of 6.5% / 7.5% / 8.5%, which I consider conservative, and a multiple of 16 / 19 / 22. Given these returns on capital, I'd honestly be willing to pay up more than that.

Output: low $160, midpoint $233, high $325. From $209, the midpoint implies about 10.5%. I have this one on my watch list at $140. For the broader housing-adjacent picture, I wrote up Home Depot, Lowe's, and Sherwin-Williams when all three hit 52-week lows together.

What the three of them teach together

Running three very different businesses through one process leaves a few principles behind.

First, the price is the market cap, not the share price — and the debt is the gap between enterprise value and market cap. Making just those two automatic removes half the "looks cheap" illusions. Netflix's $17 billion gap and Disney's $85 billion gap are completely different stories.

Second, decline size and expected return correlate weakly. The biggest decliner here, Netflix at -21%, has the lowest expected return at 8%. The smallest decliner, Lowe's at -13%, comes in at 10.5%, and Disney in the middle at -15% comes in at 13%. How far it fell doesn't determine the answer. What that price now contains does.

Third, setting a price and an alert beforehand makes the biggest practical difference. I have alerts at $55 on Netflix and $140 on Lowe's. That frees the intervening time for researching other names. There's no reason to spend emotional energy on a stock that isn't at your price yet.

Fourth, separate the story from the price. Disney is the cleanest illustration. The company that traded at $180 after COVID is precisely the same company trading at $95 now. Identical story, different expected return. I treat this as the closing clause of principle-driven investing: a great story becomes a bad investment if you pay the wrong price.

Finally, the model's output is not a buy decision — it's an answer to "is this worth more research?" For Intuit and Adobe the answer was "go dig." For Netflix it was "wait for the price." Getting that distinction right alone saves an enormous amount of time. If you want the underlying method, I laid it out in my price versus value process piece.

FAQ

Q: Is an 8% expected return on Netflix bad? That's near the market average. A: That's exactly why I'm waiting rather than buying. A single stock carries more risk than the index, so if it only offers index-like returns, there's no reason to take single-stock risk. Individual names need a clearly higher expected return. And my 9% required return calculation contains no margin of safety to begin with.

Q: Is Disney's $85 billion of debt a disqualifier? A: For me it's a deduction, not a disqualification. The company holds genuinely durable assets in theme park real estate and its character library. What deserves close attention is the combination: low returns on capital while committing another $60 billion to physical assets. That combination is why I demand a lower entry price on Disney than on the other names here.

Q: Does Lowe's need rates to fall in order to work? A: Not necessarily. Transaction volumes can recover simply from people adjusting to current rates. But I think timing that shift is impossible, so instead of predicting the date, I demand a low enough price and wait.

Q: How do you set the watch list price? A: I work backwards from the midpoint intrinsic value, applying my required return and a margin of safety. Netflix: $55 against a $68 midpoint. Lowe's: $140 against a $233 midpoint. The reason Lowe's gets the larger discount is that the housing cycle's recovery timing is genuinely uncertain and the buyback pace has recently slowed.