The combined company brings together Paramount Pictures and Warner Bros., along with CBS, CNN, HBO and a deep bench of cable networks. Its library includes Harry Potter, Game of Thrones, the DC Universe, Top Gun and Mission: Impossible.

On paper, that’s a content powerhouse. In the market, it’s a balance sheet question.

To be fair, investors have been sizing up the deal for months. The key objection comes down to debt. Specifically, Warner Bros. Discovery is bringing a significant debt load into the new company. In its most recent quarter, the company reported $33.1 billion in gross debt, $29.7 billion in net debt, and net leverage of 3.4x.

The deal financing added to that burden. On Oct. 1, the company priced $41.4 billion of senior secured notes and an $8.5 billion term loan. PSKY fell 10% that day. One week earlier, S&P Global cut the company’s credit rating to BB from BB+, citing higher leverage at closing.

That means Skydance will have to navigate net debt of approximately $80 billion. This comes at a time when investors will be watching to see how the company invests in new content and new technology. Or maybe the better question is: will it be able to make those investments?

That question matters because newly appointed chief executive officer (CEO) Davide Ellison has set ambitious goals. He plans to combine Paramount+ and HBO Max into a single streaming platform. He has also promised 15 theatrical releases per year. Both require heavy, sustained spending. Investors will want to see how the company balances those commitments against its interest payments.

Targeting $6 Billion of Cost Efficiencies

Ellison has said he anticipates $6 billion of cost efficiencies. In investor parlance, that usually means job cuts are coming. Skydance confirmed as much on the day the merger was finalized.

Investors have seen this playbook before. After Skydance merged with Paramount Global in August 2025, the company targeted $2 billion in savings. Roughly 2,000 layoffs followed, about 10% of its workforce. The new target is three times larger, and the integration is far more complex.

Ellison will remain chairman and CEO, with former Mattel CEO Ynon Kreiz joining as co-CEO. Announcing cost cuts is the easy part. Making them without damaging the studios and brands that made the deal attractive is much harder.

The company may also find savings by cutting or suspending its dividend. Before the merger, Paramount Skydance paid a dividend of about 10 cents per share annually. That was only about 1.45% of cash flow. But cash flow is precisely what investors are concerned about as the company navigates its debt load.

Suspending a small dividend wouldn’t save much money. But it would send a clear signal that debt reduction comes first. Some investors might actually welcome that message.

Could Netflix Be the Surprise Winner?

Given Skydance’s debt burden, Netflix Inc. (NASDAQ: NFLX) may win the award for the best deal never made. Investors will remember that it was Netflix that was originally in line to purchase Warner Bros. Discovery. Having access to that gigantic, and in some cases iconic, content library would have been a feather in the cap for the streaming giant.

But investors didn’t like it. In fact, NFLX had a relief rally after the news broke that Warner Bros. Discovery was going with Paramount’s offer. The stock has come under pressure since then, largely due to concerns about the opacity of the company’s subscriber numbers with a valuation that’s on par with some technology stocks. 

Now that Paramount+ and HBO Max are part of the same streaming family, what will that mean for subscriber costs and subscriber numbers? A combined service could be a stronger competitor. But integrations are messy. Price changes, app migrations, and overlapping content can push subscribers to cancel rather than consolidate.

Time will tell, but “streaming fatigue” is real, NFLX looks more attractive at 19x forward earnings, and analysts are also signaling that the sell-off may be overdone. 

Momentum Is on the Side of the Skeptics

SKYD pared its losses slightly before the market closed on Oct. 6. However, the chart suggests that bullish investors need to proceed with caution. A “sell the news” reaction isn’t uncommon, which means a drop of around 2.7% is nothing to panic about.

However, the day before the close, PSKY rallied but failed to reclaim either its 20-day or 50-day simple moving average. At a bare minimum, investors will want to see a close above one or both averages before thinking the stock is ready to reverse its trend.

The analyst picture offers little cushion either. Heading into the close, the consensus price target sat around $10. That was only about 6% above PSKY’s Oct. 1 close.

Execution Has to Win Over Perception

Skydance owns one of the deepest content libraries in Hollywood. That’s the story bulls will tell. The story the market is telling right now is about leverage. Until the company shows real progress on cost savings and debt reduction, the market’s story is likely to win. Patient investors may get a better entry point once the post-merger dust settles.

Since he sold NFLX in 2022, the stock has risen nearly 650%. And Netflix has changed a lot during that time. The company has cracked down on password sharing, added a cheaper plan with ads and expanded into live events and sports. Pershing Square now believes Netflix has become the clear winner of the streaming business.

Why Did Ackman Sell NFLX in 2022?

Ackman’s first investment in Netflix did not last long.

In April 2022, Netflix reported that it had lost about 200,000 subscribers during the first three months of the year. It was the company’s first subscriber loss in about a decade. Netflix was also hurt by the decision to stop its service in Russia after Russia invaded Ukraine. That move cost the company about 700,000 members.

NFLX shares then dropped about 35%.

Ackman’s firm owned about 3.1 million Netflix shares. He decided to sell them all, taking a loss of more than $400 million.

At the time, Ackman said Netflix’s plans to add advertising and stop people from sharing passwords made sense. But he believed those changes would make the company harder to predict in the short term. The decision was costly because Netflix later made a huge comeback.

Why Does Ackman Like Netflix Now?

Pershing Square believes Netflix is now the strongest streaming company in the world.

Netflix has more than 325 million subscribers. That is almost twice the combined subscriber base of Disney+ and HBO Max, according to Pershing Square.

The company has also become better at controlling its spending. Netflix is still spending billions of dollars on movies and shows, but its content spending has grown much more slowly in recent years. At the same time, the company is generating a lot of cash.

Pershing Square added that Netflix now turns about 90% of its earnings into free cash flow.

Advertising Could Be a Big Opportunity

Netflix’s advertising business is another reason Ackman is interested.

The company has quickly grown its advertising business toward $3 billion. Netflix also offers a cheaper subscription plan that includes ads. This gives customers another option if they do not want to pay for the company’s more expensive plans.

Pershing Square believes this could be especially helpful in international markets, where customers may be more careful about how much they spend on entertainment. The ad business could also give Netflix another source of revenue without requiring the company to raise subscription prices.

Netflix Stock Has Become Cheaper

Another reason Ackman is buying Netflix now is the stock’s lower price. Netflix shares have fallen roughly 50% from their June 2025 high of $134. That drop made the company much cheaper based on its expected future earnings. Pershing Square says NFLX’s valuation fell from more than 40 times forward earnings to about 21 times. The stock also came under pressure because of Netflix’s attempted deal for Warner Bros. Discovery (NASDAQ: WBD).

Investors also became worried about slower viewer engagement and the possible impact of artificial intelligence on the entertainment industry. However, Pershing Square does not believe those risks are as serious as some investors think.

Netflix Still Has Some Problems

In July, the company reported second-quarter revenue of $12.56 billion. That was slightly below what analysts expected. However, NFLX still reported earnings per share of $0.80, which was better than expected. Revenue increased in every major region. Latin America was especially strong, with revenue rising 21%. Revenue in Asia Pacific increased 16%.

In addition, live programming is also becoming more important for Netflix.

The company expects live programming to make up about 5% of its content budget. But live events have already helped Netflix attract new customers. Six of the company’s 10 biggest new-member sign-up days over the past five years came from live programming. 

What’s Next?

Netflix now has a significant global customer base, a growing advertising business, strong cash flow and a bigger presence in live entertainment.

Ackman is betting that these changes make Netflix a stronger and more predictable business.

His first NFLX investment cost him more than $400 million. This time, he believes the story could have a much better, far more profitable ending.

That decision matters more than anything in its latest first quarter 2026 earnings report.

A Quarter That Looks Like Growth, But Reads Like Control

The streaming company reported $12.25 billion in revenue, up 16% year-over-year, alongside earnings per share of $1.23 versus $0.79 expected, a spread wide enough to signal not just a beat, but a business operating ahead of expectations. Operating income came in at $3.86 billion, and an operating margin of 31.5%, a level that would have been unthinkable for Netflix just a few years ago, when profitability was still being sacrificed for scale, as shown in their letter to shareholders.

At the same time, the company now serves over 325 million global memberships, and I want you to actually process what that means, because once you reach that level, the game changes from expansion to extraction. Free cash flow continues to trend strongly positive, with Netflix generating roughly $2.1 billion in free cash flow for the quarter, reinforcing a business that is no longer dependent on external financing to sustain its model.

The Growth Engine Is Far From Rusty

The engine driving this performance has shifted in a way that most investors still underestimate. Revenue is no longer primarily a function of subscriber additions; it is increasingly driven by how much each user is worth. That is where pricing and advertising come in.

Netflix expects its ad-supported tier to generate approximately $3 billion in revenue in 2026, effectively doubling year-over-year, which introduces a second monetization layer that scales alongside subscriptions without requiring equivalent growth in users . 

At the same time, content spending remains elevated, but it is being deployed with far more discipline. Instead of chasing volume, Netflix is focusing on efficiency – on titles that travel globally and deliver sustained engagement. That shift is subtle, but it shows up in the margins, and you can already see it in that 31.5% operating margin holding firm even as the platform continues to invest.

The $87.5 Billion Pass Explains Everything

This is where I think most people misread the situation.

Live sports is the most aggressive growth lever in streaming today, and if Netflix had leaned into that $87.5 billion opportunity regardless of the lawsuit, the long-term upside could have been substantial. You would likely see stronger engagement, deeper ad monetization, and a broader ecosystem forming around live content.

At the same time, you would also see margins come under pressure. Cash flow would tighten. Earnings would become less predictable.

Right now, Netflix is delivering great figures in free cash flow, and that stability exists because the company is not tying itself to assets that demand constant reinvestment and escalating bidding wars. By walking away, Netflix preserved its structure.

So yes, they passed on growth. But they protected quality, and in this phase of the business, that matters more.

A Market That Understands the Trade-Off

Strangely, a quarter with this level of revenue growth, earnings beat, and margin strength would normally trigger aggressive upside. But price action flipped the script.

Heading into earnings, Netflix traded around $97–$100, holding just above its 50-day moving average with no aggressive positioning. The initial reaction was strong, the NFLX price broke above $100 and pushed toward $106 on expanding volume, signaling institutional participation.

But it didn’t hold as it gapped down nearly 9% back to $97, rejecting higher prices immediately after the breakout. RSI sits around 47.9, confirming a reset in momentum rather than a breakdown.

The move higher reflects confidence in the earnings, while the sharp gap down reflects hesitation about what comes next.

Meaning, we are no longer dealing with a company that the market prices purely on growth acceleration. But one that is being evaluated on how well it can sustain what it has already built. 

Hastings Leaving Is Not a Footnote

Reed Hastings built Netflix from DVD mailers into the dominant global streaming platform, effectively rewriting how content is distributed and consumed at scale. That kind of leadership is built for one phase of a business – the phase where you are creating something from nothing, pushing through resistance, and growing faster than the market expects. But this phase demands discipline, capital control, and consistency to maintain the company’s legacy.

A Business That Knows What It Is Now

A company generating $12.25 billion in quarterly revenue at a 31.5% operating margin with $2 billion in free cash flow is not experimenting. It has a model, it understands the model, and it is executing against it with growing precision. Debt remains manageable relative to cash generation, and the continued free cash flow build strengthens its ability to fund strategy internally without returning to external capital markets. Consequently, it is no longer about whether Netflix can grow, but how deliberately it chooses to.

Perfect Entry Point For Buyers

Netflix has not abandoned growth. It has redefined it, and the numbers make that case cleanly. Revenue up 16%, margins at 31.5%, free cash flow above $2 billion, monetization runway still expanding. The $87.5 billion pass was discipline, not retreat. Of course, the leadership transition is a real variable worth watching. But a business with this margin profile and cash generation doesn’t stay mispriced for long. This presents good entry points, and I’d be a buyer here.