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**Edit: Added a short therm thesis up front to TLDR, make sure to read up on the full article for the full analysis.**
# Overall Thesis - Short format
Netflix's growth outlook is driven by three self-reinforcing forces. First, the advertising business is scaling rapidly and is expected to become a primary contributor to top-line growth in the near future. Second, aggressive content amortization continues to build a substantial off-book asset base, which systematically understates the company's true earnings power. Third, content spending functions as an open capital deployment channel — one that has historically returned over 20 cents of market value for every dollar invested.
# Is Netflix Understating it’s income?
The main thesis of investment is supported by this question, given the accounting decomposition we should went through, should we consider these earnings as understated? Is Netflix inflating their COGS to artificially create a steady earnings line, pay less tax and create a margin for the future?
At this point the company has been matching it’s content spending with it’s amortization. Everyone that keeps up with the content library can see an increase in new original shows and episodes from 2020 to 2025.
In fact, according to independent sources, during the 2020-2025 period, Netflix has increased it’s total number of titles from 5,817 to 7,800. More interesting is how the composition of these titles has changed. In 2020, Netflix Originals were only 25% of the US Library. In 2025, it’s closer to 61%.
Given all these changes to the library, it’s book value has remained the same at roughly $32 billion. The company has been closely matching their amortization accounts to their cash addition to spending.
Inflating the amortization expenses results in larger COGS which reduces earnings. Surely this will reduce the gross margin? Not for Netflix. Revenue growth has been so accelerated that the increase in COGS has not dampened the profitability, surprisingly the company has managed to report a record gross margin of 48.5%. Note how considering the a amortization charge percentage similar to the ones they used in 2018-2021, Netflix’s gross margin would be 60%.
Given that every year the company adds a larger amount of content spending, it’s expected that the asset base should be increasing, which is not happening. Netflix is closer to expensing it’s total content spending than capitalizing it.
Think of a hit tv show that Netflix could produce right now. If we suppose that it produces another k pop demon hunters or squid game. It’s current production cost is completely deducted in the product year. The revenue (mostly subscribers) that these shows will bring in the future will have no cost.
As per their 2025 engagement report, half of the viewing for netflix originals came from title that debuted in **2023 or earlier**, that means that the other half is viewing content older than two years.
This aligns with their amortization spending, with their current 32B content asset base and 17B content amortization, they’ll deplete this account in two years time.
This means that the company is driving very strong engagement and attracting users with fully amortized content that is not a cost to the company. This effect can easily snowball as they keep adding more content to the library. In fact, Netflix has grown their amortization account extensively to keep up with this effect.
Management comments and strategy have been based on a 1.1x cash spending to P&L expensing. That means that they will plan to keep cash spending very close to overall expenses, which keeps a very strong asset base of original IPs off the books.
As a result, it is my opinion that Netflix currently has a stronger earnings power than their accounting leads us to believe. Not only as an effect of a substantial amortization charge that substantially affects the bottom line, but also because of the large asset base it keeps off books by aggressively amortizing it. This is not just a future cushion for any drop in subscribers, but also an accelerant and compoundable earnings in the next years.
Check out [https://open.substack.com/pub/medismarketnotes/p/netflix-a-sisyphean-task-or-understated?r=35je77&utm\_campaign=post&utm\_medium=web](https://open.substack.com/pub/medismarketnotes/p/netflix-a-sisyphean-task-or-understated?r=35je77&utm_campaign=post&utm_medium=web) for the accompanying graphs, charts and other topics
