Wall Street Feared AI Would Kill Netflix’s Moat. The Opposite Is Happening

For the past two years, one worry has consistently overshadowed the Netflix (NFLX) investment thesis. If artificial intelligence makes content cheaper and easier to produce, anyone can flood the market with content, and Netflix loses an important part of its moat. That fear treats AI as a threat to the business. However, on its last earnings call, Netflix proved the opposite is happening. 

Co-CEO Theodore A. Sarandos stated that the company is now producing higher-quality content more quickly and efficiently using generative AI. The part most investors missed was the ability to integrate AI to speed up content creation. This ability, coupled with scale, has helped Netflix strengthen its business, turning AI into a strength instead of a disruptive threat.

AI Is Already Inside the Machine

AI integration into movie-making workflows is not a pilot project. A year ago, Netflix said it had started using AI in one of its productions. Today, it has been used in roughly 300 titles, and the number is climbing fast. Currently, most of the work happens in post-production. Netflix uses AI for complex visual effects, historical battle sequences, and shots that would normally cost a fortune. 

The clearest example is a documentary series called The American Experiment. It contained 17 minutes of AI-enhanced footage that Netflix said was made twice as fast and at half the cost compared to the usual movie-making techniques. The management revealed that, were it not for AI, some of the shots in that documentary would’ve ended up being cancelled for being too costly. AI made them possible. Netflix has also been buying the tools to do this, including a roughly $600 million purchase of InterPositive, an AI-film technology company, earlier this year. 

The Cycle Just Got Faster

Netflix’s real strength has never been just the subscriber count. It is what that count sets in motion. More subscribers fund more content. Better content draws more subscribers. The cycle feeds itself. That is the moat. 

AI makes the loop spin faster. Netflix plans to spend around $20 billion on content this year. If AI lets each of those dollars stretch further, the company gets more and better shows, with the same spending. Just as important, it can now afford ambitious shots that smaller rivals still cannot. So the gap in quality between Netflix and everyone else does not shrink. It widens. The very thing investors feared would level the playing field is doing the reverse.

The Return on AI 

Here is where it pays off, though not in the way you might expect. Sarandos mentioned that the savings are more likely to be poured back into content than kept as pure profit. This means that the company is willing to sacrifice its near-term returns to improve long-term growth. Every dollar saved buys more or better content, which feeds the flywheel. Over time, that shows up as either better margins or a bigger lead over rivals, and both are wins. Since the revenue growth is slowing and operating margins have actually declined YoY from 34.1% to 33.4%, the investor concern is valid. However, the company explained on the earnings call that this was due to the investments in technology and a higher marketing expense. Once the company is done with the acquisitions and the lower costs start showing up in the financial statements, the stock will eventually reverse its course.

The valuation makes this more interesting. Netflix trades at a forward earnings multiple of 18.99x, almost half its 5-year average of 36.13x. The forward sales multiple of 5.50x sits 23% below its historical average too. The company’s stock price has gone down after the earnings release indicated slower revenue growth. What the market seems to be missing is that AI is quietly improving the economics underneath that slower growth. This is the ideal time to invest in the company before the market wakes up to Netflix’s AI advantage.

Where This Could Go Wrong

The thesis is not without risk. If AI makes content cheap across the whole industry, Netflix’s spending advantage matters less, and the moat narrows rather than widens. There is also a human cost. AI in Hollywood is deeply controversial, and Netflix has already clashed with creatives, some of whom refuse to touch it. The company’s production partner, Guillermo del Toro, said that he will never agree to use generative AI for filmmaking, bluntly stating ‘I’d rather die’. A backlash from artists could bring reputational trouble for Netflix, and therefore this isn’t just a matter of improving workflows and margins. 

Netflix spent years building a lead that rivals could not match. AI does not threaten that lead. Netflix owns the audience, the data, and now the tools to turn AI to its advantage. For a company the market keeps bracing to be disrupted, that is a quietly powerful position to be in. Sooner or later, the market will wake up to that advantage and the stock price will follow.