Most people likely recognize Netflix (NFLX 2.65%) as the world's largest subscription-based platform for streaming videos. But when Netflix went public in 2002, it only rented out DVDs through the mail.

Netflix wouldn't actually launch its first streaming video platform until 2007. But if you had invested just $3,000 in its stock at the beginning of that transformative year, your stake would be worth nearly $180,000 today. Let's see how that strategic shift turned Netflix into a tech and media powerhouse.

A person eats popcorn while watching a video on a laptop.

Image source: Getty Images.

A history of disrupting entrenched companies

Reed Hastings reportedly founded Netflix in 1997 after being charged $40 for a lost video rental at Blockbuster Video. Instead of in-store video rentals, Netflix offered DVD rentals by mail with prepaid returns and no late fees. It converted that à la carte model into a subscription-based one in 1999, and subsequently reached 6.3 million paid subscribers by the end of 2006.

Recognizing that increasing internet speeds would enable streaming video to replace DVDs, Blu-ray discs, and other physical media, Netflix launched its streaming service in 2007 for set-top boxes, gaming consoles, and Blu-ray players. It subsequently launched apps for mobile devices and expanded into additional overseas markets. By 2012, it had locked in over 25 million paid streaming subscribers across the world.

Blockbuster had a chance to buy Netflix for just $50 million back in 2000, but it passed on that deal and suffered as the physical video rental market slowly crumbled. In 2010, Blockbuster filed for bankruptcy after failing to pay off approximately $1 billion in debt.

Yet Netflix wasn't satisfied with simply beating Blockbuster. It realized that to expand, differentiate itself from other platforms, and reduce its costly dependence on licensed shows and movies, it needed to produce its own content. So in 2013, it launched its first slate of original shows -- including Orange is the New Black, House of Cards, and Hemlock Grove -- which set the company up to aggressively challenge traditional media companies.

Netflix has produced over 1,500 original shows and movies since then. It ended its latest quarter with 220.7 million paid subscribers and remains ahead of Walt Disney, Warner Bros. Discovery, Paramount Global, Amazon, and others in the crowded market for premium streaming video services.

But those high-growth days could be over

Between 2007 and 2021, Netflix's revenue rose from $1.2 billion to $29.7 billion, representing a compound annual growth rate (CAGR) of 26%. Its net income increased at a CAGR of 36% from $67 million to $5.1 billion.

That expansion rate is astonishing, but its high-growth days could be over. In the first quarter of 2022, it lost subscribers for the first time in over a decade. It continued to lose even more subscribers in the second quarter. Netflix expects to stop losing subscribers in the third quarter, but it's also cracking down on password sharing as well as rolling out a cheaper ad-supported tier next year. Both those moves indicate it's starved for new subscribers.

For the full year, analysts expect Netflix's revenue to rise 7% and for its net income to decline 10% as it ramps up its spending on new content. But in 2023, they expect its revenue and net income to grow 9% and 12%, respectively. That longer-term outlook is encouraging, but it also indicates that Netflix's days of double-digit sales growth are over.

As a result, Netflix's stock merely seems reasonably valued at 21 times forward earnings today. But if the market values it more closely to a traditional media company like Disney, which trades at 19 times forward earnings, its upside potential could be limited. Netflix had a great run over the past 15 years, but it seems highly doubtful that it will replicate those multibagger gains over the next two decades.