It is possible to generate big returns over short time periods on the stock market. There are always a few magnificent winners out there, especially after the type of rally that investors have seen over the past 18 months. Several growth stocks have more than doubled since early 2023, after all.
Yet many more have declined sharply or been left completely out of the rally, which illustrates why smart investors tend to focus on holding periods measured in years rather than months. Patience can pay huge dividends in investing.
With that prospect in mind, let's look at one stock that's primed for significant gains over the next several years. Read on for some killer reasons to be bullish on Netflix (NFLX +0.02%)
Riding the wave
Netflix has thrived through enough rounds of competitive attacks to give investors confidence that it can defend its premium market share position. The most recent one involved huge spending and price cuts by several rivals, including Walt Disney (DIS +0.61%).
These moves did impact the streaming video giant's growth rate in the pandemic's immediate aftermath. For a handful of quarters, investors feared that Netflix's days of high growth might be over. Why else would the company insist on tracking a different set of key metrics from now on? Surely, there must be something wrong with the previous focus on adding users above all else.
Yet Netflix is back in full expansion mode, having added 22.5 million new subscribers over the last six months. Disney and other competitors have had to slash budgets and boost prices in the meantime, as investors became less amenable to streaming video losses.
NASDAQ: NFLX
Key Data Points
Netflix executives are clear on what sets the company apart. "We have built a hard to replicate combination of a strong slate, superior recommendations, broad reach, and intense fandom," management said in late April.
The financial wins
Look deeper into Netflix's financial statements and you'll see even better reasons for the stock's continued rally. Operating profit margin hit a record 28% in the most recent quarter, and executives now see that figure landing at 25% of sales this year, up from the prior forecast of 24% of sales.
Netflix is generating ample free cash flow as well, which means there are more resources to pay down debt and make aggressive stock buybacks. Investors can expect these factors to continue lifting per-share earnings over the coming years, and a dividend payment can't be too far off in the future, either.
Management is planning to bolster the balance sheet more for the rest of 2024, so stock buybacks might slow down over the next few quarters. That's the best long-term strategy, and it is putting shareholders in position for higher cash returns in 2025 and beyond.
Why buy the stock
Netflix shares have rallied this year, but they are still sitting about 12% below their all-time highs. It's true that the streaming video giant's business isn't growing nearly as quickly as it was back when the pandemic was lifting digital entertainment demand to record levels. But Netflix is still winning market share in an industry that's likely to expand for many more years. It is also highly profitable and set to deliver much more cash to shareholders in the coming years.
The biggest risks to buying the stock today are its high valuation and the potential for sales growth to slow again. Yet its engagement levels show no sign that competitors have an opening to exploit in 2024. And Netflix can earn that premium valuation as it pushes profitability further above 20% of sales.
Altogether, this is a stellar growth stock to consider adding to your portfolio.
