In the past 20 years, shares of Netflix (NFLX -1.52%) are up more than 35,000% (as of Sept. 10). The gains have continued in recent times, with shares soaring 87% and 440% in the past 12 and 36 months, respectively. The business is doing something right if it's getting this much love from investors.
Here's one reason why I think Wall Street is obsessed with this top streaming stock.
Image source: Netflix.
Netflix has a scale advantage
Netflix has come to dominate the streaming landscape. However, the bears had a valid argument early on. Since creating and licensing content is so expensive, there were worries that the business would never generate positive free cash flow (FCF). Even though Netflix was growing its subscribers and revenue quickly, the thinking was that it would never be enough.
This is no longer a concern. Netflix raked in $6.9 billion in FCF in 2024, with management expecting $8 billion to $8.5 billion this year. This is up significantly from a loss of $3.3 billion in 2019. Netflix is using excess cash to repurchase shares.
The company is demonstrating the advantage it has achieved from its massive scale. Netflix can spread large content costs over a huge customer and revenue base, allowing it to generate robust profits.
Growth at an expensive price
Netflix's bottom line is impressive. However, investors shouldn't let this take away from the ongoing growth story. The company's sales increased 16% year over year to $11.1 billion in Q2 (ended June 30).
It's clear Netflix is thriving these days. But this doesn't mean the stock is a no-brainer buy. With shares trading at a steep price-to-earnings ratio of 53.7, it might be best to wait for a sizable pullback before putting money to work.
