Even at all-time highs, Netflix ( NFLX ) stock remains an attractive option

As seen in the chart below, Netflix ( NFLX ) stock is up more than 85% over the past year, but the stock may still have more room to run. The streaming giant continues to deliver excellent results, showing accelerating growth in both membership and revenue, even as the industry landscape becomes more competitive. Netflix’s free cash flow is snowing and expected to increase in the coming years. So despite a seemingly high valuation, there are still compelling reasons to be bullish on NFLX stock.

Netflix’s revenue growth

For starters, I think it’s abundantly clear that Netflix’s continued bullish momentum comes down to one critical factor: the continued growth of its member base. In its latest Q3 results, the company reported a 14.4% increase in global streaming paid memberships, paired with a 15% year-over-year increase in revenue.

These numbers represent an acceleration compared to the same quarter of 2023, when membership and revenue growth were 10.8% and 7.8%, respectively. This level of growth is more remarkable when you consider the highly saturated streaming market, where Netflix now competes with Disney’s ( DIS ) Disney+, Amazon’s ( AMZN ) Prime Video and various other players.

Netflix’s management credited the strong revenue and membership growth in Q3 to several factors, including the success of big hits such as The perfect couple and Monsters: The Lyle and Erik Menendez Storyboth of which significantly increased engagement. Netflix’s advertising business, while still a relatively new part of their revenue mix, is starting to take off. In fact, ad-supported plan memberships grew 35% quarter-over-quarter, accounting for over 50% of enrollments in ad-supported markets, showing promising potential as a supplemental revenue driver.

Growth can be sustained

Netflix’s outlook for Q4 gives even more reason to be optimistic about growth. Management expects another quarter of double-digit revenue growth, suggesting the company’s momentum is not slowing.

The upcoming lineup of content, which includes blockbuster hits like “Squid Game S2” and two NFL games on Christmas Day, should help boost memberships and maintain high engagement levels. Coupled with higher prices in select markets, Netflix is ​​forecasting revenue growth of 14.7% in Q4, maintaining nearly the same pace as Q3’s growth of 15% and making for a strong end to the year.

Netflix’s Free Cash Flow Snowballs

Beyond Netflix’s impressive ability to maintain top-line growth, one of the most compelling reasons to be bullish on its stock is the company’s rapidly increasing free cash flow. Netflix’s scale has allowed it to stabilize its capital expenditures (CAPEX), and combined with rising revenues, this has resulted in a snowball effect on its free cash flow. The concept here is economies of scale, where a growing subscriber base allows for decreasing CAPEX per subscriber, which increases margins. In Q3, Netflix posted $2.2 billion in free cash flow, up from $1.9 billion last year. Therefore, Wall Street now expects free cash flow to reach $6.59 billion in 2024.

Looking further ahead, the trend looks set to continue. Wall Street consensus estimates expect Netflix to generate $8.99 billion in free cash flow in 2025 and $10.75 billion in 2026. To me, this significant increase highlights how Netflix can capitalize on its growing subscriber base without a corresponding increase in operating costs. In fact, I think free cash flow growth could accelerate further because of this dynamic, which helps explain the sharp increase in expected free cash flow over the coming years.

Circling back to my initial argument, I think with such strong free cash flow generation, it’s easy to see why the stock has maintained bullish momentum, even at its current levels. Sure, Netflix’s valuation remains a bit stretched, with the stock trading at 53 times this year’s projected free cash flow. However, taking the growth path into account, Netflix’s valuation becomes more reasonable at around 44 times the expected free cash flow for 2026. This implies that the company, now well into the phase of achieving economies of scale, could grow into its valuation quite comfortably, thus maintain its upward potential.

Is NFLX Stock a Buy?

Wall Street’s view of Netflix seems somewhat more cautious. The stock currently has a moderate buy consensus rating, with 24 analysts recommending a buy, 10 a hold and two a sell over the past three months. Still, with an average price target of $786.86, Wall Street’s forecast suggests a potential downside risk of 5.25%.

If you’re wondering which analyst to follow if you want to buy and sell NFLX stock, check out Jason Helfstein of Oppenheimer (OPY). He is both the most accurate and profitable analyst covering the stock (on a one-year time frame), with an average return of 48.3% per share. rating and a perfect 100% success rate.

Read more analyst ratings on NFLX stock

Conclusion

Netflix has managed to maintain excellent membership and revenue growth despite reaching a stage of maturity and facing increasing competition. Meanwhile, its strong content lineup and expanding advertising business provide a solid foundation for continued growth. Coupled with accelerating free cash flow generation, I believe Netflix seems well-positioned to take advantage of economies of scale, making its current valuation justifiable for investors looking to hold the stock for the long term.

Disclosure