Businesses and management teams that not only can accurately predict a new paradigm shift but also can successfully monetize a particular trend can become lucrative category creators. The result for investors can be very strong returns over the long term.
This is precisely what one dominant media enterprise has done. In fact, this growth stock has skyrocketed almost 69,000% in the past 20 years (as of Feb. 18). This monster gain would have turned a $10,000 investment in mid-February 2005 into $6.9 million today.
Continue reading to learn more about this industry-leading company and what exactly is its key competitive advantage.
It pays to be first
Investors are likely familiar with the rise of streaming entertainment. The internet revolutionized how people view video content. This trend was spearheaded by the market leader, Netflix (NFLX -2.09%).
As is the case with some of the most powerful technology businesses today, investors might assume that Netflix possesses network effects because its service has become more valuable to users the bigger it has become. However, this isn’t the right way to think about it.
Instead, the company’s main competitive strength comes from its scale advantage. Netflix generated $39 billion in revenue in 2024, and it ended the year with 302 million subscribers. This sheer size puts it in a very favorable position.
It’s an extremely expensive undertaking to license and create content. That’s why most other competitors continue to lose lots of money with their streaming operations. In order to keep existing subscribers happy and engaged, while also bringing in new ones, businesses must spend copious amounts of cash year in and year out.
Thanks to its scale, Netflix is able to spend more cash on content in absolute terms than rivals (an expected $18 billion in 2025). This allows it to offer its viewers new shows, movies, documentaries, and live events.
On the flip side, Netflix’s scale results in tremendous profitability because it’s able to spread that massive fixed content expense over a large user and revenue base. The company is expected to report a stellar 29% operating margin in 2025, with a forecast for free cash flow of $8 billion. Rivals aren’t even close to this level of financial success.
What led to Netflix achieving such massive scale? It was the first mover in the streaming wars. Since launching its streaming service in 2007, it has registered phenomenal growth, adding new members and increasing revenue at a rapid clip. By simply providing a cheaper and more convenient alternative to traditional cable TV in the early days, it found remarkable success.
Nowadays, the streaming landscape is incredibly crowded, with consumers having varied choices. But no competitor holds a candle to what Netflix has built.
Should you buy Netflix stock?
Investors bold and lucky enough to get in early on an industry-disrupting enterprise that eventually becomes a market leader can obviously see impressive returns. This is what Netflix has done in the past couple of decades.
If you missed the boat, though, it’s best to think critically about what future returns will look like. To be clear, Netflix isn’t going to generate the same returns it did in the past. Given that this is now a more mature business, growth will likely slow.
The current valuation also doesn’t provide much upside. As of this writing, shares trade at a price-to-earnings ratio (P/E) of 52.5. This is after the P/E multiple expanded by 141% just in the past two and a half years. And that’s twice as expensive as the overall S&P 500.
Investors shouldn’t rush to buy the stock right now. Instead, put Netflix on your watch list and wait for a more attractive opportunity to capitalize on it.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
