As shown in the chart below, shares of Netflix (NFLX) are up more than 85% in the past year, yet 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 snowballing and is expected to rise sharply 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

To start, I think it’s pretty clear that Netflix’s continued bullish momentum comes down to one crucial factor: continued membership growth. In its latest third-quarter results, the company reported a 14.4% increase in paid memberships for global streaming, combined with a 15% year-over-year revenue increase.

These numbers represent an acceleration from 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 several other players.

Netflix management attributed strong revenue and membership growth in the third quarter to several factors, including the success of big hits such as The perfect couple And Monsters: The Story of Lyle and Erik Menendezboth of which have significantly increased engagement. Netflix’s advertising business, while still a relatively new part of the revenue mix, is starting to gain momentum. Ad-supported memberships grew 35% quarter-over-quarter and represented more than 50% of signups in ad-supported markets, showing promising potential as an additional revenue stream.

Growth can be sustained

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

The upcoming slate of content, including blockbuster hits like “Squid Game S2” and two NFL games on Christmas Day, should boost membership and maintain high engagement levels. Along with higher prices in select markets, Netflix forecasts revenue growth of 14.7% in the fourth quarter, maintaining nearly the same pace as the 15% growth in the third quarter and posting a strong finish to the year.

Netflix’s free cash flow snowballs

Besides Netflix’s impressive ability to maintain revenue growth, one of the most compelling reasons to be bullish on the 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 growing revenues, this has resulted in a snowball effect on free cash flow. The concept here is economies of scale, where a growing subscriber base allows for declining CAPEX per subscriber, thus increasing margins. In the third quarter, Netflix posted $2.2 billion in free cash flow, compared to $1.9 billion last year. Therefore, Wall Street now expects free cash flow to reach $6.59 billion by 2024.

Looking further ahead, the trend appears to be continuing. 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 underlines how Netflix can leverage its growing subscriber base without a corresponding increase in operating costs . In fact, I believe that free cash flow growth could accelerate further as a result of these dynamics, which helps explain the sharp increase in expected free cash flow in the coming years.

Returning to my original argument, I believe that with such strong free cash flow, it’s easy to see why the stock has maintained its bullish momentum even at its current levels. To be sure, Netflix’s valuation remains somewhat stretched, with the stock trading at 53 times this year’s expected free cash flow. However, given its growth trajectory, Netflix’s valuation becomes more reasonable, at roughly 44 times projected 2026 free cash flow. This implies that the company, now well into the phase of achieving economies of scale, could grow to its valuation quite comfortably, and thus maintain the upside potential.

Is NFLX Stock a Buy?

Wall Street’s outlook on Netflix appears a bit more cautious. The stock currently has a consensus rating of Moderate Buy, with 24 analysts recommending a Buy, 10 a Hold, and two a Sell over the past three months. Still, Wall Street, with an average price target of $786.86, 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 the most profitable analyst covering the stock (over a one-year period), with an average return of 48.3% per rating and a perfect success rate of 100%.

Read more analyst ratings on NFLX stock

Conclusion

Netflix has managed to maintain excellent membership and revenue growth despite reaching a maturity stage and facing increasing competition. In the meantime, the strong content offering and growing advertising business provide a solid foundation for continued growth. In addition to accelerating free cash flow generation, I believe Netflix appears well positioned to leverage economies of scale, justifying its current valuation for investors looking to hold the stock for the long term.

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