Netflix (NFLX -0.50%) has been without a doubt one of the best-performing stocks this century. If you were lucky enough or foresightful enough to invest $1,000 in this streaming stock in late January 2005 and hold on, your position would be worth a whopping $617,000 as of Jan. 27. This almost 62,000% gain is well ahead of the total return of the S&P 500. A similar investment in the index would have grown into just shy of $7,600 over those 20 years.

Let's take a closer look at Netflix's rise to become the streaming leader. Then investors can consider the present situation with a fresh perspective to figure out if the stock is a smart buy right now.

Creating the streaming category

For a company to generate a monster return like Netflix has requires unbelievable business execution. In addition, it often takes a strategy that involves disrupting a major industry. That was precisely what Netflix did when it created the streaming-video-on-demand category.

Netflix began its transition away from being a DVD-by-mail service when it officially launched streaming in the U.S. in 2007. Co-founder Reed Hastings and his leadership team recognized early on that the internet would profoundly change how people consumed video entertainment. Netflix expanded its streaming service into new markets throughout the 2010s, and during that decade, it registered fantastic subscriber growth. Not only was Netflix cheaper than the traditional cable TV bundle, but it gave households a far better experience because they could watch whatever they wanted at times most convenient for them.

Whereas the company's streaming service started out licensing content from other studios, Netflix has become a dominant force in producing original shows and movies. It has won numerous Emmy and Oscar awards, reflecting the quality of content available.

As the number of U.S. households with cable subscriptions has steadily declined, virtually every media business has launched its own streaming service. But Netflix, with 302 million global members and 2024 revenue of $39 billion, reigns supreme.

Netflix of the future

The first-mover advantage helped drive tremendous scale and brand recognition for Netflix. It's now a ridiculously profitable enterprise. Its operating margin went from 7.3% in 2014 to 26.7% last year, and it has raked in $13.8 billion in free cash flow over the past 24 months.

Because it operates from a position of financial strength, its executives have enjoyed the option of adopting new strategies to support growth -- even strategies that it previously shunned. Introducing an ad-supported subscription tier was one such pivot, and it has proven fruitful. Netflix's ad revenue doubled in 2024, and management expects it to double again in 2025 thanks to strong consumer interest in that cheaper subscription option.

Netflix has also begun showing live sports, from a must-see boxing match to pro football to WWE wrestling, and will stream the FIFA Women's World Cup in 2027 and 2031. It's all in the name of attracting new customers and boosting engagement and monetization.

The writing is on the wall. There's no question in my mind that five or 10 years from now, advertising will represent a larger chunk of the company's overall revenue. Additionally, Netflix will likely invest more into acquiring rights to other live sports and events.

Huge expectations

Investors shouldn't expect Netflix's share price growth to resemble what it delivered in the past. It's a massive $415 billion company now, so such gains are no longer feasible. It also doesn't help that its shares trade at a forward price-to-earnings ratio of 39.3. The market has baked a lot of bullishness about the business into the stock.

That valuation is steep, in my opinion. Investors should be patient and wait for a pullback before they think about buying Netflix shares.