Netflix Stock Is Crushing the Market. Time to Buy?

Following a strong earnings report from streaming service juggernaut Netflix (NASDAQ: NFLX) earlier this month, many investors are likely contemplating whether or not they should buy shares. Not only is the company growing nicely on both the top and bottom line, but the stock also seems to have significant momentum. As of this writing, shares are up more than 22% year to date. This obliterates the S&P 500's decline of almost 7%.

Is it too late to get in on this growth stock? Or have shares risen too much, too fast?

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Executing on growth initiatives

Going into 2025, Netflix had a few big opportunities in front of it. All the company needed to do was capitalize on them.

It's doing exactly that. First-quarter revenue grew about 12.5% year over year and operating income jumped 27.1% over the same period. Both metrics beat management's guidance. Helping results were better-than-expected subscription and ad revenue. This reflects the company's execution on its key initiatives, including recent price increases for some of its subscription plans and the continued build-out of its advertising business.

Netflix's advertising business, in particular, has been an area investors have been watching closely. For now, there's nothing but positive news. Management emphasized on the company's first-quarter earnings call that the fact that its ad business is still small relative to the opportunity it has to expand provides some "insulation" to an uncertain macroeconomic environment. Indeed, Netflix co-CEO Gregory Peters said he expects the company's advertising revenue to "roughly double" this year.

While this business is still small as a percentage of Netflix's overall sales, the company's execution on an important, high-margin business with a lot of growth potential bodes well for its future.

Bullish signs

While investors debate whether or not to buy shares of the streaming service specialist's stock, management isn't hesitating to do so with the company's capital. Netflix has been aggressively repurchasing shares. The company spent $3.7 billion buying back its stock in the first quarter alone. This was far more than the $800 million the company spent paying down debt during the period.

Supporting management's upbeat approach to repurchases is a bullish forecast for its second quarter. Management said it expected first-quarter revenue to grow at a rate of 15.4% year over year -- an acceleration from the company's growth rate of 12.5% in Q1. In addition, management said it expects its operating margin to expand to 33.3%. This is up big from 27.2% in the second quarter of 2024.

Of course, with revenue expected to rise and operating margin anticipated to expand, the company should see positive operating leverage. This explains why management forecast operating income in the second quarter of 2025 to increase 41% year over year.

Given all of this information, the only reason an investor might be skeptical about the stock right now is valuation. Shares currently trade at a price-to-earnings multiple of 52. But the company's strong earnings momentum, aided by the lucrative combination of double-digit revenue growth and operating margin expansion, helps explain this premium valuation.

Still, a valuation this high prices in near-perfect long-term execution from a company in an industry with well-capitalized competitors, including tech giants Apple, Amazon, and Alphabet. Put another way, the valuation doesn't leave much breathing room for risks. So it might be wise for investors to stay on the sidelines and hope for a better entry point into the stock at some point in the future.

For existing Netflix shareholders, however, such a rosy update from the company is great news. Netflix keeps giving shareholders reasons to hold, despite a high valuation. While there's no guarantee that returns are attractive from the stock's high price tag today, there's arguably not a good enough reason to sell either. This puts shares squarely in a hold recommendation.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Netflix. The Motley Fool has a disclosure policy.