Netflix (NASDAQ:NFLX) has been an incredible stock to own since its initial public offering in 2002. A $10,000 investment at its split-adjusted $1.16 per share offer price would be worth over $5.3 million today.

There have been periods where investors went against the tide. You don’t need to go back far. Netflix stock dropped 73% after the pandemic, as film studios entered the streaming business. Netflix faced tough competition from bigger, wealthier rivals.

Of course, such periods were also the best time to buy Netflix stock. From that low point two years ago, the streaming star returned almost 260% for investors versus a 40% return for the S&P 500. Many of those upstart streamers found out it wasn’t so easy to make a profit streaming. 

Now that Netflix seems back on track and the industry is undergoing a period of realignment, should investors expect the streamer to continue generating outsized returns? Is this a good time to buy Netflix stock?

A Profit Powerhouse

Netflix is incredibly profitable. It generated $7 billion in operating income for margins of 20.9% in 2023. Net income of $5.4 billion or $12.03 per share was a 20% improvement from the year before. 

With operating margins surging 54% in the first quarter of 2024, it shows just what a cash-producing juggernaut Netflix is. Margins widened to 28.1%. Management forecasts 25% operating margins for the full year.

Because the streamer does not need to invest in infrastructure anymore it can use its cash to pursue content creation and acquisition. It expects spending $17 billion this year on content. It also means Netflix can use its excess cash to boost shareholder value.

Netflix bought back 3.6 million shares in the first quarter for $2 billion while also paying down $400 million in senior notes. 

Netflix has $13 billion in long-term debt, but also has $7 billion in cash and equivalents. That is exceptionally manageable.

Streaming New Revenue Sources

Yet how much more can Netflix grow? It has 270 million subscribers in 190 countries around the world. The U.S., its largest market, is mostly saturated. Growth won’t be happening here in any appreciable numbers.

It is why it tried to squeeze extra cash out of its member base by cracking down on password sharing.

It was a successful effort and added about 22 million accounts last year but that was mostly a one-time cash injection. Netflix will now face more difficult comparables until it laps the period. This may be why the streamer is turning to a new revenue stream.

Netflix recently announced it was jumping on the bandwagon of launching an advertising platform through a partnership with The Trade Desk (NASDAQ:TTD), Google’s Display & Video 360 and Magnite (NASDAQ:MGNI).

The streaming site has 40 million subscribers to its ad-supported plan, up five million from last year. Some of those may have come from the password-sharing crackdown. Nielsen says 70% of those subscribers watch 10 hours or more of content a month, 15 percentage points higher than its nearest competitor.

That makes them a more engaged viewer, which should be attractive to advertisers. Yet just as everyone was becoming a streaming service a few years ago, there is a sudden rush to become an advertising platform too. But is it too much?

Ad Dollar Feeding Frenzy

Pinterest (NYSE:PINS), PayPal Holdings (NASDAQ:PYPL) and others have recently announced plans to become “ad platforms,” joining established players like Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META) and Walmart (NYSE:WMT).

Although digital ad spending is expected to grow 12.2% in 2024, that will be its peak, according to eMarketer. Growth will then steadily decline over the next few years. It means more platforms will chase fewer new ad dollars. Some players have as good or better case to attract ad dollars as Netflix.

With subscriber growth limited, additional revenue streams restricted and fewer but more intense competitors, Netflix revenue might stagnate. And trading at 45 times earnings and 40 times free cash flow, it is hard to say Netflix stock is a buy.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.