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Even though shares have skyrocketed in the last decade and a half, Netflix (NFLX -0.01%) hasn’t quite panned out for investors more recently.

In the last five years, shares of this streaming leader have been extremely volatile. And they’ve only climbed 51%, a gain that significantly lags the Nasdaq Composite Index.

But where will Netflix be five years from now? Here’s what investors should be thinking about when trying to come up with a forecast.

Still the dominant streaming platform

Despite a poor stock performance, Netflix’s key metrics, like subscribers, revenue, and operating margin, are much higher today than they were five years ago. Looking out toward the future, I believe it’s smart to assume this trend will continue. In other words, Netflix will remain the dominant streaming platform.

The business added nearly 8.8 million net new customers in the third quarter of 2023, the most of any single three-month period since second-quarter 2020, when the pandemic forced everyone to shelter in place. Management expects to sign on a similar number of subscribers in the fourth quarter.

While the U.S. and Canada are likely close to a saturation point, less developed countries across the globe can help Netflix boost its long-term business growth. Almost 70% of Netflix’s membership base is outside these two markets, which means the company has a huge presence internationally.

Netflix’s efforts to crack down on password sharing seem to be working. The ad-supported tier is also finding early success. Executives said that members of this plan represent 30% of new sign-ups in the 12 countries in which it’s offered. Growth with the ad-based option should continue since it is an attractive choice for price-sensitive consumers.

Superb financial picture

There’s no question that the streaming landscape remains incredibly competitive. People have an enormous number of entertainment options to help pass the time. But thanks to its first-mover advantage, Netflix stands out because of its massive scale, now with just under 250 million subscribers.

Why is this scale so important? Well, unlike most of the rival streaming services, Netflix has long been consistently profitable. Therefore, it is able to spend more on producing and licensing fresh content, while at the same time spreading these large content costs out over a bigger membership base. Subscale competitors might never be able to reach this milestone.

The result is that Netflix is becoming a sound financial enterprise. After posting a 20% operating margin in 2023, the leadership team predicts this metric will come in between 22% and 23% in 2024. Economies of scale continue to be put on display.

Even more impressive: Netflix is generating a growing amount of free cash flow, to the tune of $1.6 billion in 2022 and an estimated $6.5 billion in 2023. This allows management to buy back stock more aggressively.

It’s really easy to believe that as Netflix keeps growing in the years ahead, its bottom line should keep expanding. This can be a boon for the stock price.

Don’t forget the valuation

But even though key fundamental metrics are heading in the right direction, it doesn’t automatically mean investors will be rewarded. We must also take a closer look at the current valuation, which can have a profound effect on forward returns.

The stock has soared since the rock-bottom summer of 2022, adding to the optimism. And as of this writing, Netflix shares trade at a price-to-earnings (P/E) multiple of 48. On its own, that’s expensive. Still, it’s below the trailing five-year average of 67.

The important question to ask is: “What will the stock’s P/E ratio be in five years?” Although this is impossible to predict, I think it’s a likely scenario that Netflix will face valuation compression going forward due to the business becoming more mature. It doesn’t help that the starting valuation is already very high.

This adds a major headwind for the stock to outperform the overall market between now and 2029. Given Netflix’s sustained dominance and improving financial health, it remains an attractive prospect for long-term investors. At the same time, its lofty valuation requires a cautious approach in the ever-evolving competitive landscape.

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.