Methinks Naruto falls into the same problem as popular video games like Halo. In spite of great popularity a lot of people don't seem to get what's so great about it.
When I initially watched/read Naruto I thought it was fairly average. What first stood out was Naruto's signature technique which I thought was an unusual choice for a male lead. Sasuke quickly hit the cliche male lead, possessing some boring fire techniques, so I almost felt like the series was a parody of cliches, including the fact that the only blatant kiss I recall is the one between two guys for comical effect. Probably the worst development in the series has to go to the female characters, at least until Tsunade showed up. The series really grew over time and gave seemingly shallow stock characters a decent roundness to them, sort of like what Kojima did with Metal Gear Solid before becoming too preachy.
To continue on the beaten path another thing I loved about Naruto was storylines. Like Dragonball Z, which I'd argue Naruto is a somewhat spiritual successor to, the series has blatant storylines that do a decent job of using an ensemble cast in spite of primary characters. There are no real one-off episodes (unless you count the anime filler, which I loathe) once the story gets going and its kind of nice. Plus people developing unique attacks helps characterize them and make them diverse, similar to the appeal of stuff like Heroes (a woman who wants to be strong gets super-strength, etc.). The awesome and varied stylish attacks also take the concept of the techniques from Dragonball Z to new heights by being more inventive thanks to the ninja theme, thus there are some pretty cool abilities that aren't necessarily for combat.
Finally, we have the protagonist. Naruto, a simple-minded idiot with great power and a decent amount of on his feet wit and understanding of his own limitation as well as balls of steel, is an ideal protagonist. It's because he isn't overly whiny (Kira from Gundam Seed comes to mind or that dick Shinn from the sequel) though he still is decently emotional and doesn't have blatantly strong charisma. In a way he's almost a parody of main characters as while he does possess decent charisma though seemingly stupid determination he isn't a stalwart hero like Cyclops from X-Men who's a bit of a dick. His character flaws also make him perfect for viewers to relate to as he doesn't seem to know anything unique to the universe thus exposition fits best when he asks, "Why this?"
Anyhow, that's why I think Naruto works. The action is decent, the animation is decent, the story is pretty typical but its all executed in a very compelling way which might be surprising to many.
