Is it too late to cash in on the Netflix boom?

As the video streaming site hits 125m customers

Not so long ago, if you wanted a cosy night on the sofa watching the latest blockbuster movie, you first had to trudge down to your local video rental store.

But then along came Netflix. Now, for a small monthly fee, you can stream the latest hit movie from the internet to watch on your tV, laptop or smartphone when it suits you.

So-called streaming sites are getting so popular they are beginning to steal customers from satellite and cable companies such as Sky and Virgin.

this week Netflix revealed it had hit 125m subscribers. In just five years, the California tech giant has signed up nearly 96m people, adding 7.4m in the past three months alone.

this has not escaped the attention of investors, who have piled in and pushed its shares up an astonishing 1,223pc since 2013.

With a market value of £103bn, Netflix is only slightly smaller than Disney, worth £108bn, on paper. But it has become a victim of its own success.

Despite its obvious accomplishments, the harsh truth is it makes very little money.

In the 21 years since it launched, it has banked just £2.1bn in profit from £37.7bn of sales, according to figures by broker AJ Bell.

Detractors say this makes it hard for Netflix to justify its lofty share price, which at $330 a share means it is trading at more than ten times sales.

It also burns through cash. this year it plans to spend £5.7bn producing its own shows and movies, roughly four times the BBC’s production budget.

US vulture funds believe this is enough evidence to make big bets on its shares falling. So the question for investors is: have they missed the Netflix boat?

Russ Mould, of broker AJ Bell, said: ‘ Netflix is undoubtedly a success but portfolio builders still have to ask whether that makes it a good investment.

‘Good companies can still provide poor share price returns if you overpay for them, so the long-term call is really one that hinges on valuation.’ the key to Netflix’s future profitability is signing up new members.

on that front, Netflix and the analysts that cover it are bullish. the streaming firm has forecasted another 6.2m new signups in the next three months while Baird, the US investment bank, is predicting 300m global subscribers by 2025.

But even if that comes to pass, Netflix faces headwinds.

Firstly, it can’t keep growing at the rate it has forever. the US market of 325m people only offers so much potential. And in poorer countries, it is hindered by poor broadband availability.

on top of that, there is no guarantee of its continued popularity. Netflix has built its success on original shows such as the Crown – starring Claire Foy and Matt Smith ( picturedabove), Stranger things and orange Is the New Black, which have become global hits.

But for that to continue, it needs to keep producing the goods. And making shows and movies is expensive and could easily spiral, which concerns some experts.

William Power, of Baird, said: ‘the push toward increased original programming and content costs generally could pressure profitability and cash flow more than expected.’

Netflix also faces stiff competition from the likes of Amazon, which has roughly 100m subscribers to its own streaming service. But at the moment, that is all theoretical.

the fact is, Netflix is undoubtedly the leader in streaming and, if you believe the forecasts, it will be for some time.

That makes it a target for the likes of Apple, according to some analysts, which would provide a bumper payday to existing investors.

Neil Goddin, manager of the Kames Global Equity Fund, said: ‘We should have held Netflix and that debate gets harder every quarter as it outperforms more. We are looking at it again now and we will think about it again.

‘they have done a really good job and they continue to surprise the market. While they are doing that, I wouldn’t put anyone off owning it – even now.

‘However, you have got to keep in mind that it is expensive. Although, we have seen plenty of expensive stocks go up lots – it is not “out there” to suggest it can continue to carry on as it is.’

But, in reality, those who haven’t already bought into Netflix are likely to have missed out on its most rapid period of growth.

However, if it can turn a decent profit, keep signing up members at the rate it has and continue to pump out shows people want to see, the Netflix story might still have some way to go.

But investing now is only a good idea for those willing to accept the risks, experts say.

Mould of AJ Bell said: ‘Netflix remains a high-risk, potentially high-return stock.

‘It is only best suited to risk tolerant, patient investors who may need to be prepared for volatility.

‘Value seekers are likely to look elsewhere and just admit they have missed this one.’