Investor optimism for Netflix is poised to collapse like a house of cards as its high-risk investment strategy could soon turn into a vicious cycle, according to a research analyst.
Video streaming giant Netflix defied gloomy market expectations when it published its third quarter results in 2016 and the positive momentum since has continued into 2017. Its share price has increased 34 percent in the past six months having closed at $129.18 on Thursday.
"In my view, Netflix's momentum in terms of its stock value is overdone in the short term. The investments they are making into new projects are so vast that the returns will struggle to match the output… I worry it's becoming a vicious circle," Neil Campling, head of global technology, media and telecom research at Northern Trust Capital Markets, told CNBC by phone.
Netflix yielded to popular demand in November and offered subscribers the opportunity to download their favorite films and television shows to watch offline. The feature had previously been unveiled by rival video streaming service Amazon Prime.
"The increasingly overcrowded market is an intense environment in which to succeed. I mean, Netflix have done very well to move into the offline market but I do expect them to struggle in 2017, particularly in the second half of the year," he added.
The video streaming service appeared to change tact in 2016 with even bigger investments into new projects, such as its flagship drama The Crown. Netflix announced plans to spend $6 billion securing new content for its subscribers in 2017, which would represent a 20 percent increase from the year previous.
The consensus among analysts has remained bullish with most recommending buying Netflix stocks with the median price target at $133.50. Netflix is due to release its fourth quarter results on January 18.
Morgan Stanley analysts remained overweight on Netflix stocks and lifted its price target to $150 by the end of 2017, which would represent a 15 percent rise from its current levels.
Meanwhile, Deutsche Bank analysts defied upbeat market sentiment for Netflix and projected a decline in share price to $110 by year end.