Netflix Inc. (
declined $7.58 (2.24%) to close at $330.38 on Jan 15, close in
the heels of
legal victory over Federal Communications Commission (FCC), which
threatens its current price structure.
Most recently, the U.S. Court of Appeals threw down FCC's net
neutrality regulation, which asked Internet Service Providers
(ISPs) to treat all online traffic equally. The ruling now allows
the likes of Verizon and
to charge extra fees for faster service.
This is particularly a concern for the likes of Netflix and
prime streaming service, as the broadband carriers can now charge
them extra for providing preferential treatment. This will
increase operating costs ultimately hurting profitability.
We believe that the recent ruling puts Netflix in a precarious
situation. The company is already facing significant headwind
related to rising content costs. An increase in carrier charges
will put additional burden on Netflix's business model in the
Netflix currently charges $7.99 for its streaming service that
had 33.1 million U.S. subscribers at the end of third-quarter
2013. The increase in operating costs may force Netflix to
increase subscription price, which can negatively impact
subscriber growth, going forward.
However, we believe that the company's ever expanding content
portfolio will continue to attract subscribers despite a price
rise. Its partnerships with major film studios and production
houses have helped it to expand its content portfolio faster than
its rivals. These deals have enabled it to venture into different
genres like comedy, political thrillers, autobiographies and
The partnerships will help Netflix to stream original shows such
(some time in 2014) and
over the next 12 months. Netflix's agreement with Walt Disney's
Marvel Entertainment will bring at least four new 13-episode
series and a mini-series in 2015.
Although rising costs and uncertainty related to additional
carrier charges will remain an overhang on the stock in the near
term, we believe that Netflix's growing subscriber base and
international expansion opportunities are significant positives.
Currently, Netflix sports a Zacks Rank #1 (Strong Buy).
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