Why I Am Neutral on Netflix, Inc. (NASDAQ:NFLX)

market accepted the news calmly, with the stock only slightly off the post-earnings high.

Given the way investors tend to behave, a little market melodrama comes as no surprise. But what should those of us on the side lines make of this?

First, let’s take a closer look at the net neutrality issue and our bet on what the recent Court of Appeals decision is likely to mean in practice.

The court’s decisions opens the door for ISPs like Verizon and Time Warner Cable Inc(NYSE:TWC) – which own the pipes through which Netflix delivers its content and have their own video-streaming businesses that compete with Netflix – to reduce streaming speed for their web-based rival while ensuring that their own content streams faster. However, ISPs might think twice before they go down this road.

First, the FCC and the Obama administration are committed to a free and open Internet. The FCC has already said it will rewrite its net-neutrality rules in a way that will pass court muster. Failing that, the agency could go so far as to designate ISPs as utilities and consequently subject them to common-carrier rules. This would certainly prevent providers from offering different levels of service. (It, too, would no doubt draw a court challenge.)

Second, cable companies and ISPs are not typically the most beloved of companies, and they’re locked in a kind of “frenemy” relationship with Netflix. Few things are more frustrating to a streaming- content viewer than that annoying buffering wheel, and those people will know who is to blame if they can’t access their Netflix’s content… the cable company.

Consider that one in six Netflix subscribers streamed at least one episode of season two of the political drama House of Cards on its February 14 release date, according to Procera Networks.

According to CBS Corporation(NYSE:CBS) chief Leslie Moonves, “at the end of the day, if you have the right content you’re always going to have the power.” He should know. When CBS and its subsidiary, Showtime Networks Inc., pulled their programming from Time Warner in a dispute last August, the cable provider lost more than 300,000 subscribers.

Analysts suggest that the deal between Comcast and Netflix could offer a solution for the industry’s largest content providers. However, smaller content providers with less market power could find it increasingly difficult to compete. Moreover, there are concerns that the greater power accruing to industry giants could result in a corporate-controlled internet.

It’s clear that Netflix’s original programming has fueled expansion in its subscription base. The company recently announced that it has more than 44 million subscribers globally, with 2.33 million added domestically in the final quarter of 2013 and an additional 1.6 million in the first quarter of this year so far.

With the company’s history and management projections of more than a 140% increase in earnings this year, it’s likely the stock will continue to see growth, particularly if the FCC manages to prevail in the fight for net neutrality.

However, there are some concerns, particularly with the company’s negative free cash flow. Original programming is expensive, and Netflix has been funding their wildly popular shows through the debt and credit markets rather than through internally-generated funds.

by Rebecca Baldridge, Investment U Research

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Complete List Of ETFs That Hold “Netflix (NFLX)

Netflix Inc. is an Internet subscription service for watching tv shows and movies. Subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs computers and mobile devices and in the United States subscribers can receive standard definition DVDs and Blu-ray Discs delivered to their homes. 

Click HERE for a complete list of ETFs that hold Netflix

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