Netflix Stock: Sell Before Net Neutrality Repeal

Posted On November 27, 2017 2:46 pm

The internet as we know it is about to end, as the Federal Communications Commission is almost guaranteed to repeal net neutrality laws which prevent the telecom companies like AT&T, Comcast and Verizon from charging internet users money based on the type of content they access. Of all the firms affected, Netflix, Inc. (NASDAQ:NFLX) remains the most threatened from the repeal of net neutrality laws. Netflix stock is at risk because the company’s business model will be directly affected if net neutrality laws are repealed. Therefore, it’s time for Netflix investors to practice caution.

Netflix has already tasted the glimpse of post-net neutrality horror. In 2014, Comcast started throttling bandwidth of its users who were using Netflix on their internet connection. This resulted in a massive drop of service quality and revenue for Netflix.

Later investigations revealed that Comcast had been demanding a hefty amount from Netflix to restore the bandwidth back to normal. Netflix had to pay Comcast millions of dollars as a result. This shows that Netflix can practically do nothing in case telecom companies start throttling internet bandwidth. Netflix content consumes a lot of data because of the quality and size of Netflix movies and TV series. The company will have to pay telecom companies a lot of money to sustain the current levels of viewership. This would directly take a toll on revenues, and by extension, Netflix stock prices.

Netflix Will Have to Increase Fees

To sustain growth, Netflix will have to increase its monthly fees, which will result in a decline in subscriptions. The company has over 50 million subscribers in the US. Earlier this year, a Wall Street analyst Anthony DiClemente said in a program on CNBC that Netflix is approaching a saturation point, as the company’s own estimates suggest that the US market has a potential of about 60 million-90 million subscriptions. The end of net neutrality will make the US practically a loss market for Netflix. Therefore, Netflix will have to focus on emerging markets, where it also has over 50 million subscribers.

Netflix CEO Reed Hastings has been persistently grilling telecom companies like AT&T and Comcast for their “bad behavior” and lobbying to end net neutrality laws. In 2014, the CEO of Netflix said in a statement that net neutrality must be “defended and strengthened.” Hastings also said that neutrality should be implemented in its complete and strongest form. He argued that “weak net neutrality” is not enough to protect an open and competitive internet.

In January, Netflix tried to assuage the investors’ fears and reassured the market that Netflix won’t be affected due to net neutrality repeal. At that time it was regarded as highly unlikely that the Trump administration would seriously move forward to neuter the internet. With that prospect becoming more concrete by the day, Netflix stock is an increasingly questionable proposition moving forward.

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