In a landmark decision on Dec 14, the FCC repealed Net Neutrality laws which came into force under the Obama administration. The move was in the offing ever since Ajit Pai was appointed the FCC’s chairman earlier this year. Pai, a staunch Net Neutrality opponent, has always maintained that consumers would be worse off under Net Neutrality and should expect their bills to go up along with slower broadband speeds.
The move is expected to significantly impact individual consumers with several interest groups organizing demonstrations against such a move. Interestingly enough, major Internet powers such as Facebook Inc. FB and Alphabet Inc. GOOGL, which have been long term advocates for Net Neutrality, issued only muted protests on this occasion. It seems that though you may be worried about your Netflix, Inc. NFLX account stalling in such a scenario, the streaming giant may emerge virtually unscathed.
ISPs Emerge as Big Winners
Cheering the move to end Net Neutrality rules were the likes of AT&T Inc. T, Verizon Communications Inc. VZ, Comcast Corp. CMCSA and Charter Communications Inc. CHTR. This is because ISPs are expected to hugely benefit in the post Net Neutrality era. They will now be able to implement discriminatory pricing for utilizing different parts of the Internet.
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Further, they will be able to indulge in data traffic blocking and traffic slowdowns. Paid prioritization is also likely to become a common practice. This is a method through which content developers strike deals with ISPs for fast and smooth transmission of their data traffic. (Read: FCC's Net Neutrality Rules: Who Benefits the Most?)
Why Has Netflix Issued Muted Protests?
In the past, major Internet companies such as Amazon.com, Inc. AMZN have been vocal supporters of the Obama era Net Neutrality rules. However, reactions from these quarters have been extremely muted on this occasion with the likes of Netflix choosing to comment only when the rollback finally happened. And yet only three years ago, it was the poster boy for Netflix champions.
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The reason for this is that in the intervening period, Netflix has grown into an online giant with revenues poised to hit the $12 billion mark this year. Clearly, it now doesn’t need those Net Neutrality rules as badly as it did before. Conversely, ISPs urgently need the 53 million U.S. subscribers it provides, most of whom are hooked onto the likes of Stranger Things and The Crown. Netflix has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moreover, Netflix has the deep pockets to afford any paid prioritization for its services. And it’s clear from the revenue and subscriber numbers that it can negotiate hard for favorable rates in such an event. The next Netflix or any other number of sundry startups for that matter may not find the going that smooth. They would have to incur high costs to ensure that their services reach their end users smoothly.
Can the Stock Deliver Strong Gains in 2018?
The undisputed king of original content has made further strides in this area in 2017. Netflix is planning to spend almost $8 billion on producing its own content next year. This is a substantial jump from the $6 billion that it spent on content in 2017. Rapid international expansion has also paid off, with the company adding 4.45 million net new subscribers overseas in the quarter, higher than the estimated 3.65 million.
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With the stock gaining a searing 52.5% year to date, the only factor working against it at this point is valuations. With a PEG ratio of 3.13, Netflix is clearly pricier than the S&P 500, which has a PEG ratio of 2.01. However, it is still much less exorbitant than arch rival Amazon, which has a PEG ratio of 7.01.
Also, the ongoing market rally has dispelled such concerns over valuation time and time again. Tech majors have delivered ever stronger earnings performances, as was in evidence during Netflix’s third quarter results, to justify such exorbitant valuations.
In Conclusion
Netflix is likely to remain largely unscathed from an end to Net Neutrality. In fact, it is likely to surge even higher in 2018 on the back of its strong original content and international subscriber additions. This makes it a great option for investors going forward.
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