Netflix Survives SEC Enquiry

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Netflix (NFLX) reportedly had a respite from the Securities and Exchange Commission (“SEC”) after the latter revised its disclosure rule for companies called Regulation Fair Disclosure or Reg FD.

This change comes after the SEC investigated an announcement by Netflix CEO, Reed Hastings, that the company had clocked 1 billion hours of viewing in June on his Facebook (FB) account, which violated the old Reg FD rule.

Though in the current situation the SEC did not enforce any action against Netflix but stated that the company should pre-announce the social networking address, so all its shareholders are aware of the place where the announcements were being made.

As per the revised guidelines, the SEC allowed the companies to make corporate announcements over the social media, including Facebook and Twitter, by providing relevant web addresses through notifications on their company websites and press releases. This change in rules comes as the SEC accepted the relevance and participation of the social media in corporate communications.

Notably, the new rule would strengthen Netflix’s social integration with Facebook. Very recently, Netflix had decided to extend its social features to its U.S. subscribers. The streaming services provider announced new features that will enable U.S. subscribers to link their Netflix accounts to Facebook.

However, we believe that Netflix will not be the sole gainer from the newly-amended rule. Every other company will be in the race to utilize social media in their corporate communications.

Nonetheless, the respite from SEC is a positive for Netflix. Over the last 6 months, Netflix’s shares have gained a staggering 150%.

We believe that more than anything else, Netflix’s  new and exclusive content offerings to its subscribers are its biggest USP improving its competitive position versus  peers Hulu, HBO, Amazon (AMZN)  as well as the newly-launched services from cable and media companies such as Comcast (CMCSK) .

We believe that an improving paid subscriber base, international expansion, a diversified content portfolio and a huge video library are the positives in the near term.

However, higher costs owing to international ventures and licensing fees and continued subscriber losses in its DVD business are near-term headwinds. Mounting losses from the international business, due to higher content and marketing costs, is another concern in the short term.

Currently, Netflix has a Zacks Rank #1 (Strong Buy).

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