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Reportedly, the U.S. Court of Appeals for the District of Columbia Circuit ruled that Netflix Inc. (NFLX - Analyst Report) had received unfair advantage and favors from the U.S. Postal Service. The Postal Office is alleged to have discriminated between Netflix and other mail-order companies by prioritizing Netflix’s DVDs. 

GameFly Inc., a video game rent-by-mail service, had filed the case against the Postal Regulatory Commission and demanded that the mailed games should be equally treated. Netflix is currently the largest DVD-delivery customer but that not might come of any help to Netflix, as the ruling may change postal authority’s handling of Netflix’s DVDs.

We believe that the current ruling by the court does not materially impact Netflix, as it has shifted its business focus from DVD mail to online streaming. Netflix’s management has made it clear that its future growth strategy is entirely dependent on the online streaming business. Lower demand and increasing postage and sorting infrastructure costs and the increasing demand for the video-on-demand market prompted management to shift focus to the digital medium.

Additionally, Netflix’s movie rental service has been witnessing slowdown for the past several quarters. In the last quarter, the company recorded 6.8% sequential decline in total subscribers, while revenue from the same declined by 6.9% sequentially. Going forward, the company expects further decline in the segment’s revenue.

Moreover, when compared to some of its cable and communications peers who have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. We believe that the streaming market is becoming overcrowded and this will hurt Netflix’s margins going forward.

Nonetheless, we believe that Netflix’s diversified streaming portfolio will not only strengthen its position in the video-on-demand market, but will also be incrementally beneficial for the company in attracting new subscribers as well as retaining the old ones.

We believe that improved content makes its streaming services distinguishable from other service providers such as HBO, Inc. (AMZN - Analyst Report), Hulu as well as the newly-launched services from cable and media companies such as Comcast Corp. (CMCSA - Analyst Report), Dish Network Corp. (DISH - Analyst Report) and Verizon Communications (VZ - Analyst Report).

Currently Netflix has a Zacks Rank #3 (Hold).

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