New Lawsuit Threatens Netflix Stock

| About: Netflix, Inc. (NFLX)

Analysts continue to question whether or not Netflix (NASDAQ:NFLX) is going to recover from its long-term fall in the stock market. Competitors are rising and starting to cause Netflix to struggle. I think the recent update of its iOS app will have a positive impact on Netflix stock, but its bad ratings will probably keep the stock dropping, at least slightly.

Netflix is going to have to pay for actions that have infringed on the privacy rights of its former customers. These actions violated the Video Privacy Protection Act and are resulting in a financial loss for the company. Netflix will owe $9 million as a result of a class-action lawsuit over the fact that it kept information from former customers for too long after they cancelled their subscriptions. Netflix will also face ramifications from the bad image this creates. In this day and age, the security of one's private information is becoming increasingly important to consumers. The publicity from this court case may push away some potential customers and hurt the company and the stock as a result.

This is coming at a bad time for Netflix as the stock continues to struggle. One analyst has cautiously given the stock a "hold" rating at the very best. The company has been having difficulty for some time now, and as competition continues to arise, this trend may simply continue. Combining the poor ratings from analysts and the bad publicity from the court case, few are going to invest in Netflix based on its current reputation.

Not all news is bad for Netflix, however, and the company may be able to turn things around if it continues to keep an edge over its developing competitors.

With the increase in the popularity of streaming on mobile devices, Netflix is continuing to make a mark by improving its services. It has recently improved its iOS app, allowing users to choose if they want to limit streaming to only occur with WiFi. This will help customers avoid unexpected overage charges. I believe that this will make video streaming much easier on mobile devices, especially since limited data allotments continue to make overage charges a major issue for customers.

The improvements in the iOS app are attracting positive attention for other features as well. For example, thumbnails now appear as users fast forward or rewind through shows, helping users jump to certain scenes with greater ease. As a user of the Netflix app, I believe this was a much-needed improvement, so it does not surprise me that the reception of this update has been so positive. Another important feature to note is that the app has a "do not share" option that allows users to avoid sharing their viewing activity on Facebook (NASDAQ:FB). This may seem minor, but it will help demonstrate Netflix's commitment to helping users protect their privacy. This may help overshadow some of the bad publicity coming from the class-action lawsuit I have already discussed.

As Microsoft's (NASDAQ:MSFT) Windows 8 nears its release, furthermore, Netflix is also one of the app-makers that is already taking action and developing apps. Thus far, (NASDAQ:AMZN) has not given any indication of its plans. Amazon has become a competitor of Netflix through its prime video streaming services, so the fact that Netflix is taking action sooner should be encouraging to investors. The initiatives that the company continues to take will help Netflix stay at the top of the industry, and hopefully, that means its drop in the stock market will soon cease.

A smaller competitor may be shutting down soon. Aereo is an online television service, which is currently in court defending that it does not break any copyright laws. This court case is important for Netflix stock, as the elimination of new competition would be helpful to the company. This will likely have a small impact on Netflix stock, but stockholders should still pay attention to this case. If it continues, Aereo will continue to take away at least some customers from Netflix through its online video services.

News for some of the larger competitors is much more positive though.

Unlike Netflix, Coinstar (NASDAQ:CSTR) is being upgraded to a "buy" rating. As the owner of Redbox, the company is an important part of the rental industry. Analysts have upgraded it largely because of its growth, as it continues working on new vending services. The company should also improve as a result of Netflix's anticipated loss of DVD-only subscribers. The positive reports from analysts and the continued growth of this company means that its stock will likely be increasing. It is likely that it will only continue to take some of the market share away from Netflix.

Despite not commenting on its plans for Windows 8 app development, current news for Amazon appears to be fairly positive as well. For example, it has implemented a program that allows customers to trade in their old laptops and netbooks. This will encourage people to shop for newer products rather than hanging on to older technology simply because it still works. As a result, this will improve Amazon's business and lead to increases in its stock. While this does not relate to Amazon's streaming services, it does demonstrate that the company is continuing to innovate and thrive. If this new program is successful, it will only give the company that much more power to continue improving its wide variety of services, including streaming. In other words, Amazon continuing to grow is not good news for any of its competitors, so Netflix stock will likely be harmed slightly by this growth.

Netflix stock does not have the best reputation at the moment, and the recent lawsuit will only make things worse. The new iOS app and Netflix's plans for a Windows 8 app will help counter some of these effects. Many major competitors are continuing to grow and make themselves appear more attractive, however, which will only continue to put a strain on Netflix. I believe the new app update and the positive reception will help Netflix a little, but I think it will still continue to drop as a result of the stock's reputation and the continued growth of major competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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