The stock price has dropped 17% in the last month.
Recently, Netflix inventory has faced some challenges after an extended period of solid performance. This shift isn’t happening by chance; a significant and somewhat risky strategic change has led investors to rethink the value of this streaming giant’s stock.
Back in early December, Netflix announced a deal to acquire Warner Bros. studios and its streaming assets. Warner Bros. Discovery has finished separating its global network operations and established a new entity called Discovery Global. This deal is valued at roughly $72 billion in equity and about $82.7 billion in total enterprise value.
However, there are two notable concerns. Investors appear uneasy about the deal, mainly because, if it moves forward, it will take a considerable amount of time to finalize. Netflix estimates it will take between 12 to 18 months to close.
In simpler terms, the uncertainty surrounding this acquisition is affecting the stock price.
Deals that change the story
For quite some time, Netflix has thrived with a clear narrative focused on scaling streaming, boosting engagement, improving profit margins, and increasing free cash flow.
This acquisition, however, muddles that narrative.
First off, the trading situation is complicated. The deal hinges on Warner Bros. Discovery completing the Discovery Global separation, which Netflix anticipates will happen in the third quarter of 2026. This is not a straightforward process.
Then there’s the uncertainty factor. Competing buyers have already surfaced, and Warner Bros. Discovery has publicly rebuffed offers from Paramount Skydance while reaffirming its commitment to Netflix. Even if Netflix does close the deal, this backdrop could make investors anxious.
Lastly, Netflix intends to retain Warner Bros., which complicates business operations. Although the company talks about potentially saving $2 billion to $3 billion annually by the third year and boosting GAAP earnings per share by the second year, one might wonder if these projections really justify the heightened risk and complexity of the transaction.
Rapid growth
Another reason for the stock’s decline could be that Netflix was performing well without ramping up big acquisitions. In the third quarter, its year-over-year revenue surged by 17%, with similar growth expected in the fourth quarter.
Moreover, Netflix is also developing its advertising business, which, while still relatively new, is expanding quickly.
“We’re on track to more than double our advertising revenue by 2025, although it’s from a small starting point,” management mentioned in its third-quarter letter to shareholders.
Meanwhile, the popularity of Stranger Things Season 5 has shown off Netflix’s strong streaming model and global reach. The first four seasons have attracted over 1.2 billion viewers, and within just four weeks of Season 5’s debut, the first episode approached 103 million views.
Given this momentum, some investors might think that a major acquisition could introduce undue risk to a business that’s already doing well.
Is this a buying opportunity?
Netflix is, undoubtedly, a strong business. Yet, the pending acquisition complicates the scenario for investors. On one side, there’s Netflix’s solid operational performance, but on the flip side, the impending acquisition could both propel growth and alter the company’s risk landscape.
Ultimately, though, the stock does seem overvalued. The company has a price-to-earnings ratio of 38 and a forward P/E of 29. Such high valuations necessitate ongoing rapid growth and leave little room for setbacks. Consequently, I think it might be best to keep my distance, especially with pending acquisitions that could raise the stock’s risk profile.
