Breaking Down The Rumored M&A Chatter Surrounding Netflix

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Netflix‘s stock saw a marginal uptick when rumors of Disney‘s and Apple‘s potential interest in the streaming giant surfaced. Rumor has it that Disney is looking at a few acquisition options, and Netflix could be one of the main targets. Disney has been hurt by the prevalent cord-cutting trend, which has made the future of its lucrative ESPN business somewhat cloudy. Adding Netflix to its portfolio could change Disney’s fortunes overnight, as the media giant could easily leverage Netflix’s 80 million subscriber base and its international reach to bolster its entertainment properties.

The entire situation remains hypothetical, as the probable acquisition price would likely be a little too much to digest for Disney. And cash-rich Apple’s interest in Netflix could potentially start a bidding war, which would make things much harder for Disney. Netflix’s current market cap is over $45 billion, and for it to consider an acquisition, the premium would have to be attractive. The acquisition price, even for a giant like Disney, won’t be easy to swallow. On the other hand, if Apple, with its massive cash position, decides to enter the picture, it could easily pitch an offer too hard for Disney to match. While all of this is speculative, it is worthwhile to analyze if an acquisition would make sense for Netflix.

 

Netflix started out as a DVD rental business but quickly revolutionized the online streaming space, garnering over 44 million subscribers in the U.S. and around 30 million internationally. While the company expects to keep its subscriber growth running in international markets, it appears to be on the cusp of a slowdown in the U.S. Growing competition, apparent saturation in internet penetration in the U.S. and a large existing subscriber base will likely prevent Netflix from experiencing the same runaway growth that it has seen previously. Additionally, there are some factors surrounding Netflix’s profitability and growth potential that concern investors. The company is still spending a hefty amount on creating new content, which forms the entire backbone of its business model. Its content costs as a percentage of revenues have increased almost 25 percentage points in the last four years. Moreover, Netflix is still unprofitable in international markets due to slow growth in revenues and high marketing costs. Granted, the company’s profitability will improve once incremental revenues start pouring in and marketing costs fall, the need for new content will maintain pressure on the company’s bottom line. These concerns are evident and somewhat explain why Netflix is trading well below its one-year high of $132.

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If it were to get acquired by a larger, cash-rich player, Netflix would be able to keep investing heavily in creating new content, which could eventually help the company improve its profitability in the 190 countries it has set foot in. Also, if the rumored acquisition talks unfold into a bidding war between Disney and Apple, it could help Netflix command an attractive premium, one which the company might not be able reach in the public market. However, it still remains to be seen if there is any substance behind all this M&A chatter.

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