Is Netflix Stock a Takeover Target?
The stock market doesn’t seem to appreciate the kind of asset Netflix, Inc. (NASDAQ:NFLX) has right now. Year-to-date, Netflix stock plunged nearly 20%. However, the outlook for the company’s business hasn’t really changed. If the market keeps punishing NFLX stock, someone else could snap up the company altogether.
Let me explain…
Today, one line of business—no matter how great it is—is not enough to keep investors happy for a prolonged period of time. Netflix, despite having a fast-growing business, falls into this category. The company is made up of mostly one business line: on-demand video streaming.
There are still people renting DVDs from Netflix, but most if its users choose the streaming option. In the first quarter of 2016, Netflix generated $1.81 billion of revenue from its on-demand video streaming business. That’s 92.6% of the company’s total revenue! (Source: “Q1 16 Letter to Shareholders,” Netflix, Inc., April 18, 2016.)
The business is also booming. In the first quarter, Netflix added 6.74 million subscribers to its userbase. The company now has more than 81.5 million members worldwide.
Unfortunately, as I have said, relying on one business is not going to wow the market in the long term. Even though NFLX stock was the top gainer among S&P 500 companies last year, its performance this year has been disappointing to say the least.
Look around and you’ll see that the Internet companies whose shares kept climbing have one thing in common: they are leveraging their assets across different product lines.
Can Netflix break into other areas?
It’s possible, but given that the company just launched its service in 130 additional markets around the world and is investing heavily in original content, there might not be that much financial freedom to take on new projects.
Also, this means Netflix probably won’t be shopping for other companies to find synergies. That doesn’t prevent other companies from potentially making an offer on Netflix, though.
Why would a company be interested in buying Netflix?
Well, first of all, Netflix has a huge userbase. If you have been paying any attention at all to today’s Internet sector, you’d know that companies are fighting for users. Netflix’s 81.5 million users would certainly give any company wanting to expand its online presence a good starting point.
Also, a Netflix member is not just any member. The standard price for the company’s on-demand video streaming service is $9.99 a month. So it doesn’t just have tens of millions of subscribers; it has tens of millions of paying subscribers.
And then there’s the company’s content. In case you haven’t noticed, there is a content war going on in the entertainment industry. Through years of heavy investment in original content, Netflix has built an unrivalled content library in the streaming business. It earned eight Golden Globe nominations last year, which was not only more than the number of nominations Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Video” received, but more than any TV network as well.
So, who might be interested in buying Netflix?
Well, a company with an over $200-billion cash pile would certainly be interested. Yep, I’m talking about Apple Inc. (NASDAQ:AAPL).
With “iPhone” sales being less exciting now than before, Apple is trying to find new sources of growth. The Financial Times recently reported that Apple is thinking about moving into the entertainment business with plans to spend “several hundred million dollars a year” on original content. Some banks have said that the company has been “on the lookout for content assets for several months.” (Source: “Apple Executive Proposed Bid for Time Warner,” Financial Times, May 26, 2016.)
Another possible suitor for the on-demand video streaming giant is Alibaba Group Holding Ltd (NYSE:BABA). Alibaba is the most dominant player in China’s e-commerce industry, but it has yet to have meaningful success overseas. At the same time, Alibaba is no stranger to investment in content. Its film-making arm, Alibaba Pictures Group, has invested in quite a few blockbuster films, including Mission: Impossible – Rogue Nation and Teenage Mutant Ninja Turtles: Out of the Shadows.
The No. 1 reason why Alibaba might be interested in buying Netflix is the success story of its Western counterpart, Amazon. By offering on-demand video streaming as a free service to “Prime” members, Amazon was able to boost the appeal of its Prime membership. If Alibaba wants to really expand its presence internationally, getting its hands on a streaming service that’s available almost everywhere in the world would certainly be helpful.
The Bottom Line on NFLX Stock
At the end of the day, don’t forget that Netflix is running a solid business on its own. Its bottom line beat Wall Street’s earnings per share estimates by 100% in the first quarter, yet NFLX stock still got killed.
For any company interested in moving into the video segment, Netflix could be a great partner. With the stock’s downturn, the price might be right, too.