Credit: Shutterstock photoNetflix (NFLX) shares made substantial gains over the past week due to increased chatter that the company could be an acquisition target. While an acquisition could come eventually, it is not likely to happen anytime soon for a few key reasons.
Seemingly, it makes a lot of sense for companies such as Disney, Apple, Google or a host of other media and tech players to bring Netflix into its stable. Netflix's CEO Reed Hastings is a visionary, who has successfully merged media and technology as few others have. The company's 79.9 million paid subscribers would be a significant ift to any of these company's businesses, such as potentially boosting Apple's Service revenues, or allowing Google to become less reliant on advertising, or perhaps complementing the nascent subscription revenue from YouTube Red.
However, those fail to recognize the biggest opportunity Netflix presents: subscriber growth.
Netflix has become arguably one of the de-facto destinations for content, including original content like Luke Cage , Narcos or House of Cards . While this type of content is certainly very attractive, it's the company's ability to acquire older libraries from legacy media companies such as Time Warner, CBS and the aforementioned Disney that also provide enormous amounts of value for customers.
Where else can teenagers go to binge-watch entire series like Breaking Bad , Friends , or catch up on classic movies like Jaws or Back to the Future , all for $9.99 a month?
However, a company have to pay a significant price for Netflix (a 20% premium would be a good starting point), but it would have to deal with off-balance sheet liabilities ($13.2 billion and climbing), not to mention potentially upsetting content partners that Netflix relies on to fill out its library.
Moreover, Such an acquisition at this stage in the company's life-cycle would be destructive, as it could hurt subscriber growth, Netflix's primary goal. Deutsche Bank analysts downplayed any acquisition chatter, writing they're "skeptical" of an acquisition, citing its "long runway for growth due to its first mover advantage and self reinforcing model."
For a tech company such as Apple (AAPL) or Google (GOOG, GOOGL) to acquire Netflix, it would likely want to position Netflix as a feature to sell additional iPhones, iPads, Apple TV's or Chromecast devices.
Apple and Alphabet currently have services available on the others' operating systems (i.e. Apple Music on Android and seemingly every Google service), but it's the marketing and advertising that this service would work best on a particular device that would be destructive. This also doesn't take into account that an acquisition of Netflix's size has never been done by either management team, but that's less of an issue then trying to capture as many subscribers as possible.
Netflix has as many subscribers as it does because it's platform agnostic.
Even though Netflix may not enter China anytime soon, its prospects for continuing to add subscribers, particularly international subscribers, looks exceedingly bright.
Only when Netflix's gowth has slowed and it transitions from a growth company to a mature company, will talk of an acquisition make sense.
Not now, though.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
