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Apple Could Buy Netflix -- but Why Bother?

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Gleacher & Co. analyst Brian Marshall sat down to do some math this week and came away with two conclusions:

  • Apple (Nasdaq: AAPL  ) is generating about $60 million in quarterly movie sales, or about one-tenth the movie sales digital leader Netflix (Nasdaq: NFLX  ) boasts. Assuming Netflix-like growth for Apple's cinematic efforts, this represents something like a $1 billion sales opportunity as soon as 2015.
  • Never mind catching up to Netflix -- Apple should just buy the DVD-mailer-turned-digital-streamer and be done with it.

All of this assumes that Apple is positioned to copy the growth Netflix has shown in this particular market, of course. And I'm not entirely sure that's a fair bet.

Marshall is basing his numbers on recent comments by Steve Jobs on the number of daily iTunes movie downloads, and publicly available financial data on Netflix. Apple is relatively new to the movie game when compared to Netflix, but that's only if you hearken back to when the smaller company started sending out red envelopes by mail in 1999. iTunes video content has been around since 2005, but Netflix didn't start streaming until 2007.

Is it fair to say that Netflix has a head start on Apple, when Cupertino arguably launched its digital service more than a year earlier? We can split hairs about full-length movies versus TV show episodes and music videos all day, but the basic fact is, Netflix actually had to play catch-up to Apple first -- and it did so with aplomb.

That's not to say that Marshall's investment thesis on Apple is null and void -- he has a buy rating and a $355 target price on the stock, mainly because of iPad sales trends and a Verizon (NYSE: VZ  ) iPhone appearing in the near future. Getting big in the movie market would simply be some nice icing on the cake.

Longtime readers probably know that I don't exactly see eye to eye with that rosy view, because you're assuming perfect-10 execution from Apple every step of the way. Adding Netflix to the mix wouldn't change the investing risks ahead -- and we Netflix shareholders would appreciate the sudden buyout premium while grieving for a lost future of freestanding growth. Then again, Steve Jobs has seen that movie before.

Apple can certainly afford to buy Netflix for $12 billion or so, but why would the movie maven shack up with Apple's diametrically opposed business philosophies? Sorry, Brian -- I don't think this is going to happen.

What do you think? Argue the case for or against Apple engulfing Netflix in the comments below.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies discussed here. Apple and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 2:47 PM, demodave wrote:

    At a P/E ratio of 65-70 lately, it seems to me that NFLX woudl be overpriced versus AAPL's currently typical P/E ratio of 20. Yes Apple could pay cash, but that's a lot of weighted dollars. For now, Apple can do fine letting Netflix help sell Apple TVs. My sister and brother-in-law use the combination that way constantly. I expect to be doing the same after my birthday in late January. :)

    I know, I know. Same drum, different day. Go-go Apple gadget!

  • Report this Comment On December 30, 2010, at 2:58 PM, dstb wrote:

    If they can buy NFLX for half the current market price it might be worth it. Otherwise, I'd rather see a dividend.

  • Report this Comment On December 30, 2010, at 3:24 PM, BioBat wrote:

    I don't think it's going to happen but if Apple wants to be the leader in the digital space, it makes sense. Of course if they're content just selling devices, where margins will probably remain higher, then keeping a Netflix partnership, as opposed to absorbing the company for a premium makes more sense.

    On a side note, the notion that Apple will generate $1 billion revenue for digital downloads based on the thesis that they're growth will somehow equate to Netflix', to me seems like it's totally out to lunch.

    1) A good portion of Netflix growth has been attributed to being integrated onto every device known to man so EVERYONE with an internet connection gets a free trial, finds they like it,and sticks. Good luck finding iTunes on GoogleTV, Roku box, BluRay player, Gaming systems, etc. Netflix is open where Apple has traditionally been closed.

    2) Value - Netflix at $8 a month provides a lot of streaming titles, Netflix at $10 a month provides a lot of streaming titles and access to one of the biggest DVD libraries on the planet. Buy one movie from Apple and you've already surpassed a monthly subscription to Netflix.

    3) Competition. Every company has a pay per view or digital download purchasing model - Best buy, Amazon, Blockbuster, Apple, Walmart, hell even Sears jumped into the fray and there isn't anything that differentiates one service from another. In other words, this ain't iTunes post-Napster, where Apple has a monopoly on the digital space.

  • Report this Comment On December 30, 2010, at 3:45 PM, nickfinia wrote:

    WHY shoudl Apple but Netflix??? Apple users can use netflix today which is boost to Apples streaming content. So, what is the point of spending $12 billion Dollars (20% premium on today's price) by Apple for something that is already there? It does not make any sense.

  • Report this Comment On December 31, 2010, at 6:35 AM, lowmaple wrote:

    I think apple wants that cash hoard to buy a company that has a product that would be a major threat to apple so buying netflix doesn't fit that scenario

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