Netflix (NFLX 2.18%) announced its blockbuster acquisition of Warner Bros. Discovery (WBD +1.03%) on Dec. 5. Since then, the stock is down 20%, including an after-earnings sell-off on Tuesday.
The earnings call gave Netflix management its first chance to convince shareholders that the deal was in its best interest, but it seems to have come up short.
Netflix stock fell approximately 5% after hours on the report, even as the results were in line with expectations and it offered solid guidance for 2026. Still, the WBD acquisition is likely to hang over the stock for the rest of the year, especially as it's still unclear if it will gain regulatory approval, and Paramount Skydance hasn't given up on its effort to win WBD.
Image source: Netflix.
Why investors seem skeptical of the deal
Netflix's decision to make an offer for WBD surprised even Netflix. Co-CEO Ted Sarandos said on the earnings call, "I just want to make it clear that it was our default position going in that we were not buyers," referring to WBD. However, as the management team learned more about the opportunity, it decided it was a good fit.
WBD does have an attractive content library and a theatrical business that Netflix lacks, but it's worth remembering that Warner Bros. Discovery, which was formed by a 2022 merger, has been mostly a failure as a business. That's partly because of a large debt burden that came as part of AT&T's acquisition of Time Warner, but it also shows how competitive and mature the entertainment business is.
Even Netflix's own engagement report showed that hours watched on the platform only rose 2% in the second half of the year from a year ago. That prompted one Wall Street analyst to ask if slow growth was the driver behind the acquisition.
Netflix has historically avoided acquisitions with a couple of minor exceptions and has staked its reputation on its own original programming, a strategy that has played out well. The WBD acquisition poses a lot of questions for Netflix, like how it will handle the HBOMax platform. It's also expensive as Netflix is set to pay about $72 billion in cash for the Warner Bros. and HBO assets, and take on net debt of $10.7 billion.
The cash offer represents nearly six times Netflix's current net income and more than four years worth of its content spend.
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Key Data Points
What it means for Netflix
Perhaps the biggest issue with the acquisition is that it adds a huge risk for Netflix at a time when the business seems to be firing on all cylinders. It has asserted its dominance over the global streaming industry and delivered several quarters of strong growth.
WBD is an attractive asset, but it's unclear if it's worth the price. If Netflix gains control of Warner Bros., it will have to prove to investors that it was worth it. So far, investors are right to be skeptical.
