Quick, think about an artificial intelligence (AI) stock. What's the first name to pop into your mind? It probably wasn't streaming giant Netflix (NFLX 2.38%). But don't be fooled: AI is going to start changing the way we work, shop, and consume media.
Netflix may not be an obvious AI stock, but it is an AI company. Its algorithms gently push you to binge-watch the new show you love, and it will continue to evolve, looking for ways to commandeer your attention.
Despite the market's AI craze, Netflix stock has dumped more than 35% since the summer. World-class companies don't go on sale often. Here is why investors may want to buy the dip before Netflix's potential monster run this year.
Image source: Netflix.
Acquisition drama is weighing the stock down
Netflix peaked over the summer, but the stock has only fallen further since the company announced it had struck an $82.7 billion deal to acquire Warner Bros. Studios, HBO, and HBO Max from Warner Bros. Discovery. The deal still needs to go through regulators, but it would clearly be a massive swing for the company if it closes.
One of the market's primary concerns about the acquisition is its funding. Netflix was going to fund the deal with a mix of cash and stock, but had to revise it to an all-cash structure under pressure from a competitor, Paramount Skydance, which was hoping to convince Warner Bros. Discovery to back out.
The deal could add up to $59 billion to Netflix's balance sheet. Netflix, which currently has little debt, can afford it, but all that new debt would likely weigh on the company for a while and diminish its financial flexibility.
NASDAQ: NFLX
Key Data Points
Why this dip is worth buying
The further into the future you look, the more you might like this deal for Netflix. The acquisition would add a vast amount of intellectual property to Netflix's portfolio, including the Harry Potter franchise, the DC Universe, Game of Thrones, The Sopranos, The Big Bang Theory, and much more.
Owning Warner Bros. gives Netflix an imposing footprint in television and film, and the HBO Max streaming service adds to Netflix's existing global base of 325 million subscribers. The cross-selling and other monetization opportunities seem endless, especially if Netflix follows the Walt Disney Company's playbook of reinventing key franchises multiple times with remakes and spinoffs.
It would probably take several years, perhaps longer, to pay down that debt. But once Netflix gets there, investors might have a massive cash cow on its hands, an AI-powered media giant with a global footprint that could grow for years as consumers continue to adopt streaming in emerging and established markets.
Netflix's decline has dropped the stock to a price-to-earnings ratio of 34, near its lowest valuation over the past three years. It could pay to buy the dip here, as Netflix could go on a monster run once the market gets some acquisition clarity and realizes just how bright Netflix's future is.
