With shares down 12% year to date and a whopping 19% during the past 12 months, Netflix (NFLX 0.73%) stock has fallen out of favor on Wall Street. Analysts are nervous about management's planned $82.7 billion acquisition of Warner Bros., which is expected to be completed in the third quarter of 2026, pending the necessary regulatory approvals.
NASDAQ: NFLX
Key Data Points
Although Netflix's revenue and earnings continue to grow at a respectable clip, some fear that a deal of this size could burden its balance sheet (the streaming giant has reportedly secured a $59 billion loan to help with the purchase) and fail to create real value for shareholders. Let's discuss the pros and cons of the planned acquisition to decide if Netflix's stock price dip is a buying opportunity or a sign to stay away.
Image source: Getty Images.
Why does the market hate large acquisitions so much?
On the surface, it might seem counterintuitive for a stock to sell off after a significant acquisition. After all, incorporating a new business means more revenue and economies of scale advantages, which can mean more profits if redundancies are eliminated. But statistically, there are good reasons for investors to view these deals with skepticism.
According to research conducted by Fortune magazine, a whopping 70%-75% of acquisitions fail to improve the combined company's sales growth trajectory, unlock cost savings, or maintain its stock price. New York University finance professor Aswath Damodaran takes it a step further by calling mergers the "most value-destructive action a company can take."
The reasons for underperformance include overpayment, unrelated businesses, and the difficulty of incorporating different operational structures into one unified company. Netflix might be guilty of the first pitfall. The Warner Bros. acquisition is expected to cost $82.7 billion (including the assumption of the target company's debt). And this will be a tall hurdle to jump when trying to make the deal worthwhile.
Aside from the hefty price tag, however, the Netflix and Warner Bros. combination has the potential to succeed where others failed.
Why Netflix's acquisition might work
Unlike other failed acquisitions, Netflix and Warner Bros. operate extremely synergistic business models. Their basic strategy is to create film and television content in the real world and monetize it online or through other distribution channels. There are no complex manufacturing processes or production lines to complicate things.
Furthermore, a portion of the Warner Bros. purchase price is likely related to intellectual property -- this includes things like TV shows and movies that have already been produced and can be easily added to Netflix's existing video library to drive user retention and advertising opportunities. The intellectual property could also be used to create new content with built-in audiences, similar to the strategy Disney has used to expand Disney+.
Famous Warner Bros. intellectual properties include Harry Potter, the DC Comic Universe, Game of Thrones, and The Lord of the Rings. These are the types of assets that could boost Netflix's original content efforts for years, if not decades, into the future. Investors also shouldn't underestimate the value of removing a rival to maintain or increase market share.
Is Netflix stock a buy after the dip?
The recent sell-off in Netflix stock looks overblown. But with a forward price-to-earnings (P/E) multiple of about 26, the shares still trade at a slight premium over the market average, so the stock hasn't hit rock bottom in terms of valuation.
There is also a very real possibility that the transaction won't go through, with Bloomberg reporting that the Department of Justice is probing Netflix for potential anticompetitive practices -- a move management says is a standard procedure.
On the whole, the dip looks like a buying opportunity, but there is a ton of doubts surrounding the stock. And no one wants to get cut catching a falling knife, so it could make sense to wait for the matters to settle before considering a position.
