The media industry got a little smaller this week when Paramount Skydance completed its acquisition of Warner Bros. Discovery to form Skydance (SKYD -1.29%). For some time, it looked like Netflix (NFLX -1.77%) would acquire most of Warner Bros.' assets, but a competing bid from Paramount ultimately prevailed and cleared regulatory review and lawsuits brought by 12 state attorneys general and the Writers Guild of America.
The merger will make Skydance a formidable competitor in streaming with the potential to combine HBO Max with Paramount+ into a unified service. Despite the scale of Skydance's streaming and production capabilities and the breadth of its intellectual property portfolio, my money is still going to Netflix stock. Here's why.
Image source: Netflix.
Skydance still faces some major hurdles
While the merger is financially complete, there are still many operational details to figure out. Specifically, management said it's targeting $6 billion in run-rate synergies within three years in a presentation detailing the merger's completion. It's also targeting $20 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) and more than $10 billion in free cash flow by 2030.
Those are ambitious goals. The company is expected to generate $12 billion in pro forma EBITDA this year before synergies. That means synergies will be driving the bulk of that EBITDA growth over the next four years. But management has committed to increasing film production spending by at least $300 million annually as part of its settlement with the state attorneys general. Additionally, it must continue to negotiate cable networks from Warner Bros. and Paramount separately.
Meanwhile, the decline of cable TV will continue to weigh on the business, which will own the bulk of the networks in the bundle, about 50 networks total. If management expects to achieve its outlook for mid-single-digit revenue growth through 2030, it'll have to fully offset the decline in linear programming revenue both companies have experienced and should continue to experience as more entertainment moves to streaming. Note, neither Paramount nor Warner Bros. grew revenue that quickly last quarter.
Then there's the debt of it all. Skydance took a $52 billion loan to complete the acquisition. That leaves its balance sheet strapped with $86.8 billion of debt and just $7.9 billion of cash. Against EBITDA of just $12 billion plus whatever synergies it can eke out, that's going to take a long time to pay down. Management's target of debt-to-EBITDA of 3.0 by 2029 also looks aggressive.
To be sure, investors don't appear sold on management's vision for the company's finances either. The stock trades at an enterprise value-to-EBITDA ratio of about 10 times full-year expectations. Still, I'd rather wait and see meaningful progress and execution on its goals before buying into a business that's been forced to merge multiple times to stay afloat.
If a business's value is a reflection of the future cash flows it will earn, I'd much rather own the future cash flows of Netflix, which look much better positioned to grow. And investors can buy Netflix at an extremely attractive price today.
Is Skydance a threat to Netflix?
Streaming is the present and future of media, and Netflix has become the dominant force in streaming. Skydance now owns platforms with over 200 million global subscribers, though there may be considerable overlap among HBO Max, Discovery+, and Paramount+. Still, that significantly trails Netflix's 325 million paid subscribers as of the start of 2026.
NASDAQ: NFLX
Key Data Points
That scale, and a lack of linear network operations, gives Netflix a lot of leverage. That's why its content budget of around $20 billion can produce better growth than Skydance's $30 billion content budget. Not only will Netflix grow revenue faster without cord cutting acting as a drag, but it can also grow earnings even faster as it amortizes content costs across a larger subscriber base. As a result, free cash flow is expected to reach about $11 billion, plus the after-tax benefit of the $2.8 billion breakup fee from its deal with Warner Bros. Discovery (about $1.5 billion).
Importantly, Netflix should be able to maintain strong operating leverage thanks to its predictable revenue and smart content planning. It's built a large back catalog that, while not quite as impressive as Skydance's, holds valuable Internet Protocol (IP) addresses and rewatchable content. At the same time, it's shown the ability to create new cultural phenomena and a willingness to try new creative projects that big studios like Paramount and Warner Bros. haven't. As a result, I have much more confidence in Netflix's ability to grow earnings and cash flow going forward.
With the stock trading for just 19 times analysts' forward earnings expectations, it's an absolute bargain right now.
