When Netflix (NASDAQ:NFLX) released impressive quarterly results in July, it was hardly surprising when the stock initially skyrocketed as a result. Netflix not only achieved earnings of $0.06 per share, crushing estimates for $0.04 per share, but also added an impressive 3.3 million subscribers during the period, compared with guidance for 2.5 million and bringing its total to 65 million.
After touching a new all-time high at over $129 per share in August, however, shares of Netflix have since pulled back more than 20%. That's not an uncommon occurrence for the typically volatile stock. But considering Netflix's industry leadership position, trove of differentiated content, and long runway for global growth, this raises the question: Might the recent drop be enough to entice a buyer to step in? And if so, to which buyer might Netflix make sense as an acquisition candidate?
According to three fool.com contributors, here's why Apple (NASDAQ:AAPL), Verizon Communications (NYSE:VZ), and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) parent Alphabet could each seriously consider making a play for everyone's favorite video streaming specialist:
Steve Symington (Alphabet/Google): With Netflix's current market cap sitting right around $42 billion, not many companies could afford to make an offer worth accepting for current Netflix shareholders. But as the $420 billion industry juggernaut with a 91% share of the global Internet search market, Alphabet -- the largest subsidiary of which is Google -- isn't just any company.
For one, it has the financial resources to make it happen. Last quarter alone, (then-named) Google generated operating cash flow of nearly $7 billion, free cash flow of almost $4.5 billion, and ended the period with almost $70 billion in cash and equivalents on its balance sheet.
What's more, acquiring Netflix could help Alphabet diversify away from Google's core advertising business, which represented an overwhelming 90.4% of total revenue last quarter. Incidentally, revenue from Google's "Other" segment -- which notably included sales from the Google Play business and that of Nexus hardware -- climbed 17% year over year last quarter to $1.7 billion. That's more than Netflix's most recent quarterly revenue, which increased at a slightly faster 22.7% to $1.65 billion. But keeping in mind Netflix's top-line growth is expected to accelerate to over 26% next fiscal year on the heels of ambitious international expansion plans, its streaming subscription model could serve as a lucrative complement to Google's Play and YouTube video sites.
Andres Cardenal (Apple): Apple doesn't typically make big and bold acquisitions. The company is more about buying small businesses with valuable technologies to incorporate into its own products. However, there are some strong reasons to believe that Apple and Netflix could be a match made in heaven.
To begin with, Apple has more than enough financial resources. The company is sitting on over $200 billion in cash and liquid investments on its balance sheet. Netflix has a market capitalization around $42 billion, so Apple could afford to buy the online video leader and even pay a considerable premium over current market prices. Also, Apple's cash hoard can be an enormously valuable strategic advantage when it comes to buying and producing content.
In addition, Apple is reportedly exploring the possibility of venturing into original content to strengthen its competitive position in the war for the living room. According to an article from Variety, the company has "held preliminary conversations ... with executives in Hollywood to suss out their interest in spearheading efforts to produce entertainment content."
By acquiring Netflix, Apple could make a triumphal entrance into online streaming. The company would be buying not only a huge library of content and the leading brand in the industry with over 65.6 million global subscribers, but also a lot of human talent and industry-specific know-how providing a huge edge over the competition.
Tim Green (Verizon Communications): While Verizon doesn't have tens of billions of dollars in excess cash lying around, the company's acquiring Netflix would make strategic sense. With Verizon's wireless business expected to plateau in 2016, caused by disruption from the smaller players in the industry as well as the end of two-year contracts, Verizon has been increasingly shifting its focus toward providing content directly.
Verizon's new Go90 mobile video service, providing a mix of traditional TV and YouTube-like videos for free, is supported by ads. Go90 will also feature NFL games, but unlike the rest of the service, these will be exclusive to Verizon subscribers. Go90 is Verizon's attempt at breaking into the video streaming market, which is dominated by Netflix but also features major players such as Amazon.com and Hulu.
For Verizon, acquiring Netflix could accelerate the company's plans to become a content provider, and the company could even conceivably offer perks, like exclusive content, to Verizon wireless subscribers in an effort to keep them from straying to other wireless providers. Such a deal would be a long shot for sure, given that Verizon already has well over $100 billion of debt on its balance sheet, and any deal for Netflix would likely end up costing $50 billion or more. But it would be a game-changer without a doubt.
Andrés Cardenal owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), and Netflix. Steve Symington owns shares of Apple. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool recommends Verizon Communications.
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