Netflix shares fall on Warner Brothers acquisition news

On 5 December, streaming giant Netflix (NASDAQ:NFLX) announced that it has reached a definitive agreement with Warner Bros. Discovery (NASDAQ:WBD) (WBD) to acquire its rival in a cash and stock transaction with an equity value of approximately $72 billion. But the deal has not gone down well with investors.

Netflix shares were once counted among the world’s top stocks during the ‘FAANG’ days, but in recent years it has played second fiddle to the new formulation of the Magnificent Seven. Netflix stock fell out of favour during the post-pandemic era as the end of lockdown conditions posed a headwind for businesses associated with the stay-home economy.

It is also not viewed as directly connected to the artificial intelligence (AI) wave that has buoyed stocks like Nvidia.

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But Netflix’s share price has been gradually gaining ground ever since, and had risen 9.2% in the year to 5 December.

“If the deal passes regulatory scrutiny, Netflix would acquire a substantial portfolio of high-quality IP and a premium subscription service, resulting in massive market share,” said Alicia Reese, SVP media and entertainment equity research at Wedbush Securities.

“Despite considerable overlap among households that subscribe to both Netflix and HBO Max, bundling the two services could reduce churn by creating a sticky ecosystem with two massive content libraries.”

Netflix anticipates that acquiring WBD will boost its earnings per share within two years’ time, and that it will provide $2-3 billion in cost synergies within three years.

But investors didn’t seem to like the idea of the deal. Netflix shares swung widely after opening on 5 December but closed the session 2.9% down. WBD shares, meanwhile, gained 6.3%.

“Splashing out so much cash was never going to make the share price jump with delight,” said Danni Hewson, head of financial analysis at AJ Bell.

But the implications of one media giant acquiring another could stymie the deal going through at all.

Will the Netflix-Warner Bros. Discovery acquisition go ahead?

Over the weekend, the likelihood of the merger going ahead has come under scrutiny. US president Donald Trump admitted that the size of the combined entity – which would come close to the 30% US market share threshold for streaming content – could cause problems as far as antitrust regulators are concerned.

Netflix, though, is expected to contend that the total market should be viewed as broader than just streaming services, and that it should account for other widely-consumed media platforms such as YouTube. Whether or not regulators buy this argument remains to be seen.

There is also expected to be pushback from groups concerned that the merger would give Netflix too much pricing power. Hollywood is also said to be concerned about what the acquisition of one of the world’s largest film studios by a streaming-first platform could mean for the film industry.

“Ultimately, we think the Department of Justice will reject a deal without concessions on pricing and industry standards,” said Reese.

A further spanner in the works as far as Netflix’s bid is concerned came when Paramount Skydance (NASDAQ:PSKY), which had previously bid unsuccessfully, made a renewed all-cash bid to acquire WBD on the morning of Monday 8 December.

“Much attention has been given to Trump’s friendship with Larry Ellison, whose son David Ellison had previously spearheaded a deal for Paramount Skydance to buy WBD,” said Dan Coatsworth, head of markets at AJ Bell.

Netflix shares fell 3.6% within the first hour of trading on 8 December following these developments.

Is Netflix stock a buy?

On average, analysts expect Netflix to post solid gains over the coming 12 months.

The consensus 12 month price target among analysts polled by London Stock Exchange Group is $139, implying around 39% growth from Netflix’s 5 December close price.

Wedbush Securities sets a price target of $140 for Netflix stock, in line with the broader consensus and roughly 40% above its 5 December close price.

But Netflix stock isn’t cheap: it trades at around 37 times expected earnings and 42 times trailing earnings (as of 5 December). It will have to keep consistently growing its earnings and profitability if it is to justify this valuation.

Investors considering investing in Netflix should conduct thorough research and consider the risks involved carefully before doing so.