No One Is Buying Netflix

Netflix (NFLX) has become the King of Content, and that is in great demand right now. A federal judge has just approved the merger of AT&T (T) and Time Warner (TWX) without any requirements that they shed significant assets. There is still a possibility the Justice Department could appeal the ruling and actually get a reversal of the judge’s decision. But the odds are that in the next few days AT&T and Time Warner will be one company and others will look to copycat.

The problem Netflix has is that its valuation is so high compared to similar companies that the few companies large enough to acquire Netflix would have to do so in a highly dilutive transaction. That is simply not going to happen. Netflix has a market-cap of $158 billion. But in 2017 the company had revenues of only $11.7 billion, which means it is trading at a very high 13.5 times trailing revenue. For comparison’s sake consider The Walt Disney Company (DIS) with a market-cap of $155 billion. Disney had $54.9 billion in revenue in 2017, and it is trading for only 2.8 times trailing revenue.

The incredible premium carried by the shares of Netflix are best understood by looking at its income statement and subscriber growth rate. First we will look at the income statement:

Netflix earned a $1.25 in 2017 per diluted share. With a closing price per share of $364, Netflix is trading at a whopping 291 times trailing earnings. Again, compare that to Disney which is trading at 14 times trailing earnings. A big question is, does Netflix have the growth rate to justify such a lofty premium? Here is a look at its subscriber growth numbers:

Netflix is growing. It increased its number of global streaming memberships from 93.8 million in 2016 to 117.6 million in 2017. Any large company would be very pleased with a 25% growth rate, but that doesn’t justify a company’s trading at 13.5 times trailing revenue and 291 times trailing earnings per share.

It is clear that based on the metrics, there is no doubt no one will be placing a hostile bid to acquire Netflix. However, Netflix is in a great position to be an acquirer of assets. Almost anything it buys will be highly accretive to shareholder revenues and earnings. For example, one of the companies the market is speculating may be acquired is CBS Corporation (CBS). CBS would give Netflix additional content and an alternative distribution system for the excellent original content Netflix is creating.

CBS has a $20 billion market-cap and is trading at 1.5 times trailing revenue. The company is also trading at 17 times trailing earnings. Obviously, an acquisition of a company like CBS would be highly accretive for Netflix. Additionally, there could be real synergies between Netflix and CBS.

There are other companies Netflix could consider making a bid for that would also offer real synergies. The risk in making an acquisition is that Netflix would be changing its narrative, which may cause investors to reconsider its lofty premium. It may also be hard to integrate the culture of the acquired company into the culture of Netflix. However, Netflix has a real opportunity right now to strike while the iron is hot. In the long run Netflix shareholders should be better off if Netflix makes an aggressive move now rather than sitting back and playing the rapidly changing environment cautiously.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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