Should Disney Buy Netflix?

Although Disney (DIS) has been a great long-term performer, it is well known that the company’s TV business is currently struggling. Both ABC and ESPN have underperformed over the last few quarters. BTIG analyst Richard Greenfield recently suggested that Disney should buy Netflix (NFLX) to tackle the weakness.

"Netflix is already a great friend of Disney," Greenfield says. "In fact, Iger has repeatedly acknowledged how they are in part responsible for Netflix’s success.
Disney continues to sell more and more content to Netflix spanning movies and television series while at the same time struggling to get their own direct-to-consumer content business off the ground in the UK."

While the idea looks good on paper, I think it is too farfetched and unrealistic. Due to Netflix’s extreme overvaluation, I don’t think Disney will consider buying the company in the foreseeable future. As of writing this article, Netflix has a market cap of almost $45 billion. Disney will have to pay at least a 10% premium to buy Netflix, taking the total worth of the acquisition to almost $50 billion.

Netflix has never generated significant cash flow or earnings and is currently trading at roughly 370x trailing earnings. What’s worse is Netflix has no long-term monopoly and the company’s only asset is its investment in content streaming rights, which is worth less than $2.5 billion. Bearing in the mind the growing content costs, marketing expenses, and SG&A expenses, I don’t see any reason why Disney will consider paying anywhere near $50 billion for Netflix.

Another reason why I think Disney won’t consider buying Netflix is because the company already partially owns Hulu. Since Disney already has a stake in Hulu, I think it would prefer developing Hulu rather than spending almost $50 billion on acquiring Netflix.

Netflix’s competition is increasing at a rapid rate which has forced the company’s margins lower. Netflix is already struggling to generate significant cash flow and I don’t see this changing in the future. I don’t see any reason why a company will pay $50 billion for Netflix given the company’s razor-thin margins and increasing competition.

Although Netflix’s strong revenue growth will probably continue for a long time, I doubt the company’s earnings potential. Hence, I think Richard Greenfield is wrong as Disney will probably never consider buying Netflix.
Published on Apr 15, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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