Shares of video streaming platform Netflix (NASDAQ:NFLX) now find themselves down close to 30% from their all-time highs, thanks in part to a tough third-quarter result and reports that the firm is in the running to acquire Warner Bros. Discovery (NASDAQ:WBD). Undoubtedly, it feels like there’s about to be a bitter bidding war for the right to acquire Warner Bros as Paramount looks to offer a richer hostile offer.
Whether Netflix will need to sweeten the pot further in response remains the multi-billion-dollar question. Either way, Netflix investors don’t seem all enthused by the potential deal, especially considering the sticker price is bound to be a hefty one. Undoubtedly, the battle for Warner Bros. Discovery has the potential to escalate into a bidding war, but either way, it’s not hard to imagine that Netflix’s pursuit of the media firm might be a sign that it’s getting harder to sustain that impressive growth rate.
The Netflix formula has brought forth plenty of growth. But it’ll get harder to keep the pace up from here
Of course, live sports, a move into gaming, embracing AI, and continuing to launch high-quality content that resonates with a broad audience have been a winning formula for Netflix. And while the winning formula has kept Netflix on top, there’s no guarantee that the pace of growth can continue moving forward, especially as the industry matures and consumers get a tad pickier about their streaming subscriptions.
Undoubtedly, Netflix has arguably already picked off all the low-hanging fruit by cracking down on password sharing while embracing an ad-based tier and also increasing prices every so often. Thus far, the Netflix subscription has proven quite sticky, and that’s thanks in part to the solid pipeline of high-quality content.
Though there’s still plenty of promise in the ad-based tier, I do think that adding to the content library via acquisition would be a quick and easy way to take ad revenues and perhaps the priciest subscription to the next level. Undoubtedly, Netflix already has a deep library, but as competition for consumers’ attention gets fiercer, Netflix is going to need more content to keep users engaged.
A big-league acquisition could be key to growth as the battle for attention gets fiercer
Undoubtedly, more time spent on YouTube and social media apps means less time spent binge-watching on Netflix and other streaming platforms. The perfect solution is to add even more must-see content. With a very high-quality lineup of content and a major studio that could help Netflix become an absolute behemoth in the space (if it isn’t already), I ultimately see such a major acquisition as a massive win for Netflix subscribers.
Why? My guess is that it’s going to be cheaper to subscribe to Netflix with Warner Bros. Discovery content than to subscribe to Netflix, Max, and Discovery+. There’s a significant opportunity in bundling. And I do think some consolidation would make the streaming experience far better and perhaps cheaper for customers.
If it’s a win for customers, I think regulators might wish to give the acquisition a green light despite the magnitude of the deal and its potential to draw forth considerable antitrust scrutiny. Though Warner Bros. Discovery would fit well into Netflix, especially as Netflix commits to keeping theatrical releases, the Paramount pursuit of the assets complicates things, especially if Netflix ends up running the risk of overpaying for the assets. Time will tell. Though I have no idea how things will unfold, I still see Netflix as quite an expensive stock at 39.6 times trailing price-to-earnings (P/E).
The bottom line
If Netflix winds up overpaying to get the deal done, or if growth is harder to come by from here without a big deal, I can’t say with certainty whether today’s rich, growthy multiple is worth paying. Personally, I’d rather sit on the sidelines until this whole Warner Bros. Discovery situation settles before thinking about venturing into the stock.
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