No One Is Buying Netflix


A Federal Judge has approved the merger of AT&T and Time Warner, kicking-off an expected frenzy of acquisitions of media companies.

Netflix has a stock market valuation that is too high for any other firm to attempt to acquire it in a merger.

Netflix needs to use its elevated stock price to make highly accretive acquisitions to justify its lofty valuation.

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:

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