Netflix Buyout?

For the life of me, I cannot understand why Netflix is still an independent company. It’s the single most compelling platform for delivering TV and movie content into your home — at a tenth of the cost of cable.

If you use Netflix, you’re probably well aware that its streaming technology (that sends a movie or TV show to you) is better than any other delivery technology. It’s better than Amazon Prime. It’s better than HBO Go. It’s better than Hulu.

Content-wise, Netflix is getting better. Yeah, I still have to look pretty hard sometimes to find something to watch. I’ve watched the whole Daredevil series. I’m about to start the third season of House of Cards, though I admit my interest in this one is waning. I’ve discovered a few good movies that I didn’t know about, and I’ve rewatched a few movies (Star Trek and, most recently, High Fidelity). 

Still, I often find myself searching around Netflix thinking, “There’s nothing I want to watch…”

For eight bucks a month, that’s not a problem for me. Netflix is a great value for the consumer, that’s for sure. But it looks like Netflix may be about to kick its content offerings up a notch…

Disney Gets on Board

Like I said, I recently finished watching the Daredevil series, based on the Marvel comic book character. It was good. But I didn’t really pay attention to the fact that this was a Marvel character, which is owned by Disney.

Marvel characters have been the backbone of some of the most successful movies in recent memory: Iron Man, Captain America, Guardians of the Galaxy, Thor, and, of course, The Avengers. All these movies are fun, funny, and very well produced.

And Marvel’s latest, Ant-Man, is sitting at the top of the box office this week.

So it’s easy to see why Netflix would want to jump on that success and produce its own series based on the Daredevil character. It’s got a pretty good chance of being successful and making some loot.

But the relationship between Disney and Netflix goes far beyond that…

Starting in 2016, Disney movies will be hitting Netflix within weeks of leaving movie theaters. That means Pixar movies, along with Marvel and Lucasfilm. Yeah, Netflix will have the sequel to the highest-grossing animated film of all time, Frozen. Netflix will get the next Avengers, along with sequel to one of my favorite films, Finding Nemo.

And even though the new Star Wars comes out this December, I won’t be surprised if it’s released on Netflix pretty soon after its theater run, too.

The deal that brings all this to Netflix was signed back in 2012. And I wonder: Why didn’t Disney just buy them out?

Disney’s Mega-Deals

Disney has shown that it’s not afraid to take a chance and buy out companies.

In 2006, Disney took out Pixar for $7.4 billion. Marvel was gobbled up for $4 billion in 2009 ($4 billion for Iron Man, The Avengers, and Thor… what a steal!) and Lucasfilm in 2012 for $4 billion.

These acquisitions — and the ability to integrate them and make some really good movies — are a big part of the reason Disney shares have doubled in the last two years.

But what if Disney had just bought out Netflix in 2012?

Right now, Netflix is worth around $47 billion. But in 2012, Netflix’s highest worth was $5 billion. At its low point, it was worth around $3 billion. A well-timed bid, and Disney could have taken Netflix out for what it spent on Pixar.

Sure, Disney got $300 million from Netflix for the current movie deal. But Netflix will do ~$7 billion in revenue for calendar year 2015 and $8.6 billion in 2016. In 2012, Netflix had $750 million in cash; today it’s got a net $1.6 billion. For comparison’s sake, Disney has $3.7 billion in cash and $15 billion in debt.

Disney would have had a perfect vehicle right into people’s homes. And I’d be willing to bet Netflix would have done even better revenue-wise if it had Disney movies over the last three years.

It should be very clear that Netflix would have been an incredible investment for Disney. And it should also be clear that Netflix remains a very powerful platform.

Content is King

When Comcast took a controlling interest in NBC Universal in 2009, NBC was valued at around $30 billion. Comcast was obviously after content. It had already tried to take out Disney at $41 billion, largely because it wanted ESPN. And Comcast went on to start its regional sports networks to make up for missing out on ESPN.

Yes, content is king, but a really good platform for delivering content can be pretty darn lucrative, too. And these days, with the ridiculous prices that Comcast is charging for cable TV, the time is perfect for a major content provider to step up with a platform that can rival Comcast’s. Netflix is obviously that platform.

Disney is currently valued at $200 billion. Netflix is $47 billion. The premium for such a deal would be rich — Disney would probably have to pony up at least $65 billion (roughly 10 times current revenue). But the benefit to Disney — or somebody else — would be worth it.

Amazon, maybe a merger with HBO, maybe even Apple gets involved — I don’t know what’s going to happen to Netflix. But I don’t think it’s going to be independent for very much longer.

Netflix has basically doubled in value this year. It has 60 million total subscribers and 40 million U.S. subscribers. There’s a lot of upside internationally.

Some company is going to make a big splash for Netflix, and some investors are going to make some loot when the deal is announced.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.