Netflix, Inc. (NASDAQ:NFLX) stock, which currently trades at more than 100 times earnings, doesn’t look like an ideal buyout target at first glance. But truthfully, the streaming video company would be a savvy acquisition for a bevy of larger suitors.
Bulls have been amply rewarded for their confidence in NFLX stock, which has already soared 33% in 2015 and is up 570% in the past five years. Anyone with the vision to buy and hold Netflix stock over the last decade has watched gleefully as NFLX shares roared more than 4000% higher.
Well, there’s more good news for shareholders: The gravy train’s not over yet.
An Ideal Hedge for Cable Companies
The cord-cutting revolution is turning cable’s traditional business model on its head, which should continue to drive NFLX stock higher. Initially spurred by Netflix itself, the steady trend away from the bundled cable programming of yesteryear and towards more a-la-carte online streaming options is firmly underway.
Comcast Corporation (NASDAQ:CMCSA) was involved in a high-profile dispute with NFLX last year that ended with Netflix paying CMCSA an undisclosed sum so Comcast wouldn’t slow down its website. And now Comcast is moving into streaming video itself, albeit slowly.
In an interesting twist of fate, the money could flow back towards NFLX soon. As subscriber growth wanes and customers disavow cable in favor of far cheaper subscription streaming video services, pay TV companies like CMCSA, Time Warner Cable Inc (NYSE:TWC), and even Verizon Communications Inc. (NYSE:VZ) will be increasingly incentivized to wet their beaks and own a slice of the industry that’s eating away at their prized cash cows.
I’m not the only one who thinks Netflix stock looks primed for an M&A deal. Mark Cuban said as much back in October, buying 50,000 shares of NFLX stock after an earnings-related selloff depressed the NFLX stock price. Famed activist investor Carl Icahn is also one of Netflix’s biggest individual shareholders, and it’s hard to believe the guy who helped inspire Gordon Gekko’s character wouldn’t aggressively pursue any and all buyout opportunities.
Speaking of buyout opportunities, the list of potential NFLX suitors doesn’t end with cable companies.
Don’t Rule Out Tech Heavyweights
While Amazon.com, Inc. (NASDAQ:AMZN) has the resources to buy out NFLX, it wouldn’t make much sense for AMZN to cannibalize its own streaming video service, Amazon Prime Video.
But Amazon has provided China’s e-commerce leader, Alibaba Group Holding Ltd (NYSE:BABA), with a fine template for attracting customers. A big part of the appeal for Amazon’s $99 Prime service is its streaming video offerings. The free two-day shipping is the icing on the cake.
Plus, with Hollywood and China courting each other more intensely in recent years, a NFLX acquisition wouldn’t be totally out of Alibaba’s wheelhouse. BABA is eagerly seeking out ways to access and retain a growing Chinese middle class with an appetite for U.S. entertainment. Last July, BABA and Lions Gate Entertainment Corp. (USA) (NYSE:LGF) teamed up on a service giving customers access to some of Lionsgate’s most popular productions, including the entire Twilight series, The Hunger Games: Catching Fire, and Mad Men.
Why stop there?
Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) could also boost its online entertainment presence by buying out NFLX. GOOG certainly isn’t shy about making acquisitions, and it’s proven its willingness to buy an online video service before — it bought YouTube in 2006 for $1.65 billion.
With so many angles that make a Netflix buyout possible and even logical, there’s still plenty of room for NFLX stock to run higher.
As of this writing John Divine was long shares of GOOG stock and GOOGL stock, and was long Jan 2016 $37 LGF calls. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
