Earlier this month BTIG threw more gas on this fire when analyst Richard Greenfield discussed Disney’s need to replace CEO Bob Iger in the coming years, and that Netflix’s Reed Hastings would give DIS, and ultimately Disney stock, the creative mind it so desperately seeks.
Given that Iger’s biggest moves during his tenure have been in video and film, the move to Hastings would seem like a natural fit. Unfortunately, the cost to Disney stock would be too great, and the advantages of owning Netflix would be too meaningless.
Over the last few years Disney stock has clicked on nearly all cylinders. I suppose if there is a question mark on Iger’s incredible tenure, it is the recent subscriber declines in ESPN and Disney’s inability to launch a successful direct-to-consumer streaming platform.
But the mistake that investors make is thinking that DIS needs a successful streaming platform.
The reality is that Disney has options. It is unquestionably the king of video content; everything it touches reaches blockbuster status.
Of course Disney stock has the Marvel universe and Star Wars in its arsenal, but it also has an animated business that has produced recent hits like Frozen, Zootopia, and most recently Jungle Book, all of which will have second, third and possibly fourth installments.
In other words, Disney’s video pipeline is ripe with profits, which feed into its merchandise, theme parks and other media as it sells the rights to these blockbuster titles.
So while Netflix has a good reputation for developing unique content, DIS is far better, and given the billions of dollars in content obligations that face Netflix, it is clear that Disney is far better off making money from its content versus entering the crowded game of paying for content.
NFLX Would Be Bad for Disney Stock
With all things considered, the business approach of DIS and NFLX might not align, but at the end of the day, it is the opportunity to get Hastings that so many investors celebrate.
While I admit that Hastings would be a nice transition at DIS, let’s not forget that there is more to Disney stock than just video. Furthermore, let’s remember that there are many talented and creative people at Marvel, Pixar and LucasFilm, who are constantly producing billion dollar films for Disney. Any one of these people would be a good fit for DIS.
In other words, Disney has options.
Meanwhile, Netflix is in a troubled state right now. Not only is NFLX stock well off its high, but increased competition from the likes of Dish Network Corp‘s (DISH) Sling TV, Starz (STRZA), HBO, and even Alphabet Inc‘s (GOOG, GOOGL) YouTube have many wondering whether Netflix can continue to experience rapid subscriber growth.
More importantly, there are major questions regarding whether Netflix can continue to hike prices at a rate that matches the increase in content costs. Given the influx in competition, I don’t think it can do so.
Nonetheless, if the price were right, then sure, DIS should acquire Netflix.
The problem is that the price won’t be right any time soon, and once it gets there, Hastings would never allow the sale. Even after reporting poor earnings on Monday, NFLX is still valued north of $40 billion, and as explained in a recent article, Netflix’s peak value in the best of circumstances is only $40 billion.
Seeing as how Disney is historically a smart company that does not waste money, I cannot imagine that it would try to buy Netflix.
But if it did, overpaying for such an expensive asset would drastically alter the investment outlook for Disney stock, which is yet another reason all the talk surrounding a DIS and NFLX tieup is speculation, and won’t become a realization.
As of this writing, Brian Nichols was long Disney.
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