Of all the buyout rumors I’ve heard lately, the more puzzling is that Walt Disney Co (NYSE:DIS) is going to purchase Netflix, Inc. (NASDAQ:NFLX). Let me tell you why that will not happen and why it would be bad for Disney stock.
The things propelling DIS stock over the last few years have been primarily the properties arising out of the Disney’s purchases of Marvel, Pixar and LucasFilm. ESPN was always the most profitable division, although we know it has been stumbling as of late.
Disney stock has appreciated because these three purchases all have something in common: They are self-contained studios that nicely complemented the TV and film studio divisions that were already contained within DIS.
Disney stock is worth, and will continue to be worth, hundreds of billions of dollars because all the studios are capable of producing exceptional content for film and television.
Disney Stock Doesn’t Need NFLX to Thrive
DIS does not need another studio operation. Netflix, at this point, is really nothing more than exactly that — a very high-quality studio producing expensive and high-quality content for itself. Netflix stock is being supported by the fanciful notion that its present and future content is worth its current stock price.
NFLX is not doing anything that Disney does not already do. Netflix has great talent developing its content, but so does DIS. NFLX is able to attract great talent to produce its content, but so does Disney.
You could argue that the present set of individuals at the film and TV development level aren’t producing the exact kind of high quality TV/streaming content that Netflix does, but DIS does not need to spend $45 billion to create that.
NFLX is nothing more than a cash-spending machine. Disney does the same thing. The only difference is that DIS actually generates revenue as a result, and Netflix stock just generates losses.
But listen up — it’s simpler than even all that. Disney made a deal awhile back that permits Netflix to be the exclusive distributor of new DIS films. That means NFLX is paying Disney a TON of money for this exclusive deal.
Bottom Line on DIS and Netflix Stock
There is no reason whatsoever for Disney to buy Netflix. As it stands, it is simply sucking NFLX of its cash flow anyway. Why buy it?
You might argue that Netflix has a streaming “pipe” that reaches millions of consumers. That must be worth something, especially since Disney stock has suffered a bit because it has basically shut down its money-losing online and interactive division. Well, not really.
Offering a streaming pipe to consumers is no longer impossible for studios. Companies can create and acquire the technology much more easily than before. Just look at all the options that exist on your Roku.
Sure, by owning Netflix, DIS might be more easily able to advertise its content and products to those millions of people. Yet many of those consumers already know about Disney products. DIS is the most famous brand in the world, arguably.
Finally, NFLX doesn’t make any money! Why would Disney pay $45 billion or more for a company that makes no money, is saddled with expensive debt and offers no value-add? And where would DIS come up with $45 billion? It already has $15 billion in long-term debt. It simply will not draw down more debt to buy a loser asset like Netflix stock.
Can you say, “pipe dream”?
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
