Every late-stage bull market has a silly season, a point where mere rumors of deals can send a high-flying stock shooting even higher. With the current bull market about to enter its ninth year, we have fully entered that silly season, with Citigroup Inc. (NYSE:C) analysts claiming a 40% chance Netflix Inc. (NASDAQ:NFLX) will soon be bought by Apple Inc. (NASDAQ:AAPL).
In response, NFLX shot up nearly 5%, including overnight trading, and is currently sitting at about $210 per share.
That’s a $90 billion market cap for a company that may have sales of $12 billion for 2017, if it decisively beats the “whisper” of $3.28 billion for the December quarter. Netflix is trading at over 200 times earnings, about 8 times assets, and Apple is going to pay a premium?
Tim Cook is not crazy.
Why the Rumor?
The rumors of an Apple-Netflix tie-up persist because Apple has a big cloud and is weak in streaming, while Netflix has a large, growing library of content, as well as back-end infrastructure for delivering it.
The rumors are growing in intensity because the recent tax cut would allow Apple to repatriate its $250 billion in cash for less than it would have cost before, an effective tax rate of 15.5%. Other silly rumors have Apple buying The Walt Disney Co. (NYSE:DIS) and Tesla Inc. (NASDAQ:TSLA).
The rumors are silly because Apple would do much better buying its supply chain. Foxconn Technology Co. Ltd. (TPE:2354) has a market cap of $120 billion, and Qualcomm Inc. (NASDAQ:QCOM), the chip supplier with which it’s currently feuding, has a market cap of $96 billion. For $250 billion Apple could buy both — for cash.
By the way, that’s not happening either.
What is most likely is that Apple will repatriate some of that cash and hand it to shareholders, in the form of a special dividend. Bringing in about $60 billion would mean a $10 per share dividend, plus taxes, and might push the market cap to $1 trillion.
Just because cash is burning a hole in Apple CEO Tim Cook’s pocket doesn’t mean he has to rush out and do something stupid. Overpaying for assets is always stupid. Netflix, right now, is overpriced.
Analysts continue to pound the table for Netflix as a stand-alone play. Macquarie Research analyst Tim Nollen notes that it is well ahead of rivals and has raised his target price for the stock to $220 per share, less than 5% greater than where it stands today. Note that Macquarie has an “outperform” rating on the stock, not an outright buy, because it’s so expensive. Still, the trading volume also had traders piling in.
Other writers here at InvestorPlace are divided on Netflix. Josh Enomoto says buy, buy, buy. Vince Martin says hold off because of price — NFLX is currently worth more than Time Warner Inc. (NYSE:TWX), which AT&T Inc. (NYSE:T) is in court trying to buy, and more than all the media networks owned by Disney.
The Bottom Line on Netflix Stock
If you’re a young investor and can ride out a downturn, Netflix should be one of the stocks on your buy list. If you see it fall for any reason, grab it.
If you’re a trader, if you stay on top of your stocks every day and can get out quickly, then you might also want to ride the momentum Netflix now enjoys.
If you’re an older investor, you should stay away. Frothy markets tend to fall quickly, and you may not have time to wait for a bounce-back. Besides, Netflix delivers no income, and is unlikely to. Look elsewhere.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T.