Shares plummeting, Netflix a worthy acquisition, analyst says
The streaming and DVD rental provider is now a bargain for a company that wants to break into those markets, argues Wedbush analyst Michael Pachter.
Although the issues at Netflix are becoming extremely worrisome to shareholders, the company might still be a worthwhile acquisition target, Wedbush analyst Michael Pachter wrote in a note to investors today.
How bad are things? Just yesterday Netflix announced that during the third quarter of 2011,. Even worse, Netflix said that it expects that trend to continue, and by the first quarter of 2012, will report a net loss.
Although Netflix's share price had been declining prior to that news, its shares are plummeting now. As of this writing, Netflix is trading at just $77.16, down more than 35 percent compared to yesterday's closing price of $118.84. In the last three months alone, Netflix shares are down nearly 73 percent.
Pachter has been saying for quite some time that Netflix is looking to be acquired. Last month, he said that Netflix's initial plan to split its business into two, with its streaming operation keeping its name and its DVD-by-mail business becoming a separate entity under the name, Qwikster, was. However, Netflix quickly abandoned those plans and will stay as one company.
Even so, Pachter said today, the company is still an attractive target for the many companies that want to become a streaming-video leader and gain a foothold in the DVD-rental business.
"We still think that a deal for the entire company (streaming and DVDs) remains a possibility," Pachter wrote in his note to investors. "Given recent moves by Amazon, Dish Network, and others, it is clear that becoming the industry's streaming leader has become a goal shared by a variety of different companies. With millions of subscribers and much lower content costs than streaming, Netflix's DVD business also remains an attractive asset for a rebounding Blockbuster (now owned by Dish Network) or an expanding Redbox, despite significant subscriber attrition expected in Q4."
Previously, Pachter believed that. However, Pachter now believes the chances of that are slim, since Netflix won't spin off its DVD-by-mail business. Netflix's loss of subscribers might have also proven worrisome to Amazon, he said.
However, as Pachter points out, the decline does provide an opportunity for would-be buyers. Because of Netflix's plummeting stock, the company's market capitalization, a measure of the value of a company, is just $4 billion right now. Although Netflix would likely require a premium on its stock price to sell its business, it might not take much for larger companies to come up with a deal to acquire the firm.
"A Netflix purchase (either streaming or DVDs) would provide the acquirer with an instant market leadership position at a discounted price given that Netflix shares currently trade well below the 52-week high of $304.79," Pachter said.
For its part, Netflix hasn't said that it's trying to be acquired. Instead, the company has focused much of its efforts on improving its service. Over the last several weeks, it has added a substantial amount of television content, including programming from Discovery Communications networks, like Discovery and TLC, as well as more AMC programming.
Netflix also announced yesterday that it plans toto the U.K. and Ireland in early 2012 to expand its reach.
Netflix did not immediately respond to CNET's request for comment.