Netflix Stock Is Crashing - Is It A Buy Now?

The video starts by addressing the recent 33% drop in Netflix's stock and promises to discuss the reasons behind this decline and whether it makes the stock attractive. The host then promotes his Patreon, highlighting live streams, a Discord community, access to his portfolio, and more, as ways to add value for subscribers.

The first reason for the stock decline is Netflix's most recent earnings report. While revenue grew 17% (in line with forecasts), the operating margin was 28%, below the 31.5% guidance due to a one-time tax expense in Brazil. Without this expense, the operating margin would have exceeded projections. Netflix's revenue growth rates are accelerating, and operating margins are expanding overall, indicating strong fundamentals despite the short-term impact of the tax expense. Wall Street's short-term focus and the stock's previously high valuation are cited as reasons for the 10% drop post-earnings.

The second major reason for the stock drop is Netflix's $82.7 billion bid to acquire Warner Bros. Netflix aims to acquire Warner Bros.' streaming and studio businesses, excluding the TV business which will be spun off. The acquisition is intended to expand Netflix's content library, enhance viewing options, increase US production capacity (including access to the Burbank lot), and allow Netflix to compete in theatrical releases. Netflix expects $2-3 billion in cost savings by the third year and for the transaction to be accretive to GAAP EPS by year 2.

The video then examines Warner Bros.' financial health. Revenue has been declining by -3.5% annually post-acquisition in Q2 2022. Earnings have historically been negative but recently turned positive. Operating cash flows and free cash flows, while still substantial (over $4 billion annually), have been trending downwards. Warner Bros.' global streaming subscribers are growing (128 million), and streaming revenue is compounding at about 5% annually, while studio revenue has stabilized and is now uptrending. However, the global linear networks (TV) business, which is being spun off and Netflix is not acquiring, contributes over half of Warner Bros.' EBITDA and cash flows and is declining significantly.

Since Netflix isn't acquiring the profitable linear networks business, only about half of Warner Bros.' free cash flow will go to Netflix. Coupled with increased interest payments from the debt taken on for the acquisition, Netflix might only gain roughly $1 billion in free cash flow from this deal. This would mean Netflix is paying approximately 41 times free cash flow (or potentially 80 times when factoring in interest) for the acquired businesses, making it seem very expensive, especially given that Warner Bros.' streaming business isn't growing rapidly. However, the acquisition grants Netflix access to valuable brands like Harry Potter, Game of Thrones, and The Last of Us, which Netflix, as the market leader in streaming, may leverage to accelerate its own growth.

Bearish concerns include Netflix's increased debt, which is expected to jump from $15 billion to $75 billion, peaking leverage at around 3.7 times EBITDA in 2026. Netflix expects to aggressively pay down this debt to a comfortable two times level by 2027 using its strong projected free cash flow of over $12 billion in 2026. A second bearish point is the high probability of regulatory challenges from the DOJ or European regulators on antitrust grounds. Paramount Studios has even launched a counter-offer for Warner Bros. and raised antitrust concerns, arguing that the combined Netflix-Warner Bros. would hold a dominant market share (34% excluding free platforms).

The host believes the acquisition would benefit Netflix by increasing subscription value, accelerating content production, leading to cost savings, and enabling theatrical ventures. However, Netflix is currently trading at high multiples (45 times free cash flow, 39 times earnings) even after the 33% drop. Even with the acquisition and an estimated $13 billion in free cash flow, the price to free cash flow would still be 31. The price to EBITDA is also high relative to historical averages. The host concludes that while Netflix is a great business, its stock price and the acquisition price are both too high. He would only be interested if the stock dropped another 15% to around $75 per share, which he considers "fairly valued" rather than undervalued.