How high will Netflix reach? This has been a question being discussed all over Wall Street regarding the streaming giant’s stock price. But more recently, it’s been the focus of a debate over whether the global streaming company is willing to outbid David Ellison’s Paramount for Warner Bros.’ Discovery, should Paramount’s board of directors consider Paramount’s enhanced takeover bid superior to Netflix’s recent offer.
Wall Street analysts agree that Netflix, with deep pockets, could easily outperform Paramount without causing financial problems for its management team. Instead, the real question is whether it’s willing to do so, and what the stock fallout will look like after the recent deal-related pullback and other investor concerns, along with the impact on Netflix’s management’s strategic narrative for what has so far been just streaming.
Netflix stock closed at $103.22 on December 4, the day before the initial announcement of the WBD-Netflix deal, and was down 24 percent to $78.04 as of Tuesday’s close.
WBD is reviewing the latest offer from Paramount, while Netflix co-CEO Ted Sarandos cited financial discipline and optimism about getting the deal done and crossing the regulatory finish line. So where do Wall Street experts stand on the bidding war now?
Bernstein analyst Laurent Yoon The playing condition is characterized in this way: “If [Paramount] “If the offer is high enough to prompt a response from Netflix – and the revised terms (such as financing guarantees) meet expectations, or the offer is rich enough for WBD to take some risk – the next logical question is: What’s next for Netflix, and how high can its ceiling be?” “Netflix has the balance sheet capacity and free cash flow growth to reach the $30 level if it chooses to, but that doesn’t mean it should,” he added.
Bernstein’s expert cited three angles to consider: debt leverage, stock price, and the CEO factor.
The former isn’t actually an issue, according to Yoon: “Netflix’s balance sheet and expected future cash flow could support a (much) higher offer.” “A price above $30 per share would push Netflix’s leverage into the mid-range of 3x EBITDA for 2027 but fall below 3x EBITDA in 2028 – a metric we believe matters more, given the likely timing of the deal closing if it goes ahead. We don’t think the deal would threaten Netflix’s investment grade rating, but even if it did, we see Limited practical impact because Netflix has no near-term need to issue new debt, and leverage will mean it will normalize quickly, supported by EBITDA growth and free cash flow.
In case you’re wondering what it means to mention Netflix’s investment-grade debt rating, the key thing to know is that this indicates a lower risk of default, allowing the company to borrow money at lower interest rates and on more favorable terms compared to companies with a “junk” rating.
Likewise, Yoon doesn’t see any real issues with the stock price. “Perhaps the most relevant cap is where the deal becomes dilutive to Netflix shares,” he stressed. “Assuming $1.5 billion of synergies in 2028 (50 percent of Netflix’s proposed $2-3 billion opex savings), the company can justify a bid of up to $30. Additional synergies will only expand that upside, providing further upside for the stock over the long term.”
But what about the CEO factor? “Ultimately, decisions are made by people, not spreadsheets,” Yoon emphasized. “Numbers are important, but they vary, driven by information asymmetries and what management chooses to believe.” “Although the ‘accounts’ support Netflix rising materially, that doesn’t mean it should. Netflix has earned a reputation for disciplined capital allocation – something Points Management has emphasized time and time again.”
The Bernstein analyst concluded: “If the price no longer makes sense for Netflix, and if this deal is likely to hamper Paramount-WBD from investing aggressively in growth in the near term, a walkout remains a perfectly rational outcome. Netflix can raise its offer beyond the most recent $31 per share if necessary and still create value for shareholders (if many of them are not further penalized by the deal). Netflix’s ability to bid higher depends on its certainty of achieving synergies.”
MoffettNathanson analyst Robert Fishman He discussed how “discipline” Netflix would show in its search for WBD. “When analyzing the deal calculations for Netflix, our base case scenario does not see this [financial] “A backlog exceeding $30 per share,” he wrote in a recent report focusing on the topic. In fact, “at more than $30 per share and using our current pro forma forecasts, the deal would start to modestly dilute 2028 earnings per share. Any increase in supply would likely further impact Netflix’s already significantly reduced supply.” [stock market] evaluation.”
However, Fishman concluded that the recent share price decline may help investors somewhat. His bottom line: “With Netflix stock at current lows, investors have to win either way. We see long-term benefits of owning Warner Bros.” Assets are not reflected properly at these levels. But if Netflix pulls out of the deal, the company’s underlying fundamental drivers of subscriber and advertising growth as well as pricing power should rebuild investors’ confidence that WBD was truly a “nice to have” rather than a “must have.”
Richard Greenfield, analyst at LightShed Partnerssuggested that Paramount could still walk away from the WBD business if it exercised patience. “Given our belief that Netflix will rise by at least 10%, the only way for Paramount to be the winning bid is to significantly increase the dollar value of its offer,” he wrote in a February 17 report before Paramount submitted its enhanced bid. “In our view, $30 is probably already too much for WBD,” he warned in the report, titled “Maverick, Don’t Do It: Ellison’s Warner Bros. Gamble Is a Job He Should Give Up (For Now…).”
Greenfield’s suggestion: “Paramount should simply let Netflix be the winning bidder and wait six months for Discovery Global to spin off from WBD. After that, Paramount would be able to acquire Discovery Global at a substantially lower price…assuming DG’s trading is as bad as Paramount thinks it is. While you may wonder why Paramount would continue to buy DG’s assets, we still believe it needs it to help take costs off Paramount’s distressed cable network portfolio and leverage the cash flows of the combined linear cable network.” For all the challenges facing Discovery Global’s cable networks, they are in a much better position than Paramount’s cable networks.
The rest of WBD could return to the auction block if regulators actually block the Netflix acquisition. “Paramount seems 100% confident that the WBD/Netflix deal will be blocked by regulators in the US and in all major territories around the world,” the LightShed analyst wrote. “Given Ellison’s repeated public statements that his current plan for Paramount after the Skydance deal does not require a WBD acquisition, why not simply wait for the Netflix deal to fail? If Paramount pulled out today, it would have a much stronger balance sheet, would be able to invest aggressively in content, would be able to focus on executing on its current plan for Skydance/Paramount, buy Discovery Global for well below its implied value within WBD today, and then be able to acquire Warner.” Bros. studio and HBO at a much lower price once the Netflix deal was abandoned due to regulatory issues.
