Should Apple buy Netflix? Bernstein analysts say no

Apple should partner with Netflix on a subscription service, rather than buying it outright

Financial trends and news by Steven Loeb
October 5, 2016
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These days it seems like Twitter is sucking up most of the oxygen in the M&A conversation, so it's easy to forget that there are plenty of other game-changing deals potentially in the works. In fact, there's another private company that's currently undergoing its own round of acquisition speculation.

There have been multiple reports in the last week or so of Disney being a possible buyer for Netflix, thanks to the company's slowing subscriber growth and its weaker than expected second quarter.

Much like Google and Twitter, there's another company that's always lurking in the shadows whenever a potential Netflix takeover starts looking likely: Apple. It's one of those rumors that's been out there for years, and now that Netflix is slumping a bit, and with Disney's interest becoming a real possibility, of course Apple's name would come back into the conversation.

With Apple being the most profitable company in history, it could of course buy Netflix if it wanted, but should it? The answer, according to a note from Toni Sacconaghi of Bernstein on Wednesday, is no.

Such a deal "would be highly out of character for Apple on many fronts," he wrote, since the company "historically has not done large deals" and "it does not purchase and run established  businesses."

That doesn't mean there aren't some compelling reasons why Apple might view Netflix as a potential target. 

"We think buying Netflix to run exclusively on iOS and AppleTV is not a value-creating thesis and could not possibly justify a $50B price tag. More plausibly, Apple could buy Netflix and continue to run it as it does today, believing that it could create meaningful revenue accretion or cost reduction through its brand, marketing reach, and operational prowess," Sacconaghi wrote, noting that it would all $8 billion to Apple's revenue.

The more important reason for Apple to buy Netflix would be to use the service to shift toward a subscription-based model, something that the analysts at Bernstein would like to see happen. 

"We believe AAPL could and should look to build a subscription offering of features and services that could be bundled with its hardware offerings, analogous to what Amazon does with Amazon Prime. Netflix (at a discounted price for only iPhone or iPad users who buy Apple hardware as a subscription) could be a key element of an attractive services bundle," it says in the note. 

Rather than buy Netflix, though, Sacconaghi thinks it would make more financial sense for the two services to partner. 

"Overall, we do not see a compelling rationale for Apple to acquire Netflix, and believe Apple will more likely partner or compete with Netflix than acquire it. That said, it is very hard to estimate its likelihood and potential impact on Netflix’s fundamentals. As a result, we do not believe the potential for a partnership or acquisition by Apple justifies owning NFLX."

That covers the potential deal from Apple's point of view, but what about Netflix? Why would the company want to sell?

Most likely it doesn't, but the rumors have been spreading thanks to the company's down performance so far this year.

In the second quarter, the company added 1.7 million subscribers during the quarter, including 160,000 memberships in the U.S. and 1.52 million internationally. That was below its own expectations of 2.5 million, which included 500,000 members in the U.S. and 2 million internationally.

As a result, Netflix shares dropped 15 percent in after-hours trading.

Netflix had seen its stock drop 14 percent year-to-date by the end of September, but it has since been bouyed a bit by speculation of a takeover. It is now down 7.75 percent year-to-date. It is up 3.52 percent in regular trading on Wednesday, to $105.94 a share.

Netflix will be releasing its third quarter numbers on October 17.

VatorNews reached out to Netflix and Apple for comment, but neither was available at this time. We will update this story if we hear back. 

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