Dave,
Any thoughts on how low NFLX will go?
Netflix looks increasingly like an acquisition candidate. I’m guessing that Amazon will acquire NFLX, for at least $600MM.
Why now?
Well, a lot has changed since the market first learned about Amazon’s likely entry into DVD rentals.
First, NFLX has lost $500MM in market cap, making it relatively less attractive for Amazon to build from scratch.
Second, despite that Netflix invented the market, it’s become clear that Netflix is not sufficiently capitalized to see long-term success. Blockbuster’s pockets are too deep. Blockbuster can continue a price war indefinitely and force Netflix to spend vast sums on marketing/promotion.
This marketing/cash bleed is key. Netflix’s biggest operating expense is marketing/promotion ($100MM+ annually). Amazon has previously stated that its customer acquisition cost would be close to $0. Consequently, Amazon could acquire Netflix, continue to grow Netflix's user-base organically via the Amazon user-base, and pocket this $100MM “annuity”.
If Netflix can simply retain its existing user-base, it will generate annual sales of over $600MM and annual free cash flow of over $150MM (assuming no marketing expense).
Of course, for an acquisition scenario to be viable, Amazon would need to get around the sales tax issue. Perhaps it could continue to operate Netflix as a separate entity.
Hopefully, the market will correct significantly and/or NFLX will lower guidance in the next few weeks. I’d love to buy some sub-$8, if only for its acquisition potential. |
