Sacconaghi: Apple would be crazy to buy Netflix

But there's more than one way to absorb a company.

Dreaming up new ways to spend Apple's billions is a parlor game that never gets old. One well-trodden idea has surfaced again his fall—thanks largely to True Ventures' Om Malik. From a September post:

If [Apple] really wants to get into content and wants to make a strong statement to the Hollywood establishment that has stymied its television efforts so far, it should make a big, bold bet. It should use its massive stock market capitalization and cash hoard to buy Netflix.

Bernstein analyst Toni Sacconaghi begs to differ. He addressed the idea Wednesday in a note to clients that began like this:

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.

But there's more than one way to absorb a company. Sacconaghi breaks it down.

  • Buy Netflix for Apple's exclusive use. That's not a value-creating thesis.
  • Buy Netflix and run it as is, for all platforms. That's more plausible. It would bring in an extra $8 billion in revenues and would encourage Apple customers to become subscribers.
  • Partner with Netflix. Sacconaghi likes this one best, seeing it as mutually beneficial. Apple gets the benefits of the Netflix service without the upfront risk; Netflix gets to grow its subscriber lists from Apple's high-value customer base.

Bottom line: The odds of Netflix getting gobbled up by Apple are too low, says Sacconaghi, to justify owning the stock.

5 Comments

  1. Fred Stein said:
    Yup. Third option makes sense. While analysts never talk about this, Apple has partnered up with giants to include: The largest domestic and global mobile operators; Ditto financials; The record companies (kinda passe); Plus the top Network/IT suppliers like IBM, Cisco, and SAP. Apple wisely leverages incumbents rather than displacing them.
    That said, they haven’t partnered effectively in streaming video, YET.

    1
    October 6, 2016
  2. Richard Wanderman said:
    I agree, #3 works for me (as both an Apple and Netflix user).

    0
    October 6, 2016
  3. John Kirk said:
    Apple already HAS Netflix on its platform. Why buy the cow when you get the milk for free?

    2
    October 6, 2016
  4. Jonathan Mackenzie said:
    The two companies may be compatible, but the two stocks are not.

    Whereas AAPL is full of hidden value (since the market is pricing it like Apple’s earnings will decline modestly in the coming years or at best stay even), NFLX is priced for unimaginable growth.

    With AAPL, the market is saying, “Gee we can’t really know what the future will look like. We can’t possibly tell if Apple will be selling relevant devices in 10 years.” With NFLX, the market is saying just the opposite. With its 300 PE this stock’s investors are saying, “We know exactly what the future will bring. It is 200 million people watching streaming media on Netflix and paying as much as $40 a month to do so.”

    When the topic is Netflix, every analyst seems to be able to project consumer behavior out ten years and predict that Netflix will be relevant, even trendy, and people worldwide will eagerly pay to participate in its offerings. Change the subject to Apple and suddenly some of these same people shrug and say, “The future moves too quickly, Technological trends are erratic and subject to disruption.”

    So this future world according to these kind of investors and analysts, is one where we can’t even imagine how our lives will be disrupted or what devices we will be using (or who they will be made by). But one in which many people will surely be consuming streaming media from Netflix, and paying non-trivial sums to do it.

    I think the opposite argument applies. As augmented and virtual reality entertainment products start to evolve, it is at least as likely that Apple will be selling us devices to consume our entertainment from as it is Netflix will be the one serving it up to us.

    1
    October 6, 2016

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