Netflix: Big M&A Opportunity Ahead For Amazon Inc.

 

Recent Netflix performance has been disappointing, being the first time the streaming platform giant loses subscriptions in the last ten years. In this context, the company trades at all-time low levels around 17x PER.

 At the moment, the industry market share is distributed as follows:

At the moment, this oligopoly will force competitors to differentiate from the rest to achieve a more robust market share (as Disney does with a narrower focus approach in its strategy) in case they do not get to take down Netflix in the long term. The market share war is probably the key for the business future due to Netflix, Amazon Prime Video, HBO Max, and Hulu follow broad-focus approaches so that every platform is developed with series adapted to all public.

Given the current context, Amazon can change all future prospects for the long-term through an M&A transaction because this conglomerate already got lots of resources and enough cash to acquire any other peer and take a clearer lead. This strategy has been already followed by Microsoft in the video game segment with the acquisition of Activision Blizzard business, and other strong conglomerates might do the same use of their cash to conquer attractive industries with strong growth prospects.

Personally, I think Apple would only take the lead by acquiring Netflix and they might find a more profitable industry to lead without competing one-to-one with Amazon Prime video that would not be so far behind. However, Apple might also be able to acquire even multiple peers such as Netflix, Hulu, and HBO at the same time to get a clearly superior market share of around 50%. All in all, in the current context, all these peers will prefer to get to a deal and become part of a strong conglomerate that guarantees long-term survival rather than dying.

In the case of Activision Blizzard, they prevented a long-term failure by coming to a deal with Microsoft, and they did just after World of Warcraft video game, a considerable share of its total revenue, failed on a video game expansion and therefore the video game prospects worsened considerably. By joining Microsoft and its Xbox console business, they turned prospects around completely. Therefore, whenever Netflix gets into trouble, I think conglomerates like Amazon, already quite strong in the industry, might be alert and ready to acquire it the same way Microsoft did. This is a very likely context in the case of Amazon, especially considering they are going to gain market share this year after The Lord of The Rings new series is very likely to become one of the most successful series of all time.

Moreover, Netflix would strengthen Amazon´s business considerably, not only by offering a stronger set of subscriptions systems along with Amazon´s prime in the third-party e-commerce retail segment but also by combining with Twitch, another gaming streaming platform that could event expand to other sports streaming services in the long term.

In any case, what´s clear rather than speculation and possibilities, is that an M&A deal can determine the industry leadership in the long term towards its maturity stage and it might be a much better strategy for Amazon rather than the current fierce competition.

However, this exit strategy is not sure to be taken by the company management in the medium term to “save” the company´s future. Therefore, Netflix's outlook must be examined to ensure the company will not lose market share against other weaker competitors such as Hulu or HBO so that it remains a profitable opportunity for Amazon to expand its business further. Here I will talk about some key determinants for Netflix´s future performance, but I suggest you analyze it deeper than here given the current multiple the company is trading at.

According to the consensus, content releases are the key differentiator at this point because streaming industry growth is declining, and the level of competition has increased so much that a growing subscriptions trend will be harder to sustain in the medium term if there is not a quite better strategy to take down peers. Here are some aspects I would focus on:

First, Netflix must identify the weakest points the company might be failing at by analyzing feedback and data further. The management should revise its pricing strategy considering the current inflation scenario that decreases discretionary goods demand like Netflix products, each type of subscription available, anticipate demand peaks and prepare special offers in advance to expand its customer base, strategies to keep clients paying subscriptions like reward and points systems to spend in alternative leisure activities, and the revenue drivers overall such as advertising strategies must also be checked.

Furthermore, the company can also expand the business to new segments such as gaming and sports streaming, new geographical areas with attractive markets not served sufficiently yet such as Japan and India, or strengthen advertising revenue so that the business is not all about subscribers anymore.

All in all, I think increasing revenue should be the easiest and most appropriate focus at this point rather than reducing costs, especially if this would imply a decrease in quality because Netflix's prospects could worsen from keeping as the best quality competitor in the industry in the long term.

In case we look at the very long term, streaming platforms will become more valuable compared to the current TV channels. Anyways growth expectations are like they are going to conquer live streaming and replace cable tv but they are far away to get that and you cannot value the stock at a multiple like the company is going to achieve in the next 10 years or so.

Content costs might rise in the long-term so that earnings quality and profitability levels might decrease in the long-term… anyways I think Netflix has price power in its favor when it comes to negotiating with suppliers… so there’s a kind of uncertainty on how that aspect will evolve. This is an important aspect because if some series becomes very successful after failing a negotiation with Netflix, you might lose market share in favor of HBO or whoever gave them more favorable terms. A very good example has been Game of Thrones and it can also happen the same in favor of Amazon with the upcoming Lord of the Rings series. The competition for market share is fierce at the present with no clear winner though Netflix is now at the top.

In any case, the current bearish market sentiment could be an inappropriate market overreaction if considering the variety of strategies and opportunities that can be followed and the fact that this company holds the best industry competitive advantage by providing the best quality service so that if the company executes growth strategies successfully, the market is rather likely to be proven wrong.