Netflix stock is pricey even after Warner Bros.-induced selloff

(Bloomberg/Felice Maranz) — Shares of Netflix Inc. have tumbled since October, when the streaming giant became one of the presumed suitors for Warner Bros. Discovery Inc. But despite a 28% plunge in less than three months, the stock still appears to be too expensive to entice investors.

“Netflix is not a screaming ‘buy’ at the current price levels,” said Christopher Brown, a financial adviser in private wealth management at Synovus Securities, who added that he owns Netflix shares personally and Synovus does in its portfolios.

The shares, which fell about 2% on Friday to the lowest intraday since April 9, are currently trading for around 28 times expected earnings over the next 12 months, which is a higher valuation than video streaming rivals like Walt Disney Co., Amazon.com Inc. and Alphabet Inc., which owns YouTube, as well as the S&P 500 and Nasdaq 100 indexes. Paramount Skydance Corp., which also is bidding for Warner Bros. and operates Paramount+, trades for less than 13 times forward earnings.

However, the shares actually could be considered cheap relative to where Netflix historically trades. Over the past five years, the stock’s average multiple is 34.

Netflix has been selling off since the stock hit a high on June 30, losing a third of its value in that time. The stock plunged 10% on Oct. 22, its worst day in more than three years, after the company’s earnings report raised concerns about future growth. But Wall Street’s primary doubts about the streamer now center around its bid for Warner Bros., which is valued at $82.7 billion and would combine its service with Warner Bros.’ film and TV studios, HBO Max and HBO.

Netflix shareholders have been skeptical about the deal for months. They’re worried about the cost, the potential for a regulatory fight and whether the combination would succeed given Netflix’s limited experience with big mergers. The stock is the fourth-worst performer in the Nasdaq 100 since the end of June.

“Netflix looks to me like dead dollars for investors for a variety of reasons,” said Joel Kulina, managing director for TMT trading at Wedbush Securities. “Even before the Warner Bros. deal, the narrative was pretty uninspiring. A lack of an explicit guidance for 2026 has been an overhang for the stock since the last set of results.”

A Netflix spokesperson did not respond to a Bloomberg News request for comment.

Warner Bros. once again rejected a competing offer by Paramount Skydance on Wednesday, flagging financing as a key sticking point. On Thursday, Paramount reaffirmed its bid to buy Warner Bros. for $30 a share. At least for now, Netflix appears to have the leading bid, which has some Wall Street pros nervous.

“This deal just seems like it will keep a lid on excitement for months,” Kulina said. “Before the deal noise there was interest given the quality of Netflix’s own assets, but now there is just ‘too much hair’ to the story. And tech investors haven’t shown much patience with stories with any hair on it, see Amazon and Microsoft underperformance as evidence of this.”

The stock was recently downgraded to hold at CFRA, which cited concerns about the deal. “Acquisitions haven’t been Netflix strategy for decades, and Warner Bros.’s high debt presents risks,” analyst Kenneth Leon wrote in a note to clients on Monday.

Even if Netflix is a better match for Warner Bros., the questions of regulatory and integration risks, and whether Netflix will end up overpaying, are hanging over the stock price, according to Conrad van Tienhoven, a portfolio manager at Riverpark Capital. However, he considers the shares appealing if the current offer holds.

“My view is that if they buy the assets at or around their current bid, I’m a buyer of the stock,” van Tienhoven said.

In terms of Netflix’s valuation, the company’s price-earnings to growth, or PEG, ratio of just over one may be a “more sensible metric, Synovus’s Brown said. With the stock at $90.53 as of Thursday’s close, he sees “$102.50 to $109.70 as a near-term rebound price before the end of the first quarter.” That represents a 13% to 21% climb, which he sees as realistic “provided that Netflix can meet or exceed their fourth-quarter guidance” when the company reports earnings on Jan. 20.

Analysts expect Netflix to report adjusted earnings of 56 cents per share on revenue of $12 billion for the fourth quarter.

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Earnings Due Friday

• No major earnings expected

–With assistance from Neil Campling, Subrat Patnaik and David Watkins.

(Updates shares)

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