To Buy Netflix? Reed Hastings' Dream, Jeff Bezos' Nightmare

| About: Netflix, Inc. (NFLX)

Here's the full note issued by Michael Pachter of Wedbush Securities, received via email, where he contends Netflix (NASDAQ:NFLX) split itself in two to prime its streaming division for a sale to (NASDAQ:AMZN):

We think AMZN is a likely buyer of the NFLX streaming business. The background is:

Amazon has been rumored to be entering the streaming business for at least 18 months, with little progress or news;

Coinstar (NASDAQ:CSTR) announced an imminent partnership with a streaming company 18 months ago, and has been radio silent since;

Netflix's recent moves made no sense on their own. The company separated its DVD and streaming businesses, renamed its DVD service, broke off integration between the two businesses, established separate billing, and appointed a CEO for DVD. We concluded that there must be a rational explanation; and

Amazon cannot own physical assets in most states without collecting sales tax on its core business in those states, which would cripple its core business.

We therefore concluded that there was a rational explanation for the apparently boneheaded moves by Netflix - it became clear to us that Amazon is buying the streaming business.

We think that:

Renaming the DVD brand was implemented to place all Netflix brand equity in the streaming brand;

Separation of the businesses was implemented to insulate streaming from DVD for "nexus" purposes;

The appointment of a CEO for DVD was done to allow Qwikster to be the remaining asset of Netflix Corporation, with Reed Hastings going to AMZN;

AMZN can buy without sales tax concerns;

The split-up allows a federal income tax-free sale (stock-for-stock);

Amazon's purchase of streaming gives them a huge lead, eliminates its key competitor, speeds up their entry, and allows them to capture the Netflix brand equity.

We think the price could be significantly higher than the numbers in our note, if Amazon sees large synergies.

Of course, Netflix CEO Reed Hastings would likely love to see Amazon - or an Amazon peer - do what Pachter speculates. It solves his top problem - finding the cash to pay for current content obligations as well as future ones. Remember, Netflix owes $2.4 billion in licensing fees over the next five years, according to its last 10-Q, and that number will only grow bigger. Given Netflix's current cash and subscriber situation, it cannot possibly keep the lights on. As I have said all along, a company with deep pockets easily can.

That said, buying Netflix does not feel like a Jeff Bezos move. Sure, Amazon is in the hunt for Hulu, but does it really want to buy Netflix and inherit $2.4 billion-plus in costs, not to mention Netflix's international expansion mess, as well as an unsustainable business model?

I've never viewed Amazon as a company that wants to get knee-deep into the tablet or video streaming businesses. I think it prefers to dabble with just enough of an offering to drive customers to Prime memberships and its e-commerce core.

Over the last several quarters, Jeff Bezos has already sacrificed the bottom line by plowing cash back into the business. Investors understand that Amazon tends to generate impressive ROI, therefore they have not punished the stock. In fact, they've pushed it to repeated 52-week highs, as of late. As an AMZN bull, a NFLX purchase would, at the very least, cause me to stop recommending the stock.

I don't see Amazon being the sucker that, for all intents and purposes, bails Reed Hastings out by giving him access to a war chest full of cash. Hastings will have to find another suitor or another way (e.g., selling Qwikster, doing a secondary, etc.) to keep Netflix alive. Jeff Bezos does not strike me as the type of guy to take his eye off of the ball.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.