Netflix Could Be A Prime Takeover Target Now

|
 |  Includes: AMZN, GOOG, GRPN, NFLX
by: Hawkinvest

Netflix (NASDAQ:NFLX) was trading at record highs earlier this year at over $300 per share, but now the stock trades for just over $100 per share. This huge change in valuation opens the doors to a potential buyout deal or strategic investment in the company. In the past, both Google (NASDAQ:GOOG), Amazon.com (NASDAQ:AMZN) and others have been rumoured to have interest in buying Netflix by some analysts and investors, so with the stock trading for about one-third of the peak valuation hit just earlier this year, Netflix is much more of a prime buyout target now. Netflix has about 52.5 million shares outstanding which gives it a market capitalization of about $6 billion. Back when Netflix was trading for over $300 per share earlier this year, that market capitalization was closer to $16 billion, so a deal now could save many billions for the buyer.

In a recent ZDNET.com article it details why Netflix might have been trying to split off the streaming business in order to sell that to Amazon.com. It goes on to explain that Amazon.com is most likely trying to avoid having to collect sales taxes. The article states "The tax issue is that an acquisition of Netflix’s DVD business would give Amazon more sales taxes to collect. Pachter explained: One of the impediments to Amazon’s purchase of Netflix outright is the state sales tax rules. Under the rules in most states, any company with a physical presence in that particular state (a “nexus”) is required to collect sales taxes for all retail transactions in that state. Amazon has carefully avoided nexus with virtually every state that collects sales tax, providing it with a significant pricing advantage over its brick-and-mortar competitors. Should Amazon have purchased Netflix’s business outright (including the DVD-by-mail business), the company would have found itself subject to sales taxes in virtually every state that imposes sales tax, due to Netflix’s extensive network of distribution centers." Read more here.

Even though this analyst thinks that the tax issue could be a possible deal-killer for a company like Amazon.com, there is always a way to create a deal that could address the tax issues and Amazon.com has successfully faced this challenge many times. Furthermore, chances are that Amazon.com will one day have to collect the sales taxes anyhow and a number of states are working to force sales tax collection on the company now. The international expansion potential of Netflix is huge and it doesn't make sense to not consider a deal over sales taxes. Even if Amazon.com is not a suitor for Netflix, other companies like Google (GOOG) could be. Google has plenty of cash and has been making acquisitions. It does not appear that sales taxes would be an issue for Google and Netflix would bolster their Youtube.com business. For both Amazon.com and Google, a buyout deal for Netflix would be a great way to capture the growth expected in online streaming, especially since Netflix appears to be having success in Canada and emerging market regions like Latin America. Because Amazon.com shares are richly valued at about 100 times earnings, it absolutely makes sense for them to be buying assets like Netflix that are trading at a much lower valuation, especially if they can get around the sales tax concerns. For Google, the deal makes sense due to the growth potential and their expansion into streaming and mobile devices. Here is a closer look at these companies:

Netflix is a leading provider of movie rentals through online streaming and by mail. Netflix stock has been under siege for the past several weeks due to a flurry of news which has many led investors to sell shares. Recently there was an announcement that licensing negotiations ended with Starz, then Netflix raised prices on subscribers which prompted anger, then Netflix decided to split the streaming business apart and since decided to reverse course on that decision. All these events have shaken investor confidence in management and the stock price has taken a beating. The stock looks cheap now, and whether or not a buyout deal comes, the stock is likely to rebound after hitting new 52 week lows.

Here are some key points for NFLX:

  • Current share price: $113.67
  • The 52 week range is $103.13 to $304.79
  • Earnings estimates for 2011: $4.49 per share
  • Earnings estimates for 2012: $6.48 per share
  • Annual dividend: none

Amazon.com is a leading online retailer that has grown into much more than books. Amazon is involved in video streaming, cloud computing, online deals similar to Groupon (NASDAQ:GRPN), and more. This stock trades for about 100 times 2011 earnings. With Netflix now trading at a much lower price to earnings ratio, a deal could be paid for with Amazon.com's richly valued stock.

Here are some key points for AMZN:

  • Current share price: $237.43
  • The 52 week range is $151.40 to $244
  • Earnings estimates for 2011: $1.96 per share
  • Earnings estimates for 2012: $3.21 per share
  • Annual dividend: none

Google, Inc. offers a wide variety of online products and services ranging from advertising online to email, maps, and more. Google has been one of the leading innovators in the Internet sector and that should continue. Google has the cash to make more acquisitions and Netflix could be a great way to tap the potential growth of online and mobile streaming. Google recently announced a deal to buy a restaurant ratings company called Zagat, and more deals could be coming.

Here are some key points for GOOG:

  • Current share price: $549.56
  • The 52 week range is $473.02 to $642.96
  • Earnings estimates for 2011: $35.48
  • Earnings estimates for 2012: $41.94
  • Annual dividend: none

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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