Netflix And Verizon Are Better Off On Their Own

| About: Netflix, Inc. (NFLX)
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The media have been reporting that Netflix (NASDAQ:NFLX) may become acquired by any number of companies. Specifically, rumors have surfaced this week Verizon (NYSE:VZ) may be interested. These reports are likely nothing more than fantasy. Instead, it is much more likely Netflix will go it alone.

Sure, you can argue there are synergies. An acquirer would benefit from immediate scale. And the acquirer would save a lot of time, effort and energy in putting together content deals, which already exist at Netflix. But the idea Netflix shareholders, including CEO Reed Hastings, would be interested in unloading the company at such a steep discount to where it traded earlier this year are far-fetched.

It's likely Mr. Hastings is a bit tired and frustrated by stumbles this past summer and resulting subscriber cancellations this fall. But Netflix clearly has a vision. And this vision is focused on expanding streaming in the U.S. and building its brand overseas.

It's likely Mr. Hastings would love an opportunity to see this strategy to completion and prove it has been worth the effort. To that point, it's hard to imagine an acquirer wouldn't want to avoid clashing with Mr. Hastings, which suggests any combination would result in his separation - making a deal even less likely.

The upside to Netflix being acquired would clearly come from access to cash for growth. Obviously, a large company such as Verizon, which generated $5.1 billion in free cash flow in Q3, or Comcast (NASDAQ:CMCSA) has the money Netflix needs. Arguably, Netflix existing as a small piece of a big pie would also take the heat of leadership allowing it to focus less on media gaffes and more on the business at hand.

But the bigger question lies in why companies like Verizon, which already reach millions of homes and consumers, would need Netflix. For its part, Verizon has already made investments to merge terrestrial with celestial. Just last week, the company announced a $3.6 billion deal to acquire unused spectrum from SpectrumCo, which is roughly 95% owned by Comcast and Time Warner (NYSE:TWX). The deal not only gave Verizon a thicker pipe, but came with a cross-platform marketing pact. There's no doubt the future is seamlessly delivering content across TV, PC and mobile devices. Of course, you'll need the right content to make that work and the right infrastructure to handle it. It appears Verizon already landed an opportunity to do that.

And don't forget, Verizon already passed on Hulu.

Netflix shares currently value the company north of $4 billion. In July, the company had a market cap of 12 billion. Long-term shareholders would be done little service by any offer in the low one hundreds. And any offer higher for a company which is expected to generate losses would be hard pressed to add value. Particularly given customers can be bought more cheaply leveraging its existing customer base.

Instead, Netflix should keep its focus where it should have been: on its customers. There's evidence leadership has gotten the message. And, at some point customer attrition will end and growth will return. Netflix for its part remains a troubled play, and investors would be better served staying on the sidelines until there is clarity in subscriber growth. After all, buying rumors is a very risky strategy.

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