The global streaming leader is no stranger to such air pockets. It has experienced others throughout its phenomenal expansion. The most recent, albeit dramatic, took place during the pandemic: subscriber numbers stagnated for four consecutive quarters, triggering a 75% plunge in market capitalization in the space of just a few weeks.
We are far from that kind of panic right now, even though the market in reality appears to be cautiously pricing in the ambitious bid to buy Warner Bros Discovery's streaming assets and studios, recently revised to ensure an all-cash payment, whereas the initial offer included a Netflix shares component - entirely opportune given the stock's record valuation at the time of the bid.
The transaction still has to clear antitrust scrutiny, overcome sabotage attempts by Paramount and the Ellison clan that controls it, as well as potential reluctance from WBD shareholders, who would end up with shares in the group's linear television activities, led by CNN, which Netflix intends to leave them via a spinoff ahead of the acquisition.
Versant's calamitous debut - Comcast's spinoff, which shed its linear TV assets - CNBC and MSNBC - in the stockmarket is not reassuring. Above all, based on the comparison with Versant, it tends to show that Netflix's offer overvalues those linear television assets. With these elements in hand, WBD shareholders could still try to push the price higher.
Beyond these big manoeuvres, in the background, it is still a clean sweep for Netflix, which ends 2025 with 325 million subscribers, versus 302 million at the end of last year. Operating profit and EPS both jump 28%. Free cash flow, meanwhile, rose 38% to $9.5bn, versus $6.9bn at end-2024.
(As usual), that cash profit is being entirely redirected into share buybacks - a point on which we once voiced reservations - even though they are now paused to finance a potential WBD acquisition on optimal terms.
At over 40x earnings, Netflix's valuation remains rich by every measure, all the more so as the group's capital structure should evolve with the addition of new debt that should represent between 4 and 6 years of free cash flow.
