NFLX Stock Surges 5% — Is Netflix About to Dodge a $83 Billion Bullet?

Just after noon, the trading screen turned green, and Netflix, Inc.’s stock had increased by over 5%. Not on a report with a lot of earnings. not on the number of subscribers. On a more intriguing note, though: relief.

Investors started placing bets that NFLX might abandon its proposed $82 billion acquisition of Warner Bros., which caused the stock to rise toward $82. Findings. The rise in shares on the prospect of restraint was remarkable in a market that is typically eager for expansion.

The amount of change that has occurred in the streaming industry over the last ten years is difficult to ignore. At one point, Netflix represented unbounded growth, with its subscriber numbers steadily rising, its global expansion speeding up, and its money pouring into original content. Building an empire seemed inevitable back then. Investors now appear more circumspect, possibly even wiser.

A lot of shareholders were offended by the proposed Warner deal. There were concerns because of its enormous scope, which included tens of billions of dollars, significant debt ramifications, and regulatory scrutiny. Perhaps the market just concluded that Netflix didn’t require such a risk.

The situation was further complicated by Paramount’s revised $31 per share bid for Warner, which sparked a new bidding drama. Wall Street’s response to NFLX stock, however, hinted at a more nuanced idea: perhaps losing the deal wouldn’t be a complete loss.

Inside the glass-walled campus of Netflix’s headquarters in Los Gatos, which is nestled into the undulating California hills, the atmosphere is probably less dramatic than the headlines imply. Engineers modify algorithms. Producers argue over scripts. Projected cash flow is examined by finance teams. Entertainment streaming to over 190 countries is the company’s main business, and it is still thriving.

It is also in a better financial position than many of its detractors realize. In the most recent quarter, revenue reached approximately $12 billion, an increase of nearly 18% year over year. Impressive for a business that relies heavily on content, profit margins are above 24 percent. Previously a weakness, free cash flow has significantly improved.

Valuation, however, always casts a shadow over the discussion. The price of NFLX is about 24 times forward estimates and 30 times trailing earnings. That is not inexpensive. It appears nearly restrained, though, in contrast to its position during the pandemic boom, when multiples were well above 50.

It seems like Netflix has grown up. The tenacious disruptor who mailed DVDs and the careless spender who pursued subscriber growth at all costs are gone. It now acts more like a well-known media company, even though it continues to experiment with gaming, live programming, and tiers that are supported by advertisements.

The scrolling ticker in a Manhattan brokerage office this week matched NFLX with businesses like Warner Bros. Discovery, Inc. and The Walt Disney Company. Once a new phenomenon, the streaming wars have subsided into a more subdued rivalry over pricing, advertising revenue, and intellectual property.

In the end, investors seem to think that Netflix’s discipline may be more important than ostentatious acquisitions.

You can’t help but notice the irony. Upon announcing its Warner bid, Netflix faced criticism for potentially overpaying for assets in a market that was consolidating. With Paramount circling with a higher offer, Netflix shares are rising on speculation that it may withdraw. Markets occasionally reward businesses for actions they take.

However, there is still uncertainty. Antitrust concerns have been raised by reports that the Department of Justice has been under pressure to examine the deal. Market concentration has raised concerns, according to Hollywood insiders. Netflix may face months of regulatory wrangling if it moves forward.

The underlying business, meanwhile, continues to change. The business keeps growing its ad-supported tier, which attracts viewers on a tight budget and generates extra income. Global growth is still consistent but not as rapid as it was in previous years. More care is being taken in managing content expenditures, striking a balance between local productions and popular series.

Without making another significant strategic change, it’s still unclear if Netflix can maintain double-digit revenue growth. In developed markets, subscriber growth has slowed, and rivals like Disney+ and Amazon Prime Video continue to pose a threat. Netflix still has a cultural edge, though, because its platform seems to be everywhere.

Investors appear to be adjusting their expectations. Instead of aiming for unrelenting subscriber gains, they are concentrating on cash flow, margins, and prudent capital allocation. That change could be the reason why prudence signals cause NFLX stock to rise.

As this is happening, it’s hard not to think back on Netflix’s past. It outlasted innumerable rivals, made it through the transition from DVDs to streaming, and survived the dot-com bust. It was founded in 1997. It is rare for businesses to undergo such a significant transformation without losing their essential identity.

The stock of NFLX has not retreated to its 52-week peak of $134 and is still above its 52-week low of $75. The middle ground is not ecstatic nor upset, but rather symbolic.

It’s unclear if the next phase will entail organic expansion, consolidation, or additional strategic changes. However, given the recent upswing, investors might favor a more stable Netflix that prioritizes growing its current empire over making big acquisitions.