Should You Sell Netflix Stock Before It Wins the Warner Bros Takeover?

Netflix (NFLX) shocked the entertainment industry and the stock market with its blockbuster bid to acquire Warner Bros. Discovery’s (WBD) premium assets, including the iconic Warner Bros. studios, HBO, HBO Max, and a vast library of franchises like Harry Potter, DC Universe, and Game of Thrones.

Announced on Dec. 5, the deal values the assets at approximately $72 billion in equity (with an enterprise value of $82.7 billion), structured as a mix of cash and stock. The move follows a competitive bidding process involving rivals like Paramount Skydance (PSKY) and Comcast (CMCSA). While the acquisition promises to create a streaming powerhouse, it has sparked debate among investors about risks, including debt, integration challenges, and regulatory scrutiny. The question for investors is, should you sell NFLX stock before it wins the bid?

The market’s response to the Netflix-Warner Bros. deal has been decidedly negative for NFLX shareholders, reflecting concerns over the financial and strategic implications of such a massive transaction. Although Netflix says the deal is all about “growth,” investors appear wary of Netflix’s shift from its traditional organic growth model to a large-scale acquisition, especially one involving Hollywood assets.

NFLX stock closed at $93.50 per share on Tuesday, Dec. 23, down 6.7% from where it traded before the deal news. Despite the pullback, the stock trades at 10x sales and 37x forward earnings, a premium multiple that underscores high growth expectations but also indicates it remains vulnerable to further setbacks.

The deal’s structure adds to the worries. Netflix will pay $23.25 in cash and $4.50 in stock per WBD share (subject to a collar), requiring it to drain its cash reserves and potentially raise additional capital through debt or issuing equity. This comes at a time when interest rates remain elevated, increasing borrowing costs and leverage risks.

Integration poses challenges, with Netflix’s data-driven, agile culture contrasting with Warner Bros.’ traditional Hollywood operations. It raises fears of execution risks similar to past media mergers that destroyed value. Fortunately, the deal excludes WBD’s declining linear TV assets (like CNN and TNT), which Warner Bros. will spin off as Discovery Global in late 2026 before closing.

However, Paramount Skydance launched a hostile all-cash bid for the entire WBD at $30 per share (valuing it at $108 billion) shortly after Warner Bros. accepted Netflix’s deal. Although WBD’s board rejected this as inferior and risky – citing financing uncertainties and lower certainty – Paramount has plowed forward.

While WBD urges shareholders to support Netflix’s deal as superior, critics, including unions and industry groups, have voiced opposition, fearing job losses and reduced competition. There are potential regulatory roadblocks that also must be circumvented. Not only might the Justice Department block the deal or require divestitures or other changes, other countries, which seem have increasingly thwarted large megamergers, could also intervene.

Wall Street maintains a generally positive stance on Netflix despite the deal. The consensus recommendation is a “Buy” or “Moderate Buy,” based on ratings from 43 analysts (e.g., 28 “Buy,” 13 “Hold,” and 2 “Sell”). The average 12-month price target is $128.99, with a high-end $152.50 per share and $92 on the low side.

Analysts highlight Netflix’s strong subscriber growth, advertising momentum, and content advantages, viewing the Warner Bros. deal as a long-term positive for its content moat. However, some have tempered their price targets because of the regulatory and execution risks. Firms like Wolfe Research recently lowered their target to $121 while staying bullish. Both Pivotal Research and Rosenblatt Securities dropped their targets to $105 per share. Barchart has a technical “Strong Sell” rating on NFLX stock.

While the Netflix-Warner Bros. Discovery deal offers transformative potential, there are numerous near- and long-term risks facing a merged entertainment behemoth. NFLX stock is not an automatic sell, but I wouldn’t be rushing in to buy even at these lower stock prices.

On the date of publication, Rich Duprey did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com

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