So what is behind the unfriendly market reaction?

The disconnect between Netflix’s ambitions and its stock’s performance stems from a clash between long-term strategy and short-term financial realities, according to two entertainment analysts and a corporate lawyer who specializes in large acquisitions. While Netflix is ​​still profitable and aggressively expanding its content library and advertising infrastructure, the market is focused on shrinking margins and that aforementioned big deal—especially the uncertain cost of a potential acquisition of Warner Bros.

Melissa Ottothe head of visible Alpha Research at S&P Global, bluntly: “It will be dead money until we get a meaningful factor.” This means that he saw the recent sale of Netflix from the $ 109 range, before the announcement of the Warner deal, to the low $ 80s, because the market has repressed the large streamer in the reader, meaning that it is likely to sell “range bound” for the foreseeable future until the narrative changes. Another out-the-box hit like Stranger Things or Squid game not a factor for him, he explained: “What we want to see is how a deal with Warner Brothers will drive revenue growth and fuel cash flow generation.”

Some analysts are more bullish on the stock but are forced to admit that Otto’s takeover speaks volumes for investors. “I think what upsets the Street is the content spending, you know, the change of offer for Warner with all the money,” said analyst ARK Invest’s Nick Grouswhich aims to amend Netflix’s all-cash deal with the Warner sweepstakes, along with its plan to boost content spending. ARK, which usually focuses on the long term, is “excited” about where Netflix is ​​going, he added. “From our perspective, especially if they can close the Warner acquisition, I think you’re looking at an entertainment giant.”

Otto said the Street was not moved. Netflix may be a “deal stock” to investors today, meaning its fundamentals are likely more important than the outcome of merger negotiations. “The whole investment thesis is now a snoozer until we get more clarity on the deal.”

Netflix did not respond to a request for comment.

‘The market is a fickle beast’

In the deal, Anthony Sabino in St. Johns law school in Queens, New York, said he is excited about the next phase of what he said before luck is one of the most interesting M&A deals of the year. Shouting that “cash is king in America, always will be, God willing,” Sabino said it also sends a big message to investors: “I’m sure it’s a big effort by Netflix to say, ‘Okay, listen, we’re going from cash-stock to all-cash. He noted that it levels the playing field with the rival offer from Paramount, whose biggest weapon is the consideration of money. money and you can’t question that. Money is cash.” On the other hand, he said—while saying he’s just a “plain old country lawyer” and not an investment analyst—”the market is a fickle beast, it’s a fickle herd.”

Sabino said he thinks some in the market are a little concerned about moving to all cash, and “no one has cash sitting around.” This means that Netflix will have to finance the bid somehow, meaning debt, and Netflix has already announced that it has stopped its buyback program, which current investors may not want to hear. Everyone is crumbling, he says, of that sentiment: Netflix shareholders saying “Wait a minute, how much are we going to hock to buy these guys?” The reason is that the market sees it as bad.

The magic margin question

Beyond the takeover drama, investors are troubled by Netflix’s forward guidance, said S&P Global’s Otto. The market expected profit margins of around 32.75% but the company is guiding closer to 31.5% – a sharp change from the growth that Netflix has made in the last few years.

“They have this very good profitability story, taking their margins from basically 18% to essentially 30% in a couple of years,” Otto said, noting that Netflix has pulled it off while also providing a steady output of must-see content and growing its revenue. Unfortunately, he said, that narrative has been lost over the past few quarters. “If that story starts to feel like it’s fully priced, or slowing down, or there’s uncertainty around it, that’s probably going to hurt the market,” Otto said.

Grous agreed that the Street is confused about margins, with Netflix’s reduced guidance indicating a return to the company’s pre-COVID penchant for big spending, with content costs trending toward $20 billion this year and “no signs of slowing down.”

That’s not the only throwaway to investors accustomed to Netflix’s recent track record of relentless growth in users and revenue. The latest earnings call, and some of the analyst questions, had a pre-pandemic vibe, Grous said, with a big focus on the time spent on the platform and how mature Netflix has become as a company, ie, no longer offering much growth. This happened because investors had to infer growth from engagement growth, since Netflix stopped reporting subscriber numbers, he said.

However, Grous said he saw strength in other areas of the business in the quarter. He highlighted greenshoots around advertising as well as what he sees as Netflix’s ace-in-the-hole: the live business. The company has seen success with boxing matches and celebrity roasts, and Grous pointed to a recent example of Netflix thinking creatively in this area: livestreaming a climb the death-defying skyscraper by Alex Honnold. “I think Live is going to be a much bigger part of the story for them,” and that should be exciting, Grous said.

How long will Netflix be a deal stock?

The most important story for Netflix in the short term isn’t about programming or the stock market—it’s about “the purest essence of capitalism,” said St. Johns law school in Sabino, taught the bidding war for Warner Bros.

Netflix’s recent move to make its all-cash offer has turned up the heat, and there’s the potential of a “white knight” — someone who isn’t Netflix or Paramount — riding onto the scene to take the Warner Bros. prize. That white knight is none other than Barry Diller, the former Paramount CEO who was indirectly involved in the creation of Time Warner in the 1980s, and was directly involved in the bidding war for Paramount in the 1990s. The Wall Street Journal reported this week that Diller expressed interest in acquiring CNN from Warner last year but was rebuffed. According to the report, Diller remains interested in the news network, an asset in the Warner Bros. portfolio that Netflix has yet to show any interest in.

In other words, the Netflix-Warner takeover saga may have a lot of room to run, and from Melissa Otto’s bearish perspective, that’s not good news for investors looking at this stock deal. Until there is transparency about the debt structure of the WBD deal and proof that the new ad-supported model can optimize cash flow, the stock may remain stagnant, he warned. “Investors are not really tastemakers … They just want to see what will ultimately translate into earnings growth.”

Editor’s note: the author works at Netflix from June 2024 to July 2025.