- Netflix shares fall 5% in pre-market trading
- Investors spooked by forward revenue guidance and suspension of share buybacks
- Q4 revenue and earnings beat expectations
- Shares have been falling since Warner Bros bid interest first confirmed
- Market worried about Netflix overpaying to secure the deal
Dan Coatsworth, head of markets at AJ Bell, comments:
“Netflix’s shares have been in decline since it first announced plans to buy Warner Bros as investors worry it will potentially overpay amid a bidding war with Paramount. The downward share price trend has now been extended further by negative factors in Netflix’s latest results.
“The decision to pause share buybacks until the Warner Bros deal is in the bag has not gone down well. Buybacks have a positive effect on earnings per share by reducing the share count, so the removal of this carrot leaves investors unfulfilled.
“Revenue guidance for the first three months of 2026 also implies minimal gains quarter-on-quarter, causing investors to fret.
“The market is not happy with the situation, clouding Netflix’s latest results which revealed better than expected fourth quarter sales and earnings.
“It’s easy to see why investors are grumpy. Netflix was doing fine on its own without resorting to large M&A deals. It had perfected the recipe for success and did what every company would do in this situation – rinse and repeat. It churned out hit after hit with its TV shows and films, and subscriber numbers kept ticking higher. Earnings progression was fuelled by subscription price hikes, advertising revenue, and merchandise income.
“But Warner Bros appears to be the prize it couldn’t ignore, with the scope to bring a rich library of content inside the Netflix empire and a host of production facilities to help keep churning out hits.
“It’s rare for a ready-made bundle to be on the market, and it is understandable why Netflix’s management felt the need to bid. However, the negative share price reaction implies the market is worried the deal might cause indigestion if it takes a long time to earn a positive return on investment. There is also the potential for a significant change to how Netflix operates, not to mention that it could potentially represent a nail in the coffin for the cinema industry more broadly.
“The latest twist in the story is Netflix shifting its bid to an all-cash deal, albeit not raising the overall price which shows some restraint. Cash deals typically trump a mixture of cash and shares or all-share deals as investors on the receiving end of a bid tend to want something they can spend today, not paper that fluctuates in value.
“Warner Bros’ shareholders might be swayed by Netflix structuring its deal in cash, but it’s not a slam dunk. They ultimately want the best price possible, and it doesn’t look like Paramount is ready to back down in the fight. The prospect of another counter bid is clearly worrying to Netflix’s investors – not because the company might lose the bid, but because it might end up paying too much.
“The latest quarterly results show that Netflix is doing just fine with its current strategy. Stranger Things’ final season has helped to bring in a swathe of new subscribers. There was a multitude of other big-name hits including Nobody Wants This and Frankenstein to draw in the crowds. Netflix’s foray into live sporting events continues to work well, and there’s a good range of releases that have widespread appeal in the coming months.
“Netflix’s goal is for content spend to grow at a slower rate than revenue, thereby enhancing margins over time. Plans to licence more content from third parties should help to keep existing customers engaged and bring in more viewers.
“Netflix investors might be pleased if their company fails in its quest to win Warner Bros. However, that would then shift the debate to whether a successful bid from Paramount creates a more serious competitor. The picture is unclear for Netflix investors in either situation, meaning share price volatility could remain in motion for some time.”
