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Netflix’s Kryptonite: A Low-Risk Buyout Opportunity

Netflix’s Kryptonite: A Low-Risk Buyout Opportunity

Article Highlights:

  • Netflix shares are up 455% since 2014.
  • However, the company carries $13.5 billion of long-term debt.
  • Meanwhile, another media company generated $2.2 billion in free cash last year.

Every hero has his or her kryptonite.

Netflix’s massively disappointing report last week showed where this stock market hero’s biggest weakness lies.

It also presents a low-risk buying opportunity for a few old-media “dinosaurs” as Netflix CEO Reed Hastings contemplates his next move.

See, even as Wall Street analysts point to higher subscription prices and slower subscriber growth as the problem last quarter, Netflix has two bigger challenges:

  1. The lack of a huge catalog of movie and TV properties.
  2. It has just one platform — streaming via app — to show its wares.

Both have been advantages until now.

Ever since House of Cards premiered at the start of the decade, Netflix was where you went to watch cutting-edge content.

By subscribing to Netflix, you could also tell the TV networks (with their warmed-over video pablum) and your local cable provider (with its ever-rising monthly fees) — to shove it.

Now, most of these old-line media dinosaurs are streaming their content too, just like Netflix.

Reruns Bring in Cash

Unlike Netflix, they also own huge portfolios of preexisting TV and movie titles.

Yes, it’s all stuff we’ve seen about a million times — at the theater or on broadcast TV, DVD or countless rerun channels.

Why is that an advantage?

Each time the title gets shown, it brings in a bit more cash. And let’s face it: Many are shown dozens of times a day on multiple channels and platforms.

Since each title was paid for years ago, its cost to the media company is essentially nothing.

Viacom Inc. (Nasdaq: VIA) is a good example of the opportunity at hand for smart investors.

Better known for its cable TV properties such as Nickelodeon, it’s only been in the streaming game for a few months with its Pluto TV app.

The company’s plodding nature is a big reason why the stock is down 55% since 2014:

Viacom Is Late to the Streaming Game

Netflix’s massively disappointing report last week presents a low-risk buying opportunity for a few old-media “dinosaurs” as Netflix CEO Reed Hastings contemplates his next move.

(Source: TradingView.com)

From that perspective, Netflix is the clear winner, right?

Netflix shares are up 455% since 2014. Its market cap is 11 times larger than Viacom’s puny $12 billion valuation.

But here’s the rub…

The Dinosaurs Strike Back

All those reruns of Viacom-owned movies, TV shows and cable programs add up. The company generated $2.2 billion in free cash last year for its shareholders.

Netflix, on the other hand, lacks an extensive catalog of movie and TV titles. It has to keep developing new content all the time — a very expensive endeavor.

So it’s no surprise Netflix was cash-flow negative to the tune of $2.8 billion.

It’s the same story for the ball and chain called long-term debt. Netflix keeps borrowing more and more.

The company carries $13.5 billion on its balance sheet — up from less than $1 billion five years ago.

By comparison, Viacom’s debt keeps shrinking — $8 billion currently, down from $12 billion in five years’ time.

So here’s my point — and my prediction…

Viacom’s stock is a good buy here. Not just for you, but for Netflix as well!

The Next Step for Netflix

It sounds crazy, I know. Feel free to scoff.

But Netflix needs content and cash flow.

So, the company has a choice. It can pile on another $12 billion in debt, like it did in the last three years…

Or Netflix could use that money to buy Viacom — with its thousands of cash-generating movies and TV programs — for the same price.

Best of good buys,

Jeff L. Yastine

Editor, Total Wealth Insider

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