Netflix Stock: Buy, Sell, or Hold? | The Motley Fool

In recent years, Netflix ( NFLX +0.89%) has presented a clear growth story for investors: It's the largest subscription streaming service, operating on a global scale, leveraging its operational efficiency and pricing power as it expands. But confusion entered the story earlier this month when Netflix announced a definitive agreement to acquire Warner Bros. Discovery 's ( WBD 1.47%) Warner Bros. studios and HBO's streaming business in a cash-and-stock transaction valued at $27.75 per WBD share, representing approximately $82.7 billion in enterprise value. The deal not only introduces risks to the business, but it may also inadvertently expose weaknesses. Ultimately, Netflix now arguably looks less like a focused platform with an attractive business model and more like one with a capital-intensive need to own more franchises and studios in order to continue growing rapidly. However, shares have pulled back sharply since the deal was announced. So, are these risks already factored into the price? Image source: Netflix. This deal changes the narrative To be clear, Netflix is a great business. Its third-quarter revenue rose 17.2% year over year -- an acceleration from 15.9% in Q2. And third-quarter free cash flow was $2.66 billion. Even more, the company expects its operating margin to expand meaningfully in 2025 compared to 2024, even when including a massive one-time charge related to a Brazilian tax dispute. Clearly, the streaming service specialist is not trying to make this massive acquisition to fix some major issue, because there really aren't any. But is the acquisition exposing a potential future weakness? Part of the bull case in recent years has been that Netflix can win with product quality and global reach, even as competitors spend heavily. The company has become well-known for its ability to create its own original programming and blockbuster hits, without relying heavily on licensing content from other studios. The Warner Bros. deal, however, suggests that Netflix's own content is on a more level playing field with other studios than investors might have assumed. Previously, the story investors bought into was that Netflix was more efficient at creating and distributing content than its competitors. This meant investors were under the impression that Netflix could build out its content slate in a measured and efficient way. But, apparently, the assets Netflix wants to buy from Warner Bros. Discovery are worth $82.7 billion to Netflix -- and that's $82.7 billion that could have been spent on more incremental content creation and product development in the coming years. The acquisition will "improve our offering and accelerate our business for decades to come," said Netflix co-CEO Greg Peters in a press release about the deal. A mega-deal shifts Netflix from a model where content spending is adjustable to a massive investment that investors now have to speculate will work out well. Complicating matters, Netflix says it plans to maintain Warner Bros.' current operations. While this would help protect Warner Bros. creative studios, it also limits some of the potential synergies that could occur from a more streamlined approach...

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