Rosenblatt's Barton Crockett explains why he is 'skeptical' of Netflix making a bid for WBD

Key Concepts

• Netflix's Streaming-First Strategy: Netflix's primary focus is on its streaming service, with minimal engagement in theatrical releases.
• Warner Bros. Discovery (WBD) Assets: Iconic intellectual property (IP), a significant library, and a studio operation.
• Box Office Performance: Warner Bros. is a top contender globally in box office revenue, competing with Disney.
• Cultural Fit: The potential acquisition of WBD assets by Netflix raises questions about cultural alignment, particularly regarding theatrical releases.
• Library Deterioration: Content libraries require ongoing new production to maintain their value.
• Theatrical Motivation: New film production is heavily influenced by and tied to the theatrical release model and the preferences of directors and talent.
• Hollywood Trust: Skepticism exists within Hollywood regarding Netflix's commitment to theatrical releases if they were to acquire WBD's studio assets.
• Netflix's Earnings Per Share (EPS) Growth: Projections of significant EPS growth for Netflix, with a target CAGR of 28% over three years.
• Price-to-Earnings (P/E) Multiple: A projected 45x P/E multiple for Netflix, reflecting its dominant market position and historical performance.
• Comcast's Broadband Challenges: Difficulties in Comcast's core broadband business impacting its stock performance and acquisition capacity.
• Ellison Family: Mentioned as a potentially formidable competitor in any bidding process for WBD assets.

Potential Netflix Acquisition of Warner Bros. Discovery Assets

Barton Crockett, senior analyst at Rosenblot Securities, discusses the possibility of Netflix acquiring assets from Warner Bros. Discovery (WBD). He expresses skepticism about the likelihood of such a deal, primarily due to fundamental strategic and cultural differences.

Main Topics and Key Points:

• WBD's Iconic IP vs. Box Office Challenges: While WBD possesses "iconic IP," its significant reliance on the box office is a major hurdle. Warner Brothers is a global leader in box office revenue, competing directly with Disney.
• Netflix's Streaming-First Strategy: Netflix's stated strategy is "streaming first" and "box office hardly ever." This directly contrasts with WBD's theatrical focus.
• Cultural Fit Concerns: Crockett questions how these divergent strategies would "culturally fit together." He believes it would be "very difficult" for Netflix to "completely pivot" to become a major box office player.
• Hollywood's Trust Issues: Hollywood's trust in Netflix's commitment to theatrical releases is questioned, given Netflix's historical "casting aspersions on the whole idea" of theatrical distribution. This lack of trust could lead to significant pushback.

Step-by-Step Process/Methodology:

Crockett outlines a hypothetical scenario of breaking apart WBD's assets (library, studio, etc.) and pairing them with various players. However, he focuses on the challenges for Netflix:

1. Netflix acquiring the library: While possible, Crockett argues that libraries "deteriorate without new production."
2. New production dependency: New film production, especially on the movie side, is "very theatrically driven, theatrically motivated, theatrically culturally kind of tied into that universe of directors who and talent who want that."
3. Netflix's pivot difficulty: He finds it "really hard to fathom how Netflix can completely 180 pivot and do that."
4. Hollywood embrace and pushback: Netflix would face challenges in being "embraced by Hollywood" and would likely generate "a whole bunch of push back of people worried that they might shut down all of the movie production for one of the biggest studios into theaters." This would "cause an uproar" politically and within Hollywood.

Key Arguments and Perspectives:

• Crockett's Skepticism: His primary argument is that the cultural and strategic misalignment makes a Netflix acquisition of WBD assets unlikely.
• Supporting Evidence: The evidence presented is the fundamental difference in business models: Netflix's streaming-first approach versus WBD's theatrical reliance. The historical stance of Netflix on theatrical releases also serves as evidence for Hollywood's potential distrust.

Notable Quotes:

• "I think obviously WB has iconic IP. Um I think the challenging thing is the box office side of it."
• "Netflix's, you know, stated strategy is, uh, streaming first and really box office hardly ever. And, um, it's hard to see how those things would culturally fit together."
• "I think it would be very difficult for them culturally to completely pivot to become, you know, one of the biggest box office."
• "Libraries deteriorate deteriorate without new production. And the new production, at least on the movie side, is very theatrically driven, theatrically motivated, theatrically culturally kind of tied into that universe of directors who and talent who want that."
• "I think politically and in Hollywood would would be would cause an uproar."

Netflix's Price Target and Valuation

Crockett explains the basis for his "buy rating and a 1530 price target" on Netflix stock.

Main Topics and Key Points:

• Earnings Per Share (EPS) Growth: The price target is predicated on Netflix achieving "very good growth in um um earnings per share."
• CAGR Projection: He models a "28% kagger over uh 3 years with 20 26 in the middle of that."
• P/E Multiple: The assumption is that Netflix can "trade at a 45p," which is a "premium to the growth."
• Justification for Premium: This premium is justified by Netflix's "dominant position," "secularly kind of strong position," and its "past kind of tendency to beat and raise so estimates move up and that multiple can move down."

Key Arguments and Perspectives:

• Growth-Driven Valuation: The valuation is primarily driven by expected strong EPS growth.
• Market Dominance Justifies Premium: Netflix's leading position in the streaming market warrants a higher valuation multiple.
• "Beat and Raise" Tendency: The company's history of exceeding earnings expectations and subsequently raising future guidance supports the optimistic outlook and the premium multiple.

Comcast's Position and Potential Role

The discussion touches upon Comcast's potential involvement, especially given its stock hitting a 5-year low.

Main Topics and Key Points:

• Comcast's Acquisition Difficulties: Crockett believes Comcast would face "difficulties doing a big acquisition" due to challenges in its "core kind of broadband business."
• Impact of Broadband Pressure: The pressure on the broadband business has "really pressured the shares."
• Capital Allocation Concerns: Pivoting "a whole bunch of capital" to acquire WBD assets at a time when its stock is low is seen as a "long shot."

Key Arguments and Perspectives:

• Financial Constraints: Comcast's current financial situation, impacted by its broadband business, makes a large acquisition less feasible.
• Strategic Risk: Acquiring WBD assets while its own stock is at a low point presents a significant strategic risk.

Competitive Landscape and Bidding Process

The conversation briefly mentions potential competition in any bidding scenario.

Main Topics and Key Points:

• Ellison Family as Competitor: The "Ellison's" (referring to Larry Ellison and his family) are identified as a potentially strong competitor in any "auction or bidding" process.

Key Arguments and Perspectives:

• Formidable Bidders: The Ellison family is presented as a wealthy and capable entity that could outbid other potential buyers.

Synthesis/Conclusion

Barton Crockett's analysis suggests that while WBD possesses valuable assets, a potential acquisition by Netflix is unlikely due to fundamental strategic and cultural incompatibilities, particularly concerning Netflix's streaming-first model versus WBD's theatrical focus. Hollywood's trust in Netflix's commitment to theatrical releases is also a significant barrier. For Netflix, Crockett maintains a positive outlook, projecting strong EPS growth and justifying a premium valuation multiple based on its market dominance and historical performance. Comcast, on the other hand, faces internal challenges in its broadband business that would likely hinder its ability to pursue a large acquisition like WBD. The competitive landscape, including the potential involvement of entities like the Ellison family, adds another layer of complexity to any potential transaction.