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Why Netflix Might Make a Tempting Acquisition Target

Netflix (NASDAQ: NFLX) has had a challenging 2022 so far. The company reported a loss of 200,000 subscribers in its fiscal first quarter, and it expects to drop another 2 million in Q2. This exodus of subscribers comes as the company’s stock price has declined. Netflix’s shares are currently trading around the $180 mark, far below the peak of approximately $690 per share in late October 2021. Adding to the woes, Goldman Sachs has downgraded Netflix to sell, citing concerns about a potential recession.

Regardless, Netflix still has over 220 million subscribers, making it the biggest subscription video-on-demand (SVOD) service in the world. For other tech companies with deep enough pockets, this alone could make Netflix an attractive takeover target — especially to those looking to move further into the subscription services arena.

Image source: Getty Images.

Netflix has a plan

Netflix has acknowledged its challenges, and it’s working to stem subscriber losses. The streamer is openly considering a cheaper ad-supported tier, and it’s testing a new pricing model in some Latin America countries, charging users slightly more if they share their accounts with other households. Notably, Netflix has identified another area of potential growth: Gaming.

Netflix launched its mobile games hub in November 2021, and while the company has not broken out download numbers, it’s certainly bullish about the prospect of games becoming a key part of its service. During Netflix’s Q1 earnings call, Chief Operating Officer and Chief Product Officer Greg Peters described gaming as “a top-level priority” for the firm, noting that games linked to Netflix Originals are being viewed as a way to “drive more people to sign up for [the service].”

SVOD and subscription gaming are converging

Netflix is not the only company offering on-demand video content and game downloads. Amazon has operated its Prime Video service since 2006, and most recently got into cloud gaming with Luna. Elsewhere, Apple has Apple TV+ and its Arcade platform. It’s not an enormous leap of imagination to consider how Netflix and its library of original content could be absorbed into an Amazon Prime subscription or Apple One bundle.

Of course, one thing that might prevent Amazon or Apple from kicking the tires on a Netflix acquisition would be the looming possibility of regulators impeding such a deal. In 2011, AT&T and T-Mobile tried to merge, only for the arrangement to be flattened by both the U.S. Department of Justice (DOJ) and the Federal Communications Commission. And though any such tie-up in the streaming space would likely not be a straight comparison, the DOJ cited the threat to consumer choice when it went after the deal between AT&T and T-Mobile.

Still, while Netflix, Amazon, and Apple are all getting into the games business, two of the biggest names in that universe — Microsoft and Sony — are not active in the SVOD space.

Microsoft operates subscription-based game service Xbox Cloud Gaming, as well as offering movie and TV show rentals and purchases via its online store. Sony has on-demand subscription cloud gaming offering PS Now, and in the past it has also let PlayStation customers rent and buy content through its in-console store. It even once had an over-the-top TV service dubbed PlayStation Vue.

With this in mind, a tech giant keen to bolster its subscription offerings might conceivably start eyeing Netflix as a takeover target. And with the streamer’s current P/E ratio sitting around 16 — compares to a five-year average of 115 — it might only take a few more rough quarters before a takeover offer appears.

Fool contributor Tom Wilton has business dealings with Netflix, but holds no financial position in any companies mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Netflix. The Motley Fool recommends T-Mobile US and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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