Is Netflix's Plan to Buy Warner Bros. a Good Move for the Stock? Here's What Investors Need to Know About the Deal.

Netflix (NASDAQ: NFLX) made a surprise announcement this month: It's planning to buy Warner Bros., which is still currently part of Warner Bros. Discovery (NASDAQ: WBD). If the deal goes through, that company would split up, and Netflix would significantly expand its library, production wing, and streaming business through the acquisition of Warner Bros. (including its TV and movie studios), HBO Max, and HBO.

The transaction values those assets at $82.7 billion, including debt. This is a massive move for Netflix, and it has some obvious positives, such as adding popular HBO franchises and shows to Netflix's portfolio. However, there's more for investors to consider here than just that.

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The acquisition would add a lot of debt to Netflix's books

To complete this cash-and-stock deal, Netflix may end up adding as much as $59 billion in new debt to its books. As of the end of the third quarter, Netflix had just $14.5 billion in long-term debt.

Debt can be burdensome for a business, as it can limit future growth opportunities. Plus, it can add new costs. Netflix's interest costs last quarter totaled $175.3 million -- a modest sum in relation to its operating income of $3.2 billion.

The good news is that its strong free cash flow would position the company to chip away at that debt load over time. Over its past four reported quarters, Netflix generated free cash totaling just under $9 billion.

Warner Bros. hasn't been doing all that well

The outcome of Netflix's bid is far from a certainty, given both the need to get the deal past President Donald Trump and federal antitrust regulators, and the fact that Paramount Skydance recently re-entered the fray with a higher hostile bid for all of Warner Bros. Discovery -- not just the segment that it aims to sell to Netflix. But if Warner Bros. joins Netflix, the streamer would be the third entity it would be a part of within just the past few years. Back in 2022, AT&T spun off Warner Bros. and other assets after it abandoned its video streaming efforts.

The business it's currently part of, Warner Bros. Discovery, hasn't been doing all that well, either. Over the trailing 12 months, its net income was a paltry $482 million, a small fraction of the $37.9 billion the company reported in revenue during that time frame. That equates to a lowly profit margin of just 1.3%. Contrast this with Netflix, which has averaged a profit margin of 24%.

Netflix has proven that it can go toe-to-toe against the big studios and be successful by simply relying on its own content. Adding Warner Bros. to the mix could add all sorts of challenges, complexities, and costs to the operation. It could weigh down Netflix's already strong margins while adding a ton of debt to its books in the process.

Netflix shareholders may be better off if the deal falls through

Running a profitable streaming operation has proven difficult for many media companies. Netflix is the anomaly, not the norm. And while Warner Bros. has some strong brands, so does Netflix. At the end of the day, I don't think it needs Warner Bros. -- certainly not at this price.

Paramount Skydance's hostile bid could make matters worse, because if Netflix ends up in a bidding war and pays even more for Warner Bros., the deal will be even less attractive for investors. While the acquisition would be a huge opportunity for Netflix to grow its business and brand, it could take a long time to pay off, and even afterward, it may be debatable whether it was worth it.

Netflix's business isn't broken, and I think it would be just fine continuing along its current course. If this deal goes through, it could end up hurting the stock in the long run. But between the regulatory hurdles and the possibility of a bidding war, I don't think it'll end up happening.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.