Netflix Stock Just Keeps Falling. Is It Finally a Buy?

After a prolonged period of strong performance, Netflix (NASDAQ: NFLX) stock has been under pressure recently. The timing is not a coincidence. The company just signed for a massive strategic (but risky) shift, prompting investors to reassess what they think the streaming service specialist's stock is worth.

In early December, Netflix entered into a deal to buy the studio and streaming assets of Warner Bros. after Warner Bros. Discovery (NASDAQ: WBD) completes a separation of its Global Networks business into a new company called Discovery Global. The deal values the assets at roughly $72.0 billion in equity value and about $82.7 billion in enterprise value.

The problem is twofold: Investors don't seem to like the deal, and it's going to take a long time for the deal to close, if it even closes at all. Specifically, Netflix expects it to take 12 to 18 months to close.

In short, uncertainty about this deal is weighing on the stock.

Image source: Getty Images.

A deal that changes the story

For years, Netflix has benefited from a relatively clean narrative: scale in streaming, rising engagement, improving margins, and growing free cash flow.

But this acquisition muddies that story.

First, the deal is complex. The transaction is both large and multi-step, as it depends on Warner Bros. Discovery completing the Discovery Global separation first, which Netflix expects to occur in the third quarter of 2026.

Then there is uncertainty. Competing bidders have already emerged, and Warner Bros. Discovery has had to publicly push back on Paramount Skydance's efforts, while reaffirming its support for the Netflix agreement. That kind of background noise can keep investors cautious even if Netflix ultimately closes the deal.

Finally, there's the fact that Netflix plans to maintain Warner Bros.' current operations, increasing the operational complexity of its business. Netflix believes that combining the two companies will lead to at least $2 billion to $3 billion of annual cost savings by the third year, and that it will become accretive to generally accepted accounting principles (GAAP) earnings per share by year two, but are these exciting enough figures to justify the risks of the deal and the increased complexity of its business?

Rapid growth

Another reason the stock may have been sliding is that the company was already doing exceptionally well without a big acquisition. Netflix's third-quarter revenue rose 17% year over year, and it guided for this growth rate to persist in Q4.

Even more, Netflix has a catalyst rising up in its advertising business, which is still small but growing extremely quickly.

"We are now on track to more than double our ads revenue in 2025 (still off a relatively small base)," management said in the company's third-quarter shareholder letter.

Meanwhile, Netflix's Stranger Things Season 5 has been demonstrating the strength of its focused streaming model and global reach. In a recent press release, Netflix said that seasons 1 through 4 of Stranger Things have garnered over 1.2 billion viewers, and by Dec. 23, volume 1 of season 5 had garnered nearly 103 million views in just four weeks of airing.

With such a strong business and so much momentum, some investors might feel like a massive acquisition simply adds unnecessary risk to a business that didn't need it.

Is this a buying opportunity?

Netflix is a great business. But this pending acquisition complicates matters for investors. On the one hand, we have Netflix's strong business execution. But on the other hand, there's its pending acquisition that could bolster its growth but also reshape its risk profile.

Ultimately, however, shares are arguably expensive regardless. The stock's price-to-earnings ratio is 38, and its forward price-to-earnings is 29. A valuation like this demands continued rapid growth, leaving very little room for missteps. So, I'd personally stay on the sidelines -- especially with a pending acquisition arguably increasing the risk profile of the stock.

Daniel Sparks and his clients have 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.