Should Apple (AAPL) Buy Netflix (NFLX)? Bernstein's Sacconaghi Answers

Takeover rumors have been swirling around Netflix (NASDAQ: NFLX) for years but the vague murmurs grew to a dull roar last week, which has put a solid bid under the weakest-link of the mighty FANG stocks.

Today, Bernstein's crack tech analyst Toni Sacconaghi weighed in on the matter regarding one rumored suitor - Apple (NASDAQ: AAPL) (Disney is the other rumored suitor).

Sacconaghi said while Apple could easily buy Netflix, it would be out of character for the tech giant. However, a partnership might make sense.

The analyst said if Apple were thinking of buying Netflix to run exclusively on iOS and AppleTV it would not be a value-creating thesis and could not possibly justify a $50B price. However, Apple could buy it an leave it alone. This would add $8B to Apple's services revenues (or 3-4% to total Apple revenues), and more importantly could be used creatively to help shift Apple's transactional business model towards a subscription-based model.

"We believe AAPL could and should look to build a subscription offering of features and services that could be bundled with its hardware offerings, analogous to what Amazon does with Amazon Prime," he said. "Netflix (at a discounted price for only iPhone or iPad users who buy Apple hardware as a subscription) could be a key element of an attractive services bundle."

An acquisition of Netflix, however, would be highly out of character for Apple, the analyst said. He highlights: Apple historically has not done large deals; it does not purchase and run established businesses; the deal would in reality likely be 2-3% dilutive (in a cash transaction; much more so in a stock deal); and Apple more likely wants to build an OTTP content offering including live TV (sports, news), which could be a replacement for pay-TV, instead of (just) a Netflix-like, on-demand content offering.

He said Apple could Apple could get much of the benefit of a services offering with much
less upfront risk by partnering with Netflix, rather than acquiring it. "In fact, a partnership could be mutually beneficial," he commented. "Directionally, we believe that Apple and Netflix could look to sell Netflix for $8 or $8.50 per month (vs. $10 currently) to "Apple Prime" users (i.e., those consumers who pay for their iPads or iPhones on a subscription basis). We suspect that the $1.5 to $2 reduction in monthly price could potentially be funded jointly by Apple and Netflix, particularly if it was a new customer acquisition tool for Netflix. If the Apple Prime user was a pre-existing Netflix subscriber, then Apple would likely fund most or the entire price differential."

Overall, Sacconaghi doesn't see a compelling reason for Apple to acquire Netflix and believes that Apple will more likely partner or compete with Netflix.

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