Shares of Netflix, Inc. (NFLX) snapped out of lengthy slump after the streaming entertainment giant walked away from an effort to acquire Warner Bros. Discovery. Put simply, Paramount Skydance (PSKY) outbid Netflix, delivering a superior offer to the target. The “loser” did the right thing by walking away.
Markets spoke: Netflix made the right decision. Plus, the company will receive a $2.8 billion breakup fee, which Paramount will pay. Put it all together and signs point to opportunity with the Direxion Daily NFLX Bull 2X Shares (NFXL ). Indeed, it would have been nice to have held NFXL the day before news broke of Netflix walking away from the deal.
However, with the overhang of the Warner Bros. deal out of the way, Netflix stock could regain some of its lost luster. That signals potential opportunity with NFXL, an ETF designed to deliver 200% of the daily performance of the communication services stock.
Netflix Did the Right Thing
There’s no denying that from a content perspective, Warner Bros. is an alluring target. That spurred the battle between Netflix and Paramount. However, the target is expensive. Paramount will take on a massive amount of debt to get the deal done.
Conversely, Netflix avoided that scenario. That’s good for investors that grew accustomed to the streaming giant typically sporting a strong balance sheet. Had Netflix won Warner Bros., it would’ve taken years for the buyer to eliminate the related debt, potentially imperiling the stock and NFXL in the process. Many investors simply don’t have the patience for debt-reduction strategies. Netflix doesn’t have to worry about that now. For traders eyeing NFXL, it’s worth noting Netflix avoided overpaying for an asset it probably doesn’t need.
“This was absolutely the right move for Netflix, in our view. We estimated it was overpaying for Warner’s streaming and studios when it had no need to, given its extraordinarily strong business,” observed Morningstar analyst Matthew Dolgin.
NFXL could be worth examining if Netflix unveils clear plans for the $2.8 billion it’s going to receive from Paramount. Plus, the potential exists for the sell-side to revisit the stock in favorable fashion.
“We maintain our $28 fair value estimate for Warner, discounting the value we believe they are almost—but not completely—certain to realize within the next year. We intend to raise our fair value estimate for Netflix to $80 from $79 to account for the $2.8 billion it is set to receive,” added Dolgin.
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