Netflix: SEC Investigation Or Being Bought By Verizon?

by Justin Dove, Investment U Research
Wednesday, December 14, 2011

It’s been quite the interesting year for Netflix (Nasdaq: NFLX).

The stock lasted more than half of the year as a high-flyer, touching its 52-week high of $304.79 in the middle of July.

Then management got gully and overestimated the loyalty of its customer base…

After hiking up its rates and limiting its service, Netflix’s stock fell off a cliff. Pushed further by a horrendous market through the second half of the year, Netflix stock is hovering around $70 a share.

We Called It

We called the fact that Netflix was overpriced back in July, but I’m not sure anyone knew that it would fall so far, so quickly. Anyone could see that a P/E of 180 was expensive and that earnings and the price would have to eventually converge at some point. But while most thought that the earnings would eventually catch up to the price – or at least close to it – the price fell all the way down to the earnings.

But now, five months later, Netflix is at an interesting crossroads. Two developments in the news are making Netflix a very interesting company to watch:

Verizon (NYSE: VZ) is rumored to be strongly interested in acquiring Netflix. It would likely add the streaming video service to its FiOS TV product to beef up its on-demand service. According to a Bloomberg source, “Verizon may kick off a bidding war for streaming-video pioneer Netflix that could result in a sale by Easter for about $4.6 billion.” But just as investors were snapping up the stock earlier this week, came this news…

According to Disclosure Insight, Netflix is now facing a possible SEC investigation. The disclosure stated that: “In a letter dated 1-Dec-11, we received information from the SEC suggesting this company was involved in unspecified SEC investigative activity. We found no disclosure of the same as of this date.”

Takeover Rumors May Mean Netflix is Cheap

Right now Netflix has a much more reasonable price to earnings of 15.90 with an EPS of 4.40. And since many investors are steering clear because of such poor management decisions and this newly discovered possible SEC investigation, it’s an interesting contrarian stock to watch.

While the stock could still fall a bit further – especially with an investigation by the SEC – it appears with such a low valuation compared to earnings that the floor isn’t too far below.

And with rumors circulating that Verizon or another company may pay up to a $1-billion premium on its current market cap, it could be a nice bargain.

Granted, rumors surrounding a Netflix takeover have come and gone without much action over the past few years. But the latest rumors may be a good clue to investors, that Netflix appears cheap at current valuations and a possibly a good buy for a large company such as Verizon. If a company such as Verizon is doing its due diligence in looking at a possibly buy, maybe investors should, too.

Good Investing,

Justin Dove

Article by Investment U