Wells Fargo analyst Steven Cahall downgraded Netflix and Paramount stock following the bidding war over Warner Bros. Discovery.
Cahall resumed coverage of the Netflix and Paramount stocks following the bidding war in which Paramount prevailed, downgrading Netflix from a “Buy” rating to a “Hold” and Paramount from a “Hold” rating to a “Sell,” per Tip Ranks:
Wells Fargo analyst Steven Cahall resumed coverage of Netflix and Paramount Skydance shares after the Warner Bros. Discovery buyout war ended last week. He downgraded Netflix to a Hold rating from his prior year’s Buy rating, with a $105 price target (6% upside potential). For Paramount, he cut from a Hold rating to Sell, with a $10 price target implying 16.6% downside.
Cahall wrote that Wells Fargo expects the streaming giant Netflix to “to rebound from the WBD saga by aiming to accelerate engagement with more content,” adding that its decision to not raise its bid for Warner Bros. to beat Paramount essentially supported its original growth strategy.
“We think WBD was NFLX’s opportunistic Plan B,” Cahall said. “Now it’s back to Plan A: invest for growth.”
According to Investing.com, Netflix has already proposed “plans for roughly $20 billion of content spending this year, a level Wells Fargo expects to grow into 2028.”
“The firm also expects Netflix to be aggressive in sports, noting an upcoming NFL renewal and estimating the company could go for 10-20 games/season at an annual cost of around $500million to $1 billion,” it added.
As to why Cahall downgraded Paramount from a Hold to a Sell, he cited elevated leverage risk following the deal.
“He flagged above-average debt as a key negative, amid softening ad markets and streaming losses,” per Tip Ranks. “Cahall warned that earnings miss or sector derating could drive shares ‘far lower’ from recent $12-$15 levels, echoing post-merger integration woes in a competitive landscape with Netflix and Disney.”
The streaming giant Netflix backed out of its deal with Warner Bros. Discovery in the wake of the studio’s board deeming Paramount’s improved offer superior. Netflix co-CEOs Ted Sarandos and Greg Peters announced in a statement that Paramount’s improved offer made the bid for Warner Bros. “no longer financially attractive,” adding that it “was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.”
“The transaction we negotiated would have created shareholder value with a clear path to regulatory approval. However, we’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive, so we are declining to match the Paramount Skydance bid,” the co-CEOs said.
“Warner Bros. is a world-class organization, and we want to thank David Zaslav, Gunnar Wiedenfels, Bruce Campbell, Brad Singer and the WBD Board for running a fair and rigorous process,” they added. “We believe we would have been strong stewards of Warner Bros.’ iconic brands, and that our deal would have strengthened the entertainment industry and preserved and created more production jobs in the U.S. But this transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.”
The co-CEOs pledged to keep pouring cash into creating the “best-in-class streaming service,” adding that the Netflix brand will keep “healthy, strong and growing organically.”
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