Netflix Slumps as All-Cash Warner Bid Drains the Buyback Tank

TradingKey - After the bell on January 20 ET, Netflix (NFLX) released its Q4 2025 earnings report. Although both revenue and earnings exceeded expectations, the stock tumbled nearly 5% in after-hours trading, retreating to its lowest level since the market panic of last April.

According to Bloomberg, Netflix has amended its acquisition proposal for Warner Bros., shifting from a mix of cash and stock to an all-cash offer. Analysts believe this acquisition will put significant pressure on Netflix's cash flow, contributing to its after-hours stock decline.

Why is the Acquisition Weighing Down Netflix?

Netflix announced on Tuesday that it has revised the acquisition agreement to purchase Warner Bros. in an all-cash deal at $27.75 per share, with the total transaction value remaining unchanged at $720 billion. Warner Bros. plans to spin off its cable network business in a separate transaction. Netflix co-CEO Ted Sarandos stated that the revised all-cash agreement would accelerate the shareholder voting process and provide greater financial certainty.

Netflix stated that Warner Bros. is highly complementary to its business, and the merger will provide more opportunities for creators and strengthen the entertainment industry. Upon completion of the acquisition, the combined companies will have approximately 450 million subscribers, giving Netflix one of the world's most powerful content libraries to compete with rivals such as Disney and Amazon.

Netflix secured a $59 billion bridge loan commitment at the end of last year to support the Warner acquisition and increased that commitment by another $8.2 billion on Monday to support the all-cash offer; as of the end of 2025, approximately $60 million in loan-related costs had already been incurred.

Historically, Netflix generated nearly $10 billion in cash flow in 2025, with a 2026 target of $11 billion. However, as of late 2025, net cash on hand was only $9 billion, and approximately $1 billion in short-term debt must be repaid within the coming year. Following the shift to an all-cash acquisition, Netflix's interest costs on loans have increased. Under these circumstances, if the acquisition is prolonged by regulatory review, it will place even greater pressure on short-term cash flow.

To preserve cash for the acquisition, Netflix has announced the suspension of its share buyback program, another key reason for the after-hours sell-off. Suspending buybacks not only means the stock loses a significant near-term support level and marks a shift from returning capital to shareholders to external expansion, but more importantly, it signals a slowdown in organic growth. This suggests that Netflix is struggling to grow through its core business alone, necessitating the Warner Bros. acquisition—undoubtedly more negative news.

Beyond the Acquisition: Q1 Guidance Disappoints

Despite Netflix's strong Q4 performance—with revenue reaching $12.05 billion and earnings per share (EPS) at $0.56, both exceeding Wall Street estimates—the company's guidance for Q1 disappointed the market.

Netflix's guidance for Q1 2026 was lower than Wall Street expectations across the board. For Q1, Netflix's projected revenue is slightly below analyst forecasts; the company expects EPS growth to slow to nearly 15.2% year-over-year, down from over 17% in Q4, while Wall Street expected 24.2% growth, creating a significant gap. Netflix's EPS guidance of $0.76 is 7.3% lower than analyst estimates, and operating profit is nearly 6.5% below consensus.

For the full year 2026, Netflix expects revenue to grow 12%-14% year-over-year to between $50.7 billion and $51.7 billion, slightly above expectations. However, its projected operating margin of 31.5% and free cash flow of approximately $11 billion both missed market estimates.

Netflix explained that the lower full-year operating margin guidance includes approximately $275 million in acquisition-related expenses. Additionally, operating profit growth is expected to be higher in the second half of the year than in the first, and 2026 advertising revenue is projected to double compared to 2025.

In addition to the disappointing figures, analysts pointed out that Netflix is at a critical juncture in its transformation. Despite the release of the 'mega-hit' Stranger Things ( Stranger Things) final season at the end of 2025, which generated 15 billion viewing minutes, overall engagement only grew by about 2%, suggesting that the model of driving growth solely through proprietary series may have reached its ceiling.

Furthermore, Netflix previously relied on price hikes and a crackdown on password sharing to boost revenue, but these benefits are one-time gains. JPMorgan analyst Doug Anmuth noted that future growth will depend more on the performance of new business lines, such as live streaming, sports, and advertising.

Currently, while the advertising business is growing rapidly, its base remains small; Netflix expects 2026 ad revenue to reach approximately $3 billion, representing only about 6% of its $51 billion annual revenue guidance and failing to effectively offset the slowdown in core business growth. The sports and live streaming businesses started even later and also contribute relatively little to revenue.

The evident growth bottleneck is precisely why Netflix is determined to acquire Warner Bros. However, the issue is that Netflix's advantage has always been its simplicity. By acquiring Warner Bros. to scale up and returning to the 'asset-heavy' path of traditional media—requiring theatrical releases, sports rights, and advertising systems—could it become bloated, leading to integration challenges and operational conflicts?

Investors are waiting to see whether Netflix can successfully integrate Warner Bros.' resources, resolve its cash flow issues, and create new growth drivers in 2026.