Who Are the Best Candidates to Buy Netflix?

 | Mar 13, 2018 | 2:00 PM EDT
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Monday was a rough day for Netflix (NFLX) . First, the popular Financial Times blog Alphaville published an article titled, "This is Nuts, When Does Netflix Crash?" Later in the day, Apple (AAPL) said that it wasn't interested in buying the streaming entertainment company.

I've never believed that Apple was interested in buying Netflix, or Tesla (TSLA) or any of the other companies that are constantly rumored as takeover candidates. Apple has enough cash to buy almost anyone, which makes it convenient grist for the rumor mill.

Who would be a good candidate to buy Netflix? With a market capitalization of nearly $140 billion, there are few serious contenders. For example, Disney's (DIS) market cap is only slightly larger, at $158 billion. Of course, Disney has plans for its own streaming service.

With a market cap exceeding $800 billion, and with nearly $100 billion in cash, Alphabet (GOOGL) would be my top candidate to buy Netflix. It's a good match, and it's easily doable.

Amazon (AMZN) would be my second choice; imagine ordering a movie from your couch, via Alexa.

Microsoft (MSFT) is my dark horse candidate; nobody is talking about this possibility, but then again, few people believed that Microsoft would buy LinkedIn.

That said, I believe Netflix will remain independent. That's because many see it as overvalued, just as many have complained for years that Amazon is overvalued.

Regarding the Alphaville article, the author's point was that Netflix's business plan seems unsustainable. However, I believe we should view Netflix the same way we view Amazon -- a company that is playing the long game, sacrificing short-term profit in favor of market share. In this context, Netflix' strategy makes sense.

By spending heavily on content, Netflix can solidify its position, build its brand, and fend off competitors as viewers continue to seek alternatives to cable TV.

Technically, Netflix is trading near the upper end of a bull channel (diagonal lines). The stock is overbought according to its RSI (relative strength index) indicator (red), so a mild pullback may be coming. If Netflix pulls back to the lower boundary of the bullish channel, it will alleviate the overbought condition and create a buying opportunity.

Source: TradeStation

Disney's streaming service could prove to be a headache for Netflix. Imagine a service that provides access to movies from the various Disney, Star Wars, Marvel, and X-Men franchises, among others.

Because Disney owns the rights to these properties, it can create original films and TV series using already popular characters and storylines. One of the first among these will be a just-announced live action Star Wars TV series. That series is a salvo aimed directly at Netflix.

However, Netflix has the advantage of being first mover. Every day, it brings more people into its ecosystem. Sure, there will be competition, but remember, Amazon has always had competition too. Instead of worrying about profit margins, Amazon gobbled up market share; now, the company is well on its way to becoming a case study in 21st Century business success. Netflix is following that same path.

This commentary originally appeared on Real Money Pro. Click here to learn about this dynamic market information service for active traders.

Apple, Alphabet, Amazon and Microsoft are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, GOOGL, AMZN or MSFT? Learn more now.

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