Is Amazon "Primed" to Buy Netflix?

What some thought was impossible just a few months ago now looks more likely than ever. There was a report out this morning by noted Netflix NFLX bear Wedbush that the company could actually be acquired by, gasp, of all companies, Amazon AMZN. In the note, Wedbush wrote, "Upon reflection, it appears to us that the driver for the separation of Netflix into two businesses—Netflix.com (for streaming) and Qwikster.com (for DVD rentals—was to position the streaming business for sale to Amazon.com." Wedbush went on to say, "In our view, Amazon has always wanted to be in the streaming business, and has been constrained from buying Netflix due to tax considerations. The split up of Netflix's business addresses the state sales tax issues raised for Amazon in having a “nexus”. If Amazon were to acquire only Netflix's streaming business, it could triple the size of its content library, and gain traction as an industry leader. Netflix streaming has current content deals that provide it with access to movie content during the premium cable TV window, and Amazon has the financial resources to secure additional streaming rights, including Starz content. Netflix's financial flexibility is quite limited, while Amazon's is virtually unlimited." After seeing the company's stock price drop from around $300 per share in July to the low $120's recently, Wedbush's theory certainly does make sense. Amazon is aggressively entering the online streaming space, and seems intent on killing Netflix. Amazon recently signed up with CBS CBS, and NBCUniversal, while Netflix lost a major content provider in Starz LTSZA. A combination of this news, along with the recent price hikes at Netflix and now the split between the streaming business and the DVD rental business makes a potential acquisition that much more likely. Amazon has almost enough cash on the books now to purchase Netflix as a whole ($6.78 billion market cap). Amazon could offer a 50% premium right now, acquired Netflix's 20,000 pieces of content to go along with its approximate 9,000 pieces of content. That would make Amazon the ultimate player in streaming, which it clearly sees as a huge business. As Amazon brings its tablet to market, it is going to nee something to differentiate it from the Apple AAPL iPad, besides price. Access to all that content under one roof is incredibly appealing. Especially when you couple it with free shipping all for $79 per year. This is not to say that something happens between Netflix and Amazon, but Wedbush talking about a potential positive for Netflix is certainly a positive for the name. As the gorilla in the space, there will always be competitors gunning for you, and Reed Hastings and company know this. Now that Netflix's market cap has been chopped in half since July, it is even more vulnerable. Amazon, like Apple, is one of those companies that everything it touches turns to gold. The Kindle. Online ordering. Digital downloads. Warehouse distribution. Customer service. Amazon does it all, and does it well. Jeff Bezos is a genius and if he wants Hastings to come aboard, he will get it. Or he could just crush the company into nothing. That could happen too. ACTION ITEMS:

Bullish:
Traders who believe that Netflix will get bought by Amazon might want to consider the following trades:

• Amazon can afford to pay a 50% premium for Netflix, with cash on hand and taking out debt. Traders could consider options or common shares of Netflix.

Bearish:
Traders who believe that Netflix does not get bought by Amazon may consider alternate positions:

• Netflix has suffered a lot of PR blows recently, and Amazon is poised to take advantage of this. If Amazon decides it is cheaper to go at it by itself rather than buy Netflix, then Netflix could see further sharp declines.
  
  

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