Skydance Trades at a Fraction of Netflix's Valuation. Is the Discount Deserved?

Skydance (NYSE: SKYD) finally swallowed Warner Bros. Discovery on Oct. 6. The combined company owns HBO, CBS, CNN, Paramount Pictures, Warner Bros., and dozens of cable networks. That's a lot of media in one place.

The market's reaction? Shares closed at an adjusted $9.07 on Oct. 13 and trade at $7.06 today, down 22.2% over the past week. At roughly 5 billion shares, the whole empire is worth about $35.4 billion. Netflix (NASDAQ: NFLX) sits at $291.5 billion, about 8 times larger.

Is Mr. Market being unfair to the new kid? I dug through the filings.

Short answer: no. Skydance's discount looks earned.

Image source: Getty Images.

5 notes on Skydance's discount

1: Skydance's debt

Skydance's pro forma net debt is $78.9 billion. That's more than double the stock's market cap. The capital structure table reads like a restaurant menu, with every dish a different flavor of debt.

Management wants leverage down to 3.75 times EBITDA by 2028. My napkin math says the leverage ratio is near 6 times today. Reaching the target depends on $6 billion of promised synergies. Skydance won't evaluate additional shareholder returns until it reaches investment-grade credit metrics.

That could take years, assuming Skydance meets its cash-generation goals in the first place.

2: The folks who paid $12 per share

To close the merger, Skydance raised $47 billion of fresh equity at $12 per share. Those buyers didn't get any of the new stock warrants, either; those went only to public holders. The stock now sits 41.2% below the $12 purchase price. Ouch.

3: The businesses

In Warner Bros. Discovery's last solo quarter, revenue fell 11.2% year over year. Linear ad sales were down 27%, studio profits down 89%. Paramount Skydance's sales were roughly flat, with its TV segment down 9.4%. Together, they earned $190 million on $15.6 billion of sales.

Netflix earned $3.4 billion on $12.6 billion in revenue in the same quarter. Less revenue, about 18 times the profit. I checked that twice.

Fun footnote: Netflix's first-quarter pre-tax profit got a $2.8 billion boost from the breakup fee Warner owed it. Paramount drew on its credit line to help pay that bill. The deal was padding Netflix's profits before it even closed.

4: The 2030 dream vs. Netflix's 2026 reality

Skydance hopes to generate $10 billion or more of free cash flow by 2030. Netflix expects about $12.5 billion this year, and presumably more in the 2027-2030 span. The new rival's target four years out still trails Netflix's current cash machine.

5: Netflix's price tag

Netflix stock trades at 18.5 times forward earnings. It carries some net debt, but only $5.2 billion. The company executed $4.7 billion of buybacks in a single quarter. Netflix could erase its net debt by slowing down those buybacks for a couple of quarters. (Retiring the entire long-term debt of $11.8 billion would take longer.)

And its shares are nowhere near the 52-week high of $124.86. That's a sale price for a business running a 33.4% operating margin. By comparison, Skydance's operating margin is a single-digit figure, just below 5%.

Bottom line (for now)

Skydance is cheap because it's hauling a mountain of debt up a hill made of shrinking cable networks. Maybe the synergies show up on schedule. I'm not betting on it.

Netflix offers a clean balance sheet, a powerful cash machine, and a stock price that finally makes sense again. I know which one I'd rather own.

Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.