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Why investors shouldn’t believe the Netflix hype

Netflix shares have surged as much as 8 percent over the past three sessions, largely based on speculation that the streaming giant could become the target of an acquisition. The problem is, there's no indication that there is any truth to these market rumors.

The idea that it would make sense for Disney to buy Netflix was floated in April by BTIG's Rich Greenfield, a call that accorded the analyst a huge amount of press. This after Greenfield published a note downgrading Disney to sell on the day that "Star Wars: The Force Awakens" debuted in theaters.

The analysis became market rumor when squawk service "The Fly on the Wall" broadcast the idea that Disney was indeed looking into such a tie-up, and Barron's consequently picked it up in a Friday post.

Netflix shares opened significantly higher Monday, which laid the groundwork for financial news segments (one of which, in full disclosure, was produced by the writer) to further mainstream the idea that something could going on between Disney and Netflix.

On Tuesday morning, MarketWatch did a story on a possible deal: "Netflix deal said to be in Disney's crosshairs, and it makes perfect sense to analysts."

Just one analyst was quoted in the article: William Power of R.W. Baird, who in the eighth of the 11 bullet points in his most recent research note, noted that "Netflix could become a target," but added that "timing and likelihood remain difficult to call."

After CNBC requested comment, MarketWatch corrected the story, changing the headline and adding the thoughts of another analyst.

A Disney-Netflix deal appears improbable on its face.

Netflix has a market capitalization of more than $45 billion; with a reasonable takeout premium ($130 a share was being bandied out on the Street in connection with this rumor, according to one analyst) the company would be sold for something like $60 billion. Disney is itself worth less than $150 billion, reporting less than $8 billion in revenue over the past four quarters, and boasting less than $12 billion in assets.

In other words, a Netflix acquisition would be a giant deal even for a company as large as Disney, and a mistake — not hard to imagine, given Netflix's sky-high valuation — could be catastrophic to the value of the storied company.

Such a gamble is even less likely given the company's management situation: Disney's highly respected CEO, Robert Iger, has announced that he has no plans to stay at the media giant past June 2018.

"Could it make sense for Disney to buy Netflix? Potentially," FBR Capital Markets analyst Barton Crockett, who covers both stocks, offered Monday on CNBC's "Power Lunch." But he added: "I'd be surprised if Iger did this now. Someone new in charge of Disney might think about it, but I've heard nothing from Iger to suggest that they're thinking about this kind of push."

"I don't think it's up for sale," Cantor Fitzgerald analyst Youssef Squali said flatly in the same Monday segment. "We've been here before and seen many rumors" and "we're not seeing or hearing anything to that effect."

So whom should investors trust?

After answering that question, perhaps traders should draw a lesson from this event. Information travels quickly on Wall Street, but so does noise.

But it is still up to traders to decide whether they will take the bait, or merely put the rumor in the bank for future conversations.

Netflix declined to comment on the rumor, and Disney did not respond to a request for comment.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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