What Is Carl Icahn's Plan For Netflix?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

So Netflix (NASDAQ: NFLX) fell by 4.14% last Wednesday, with rumors brewing that Carl Icahn may dump his stake in the company. It is hard to figure out Icahn, really; but right now he seems to be more interested in Transocean, one of the world’s biggest drilling contractors.

We also heard some buzz in trading circles telling us that hedge fund investor David Einhorn is short NFLX. I for one thought that this should have actually worked to prop up the share price to some extent; but it did not.

NFLX stock – Roller coaster ride

The shares of the video streaming giant have been marked by abrupt and extreme ups and down between 2010 and 2011, during which period the stock rose from $53.30 (January 8, 2010) to $295.14 (July 8, 2011) only to fall back to $69.29 (December 30, 2011) due to the pricing debacle. With a 52-week low/high of $52.81/$133.43, ups and downs in the stock price continued in 2012. Much of the upside in 2012 was triggered by Icahn announcing in a 13D SEC filing that he had accumulated 9.98% of the shares.

About Carl Icahn - in case you didn't know already:

Carl Icahn is an activist investor, who according to an article in Fortune, (January 9, 2013) is known for “targeting undervalued companies at bargain basement prices, and then arm twisting or using proxy battles to fight his way onto their boards and turn them around through restructurings or sales.”

The basis of the speculation was that Icahn is sitting on a sizable profit. His average cost, initial shares and the exercised calls taken together, comes to around $58.40 per share and NFLX was trading at above $100 all through the trading day, Tuesday, January 15, 2013.

Although he is famous for arm twisting and proxy wars, what gave credence to the speculation that Icahn might sell his stake in NFLX was the announcement by Transocean that he had bought 1.56 percent of its shares and has sought regulators’ permission to own more than 3 percent.

On top of it, the activist investor, known for launching vocal campaigns, chose to remain silent about his future course of action.

Icahn was quoted at the time of his initial purchase that Netflix has "significant strategic value" for "a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the internet, mobile, and traditional industry." This was construed as an indication that companies like Microsoft, Comcast, Amazon or Verizon could or should buy Netflix and he was prepared to strike a deal with them.

However, developments after Icahn’s initial purchase in October 2012 seem to point at a situation where he would be less interested in forcing the sale of Netflix.

The Changed Scenario

  • Netflix’s CEO, Red Hastings, has said that he is not interested in selling and announced adoption of a poison pill to fend off Icahn.
  • There has been a substantial increase in Netflix’s library after it made content deals with Time Warner and the Walt Disney Company.
  • The stock that was then trading at sub $60 levels is now trading at above $95.
  • The most likely acquirer, Amazon and also NFLX’s main competitor has little need for acquiring a video-streaming company as it has a solid subscriber base, adequate content licenses of its own and a strong infrastructure.

Considering these factors, Icahn might as well sell his stake.

Netflix faces more challenges

  • Time Warner has entered in a deal with Universal Pictures through HBO Go. Although it is going to be more costly as it requires a cable connection, the exclusive deal prevents Netflix from adding more popular content to its library. 
  • Many media and internet companies are shifting focus and entering subscription-based internet TV space.
  • Hulu, LLC, a private company backed by Disney, offering go-to service for online TV is gaining momentum with more than 3 million subscribers.
  • Redbox Instant launched by Coinstar in partnership with Verizon, although not a Netflix competitor yet, with prices similar to Netflix is a potential threat to Netflix.

Of interest would be the company’s quarterly results scheduled for release on January 23, 2013. The earnings report may affect Icahn’s future action and also investor sentiment.

Most of the new content deals have been at exceptionally high cost and there is pressure on the company to increase its subscriber base substantially. To justify the rumored $300 million a year deal with Walt Disney, Netflix must add at least 3.125 million new subscribers (at $8 per month or $96 per year). This needs to be viewed in light of the fact that with people becoming more internet savvy than before, subscriber growth in the U.S. has been sluggish and the International Segment has yet to take off in full force.

On the other side, Netflix has had to borrow more to fund the cost of fresh content. This debt needs to be managed properly and could have a detrimental effect on its bottom line.

Conclusion

Shares of Netflix seem to be caught between the proverbial devil and the deep sea. On one side is the fundamental fact that if it does not come up with good numbers later this month, it is not likely to go down well with investors.

On the other side are two well know investors, seemingly working at cross purposes – one trying to force Netflix to sell itself and the other forcing the share price down by short selling it.

For all practical purposes it may turn out that Icahn has or is in a position to raise adequate cash for pushing RIG into creating an MLP and retain his stake in NFLX. Netflix is a pioneer and strong player in the online video market with 25.1 million subscribers in U.S. and 5 million overseas. It is a big prize and Icahn considers the online video business ready for consolidation. After all, acquiring a company like NFLX whose market cap is only $5.33 billion is tantamount to spending loose change for many giants in the technology sector.

If David Einhorn keeps on short selling in a big way, it could push NFLX stock further down, making it an attractive buyout candidate.

In short, for the time being it all depends upon what the two giants have in their minds for their respective positions in NFLX. It is a trading play at present and the earnings call can take a back seat for now – there is no knowing whether the bulls will win or the bears will have it.

As an average investor, I would rather stay away from NFLX. If I am sitting on a profit, I would play safe and bring profit home.


StockRiters.com has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure