Can You Have Faith in Netflix Like Icahn?
Kathleen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Carl Icahn, a 76-year old billionaire investor announced on October 31 that he has purchased a 10% stake in Netflix Inc., (NASDAQ: NFLX) with $168.9 million. Netflix’s balance sheet and cash flow are currently quite poor. With a background in the credit markets, it is obvious that Icahn must have seen value in Netflix before scooping it up. What could have enticed a billionaire investor into owning an enormous share of an online movie streaming company that has been stumbling in several areas and currently has 30% of its floated shares shorted?
Icahn considers Netflix to be undervalued. In his assessment, the company has strong potential as a dominant player in the movie streaming industry, and it has a strong potential for international growth. Should other investors have more faith in Netflix and follow suit?
The Rise and Fall of Netflix
Netflix has become well-known as a market leader among providers of Internet movies and TV shows via video streaming and compact discs. Unfortunately for its investors, Netflix stock has plunged by about 75% from $300 on July 13, 2011 to less than $78 now. This rather massive drop is due to many factors that include investors’ concerns regarding growth, the company’s persistent decline in margins, and its failure to launch new and original DVD content. The trouble with Netflix started when many of its subscribers defected to its competitors because management made ill-advised decisions on product changes and pricing without adequate communication with its customers.
How Netflix Compares With the Competition
A recent research report released by an independent research company, ChangeWave Research, has shown that Netflix’s main competitor in the video streaming business currently appears to be Amazon (NASDAQ: AMZN). Netflix currently offers movie selection service that is superior to Amazon’s Prime online streaming video service, yet the company is probably gradually gaining over a significant number of Netflix’s subscribers. The report shows that out of 1,115 people surveyed, 82% still subscribe to Netflix’s movies and TV shows. This is a reduction of 2% from the 84% recorded in the previous research survey.
The data obtained from their user survey also shows that Amazon’s Prime subscriber base increased from 17% recorded in the previous survey taken last February, to 22% as of October. Amazon Prime is streaming its movies from Lions Entertainment Corp. (NYSE: LGF) by an agreement signed with EPIX. Though Netflix currently offers a movie selection service that is superior to Amazon’s Prime online streaming video service, the company is gradually attracting a significant number of Netflix’s subscribers.
Apple (NASDAQ: AAPL) came next in line as a competitor to Netflix. Apple’s iTunes is also well known as a leader for streaming movies and purchasing music and films. The iTunes subscriber base is reported to have increased from 15% to 16%. In addition, the report shows that 18% of the people surveyed are subscribers to both Netflix and Amazon Prime. This is an increase of 4% from the survey taken previously.
How Icahn May Benefit Netflix Investors
If Icahn has his way with Netflix’s balance sheet and improves the quality of its earnings, then Netflix may become a good investment. Realistically speaking, this is a daunting task. The costs and the liability of acquiring content remain a challenge, but they are the factors that will drive future profit and growth. The ability to generate more cash from actual video streaming services is important to fixing Netflix’s balance sheet. In an interview with Bloomberg TV, Icahn hinted at actually priming Netflix for sale at a value higher than its current market valuation. Potential buyers would be larger companies with more resources, such as amazon.com or Microsoft Corp.
Since the details of how Icahn intends to make Netflix turn the corner aren’t available, it is up to individual investors to analyze the business and decide whether they, too, will have faith in Netflix’s potential.
mimosacreations has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, and 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.If you have questions about this post or the Fool’s blog network, click here for information.