Yet again, Netflix (NASDAQ:NFLX) has posted another rally. But a key factor this time was the announcement of Carl Icahn’s 10% stake in the company on Oct. 31. Since then, the stock has gone from $54.40 to $81.38 as of Thursday’s close.
So, could there be more room on the upside? No doubt, Icahn — a pioneer in shareholder activism, going back to the early 1980s — will work hard to make that a reality.
It’s true that his track record is far from perfect. One recent dud was his play for Clorox (NYSE:CLX). Then again, he has been the catalyst for big gains in other stocks, such as ImClone. And hey, Icahn is worth about $14 billion.
His investment strategy is straightforward: He takes a big position in an undervalued company and agitates management to find a buyer.
At Netflix, this approach has a decent chance of panning out. All in all, the company faces many challenges. One is the escalating cost of licensing content. For example, the company recently allowed its deal with A&E to expire, which will mean losing access to shows like Ice Road Truckers, Hoarders and Storage Wars.
But without an ever-richer library of content, Netflix may have a tough time avoiding attrition in its membership base. If anything, customers may start looking at the competition like Amazon (NASDAQ:AMZN) or Comcast (NASDAQ:CMCSA).
To find growth, Netflix has been expanding into foreign markets. While that’s a smart move, success will still take several years — and the costs will be substantial.
Netflix has even been creating original content as a way to retain customers. But this has its risks as well. Flops are notorious in the entertainment industry.
However, by being part of a larger company, Netflix would have the resources to pursue its ambitions. And there are many potential suitors. They include Amazon, Comcast, Apple (NASDAQ:AAPL) and Verizon (NYSE:VZ). All could easily pull off a deal and benefit from Netflix’s great brand and 30+ million streaming-video customers.
Yet perhaps the most interesting suitor is Microsoft (NASDAQ:MSFT). Its next-generation version of the Xbox — called the 720 — will likely have streaming video capability. So why not plug in Netflix? If so, it could be a way for Microsoft to further become the entertainment operating system for the household.
Netflix has already instituted a “poison pill,” which will trigger a flood of new stock if the company is subject to a hostile bid. But Icahn knows such defenses aren’t very effective. If he can bring some suitors to the table, it will be tough for Netflix to say no to a deal.
In other words, Ichan may have another winner to add to his riches.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.