Icahn Has the Right Script for Netflix

The veteran activist investor could help the stock keep rising


carl icahn screenshot 120 Icahn Has the Right Script for NetflixYet 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.

Article printed from InvestorPlace Media, http://investorplace.com/2012/11/icahn-has-the-right-script-for-netflix/.

©2015 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.