Icahn Has the Right Script for Netflix

by Tom Taulli | November 30, 2012 8:40 am

carl icahn screenshot 120 Icahn Has the Right Script for Netflix[1]Yet again, Netflix (NASDAQ:NFLX[2]) 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[3]. One recent dud was his play for Clorox (NYSE:CLX[4]). 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[5]) or Comcast (NASDAQ:CMCSA[6]).

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[7]) and Verizon (NYSE:VZ[8]). 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[9]). 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[10].

Netflix has already instituted a “poison pill[11],” 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[12], 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[13]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[14].”  Follow him on Twitter at @ttaulli[15]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/05/carl-icahn-screenshot-120.jpg
  2. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  3. track record is far from perfect: http://investorplace.com/2012/11/carl-icahn-netflix-friend-or-foe/
  4. CLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLX
  5. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  6. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  7. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  8. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  9. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  10. entertainment operating system for the household: http://investorplace.com/2012/11/with-xbox-720microsoft-wants-to-take-over-your-home/
  11. poison pill: http://investorplace.com/2012/11/netflix-swallows-poison-pill-to-stop-icahn-takeover/
  12. IPOPlaybook: http://investorplace.com/ipo-playbook/
  13. How to Create the Next Facebook: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  14. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders: http://goo.gl/pR2F3
  15. @ttaulli: https://twitter.com/ttaulli

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