Icahn Has the Right Script for Netflix

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

[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.

Source URL: https://investorplace.com/2012/11/icahn-has-the-right-script-for-netflix/

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