Inside the Mind of Carl Icahn, Netflix Agitator
Shareholder activist Carl Icahn’s interest in Netflix (NFLX) made the company’s investors a lot happier than they have been lately, ramping up the share price as it did some 25% since his build-up of a near-10% stake was disclosed last week. But can the rest of us make money joining him now? Here’s an illustrated version of what Icahn sees in Netflix that makes him believe you can.
The share price for Netflix, a $4.28 billion market cap company, is down more than 50% in the past couple of years, as seen in a stock chart, which is a big red flag in Icahn’s world. Unhappy shareholders are more welcoming to corporate raiders.
There are some very good reasons for Netflix’s fall from grace, which one might recall started with a premature plan to run down its DVD by mail subscriptions in favor of streaming subscriptions. Netflix remains the world’s largest subscription video service, but its costs have been rising as more and more competitors bid for programming rights. Netflix’s content costs were 73% of revenues in the latest quarter, compared to 65% a year earlier, according to SEC filings. Even paying up, Netflix can’t offer some of TV’s most popular shows because their producers, including HBO, consider it a competitor.
The problems have taken Netflix’s PE ratio from about 60 to the 20s for a while late last year. But a poor earnings report last month, created by weak gains in new streaming subscriptions, put those valuations right back into the stratosphere.
Icahn, however, dismisses share price ratios for this company. For the record, he bought his shares at an average price of about $60, which would have represented a PE of about 33 in the second quarter.
In any interview Icahn gives about Netflix, he mentions often the company’s abundant cash flow. Revenues from domestic subscriptions alone, he notes, bring in some $2.5 billion annually.
Netflix has been spending money lately on technology upgrades and international expansion. Fighting Icahn, which Netflix’s poison pill initiative proves the board is determined to do, will cost lots of cash, too. Icahn contends the company should spend more money on original programming. For about $36 million, he told Bloomberg TV, Netflix can make 12 episodes of something viewers can’t get somewhere else.
That works if Netflix can create content that viewers will seek out. Netflix has a handful of originals launching through next year – comedy “Lilyhammer” and political drama “House of Cards,” for example -- but it will not release ratings numbers. Some industry analysts have questioned whether Netflix, unlike HBO years ago, has much hope of building loyalty this way now that viewers have so many other options.
Capital held by competitors
Really though, it’s probably competitors’ cash Icahn is more interested in here. Unlike some of his other plays, the Netflix move appears to be about selling the company quickly. He has named as hypothetical buyers Amazon.com (AMZN), Google (GOOG), Microsoft (MSFT) and Verizon (VZ). They’re all into streaming entertainment in some form, and Icahn points out that a $5 billion acquisition is a reasonable prospect for any of them.
Whether any of these companies want or need Netflix is hotly debated at the moment. But this is all about Icahn’s view: a cash-fine company, discounted (sort of) shares, in a business everyone wants a piece of. What’s not to like?
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis