Activest Investor Carl Icahn Purchases 10% of Netflix (NFLX)

Shares of online video rental company Netflix (NFLX: Charts, News) surged this week, after activist investor Carl Icahn purchased approximately 10% of the company's outstanding shares. According to a filing with the SEC, Icahn purchased 5.4 million shares of the company, which has slid nearly 80% since last July.

The company's precipitous plunge was caused by a poorly publicized attempt to raise prices followed by an attempt to split the company into two segments - DVD-by-mail and streaming video services. These two services were originally offered as a single product. CEO Reed Hastings also increased prices by nearly 60%, causing Netflix's customers to flock to free services such as Hulu, and cheaper ones such as Amazon's (AMZN: Charts, News) Prime service and Apple's (AAPL: Charts, News) iTunes service. Hastings' mishandling of the resulting social media backlash from Netflix customers on Facebook and Twitter also dented the company's public image as its stock price plunged. Daily Chart
Carl Icahn has been known to invest heavily in struggling companies in order to force changes. Clorox (CLX: Charts, News), Motorola (MSI: Charts, News) and Yahoo (YHOO: Charts, News) have all been targeted by Icahn in the past. Analysts and investors believe Icahn will use his newly acquired stake to force changes at Netflix - which may start with altering Hastings' plans for the company. Although the market has turned on Netflix - once a darling of Wall Street analysts - several other large investors, such as hedge fund manager Whitney Tilson, have noted that Netflix's light business model and strong growth potential were "encouraging." Wedbush Securities analyst Michael Pachter, on the other hand, has given Netflix a "sell" rating with a $4 target price. Pachter, one of the most bearish Netflix analysts, criticized Icahn's rationale for investing in the company, which still trades at nearly 100 times trailing earnings despite losing two-thirds of its value over the past year. "It's OK with him thinking Netflix is undervalued," Pachter stated, "but as a strategic fit elsewhere he's wrong." Pachter believes that Amazon's $79 per year Prime streaming video service, boosted by the popularity of its Kindle tablet devices, will marginalize Netflix's market share. Microsoft (MSFT: Charts, News), where Reed Hastings once had a board position, was rumored to consider acquiring Netflix last week. Although the rumors have been unconfirmed, Hastings relinquished his seat at Microsoft last month, stating that he needed more time to concentrate on Netflix and other projects. Last week, Netflix disappointed investors with a weak earnings report and bleak guidance. The company finished the third quarter with 25.1 million domestic streaming customers, expecting to finish the year with between 26.4 million to 27.1 million streaming subscribers in the U.S., its largest market. Although this would represent a gain of 4.7 million to 5.4 million customers from the prior year, it falls far short of Hastings' promise to gain 7 million customers by the end of 2012. "We're guilty of making a bad forecast," admitted Hastings, "but 5 million subscriber additions is substantial." After the dire earnings report, the stock slid 15% after hours. Netflix now reaches 30 million subscribers worldwide in 51 countries. Although Netflix has shown some flicker of life after Icahn's disclosure, investors should be aware that Icahn's previous aforementioned investments have been slow to turn around. The stock still trades at 177 times forward earnings with a 5-year PEG ratio of 70.6. These lopsided fundamentals make Netflix a wobbly stock for everyday investors to hold, and strong competitors such as Amazon have cast uncertainty on the sustainability of the company's business model. Other News About NFLX IcahnseesNetflixasaHalloweentreat Icahn swoops in on Netflix; should Hastings be worried? Netflixhitsreset, downplaysAmazonthreat Netflix talks tough as Amazon looms large. Other Stocks in the News Ford'ssmoothCEOsuccession - plusafewbumps Ford gets a new CEO, as auto sales surge. WeakPrevnarvaccine, emergingmarketsaleshitPfizer Pfizer drops due to poor global sales. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Nov 2, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...