Thursday, November 01, 2012

Netflix (NASDAQ:NFLX): Icahn = Sale? Not so fast..

So what to make of Carl Icahn's involvement in Netflix (NASDAQ:NFLX)? Is he going to push for a sale/takeover of the company or does the billionaire investor have a more cunning plan in mind?

Here's what the analysts think:

- Oppenheimer downgrades Netflix to Perform from Outperform noting that while they continue to believe the co has a strong competitive position, AMZN's future behavior toward subscription video is not predictable and will limit the stock's valuation to 13x US earnings.

Oppenheimer also believes CEO Hastings is a key driver of the long-term success of NFLX, and they do not see him "working" for another company. As such, they think this limits the potential price another company would pay for NFLX.

- Barclays says they believe the perceived strategic value of Netflix is not related to growth or profitability; it’s the value the service has to draw consumers into an ecosystem, similar to Amazon’s Prime Instant Video offering or Apple’s iTunes—loss leading or marginally profitable businesses that promote growth for core platforms like e-Commerce and premium hardware sales. However, the firm is skeptical that a buyer would find more value in purchasing Netflix than building a content offering organically.

- Janney's Tony Wible notes Icahn's disclosure of a 10% stake in NFLX has generated a new round of optimism around the name. His position and two more recent new long term holders essentially reduces the float by 33%; however, his entrance does not assure a turnaround and could disrupt growth if he were to challenge management's strategy as he did with Blockbuster. In a best case and least disruptive scenario he could push shareholders to embrace a sale of the company. His first press comments suggest he may be angling for a sale, although he notes he has no definitive plans, but his reference to US cash flows could also lead one to believe he sees international as a drag.

Strategy Trade-offs - Icahn has typically sought to create value by targeting mismanagement and cost. If that is his angle and he is not pushing for a sale, Wible suspects he would target cutbacks on international. However, NFLX needs international to sustain growth, as the US shows early signs of maturity. The firm maintains that NFLX must hit certain sub milestones to fund its future content obligations (e.g. NFLX is obligated to pay for content in international markets regardless of its initial sub base). It cannot afford to lose sub momentum. Further, NFLX has not demonstrated that it can grow subs without a somewhat commensurate increase in cost. In fact, this past quarter saw a decline in incremental US streaming margin despite some cost controls.

Wible maintains his Neutral rating and $48/share fair value estimate on NFLX.

Notablecalls: So is Icahn's involvement setting Netflix up as a takeover target for the likes of, Microsoft or the movie studios? Possibly. Janney's comments regarding the reduced float are very intriguing as well.

In the very short term however the risk/reward appears to be tilting to the downside. People are likely to use the recent squeeze to take profits, I suspect. Levels around $70-$75 look prudent in the near term.

Rememeber that at $80/share Ichan is already up 30% on his Netflix position.

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