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Carl Icahn Says Netflix Is Cheap

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Days after rumors of a Microsoft (Nasdaq: MSFT  ) buyout bid drove Netflix  (Nasdaq: NFLX  ) shares up 13%, earlier today, the Nasdaq halted trading the stock in the wake of a report that activist investor Carl Icahn has taken a 10% stake in the company. The stock is up another 13% since.

According to Icahn's filing with the Securities and Exchange Commission, his company now owns 5,541,066 shares, representing 9.98% of the business, but that includes call options and puts sold against those options. Icahn is betting big, but he's also hedging.

The Netflix rumor mill has been on overdrive ever since CEO Reed Hastings announced plans to step down from Microsoft's board. As a director, he would have been forced to recuse himself from any discussion about an acquisition of the company that he founded.

Regardless of whether a deal with Microsoft is in the works, Icahn may force talks sooner than anyone would like. From the filing:

The Reporting Persons are considering ways for the Issuer to maximize shareholder value but have reached no conclusion. The Reporting Persons may in the future seek to have discussions with the Issuer. [Emphasis added.]

The filing also says that Icahn considers Netflix "undervalued" on the basis of its "dominant market position" and "international growth prospects." The implication? He appreciates Hastings' strategy, even if the Street has been slow to approve of Netflix's substantial capital outlays.

Yet, Icahn has a checkered history that includes badgering Yahoo! (Nasdaq: YHOO  ) executives to sell to Microsoft years ago, a move that looks good in retrospect. His biggest current holdings include Dynegy (NYSE: DYN  ) and Lions Gate Entertainment (NYSE: LGF  ) , S&P Capital IQ reports. With Netflix, he's adding to his stake in top entertainment brands.

Hollywood is just as interested in seeing Netflix succeed. Just this week, as Hurricane Sandy kept millions hunkered down at home, Netflix saw a 20% surge in streaming views. That isn't surprising, really. Netflix has a noticeable content edge when compared to its closest competitor, Hulu.

Is that enough to make the stock a buy? Icahn seems to think so, but there are several other factors to consider. One of our own star analysts has developed a premium report weighing all the risks and opportunities for Netflix, so you can decide for yourself. Click here to get your copy instantly.


Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He had shares of, and a long-term call options position in, Netflix at the time of publication. Check out Tim's web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Netflix and Microsoft. Motley Fool newsletter services have recommended buying shares of Netflix. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 01, 2012, at 10:05 AM, prginww wrote:

    "...that includes call options and puts sold against those options. Icahn is betting big, but he's also hedging."

    Buying calls and selling puts is not really hedging. It's a synthetic long position, similar to buying stock.

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