Get Over It: Netflix Isn't for Sale

When Netflix (Nasdaq: NFLX  ) announced that its board of directors had approved a "stockholder rights plan," the subtext was perfectly clear: CEO Reed Hastings was telling Carl Icahn to take his money elsewhere.

Icahn announced that he acquired a 9.98% stake in Netflix last week. Not long after, he talked with Bloomberg about the possibility of a sale. Hastings wants no part of that. Instead, an unnamed spokesperson told The Wall Street Journal that the rights plan was a reasonable step "in light of the recent, and stealth, accumulation of stock and options by an activist investor."

Initial enthusiasm for Icahn's interest in Netflix, which he calls "undervalued" and better positioned than rivals Amazon.com (Nasdaq: AMZN  ) and Coinstar's (Nasdaq: CSTR  ) Redbox, briefly pushed the stock above $80. Netflix closed yesterday's trading at $78.24. Which raises a question: Do investors see what Icahn sees?

There's reason to believe competitors see Netflix as a growing threat. Just today, Amazon stealthily unveiled a $7.99 per month alternative pricing plan for Prime, providing unlimited streaming and free two-day shipping for roughly the same as what Netflix charges its streaming subscribers. Coinstar, meanwhile, couldn't meet the Street's third-quarter revenue estimate despite hopes of a tailwind arising from its streaming partnership with Verizon (NYSE: VZ  ) .

More importantly, is it possible that, amid the posturing, some see a genuine bargain in Netflix's shares? Those buying now can't really be betting on the inevitability of a buyout.

Fortunately, they don't have to. Strip away the cost of Netflix's international expansion and what remains -- domestic streaming plus legacy DVD rental -- has produced $897 million in contribution profit over the trailing 12 months. Taxing that at a normalized 40% and dividing by the company's 55.5 million shares outstanding puts Netflix's core profit at roughly $9.70 a share .

No wonder Icahn is interested. Underneath the outsized spending on overseas growth is a business trading for about eight times its core earnings power. That may be why noted bargain hunter Whitney Tilson, once short Netflix shares, is now betting on a recovery.

Is he right? Or is Icahn's position that Netflix is "undervalued" just bait for a big acquirer? And most important of all, are the company's international aspirations the opportunity Hastings wants us to believe? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


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  • Report this Comment On November 06, 2012, at 9:20 PM, FoolSolo wrote:

    I'm not sure what Icahn sees in Netflix. Maybe the possibility of splitting the company up into DVD and Streaming? As it stands, the DVD business is far more profitable, yet this is the part of Netflix's business that is in decline, and the part that Netflix is trying to close down. Another key concern is the increasing competition, and the fact content is getting more expensive. Additionally, it is costing Netflix a lot more money to convert international subscribers than domestic, so the ROI is much less compelling. All of this is continuing to impact margins, and the continued push internationally is consuming all the profits.

    Regarding the so called "Stock holder rights plan" I am opposed to such plans, these are inherently not in the stock holder's best interest. Such plans should be put to the stock holders to vote on, and they should never be crafted and rushed overnight as a knee-jerk reaction to a run on the company by an investor.

    I remain unconvinced that Netflix is a bargain here. I'm not certain they can find a way to a level of profitability that justifies their multiples.

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