Carl Icahn Reduced His Netflix Stake by 15%. So What?

Carl Icahn sold some 420,000 shares of Netflix in the first quarter. Does this really mean anything for Netflix shareholders?

May 22, 2014 at 5:45PM

Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps.

Carl Icahn has made a boatload on his investment in Netflix (NASDAQ:NFLX), and he has cashed in some of his chips again, selling around 421,000 shares in the first quarter, according to the most recent 13F filing. If Icahn sold Netflix at the quarterly peak of $458, that's a cool $193 million, versus $138 million at the lowest price of the quarter, $328.71:

NFLX Chart

NFLX data by YCharts.

However, here's what Netflix shares were trading at during the quarter that Icahn made his largest investment in shares:

NFLX Chart

NFLX data by YCharts.

Netflix shares peaked at around $95 in the fourth quarter of 2012, and Icahn loaded up on more than 4.2 million shares over that time frame. At worst, he tripled his money when he sold last quarter. 

However, what really matters is what the future looks like for Netflix. And while it's not usually a good idea to blindly follow another investor's moves -- even Icahn's -- it's worth noting that he still retains 2.2 million shares as of the most recent 13F. While Icahn's decisions may or may not align with what's right for you, he's clearly bullish on Netflix right now. Let's look at a few reasons Netflix's future looks bright. Should you follow Icahn's decision to hold a large stake in Netflix?

Return to strong growth 

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Source: Author.

The long and short of the Netflix story is about growth. As it says on the company's investor relations website, people still watch more than 1 billion hours of traditional TV broadcasts every single day, but those numbers are on the decline as cable companies continue to raise prices and more and more people take advantage of mobile-friendly services like Netflix, which can go with you on your smartphone, tablet, or laptop. 

Add in the benefit of not being locked into programmers' schedules, or a DVR that's available only at home, and the freedom of services like Netflix is an attractive option for millions. Netflix added around 4 million subscribers last quarter, bringing its paid member count to more than 46 million. This is a 28% increase from a year ago -- shortly after Icahn first started buying shares -- when Netflix had 36 million members. Go back to 2012's first quarter, and Netflix has grown its membership an astounding 76%. 

The growth is hitting the bottom line as well. In Q1 last year, domestic streaming contributed $131 million in profit; that number has since grown to $201 million. Just as importantly, the growth in international streaming, where Netflix has been heavily investing, is close to paying off. International revenue has almost doubled from $142 million to $267 million, and a $77 million loss has been more than halved. At the current rate of growth, international streaming could be profitable as soon as the third quarter. 

The DVD is slowly dying, but international will more than make up for it 
This has -- in the past -- been pointed at as Netflix's weak spot. Last quarter, DVD memberships contributed $98 million in profit, and that's expected to decline to $92 million next quarter. However, international streaming's move toward profitability is progressing much more quickly than the DVD is declining. DVD streaming's profit will decline about $6 million next quarter, while international streaming is expected to cut its loss from $35 million to $12 million. Combined, that's a net shift of about $17 million in profits added to the bottom line. 

Final thoughts: Keep it long-term and balanced 
Carl Icahn's 2.2 million shares of Netflix are worth more than $873 million, but they make up less than 2.5% of his stock holdings, according to the 13F. And since you'll always find out about his trades both after they happen and at the same time as the rest of the market, don't get too caught up in what he does. Chances are his motives and time horizon are quite different from yours.

On its own merits, however, Netflix remains a tremendous long-term growth story. The international story is just getting started and is more quickly becoming profitable than the DVD business is in decline. Does it fit your portfolio? It's definitely worth a look. 

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Jason Hall owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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