Icahn May Be Selling, But Netflix Remains An Attractive Stock

Netflix Remains Attractive Despite Icahn Sell-Off

Carl Icahn has sold 16% of his stake in Netflix; but while that news may push its stock price down, we expect it will rebound soon on the company’s strong growth prospects

By Muhammad Saad Khan on May 16, 2014 at 10:59 am EST

The ongoing battle over net neutrality and Amazon.com, Inc.’s (AMZN) deal with HBO has followed by more bad news related for Netflix, Inc. (NFLX) investors . According to a regulatory filing made today, Carl Icahn sold 16% of his stake (420,958 shares) in the streaming company during the first quarter of this year. He now has a stake of only 3.7% in Netflix, holding 2.24 million shares with a market value of roughly $773 million. Although Icahn’s move signals that the stock may move down in the weeks to come, we continue to believe that Netflix promises upside, based on its strong growth prospects.

Netflix: Will Market Over-React to Icahn’s Move?

Some might think that Icahn’s reduced holding in Netflix will add to investors’ concerns about the company’s high valuation, and that investors might pull down the valuation of this high-growth stock going forward based on this news. However, we think this will likely not happen. After all, when Icahn sold almost half of his Netflix shares in October last year, the stock price dropped only temporarily, and just a week later it started to recover. In a month’s time, the stock had broken through its historical highs.

Icahn bought Netflix’s shares at an average price of $58 in 2012, and has realized significant gains by selling the shares at the current price.

This does not necessarily mean that the hedge fund manager thinks of the company as a risky investment; it might just be that Icahn does not expect his investment’s value to increase at the same rates as earlier. We believe that while Netflix’s stock price may drop over the next one week due to this news, it will eventually rebound. The drop in price is a good opportunity for the investors to go long.

Netflix Increases Prices

Netflix recently raised its rates for subscribers by $1 to $8.99 per month, as part of its strategy to raise funds for higher investments into movies and TV shows. This is the first price increase for video-streaming service in three years, and will help the company improve content through higher investments. Considering that Netflix suffered a loss of subscribers when it bumped up prices by 60% for customers who wanted both DVD-by-mail and streaming services in 2011, some investors might be concerned about the potential impact of this price increase on the company’s existing and potential subscribers. However, the strategy to increase prices is expected to be successful this time.

This is because the company plans to lock in its existing subscribers for at least two years. This would not only help Netflix retain existing subscribers, as sthey might not disconnect Netflix for now to keep benefiting from lower prices over the next two years. In addition, the company has introduced a $7.99 plan without high-definition service for cost-conscious subscribers. This subscription plan does not allow subscribers to view programs on more than one device at a time, so it would help Netflix improve revenues by prohibiting the sharing of accounts.

The company has also introduced a premium subscription plan for $11.99 per month that allows customers to simultaneously stream shows on as many as four devices. These plans have been implemented after passing through a long research and testing phase. Therefore, there is a high probability of the new pricing plans being successful and producing tangible results for Netflix, going forward.

The new pricing plan will not significantly add to revenue growth due to the “grandfathering” of Netflix’s current online subscribers worldwide, which now number 48.4 million. It would, however, have a substantial impact on the company’s top line after two years, when the existing subscriber base starts paying the higher fees.

We have already done an investment analysis of Netflix.


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