MorningWord 9/12/13: Icahn Called His Shot on the Enrty, Don’t Expect Same on Exit – $NFLX

by Dan September 12, 2013 9:16 am • Commentary

MorningWord 9/12/13:    In my 17 years in the business I have seen very few situations that rival the roller-coaster ride that NFLX shares have been on for the last 5 or so years.  Most logical investors have struggled with the valuation of the video delivery service since the moment it went public back in 2002, and for many years, the stock wallowed btwn $10 and $50 until the explosive break-out in late 2009 that saw the stock rise 6 fold in less than 2 years.  The rest of the story is more familiar.  The company tried at the stock’s top in mid 2011 to migrate users from dvd sales to their streaming platform, and thus set in motion a sequence of events that would cause the stock to crater right back to the 2009 break-out levels in the ensuing 12 months.  Any active U.S. market participant knows the next part of the story – the stock re-taking the previous highs, after one man stepped up called the bottom and hasn’t  “sold one share“.  Of course I am talking about Carl Icahn, who is the third largest shareholder of the company with a 9.4% stake.

The chart since inception is truly amazing,  and no doubt there will be MBA case studies written on the rise and fall, and rise again of the company, and the stock for years to come.

NFLX since IPO in 2002 from Bloomberg
NFLX since IPO in 2002 from Bloomberg

While the stock has been a favorite of momentum investors and day-traders, Wall Street analysts for all intents and purposes have missed the latest ride on the NFLX express.  With 2 analyst downgrades in the last 24 hours, the stock has very few champions on the sell side with just 6 Buys, 22 Holds, and  8 Sells with an average price target almost 30% lower than where the stock is currently trading.

For those of you riding Mr. Icahn’s coattails in this one, I wouldn’t expect him to be nearly as forthcoming on his exit as he was in his entry to this one and most recently AAPL.   There will not be a Tweet saying “sold a little bit of my stake, think all the good news is in the stock, slowly piecing out of it”. There will more likely be an appearance on a TV show prior to an expected filing date where he drops the bomb.  So this post is a little bit of a PSA, not meant to scare any holders into exiting their position (heck maybe it doubles again from here), but merely to state what is a fairly obvious fact that for those who are riding the Icahn-Express, don’t expect him to hold your hand on the way out.

The bear story in the stock is well known, and selling your long or shorting on valuation has been the wrong trade for the last year.  The company is expected to grow earnings at 85% a year for the next couple years, unless they go down the AMZN route where they re-invest profits for geographic expansion and content acquisition.   I would bet on the latter, and the notion that Carl Icahn, an Activist Investor at heart could add any value at the current stock price seems fairly ludicrous.  The risk reward at current levels does not look that attractive if you are a value, momentum or activist investor in my opinion.