Analysts: Netflix Sale, International Losses Likely Focus for Carl Icahn

4:02 AM PST 11/01/2012 by Georg Szalai
Jin Lee/Bloomberg/Getty Images

The activist investor's purchase of a stake could lead to a showdown with CEO Reed Hastings and "disrupt growth," one warns.

Wall Street analysts on Thursday started discussing possible scenarios for Netflix after late Wednesday's news that activist investor Carl Icahn has acquired a 10 percent stake in the online streaming giant.

Observers mostly cited a possible push by Icahn for a company sale and reduced spending on international expansion, which has lead to losses, as his likely focus areas. They could become key points of contention between the new investor and Netflix CEO Reed Hastings, they argued.

At least one analyst warned that a showdown between the two could become a distraction for the company. Janney Montgomery Scott analyst Tony Wible said Icahn's entrance "could disrupt growth if he were to challenge management's strategy as he did with Blockbuster."

Based on Wednesday's disclosures "and our experience in covering companies targeted by Icahn, like Blockbuster and Lionsgate, we believe Icahn's motivation behind his stake in Netflix is to control and then ultimately sell the company," Barclays Capital analyst Anthony DiClemente said in a report.

Hastings, who owns a stake of about 2 percent, has shown no interest in a sale.

"Due to the fundamental challenges facing the business today, including increased domestic competition and rising content costs, we believe other shareholders would be willing to partner with Icahn in his efforts to force a sale," DiClemente said though. "However, we are skeptical that a buyer would find more value in purchasing Netflix than building a content offering organically."

DiClemente said the possible strategic value to a buyer does not lie in Netflix's growth or profitability. "It's the value the service has to draw consumers into an eco- system, similar to Amazon's Prime Instant Video offering or Apple's iTunes - loss-leading or marginally profitable businesses that promote growth for core platforms like e-commerce and premium hardware sales," he argued.

Icahn himself has signaled that large technology companies, such as Google, Microsoft, Amazon.com and Verizon, could be interested in Netflix.

DiClemente maintained his "equal-weight" rating, similar to other analysts' "buy" ratings, on Netflix with a price target of $65.

Wible, who has a "neutral" rating on the stock, said that "in a best case and least disruptive scenario," Icahn could push shareholders to embrace a sale of Netflix. "But his reference to U.S. cash flows could also lead one to believe he sees international as a drag."

That could lead the activist to push for cutbacks on spending in international expansions. "However, Netflix needs international to sustain growth as the U.S. shows early signs of maturity," Wible argued.

That could be another key dispute for Icahn and the Netflix boss. "Hastings has shown he is willing to lose money for long- term growth, while Icahn more typically targets near-term cash flow opportunities that could detract from Mr. Hastings' vision," he said.

Email: Georg.Szalai@thr.com
Twitter: @georgszalai

comments powered by Disqus