Netflix

Whitney Tilson just cannot seem to catch a break! One day after Carl Icahn announced a 10% stake in NFLX, sending shares soaring. But the stock got a downgrade this morning from Oppenheimer. They are downgrading NFLX on valuation, following its 14% increase, now near their $80 target. They believe NFLX has a strong competitive position, but Amazon.com, Inc. (NASDAQ:AMZN)’s future behaviour toward subscription video is not predictable and will limit the stock’s valuation.

However, there could be a saving grace for Netflix, Inc. (NASDAQ:NFLX), Stifel Nicholas analyst,  George I. Askew.,  has some interesting notes about the Carl Icahn purchase.

He believes that  Carl Icahn’s investment and activist tone may force Netflix, Inc. (NASDAQ:NFLX) to combine with a company that offers the an incremental revenue stream, or the content to defend its business.  He notes that he has no knowledge of any M&A activity or discussion, he believes that an interesting combination partners might include Amazon (although he believes that Amazon.com, Inc. (NASDAQ:AMZN) is committed to its existing path); Verizon Communications Inc. (NYSE:VZ)  which could buy Netflix rather than build a system as it is currently trying to do; or The Walt Disney Company (NYSE:DIS) which is an example of many companies that are treasure troves of content that could create the proprietary content advantage for Netflix that Netflix itself desires.

However, buying a company hoping for a buyout is not always a great investment. This is especially true when the company is facing heavy competition and has a weak moat. Stifel notes the following in regards to Netflix, Inc. (NASDAQ:NFLX), (emphasis Mr. Askew’s):

Without barriers to entry, and without another revenue stream to support its expensive content model, we believe Netflix’ business model is broken.

Additionally Barclays notes two further problems still facing NFLX and Carl Icahn:

Netflix management may be reluctant to sell:

They believe Icahn’s efforts may initially be met with resistance from management, particularly Reed Hastings, Netflix’s CEO. In the past, Hastings has expressed his reluctance to sell the company, a view they believe he still holds today.
What is the value for a buyer?

They believe the perceived strategic value of Netflix is not related to growth or profitability; it’s the value the service has to draw consumers into an ecosystem, similar to Amazon.com, Inc. (NASDAQ:AMZN)’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. However, they  are sceptical that a buyer would find more value in purchasing Netflix than building a content offering organically.

Shares of Netflix are down 2.3% in pre-market trading.

Disclosure: No position