Netflix: Should You Cash In? Barron’s, Icahn, Morgan Stanley Say Yes

On October 22 Carl Icahn sold off 2.4M shares of Netflix, Inc. (NASDAQ:NFLX) at a price of $341.44.  He said at the time, “As a hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457% in only 14 months it is time to take some of the chips off the table.”

Netflix value offering

Note that his fund managers David Schechter and Brett Icahn continued to believe in the value offered by Netflix, Inc. (NASDAQ:NFLX), saying it was one of the “few companies at any given time in history that represent the pure life blood of a colossal secular growth category.”

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Yet the fact remains that on September 12, when the stock was at $301.41, analysts at Morgan Stanley and BTIG Research chopped their ratings on Netflix due to concerns that it may be fully valued. An article that appeared in Barron’s on Tuesday, warning that Netflix, Inc. (NASDAQ:NFLX) could plunge 50%, failed to trigger any untoward selling pressure in the stock – it closed unruffled at $333.73.

Worries for Netflix stocks

Given that a savvy investor like Icahn, who entered the stock at $58, is lightening up, and that analysts are uncomfortable with the price of the stock, should you be worried if you are holding Netflix, Inc. (NASDAQ:NFLX)?

In fact, shareholders would probably do well to heed the Barron’s article warning. A stock that has quadrupled inside of a year is certainly in overbought territory – and the stock has a previous history of volatility. Between July and November 2011 it fell from $295 to $64 following the company’s ill-conceived marketing decisions.

Analysts remain wary about earning shocks that could emerge in the future due to the company’s policy of amortizing content costs against revenues over a number of accounting periods, while the costs for creating/purchasing the content is incurred immediately. With the subscriber base growing as it has, the company may be able to keep net earnings intact – but what if content prices go up, or subscriber growth peaks out? The company is still licking its wounds from the backlash it suffered at the hands of the subscribers the last time it tinkered with pricing, and therefore pricing power may be available only in theory.

In the tech world competition can be emerge unexpectedly, and be swift and brutal. Netflix, Inc. (NASDAQ:NFLX) must contend with YouTube, a streaming content provider that incurs negligible marketing and content costs, Amazon and its cloud clout, as well as the cable industry.  Moreover, to keep its subscriber cost intact, Netflix has no option but to keep investing in ever-fresh content, which runs only for a licensed period, and has limited shelf life as far as customer gratification is concerned once the content has been aired. Note that Netflix has much higher subscriber ‘churn’ compared to cable.

And while on the subject of tech, and looking at the current trajectory of shares such as Twitter Inc (NYSE:TWTR),, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB), investors should not ignore any ‘déjà vu’ from the last dotcom bubble – it may well happen again.