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A man worth pennies who criticizes a man worth millions each have exactly what they are worth.
–Russell Conwell
People mostly seem to hate Carl Icahn. That’s probably because, as the quote above illustrates, the guy is a genius when it comes to stocks and investments. He is also brash and outspoken, with an ego the size of Manhattan. He has, of course, earned the right to be all of those things.
A lot of people are grumpy that he made about 12 times his money by investing in Netflix (NASDAQ: NFLX) at $58 per share. I have to admit, I thought he was crazy at the time. As we’ve learned, however, what a company actually generates in cash flow has little bearing on how high its stock might go.
Why did Ichan sell, and what are Netflix’s prospects? The two have almost nothing to do with each other.
When Icahn purchased Netflix he said the company had, “significant strategic value” for “a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the internet, mobile, and traditional industry.”
It’s a Disaster
Nobody merged with Netflix or bought it out. In fact, very little has changed for Netflix. Yes, it has dumped a lot of money into high-quality original programming. Yes, it has expanded both U.S. and international subscribers.
However, the company still barely makes much of a profit, generates no free cash flow to speak of, and is valued at 150x last year’s net income. In other words, Netflix is a financial disaster but nobody cares.
This is probably why Icahn bailed. He knows the company isn’t making any money. He knows the DVD business is dying, and that’s the high-margin segment of the company. He knows the company will have to raise prices on streaming. He knows the company cannot afford to meet the billions of dollars in off-balance-sheet liabilities for content.
What he does know is he has sold pieces on the way up and just got out of the last bit of his massive stake with a massive profit. The company just announced a 7-for-1 stock split, which will increase the limited number of shares out there, making it harder for the stock to run as it has.
He also knows that Netflix stock has been living on borrowed time. As great a product as Netflix has, when it comes to original programming, it has increasing levels of competition. Beyond that, there are multiple streaming services and they are only growing and acquiring more content.
Time to Move On
Apple (NASDAQ: AAPL) and its iTunes platform is a huge competitor. So is Amazon.com (NASDAQ: AMZN). Hulu is big. I just bought a Roku and cannot believe all the on-demand content that is available. Given the deep pockets that Apple and Amazon have, not to mention other services, the price for streaming content is only going to increase and Netflix simply doesn’t have the capital to compete.
Icahn knows this, too.
So now it’s time for him to move on. He keeps pressing his case on Apple, which he thinks can double from here. He’s got other positions, too, and you can invest right along with him by purchasing shares of Icahn Enterprises L.P. (NASDAQ: IEP), if you are so inclined.
This is making ordinary people rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her. Find out how they did it right here.