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Icahn Unloads 50% Stake in Netflix

22 Oct, 2013 By: Erik Gruenwedel

Carl Icahn

Mercurial investor reaps hundreds of millions in 14 months of Netflix stock ownership. He thanks CEO Reed Hastings and actor Kevin Spacey

Netflix’s largest individual investor, Carl Icahn, has unloaded 50% of his stake, according to an Oct. 22 regulatory filing.

Icahn, who owned 9.4% of Netflix outstanding common stock, sold more 2.9 million shares in myriad transaction for prices ranging from $304 to $341 per share. He had acquired the shares for $58 per share in late summer 2012. Icahn’s return amounted to about $750 million.

The 77-year-old investor is known for acquiring sizable stakes in public companies he feels are undervalued or mismanaged, and then turning the screws on the executives in charge. Indeed, upon Icahn’s arrival, Netflix CEO Reed Hastings welcomed him, followed by the board enacting a “poison pill” amendment as safeguard against investors attempting a hostile takeover.

“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. I want to thank Reed Hastings, Ted Sarandos and the rest of the Netflix team for a job well done. And last but not least, I wish to thank Kevin Spacey,” Icahn wrote in the filing.

Spacey, of course, played lead in Netflix’s Emmy-winning original series, “House of Cards.” Interestingly, Netflix management during the Q3 financial webcast admitted that women’s prison dramedy “Orange Is the New Black” has generated the most viewers for any of its original programs.

The selloff by Icahn didn’t go unnoticed as Netflix shares, which hit $400 a share after trading Oct. 21, fell to $330 per share Oct. 22 in heavy trading.

Wedbush Securities analyst Michael Pachter, a long-time Netflix bear, begrudgenly admitted Netflix had outperformed expectations. But he cautions for how long it can do so.

"They did $1.1 billion in revenue and they generated $7 million in free cash flow,” Pachter wrote in an Oct. 22 note.

Such scuttlebutt prompted Icahn’s son, Brett, and fellow co-manager David Schechter, in Icahn’s regulatory filing to sing the praises of Netflix.

“We find it difficult to understand why a household would not subscribe to the service, considering the low monthly price, the robust content aggregation (which includes an increasing mix of premium and award-winning original series) and the dramatically superior user experience from both an interface and overall technology perspective,” they wrote.

Icahn and Schechter said Netflix’s predominately fixed content cost (variable primarily to the extent management chooses to further improve the service) gives the business model operational leverage.

“Our recognition of this operational leverage, combined with our expectations for both domestic and international subscriber growth with modest price increases over time, has been and continues to be the core of our investment thesis,” they wrote.

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