Much has been made of Carl Icahn's sale of roughly half of his position in Netflix (NFLX), and the sale has thrown a damp rag on an otherwise very good quarterly report from NFLX. The question on everyone's mind, of course, is should I sell too? I think not, and here's why.
As mentioned above, Netflix's report was very good. Netflix now exceeds 40 million subscribers worldwide, and continues to grow exponentially as it has done historically. Netflix has surpassed Time Warner's (TWX) domestic HBO subscriber base at this point, a competitor and often cited comparison for NFLX. Domestic subscriber growth was roughly 24% for the last year, going from 25.1 million Q3 2012 to 31.1 million Q3 2013. That level of growth is outstanding. Is it any wonder, really, that NFLX's valuation is growing like it is?
International subscribers grew at a similar rate, but not for a single year, but rather a single quarter, adding 1.4 million subs onto 7.8 million, a total of 9.2 million international subs, a number that is similar to total subscriptions in 2008, a mere 5 years ago, and a number that has now more than quadrupled. It's likely that in another 6 months, that number will have quintupled. While HBO's domestic subscriber base is in the neighborhood of 28 million, its global base is 114 million, and that suggests that Netflix has a lot of subscriber room overhead from the international set.
Net income was also stellar, having more than quadrupled since a year ago, yet Carl's sale has so many crying Chicken Little. Keep in mind that he only sold half his stake, so he has nearly $1B still at stake, and so he is still very exposed to the price action of the stock.
Meanwhile, Carl is planning to hand back almost $1.8B to his investors. While the $800M garnered from the sale of NFLX seems grand beyond what most of us can imagine, it doesn't even cover half of what Mr. Icahn plans to disburse, and that steps it down a few notches for me. It is entirely conceivable that he will use the money from the sale for this purpose, as he's done so well with Netflix, but he may not want to miss out completely on future gains, so he only sells half his stake. Also consider that Icahn Enterprises (IEP) has holdings in 9 different sectors, only one of which is "investment;" he has numerous opportunities to need that funding for other obligations.
Netflix continues to do an excellent job of executing on its business plan, driving revenue, net income and subscribers. There is no reason to suspect that it will not continue to do so in the future, so are you selling Netflix because its prospects look poor, or are you selling because Carl did, when he sold for no expressly good reason other than to hedge his run some?