This is not a terribly complex argument to make.
1) Netflix's streaming business does not make any money, and DVDs are dying.
DVDs will be gone within three years. Streaming will soon be ubiquitous.
Thus far in FY12, Netflix (NFLX) domestic streaming profit was $240 million. International streaming losses were $284 million. Eventually, one would expect marketing expenses at the international level to drop off and that side of the business will make a profit. How much of a profit remains to be seen, however, as contribution margins on the streaming side are 17% vs. almost 50% on the DVD side.
It will take years for Netflix to have substantial streaming profits.
2) Netflix does not have the money to compete.
The company has $800 million in cash and $400 million in long-term debt.
Amazon (AMZN) has $5 billion in cash, and no debt.
Content costs money. Prices are rising as more competitors move into the field, including the Coinstar (CSTR) and Verizon (VZ) joint venture, and of course, Apple (AAPL). Both Apple and Verizon have deep pockets.
Netflix is also blowing wads of cash on original programming, which will not result in nearly enough new subscriptions to justify the expense.
Netflix has $5 billion in content obligations it cannot pay for. Those deals will collapse, and the competition will scoop up the content, and possibly try to push Netflix out of business by making those exclusive deals.
3) Microsoft has no use for Netflix.
A rumor has been launched regarding Microsoft (MSFT) buying out Netflix, apparently because Reed Hastings left Microsoft's board. Perhaps Microsoft is kicking the tires here, but why would Microsoft spend billions on a business that would not provide even a return on that capital for years and years - if at all. Some folks say that they want Xbox to be a streaming device. But Microsoft doesn't need to buy Netflix to create that technology, and it also has deep enough pockets to purchase the content and attract Netflix subscribers.
Nor would Microsoft purchase a company with $5 billion in content obligations.
4) Icahn often proves to be more troublesome than helpful
Whitney Tilson, who can't seem to decide what side of the Netflix game he's on from one day to the next, said it best.
"If it doesn't get acquired, there's a risk that Icahn could be a real distraction to the board and management."
There is no better example than Icahn's run at Lionsgate (LGE). It created months of distraction for the company, and ultimately Icahn bowed out. He also took a failed run at a company that eventually failed named Blockbuster. He has not shown good judgment with investments in entertainment properties.
Icahn's motives should always be questioned - not because he's somehow a terrible person, but because he's a corporate raider. Raiders like to make money and do it in aggressive ways, and take lower premiums for companies than they might be worth.
This has obviously occurred to Netflix's Board of Directors. They put a poison pill in place on Monday. That removes the Icahn distraction threat, but it also sends a message that Netflix continues to overvalue itself. Were Icahn to try and takeover and sell the company, he'd likely do it for less than shareholders and the Board would like. With Icahn neutralized, Netflix thinks it can get a higher premium were it to be sold - except, as mentioned above, nobody will buy it.
How is this actionable?
Netflix is a dying company. It will be unable to compete in the market, and remains vastly overvalued. You should sell shares if you have them or, if you can find shares to short, do so. If not, buy long range in-the-money puts which function as a short.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.