In an interview with CNBC, Icahn said:
“I’m buying it because it’s undervalued. I believe there is a secular change in the media industry, and consolidation in this space makes sense,” Icahn added.
Shares of NFLX surged 14% on the news as short-sellers panicked.
However, Icahn's disclosure reveals an odd fact. He mainly purchased in the money call options instead of shares.
Icahn only purchased 500,000 shares of NFLX. The rest of his position, which amounts to almost 10% of the company, was in the form of call options. More precisely, Icahn disclosed a 5.541 million stake from call-option equivalents with an exercise price of $36.05. These call options expire on Sept. 4, 2014. In other words, Icahn was able to gain significant control without using nearly as much cash as he would have needed if he bought the shares outright.
However, the question is why did Icahn use call options instead of actually buying shares? Surely, his fund has a lot of cash as he's struggled to find opportunities in the current market environment.
Icahn appears to be making a speculative bet that the company would be purchased by a major tech company within the next 18 months. In fact, one would think that he would pressure a sale within the next three months as his call options experience time decay.
Investors should be wary of Icahn's track record when it comes to video and the Internet. He lost a lot of money on his investment in Blockbuster Video and his stake in WebMD (WBMD) has also been a failure.