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Netflix Stock Surges After Announcing Disney Deal, Guru Commentaries

December 04, 2012 | About:
Today, Netflix Inc. (NFLX)’s stock soared up to almost 15 percent after announcing a multi-year licensing agreement with The Walt Disney Company (DIS), reserving Netflix's exclusive rights to Disney movies after their run in theaters. Though the financial terms of the agreement have not yet been disclosed, Netflix chief content officer, Ted Sarandos, says Disney and Netflix have long shared a mutually beneficial relationship, and this partnership is just “a bold leap forward for Internet television.”

Recently, Netflix has flooded media headlines about concerns dealing with its programming spending.

In October, leveraged buyout investor Carl Icahn made comments about Netflix, insisting it was undervalued, especially in direct competition with significantly larger companies. The comments accompanied Icahn’s stake increase of Netflix that placed him at 9.98 percent ownership of the company.

Days later, Netflix announced a stockholder rights plan, intending to protect Netflix and its stockholders from “efforts to obtain control of [the company] that [its board] determines are not in the company’s best interests.” The plan was a move to strike back at Icahn, whose normal takeover practices involve taking the minority stake in public companies and aggressively pushing for change.

In the Baron Funds’ second quarter commentary, Rich Rosenstein shared the fund’s following insight about Netflix:

“Netflix continues to rapidly grow its subscriber base, as it offers the widest selection of TV and movie programming on the largest array of televisions and other devices among all streaming providers. This scale advantage allows Netflix to invest more for its programming, which then appeals to a larger subscriber base, allowing it to invest more for its programming creating a virtuous cycle. Netflix's business model is similar to that of HBO and other premium pay TV networks and, at scale, Netflix's profit potential would be considerable. Netflix is rapidly approaching HBO's scale in the U.S., and has a similarly large opportunity, in our view, outside of the U.S., a business that Netflix is just beginning to develop. Following a rare management misstep last year, Netflix shares have been volatile, having fallen as much as 80% from their highs. We have established a position to take advantage of this meaningful correction in the shares, as we believe the opportunity for Netflix remains intact.”

In more recent commentary, Guru Whitney Tilson of T2 Partners Management LP, said he thinks Netflix has a good business model, and is probably one of the more controversial picks in his portfolio. In a CNBC interview last October, he said:

“I only own about 10 to 12 positions on the long side now and [Neflix] is one of the ones I bought back at a high conviction, but understanding its high risk and high volatility, which has to be sized appropriately…I see it as a very entrepreneurial company, using technology to take an old product and deliver it in a new way to customers, with a very high value proposition to customers. Netflix only costs 26 cents a day for its subscribers. There is very high customer satisfaction and there’s a real global growth opportunity.”

With a market cap of $4.54 billion, Netflix operates by having its members pay a monthly low price to attain access to its video and digital offerings via PCs, Macs, internet-connected TVs, video game consoles, mobile devices and MP3 players. Additionally, Netflix enables members to organize movie rentals online and distributed via mail, with the added perk of no late fees.

Investing Guru Rob Baron definitely took advantage of the stock, as mentioned in Rosentein’s commentary, as Baron Funds reported selling all of its shares of Netflix in the third quarter.

At the same period, Gurus such as Whitney Tilson and Edward Lampert purchased shares of Netflix, while investors John Griffin, Frank Sands, George Soros and Steve Mandel sold all of their shares of the company.

"With this cutting-edge agreement, we are thrilled to take our highly valued relationship with Netflix to the next level by adding Disney's premier films to their programming line-up," Janice Marinelli, president of Disney-ABC Domestic Television, said in a Netflix press release. "Netflix continues to meet the demands of its subscribers in today's rapidly evolving digital landscape, and we are delighted that they will have much earlier access to our top-quality and entertaining slate."

Trading at $86.65, Netflix has a P/E (ttm) ratio of 92.2, a P/B ratio of 6.3 and a P/S ratio of 1.4. Netflix is ranked five stars in Business Predictability, 8 out of 10 in Profitability and Growth and 7 out of 10 in Financial Strength on GuruFocus.

To read more about Netflix, and other related articles, visit GuruFocus’ archived posts and submissions:

Carl Icahn Says Netflix Shares were ‘Undervalued,’ Takes 10% Ownership

Carl Icahn – Netflix Poison Pill is a Travesty of Corporate Governance

Whitney Tilson Shares Favorite Stocks

Why Did Icahn Buy Call Options of Netflix?

Netflix Managers Get Paid Regardless of Performance

Tech Stocks Review and Updates

About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

Visit Dianne Tordillo's Website


Rating: 2.6/5 (7 votes)

Comments

ValueStockPicer
ValueStockPicer - 1 year ago
Does Whitney Tilson watch TV? Reading his short thesis you get the idea he doesn't. Outside his circle of competence likely. Do the opposite of what he does. Now is the time to short nflx.

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