On October 31, 2012, Carl Icahn through a SEC 13D filing announced to the investment public he had taken a 9.98% ownership position in NFLX. NFLX stock reacted positively to this news as Mr. Icahn is viewed as shareholder friendly. Much was written in the business news about this filing and Carl Icahn himself provided a telephone interview conducted by Bloomberg News where he professed secular change in viewing habits of movie goers globally and Netflix’s business model – subscription based – would be the winner. (I have nothing to say of Netflix’s business model or whether this company even survives in the future.)
The business press and analyst circus followed after the disclosure with many opinions not only about Mr. Icahn’s investment history but also about Netflix as a company. Everyone, and I mean everyone seems to have an opinion of this company and Mr. Icahn’s investment has thrown fuel to this already burning fire. To me, and hopefully my readers, ModelPrice Guy is here to add commentary that doesn’t exist anywhere else. This blog is about about model price math of the present and use this math to form a probability of future prices. Yes, it’s the math of today – the company’s balance sheet – interacting with current market prices can give investors and general observers a sense of price activity in the future.
Hogwash, you say. Well back on January 30, 2012, ModelPrice Guy predicted NFLX would end up at EBV+5 or $47.80 (EBV+5 at the time) when NFLX was trading at $123.93 on February 10, 2012. I have reproduced our model price chart, at that time, for February 10, 2012 and indicated my target price.
NFLX with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Forget about the past, what about today and the future you say?
Well ModelPrice Guy reviewed the 13D that Mr. Icahn filed and what leaped out at me was where Mr. Icahn purchased his investment. Yes, Mr. Icahn purchased his shares just above EBV+5 or $55.17.
Here is our Model Price chart where Mr. Icahn made his investment.
Netflix with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.
Let me put this together for you. Mr. Icahn, who by the way is 76 years old, and a legend in the investment field (why would his investment create such buzz) goes “all in” in purchasing 10% (9.98%) of a company that is trading just above EBV+5.
What is so special about EBV+5?
This is what I said in my prior post on Netflix and EBV+5,
… [according to our work] some of our EBV levels are more significant then others. EBV+5 is one of those important levels. If NFLX transits down through EBV+5 or as I have indicated $54.65, “the market” will be taking away latent capital; capital the company can use to expand their business or do whatever management seems fit. The way we look at companies trading over EBV+5 is that “the market” believes in you and your story. Transiting down through EBV+5, means “the market” is saying your mortal. A mortal company that is earnings based not valuation based. Currently “the market” doesn’t care about earnings on NFLX because of where the company trades. If there is a negative transit of EBV+5, this will be a different company in “the market’s” eyes.
So Mr. Icahn obviously believes that EBV+5 is the price bottom for NFLX, and that “the market” will support this level. If “the market” does support Netflix’s business model then Mr. Icahn has made a very shrewd investment at an optimum price.
Obviously Mr. Icahn knows nothing of ModelPrice Guy (me) or of our work and to suggest that Mr. Icahn timed his purchase perfectly in relation to our work would be naive. However I would like to make two observations. First, great “old timers” in the investment field have great instincts – they aren’t billionaires by luck – and his instincts where sharp on buying NFLX just above EBV+5 (if this level holds in the future). Second, stuff happens at these EBV levels that are amazing when you view these levels as legitimate. Marginal buyers would have purchased shares of NFLX at EBV+5 saving a negative transit anyway, however Mr. Icahn purchased his legal share as part of the marginal buyer group. Hopefully my goal is putting some concrete math around these instinctive moves as a roadmap for other people to follow.
You can play this game!
So, for fun let me strategize Netflix for you my readers. As I have noted previously in my blog on Netflix’s 3rd quarter earnings, NFLX is trading between EBV+6 ($87.61) and EBV+5 ($55.17). To me this is a battlefield where I want no part. If NFLX were to trade close to EBV+5 again, this would be your opportunity to start or add to your position. If NFLX transited down through EBV+5, I would sell the position. Transiting down through EBV+5 would indicate lower future prices, especially with my calculated model price currently at $19.77 – our definition of fair market value (FMV). If NFLX were to transit up through EBV+6 this would be a BIG positive indicating higher future prices for NFLX. Subsequently if NFLX transited back down through EBV+6, the investment should be sold.
So there you have it. Mr. Icahn made a shrewd investment according to our model price math. Investors can piggyback on Mr. Icahn’s investment strategy with considerably less risk and without public disclosure.
I have now written more on NFLX then any other company since the start of this blog back in mid January of this year. NFLX is providing enormous material demonstrating model price math and with Mr. Icahn’s investment this business story promises to get ever more interesting. Stay tuned.