Carl Icahn Sells Netflix (NFLX), Buys Shares in Apple (AAPL)

Carl Icahn Sells NetflixBillionaire Carl Icahn sold his holdings in Netflix, Inc. (NASDAQ/NFLX) for $2.1 billion; and he wasn’t shy about what he’s looking at buying next—Apple Inc. (NASDAQ/AAPL).

On Wednesday June 24th, Icahn tweeted that his hedge fund “sold last of [their] $NFLX today.”  He added that they “believe $AAPL currently represents same opportunity [they] stated NFLX offered several years ago.” (Source: The Wall Street Journal, June 24, 2015.)

The famous investor quietly amassed a 10% stake in Netflix in the autumn of 2012. Between 2011 and 2012, Netflix’s stock price had plummeted below $60.00 from a high of $270.80. He paid an average price of $58.00 per share.

Icahn picked up those shares when nobody else would touch them. And less than three years later, he sold them at a 554% profit.

Why Icahn Sold Netflix

Netflix’s stock price has skyrocketed in recent years. But it’s easy to see why its growth may be leveling off. At a forward looking price-to-earnings (P/E) ratio of 200.77, investors may be overestimating the company’s ability to boost its bottom line.

When Netflix first arrived on the scene, its biggest competitor was Blockbuster LLC. Without the burden of brick and mortar locations, Netflix could afford undercut traditional movie rental stores on price.

They crushed Blockbuster and expanded their streaming service, breaking the mold of traditional TV programming.The price point of $7.99 has proven irresistible to millions of customers, but the company is less efficient than its competitors at turning a profit.

Its return on assets is 4.28%, well below Comcast Corp.’s 5.27% and Time Warner Cable Inc.’s 5.83%. The company is facing increased pressure from competitors like Hulu, with its expenses rising rapidly alongside the development of original content.

By investing in shows like House of Cards and Orange is the New Black, Netflix is cementing its relationship with customers. Fans are less likely to switch to another streaming service if it means not being able to watch their favorite shows.

The move will hopefully improve customer loyalty, but it’s unclear how Netflix can monetize their investment. In theory they could charge a premium for original content; but customers may not respond kindly to the added fee.

Shares fell 0.38% on Wednesday and were down an additional 0.8% in premarket trading on Thursday, June 25th.

Apple, the Next Netflix?

Apple and Netflix aren’t in the same industry. So when Icahn called Apple the next Netflix, he wasn’t making a linear comparison. Our best guess is that he was talking about Apple’s ability to win two emerging markets: the online music market and the wearable technology market.

Apple was the first company to monetize music online with iTunes. Aside from providing record labels with a digital distribution channel, it offered independent artists a broad avenue for their work.

The company now faces a more crowded market, with stiff competition from Spotify and Pandora. But Icahn’s comments suggest that neither of those streaming services could compete with Apple’s market power or ability to provide a richer experience for consumers.

As for wearable technology, the Apple Watch sales speak for themselves. Roughly a million watches were pre-ordered in the first week. (Source: Forbes, April 20, 2015.) As Apple combines its mobile offerings with fitness features, it will staunchly defend its market share against upstarts like Fitbit Inc. (NYSE/FIT).

Icahn also believes the time is ripe for share buybacks. In an interview on CNBC, he said, “The one thing I disagree with the company on is not buying a great deal more stock here.”

The tech giant has been sitting on a cash stockpile of $194 billion as of April 2015. Icahn estimates that buybacks and a few years of growth could push Apple’s valuation to $240.00 per share. (Source: CNBC, May 19, 2015.)