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Why binging on Netlfix could cost you

Talking Numbers

Netflix subscribers in the US stayed indoors this Presidents Day weekend to indulge in a show about the dark side of Washington.

According to data from Procera Networks, roughly one in every six Netflix user watched at least one episode of the news season of "House of Cards". The drama following the ruthless machinations of Majority Whip Frank Underwood (played by Kevin Spacey) is one of the network's most popular original programs.

But while viewers may be binging on "House of Cards", legendary investor Carl Icahn is purging his portfolio of Netflix shares. In late October, the billionaire fund manager reduced his stake from 5.5 million shares down to a little less than 2.7 million shares. He remains one of the top owners of the Netflix, with control of 4.5% of the company.

It's estimated that Icahn made $826 million in the shares he sold – quadrupling his money at that point – though his remaining shares are up an additional 35% since his October sale. 

So, did Icahn make the right move?

Portfolio manager John Stephenson of First Asset Investment Management believes Icahn made the correct decision.

"It's a valuation call," says Stephenson. "I think the company is a fantastic company but I think [Icahn's] sale was a wise move. Look at it by metric: 3.2 times enterprise value-to-sales in 2015 [and] 50 times [price-to-earnings] in 2015. This is an expensive stock."

Stephenson believes Netflix's plan to go from 33 million subscribers to between 60 million and 90 million as overly ambitious, if not outright far-fetched. There are about 83.6 million broadband customers in the United States.

"For all those reasons – valuation and the fully-baked share price – you've got to just run away," says Stephenson. "I think Carl [Icahn] had the right idea."'

Jeff Tomasulo, Managing Partner of Belpointe Alternative Investments, agrees with Stephenson that Icahn made the right move and that Netflix is priced such that it can't afford one misstep.

Tomasulo notes the stock had one such tumble in 2011; the stock lost nearly 80% of its value in just five months. "What happens in these momentum stocks is that when they start to miss a little bit," says Tomauslo, "they have a really hard down move."

On a short-term basis, Tomasulo sees two support levels investors should be watching for.

"Some of the levels that I would be looking at are about $380 for some support," says Tomasulo. "And then I'm looking at a long-term trend which is around the $340. And, even with that, the stock would only drop 20% and still be an uptrend."

To see the rest of the discussion on Netflix with Stephenson on the fundamentals and Tomasulo on the technicals, watch the video above.

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