Bill Ackman (Trades, Portfolio) is a legendary investor who is known for his public positions and bullish stances on stocks. After purchasing a major position in Netflix (NFLX, Financial) at the start of 2022, Ackman has now made a very public u-turn and sold the position after Netflix reported losing 200,000 subscribers. By my estimates, Pershing Square has lost approximately $400 million on this trade.
Ackman wasn't the only one selling; Netflix shares got hammered after the first net subscriber loss in a decade, and the sell-off caused the stock to decline by an eye-watering 35% in a single trading day. The share price is now trading at a similar level to 2018.
The buy
On Jan. 26, Ackman reported in a letter to shareholders of Pershing Square Holdings (LSE:PSH, Financial) he had “acquired more than 3.1 million shares of Netflix... making us a top 20 shareholder.” Ackman then went on to praise the company extensively for its “superior customer experience” and “high quality business overseen by a world class management team.”
He highlighted that their product offering is “80% less expensive than the average Pay TV package in the USA” and they have the “lowest churn rate by a wide margin amongst streaming services.”
Netflix's share price at the time had declined 47% from its highs of $671 per share in November 2021. Ackman saw this as an “opportunity to acquire Netflix at an attractive valuation/" In the Pershing Square annual investor report, Ackman outlined the investment in detail. Using the “proceeds of a hedge” which equated to approximately $1.2 billion, the firm purchased 3.1 million shares of Netflix at an estimated buy price of $395 per share, making Pershing Square Holdings a top 20 shareholder in the company. I outlined an overview of Bill Ackman (Trades, Portfolio)’s bullish Netflix stock thesis in a previous article.
(Image from Pershing Square's investor presentation)
The sell
On April 20, Netflix reported its first-quarter results, which included a surprise net loss of 200,000 subscribers. Their shareholder letter stated, “Our revenue growth has slowed considerably as our results and forecast [shows].”
The company also stated, “A large number of households sharing accounts, combined with competition, is creating revenue growth headwinds," though one could make the argument that Netflix's crackdown on households sharing accounts has potentially contributed to its subscriber loss.
It seems Ackman saw this as a turning point and thus decided to sell the large position that his firm had just acquired. According to my back-of-the-envelope calculations, Pershing Square lost approximately $435 million on the sale. In Ackman’s new letter to shareholders released on Wednesday, April 20, he states in a somber tone:
“Today, we sold our investment in Netflix, which we purchased earlier this year. The loss on our investment reduced the Pershing Square Funds’ year-to-date returns by four percentage points...
[Thus] Pershing Square Funds are down approximately two percent year-to-date..
While we have a high regard for Netflix’s management and the remarkable company they have built, in light of the enormous operating leverage inherent in the company’s business model, changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value.”
In Ackman’s previous analysis, he viewed Netflix’s operating leverage positively due to the long-term growth expectations for the company. However, due to the subscriber growth issues, Netflix has announced a one- to two-year plan to focus more on advertising and go after “non-paying customers,” Ackman believes these changes are “sensible” but it is “extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity.”
One of Pershing Square's core tenants is to invest into companies which offer “predictable free cash flow generation.” Ackman states in his latest letter that “We have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.”
Was selling the right call?
Ackman does caveat his sale of Netflix with a positive tone, stating:
“Based on management’s track record, we would not be surprised to see Netflix continue to be a highly successful company and an excellent investment from its current market value.”
Thus, for existing shareholders, all may not be lost. However, he also stated “the dispersion of outcomes has widened.”
The GF Value Line, a unique intrinsic value estimate from GuruFocus, shows Netflix stock is a “possible value trap.”
Despite the major decline in share price, Netflix still trades at a fairly high price-earnings ratio of 20, which is above the media industry average.
A new tactic Ackman is implementing, having learned from very public mistakes in the past, is to “act promptly when we discover new information about an investment that is inconsistent with our original thesis.” That is what Pershing Square has done here.
Ackman goes on to give a macro overview of the “opportunity rich environment” which results from high inflation combined with geopolitical uncertainty. Thus, he expects to find “good use for the Netflix proceeds.”
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