Bill Ackman sells Netflix stake after post-earnings plunge

Published Wed, Apr 20 20226:55 PM EDTUpdated Thu, Apr 21 20229:19 AM EDT

Pershing Square dumped its stake in Netflix Wednesday following the streaming service company's disappointing quarterly report, founder and CEO Bill Ackman said in a letter to shareholders. Ackman disclosed his purchase of more than 3.1 million shares of Netflix in January. He became a top-20 shareholder after buying the dip in the stock earlier this year. The hedge fund manager threw in the towel after Netflix on Tuesday reported its first subscriber loss in more than a decade and forecast a loss of 2 million global paid subscribers in the second quarter. "In light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty," Ackman said in the letter released Wednesday evening. Netflix shares cratered Wednesday , closing down 35% and wiping more than $50 billion off the streamer's market cap. Netflix management said it is exploring a global crackdown on password sharing and lower-priced, ad-supported tiers in order to bring in new subscribers. "While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company's long-term subscriber growth, future revenues, operating margins, and capital intensity," Ackman said. The loss on Pershing Square's Netflix investment reduced the hedge funds' year-to-date returns by four percentage points, according to Ackman. The funds are down about 2% in 2022, he said. "One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here," Ackman said. Pershing Square's Ackman on Thursday told CNBC's Scott Wapner that a losing bet could be costly for his very concentrated portfolio. "I'm 100% ready to admit when I'm wrong and 100% ready to admit when I'm wrong, quickly," Ackman told Wapner in a phone interview. "This might work with someone with a portfolio with smaller positions. But when you have 8 or 9 investments that are large it's hard to have bets where the dispersion of outcomes can be so wide." Read the full letter below: Dear Pershing Square Investor: 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. Reflecting this loss, as of today's close, the 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 our original analysis, we viewed this operating leverage favorably due to our long-term growth expectations for the company. Yesterday, in response to continued disappointing customer subscriber growth, Netflix announced that it would modify its subscription-only model to be more aggressive in going after non-paying customers, and to incorporate advertising, an approach that management estimates would take "one to two years" to implement. While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company's long-term subscriber growth, future revenues, operating margins, and capital intensity. We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. While Netflix's business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty. 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. That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding. One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here. We are in the midst of an opportunity rich environment for Pershing Square due to the dramatic shift in Federal Reserve policy, the highly inflationary environment, geopolitical uncertainty, and the resulting high degree of security price volatility. We therefore expect to find a good use for the Netflix proceeds. Please feel free to contact the investor relations team if you have any questions about the above. We are grateful for your support and long-term partnership. Sincerely, William A. Ackman

Bill Ackman, founder and CEO of Pershing Square Capital Management.

Adam Jeffery | CNBC

Pershing Square dumped its stake in Netflix Wednesday following the streaming service company's disappointing quarterly report, founder and CEO Bill Ackman said in a letter to shareholders.