Bill Ackman cuts losses on Netflix after ‘losing confidence’

The star investor has sold his entire stake in Netflix at an estimated loss of $400 million.

Star investor Bill Ackman has sold his entire stake in Netflix Inc (NASDAQ:NFLX) at an estimated loss of $400 million just three months after snapping up shares in the firm.

Ackman moved to cut his losses after the firm reported this week its first quarterly decline in subscribers in a decade. It lost 200,000 customers compared with expectations that it would gain 2.5 million. In addition, the streaming giant warned shareholders another two million shareholders were likely to leave over the next three months. Its share price plummeted in response, dropping 35% to $226 as at last night’s US market close.

Ackman, the founder and chief executive of Pershing Square Holdings (LSE:PSH), had become a top 20 shareholder in Netflix when he bought 3.1 million shares worth about £1.1 billion in late January. At the time he highlighted Netflix as being attractive for its recurring revenue model, best-in-class management, economies of scale, industry leading content and pricing power.

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In announcing the share disposal last night, Ackman said he had “lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty”.  The loss of confidence stems from Netflix’s plans to make changes to its subscription model.

Ackman wrote to investors: "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 favourably 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."

Based on yesterday’s closing price, Pershing's stake was valued at just over $700 million. This indicates a loss of around $400 million.

Pershing said the losses reduced the Pershing Square Funds' year-to-date returns by four percentage points. It added that Pershing Square Funds are down approximately 2% year-to-date.

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Ackman’s letter to investors concluded by saying: “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.”

While Ackman has made losses in Netflix, a number of his other investment decisions have paid off handsomely over the years; including taking out hedges against market drops to protect his portfolio. Early last year, before inflation had begun to take hold, Ackman bought protection against interest rates rising to combat higher inflation later in the year.

Ackman’s investment approach is to buy high-quality businesses that generate predictable, recurring cash flows, and which he believes have limited downside.

Ackman’s investment vehicle dates back to 2004, with the investment trust launching in 2013. It has returned 17.1% a year on average for 18 years compared with a 10.2% return for the S&P 500 index of America’s largest companies.