Bill Ackman’s Pershing Square Holdings, which made a high-profile purchase of Netflix stock in January after a stock price plunge, said it sold the stake today because they “lost confidence in our ability to adequately assess the company’s future prospects.” to predict of certainty.”
Pershing’s portfolio “requires a high degree of predictability in the companies in which we invest,” Ackman said in a letter to shareholders. The company had acquired more than 3.1 million shares to become one of the top 20 shareholders.
Read the letter below in full.
Pershing’s losses on its investment in the streamer reduced the fund’s year-to-date returns by four percentage points.
Netflix shares plunged 35% today as investors exited after a weaker-than-expected earnings report and forecast on Tuesday that showed slowing subscriber growth and no immediate fixes. The streaming leader’s troubles could have ramifications for the entire industry.
Netflix lost 200,000 subscribers in the first quarter and expects a 2 million drop in the current quarter, citing a range of headwinds from macro factors to smart TV rollouts for 100 million freeloaders who share other people’s passwords.
The company is cracking down on password sharing and will, in a big move, introduce a layer of advertising like most of its competitors have done or plan to do. That would cut costs and diversify the revenue base, but it would take a few years to get up and running.
ACKMAN LETTER:
Dear Pershing Square Investor,
Today we sold our investment in Netflix that we bought earlier this year. The loss on our investment reduced the Pershing Square Funds’ returns by four percentage points year-to-date. As a result of that loss, the Pershing Square Funds are down about 2 percent year-to-date as of the close today.
While we have great respect for Netflix’s management and the remarkable company they have built, given the tremendous operational leverage inherent in the company’s business model, changes in the company’s future subscriber growth may have an outsized impact on our estimate of intrinsic value. In our original analysis, we were positive on this operational lever given our long-term growth expectations for the company.
Yesterday, in response to continued disappointing subscriber growth, Netflix announced it would change its subscription-only model to more aggressively pursue non-paying customers and include advertising, an approach management estimated would take “one to two years.” “ to implement. While we believe these business model changes are worthwhile, it is extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenue, operating margins and capital intensity.
Due to the high concentration of our portfolio, we require a high level of predictability in the companies in which we invest. While Netflix’s business is fundamentally easy to understand, recent events have made us lose confidence in our ability to predict the company’s future prospects with reasonable certainty. Based on management’s track record, we wouldn’t be surprised if Netflix continues to be a hugely successful company and an excellent investment given its current market value. However, we believe that the dispersion of results has widened to such an extent that it is challenging for the company to meet our core ownership requirements.
One of the lessons we have learned from past mistakes is to act immediately when we discover new information about an investment that doesn’t align with our original thesis. That’s why we did this.
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 volatility in security prices. We therefore expect to find a good use for the Netflix proceeds. If you have any questions about the above, please contact the Investor Relations team. We are grateful for your support and long-standing partnership.
sincerely,
William A. Ackman