Bill Ackman dumps Netflix stake, takes $400 million loss
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Bill Ackman sold his large stake in Netflix (NASDAQ:NFLX) Wednesday after the company reported a surprise drop in subscribers and looked to tilt toward an ad-supported service.
The fund manager said in a letter to investors that he decided to sell the shares, and take a big loss in the process, instead of sticking with a company where he has lost confidence to predict its future.
Pershing Square lost about $435M on its 3.1B share stake in the company, based on Wednesday's closing price, according to Bloomberg.
Ackman announced on Jan. 26 that he had accumulated a stake in Netflix (NFLX) over four trading days that made him a top 20 shareholder in the company, citing "attractive valuation" given declines in the stock in reaction to disappointing subscriber growth numbers.
"While we have a high regard for Netflixâs management and the remarkable company they have built, in light of the enormous operating leverage inherent in the companyâs business model, changes in the companyâs future subscriber growth can have an outsized impact on our estimate of intrinsic value," Ackman said in the letter. "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," he said. "While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the companyâs 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," he added. "While Netflixâs business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the companyâs future prospects with a sufficient degree of certainty."
"Based on managementâs 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."
Pershing Square Funds are down 2% year to date after the sale.
SA contributor Paul Franke made the "crazy" case to buy Netflix.