Following the value drop of streaming service, Netflix, Bill Ackman’s Pershing Square fund dumped a 7% stake for a $400m loss
After it reported an outflow of more than 200,000 subscribers, the billionaire hedge fund manager Bill Ackman sold his shares in Netflix at a loss of about $400m (£305m), reversing his optimistic position in the streaming giant.
Despite grim forecasts about the company’s subscription levels, the New York-based investor bought more than $1bn of Netflix shares in January. Ackman said the subsequent drop in the share price, at the time, had presented an “attractive” opportunity for his Pershing Square fund.
However, in response to news that Netflix had lost over 200,000 subscribers in the first quarter of the year and was likely to lose another 2 million over the next quarter, the shares in the online streaming platform plunged more than 35% leading to Ackman making a U-turn overnight, as customers reviewed subscriptions bought at the height of Covid-19 lockdowns.
About $50bn of Netflix’s market value was wiped off by the share drop. The Pershing fund suffered an estimated $400m loss from Ackman’s decision to offload the stake. Ackman, in a letter to investors, agreed that the losses had knocked returns by 4%. Ackman told investors:
“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 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.”
He agreed that Netflix had a strategy to reduce the losses, including the incorporation of advertisements into its streaming service and going after non-paying customers more aggressively. But the changes could take at least one or two years to execute, he noted.
“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.”
The strategy amounted to “radical changes” at the streaming service, said Russ Mould, investment director at AJ Bell:
“It will be interesting to see how its biggest shareholders view its chances of executing them with any success or whether it’s back to the drawing board with fresh thinking and potentially fresh leadership.”