On Wednesday, billionaire investor William Ackman sold a $1.1 billion bet on Netflix (NFLX.O), netting a loss of more than $400 million as the streaming service’s price plummeted after news that it had lost members for the first time in a decade.
As Netflix’s stock fell 35% to $226.19, Ackman’s hedge fund Pershing Square Capital Management did a dramatic U-turn, dumping the 3.1 million shares it had bought just three months before.
The investor poured over $1 billion into the streaming service in January, just days after a dismal subscription prediction knocked the stock lower. Now, a second round of bad news concerning subscribers – the company announced it had lost 200,000 – has forced the fund manager to abandon a company he had praised only weeks before.
Ackman said proposed business model changes, such as introducing advertising and going after non-paying consumers, made sense but would make the company too unpredictable in the short term, in a brief statement announcing the move.
“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,” he stated.
Pershing Square, which has a $21.5 billion investment portfolio, buys shares in just around a dozen companies at a time and requires “high degree of predictability” in its portfolio companies, according to Ackman.
Instead of waiting for things to improve at Netflix, Ackman locked in losses worth more than $400 million, according to sources familiar with the portfolio. Pershing Square’s portfolios are down about 2% for the year as a result of the sell, according to Ackman.
Netflix announced that it lost 200,000 customers in the first quarter, falling far short of its modest expectations of 2.5 million new subscribers. Its decision to cease service in Russia after the invasion of Ukraine in early March resulted in the loss of 700,000 members.
Pershing Square was able to weather the early days of the pandemic in 2020, as well as the recent spike in interest rates, thanks to profitable hedging. The hedge fund’s last three years have been among its greatest in its history, with a 70.2 percent gain in 2020.
However, Ackman acknowledged in his statement on Wednesday that he had learnt from his fund’s failed gamble on Valeant Pharmaceuticals, which cost the hedge fund billions of dollars.
He wrote – “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.”
