(Alliance News) - Pershing Square Holdings Ltd late Wednesday said it disposed of its entire stake in Netflix Inc, after shares in the streaming service plunged, potentially taking a hit of roughly USD400 million from the bet.
The investor, managed by Bill Ackman-founded Pershing Square Capital Management LP, was full of praise for Netflix's management, but said the company is unpredictable.
It had snapped up 3.1 million shares over the course of several days in late January. It made Pershing a "top-20 shareholder in the company". The investment came after Netflix shares had slumped 22% on January 21, when investors sold off the streaming services after it reported subscriber growth slowed.
Based on closing prices on January 21, Pershing's stake was worth USD1.12 billion. However, Ackman's Pershing has now sold its entire stake.
"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," Pershing explained.
"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."
Netflix shares closed down 35% to USD226.19 each in New York on Wednesday.
Based on Wednesday's closing price, Pershing's stake was valued at USD701.2 million, implying roughly a USD400 million valuation fall.
Pershing added: "The loss on our investment reduced the Pershing Square Funds' year-to-date returns by four percentage points. Reflecting this loss, as of today's close, the Pershing Square Funds are down approximately 2% year-to-date.
"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 degree of security price volatility. We therefore expect to find a good use for the Netflix proceeds."
Netflix late Tuesday reported its first drop in quarterly subscriptions in a decade.
The Los Gatos, California-based company attributed the drop to the suspension of its service in Russia due to Moscow's invasion of Ukraine. Further, the firm pointed to a large number of households sharing accounts, combined with rising competition from the likes of Hulu, Apple TV and Walt Disney Co's Disney+ which has stifled revenue growth.
By Eric Cunha; ericcunha@alliancenews.com
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Pershing Square Holdings (PSH)