Netflix stock, down 30% since it missed Q4 subscriber growth estimates and issued weak guidance for the first quarter, got a boost Thursday after hedge fund legend William Ackman’s Pershing Square Capital Management said it has purchased 3.1 million shares worth about $1 billion in the SVOD pioneer, vaulting into the top 20 largest individual shareholders in the company.
Netflix stock was up by nearly 10% to $394.80 each in early trading Thursday -- it was up 7% to $385.44 each as of 11:39 a.m. -- not a huge bump but perhaps the beginning of a reversal of the downward trend in the past few days. Whether Ackman’s investment is a true showing of confidence in the company or just another example of an investor snapping up shares when they are down, remains to be seen. In a letter to shareholders Wednesday, Ackman praised Netflix’s “best-in-class management team.” Later on Twitter, he said he has long admired Netflix chairman Reed Hastings and “the remarkable company he and his team have built.”
Pershing Square financed the Netflix share purchase by unwinding most of its interest rate hedge, which raised about $1.25 billion.
In his note to shareholders, Ackman said Pershing Square didn’t own a share of Netflix before Friday, and he decided to buy the stock after it fell about 25% on January 21, adding that the hedge fund has been looking at the company for months, along with streaming music company Universal Music Group.
"Now with both UMG and Netflix, we are all-in on streaming as we love the business models, the industry contexts, and the management teams leading these remarkable organizations," Ackman said in the note to shareholders.
Ackman’s stance on streaming appears to be contrary to the current consensus, as players like Disney Plus, Paramount Plus, HBO Max and others have seen their early torrid customer growth slow down.
But $1 billion from one of the more savvy Wall Street players is nothing to sneeze at. Ackman has made billions over the past several years taking positions that at first were against the conventional investing tide.
Ackman himself said essentially the same in his shareholder letter.
“Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon,” Ackman wrote.
Ackman is known as an “activist” investor -- he famously convinced Wendy’s International hamburger restaurants to spin off the Tim Horton coffee shop chain in 2006. Pershing Square has about $13billion in assets under management in relatively few companies -- Lowe’s, Chipotle Mexican Grill, Hilton International and Domino’s Pizza are among its biggest holdings. Pershing Square Capital Management gained about 27% last year after a 70.2% rise in 2020. In January, the fund slipped almost 14%, its worst start in years.
But not all of his investments have been home runs. In 2010, Pershing Square bought about 18% of the J.C. Penney retail chain and sold the stake in 2013 for a $500 million loss. A five-year battle with health supplement maker Herbalife -- in which Pershing had a near-$1 billion short position and had been accused of using a PR campaign and regulatory pressure to keep its stock price low -- ended in 2018 after the fund exited its position in the company. Later, his misgivings about the company were justified in 2020 after Herbalife agreed to pay about $123 million in fines to settle U.S. Dept. of Justice claims that it bribed Chinese government officials.
Granted, Netflix is not a fast food restaurant, hotel chain or a home improvement retailer, but Ackman wrote in his note to shareholders that the SVOD giant has a strong position in the market, its recurring subscription-based revenue has “enormous future growth potential,” has economies of scale and a rapidly growing international subscriber base that should continue to increase margins, and has an improving free cash flow profile that should allow for continued growth investment and cash returns to shareholders.
And he seems to be betting real money on a Netflix turnaround. In his letter to shareholders, Ackman said that by selling its interest rate hedge, Pershing likely missed out on gains as rates rose in the past week. But he has confidence in Netflix’s prospects.
“Had we not sold the hedge, we could have likely realized more gains based on the increase in rates, largely today (January 26), since our sale,” Ackman wrote. “That said, we believed the opportunity to invest in Netflix at current prices offered a more compelling risk/reward and likely greater, long-term profits for the funds.”
but what seems to have spooked investors and analysts the most recently is the lack of visibility beyond Q1. If Netflix sees such shrinkage ahead in what is traditionally one of its biggest growth quarters -- Q1 subscriber additions have accounted for as much as 45% of total yearly growth in past years -- what does that mean for the rest of the year?
Netflix isn’t alone in seeing its subscriber growth ease. Disney Plus, HBO Max and Peacock all have experienced a slowdown in the pace they add new customers, just as they are all committing to step up content spending to keep the subscribers they do have. Some analysts have even predicted that streamers will have to make the decision soon to either double down on content spending or sell assets. Netflix appears to be in spend mode -- it spent about $14 billion in 2021, up from about $11 billion in 2020 -- as are Disney Plus, Paramount Plus, Peacock and HBO Max. Only time will tell whether that is money well spent.
We recently purchased more than 3.1m shares of @Netflix which makes us a top-20 holder. I have long admired Reed Hastings and the remarkable company he and his team have built. We are delighted that the market has presented us with this opportunity. https://t.co/BNx1EWUVGhJanuary 26, 2022
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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