Bill Ackman’s Pershing Square Capital Management exited its position in Netflix (NASDAQ: NFLX) on Wednesday, the billionaire hedge fund manager told shareholders in a letter.
The Loss: Pershing Square built the Netflix stake three months ago, buying 3.1 million shares at an average price of about $354 per share.
Netflix shares plunged by over 35% on Wednesday to $226.19 as the streaming video on demand platform clocked a subscriber loss after a decade and gave downbeat guidance for the current quarter.
This translated into a loss of about $400 million for Ackman’s firm, according to an earlier story.
Pershing Square funds are down about 2% this year with this loss reflected.
See Also: 'Nice Growth' In APAC: Netflix CEO Highlights Rising Subscription Numbers In Key Region
Uncertainty About New Business Model: Ackman said the hedge fund built the stake based on viewing the “enormous operating leverage inherent in the company’s business model” favorably.
“Changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value.”
Netflix suggested during the earnings call that it was warming up to ad-supported plans — something CEO Reed Hastings noted he has been opposed to historically.
Hastings cited the Walt Disney Company (NYSE: DIS) and Hulu as examples to note that the advertising model works. "I'm sure we'll just get in and figure it out as opposed to test it and maybe do it or not do it," he said.
“Allowing consumers who would like to have a lower price and are advertising-tolerant to get what they want makes a lot of sense ... We're trying to figure out over the next year or two,” the CEO said on Wednesday.
Ackman sees this hybrid approach as “sensible” but says it is extremely difficult to predict its impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity, especially given the timeline.
“We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio,” Ackman said. He noted that his hedge fund had lost confidence to predict the company's prospects with any significant degree of certainty.
Turnout Potential: The billionaire investor showed faith in Netflix’s management and said he can still see it turning into an “excellent” investment and fetching significant returns.
See Also: One Analyst Is Upgrading Netflix Shares Despite The Subscriber Loss: Here's Why
Price Action: Netflix shares traded 1.4% lower at $222.98 in the after-hours session on Wednesday after slumping 35.1% in regular trading, according to data from Benzinga Pro.
