Billionaire investor Bill Ackman loses $400 million as he dumps entire Netflix stake after only 3 months

Why has a remarkable company's future prospects with a sufficient degree of certainty failed one of the biggest hedge fund managers in its history?

The Summary:

Pershing Square capital management, Bill Ackman's hedge fund, has re-purchased its share of the streaming company after its share prices plunged 35% on Wednesday.

Then Pershing Square has lost at least $400m in their more than 1 billion dollar investment recently after more devastating news on the prospects of the company. 

They held 7% of the company's future prospects and shares in total, more than a billion dollars worth, according to the Guardian.

So why did they pull out?

The Short Answer:

After the second wave of negative news for Netflix's business Ackman told investors he has little to no confidence in their ability to predict the company's future prospects with a sufficient degree of certainty.

The Long Answer:

Pershing Square, which now invests $21.5 billion, buys shares in only about a dozen companies at a time and needs a "high degree of predictability" in its portfolio companies, Ackman said.

In January, the investor funneled over $1 billion into the streaming service just days after a disappointing forecast for subscriptions pushed the share price lower.

Now a second bout of negative news about subscribers - the company said it had lost 200,000 - prompted the fund manager to turn his back on a company he had showered with praise only weeks before.

Ackman said proposed business model changes, including incorporating advertising and going after non-paying customers, made sense but would make the company too unpredictable in the short term. 

According to Reuters.

"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 wrote.

Ackman, who began amassing shares in late January following Netflix's disappointing fourth quarter earnings, said late Wednesday that he's liquidated his entire $1.1 billion position, and is taking a $400 million loss, following the group's revelation that it had shed 200,000 subscribers over the the first three months of the year and expects to lose another 2 million by the end of the second quarter.

Around 700,000 of those were the result of cutting its service in Russia, Netflix said, but the bulk of the exodus was put down to rising prices, increasing competition and password sharing, which Netflix estimated at around 100 million households world wide.

Background on Pershing Square capital

Profitable hedges helped Pershing Square survive the early days of the pandemic in 2020 and then again in recent months as interest rates began to rise. 

The last three years have been among the best in the hedge fund's lifetime, including a 70.2% gain in 2020.

But Ackman also acknowledged in his statement on Wednesday that he had learned from leaner times when his fund backed Valeant Pharmaceuticals, a disastrous bet that cost the hedge fund billions in losses

In a letter to investors, Ackman conceded that:

"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," he wrote.