Interactive Investor

Why Bill Ackman just took a massive punt on Netflix

27th January 2022 14:58

Graeme Evans from interactive investor

The star investor and CEO of FTSE 100 company Pershing Square Holdings reveals his thinking.

Star investor Bill Ackman declared he is “all-in on streaming” after adding Netflix (NASDAQ:NFLX) to a Pershing Square Holdings (LSE:PSH) portfolio that is already home to Universal Music Group (EURONEXT:UMG).

His swoop for 3.1 million Netflix shares worth about $1.1 billion (£820 million) began on Friday after the Squid Game creator lost 20% of its value on slowing subscriber growth figures.

Ackman disclosed in a letter to Pershing Square investors that the opportunity to buy Netflix at an attractive valuation was too good to miss. He said: “We have greatly admired Netflix both as consumers and as investors, but have never previously owned a stake in the company.”

Ackman could move swiftly because Pershing Square had previously analysed Netflix in connection with last year's purchase of a 7.1% stake in Universal Music Group (UMG) from Vivendi.

The founder and chief executive said: “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 organisations.”

When we spoke to Ackman in November, he revealed some of the thinking behind the Universal deal, pointing out that it owns the rights, in effect, on a third of global music.

This new purchase makes FTSE 100-listed Pershing Square a top 20 shareholder in Netflix.

The streaming giant's shares today rose $19.44 to $379.14 but had been above $500 last Thursday prior to it forecasting the addition of 2.5 million new paying subscribers in the current quarter. This compared with four million last year.

Netflix blamed the estimate on the timing of content releases, but investors were spooked by the decline at a time of margin pressure.

Ackman said: “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.”

He highlighted Netflix as being attractive for its recurring revenue model, best-in-class management, economies of scale, industry leading content and pricing power.

Ackman believes this should benefit margin expansion and improving free cash flow profile.

His early move on Netflix shares came after Pershing generated $1.25 billion (£930 million) from unwinding a substantial proportion of its interest rate hedges.

New York-based Ackman explained in the letter: “We invest in hedges not to protect the funds from a short-term mark-to-market loss, but rather because they can become a large source of potential liquidity at precisely the time stocks become cheap.”

Analysts at Numis Securities praised the transaction as well as Ackman's “active approach and his effective use of hedging”.

They added: “It shows discipline in investment style, where he seeks to buy high-quality businesses that can be long-term compounders, but aims to take advantage of attractive valuation points to initiate positions.”

Numis said the fund has performed strongly in recent years, with net asset value (NAV) up 70% in 2020 before returns of 27% in 2021 equal to 28% for the S&P in US dollar terms.

So far in 2022, the NAV is down 13.8% versus 8.7% for the S&P 500. Pershing shares closed last night at a 26% discount, which Numis said offers significant value.

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