Pershing Square Capital Management has sold the 3.1 million shares in Netflix that it acquired only in January this year.
By doing so, according to Reuters, it made a loss of more than $400 million on its initial investment of $1.1 billion.
Broadband TV News notes that the sale was a direct result of Netflix’s recent performance. The streaming platform revealed in its results earlier this week that it lost 200,000 paying customers in the first quarter and may consider introducing advertising. It also said it will make greater efforts to monetise account sharing.
In a note to shareholders, Pershing Square said: “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”.
It added: “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.
“We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. 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. Based on management’s track record, we would not be surprised to see Netflix continue to be a highly successful company and an excellent investment from its current market value. That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding”.
Pershing Capital concluded by saying: “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”.
Following its acquisition of shares in January, Pershing Capital became one of the top 20 investors in Netflix.
