Bill Ackman Nixes Netflix In 2022: How Bad Did He Whiff? - Netflix (NASDAQ:NFLX)

Netflix Inc NFLX stock is down Friday after the company beat analyst estimates for the second quarter. Investors see the beat as lower than expected, and higher costs in the second half could be scaring some away.

The streamer is trading near all-time highs. Patient investors earned strong returns over the years — 146% over the last five years. One investor who may not have been patient enough was Bill Ackman.

Ackman Buys Netflix: Pershing Square Capital, Ackman’s hedge fund, acquired 3.1 million shares in Netflix for more than $1 billion in January 2022.

In a letter to shareholders at the time, Ackman said Netflix was a winner in the growth of streaming over linear TV.

"It’s subscription-based, highly recurring revenues, which have enormous future growth potential," Ackman said. Netflix has "industry-leading content," which gives it a competitive moat and pricing power over rival streaming services, he added.

The Pershing Squre CEO also highlighted a growing global subscriber base and room for expansion.

Several months later, a poor earnings report from Netflix and uncertainty around the streamer's push into future ad-supported subscription plans spooked Ackman.

The investor cashed out of part of the position and later fully exited from the investment by April 2022, taking a loss of around $400 million.

"Changes in the company's future subscriber growth can have an outsized impact on our estimate of intrinsic value."

Ackman said a hybrid approach of paid and ad-supported plans could be "sensible," but would make it tough to predict subscriber growth, future revenues and operating margins.

"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 as the time.

Ackman said the hedge fund had lost confidence in predicting Netflix's future with certainty.

Missed Profits: At the time of Ackman's sell, Netflix stock traded at around $225. While this was down from purchase prices in the $350 to $410 range, the stock continued to go lower after Ackman's sale.

With Netflix stock trading down to $175 later in 2022, Ackman's exit looked like the right decision.

Over a year later, Netflix stock climbed back up to Ackman's cost basis and continued to rise.

Today, Netflix trades at $1,208.97, down from its 52-week high of $1,341.15 set just weeks ago.

Ackman's original 3.1 million share purchase would be worth $3,745,327,000 today.

Ackman announced the Netflix stake on Jan. 26, 2022 saying the hedge fund had been acquiring shares since Jan. 21, 2022. Netflix stock traded between $351.46 to $409.15 over that six day period.

Based on the highest price, Ackman paid up to $1,268,365,000 for 3.1 million shares.

That means Ackman missed out on potential profits of $2,476,962,000 by selling Netflix stock early.

To put this another way, an investor who bought $1,000 in Netflix stock on the day it was revealed Ackman sold could have bought 4.02 shares based on a price of $248.70. That investment would be worth $4,860.06 today, representing a 380.6% increase.

What's Next: Netflix beat second-quarter estimates thanks to several successful shows and movies, including the premiere of the third and final season of "Squid Game." The company also cited having higher subscriber revenue from user growth and higher priced plans. Advertising revenue also rose in the quarter.

Going forward, Netflix has key releases in the second half including new seasons of "Wednesday" and "Stranger Things".

Netflix is also expanding its live events with a key boxing fight and two NFL games on Christmas day.

While Ackman may not have been sure on how Netflix would play out with the launch of ad-supported plans, they are a key to the business today, and with live events seeing a boost from overall revenue thanks to advertisements.

Netflix said it expects its advertising revenue to double this year compared to last year.

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