Today, shares of Netflix (NASDAQ:NFLX) stock are in the spotlight after Pershing Square’s Bill Ackman reported selling his entire stake in a shareholder letter. Ackman had purchased 3.1 million shares in late January for around $1.1 billion and sold them for a more than $400 million loss. That massive loss has reduced Pershing Square’s year-to-date (YTD) returns. After the sale, it’s now down about 2% YTD.
This sale came as a shock to some investors, as Pershing Square held its NFLX position for only three months. The hedge fund typically has an average holding period of more than four years for stocks in its portfolio
Yesterday, shares of Netflix sank by more than 30% after the streaming provider reported it had lost 200,000 subscribers during the first quarter. Analysts had been expecting an addition of 2.5 million new subscribers.
With that in mind, let’s take a look at why Ackman made the NFLX stock sale.
Bill Ackman Sells NFLX Stock
Yesterday, Netflix announced that it would strengthen its advertising business by targeting non-paying subscribers. Ackman believes “these business model changes are sensible.” However, the fund manager also added that it would be difficult to gauge the effectiveness of increased advertisements “on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity.”
In the shareholder letter, Ackman goes on to explain that Pershing Square focuses on businesses with a “high degree of predictability.” This is because the fund is heavily concentrated among a few names. Based on the latest 13F filing, Pershing Square owns only seven positions. With Netflix’s new model of targeting non-paying users, Ackman says the firm is no longer able to predict its business prospects with a “sufficient degree of certainty.”
However, Ackman isn’t necessarily bearish on Netflix. He stated the following:
“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.”
What Will Pershing Square Do with Netflix Sale Proceeds?
Looking forward, Ackman believes Pershing Square can capitalize on “an opportunity rich environment” due to high inflation, impending rate hikes and the current geopolitical climate. Therefore, he expects to find good use for the Netflix sale proceeds. That said, he did not explicitly state what the firm plans to do.
The deadline for institutions to file a Q1 13F form is May 16. By that date, Pershing Square will have disclosed its equity positions as of March 31.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.