Executive Summary

The Covid-19 pandemic has significantly affected business operations globally, cutting down operations, customers, and revenues. Netflix is among the companies that have extraordinarily experienced the wrath of the pandemic. Between 2020 and 2021, at the height of the pandemic, Netflix has recorded a significant decline in the number of new subscribers joining the platform. The decline in subscribers has hurt the firm’s share prices and revenues. Bill Ackman, chief executive and founder of Pershing Square Capital Management, saw this share price drop as an opportunity to acquire a substantial stake in Netflix. However, this has not worked well with Ackman, who has sold his stake in April (less than four months after the purchase) while taking a nearly $400 million loss. One takeaway from this case analysis is the need for investors to perform thorough due diligence and industry analysis before investing. On its part, Netflix needs to crack down on password sharing to increase paid subscriptions, prevent company revenues from falling in the future, and cushion its shares from falling further.

Introduction

Undoubtedly, the Covid-19 pandemic has profoundly impacted local and global businesses, hitting hard even the most financially secure conglomerates that depend not on a specific regional market. It was expected that stay-at-home Covid-19 regulations implemented across the globe to combat the spread by limiting close contact would only devastatingly impact businesses in the travel & tourism, transportation and hotel, and manufacturing sectors – which require people to gather in a certain spot or place. However, as it has turned out, the pandemic has hit the most unlikely candidates, including movie streaming and video streaming sectors and firms. Netflix is one of the companies that have faced financial troubles throughout the pandemic, forcing its share prices and value to drop significantly in 2021 and early 2022. In capitalizing on Netflix’s share price plunge in Jan 2022, Bill Ackman invested nearly $1.1 billion. However, emerging reports indicate that Ackman disposed of his stake in April, shouldering nearly $400 million (Hayden, 2022). This report examines Bill Ackman’s background, Netflix’s financial issues (including a dip in shares), buying opportunity for Bill Ackman, and the resell of the stock, including reasons. The final part summarizes the case, examining whether it was a worthwhile investment for Ackman and key takeaways for potential investors to consider before investing in the future.

Bill Ackman’s Background

Albert William Ackman is an American billionaire hedge funder manager and investor. He is the chief executive and founder of Pershing Square Capital Management, one of the leading hedge funds in the US, with a market cap of over $8.05 billion (Yahoo Finance, n.d.). Ackman is a fearless and astute investor renowned for his risk-taking actions – the majority of which have earned his hedge fund company billions. In truth, Bill Ackman is not a stranger to market volatility; he is known for betting on underperforming companies (when their stock prices are at the lowest) and waiting for their stocks to rise before selling them. In 2017, Ackman’s Chipotle investment of $405 million initially looked to have flopped, only for share prices to rebound before tripling in 2018. Despite cutting its shares significantly in Chipotle to 5.4 percent from the initial 10 percent in 20120, Ackman’s company (Pershing) still holds shares worth $ 1.3 billion. The $405 million Ackman invested in 2016 has earned him nearly $2.6 billion within four years (Klebnikov, 2020). Therefore, the decision to snap up Netflix’s shares in Jan 2022 was a no-brainer for Ackman.

Netflix – Recent Financial Issues During Covid-19 and Reasons for the Company’s Decline

Netflix, Inc., often known as just Netflix, is a US-based firm offering subscription-based services worldwide. Founded in 1997, Netflix offers a television series and film library through its in-house productions, Netflix Originals, and distribution deals with other production companies. As of 31 Dec 2021, Netflix reportedly enjoyed a subscription of more than 221.8 million subscribers globally, including 74 million in Europe, Africa, and the Middle East, 75.2 in Canada and the US, and 32.7 million in the Asian-Pacific region, and 39.9 in Latin America. Netflix movies are available globally except in Crimea, Russia, Kosovo, North Korea, Syria, and Mainland China. Subscribers can access Netflix services through multiple platforms, including Blu-ray Disc players, digital media players, smartphones, tablet computers, set-top boxes linked to televisions, application software installed on smart televisions, and internet browsers on computers.  

Like most businesses, Netflix has faced serious financial issues due to the ongoing Covid-19 crisis. Among other issues, Netflix is, for the first time battling a significant decline in the number of subscriptions globally, a factor that has ultimately dented its share prices, market value, revenues, and profits. Although Netflix has been gaining subscribers over the years, from 34.24 million in the first quarter of 2013 to nearly 221.84 million in the fourth quarter of 2021, reports suggest that the company’s subscriptions have been significantly dropping since 2019, especially in major regions like the US. The firm’s customer base has fallen by 200,000 subscribers between January and March 2022 (1^st quarter of FY 2022). Estimates also show that the company’s growth has been slowing down for the past five years. In 2021, the company recorded its weakest yearly gain since 2016, gaining only 18.2 million subscribers, compared to the 36 million new subscribers the firm added in 2020 when most people were stuck at home (CBS News, 2020).

Table 1. Number of Netflix’s subscribers per year, 2001-2020 (Scope Markets, 2021)

Even before January, Netflix’s share prices and customer subscriptions have dropped due to multiple reasons. One such reason has been attributed to the ongoing Covid-19 pandemic, which has hit nearly every subscriber economically. The second reason, which the company has even recognized in its recent report, is the crackdown and sharing of passwords – factors that are making it challenging for Netflix to add substantial subscribers in most markets. The third reason is the growing competition from rival companies like Amazon, HBO, Hulu, and Disney+.

Buying Opportunity for Bill Ackman and the Aftermath

In January of 2022, through his hedge fund, Ackman bought Netflix’s stock worth an estimated $1.1 billion, hoping that the streaming giant’s share prices and subscriber numbers will rebound in 2022 after an extremely difficult 2021 in the history of the company. According to a report by Yahoo Finance, Ackman’s decision to purchase Netflix in 2021 was purely based on increasing Pershing Square’s stake in the firm when its shares were at their lowest. In breaking the news of the investors in Pershing Square, Ackman said, “The opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance” (Morris, 2022).

In April, just less than four months after acquiring stock in Netflix, Ackman surprised everyone by selling all its shares in Netflix, shouldering a nearly $400 million loss. This announcement came just twenty-four hours after Netflix revealed losing nearly 200,000 subscribers between January and March (Hayden, 2022). In part, Ackman’s decision might have been compounded by the realization that Netflix’s share prices might continue plunging beyond recovery, resulting in further losses for his hedge fund. Netflix is projected to lose an additional 2 million subscribers between April and June.  

Conclusion and Recommendations for Ackman and Netflix’s Priorities and Future Strategies

In a nutshell, it can be argued that the decision to acquire a stake in a company when its share prices are low due to poor performance can be rewarding or risky. For Bill Ackman, purchasing Netflix’s stock worth $1.1 billion was a risky move, considering the firm was already performing poorly (low market cap, losses in revenues, and a decline in subscribers) and the uncertainty surrounding Covid-19. Compounded with the growing competition from firms like HBO and Amazon, Ackman should have done more due diligence on the company and the industry before investing $1.1 billion. For Netflix, the priority now is to curb the current loss of subscribers and increase paid subscriptions. The first solution is to crack down on password sharing, which has allowed different households to access services using a single account. It is estimated that nearly 100 million households globally are feeding off one account, including roughly 20 million in Canada and the US.

References

Klebnikov, S. (2020, Feb 10). Billionaire investor Bill Ackman trims stake in Chipotle but is still betting big on Burritos with a 5% stake. Forbes. https://www.forbes.com/sites/sergeiklebnikov/2020/02/10/billionaire-investor-bill-ackman-trims-stake-in-chipotle-but-is-still-betting-big-on-burritos-with-5-stake/?sh=6d80d2a14efd

Morris, C. (2022, April 20). Bill Ackman bet $1.1 billion on Netflix months ago, and now he’s taking a beating. But the famed investor has doubled down before—and come out ahead. Yahoo Finance. https://finance.yahoo.com/news/bill-ackman-bet-1-1-155323747.html

Netflix shares slide after it loses 200,000 subscribers. (2022, Apr 20). CBS News. https://www.cbsnews.com/news/netflix-losing-subscribers-stock-drop/

Scope Markets. (2021, April 26). Netflix in 2021 – what to expect? https://blog.scopemarkets.com/en/what-is-happening-with-netflix-2021/

Yahoo Finance. (n.d.). Pershing Square Holdings, Ltd. (PSHZF). https://finance.yahoo.com/quote/pshzf/