NFLX: Bill Ackman and knowing when to quit

By now, if you haven't heard about Netflix's results then you've surely been living under a rock!

The key driver of the price decline was the first decline in subscribers in 10 years in Q1...

-200k

But the real story here isn't Netflix's decline, but the way a one Bill Ackman has responded to the price decline.

If you don't know Bill Ackman, he's the famed owner and fund manager at Pershing Square Capital Management, who is notorious for his massive short on Herbalife (which got blown out of the water, but he was absolutely right to be short that hell hole of a company).

Ackman started buying shares in Netflix back in late January, and built up a position to the tune of 3.1mm shares...

In a letter to his clients, Ackman praised the company's "best-in-class management team" and on Twitter, the manager said he has long admired Netflix CEO Reed Hastings and the "remarkable company he and his team have built."

But as we know, things change quickly in markets.

Let me preface this by saying I don't think Pershing's Netflix bet was a particularly strong one.

Many streaming services have been introduced increasing competition and diluting the customer pool and with budgets constrained by inflation, demand for luxuries was always going to subside.

That's the economic case, but from a market focused and portfolio basis, there was always going to be turbulence as the Fed turns ever more hawkish - higher rates lead to cash flows in the future being discounted less as the working average cost of capital increases, which is BAD for high growth companies with large price:earnings multiples (see what's happened to Zoom, Roku, and more generally, all the pandemic related memestocks with massive PE ratios which have been nicely deflated over the last 12 months or so).

But that doesn't take away from how Ackman handled his Netflix position.

See, the central thesis was really predicated on positive subscriber growth...

Netflix didn't achieve that this quarter...

So Ackman dumped the position.

That's what everyone should be doing, and it is how I look at risk and management of positions...

If your central thesis changes, then change your position.

Now to go further on why I don't think Netflix is a good buy, and why I disagree with Ackman that management is good, you simply have to take a look at their FX hedging strategy (or lack of).

In 2021, they lost $280mm due to not hedging their FX exposure globally.

For a company that operates in every country in the world, this is quite frankly insanity, and shows the management that they have too much concentration on subscriber growth and not enough on where they might be bleeding revenue, especially revenue that has a relatively easy fix.

But again, this is something to learn from.

Work out the core thesis as to why people will buy the stock - prioritise what matters.

To me, the unhedged aspect is simply alluding to the management not looking at certain parts of the biz, which then asks the question, 'what else don't they have their eye on?'

But if that subscriber growth had gone up, it wouldn't matter.

Prioritise your themes.

The key thing to remember as well, is that although this is a big monetary loss, the position was only about 4% of AUM at Pershing.

Some people lose that and more in a day!

So this is simply another day for good old Bill.