Bargain hunting

Activist investor Bill Ackman has made a $1.1 billion bet on Netflix. Ackman’s anti-cyclical approach has also proven to be a good nose in the past.

The US technology index Nasdaq has already lost 13 percent this year due to the Fed’s turnaround in interest rate policy. Among the stocks that corrected the most is the US media company Netflix (- 40 per cent). Shares in the streaming service provider have almost halved since peaking at $701 in mid-November, plunging 29 per cent in the last four trading days alone.

The latest decline was triggered by Netflix reporting disappointing subscriber growth in the fourth quarter. In addition, the company warned last Thursday that increasing competition from rivals such as Disney+, Hulu and HBO Max would likely weigh on subscriber growth in the current quarter.

Activist investor Bill Ackman is using Netflix’s share price weakness to make a new billion-dollar bet. His company Pershing Square has acquired more than 3.1 million Netflix shares since Friday, representing a stake of around 1.1 billion dollars. The billionaire investor revealed this in a letter to his clients on Wednesday. With a 0.7 percent stake, Ackman is now one of the streaming giant’s 20 largest shareholders.

“I have long admired Reed Hastings and the remarkable company he and his team have built,” Ackman tweeted on Wednesday, referring to the Netflix co-founder and co-CEO. “We are very pleased that the market has presented us with this opportunity.”

Pershing Square began analysing Netflix last year while exploring an investment in Universal Music Group, Ackman noted in his letter to clients. He cited Netflix’s subscription model, management team and pricing power as reasons in favour of the online media platform.

The hedge fund manager also highlighted Netflix’s commitment to the fast-growing streaming industry, its extensive content library and its user experience. In addition, he highlighted global improvements in the data transfer rate offered and the continued proliferation of electronic devices that can be used to access Netflix as key factors for long-term success.

The approach is reminiscent of March 2020

For the Netfix purchase, Pershing Square unwound one of its larger hedges against rising bond yields. After Wednesday’s Fed announcement, which led to further rises in interest rates, Ackman admitted to himself that higher profits could have been made with a later sale – but the risk/reward ratio of a Netflix investment was much more attractive.

Bill Ackman already showed good instincts when Corona’s share price plunged in March 2020. First, he made big money with hedging transactions during the stock market correction. He finally invested the profit from this in shares in mid-March, which ultimately proved to be the right decision. “Many of our best investments were made when investors with a short-term time horizon dumped great companies at prices that looked extraordinarily attractive when viewed from a long-term perspective,” Ackman explained his anti-cyclical approach in the Netflix case.