Billionaire Bill Ackman, chief executive of hedge fund Pershing Square (PSH), announced to shareholders yesterday that he is now a top 20 investor in streaming company Netflix.

Ackman's investment follows a 40%-plus decline in the share price in the last month, in part reflecting disappointing subscriber figures.

Netflix’s forecast of 2.5 million new customers this quarter was considerably below analysts’ expectations of 4 million.

Moreover, Netflix faces intense competition from rival streaming companies including Disney+ and Amazon prime video.

INCREASING COST OF CONTENT

The slowdown in subscribers is particularly disconcerting given popular shows no longer appear to guarantee an increase in new customers.

This is despite higher content spending causing a contraction in Netflix’s operating margin to 8% in the fourth quarter, a decline of 6 percentage points from the prior year.

If content is no longer a sure-fire competitive advantage, then Netflix will need to focus on other areas to sustain user growth and profitability.

One option being pursued is to raise prices for the service. Netflix increased prices in the United States and Canada this month from $14 to $15.50.

However, there is limited scope to pursue this strategy given the considerable premium this represents in relation to the $8 per month charged by Disney+.

ATTRACTIVE VALUATION

Ackman said the sell-off in Netflix shares, which was exacerbated by a sudden increase in market volatility, created 'an attractive valuation' for him to buy more than 3.1 million shares.

He explained his rationale for buying the shares: 'We have greatly admired Netflix both as consumers and as investors, but have never previously owned a stake in the company.

'Netflix is a primary beneficiary of the growth in streaming and the decline in linear TV driven by its superior customer experience, a vast and diverse amount of superb, constantly refreshed content, global improvements in bandwidth, and the proliferation and continuous improvement and convenience of devices on which one can watch.'

Combined with his investment in Dutch-listed Universal Music Group, Ackman said Pershing Square was 'all-in on streaming as we love the business models, the industry contexts, and the management teams leading these remarkable organizations'.

READ MORE ABOUT PERSHING SQUARE HERE

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Issue Date: 27 Jan 2022