Letter to Shareholders: The Netflix Exit
A Four-Month Position, Closed at a Loss, Without Hesitation
Pershing Square's shareholder letter announcing the complete exit of its Netflix position roughly four months after establishing it, at a loss of approximately $400 million. Ackman explains the decision in thesis terms: the subscriber miss and the pivot to advertising and account-sharing crackdowns changed the predictability of the business model — and when a core assumption breaks, the discipline is to exit rather than hope. A compact modern case study in volatility-vs-permanent-loss reasoning applied fast.
“April 20, 2022 Dear Pershing Square Investor: Today, we sold our investment in Netflix, which we purchased earlier this year. The loss on our investment reduced the Pershing Square Funds’ year-to-date returns by four percentage points.”
Summary
Released on April 20, 2022, this letter is Pershing Square's public account of selling the entire Netflix position roughly four months after establishing it. The loss, which reduced the funds' year-to-date returns by four percentage points, is disclosed in the opening sentence; the rest of the letter is an explanation of why a business Ackman clearly admired had to be removed from a concentrated portfolio. The argument turns on predictability. Netflix's operating leverage meant that small changes in subscriber growth translated into large changes in intrinsic value; that was acceptable only while subscriber growth itself was forecastable. The first-quarter 2022 subscriber miss, combined with management's pivot to an advertising tier and a more aggressive crackdown on account sharing, widened the range of possible outcomes beyond what Pershing Square's concentrated mandate could tolerate. The letter therefore reads as a discipline document rather than a market call: Ackman explicitly says Netflix may still succeed from its current market value, but that it no longer meets the requirements for a core holding. The closing note — that the proceeds will be redeployed in an opportunity-rich environment — preserves the renaissance mindset: losses are information, not verdicts, and capital must keep moving toward its highest-conviction uses.
On the realized loss:
"The loss on our investment reduced the Pershing Square Funds’ year-to-date returns by four percentage points."
On predictability requirements:
"We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio."
On acting on new information:
"One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis."
Full Text
Complete letter as released to investors. Paragraphing restored editorially — words unchanged.
April 20, 2022
Dear Pershing Square Investor:
Today, we sold our investment in Netflix, which we purchased earlier this year. The loss on our investment reduced the Pershing Square Funds’ year-to-date returns by four percentage points. Reflecting this loss, as of today’s close, the Pershing Square Funds are down approximately two percent year-to-date.
While we have a high regard for Netflix’s management and the remarkable company they have built, in light of the enormous operating leverage inherent in the company’s business model, changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value. In our original analysis, we viewed this operating leverage favorably due to our long-term growth expectations for the company.
Yesterday, in response to continued disappointing customer subscriber growth, Netflix announced that it would modify its subscription-only model to be more aggressive in going after non-paying customers, and to incorporate advertising, an approach that management estimates would take “one to two years” to implement. While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity.
We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty. 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. That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding.
One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here.
We are in the midst of an opportunity rich environment for Pershing Square due to the dramatic shift in Federal Reserve policy, the highly inflationary environment, geopolitical uncertainty, and the resulting high degree of security price volatility. We therefore expect to find a good use for the Netflix proceeds.
Please feel free to contact the investor relations team if you have any questions about the above. We are grateful for your support and long-term partnership.
Sincerely, William A. Ackman
Key Themes
- Volatility vs. Permanent Loss — the position is closed not because the stock fell but because the thesis about predictable subscriber growth broke
- Simple, Predictable, Free Cash Flow — the advertising and account-sharing pivots made the ten-year cash-flow sketch unwritable with sufficient certainty
- Inversion and Stress-Testing — the letter applies the post-Valeant discipline of acting promptly when new information contradicts the original thesis
- Concentration as Risk Mitigation — a highly concentrated portfolio cannot carry a name whose dispersion of outcomes has widened this far
- The Eight Commandments — the "requirements for a core holding" language is the checklist being enforced
- Bill Ackman — the letter as a fourth-act statement of how the renaissance handles error
Context & Significance
This is a renaissance document in the purest sense: a four-month position, closed at a loss, without the emotional scaffolding that prolonged the Valeant and Herbalife mistakes. The mindset is neither bullish nor bearish on Netflix; it is bureaucratic about the investment process. Ackman praises management, allows that the stock may work from current prices, and still sells — because the only question that matters is whether the business meets Pershing Square's predictability requirements after the strategic pivot. The contrast with the valley is the point. In 2015 and 2016, new information was interpreted as noise around a sound thesis; in 2022, new information is treated as a thesis update, and the update triggers action. The letter's most important sentence may be the one in which Ackman says that one of the firm's learnings from past mistakes is to act promptly when it discovers information inconsistent with the original thesis. That sentence names the entire renaissance program.
The honest retrospective is that the exit looks easy in hindsight because the market later recovered, but the logic at the time was independent of price: the dispersion of outcomes had widened, and a concentrated fund cannot live comfortably with wide dispersion. The redeployment language at the end — an opportunity-rich environment driven by the Fed's dramatic policy shift, inflation, geopolitical uncertainty, and security-price volatility — also signals a different Ackman: one who has macro tools and is not captive to any single name. Netflix was a mistake, but it was a small, fast, and well-documented mistake, which is exactly what the fourth act is designed to produce.