Netflix rose handily in after-hours trading Wednesday following news that Bill Ackman’s Pershing Square Capital has acquired more than 3.1 million shares to become a top-20 stockholder.
He bought on a big dip. The streamer’s stock has been killed since its fourth-quarter earnings report last week, and amid a series of broad market selloffs tied to interest rate jitters. Investors reacted negatively to Q4 subscriber growth and management guidance. In Pershing Square’s letter to shareholders today, Ackman called that an “opportunity to acquire Netflix at an attractive valuation.” The shares closed down 1.8% but reversed course after hours, up nearly 5%.
“We have greatly admired Netflix both as consumers and as investors, but have never previously owned a stake in the company,” he said, calling the platform founded by Reed Hastings “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.”
He said Pershing acquired the shares starting on Friday and over the last several days.
The letter laid out why he likes Netflix:
-“Subscription-based, highly recurring revenues, which have enormous future growth potential”
-“A truly best-in-class management team and unique high-performance culture”
-“Economies of scale and superb quality in its industry-leading content, which should continue to drive future growth and widen the company’s powerful competitive moat”
-“Pricing power derived from the enormous value it delivers to consumers compared with other alternatives”
-“Substantial margin expansion, with the opportunity for continued improvement due to economies of scale and the company’s rapidly growing, global subscriber base”
-“An improving free cash flow profile which should allow for continued investments in growth as well as the return of cash to shareholders”
He said Pershing, which is also an enthusiastic investor in Universal Music Group, funded the share purchases by unwinding the substantial majority of its interest rate hedge, generating proceeds of $1.25 billion.
Broader market swoons
It was also a big day for the broader market. Stocks finished lower after a third session of crazy gyrations with the Dow swinging 800 points in the session as investors digested hotly anticipated comments by Federal Reserve chair Jerome Powell before the close.
Media shares were buffeted with the rest of the market and just about every one ended the day in the red (including Netflix, before the Ackman news). Among the hardest hit: Discovery and AT&T dropped, respectively, 9% and 8% after the giant telco posted earnings and anticipated an earlier than expected close to the WarnerMedia/Discovery merger. Lionsgate fell more than 5% following news it’s looking to buy STX Entertainment. Spotify and Snap were down 5% and 6%.
The DJIA, S&P 500 and Russell 2000 ended lower (the battered Nasdaq gained a hair, up 0.02%), reversing strong gains earlier in the day. Extreme volatility this week has been pegged to confusion over how aggressive the Fed will be in tightening monetary policy in the face of 7% inflation, the highest in forty years. The Fed’s target is 2%.
Interest rates are the most potent tool the Fed has to curb inflation with a series of hikes expected this year. Markets, companies and consumers want clarity.
Powell said 2022 will be a reset year after period of injecting liquidity into the economy and keeping interest rates near zero during Covid to avoid a collapse of the financial system. It worked, the economy is growing and labor market are tight. He said Omicron would affect first quarter growth but its impact would subside quickly after. But he noted the situation is full of historic unknowns.
The immediate reaction to a Powell press conference that capped a key two-day Fed meeting appeared to be alarm as he stressed how unexpectedly high inflation is, far above Fed targets and how persistent it is. That increased fears on both sides — that the Fed could raise rates further and faster than anticipated this year, or that it isn’t acting quickly enough to stomp inflation.
“There’s no decision about the path of policy. We will be humble and nimble, navigating currents and two-sided risks and guided by the data,” Powell said
Tech and any assets viewed as risky have been particularly vulnerable in the recent downturn, in part because they’d reached such high valuations over the past few years.
Beyond the rate increase in March, Powell declined to be pinned down on the timing and size of subsequent rate increases. The Fed will finish its news purchase of bonds and assets (so-called tapering) before the first rate hike. After, it plans to start reducing assets on its balance sheet that have reached almost $9 trillion as part of its plan to support the economy and markets during the pandemic.