Pershing Square Capital Management, LP issues letter to investors


NEW YORK–(BUSINESS WIRE)–Pershing Square Capital Management, LP (“PSCM”) today released the following letter from Bill Ackman to investors:

Dear Pershing Square Investor,

Beginning Friday and over the past few days, we have acquired over 3.1 million shares of Netflix, Inc. (NASDAQ: NFLX), making us one of the company’s top 20 shareholders. The opportunity to acquire Netflix at an attractive valuation arose after investors reacted negatively to subscriber growth over the past quarter and management’s short-term outlook. The substantial decline in Netflix’s stock price has been further exacerbated by recent market volatility.

We’ve greatly admired Netflix both as consumers and as investors, but we’ve never owned a stake in the company. Netflix is ​​a major beneficiary of the growth of streaming and the decline of linear TV due to its superior customer experience, vast and diverse amount of great and constantly updated content, overall bandwidth improvements and the proliferation, continuous improvement and convenience of devices. which you can watch.

The Netflix business has some very favorable characteristics, including:

  • its very recurring subscription revenues, which have enormous potential for future growth

  • a truly best-in-class management team and a unique high-performance culture (consider Netflix’s remarkable pivot from DVD rentals by mail to video streaming, to becoming one of the biggest producers of beloved content in all the time)

  • economies of scale and superb quality in its cutting-edge content, which should continue to drive future growth and widen the company’s powerful competitive moat

  • pricing power derived from the enormous value it offers consumers compared to other alternatives

  • substantial margin expansion, with the potential for continued improvement through economies of scale and the rapid growth of the company’s global subscriber base

  • an improving free cash flow profile which should allow continued investment in growth as well as the return of cash to shareholders

We started analyzing Netflix as part of our investment in Universal Music Group, so we were prepared when the stock price fell sharply last Friday. Now, with UMG and Netflix, we’re all about streaming because we love the business models, industry contexts, and leadership teams that run these remarkable organizations.

In order to fund our purchase of Netflix, beginning Friday and over the past few days, we have unwound the vast majority of our interest rate hedge generating proceeds of $1.25 billion. We have held interest rate swaptions that are currently out-of-the-money and have also purchased additional longer-term out-of-the-money swaptions. The result of all of the above is that the notional size of our interest rate hedge has been reduced by 80%, the duration of a substantial portion of the hedge we retain has been extended, and our dollar investment in blankets has been reduced by more than 90%.

If we hadn’t sold the hedge, we probably could have made more gains due to the rise in rates, much of it today, since our sale. That said, we believed the ability to invest in Netflix at current prices offered a more attractive risk/reward ratio and likely greater long-term rewards for the funds.

We invest in hedges not to protect funds from short-term loss in market value, but rather because they can become an important source of potential liquidity precisely when equities get cheap. We invest in asymmetric hedges because they offer the possibility of significant gains without exposing the portfolio to significant losses should the potential risk not materialize.

We invested in out-of-the-money interest rate swaptions in December 2020 and early 2021 because we believed the combination of aggressive fiscal policy, monetary policy and reopening of the economy due to vaccines would lead to transient non-inflation, which would force the Federal Reserve to raise rates. We believed that an unexpected rise in rates could lead to a market correction. We considered this outcome to be likely, but the options we bought implied that this scenario was highly unlikely. Highly differentiated outlooks on future results can generate attractive gains for investors, especially when structured in an asymmetric format.

Fortunately, all of the companies in our portfolio are very high quality businesses that can withstand inflation because they have the ability to price their highly desirable products, services and assets to preserve profitability in an inflationary environment. We do not believe that the recent evolution of rates has had a significant impact on the intrinsic values ​​of our companies. As such, we believe our portfolio companies are trading at an even deeper discount to their intrinsic values, especially in light of recent market-induced price declines. While we don’t know what the stock market will do tomorrow, next month, or even over the next year or two, we believe our companies will continue to compound their intrinsic values ​​at high rates over the long term.

We are happy to add Netflix to our portfolio. Many of our best investments have emerged when other investors with short-term time horizons have squeezed out big companies at prices that look extraordinarily attractive when one has a long-term horizon.


William A. Ackman

About Pershing Square Capital Management, LP

Pershing Square Capital Management, LP (“Pershing Square”), based in New York, is an SEC-registered investment adviser for investment funds.


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