Bill Ackman has dumped his entire stake in Netflix at a loss of more than $400m less than three months after buying into the streaming business.

Ackman’s Pershing Square Capital Management told investors it had sold out following yesterday’s trading update when Netflix revealed it had lost subscribers for the first time in a decade, sparking a 35% crash in its shares.

Netflix’s shares have slumped over 67% since their November peak and 62% since the start of the year, making it by far the worst performer in the S&P 500.

Ackman’s $1.1bn stake in the world’s largest streaming platform was disclosed in January, making him a top 20 investor in the business. At the time he said Netflix was trading at a ‘meaningful discount’ to its value and had ‘exceptional growth potential’.

That confidence evaporated quickly after the company disclosed subscribers fell by 200,000 in the first quarter, against a forecast 2.5m rise, and it expected to lose 2m more in the second quarter.

‘We have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty,’ Ackman wrote to investors. ‘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.’

Ackman said changes to Netflix’s subscription model, such as introducing advertising on a lower-cost service, and restricting account sharing, would take ‘one to two years’ to implement added further uncertainty around future subscriber growth and revenue.

Although he still believes the company will continue to be ‘highly successful’ and ‘an excellent investment from its current market value’, the loss of confidence in its trajectory means he is finding better opportunities elsewhere.

‘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 favourably due to our long-term growth expectations for the company,’ he wrote.

He added Pershing Square’s funds took a 4% hit from his foray into the stock and are down 2% since the start of the year.

Pershing Square Holdings (PSH ), the £6.2bn London-listed investment company that is Ackman’s main fund, slipped 1.7% or 50p to £29.10 yesterday with its wide discount stretching to nearly 33% below asset value.

To make the investment in January, Ackman unwound a $1.25bn interest rate hedge that had protected the US-focused equities portfolio from market turbulence in the previous two years. 

Alongside Universal Media (UMG), the Dutch-listed but California-based music group into which Ackman invested a quarter of the fund’s assets last year, the brief Netflix holding lifted PSH’s exposure to streaming to 30%.  

Although Ackman has acted decisively, his u-turn on Netflix is embarrassing for the long-term investor and casts a shadow on PSH after an improvement in performance in the past three years that has seen shareholders earn a total 123%, broadly double that of US and global stock markets.

Prior to that, PSH had suffered from a big loss on Valeant, the Canadian pharmaceutical company at the centre of a damaging controversy over ‘price gouging’. 

Netflix’s long-term numbers still look impressive despite the recent share price slump. One of the big winners of pandemic lockdowns in 2020, it has delivered 20% on an annualised basis to its shareholders for the past five years and a blistering 36% for the past decade.

One firm that has benefited from Netflix’s positive longer-term performance is Capital Group, which disclosed a 10% stake in the streaming service back in August 2012.

Today it owns around 13% of the stock across three divisions - Capital Research Global Investors, Capital Research & Management Co – Division 3, and Capital World Investors - according to data from Morningstar. 

However, at least some of the firm’s funds would appear to be net sellers of Netflix in the past few quarters. 

Ackman was not the only manager who has been buying Netflix this year. The $11bn Polen Growth  fund, run by Dan Davidowitz and Brandon Ladoff, has almost doubled its position in the stock from the end of last year to nearly 1.2m shares. Netflix is the concentrated fund’s 11th largest holding, taking up 4% of its assets. The fund purchased its initial shares in February of 2021.