What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing with the federal reserve hiking interest rates for the first time in more than three years, we're starting to see the unraveling of what is increasingly looking like A pandemic tech bubble, one of the most obvious examples of this is the video streaming giant netflix, which was previously considered to be a nasdaq stalwart. Since the beginning of 2022, the stock has lost 64 percent, wiping out more than 100 billion dollars of market cap. On the back of two disastrous earnings reports, perhaps the single biggest loser from netflix is billionaire hedge fund manager bill ackman. In january he bought about 1.1 billion dollars worth of netflix shares after they reported a disappointing earnings result.

This made up almost 10 of his entire portfolio. At the time he said, the company had enormous growth potential, a best-in-class management team and was on the cusp of achieving massive economies of scale. He said that short-term investors were unfairly pushing the price down and giving long-term investors like him an opportunity to buy in at an extremely attractive valuation. However, within just a few months, he did a complete 180 degree u-turn.

He dumped his entire position, incurring a 400 million dollar loss for his investors on april 20th, netflix disclosed that they had lost 200 000 subscribers in the first quarter and are on track to lose 2 million in the second quarter. This marks the company's first quarter of negative subscriber growth in more than 10 years founder and ceo reed hastings explained this disastrous performance on password sharing, as well as increasing competition in this video. We'll look at why netflix is losing subscribers. Why bill ackman got this investment so wrong and what are the company's prospects going forward, but first quick pause from our sponsors over at policy genius.

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By a pretty large margin, netflix needs no introduction. They spend over 10 billion dollars a year on original content, including critically acclaimed hits like stranger things and squid game. You can get thousands of movies and tv shows from all over the world for 10 a month which is a fraction of the cost of cable tv plans. As the first mover in this disruptive category, netflix saw explosive growth increasing its subscriber base from 40 million in 2014 to more than 200 million.

In 2021, it became one of the most popular stocks on wall street, reaching a market cap in excess of 300 billion dollars. Netflix was a trailblazer, winning academy awards gaining millions of new subscribers every quarter and it looked like they were on track to take over the world. So what happened? For the first quarter? They reported a net loss of 200 000 subscribers, which was their first quarterly loss in 10 years. This isn't quite as bad as it seems in response to the ukraine invasion.

Netflix shut down their service in russia, which cost them 700 000. Subscribers had it not been for this, their 200 000 subscriber loss would actually be a modest 500 000 game, but it looks like things are only going to get worse from here. They gave guidance saying that they are currently on track to lose 2 million subscribers. In the second quarter, which would equate to about 1 of their subscriber base, this might sound surprising, based on the quality and quantity of their content.

They only appear to be getting better. In 2021, their original content won seven oscars, the most of any production studio, their 2021 hit show squid game was a single most watched, show in the platform's history, garnering 1.6 billion viewing hours. So why are they now bleeding subscribers? According to ceo reed hastings, there are two reasons: password sharing and competition. I'm sure that either you or someone you know, watches netflix using somebody else's username and password, be it a family member friend or even just acquaintance.

They estimate that 100 million people watch netflix using a shared password from somebody outside their immediate household. This is about 50, the size of their total paid subscriber base in the past they strategically allowed password sharing. The idea was that if someone starts watching netflix with a shared account, they'll get to see how great the platform is and will eventually pay for a full subscription themselves and at the time netflix was growing so much. They didn't need to worry too much about a few people sharing passwords, but now, with their subscriber base melting, their perspective has changed.

Netflix will start charging users a two to three dollar fee. For anyone who shares their password with someone else outside their immediate household, they will compare people's ip addresses to determine whether they are in the same household. This crackdown is currently being tested in three latin american countries and is expected to be rolled out globally. By the end of this year, even if they are successful with their password sharing crackdown, this will only give them one or two billion dollars of incremental revenue.

That's peanuts compared to the 200 billion dollars of market cap that they lost since their peak. Just a few months ago, clearly, password sharing, isn't the main issue there's something else going on too. A much bigger issue is a tidal wave of new competition coming onto the market in the past, netflix was a near monopoly in streaming. The legacy media companies avoided launching their own streaming services in fear of cannibalizing their cable tv businesses, but over the past few years the situation has changed drastically today, disney plus hbo max nbc's, peacock and viacom's paramount plus are all spending billions of dollars per year.

On new content and aggressive marketing today, the average american household uses 8.8 streaming services, with the majority of them being free ad-supported platforms like viacom's, pluto, tv or nbc's peacock, but they also use paid services such as netflix and disney, plus, with the average household paying 32 Dollars per month, while that's still far below cable tv, which can cost upwards of 70 dollars, it is getting expensive for consumers, while netflix used to be the only game in town, consumers now have choices, and especially with high gas prices and other inflationary pressures. Many people see that they're spending too much on video streaming and need to cut back at the same time that consumers are pulling back. Netflix's production costs are skyrocketing, netflix used to pay disney, nbc warner, media and others for rights to show their content, but now that these companies have their competing streaming, services they're slowly pulling back their content. They've been making up this difference by massively increasing their production of netflix originals, but that is very expensive.

Over the past five years, their content spending has more than doubled from seven billion dollars to 17 billion dollars. This was fine because they were increasing their subscriber base at a similar rate to be able to maintain profitability, but with their subscriber count now decreasing. The year-over-year increases that we've seen in content spending appear increasingly unsustainable. They recently laid off their director of original animation, along with most of his team and canceled multiple shows under development in an attempt to conserve cash, but with increasing competition.

The lack of investment may further accelerate the deterioration of their subscriber base with so much new competition. Coming online netflix's decline looked inevitable in hindsight. Why would anybody have expected anything else, but like a deer in front of headlights, billionaire investor bill ackman went all in on the stock just three months before their subscriber growth inflected negatively in january of 2021, netflix reported disappointing earnings results for the fourth quarter of 2021, While they beat on the top and bottom lines, they said that they expected net global, subscriber editions of just two and a half million in the first quarter of 2022, which would be their slowest growth rate in many years. This announcement caused the stock to lose more than 25 percent of its value in a single day.

Ackman had long, followed, netflix success over the years. He is a big believer in the shift from cable tv to streaming and has been waiting for a good buying opportunity to build a position in the stock that buying opportunity was delivered to him on a silver platter. He bought 1.1 billion dollars worth of netflix at a cost basis of about 360 dollars per share. He immediately sent a letter to his hedge funds, investors explaining the decision.

He said that the company still has enormous growth potential. They just had one bad quarter with subscriber growth, slightly missing expectations, but if you take a long-term view like he does, the mega trend of video streaming is still intact and netflix will continue to be the biggest beneficiary. Most analysts on wall street were expecting two and a half million new subscribers per quarter going forward. When reid hastings said that they were on track to lose 2 million subscribers bill.

Ackman was just as shocked as everyone else. In addition to their password sharing crackdown. Netflix is planning to launch a cheaper ad-supported tier to win back cost-conscious consumers very shortly after the earnings results. Ackman sent another letter to his hedge fund's investors.

He said that, given netflix's challenges to growth subscribers, the range of potential future outcomes for the stock are too diverse for him to predict, so he decided to dump the whole thing for a 400 million dollar loss just three months after buying it. Ackman is supposedly a legendary investor whose hedge fund manages 13 billion dollars. How could he have gotten this trade so disastrously wrong? There are few reasons ackman made his career as an activist investor. One of his biggest successes was buying a staking canadian pacific railways and replacing the ceo that increased the company's efficiency.

This caused the share price to triple within a couple years. He also had some very successful trades around the 2008 financial crisis, with his well-timed short position against the financial company mbia. Despite his successes, he almost never invests in technology companies, as these are largely outside his area of expertise. The letter they gave explaining his netflix thesis was very short, less than two pages long.

It doesn't look like he did: a ton of research on unit economics or the effects of new competition in the space. It looked like a very impulsive decision to buy the stock right after earnings. Ackman says that he himself is an avid watcher of netflix and this may have played a role in his investment decision. But if you thought the stock was undervalued when you bought it at 360, how can you be selling it at 220? Just a few months later, ackman said that one of his key learnings from past mistakes is to act promptly when he discovers new information, which runs contrary to his initial investment thesis, it's often better to cut losses and look for better opportunities.

Instead of back holding a position and hoping for a turnaround multiple times, he has taken his hedge fund to the brink of failure by doubling and tripling down on positions when he started moving against him. This happened with his long position in the failing retailer jc penny. As well as the borderline fraudulent pharmaceutical company valiant and perhaps his single most disastrous position was his multi-year short-selling crusade against the multi-level marketing company herbalife, which resulted in over 1 billion dollars of losses with the shocking deterioration of netflix's now negative, subscriber growth, akkman realized he's In over his head and has no idea what will happen to the company in the future, i personally don't have any position in netflix stock, but it does look like the selloff got a bit ahead of itself. Unlike many other high-flying tech stocks, netflix is profitable and currently trading at less than 20 times its trailing earnings per share, which is a slight discount to the s p 500, and while they certainly have problems with increasing competition, they are the premier global streaming platform.

By far with almost 40 percent of survey, respondents saying that they have the best selection of original content, while the exponential growth from the early years are now clearly behind them. Nobody can argue that netflix has built a world-class brand and is here to stay alright, guys that wraps it up for this video. Do you think netflix's share price decline is justified? Did bill ackman make a mistake by dumping his entire position at the lows? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.