Here’s why Polen Capital liquidated its position in Netflix (NFLX) in the second quarter

Polen Capital, an investment management firm, published its 2022 Q2 Investor Letter from the “Global Growth Fund Poland”, a copy of which can be downloaded here. During the second quarter of 2022, the Global Growth Composite Portfolio (the “Portfolio”) decreased by -18.08% and -18.34% gross and net of fees, respectively, compared to a decrease of -15.65 MSCI ACWI % (the “Index”). Since inception, the Portfolio has been compounded at an annualized rate of 11.04% and 10.12%, gross and net of fees, versus 6.88% for the Index. Review the fund’s top 5 holdings to take a look at its best picks for 2022.

In its letter to investors for the second quarter of 2022, Polen Global Growth mentioned Netflix, Inc. (NASDAQ:NFLX) and explained his views for the company. Founded in 1997, Netflix, Inc. (NASDAQ:NFLX) is a subscription streaming service and production company headquartered in Los Gatos, California with a market capitalization of $106.7 billion. Netflix, Inc. (NASDAQ:NFLX) has returned -60.16% since the beginning of the year, while its 12-month return has decreased -62.01%. The stock closed at $240.02 per share on October 6, 2022.

Here’s what Polen Global Growth has to say about Netflix, Inc. (NASDAQ:NFLX) in its Q2 2022 investor letter:

“After taking a small starting position in Netflix in the first quarter, we liquidated our position during the second quarter. During the first quarter of ownership, Netflix management reported weaker-than-expected new subscriber growth, provided very dovish guidance and highlighted a number of challenges. Beyond the challenging comparisons with the prior year, which were expected, management noted the economic environment, increased competition and increased market penetration. All of these factors have made it more difficult for Netflix to add subscribers at the expected rate. Starting a small position, we thought Netflix was in much earlier entries with respect to market penetration given its subscriber base of ~222 million versus ~900 million broadband households outside of China. However, management recently revealed for the first time that they have more than 100 million non-paying subscribers and that the most affordable segment of the market is the approximately 450 million households with smart TVs. While we believe that a large majority of broadband households will ultimately become smart TV households, management noted that the growth of smart TV households has recently stalled. In short, Netflix is ​​much more deeply embedded in the immediately addressable market than we thought, and that’s creating a variety of challenges. Management is now looking to develop strategies to monetize non-paying subscribers and create an ad-supported model, which they have criticized so far. With Netflix reporting 1Q22 results, we focused our investigation on trying to understand how and when the company plans to monetize non-paying subscribers and launch an ad-supported streaming subscription. We have also done more work to understand the potential growth of the smart TV market in the future. While there are scenarios that could lead to acceptable growth and a decent investment return from the current valuation, we were unable to build the confidence to add to the position. With a weight of approximately 1% of the portfolio, we considered this to be a positive or negative decision after the sharp drop in price. Given our lack of conviction and an increasing number of more attractive opportunities within our global opportunity set, we decided to vacate the role.”

Our calculations show that Netflix, Inc. (NASDAQ:NFLX) ranks 19th on our list of The 30 most popular stocks among hedge funds. Netflix, Inc. (NASDAQ:NFLX) was in 95 hedge fund portfolios at the end of the second quarter of 2022, compared to 109 funds in the previous quarter. Netflix, Inc. (NASDAQ:NFLX) returned 26.81% over the last 3 months.

In October 2022, we also share another hedge fund’s views on Netflix, Inc. (NASDAQ:NFLX) at another article. You can find other letters from hedge fund investors and prominent investors in our Hedge Fund Investor Letters 2022 Q2 page.

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Disclosure: none. This article was originally published on Insider Monkey.

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