Hedge fund manager Bill Ackman, who manages the FTSE 250-listed investment trust Pershing Square Holdings, is one of the biggest names in the investment world. It’s not hard to see why – during Covid, he turned $27m into a massive $2.6bn in what has been called the “single best trade of all time”.
Recently, it has come to light that Ackman spent $1.1bn on Netflix (NASDAQ: NFLX) shares after the stock’s post-earnings pullback in January. Ackman bought near the $390 mark, picking up 3.1m shares. Should I follow the hedge fund manager and buy Netflix stock myself? Let’s take a look.
Should I follow Bill Ackman into Netflix stock?
After Netflix’s recent share fall, I’m certainly tempted to start a position here.
For starters, the valuation doesn’t look that high. For 2023 (the next financial year), Wall Street analysts expect Netflix to generate earnings per share of $14.20. That means the forward-looking price-to-earnings (P/E) ratio is around 28 at the moment. I wouldn’t say that’s a bargain, but I don’t think it looks excessive, given the company’s growth rate. It’s worth noting that Bill Ackman said after his purchase that he saw a “compelling risk/reward” at current prices.
Secondly, I think the company is likely to keep generating solid growth in the years ahead. For 2022 and 2023, analysts expect the group to generate revenue growth of about 12% per year. “We’re optimistic about our long-term growth prospects as streaming supplants linear entertainment around the world,” said management in the recent Q4 results.
Finally, it’s worth noting that Netflix CEO Reed Hastings spent around $20m on stock himself in late January. This is encouraging as it suggests that the insider is confident about the future and that he expects the share price to rebound.
Overall, I can see appeal in Netflix stock at current levels.
A better way to play the streaming boom?
However, I think there could be a better way to play the streaming boom and that’s by investing in Alphabet (NASDAQ: GOOG), which owns YouTube.
Right now, YouTube revenues are growing faster than Netflix revenues. In Q4 of 2021, for example, YouTube revenues rose by 25% while Netflix revenues rose by 16%. And YouTube revenues are now bigger than Netflix revenues. For Q4, YouTube revenues amounted to $8.6bn while Netflix revenues amounted to $7.7bn.
Meanwhile, YouTube has to spend a lot less money to get hold of content. That’s because YouTubers make it all themselves. This is a fantastic business model, to my mind, as YouTube doesn’t need to spend billions creating content. In recent years, Netflix’s costs have ballooned.
Additionally, Alphabet has a lower valuation than Netflix. At present, Alphabet shares trade on a forward-looking P/E ratio of 24 times using 2022 forecast earnings and 21 times using 2023 forecast earnings. These are attractive valuations, to my mind.
Of course, there’s no guarantee that Alphabet shares will outperform Netflix shares in the years ahead. It’s worth pointing out that both companies face their own unique set of risks. For example, Netflix is facing intense competition from the likes of Amazon Prime and Disney. Meanwhile, Alphabet could attract attention from regulators in the years ahead due to its dominance.
All things considered, however, if I was looking for exposure to the streaming space today, I’d pick Alphabet over Netflix.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Alphabet (C shares) and Amazon. The Motley Fool UK has recommended Alphabet (A shares) and Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
