Pershing Square Capital Management, L.P.

Releases Le er to Investors

January 26, 2022, New York - // Pershing Square Capital Management, L.P. (“PSCM”) today released the
following le er from Bill Ackman to investors:

Dear Pershing Square Investor,

Beginning on Friday and over the last several days, we acquired more than 3.1 million shares of Ne lix,
Inc. (NASDAQ:NFLX), making us a top-20 shareholder in the company. The opportunity to acquire Ne lix
at an a rac ve valua on emerged when investors reacted nega vely to the recent quarter’s subscriber
growth and management’s short-term guidance. Ne lix’s substan al stock price decline was further
exacerbated by recent market vola lity.
We have greatly admired Ne lix both as consumers and as investors, but have never previously owned a
stake in the company. Ne lix is a primary bene ciary of the growth in streaming and the decline in
linear TV driven by its superior customer experience, a vast and diverse amount of superb, constantly
refreshed content, global improvements in bandwidth, and the prolifera on and con nuous
improvement and convenience of devices on which one can watch.
Ne lix’s business has highly favorable characteris cs which include:
• its subscrip on-based, highly recurring revenues, which have enormous future growth poten al

• a truly best-in-class management team and unique high-performance culture (consider Ne lix’s
remarkable pivot from DVD rental by mail, to video streaming, to becoming one of the greatest
producers of beloved content ever)

• economies of scale and superb quality in its industry-leading content, which should con nue to
drive future growth and widen the company’s powerful compe ve moat

• pricing power derived from the enormous value it delivers to consumers compared with other
alterna ves

• substan al margin expansion, with the opportunity for con nued improvement due to
economies of scale and the company’s rapidly growing, global subscriber base

• an improving free cash ow pro le which should allow for con nued investments in growth as
well as the return of cash to shareholders

We began analyzing Ne lix in connec on with our investment in Universal Music Group, so we were
prepared when the stock price declined sharply last Friday. Now with both UMG and Ne lix, we are all-
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 in on streaming as we love the business models, the industry contexts, and the management teams
leading these remarkable organiza ons.
In order to fund our purchase of Ne lix, beginning on Friday and over the last few days, we unwound the
substan al majority of our interest rate hedge genera ng proceeds of $1.25 billion. We retained interest
rate swap ons that are currently out-of-the-money, and also purchased some addi onal longer-dated,
out-of-the-money swap ons. The result of all of the above is that the no onal size of our interest rate
hedge has been reduced by 80%, the term of a substan al por on of the hedge we retain has been
extended, and our dollar investment in hedges has been reduced by more than 90%.
Had we not sold the hedge, we could have likely realized more gains based on the increase in rates,
largely today, since our sale. That said, we believed the opportunity to invest in Ne lix at current prices
o ered a more compelling risk/reward and likely greater, long-term pro ts for the funds.
We invest in hedges not to protect the funds from a short-term mark-to-market loss, but rather because
they can become a large source of poten al liquidity at precisely the me stocks become cheap. We
invest in asymmetric hedges as they o er the opportunity for large gains without exposing the por olio
to meaningful losses in the event the poten al risk does not transpire.
We invested in out-of-the-money interest rate swap ons in December 2020 and early 2021 because we
believed that it was likely that the combina on of aggressive scal policy, monetary policy, and the
reopening of the economy due to vaccines would cause non-transitory in a on, which would require the
Federal Reserve to raise rates. We believed that an unexpected rise in rates could cause a market
correc on. We viewed this outcome to be a likely one, yet the op ons we purchased implied that this
scenario was very unlikely. Highly di eren ated perspec ves on future outcomes can yield a rac ve
payo s for investors, par cularly when structured in an asymmetric format.
Fortunately, all of our por olio companies are extremely high-quality businesses that can withstand
in a on as they have the ability to price their highly desirable products, services, and assets to preserve
their pro tability in an in a onary environment. We do not believe that the recent move in rates has
had any meaningful impact on our companies’ intrinsic values. As such, we believe that our por olio
companies trade at an even more material discount to their intrinsic values, par cularly in light of
recent, market-driven, price declines. While we do not know what the stock market will do tomorrow,
next month or even over the next year or two, we believe that our companies will con nue to compound
their intrinsic values at high rates for the long term.
We are pleased to add Ne lix to our por olio. Many of our best investments have emerged when other
investors whose me horizons are short term, discard great companies at prices that look extraordinarily
a rac ve when one has a long-term horizon.
Sincerely,

William A. Ackman


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 About Pershing Square Capital Management, L.P.
Pershing Square Capital Management, L.P. (“Pershing Square”), based in New York City, is a SEC-
registered investment advisor to investment funds.

Media
Pershing Square Capital Management, L.P.
Francis McGill
McGill@persq.com
212-909-2455