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Herbalife’s $700 Million Stock Surge Is Another Blow to Bill Ackman

As has become the norm, Herbalife’s latest earnings report was a tale of two companies: One for the bulls to love, and one for the short-sellers to hate even more.

Nearly four-and-a-half years after Bill Ackman bet $1 billion that Herbalife stock would fall—a losing bet so far for the hedge fund manager—the nutrition products company is approaching what many investors see as a watershed moment, the final test that will determine which side was right.

For now, though, it’s the bulls who are winning, at least financially. Herbalife stock surged more than 12% Friday morning, adding more than $700 million to the value of the company, after its first-quarter earnings results Thursday blew past Wall Street’s expectations.

Investors were watching Herbalife’s earnings report particularly closely because it was the first quarter the company began implementing changes mandated by the Federal Trade Commission as part of a settlement last summer. Herbalife (HLF) paid a $200 million fine in July to end the FTC’s investigation into whether the multi-level marketer of diet shakes was a pyramid scheme, as Ackman had accused.

But the company had also agreed to fundamentally alter its business model, distinguishing bonafide distributors from those who signed up to get a wholesale discount on weight-loss products they planned to consume themselves, a group now labeled “preferred members.” Ackman scoffed at the idea that such bulk customers could actually exist, and predicted the change would be the downfall of Herbalife, destroying its ability to recruit new distributors. The hedge fund manager reiterated in his letter to Pershing Square shareholders this year that “we believe the stock should eventually decline to zero.”

But Herbalife declared the FTC settlement a victory, and sought to prove that in the first quarter. Herbalife now has a total of nearly 600,000 total U.S. members, a spokesperson confirms to Fortune, including distributors and 360,000 “preferred members.”

Some short-sellers gleefully pointed to what appeared to be a dramatic drop-off in Herbalife’s new recruits.

In fact, while the company reported 18,652 new members in North America in the first quarter, that number does not include the so-called preferred members, a contingent that is several times larger than the distributors who actually sell the product to others. (Since Herbalife began separating these two categories in mid-January, 80% of new U.S. recruits signed up as preferred members, the company said.)

The total combined number of new U.S. distributors and preferred members is just slightly below what it was last year: In the first quarter of 2016, Herbalife disclosed 83,276 new North American recruits, of which about 80,200 were in the U.S. This year, the number was 78,900 for the same period, a decline of 1.7%, according to the company.

Even before the quarter ended, there were signs that Ackman and other Herbalife detractors had underestimated the number of consumers amid the company’s distributor ranks. When the FTC sent settlement checks earlier this year to supposed Herbalife “victims” who had never made any money as distributors, many of those who are now preferred members received them. Fans of the diet and nutrition products who never intended to resell them, some of those people said they planned to spend the settlement money on more Herbalife shakes and protein bars.

To hear Herbalife tell it, the FTC settlement was one of the best things to ever happen to the company, pushing it to make what new CEO Richard Goudis called “the most significant advancement of our business,” by forcing it to develop the ability to better track distributors and sales. “We’re getting direct transactional visibility and insights into our customer base that we’ve never had before,” he said on the company’s earnings conference call.

Though Herbalife’s quarterly sales and profit dropped from the previous year, to $1.1 billion and $85 million, respectively, that was well above analysts’ forecasts. Herbalife’s adjusted earnings per share beat expectations by 35 cents. The rise in Herbalife stock Friday took the share price even higher than it was the day the FTC settlement was announced, when it rose 10%. Shares are up about 38% this year alone.

But Herbalife isn’t through the woods yet, nor is Ackman throwing in the towel. Herbalife has a deadline to hit this month to launch new sales tracking tools as part of its FTC agreement, and Ackman thinks May could be the inflection point for its business. In other words, it’s the current quarter that will be the one for investors to watch, with Herbalife expected to report results sometime this summer.

The company knows it has an ultimatum. “We have a war room, our distributors are active.” Goudis said on the call. “This is job one for everybody right now in the month of May.”

And it’s not only complying with the FTC that will be the challenge for Herbalife. The second quarter of last year was the company’s best ever, making it more difficult to top this year, the executives warned analysts. Should the company fail to meet Wall Street’s expectations, it’s likely the stock will fall back down. Will it be enough to make Ackman quit shorting Herbalife once and for all? At the stock’s current levels, it would need to crash more than 50% in order for the hedge fund investor to make any money on the bet.

Editor’s note: This article has been updated to reflect the additional rise in Herbalife’s stock price after the market opened Friday.