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All Right, everybody, we're gonna stay with Netflix right now because the stock is down just about five percent here in the aftermarket. Kind of the red stickies, as we like to say, the big headlines at Bloomberg. This was a blowout number. I can feel like it shocked all of us. First quarter streaming paid net change in terms of the subscribers up nine point three three million. Timmy estimate was four point eight four million.
That's not the only beat.
First quarter EPs coming at five dollars and twenty eight cents per share. Estimates were for four dollars and fifty two cents. The company also out with second quarter EPs, the guidance for sixty eight versus it's a four fifty four.
And then another big headline.
We should note they're going to end reporting quarterly membership numbers next year. We got a great group of folks with us right now to help us break down these numbers. Paul Sweeney is co host of Bloomberg Surveillance. He joins us on the phone from New Jersey. Paul spent thirty years as a media analyst, also with US as Bloomberg
News earnings reporter Red Brown. Hey, Paul, I want to start with you because I got to tell you, I'm pretty surprised by the reaction to these numbers, considering they were such it was such a blowout quarter. Why do you think the stock is moving lower in the after hours.
Yeah, I think it's a little bit by the rumor. So the news people have been hyping up this quarter as a really big quarter because you know, the paid subscription was going to fuel subscriber growth. Yet again here that a big beat on subs last quarter. So the stock was up about twenty five percent since they reported in January. So it's probably just taking back some of those games. But you know, across the board, the subscriber
numbers really really were impressive. One thing to note about that big subscriber beat to the last couple of quarters. These are kind of short term phenomena. As you know, the people that were sharing accounts now we're paying for their owns and that'll fade out over the next several quarters, and then the focus will become, i think, on the advertising side of the business as well.
Yeah, it's interesting. Do you care, Paul to hear that they're going to end reporting quarterly membership numbers next year? It feels like it's something we focus on.
Yeah, yeah, it really is, and that, quite frankly, that had been the primary driver of this stock really since it switched to this digital streaming format. That was the metric that moved the stock. The company really wants to get away from that and get more towards Hey, guys, just view us as you would any other company stock.
Look at revenue, look at cash flow, look at profitability, all those types of things, and let's focus less on subscriber growth because, quite frankly, we pretty much got pretty much everybody that's out there, so it's really not so much subscriber story. It's more how much money can we make off each subscriber?
Paul, one more to you.
And then I want to bring in Red Brown, our earnings reporter who's been watching these numbers closely. Why would a company Is there any positive way to read in to a company like Netflix no longer reporting this. I mean, no question, the more data for investors the better. Is this a negative this is a negative sign?
No? Oh yeah, I think. I think for an investor and an analyst, you always want more information, particularly when it's critical information in terms of what drives the growth of the business. And it's obviously just it's subscribers and how much revenue you generate off each subscriber. It's pretty simple, so I you take one of those data points away. But we've seen other companies in other industries do that,
particularly subscriber based industries. They try to get you away from that number and get you back to where are Look how they are managing the business, and what they're telling you is we're not managing the business to maximize subscriber with We're managing the business to maximize revenue and profit per user. That's our management focus and that's how we look at it, and that's how we think you should look at it.
Red Brown, come on in on it. We talk earnings with you all the time. You know, I'm watching Netflix shares that have been bouncing around in the aftermarket a lot of moves right now, This still lower down about three and a half percent.
Yeah, I mean, I think what might be explaining a little bit of the negative movement too, as we saw them actually boost their full year outlook for operating margin. They beat EPs in the first quarter. Their guidance for the second quarter was ahead of estimates as well, But it seems like there's a little bit of a disconnect
between the full year number. If you know, those two pretty healthy beats are not translating to the full year analysts investors might start to question maybe where in that back half of the year are things starting to slow down as well. So I think that might also be factoring in here a little bit to the negative price movement we're seeing.
Let's speak a little bit to what Paul was saying, and I think it's a good point that we talked about it earlier. Just you know, this stock has been on fire this year, and you know, it looks like the numbers are are pretty upbeat, but it has been such an outperformer this year, and I just do wonder how much of that is at play as well.
Yeah, I mean, if you look at what analysts are rating for the stock, that it's kind of topped out at the analyst ratings point at this point. So you know, even with these really impressive numbers, uh, maybe the it's just kind of a hit hit its ceiling for the time being.
Hey, Red, it's so interesting, you know, I was saying as we were going into our beyond the bell our our coverage with TV as we you know, waited for these Netflix earnings, I was saying, you know, this could really set the tone for the quarter for a lot of the consumer tech companies that are set to report in the coming weeks. And yet yet we get a blowout number pretty much across the board, and we see a negative reaction like this, and I'm wondering how we can extrapolate this beyond Netflix.
Yeah, it's a good question. I mean, people have been really focused on earnings this quarter, and a lot of analysts are saying, you know, focus on the numbers, don't buy unto the hype, and has really big implications for the stock market at general at the moment. So I don't know if if people kind of are on edge and looking for any excuse to sell at the moment, Yeah, it could. It could paint a pessimistic picture for the remainder of the quarter. Here probably for.
Us to come on back in here. I'm just thinking, you know, we're getting ready for the analyst calls, and I feel like there's going to be a fair amount of questions, especially as you see the stock kind of bouncing around here. What's kind of the top one or two questions that you would want to be putting up on that call.
Yeah, one revenue and one cost question. The revenue side is talk to us about the advertising component. How well is that catching on with subscribers. How many subscribers are going to the advertising tier, and that's a big thing because that's going to be one of the drivers going forward. And then a second one on the call side is where are we on our programming budget you need to spend more to drive more subscriber growth or are is
a company at a good level of spend? Because if they are at a good level of spend, boy, the profits just really start churning for this company, and the free cash flow as well.
I do want to bring in some of the advertising information that you mentioned, Paul in the letter. The company did come out and say that ADS membership grew sixty five percent quarter on quarter after rising nearly seventy percent sequentially in each of Q three twenty three and Q four twenty three. They're also saying that over forty percent of all sign ups in our ads markets, remember it's not fully rolled out, are coming from our ads plan
for advertisers. The companies focusing on measurement solutions, including new partnerships with Kantar and Lucid for brand awareness and recall, and then Nielsen Catalina solutions for sales lift. Paul, I don't have to tell you because you've been covering this
for years. How wild is it for us to talk about Netflix and measurement because this is a company that for years was like, we don't care about ratings, We're never going to share any numbers, We're never going to do ads, never, never, never, And here they are talking about Nielsen.
Yeah, exactly, this is crazy. It's a great point. They're going to have to start the disclosing audience levels of some degree, but we already know that the advertising video on demand model is a very successful model. Advertisers are switching some linear TV broadcasting cable to the more digital platforms, and they've been itching to get to the streaming base
of Netflix. So there will be a lot of advertisers demand, and you know, Netflix is going to have to provide the advertisers and their agencies with some data because system they can just get a sense of pricing and value.
Yeah, you know.
And the other thing is like I'm thinking about content, right, you know, original content versus licensing. And when we were talking with Githa rang an ant On earlier, she said, you know, one of the upsides is that they are, you know, doing a lot of licensing deals. They had suits, they just did something with sex and the City that's
just coming out. I mean, when you think about it, Paul as an analyst and somebody who understands the space, I mean, cheaper to do a licensing deal versus creating that original content.
It is generally speaking, it is much cheaper to license the show than to create it, particularly the shows that they make, which are extraordinarily high quality, and they have very big budgets and other good and that's the that's the investment part. The good is is it does drive subscriber growth. So I think most investors would say that's a good investment to make in original programming. We got to find a balance here and so and that's the
same and that's true for the media companies. They have to find a balance on what they licensed to Netflix and what they keep on their own streaming services.
Red Let's say you had a chance to ask management question today on the call that's coming up.
What do you want to hear about?
Yeah, I mean we're talking about programming and what's going to be driving growth in the future. I think there's a big question around sports. Yeah, what what level of investment are they planning on putting in that that area? We know it's highly competitive, it's really crowded, it's very expensive. They are kind of stipping their toe in with some of these combat sports. But yeah, it be we wwe the Jake Paul and Mike Tyson fight later this summer.
We will want to hear kind of what is their strategy. They've been on the sidelines for a while now, and you know, have they been able to see the mess that sports streaming has been from, you know, paying billions and millions of dollars? Do they have a different strategy like they have in so many other cases in the market.
I do wonder too, And I'm just looking at something like a Walt Disney in the aftermarket and Obviously, it's not just about streaming. It's just down slightly down about one tenth of one percent here, Warner Brothers, Discovery, same store. I mean, Paul, is there anything that you kind of extrapolglate when you look at something like a Netflix and then what it means for some of the other streaming services that are out there.
I think it's actually all net positive, which is it just shows you the strength of the streaming business model. We now know when you look at Netflix's financials that it can be extraordinarily profitable, generate really high returns. So now the question is who else can join Netflix with those types of financial metrics? Ken Disney do it, Ken Warner Brothers, Discovery, Ken Powermount. That's kind of the question
a lot of those investors are asking themselves. But they can be done here if you look at Netflix west In.
Paul Sweeney, thank you so much. We so appreciate it. Our own Paul Sweeney, who has covered the media industry and did as a banker for many years, thirty years as a media analyst, so really great to get his insight. We're going to continue with Red Brown. We're also going to roll into it our Githa Ranganathan, who covers the media space for our Bloomberg Intelligence team. You know, getha you called it on the subscriber numbers.
She really did. Can you remind everyone what she told us a couple hours ago?
You said it was going to be a much higher number. It is a much higher number. Walk us through the quarter? And why is it that?
Though?
First of all, I'm assuming you're watching the stock in the aftermarket. It's down about two point six percent. It just has been bouncing around a lot. Walk us through the quarter? Maybe why you think, I mean, should investors be disappointed here?
So?
Absolutely right, Carol, it was a blowout quarter. I mean, I think it came in much higher than expected. We were kind of thinking maybe six seven million dollar seven million subscriber ads net ads range.
This was, of course way above that. But I think what is really.
Kind of causing a little bit of concern here is that they are going to stop reporting subscriber metrics altogether, and that I think is coming as a little bit of a disappointment. I mean, Netflix is out and out a subscriber story, or at least it always has been, and so this is kind of going to require a complete change in the mindset of investors, right, you know, this is this was always such an easy model to follow.
You know, you just multiply subscribers by the monthly price that you pay, and you you, you know, you kind of have your whole model. But now they're going to stop reporting subscriber numbers. They're going to stop reporting the average revenue per user. So it's kind of going to
it's it's definitely becoming. It's I would say, it's gone from kind of high growth to now more you know, uh, definitely a very profitable company, but obviously they do seem to be kind of signaling that subscriber growth that the party is going to be over at some point.
Correct me if I'm wrong, Githa. But did Netflix used to report churn and then they stopped reporting churn and that was a really big deal to investors when that happened.
That was a very very long time ago. Yes, they did, they would, they would mention it, and yeah, they did stop reporting it.
But subscribers, again.
This is the bread and butter of this whole streaming business. So I think it's it's definitely going to require people are going to take some time to kind of digest that getha.
We've seen them they have started to give us a little bit more viewership on information over the past year or so. Do you think that that is part of them kind of trying to signal that, you know, ads are going to become a bigger part of our business, and you know how big of a part of their business. Do you think that will be in the next couple of years.
Yeah, So right now, they haven't really given us any concrete metrics around advertising, I mean, other than the first number that they gave us in January, which was roughly about twenty five million active users. They did report something today by saying, you know that they've seen like forty percent of their new signups are actually on the adyar,
but we don't actually have a concrete number. That said, I think what they're doing, they're they're they're still kind of taking pretty a pretty measured approach, but there are signals that they really are looking to get or to scale up their advertising business, and I think sports is obviously a big way that they're going to do that.
You know, you obviously saw that the WWE deal. There are a few more things that are out there on the horizon obviously the NBA being a big one, and they if they make an aggressive bid for that, then that really tells us how serious they are about advertising. And I think potentially what they're what we're looking at in terms of advertising dollars if they get everything right.
It has been a.
Little bit underwhelming so far, but if they you know, if they're able to execute with the sports and the other live events expected to be at least ten to fifteen percent of their revenue by twenty twenty five, So you know, you're looking at a forty forty five billion dollar business. I think you're going to see four to five billion at least in advertising.
It is kind of interesting, and you know, Githa, we all kind of kid. It's like, I only have so many hours to watch all this stuff, and so we're picking and choosing, and it seems like there's so much out there. I mean, the company said in their letter to shareholders, with more than two people per household on average, we have an audience of over half a billion, and then they go on to say no entertainment companies ever
programmed at this scale and with this ambition before. But it does feel like, you know, and listening to you talk that, you know, them not reporting their quarterly membership numbers in the future, that they are conceding that there is just a point that we're going to max out. We can just only sign up so many people. And that means even on a global scale, right.
Yes, on a global scale. So back in the day, you know, maybe even about three four years ago, they would always talk about this one billion number as their total addressable market. About two years ago, that's when the great Netflix reset and the Great correction happened, they kind
of toned that down. They said, you know, it's probably closer to about four hundred five hundred million as the total addressable market looks like it's you know, probably even slightly smaller than that, you know, so they definitely are conceding that there is an upper limit, There is a ceiling to kind of the growth here.
But is there something like I always laugh about this sometimes when we talk about some of these big tech names. We used to talk about this a lot. By Apple, We'd be like, Oh, it's a disappointing number, yet they still sell a lot of stuff, And I understand it's growth trends and trajectory. Can we still though, can see that Netflix still is kind of the big behemoth in this space.
They absolutely are.
They have completely cemented their dominance when it comes to this whole streaming wars. I mean, I think the streaming wars are pretty much over. They are the winner, There's no doubt about that. And now it's just about them kind of you know, getting into different verticals, kind of becoming that that you know, that one service they probably will you know, kind of absorbi absorb a lot of
the other smaller streaming services. I think, just because they're licensing so much of content from them and they you know, it's just but at this point, it's definitely going to become you know, how much pricing power do they have? So right now we are at about fifteen and a half dollars for a standard plan in the US. How much upside is there? Can that go to twenty twenty five dollars? That is kind of the big question.
So it's funny as you're saying this, I'm thinking to myself, Okay, well, you know, twenty years ago, all we wanted was all the card options for TV, and we kind of got that now and I think a lot of us are spending more on.
All a combination of all these services.
Given that you know, it's Paramount, it's Hulu, it's Max, it's Disney Plus, it's Netflix, just to name a few. I do wonder, getha, where the growth is for Netflix at this point. Is it in the ad supported model, is it outside of the United States? Where is that growth coming from? As the company matures, Is it raising prices?
Yeah, it's actually tim it's all of the above, and it's just you know, it's going to be a very it's a very tough balancing act for them because they don't want to do anything too quickly and too rashly, which is why when they were kind of implementing their whole password sharing crackdown, they were very careful not to raise prices because you know, they didn't want to anger you know, existing customers. So again, it's going to be it's going to be tricky. They're kind of walking a
tight trope here. But yeah, they are going to use all the different levels that they have to kind of keep profitability, which is their main metric right now, profitability and margins kind of climbing up.
Githa. Before the report, in the analys, I was speaking to a lot of them made a big deal about the T Mobile partnership that they were working on. How do you see that factoring into the future. Do you think that that has been a successful program and do you can you expect to see them maybe do some some more types of those partnerships.
Absolutely.
I think that is going to become a critical critical factor for for Netflix if it really kind of wants to grow its subscribers. So what they did with T Mobile was kind of they're offering their ad supported plan, which is the seven dollars monthly plan to you know, select Tea Mobile members for free, and they're going to do a lot more of that.
The having a low.
Priced plan kind of really gives them a lot of flexibility because they can add subscribers. But then again, they're not necessarily losing our poop because remember they're the greater the subscribers they have, they can always kind of appeal to advertise the advertising community, so and kind of makeup or offset for any of that our poo differential from from their advertising dollars. I think that's going to definitely, uh play a much bigger role, not just in the US,
but of course across the world as well. They're going to have of those kinds of telecom partnerships.
Keitha, what do we, you know, kind of pull from this when it means to like Disney Streaming and Warner Brothers Discovery and some of the other services that are out there.
So for all of those other services, I think subscriber growth is not the primary focus anymore. It's kind of moved now, Carol, to profitability, where obviously, again Netflix leads the back. A lot of these other services have made a good progress, I would say, really good progress when it comes to at least they're not profitable yet, but they're you know, moderating their losses. Disney obviously is the big one to watch for there, and now they have
the model in place. You know, you've seen exactly what Netflix has accomplished. They all know exactly what they have to do. It's just going to be a question of how well they do it and can they get there quick enough?
Githa, do you think there's any consumer confusion? I mean, okay, I know the answer to this is yes, and I just don't know how to solve it.
The consumer confusion about where to watch something.
Yeah, I mentioned Sex and the City and I was shocked to hear that that's on Netflix.
It's an HBO show.
Somebody in our smolcast chat mentioned in the office, well, I think that's now on Peacock, but it was on Netflix. Friends a former NBC show or No, Seinfeld is now on Netflix.
I believe it's confusing.
See is that right? I don't know, like you know.
It is how discovery is the Biggest's not content or it's really just discovery is the biggest problem right now in the whole of you know, the streaming space. And at the end of the day, we're kind of looking for that one or what we're waiting for, is that one aggregator or reaggregator that can kind of take all the shows that you really want to watch and do it.
I don't know who it's going to be. Is it going to be YouTube?
Maybe it is. It could be Amazon, it could be Apple. But but we're all waiting for that. Again, I'm sure exactly it's going to happen.
Roku doesn't.
Okay, Roku does a really good job of that, but you've got to have be signed into everything on your Roku and plus that means you're only watching on TV. You're not watching it on the iPad or on like your phone.
And there's still is friction.
Yeah, there is still a lot of friction.
Final thought, Githa, I'm just thinking of our invest our audience as we work through this. Netflix share is still down about three and a quarter percent here.
Yeah, So I think the big question is really going to be, you know, on the call of you know, what how many subscribers do or how many you know subscribers do you think you've captured from the whole password sharing initiative. I think the numbers that they're originally identified
was one hundred million households. I think people will definitely want to know what percentage of that has already been kind of captured, just given the strong subscriber metrics, and then they'll kind of try to figure out how much more Runway is left.
Rockstar as always, Githa Rang and Nathan, thank you so much. Tech and media analyst at Bloomberg Intelligence, Red Brown, final thoughts for you just twenty seconds here. I mean stocks down in the aftermarket, but we'll see what happens tomorrow.
Yeah, We'll see what happens tomorrow and for the remainder of the year, I think you know they put up strong financials and that could easily bounce back. You know, this quick reaction, but the investors love the short term.
It depends on what they say on the.
Call exactly, and it'll be interesting to do if some investors may say, well wait, it's a little bit cheaper than it was and I want the exposure red.
Thank you.
So also a rock star, yes, yes, induticking with Kemes a rock group here right now.
Yeah, we had a great group.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern. Listen on Apple car Play and then brout Auto with a Bloomberg Business app or watch us live on YouTube.
So the overall every trade it is lower on this Thursday. So too, though, is the Philadelphia Semiconductor Index. It has dropped more than ten percent folks since March seventh, so an official technical correction, if you will, and that has caught our attention.
Meantime, A giant in the space just selling off shares of TSMC Taiwan Semiconductor at Manufacturing down about four point five percent right now, this as it's scaled back its outlook. Free chip market expansion, Carol cautioning that the smartphone into PC markets still remain weak.
Yeah, I feel like we're all on notice. All right, let's get more on the group. Let's bring in Bloomberg News managing editor of Technology and Global Security. She's Lindawan and she joins us here in studio. All right, Lynn, let's start with TSMC investors definitely not happy with the results. It's the world's largest maker of advanced chips, cutting its expectations for twenty twenty four market growth. It sounds like bad news. How how do you read it? What does it really mean?
Yeah, I mean it does put us on notice. Right, we're just starting to see the chips companies report. You got Intel next week, possibly Texas Instruments too, and so this is like a potential sign of what's to come in the coming weeks. It's a nuanced picture though.
Right.
The outlook was bad. It was definitively bad. They were talking about weakness and the PC market, weakness and the smartphone market. But that really outshadowed a very good beat on revenue, outlook on like potential sales, on the fact that AI has growth, and so like we've been talking the three of us have been talking about how nuanced the chips recovery and the chips room from AI has been for a few quarters. Now I would say this
is like the most nuanced that I've seen it. It's like, up, that's right.
Do they have it right? Or do they not have it necessarily right? Because you say it's nuanced.
It depends on how you feel about AI and whether AI can make up for this ongoing slump in the PC market and in the personal and in the in the phone market. Right, yeah, Like can AI be enough to save these giant chip companies like Intel and TSMC like that remains to be seen, but it does make you question, you know, how you will see the fortunes of Nvidia diverge from like TSMC and the others that make you know, the chips that go into cars and phones and PCs.
And Nvidia is at about six ten seven percent today, right.
Yeah, Okay, more on in Nvidia in just a minute, But first I want to talk a little bit about asm R because I'm wondering if perhaps some investors might have seen this coming after ASML's results yesterday.
Yeah, I mean they're both very nuanced pictures, and that's exactly why we brought ASML up in that TSMC story, because this is now the second company that has said, whoa, like, we're seeing a bit slower of a market than we thought we were, but are also but is also giving a great alex. So in ASML's case, there was something like a more than sixty percent drop in their orders, and that is a that is bearished definitively. And yet most of the story and the narrative around its earnings
was like, but don't worry, that's just temporary. AI is going to lift us back up. Demanding all these other chip markets is going to lift us back up. I think it's like a short term versus long term picture, right, there's a lull in the short term. People are still drawing down inventory. An ASML's case, they make the chip machinery that makes the chips, right, so they're even further upstream. And you think about the chip plants that are being built in the US and Germany and across Asia. Those
have a long lead time. So what they're banking on is that, yes, while we're working through inventory now, there will be a boom in the coming years as construction gets way.
Well, Loser's demand on the other side, ultimately the end users, right, because I mean it's great, Like and let's go to the money that's being put in. We have Bloomberg News reporting exclusively about Micron technology. They're right, six billion dollars Intel, Taiwan, Semi have already right, or they also are going to accept some loans as part of all of this awards packaging that's coming out. Can we assume you can do a lot of investments if they build them, Will the
demand come? Can we assume that demand's going to be there ultimately or it depends where we are.
That's hard to saying, you know, And there has been this narrative around the fact that like the market is underestimating how much data center demand there is actually going to be an AI. We had an executive at a Bloomberg Intelligence AI summit not too long ago, just a few weeks ago. Come up and he's like at one of the hottest AI data center startups, and he was like, a year ago, we were talking about investments in the billions,
and now we're talking tens of billions. Next year, we may be talking exponentially more than that, because that is what AI demand in data centers looks like. But you know, the TSMC story pointed out that we had today that some analysts are like pouring cold water on that idea and are wondering whether the forecasts will hold up and whether they may actually disappoint. That's a big question mark. It depends on how long the a the AI hype lasts.
Okay, so that I was going to say it brings us to Nvidia, Yeah, go, okay, because that company our reporting earnings till next month, the twenty second of next month. They're always last, they are, but you know, it gives us lots of time to talk about I'm ahead of earnings. Shares are down from all time highs of nine hundred and seventy four dollars just a little bit ago, trading now at eight forty four. In recent weeks, we've seen some companies come out with their own chips to try
to compete with Nvidia. Meta comes to mind, Intel comes to mind. Do these things hold a candle to what Nvidia it can do?
I think in video is still seen as the leader in the pack, but you have seen these other upstarts challenge them. You have seen some established chip makers. We had one in the office not too long ago, that is, you know, coming out with its own chip and its own chip design. I think, you know, the challenge for in Nvidia now and going forward is how do you maintain that first mover advantage and keep it. It's honestly
the same challenge that ASML is facing. How do you keep up and ahead of the competition on the chip machines too. Everybody is in this race to advance it. Then again, like the to be sure on in video earnings always is that everybody every quarter is like this is gonna be the quarter where they disappoint. They can't keep this up for this long and every quarter they
defy expectations. So I think you have to, like, you know, brace yourself for the idea that they may be able to surprise on the upside.
Again, Lynn, twenty seconds, what's the next focal point for you as you watch this space the chip space or the AI space, chip space, the chips space.
More spending on the government side, Okay, more being allocated. What I'd really love to know is where the rest of the twelve billion dollars in US ships spending goes? After Microsoft, I mean after Micron, you still got a whole lot of money left, and you know, with the big companies out of the way, you could see a lot of smaller names crowded in that space and make a name for themselves.
As they say, always right, follow the money, basically all right, Bloomberg News Managing Editor of Technology and Global Security, Lynn, thank you so much. Lindawan joining us here.
You're listening to the Bloomberg Business Week Podcast. Listen live each weekday starting at two pm Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station just Say Alexa playing Bloomberg. Eleven thirty.
Well sales have previously owned homes in the US fell in March from a one year high. Underscore is the lingering impact of high mortgage rates and elevated prices. Meantime, a great story by Bloomberg's Matt Bosler today on how rents are the Fed's biggest stumbling block when it comes to taming US inflation. Housing market of course incredibly important to the economy and investors, and there are cross currents out there for sure.
Yeah, which is why we knew we wanted to check in once again with Kate Kaminski. She's chief operating officer of the privately owned and asset and real estate investment company Walton Global. They've got about three point three billion in assets under management, over ninety thousand acres under management here in the United States. She's with us once again from Scottsdale, Arizona. Kate, good to have you back. How are you.
I'm great.
How are you doing doing well? Try to keep up with everything that's coming up, and it sometimes feels cross currents are coming at us. Last time we talked late February, you said pretty excited about twenty twenty four. Are you still pretty excited about this year? Are you less excited, more excited? Tell me what's since February.
Well, you know, looking at the March numbers that came out, I mean, we've definitely seen things plummet a little bit since since we last spoke. We're down about fourteen percent for new home starts, but if you look at it year over year, we're still up twenty one percent year over years. So I would say my sentiment hasn't changed from that perspective because we're still seeing you know, at least for Walton's business where we really focus in delivering
land to new home builders. Companies like Horton put out their earnings today and I mean they just had one of their strongest quarters ever and so their stocks up. I think home builder sentiments up. There's definitely headwinds with what we're seeing with inflation creeping up, mortgage rates creeping up. I think they went over seven today, So we've got to get that under control. But we remain bullish on on the outlook in the new new home building space most definitely.
So what happens if rates don't go down? What happens to your business over the next year, Kate? I mean there's been lots of talk this year, just in the last few weeks, actually a lot in the last few days that the Fed may not even lower interest rates this year. What does that mean for your business at Walton Global?
Yeah, I mean we're we're reading the same economic data points and preparing for the fact that there may not be any rate cuts. We certainly hope that there will be, but especially given it's an election year, I think we're all we have to keep our seatbelt done and go
along for this ride. But with that, you know, we're we're continuing to hold study in terms of transactions and think that this is actually going to catapult forward additional transactions for Walton's business because you know, what we focus on is providing future land supply to the new home building space, and really we do that through a just in time inventory approach, you knowing nothing you haven't heard about or we haven't talked about before, whereby the builders
are not paying for that land today, they're paying for it in the future. And with Walton's approach, it's when they're actually selling a home to a third party. But so as builders continue to look to preserve cash they have on hand today, I think that there's going to be even more demand for these unique structures whereby they
can defer land buying costs, even development costs. I think we'll start to see a lot more of that over the coming years, and especially this year, so that the builders can take capital that they have on hand, which they have a lot, and use that for things like continuing to buy down mortgage rates, because I don't think that that's going to be a program we see go away anytime soon. That's how we're going to get buyers into homes.
Right, And as you did say earlier, US homebuilder sentiment holding at fifty one in April, so it came in line with forecasted numbers by the analyst community that was a little bit earlier in the week. Having said that, right, you guys do buy land and then homebuilders buy that land. Is there any changes in the types of activity that you were seeing or where they want to be building regionally?
We've talked about regional variations with you before and like all of the activity that's happening down south, what can you tell us, and sometimes that information gets a little bit more nuanced and interesting.
Yeah, you know, again, the data that came out on March, it's it's showing that that we saw that decrease and starts from February over March right across the country. So I'm not going to say that you know, there are there's one region in particular that that didn't see some
softening from February to March. But again, looking at things, you know, over a year, we're still seeing continued increases strengthen in the numbers, which I think is leading to that you know, home builder sentiment and and good performance that we're going to see from these builders. In Q one, we continue to be extremely focused on that southern half of the US as we continue to see more companies relocate to these markets, job growth within those markets, and
population growth, which is you know, at historic eyes. I think that the southern portion of the country is going to continue to be an area that that you know, we can can really look to for strong results.
Kate again to remind every one of what you guys do. You manage land. You buy it from folks, you manage it, you hold on to it, and then you sell it to the large home builders, some of whom you've already mentioned during our interview. I'm wondering about the other side of the equation, going and acquiring that land right now. What are you what trends are you noticing? Are you able to buy all the land that you want to buy right now? Where are the opportunities? How are prices?
You know, land price prices like everything have been rising, and it's getting more and more competitive to buy development ready land. And that's that's really the key key phrase there.
I keep driving home this point as we have these interviews, but we're not seeing anything loosen in terms of restrictions on you know, development ready land across the US, municipalities looking to approve land, and then even more important the infrastructure injections, you know, spending to get servicing to that land for it to be developed on. But so, you know, all of these factors are making the the development ready lands supply even more and more constraint.
You know, we've got.
Around ninety thousand acres under management. That makes us one of the largest owners of development ready land and in the US. But we're we're continuing to look every week for new acquisition opportunities because we just think it's going
to get tighter and tighter. But so we're certainly advocating for you know, how can we affect change to get land approved, mostly for high density residential development, to get infrastructure, you know, spending in approvals so that places you know, like here in Arizona where we have water challenges, we need to figure that out because the population continues to grow.
Yeah, I was going to say how much climate change is impacting kind of all of what you do? Just got about thirty seconds left here. What can you tell us on that? That's certainly something we're thinking a lot about here at Bloomberg and got our Earth Day coming up on Monday, so kind of thinking about that too. How is that complicating the situation? And again just got about twenty seconds.
Yeah, it's huge. You know, Florida just put some moratoriums on development to really figure out what's happening with wetlands in Florida, and so I would say that it's really region specific and the environmental impact within those markets. But there's a compromise here, and I think we need the government to work with the builders and developers and landowners to figure that out.
Gota ron Kate, thank you so much. Kay Kaminski, CEO of Walton Global.
You're listening to the Bloomberg Business Week podcast. Can't just Live weekday afternoons from two to five pm Eastern Listen on Apple, car Play and Androut Auto with a Bloomberg Business act or want us live on YouTube?
Can I see this on the radio?
Carol, Well, I don't know. You can always say it once.
The rent, as they say, is too damn high and still increasing too fast.
Just still here, okay, I'm still here. Here's what we mean. Here's what we mean.
Okay.
Yeah, when inflation peaked above seven percent back in twenty twenty two, it was relatively broad based to cross goods and services. In twenty twenty four, with inflation back below three percent, it's no longer the case. What's left of the problem is now mainly about housing.
Interesting and the new issue of Bloomberg Business Week Matt Bosler and Jennifer Epstein right about the Fed's biggest stumbling block in taming US inflation. Matt is Bloomberg News US Economy reporter. He joins us here in a Bloomberg Interactive broker studio. Really timely story makes no sense. And we've talked so much about kind of what makes inflation sticky, laid all out for us and what you found in your reporting.
Yeah, so, you know, we're used to kind of hyperventilating around the monthly inflation numbers when they come out every month, and the story is always like, oh, what happened with goods prices? They're falling, or oh, core services is looking hot. That must mean the labor markets too tight, and so on and so forth. But the truth is, if you really look at the numbers, like the kind of big underlying component that determines the trend of the overall inflation
index always comes back to rental inflation. And so we're in a situation now where not only is that usually the most important, but it's especially the most important right now because it's also the component of inflation that has been slowest to come down compared to goods and services
and food and energy. And so if you start to dig into those numbers, what's going on there, it looks really interesting on a regional basis, where you're seeing, you know, very high rental inflation still in like the Northeast and the Midwest. It's actually coming down very quickly in the West and the South, where in a lot of those cities they've been building a lot of housing over the last figure.
Yeah, you increase supply and prices come to welcome to ECO. Well, I want to make sure I get this right.
Supply and demand, supply and demand.
Okay.
So it actually brings me to a serious point because the fedcher has been asked about this several times over the last couple of years, probably more than several You follow kind of everything he has to say, but he doesn't have control over zoning, he doesn't have control over where homes are built. The FED really has a limited toolkit when it comes to this stuff. So what can the FED do to tackle rent inflation?
Well, that's a really tricky question because typically the way they think about it is, Okay, if we raise interest rates, that will reduce demand in the economy, which will reduce demand for housing overall, because people have less money to spend on things like housing. But the problem is with housing in particular, sort of that relationship between interest rates
and rental inflation. Kind of the sign on that relationship, whether it's a positive or negative correlation, can be a little ambiguous, because there's also reasons to think that, oh, maybe higher interest rates might you know, not be great for housing supply, right if you're trying to finance construction of housing.
We just talked about that with a guest in the last hour, but go ahead.
Right, And so there's things like that. I think most people still believe that on the effect is that you raise interest rates and that's going to slow housing.
On the margin.
But it's a lot harder to kind of make that case versus some other more clear cut kind of components of the inflation index where it makes more sense.
What actually makes up the rent component specifically, is it rental any kind of housing like, just break it down for me.
Yeah, So it's it's partly it's mostly multifamily housing. There's also a lot of you know, single family detached housing that is, you know, on the rental market. And so this has been kind of a story lately with some of the drama around the inflation numbers over the last few months and some of these emails that the BLS has been sending out to quote unquote Super YEARSS and
so on and so forth. Part of the problem with trying to figure out what exactly is going on is that the BLS doesn't publish the weight of single family versus multifamily housing in the index. So you kind of have to guess.
Because I guess I just just for a moment, like I just think about higher rate environment. You can't afford to buy a home, right because the mortgage rates are higher, so you end up renting more, and that just drives up rental prices even more. It's as simple as that, is it, or somewhat well.
I mean, so that's part of the reason why it's not clear that raising interest rates will reduce housing demand, because that's one of the big countervailing effects that people,
you know, speculate about. There's another kind of more interesting component of this interest rates and rental inflation conversation, which has to do with the way that the CPI numbers are constructed in particular, which is that, you know, we've been talking a lot about these measures of market rents on new leases right from Zillo Group or the BLS is even publishing their own now, and those show that rents have rental inflation has either slowed a lot or
rents are outright declining in a lot of places. The problem is, the CPI numbers measure the average rents for all tenants, and I think it's something like ninety percent of tenants don't move in a given year, and so the CPI numbers are dominated by people who aren't moving, and so it takes some time for you know, those market rents to get into the kind of like average rents.
And one theory that we talk about in the story a little bit is that high interest rates may be affecting the amount of time it takes for market rents to get into the average rent figures because there's just less turnover and so the housing stocks turning over less and therefore or you know, those market rents aren't being reflected in the full housing stock as quickly.
I don't mean to ask a question that involves moving goalposts, but Carol and I do talk a lot about a two percent inflation goal and whether or not that is something that needs to be revisited. I think there are a lot of couch houses that I know yet. But what about just stripping out what happens when you strip out housing and so called supercore, because it actually is pretty significant, and now some analysts are stripping that out when they look at how inflation is moving.
Yeah, so if you do that, inflation is basically back very close to two percent. This housing thing is really like the last, you know, big remaining piece of the issue. If we were stripping out housing, you know, on the core PCEE indicator that the FED likes to look at, we'd be talking about more like two point two two point three percent inflation. And you can imagine the conversation would be very different, given that we have five and a half percent interest rates really different.
Thirty seconds left. Wrapping up, I'm just thinking about folks who are listening to us and watching us right now. What do you think is it that they have to kind of take away from this as they think about either the investment environment or ultimately what the FED can or can't do based on this data.
So I think the big thing is to, you know, keep an eye on the rental inflation numbers when we're looking at the monthly inflation statistics in particular, and you know, think about kind of what's going to get us down back to kind of pre pandemic run rate for those rental inflation numbers. A lot of people are forecasting that that's going to happen any month now. They've been saying that for a couple of months, so we'll just have
to see. But if that does happen in the next couple months, then you know, the inflation conversation could change again pretty dramatically.
Yeah, which we've seen some big swings swings in it.
All, right, exactly?
Did I mention that Matt's story is featured in the forthcoming issue of BusinessWeek magazine. It's available now on the Bloomberg terminal and at Bloomberg dot com slash business Week.
A great read. Mepos us Economy reporter at Bloomberg News. Here in our interactive broker studio, Matt thank you so much.
A journal now about you let me drive?
No, no, no, no, please go ju honey please, I'll do the driving.
Gravel, let's mate, I want to dry it.
It's a good question time.
This is the drive to the clothes.
Don com think we'll buy around.
Each other down on Bluebird Radio.
All right, everybody just got about eighteen minutes left to end the trading session, getting ready to wrap up the trading day and get to those Netflix earnings, which are definitely a focal point after the closing. About Charlie just breaking down the numbers, a bit of a mixed trade, but lower in particular on the Nasdaq one hundred, down about four tenths of a percent, and again on a day where we've seen some movement in US treasury yields.
Al though, we're offesome of our highs. But as Charlie mentioned, looking at the ten, you're four point sixty three right now to your note, with the yield of four point ninety eight, it's so just shy of that five percent mark. But keeping an eye on that higher or high for longer.
Well, let's get to our drive to the clothes.
For that, we go to Burns McKinney portfolio manager at NFJ Investment Group, Burns, joining us from Dallas, Texas this afternoon.
Burns, how are you.
I'm doing great. Thanks, thanks for having me.
Yeah, it's good to have you with us.
What do you make of this rising rate environment? I mean, it's kind of funny for me to stay rising rate environment because that's the environment that we've been in for the last eighteen to twenty four months. But it does seem like investors are a little concerned that the Fed is not going to be cutting this year.
That's definitely been the most prevalent narrative over the last week or so. You know, we've had three straight months of stubbornly difficult to tamp down last mile inflation, and so when you had Jay Powell earlier this week suggests that really the Fed's in no hurry to cut rates and suggested that rates might be higher for longer, you saw a convergence between, you know, what investors were thinking and what the Fed had been saying for a while.
At the beginning of this year, we were talking or the market was expecting six or seven rate cuts, and really calendar to date, we've gone from that to about maybe one to two rate cuts. Now, the good news is on this front is that you know, we're seeing higher bond yields, but it really it hasn't derailed anything yet. You've still seen, despite the fact we've had a tough week, equities are up this year. It hasn't affected the economy so much. I mean, the jobs reports have been very strong.
In fact, what's interesting is that despite the fact that there's a lag in FED policy, they started hiking rates two years ago, and in fact, over the last twenty four months, unemployment has been below four percent for over twenty four months in a row. The last time we saw a run that long for low unemployment was over fifty years ago. So jobs have been very strong, and really it just it buys the FED time and patience.
It's sort of like, you know, if you're on a road trip, if your car's getting a little better mileage than you expected, then maybe you can make it a few more exits before having to take that stop. But what it does mean is higher rates for longer.
I mean, we're just kicking off earnings. You know, we're kind of little bit on pins and needles awaiting those Netflix results coming up after the close of the belt because they're one of the big megacap names, right the tech names that we really kind of follow very closely. Having said that, you've got some names, especially within the value world, that you are finding interesting. Starbucks is among them. What is it about Starbucks that you find interesting at
this point? And I'm just pulling it up on the Bloomberg stocks down about nine percent so far this year, and we're looking at what a forward looking pe of about twenty one, but we know that they've been going through some things.
Yeah, we're looking for again, we're contrarians, and we're looking for the babies that've been thrown out with the bath water. Starbucks has been lagging of late, and as a result, what you're able to get is a growth name at
a reasonable price. You noted this traded about twenty one times earnings over the last decade, it's averaged closer to thirty times earnings, and in fact, outside of that brief run during the pandemic, this is the cheapest Starbucks has been on a pe multiple basis over the last ten years. So you have that they've been very generous with shareholders, that their dividend payouts gone up by nearly twenty percent per year for a ten year run. That's a great
way to keep up with the inflation. And in this type of market, you know, pricing power is paramount, and what they sell is they're the dominant player in an addictive product. So they've been able as a result of that consistently grow sales. And yeah, just I always like to look at stocks that you maybe have a little experience in. You know, when I'm on the road for business, I might stop in there for a brief water. My daughter does her homework there, my son meets up with
his friends there. Now, I kind of like to describe Starbucks as the town square of the twenty first century.
I mean, that's what Howard Schultz wanted.
Like you're like, this is literally, like, you know, the thesis of Howard Schultz. The question is can they can they do it in a way that not not only satisfies customers but also their employees as they've had the labor challenges over the last couple of years, dock.
Hasn't really gone anywhere in the last couple of years. And you know, I feel like I'm gonna, you know, mimic our something my husband saying, just because it's on sale, doesn't mean it's a deal. Like so, I'm just saying, right, unless there's the growth there, you know, how patient do investors need to be?
Well, again, the fact that you know that the margins have been pinched a little bit over the last couple of few quarters. You know, that's one of the reasons why investors do get such a great evaluation. And you know, noting the fact that it's not just cheap on a relative basis, this is the cheapest it's been in a decade. And so you know, when you start off, you know, values what you get what you pay for it, and as a result, it just kind of you know, shifts
that risk reward to the upside for investors. As far as getting an affordable starting point. You know, you've got a company that just efficient operations. You know, same store sales have continued to grow at three to four percent per year. It's been very consistent on that front. And again, you know, I mean there's very few companies that have really demonstrated the type of pricing power that they have, and so especially in an inflationary environment, that's the type
of thing we're looking for. That and as I said, you's growing dividends. You know, in case things go sideways, you know, they'll they'll pay you.
To Wait, hey, what about Crowncastle. This is a company that is it's a rate.
Uh.
They do infrastructure for wireless communications, think cell towers and the like. You're also bullish on Crowncastle.
Why, Uh yeah, that's one again. I you know, I think that for one, you know, you just have to kind of bear in mind that you know, the the stock market's actually pricing in a pretty positive scenario. Investors aren't looking to play defense right now. I think, you know, no one's thinking about a recession now the way they were a year ago. And you know, in the case of Crowncastle, yeah, they're they own cell towers.
Uh.
They they pay a consistent six percent dividend deal, which is another great way to play defense. You know, as far as you have cellular service, I mean basically, you know, there is just a play on the rising demand for digital content. Five G in fact, is even more profitable for these guys, and it's the type of thing where they sign long term contracts with their clients and with
automatic inflation escalators. And then nice thing for us is we don't have to be smart enough to know, you know, which streaming service or which you know websites are going to be the successful ones. It's kind of that pick and shovel play in the twenty first century, whereby you know they you know, regardless, people are gonna have to use their cell phones. I was listening to a radio show the other day where someone was hypothetically asked, what
would you give up first? You're heating and air conditioning or your cell phone? And I'm not to say which side of the coin I'm going to be on on that, but the fact that people were even asking that question does significant does indicate that they do, you know, cell a very importantly.
It depends on where you live.
If you live in California, you don't need heater or air conditioning for a lot of them ask, So that's an easy ask anywhere else in the country, though you might have to.
Yeah. I think twice about.
That, Dallas.
Yeah, I can't imagine. I mean, cell phones at this point are kind of almost I don't want to say they are.
Utility, but no question are I think you can say that.
Yeah, no doubt about it. Yeah, Burns, thank you so much. Fun to talk a couple of names with you. I really appreciate it. Burns McKinney's portfolio manager at NFJA Investment Group, joining us from Dallas, Texas.
He also likes the Next Era Energy. We didn't get to talk to him about that. Next time he comes on, we'll chat with him about that. Likes Reed's healthcare industrials.
Yeah, I'm looking at Next Era. It's going to report next week, guys, before the market on April twenty third. It is up about six percent. It's got a dividend yield of about three point two percent. But it's interesting. We've talked about the power grid and energy and utilities a little bit this week, so we'll see what they have to say. Ultimately.
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