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analysts around the world looking at Netflix shares. They're continuing to move lower this after the company reported results for the most recent quarter, concerns about the guidance and boosting spending the company saying, for even though they largely beat Wall Street estimates, they issued a cautious forecast for the months ahead, setting higher program spending, and then, of course, Carol the cost of closing its deal with Warner Brothers Discovery.
Number of customers growing by almost eight percent last year, topping three hundred and twenty five million subscribers. Let's get to our team who certainly follows it, and of course our own Chris Paul Mary, who's been following this company and the ins and out of the pursuit of Warner Brothers Discovery. Chris, there out there on the West coast, Chris, you know you've known this company, you followed it. Investors not too impressed. They're worried about I guess it seems
like the spend that's out there. But walk us through what really jumped out for you in their reporting.
Well, first of all, obviously, investments has been really concerned about the Warner Brothers bid. The stock has lost a lot of money since the since the you know, in October when it first came out the Netflix was interested in bidding, and you still see concern here. I mean, they said they've spent sixty million dollars already on pursuing Warner Brothers. They're anticipating another two hundred and seventy five million in cost for that. They paused their share buybacks,
which were considerable. They had eight billion dollars left in their buyback program, so they can conserve cash for the Warner Brothers bid. So if you're if you're concerned about all this, there's certainly enough in there for that.
You know. I'm I'm just looking at some of the headlines from here, and given Chris, the re action from investors over the last few months as Netflix emerged as a bidder, it hasn't exactly been a positive one. What's the case for why Netflix actually needs these assets? Because this is a lot of money to spend, especially when investors are getting increasingly concerned about how much money the company is spending on content.
Well, they do in their Letterator shareholders sort of cite the broader case that they're you know, no longer just competing against you know, HBO or Paramount Plus or whoever, that they're competing against YouTube, TikTok, Instagram, and that they really only have a still small share of overall TV viewing about nine percent, and by acquiring this great library and these facilities Warner Brothers, they could really increase their production of stuff all around the world and getting into
some new business, more consumer products, more video games, and so that's the that's their argument. HBO Max would would give them the oppagility offer different pricing plans. So somebody just wanted HBO programming, they could get that instead of Netflix. So those are the things they're talking about.
I'm going to play Netflix's accountant. I mean how much I mean the content that they do get, They're going to get a lot of content right in one like if they get the deal. If they get the.
Deal, yeah huge, I mean it's a massive purchase in the seventy eighty billion range. There's numbers that came out today with Warner Brothers projections of what their studios and streaming business are going to doout five years, and you know it's a potentially huge boost you know, Batman, Bugs, Bunny, everything you can imagine for Netflix to own. But you know they've also been investing in their own licensing deals.
Huge deal just announced with Sony Universal kicked in as well this month, and they're even licensing shows they noted from Paramount twenty programs, So huge perchon is of every variety.
Does Netflix christ get these assets?
You mean, do they ultimately win Warner Brothers to think? Is that what you're saying?
Yeah, there's quite a few chuckles. Yeah, yeah, Well to be expected with a question like that where you know where you can't release either yes or no.
Right, they look like, well, let's do the poly market prediction exactly.
But they are the favorable. They are the favorite, no question about that. It's it's the board has said this is a better offer.
Well, they're the favorite from Warner Brothers standpoint for sure. But there's certainly a community of people that think smart people who think the Paramount is going to increase the offer, or that this is going to fail from a regulatory standpoint. So to pick the winner from here is a real dicey proposition.
In terms of their subscriber numbers. Where does that? I mean this has been something investors have been concerned about right now, the sustainability of their growth based on what we got from the company. How does that you know, push back on that argument or does it not?
It was pretty strong growth eight percent to the past three hundred and twenty five million. That was a year end that was in line with what investors were forecasting. Stronger numbers were the you know, the sales growth, which you know any company would kill for double digit like that. Uh, they said, where it's coming from, it's it's new members all around the world. And price increases. They said they're going to increase prices again this year. They weren't specific,
so it could be just in certain markets. Advertising business is growing. We all wondered how big a deal that was going to be. They said it was one point five billion last year. That's only about three percent of their overall revenue. But they said the number was going to double this year. Is that part of it's growing. So as long as they can keep the prices climbing and the and the subscribers growing and the ad sales coming, you know, they're going to see that revenue growth.
I just want to especially for those people who are listening on radio. Netflix shares are down about four and a half. They've been as low as a five percent decline here in the aftermarket. This is after the company plans to be spending on programs in twenty twenty six, crimping profits at the massive streaming company.
A Chris, before we let you go, pricing power that the company has, you mentioned price increases that we could see how much pricing power does Netflix have in the US, Like there are there's no shortage of places to go for content, but you know Netflix, they're kind of the og.
Right, Well, I think the big story of last year really was that everybody raised prices and we didn't see huge defections of subscribers. And it's certainly getting to the point where you know, it's getting very pricey. Netflix has kind of been like the video utility, that's the one you can't cancel. It's the it's got the just about the lowest churn rate of you know, subscriber cancelations of any of the big ones. So you know, how long can it continue to do that? And maybe they would say,
if we have Warner brothers. It's going to be a long time.
All right, Chris, thank you so much, really appreciate it. Chris, Paul Mary, Senior editor and Entertainment team leader here at Bloomberg News out there in our bureau in Los Angeles. We're going to stay on Netflix though.
Yeah. Let's bring in Eric Clark. He's chief investment officer of the ra Acuvest Global Advisors, about one point two billion dollars in assets under management, portfolio manager too of the Alpha Brand's logo ETF. He covers about two hundred consumer stocks, including Netflix. It's the eleventh biggest holding in the logo ETF. Eric joins us from San Diego, which I understand. It's like sixty nine degrees there. It's not like here, Eric, where the high today was twenty one degrees.
So don't rub it in.
Yeah. I don't even know why you guys like watch Netflix in San Diego. You just should be playing outside all the time. A decline of four percent after hours right now, are you buying more Netflix? I will buy more Netflix.
Tomorrow, absolutely, because it's seventy five here.
By the way, Oh my bad.
Thanks thanks very much for that. We're done with this interview. All right, so why are you going to be buying tomorrow?
Well, you know, bigger picture, nothing's really changed with the business.
It's just that people have left Netflix.
Stock because of the Warner Brothers the time that it takes to get a deal done like this. So people just say, I just don't want to have my money tied up in something that's going to be a little more uncertain than maybe quote dead money. That's the opportunity. So the stock's down over thirty percent and business is still doing really well. And at this point where the stock is now, I don't even think it matters what
the outcome of the Warner Brothers deal is. You're just getting the stock at a great price here, So we just have to be patient.
That's all. Are you? Are you saying that the Warner Brothers Discovery deal will happen, Netflix will get.
That That one is a little tough because there are the unknowns of the regulatory part. I think, generally speaking, I agree with the concept that Netflix really is competing with all of our time, not just you know, other streamers or cable. It's YouTube and TikTok and Instagram, et cetera. But within the streaming within the quote, you know, kind of core cable TV viewing. They obviously are the dominant one. It's just there's much more than just streaming and and
there's room for every brand here. You know, Netflix is the first place that people generally start that gives them that pricing power. And then we bolt on the paramount for the landman and you know Mayor of Kingstown, et cetera.
And you know HBO, Max, et cetera.
But you know, the.
Assets and Warner are so powerful and they are in the best hands with Netflix. It's impossible to know about the regulatory stuff.
But Eric, what if Netflix doesn't get Warner Brothers, do you still like Netflix going forward or do you think then there is this would be a big loss. We've done some reporting. I think we've had some stories that say, you know, this is going to help shape Hollywood, you know, for years to come. Whoever gets this property. So I'm just curious. If they don't get it, Netflix does not get it, then what well.
I think they're just going to go back to the same playbook that has you know, driven seventeen percent annual subscriber growth for the last decade. I mean, they're just nobody can compete with them on the content spend. So they're just going to go back to doing the spending. Maybe they do some tuck in acquisitions. It's you know, it's it's hard to know, but you know, you have
to give management the benefit of the doubt. They've done, generally speaking, a pretty amazing job building this brand, and so you have to assume that they're going to continue making solid decisions. And you're getting it. You know, a stock that's thirty percent off the highs with strong free cash flow. I know they will continue to grow margins, they will continue to grow subscriber growth, the ad teers growing like a weed. So there's just a lot to like here. So I love this thing on a dip.
You know. I'm looking at the the most the ten most watch movies from the second half of twenty twenty five Carol k Pop, Demon Hunter is Happy, gil Moore to Frankenstein, My Oxford. I did not see one of these.
I was just thinking movies, Wait.
The Woman and Cavin ten, A House of Dynamite.
Those are movies, not shows. Oh okay, okay, And even the top ten shows didn't see a single one of them. Wednesday, Stranger Things five, Untamed Squid Game, Stranger Things, Eric, this is interesting the way that people watch the different seasons of Stranger Things in the second half of the year in anticipation for season five. In the second half of the year, Stranger with different different seasons of Stranger Things were three of the top ten shows most watched on Netflix.
So is that is that an issue for Netflix moving forward? That's it for Stranger Things.
No, I don't think so. They will continue to bring out other stuff. I mean, they're just so good at this concept. I mean, listen, if they get Warner that's even better because there's so much more that they can do to refresh.
That entire library. Oh so you're saying, you're saying, like, Okay, Happy Gillmore two was in there, so maybe like another version of a classic each show or another version of classic Warner Brothers movies. Is that what you're saying? I think there.
I think you know, you get a bunch of creative people in a room and they take something. Let's say, let's say Sopranos for instance, what could we do to refresh Sopranos in the same theme. There's just so many, so many things that they could potentially do hard to see again, because you need the budget and nobody else has the budget.
Does does Paramount Skuidance? If they get the assets, do they have the creatives, do they have the budget to do?
I think they catalogue what you think Netflix could do. I don't think that they can compete with Netflix. And remember they get they're still going to have a metric ton of debt to deal with. So I look at this like a private equity owner. If if I owned Warner and that was my baby, who would I love to be able to sell that library to that would put it in the best shape for the rest of time.
And that's clearly Netflix. It is not Paramount Sky.
Okay, all right, So top of mind on the call with analysts and investors, Eric like, what is it that you know we need to be asking this company right now? Or is it just really all about their pursuit of Warner Brothers.
Well, I just think that there's obviously just a lot of noise, and there's a lot of assumptions. There's a lot of assumptions and a lot of industries like AI too. But I think that if you widen the lens, nothing has changed. It's still an important part of people's consumption. It's still an absolute, crazy good value even at twenty five bucks. I mean, I go out to dinner in San Diego and you get a drink and a half
and it's twenty five bucks. I can watch an unlimited amount of content on Netflix, So there's still a lot of value there, and you know, recurring revenue, business global in size and scope, you know, reaching kids as well as my mom. At eighty three male female. I mean, like, there's just a lot to love about a business like this. And I feel the same way about Spotify too. Similar you know, similar business, slightly different category, but for the
same reason. And Spotify is off thirty five percent too.
You know, it's interesting too they talk about you know, we've already begun to launch video podcasts from our partnerships with Spotify, The Ringer, iHeartMedia and Barstool Sports, and I've just announced two new original podcasts with Pete Davis in The Comedian and NFL read Legend Michael Irvin. So like, you know, we talked too about just podcast taking off, and now it's not just audio anymore, it's video. So is this a big opportunity for this company or just a nice side business.
No, I think it's a big I think it's a big opportunity. I don't know about you guys, but I can consume five, ten, ten times more content when I can listen to it in the car and you know, listen to it on a bike rider or whatever. It's not just about reading anymore. People want audiobooks, they want music,
they want videos, they want podcasts. There's just there's there's so much opportunity, and both of these brands have just a wild opportunity, you know, long term gathering subscribers and bolting on new opportunities that drive operating efficiencies.
Add AI to the to the.
Mix in in more engagement, better profitability.
There's there's just a lot of lot.
To like, and you don't often get a compounder on sale like both of these companies, so you should take advantage of it if you can look through some of the short term, you know, kind of noise.
Eric loves Netflix. Eric, always good to see you. Thanks for great to see you. Going to come out here, yes, yeah, we will.
Stupidly, I think the studio is about ten degrees.
We were out there last year and it was actually like kind of June gloom. When we were out in San Diego? Was it? Oh? Was yeah? Netflix shares let's stay on this. The company shares fell in the after hours as much as five point one percent, this after it for cast first quarter EPs below the average analyssessment. The company also plans to posits share buybacks in an effort to accumulate cash to fund them pending acquisition of
Warner Brothers. I want to bring in a Bloomberg Intelligence senior media analyst, Geetha Ranganoth, and she joins us from Princeton, New Jersey, where Bloomberg Intelligence headquarters are. Githa, just your takeaway from this report? The outlook is a concern spending on content. Got to tell you this is like an age old story for Netflix, right, the concern about, oh, you guys are spending way too much. We could have had this discussion a dozen years ago, I know.
And yes, content spending, so it was up about seven percent in twenty twenty five. They're projecting about a ten percent increase in content spend going into twenty twenty six. And then of course you have the cost related to the Warner Brothers deal. And I think it's not just the cost site right, Yes, operating margin. The guidance of tim looks a little bit light. It's below thirty two percent. I think the street was looking for something like closer
to thirty three percent. But also the ad revenue, you know, definitely not bad, but not gangbusters. So this is the very first time that they've actually reported advertising revenue. They said it was about a one and a half billion dollars in twenty twenty five. They expect to double that
in going into twenty twenty six. Again, definitely not bad given that you know, this company made its foray into adds just a few years ago versus all of the other media giants, But again, not really a number to kind of get too too thrilled about.
Was so that's not I was just going to ask, is that in line or below or above the expectations that you've been making of late. I mean, a nice to get some new data from the company, especially yeah, in recent quarters that you know they're not doing the same same sort of disclosures they have in the past.
No, absolutely, I mean, so really twenty twenty so you know, as we kind of zoom out and we just take a look at Netflix. So twenty twenty four was all about subscriber growth, right, they had about forty two million new subscribers. Twenty twenty five was all about pricing, right, huge price increases. Again, pretty stable subscriber growth. They obviously
did add close to almost twenty five million subscribers. But then twenty twenty six, as we kind of looked at twenty twenty six, here was like the big head scratcher, Right, what is the big growth catalyst for this company going into twenty twenty six. And that's really where people were wondering, whether you know, that's why they had to buy Warner. And of course one of the big things that everybody
was looking for was AD revenue. Again, it has gotten off to I would say, an okay start, but slightly on the lower side than I think people were expecting. People who are probably expecting something closer to about two to two and a half billion dollars in twenty twenty five. So definitely I think fell slightly lower than general expectations.
You know, I always think about Giza, like what's the next markets or how much more is they're out there? And in their company release they talk about, you know, we relish competition, work to earn more of our consumer's attention, and they say, despite our success over the years, our share of TV time remains below ten percent in the
major markets in which we operate. And then they said, for example, to Nielsen, in December, our share of US TV time reached an all time high nine percent point five points year overy year, yet linear TV still comprises over forty percent of US TV screen time. You know, is this just blowing smoke or is it really that there is still a lot out there for either Netflix or Amazon or some others to still grab when it comes to screen time.
Oh.
Absolutely, there is still a lot more room for streaming to grow, and I think it absolutely will. So I think one of the big things that we've seen, especially towards the end of twenty twenty five and going more into twenty twenty six, is that, you know, most of the Marquee sports properties are now moving to streaming. So obviously you have the big launch of ESPN. You know, for the very first time in the history of television, all of the Marque sports are now available for people
to watch on streaming. They don't have to subscribe to a PATV bundle anymore, and I think that makes a huge difference. You know, consumer behavior is changing, It's changing rapidly, and so obviously there is you know, a lot more room for a Netflix for and Amazon as you pointed out,
but also equally for a YouTube to grow. And this is where you have this whole, this whole debate with AI, right because as AI comes in and kind of democratizes content creation, you have more and more user generated content. Are people going to be spending more time on YouTube and less time with like premiere platforms like a Netflix, like an HBO.
I've just seen junk is obsessed with YouTube?
Yeah, but but not with the AI junk. I mean social feeds. Have you seen anything good? I mean, nothing good, nothing creative. It's like the junk with the.
AI you're talking, You're not talking YouTube.
No, like the junkiest junk.
You cannot think out there, Not yet, Tim, But I think just give it about a year or two and I think soon we're going to be seeing pretty high quality stuff come out. I mean, I know, so how the industry experts have basically projected that that, you know, another two to two and a half years you will see the first high quoquality fully AI generated movie you know, come out. So again, have to wait and watch, but definitely a possibility and definitely something Netflix is preparing for.