Netflix, China, And Real Estate (Podcast)

Leland Mellon Miller, CEO of China Basebook International. Leland, thanks so much for joining us here. You know, I guess as we look to China here, we really have to start with are they open? Are they closed? Our certain regions open, are certain regions closed? Can you give us an overview kind of where we are right now with

China and its economy. Yeah, I think that's the right question to be asking, because you know, China just came out with its first quarter results and and and they surprise a lot of people, not us, because you know, we had seen some some strength in January and February. But the but the real dynamy I make that people should be tracking is the fact that the economy is just shutting down, and it's not because there's a COVID outbreak. It's to prevent the COVID outbreaks. It's part of this

COVID zero policy. And you're seeing with what a lot of people are saying is around g d P shutdown. Almost all the major ports are either shut down or massively backlog because there's a potential lockdown in progress. So you've got you've got a real problem. The March data showed a little bit of this, but April you know, I've said this before, but Aprilo is going to be the most important month for schids is January because the extent of the lockdowns are to dictate just how gruesome

economic growth could potentially fall on the second quarter. So how what kind of drop do you expect? I mean, can you give us a range? Well, look, if if we see some of these big city lockdowns, and we're not talking about just Shanghai, but the two of the biggest cities in in in you know, down south in Guangdong Province are are are under either uh you know, the beginnings of a lockdown or or or or a lockdown already. Uh you know, we see this continue and

at last more than one or two weeks. I mean, you could see a quarter with negative growth. Now that doesn't mean they're gonna announce it, but it just means that, you know, if you're shutting down most of the economy for a huge chunk of the quarter, you know, you could have some real problems with trying to get the number out of the gutter? So Leland, is there any pushback or pressure or from folks saying, hey, this is

not the right COVID strategy here, the zero tolerance. I mean, maybe it worked in the beginning, but boy, with these you know, increasingly contagious variants, Uh, maybe not so much. Is there any push back on this policy? Well, I mean, individuals across China don't like the policy at all. I mean, I think anecdotally it's hard to find anyone who is supportive of the of the draconian extent that this lockdown has you know, has hit. But that's not the way

China works. That it's dictated from the top down. And She Jin Ping wants to lockdowns, and he's doubled down that recently on the radio, and senior policy makers in the last few days have had tripled down on it.

So they're not moving away from COVID zero anytime soon, no matter what the worries about economic growth and and other things are absolutely secondary to the general fears that they could have a major outbreak in the rural populations amongst the elderly and particularly underserved populations that don't have hospital capacity. And that's what they're really fearing, like a disaster during a politically sensitive year. So there's I mean, because it matters how much support j and Ping has

amongst the population. But I guess his his play right now is I'd rather have them um perturbed with me over a lockdown than you know, ousting me over you know, a pandemic that overflows hospitals nationwide. Right, I mean, what he's trying to do, he's looking at the worst case scenario and trying to take that off the table, and then the next priority is to take the next level of bad case scenario and trying to take that off

the table. What I don't think people understand right now, because they're obsessing over the you know, the growth rate and and and GDP targets and things like that, is that that's just not high on the priority list right now. You know that that's usually what the leadership in Beijing is obsessed with. But during this year, during a time where the the outbreak could spread out of control and cause havoc in the run up to the Party Congress

is fall, that's not. Economic growth is not the priority. Stability is, security is, safety is and getting COVID under control. Do they feel like they can always bring back economic growth with the right kind of stimulus and and have they been enacting stimulus programs that that you would expect. Yeah, that's what gets so interesting. So so they have not been doing stimulus. You know, about a year ago we said, look, the economic growth models changed, the stimulus playbooks changed. You

can see this in our data. There's just nothing percolating underneath the surface in terms of them getting ready to do a more active credit policy. And and a lot of people fought back and said, no, no, no, we understand the way China works. We understand this is a party congress here. They always go big in a party com this year and that was the wrong call that this is a different regime, this is a different kind

of economic policy making. Now, the problem you have on top of that right now is if if most of the economy are a big chunk of the economy is locked down, how do you stimulate it even if you want to? So they have a question do they want to stimulate? But even if they choose to, which they have not yet chosen to, can they make it work? Leland? Just thirty seconds left. Is there any risk to she right now? I know you mentioned a uh political year. Yeah,

I don't think so. Look, you know, there's no evidence that this is affecting she's standing. But you know, we're on the cusp of a very very big things happening right now. So he needs to get COVID under control and they need to get you know, economic growth back up the second half of the year. But no, I'm not seeing any immediate short term threats to his his governance. All right, Leland, good stuff, Thank you very much for your time. Again when we want to get the latest

on what's going on in China politically economically. Returned to Leland Miller. He's a CEO of the China beij Book International, and boy, they have some of the best data sets proprietary data sets, over a hundred thousand unique data sets on all parts of the Chinese economy if you want to know what's going on over there and maybe get the real numbers as to economic growth in other areas. The good folks at the China Beige Book are the ones to go to Netflix today off year to date.

You know, Matt, When I was covering the stock as an analyst, I said to folks, Netflix is a subscriber growth story. As long as subscribers continue to grow and hopefully at an increasing rate, stock works. Nothing's gonna stop it. But when the growth rate slows, or god forbid, it even goes negative, you don't want to be anywhere near this. It's the exact same call I had on America Online back in the early nineties and it pretty much worked. Uh, but we got a pro on right now, Michael Nathanson,

I have an apology you do to make to Michael Nathanson. Michael, I have to say I've been reading your research for years and Craig's as well, and for some reason today I quoted you as Nathan moffattson. Maybe that sounds pretty good, Michael, what's your course? I corrected it right away. Michael Nathanson and Craig Moffitt founded Moffatt Nathanson. Is that right, that's correct, almost nine and a half years ago. Yeah, and before that they were top analysts at Where's It Bernstein and

things like that. Just some smart dudes, and we always appreciate getting a few minutes of their time. Michael thirty foot view. I want your perspective. What are we seeing today? How are you viewing this company, this stock and this space.

You know, Paul, you know you brought that reference to a O L. This is not a L because there was a lot of fraud and you well, we know, but you remember the stock right that when people get these transformational businesses, I don't know how to value them, They don't know how to think about them, so they get super amped up about the longterm growth opportunity to listen to everything. Management says they trust their models more than they trust their logic. Um, and so I'm thinking

about this is you know, this is natural. As you said, you know, at some point companies can't raise pricing anymore,

they can't add more songs, and then they have to pivot. Um. What surprising me is that just the lack of preparation in the pivot right, And that's I think what keep are reacting to when they read that investor letter and watched the interview, Like, wow, these guys steam a surprised at anyone about what's happening and why wouldn't they know more about their business then even those you know, slow south side analysts, you know, So what what did happen that? Um?

You know, it was such a sudden shock to everyone. And um, now of course we were talking about this earlier. UM, they used to think people stealing accounts or passwords was just the cost of doing business. Now they're like, oh, man, there's a hundred million households they are paying. We need to get like a portion of them. Yeah, Like it's

really interesting. So we we've asked over and over again like what is what's going on within the US and why do you why are you so bullish about you know, how much more of the US can grow there at seventy million or so? And they never acknowledge that there was this much password sharing with it within the US. UM. But if you add the pastor share in too the U S base, you're like, wow, you're really are at where the U S p TV market hit a wall,

which is a hundred million subs. So the challenge is going to be you know, people like me who pay, you know, not almost twenty bucks a month for four Simultan streams. And I'm thinking, you know, maybe that's something that's allowed for my you know, college age kids or when I travel. The question is, you know, how are they gonna get me to actually now pay for someone who's out of my house, like a college student who's using my account but he's a household member. Right. It's

like to me, there's a real question. This is why they even so reluctant to do it, because it does create some ill will, right, Like I've always paid more for Netflix for the optionality used on the road or have other family members, you was it out of the house, But now what's the rule? And I just think they're they're the devil's gonna in the details here and it could create some ill will, and I think that's why

they haven't wanted to change. Well and is it is it going to be difficult because I, um, you know, have a Netflix account and I have four brothers who live all in different parts of the world. I don't know for sure, but I'm pretty sure when I see like most watched or recent history. I'm like, I didn't, I didn't watch that. You know, I'm pretty sure one of my kid brothers is using it. And Netflix must know, right when my password is being used simultaneously in Berlin,

Scarsdale and l A. Right, don't they get that? Yes, they do get that, and it's one of it was one of the value adds, right, like, hey, we don't you know, let's look the other way. We're charging twenty bucks. It's worth it, you guys a lot of the product. But now they're running out of room. Right, So the question is gonna be if if you're paying for the four sound town of streams and only they're two in your house, well, you're gonna spin down. And will your

family members actually want to pay for it? Like, we don't know, they're happy to get it for free. Um, but it's it's definitely it opens up a bunch of questions, right, And look, if the stock was cheaper, and it's definitely getting cheaper, I would have some optionality. I bet on the optionality of that. But we're still working our way through kind of what the right right pricing is the model that we see in front of us, Right, it's

getting cheaper. So you think it's getting it's getting cheaper, because a little bit later we're gonna talk to Laura Martin. She's like the soul analyst on the street who's upgraded in Yeah. Well yeah, to our credit, she was even more negative than I was. She just selling stock. Yeah, it's hard to I mean basically it's gonna it's gonna get cheaper because as you know, you're going from this growth stock to growth purgatory, right, and as it gets to the value, we camp you need cash onw and

earnings to have people come in and buy it. You're kind of in this nowhere land, right, and this is our reference kind of where you know you you noted it that you know twenty years ago we saw the same thing and it just takes a while for investor bass to turn over because there's a lot of evaluation

support on things like cash flow. It's going to just take a while, right, New people show up, and so it's it's you know, I think they need to have better answers on how they're gonna roll out the passer cheering and the ad model. Like it seems like again like they were not prepared. Yeah, that's that's kind of what it came across to me. So we'll see how this plays out. Michael Nathanson, founding partner and senior Research Channels MOFA. Nathan's all right, let's check in on the economy.

Here are we getting a recession this year and next year? It's checking with Brad Dalmon, chief economists for Courtland. Um. Brad, you know, one of the things when we think about this economy, what has really struck me is how strong the housing market has been really since day one of this pandemic. And we got some new housing starts a couple of days ago were that were very strong. What's your view? Is this market peaked? Are we going to roll over a little bit in terms of just real

estate in this country? You think you be a peak of sorts? Right? You've seen the mortgage rates go up, but you can already see indications that the housing market's gonna cool a little bit, if it's slowing home price appreciation, if it's more supply starting to pick up on the market. Um So, in that sense, as certainly a peak, but I don't think anybody's expecting home prices to come down structurally. Is so we also saw a drop in existing home sales.

But that's just because there's not enough inventory, well not just because it's also due to rising mortgage rates. What kind of effect is that going to have? Especially if what are we at right now four and a half almost five percent, What if mortgage rades get to six or seven, I think we'll see a demonsta will flow down and activity. There's been a big narrative that a lot of the upward pressure at home prices has been

because of low listed inventory. Now it's think we'll see just how that theory is tested when mortgage rates do go up. I think a lot of people will be shocked to see just how quickly home price appreciation slows down.

I can't believe more inventory hasn't come out, by the way, Brad, because I know multiple people who want to sell but are on the fence about when to do it, and now they're starting to rub their hands together, um about these mortgage rates and worrying, worrying that they waited too long. I would tend to agree with that. I think they

probably have if that's really the position they're in. Maybe one exception to that will be you know, we all know about the rate hikes that are expected to be coming. Maybe that first double rate hike will shave fifty basis points off the tenure treasure rate and kind of bring mortgage rates back down for a little bit. All right, So when we talk about, like I guess, new housing construction, what I hear a lot is they're just not building the entry level inventory. Builders are too focused on the

McMansions because obviously higher better margin. When we do look at new housing production coming onto the market, are we seeing any entry level It depends on really how you wanted to define it. I mean, all this new construction is going to happen on the margin. It's very difficult to provide this entry level housing without some kind of subsidy of any locations. But we can broaden the scope of what housing really is and we can look to rental housing in many ways as being entry level housing.

That to say, for that new household that's going to go out and form. If we look at these healthy starts that just came out, we did actually see an uptick in in five bedroom plus multi family units housing starts. So I think in that sense, we are building that kind of product. And we looked at the ownership side obviously it's a little bit of a different story, all right, Brad, good stuff. Appreciate getting your thoughts here on the overall real estate. We make some great points, by the way,

especially when it comes to a rate hike. I'll note this morning Bank America um UH went bullish on US treasuries. They say, now the tenure yield is going to come down to two twenty five really, and right now we're hovering around to nine. And that's the idea, the same thing that Brad said, you know, you get, you get a raid hike, and that attracts that investors to come back in and they bring the yield, push the yields down. Interesting, the ten year treasury two point We were here at

two to seven. Interesting, right, Brad Dalman, chief economists for Courtland. You know, Matt. In my career, I've seen a lot of sectors, a lot of stocks that have been subscriber momentum stocks, cable stock, sellier, telephone stocks, America Online back in the day, UH and now Netflix. And boy, when that momentum slows or reverses, you don't want to be anywhere near it. And that's what's happening today. Stocks down thirty six percent off of their earnings print last night.

We have one of the smartest people on Wall Street for this stuff, law Martin. She's managing director Senior Media and Internet Analysts at need Hum. Laura Boy tough quarter for the friends at Netflix, but and had find downgrades on Wall Street. But then I see Laura Martin upgrades a stock today. What's your call? Are right? So our call was so we had to sell on it before and now we really like the fact that they've done

the inevitable, which is announced in advertising tier. So one of their big problems was that they were sitting in an eighteen dollar price point when they had five competitors at a five dollar price point. And Disney and HBO Max have both announced they're going to have a lower priced ad tier, so this is great. They're catching up.

Netflix is catching up, And I think the most important point, Paul is that these Silicon Valley companies have a real not invented here problem, and Netflix needs to look around and see what his competitors are doing better than it and adapt faster. Before everyone has an ad driven tier. They need to get there two years earlier than they did this time. And I'm hoping that this lesson makes some innovative faster based on what other people are already

doing the market place. So first of all, um, you got some big props earlier from Michael Nathanson who said you've been right on this stock. Um. And secondly, UM, I wonder what you think about the content. Um. You know, obviously there have been some huge drivers for Netflix. I feel like House of Cards may have been the biggest one. It was one of those shows where everybody talked about it, everybody had to see it, and it was just a

reason to go out and get Netflix. They've had a few of a few of those shows, um, but it doesn't seem like to have them right now. I mean, nobody's tripping over themselves to get Netflix for Britain right correct. And I think Squid Games was one of those shows. But the problem is is, you know, you're a longtime media analyst with me, and as you know, you know when you drop eight hours of squid Games all at once, somebody can pay for the month and then churn out

that's dumb. They should be dropping these once a week and have to and do it mid months, So you have to subscribe for three months to watch with Games eight hours. Absolutely, we're talking about that earlier because I'm noticed Apple TV is doing that right. You have to wait until next Friday to see the following episode of For All Mankind or Slow Horses? Is Netflix had they said anything about going that way? They have not. They've specifically said they're not going to go that way because

they think it's a better user experience. But I think they need to start balancing shareholder constituencies. And by the way, they're going to start losing employees because the stock is now down to two eight levels, so everybody who's joined the last four years is making no money on their stock for the indefinite future. So they're going to start losing employees unless they figure out how to make more economics out of the content spend there they have on

their balance sheet. Matt, you want to know why. One of the reasons why law Martin's had such a long and successful career on Wall Streets many reasons, very smart research, but not afraid to go against consensus. So what do we see today nine down grades from all across Wall Street and then we get this upgrade that is out of consensus. That gets attention. Laura, is your upgrade saying, you know, hey, I think they've got it. As it relates to advertising video on demand, Is it based on valuation?

How did you kind of come to that, because that's a tough call to make, right. So I think it's based mostly on the fact that I think adding an ad driven TAM doubles their um ad driven t here of doubles their total addressable market and increases their average economics per user, because we are hearing from other firms that adding advertising actually generates more revenue than just whatever

your subscription prices. So we actually think that they will have higher value per sub than people than our our competitors think. So, Lauren, you and I we grew up in the media ecosystem where everybody made money the cable systems, that cable networks, I mean, the content creators. The only people that really paid were the consumers, and that was a great economic model for the media ecosystem. Are people questioning whether the streaming ecosystem can be a viable economic model, Yes,

they are today. There's three questions. One is how many streamers are they're out there too, Is it a positive return on content capital or is this just going to be a money, losing sinkhole indefinitely UM. And then third, you know what's going on with the unit economics UM for the for individual specific stocks like Netflix is clearly today seen as a loser in the streaming wars, having

nothing to do with the total addressable market size. But all those three questions are being asked today, and you know, again when the other stocks are down. Yeah, there are a lot of the other media stocks as well that have made the pivot toward towards streaming. I guess it kind of begs a question of again, these networks, whether you're a broadcast network or cable network and you had a lot of original programming, your programming budgets were a

billion five two billion, three billion. Now these streaming services and even the media companies who are supporting streaming services ten billion, fifty billion, twenty billion dollars. Boy, with that cost structure, that fixed cost structure, do we need to see a shake out here in this marketplace? Laura, I think you get consolidation. Netflix is getting cheaper by the day,

but you need to insolidation. So I mean, I think clear winners to date are YouTube and a vaud and advertising driven on a man in the spot which is subscribers. I think the Disney bundle is really compelling. Hulu plus Disney plus plus um SPM plus for ten bucks. Now that's a compelling UM value proposition. And I think this Discovery Warner bundle, when they put all those I think

that's really interesting. Um Netflix doesn't have anything interesting so far, so it might get bought, or it might have to buy Paramount or something which is a little too small. Now. So I do think you get consolidation, Paul, because these companies are all going to be under margin pressure, and as you know, when you consolidate, you can cut off

which helps your earnings. At some point, we'll get to a model where there's one company for each region that puts a set top box in your house and they have all the channels on that box. It sounds kind of like a cable system. It could be called that. You know, analysts like Laura Martin, she has a lot of experience in the spation. She's been right a lot more than she's been wrong. Fantastic career on Wall Street. Laura Martin, Managing Director, Senior Meeting Internet Analysts for need Um.

Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio