Netflix Must Cut Prices To Compete: Needham's Martin

We had a downgrade today Laura Martin need Um Company downgrading the stock to equivalent of a cell stocks off about one point four percent today two dollars. Again, only up about year to date. So we are fortunate to have the one and only Laura Martin in our Bloomberg and an Actor Broker studio. She's a senior annalyst for Needham and Company. Laura, thanks so much for being here.

Um why the downgrade? So what we're saying is that um, Netflix must have a second tier that is in the five to seven dollar price point, not not just it's nine six dollar premium tier. Now that Disney and Apple haves five and seven dollar tears and that's where Peacock is rumored to come as well when it launches in May. And we think the best way to do that is not to lower their core price, but to add add advertisements.

And we calculate that if they added six minute ad load, they could generate six dollars per sub per month, so that way new people could be attracted to this service. A lot of people steal the signal. Now they borrow their parents passwords and they borrow their friends passwords. They could start paying directly, but it wouldn't hurt the average

out of Netflix. We could could stay at thirteen dollars a share um because and we calculate that if they don't have a price point commensurate with other streaming options, they will lose four million U S subscribers, which are three times as profitable as international subscribers. So you said sell uh and and you point to some fundamental problems with its capital structure. I'm wondering what you think the trigger would be for the significant decline in prices too.

I think your target is two hundred and sixty dollars to share two d sixty yep, So what's the catalyst? So our our concern is that if Netflix begins losing US US subscribers, given that it lost a hundred and twenty six thousand subs in Q two and it was down ten percent and twenty four hours, is that the stock would be revalued. It would lose its growth stock credentials and become traded on e V to ebit DA.

So the closest company, and we cover all the fangs, the closest company to them is a fifteen times e V to EBITDA, which is a two sixty dollar price. There you go. Alright, so talk to us about it's really really early days of this increased competitive environment for streaming. Disney just launched. You mentioned Peacock from Comcast coming next year. Any early sense of how this might shake out in

the streaming wars? Yeah, I think we do have a sense because Disney is already at Disney has announced it added ten million subscribers in the first twenty four hours. We have app um Nextus saying it's added sixteen million

subs um adding a million subs a day. So our point of view is that some of those subs will churn out of Netflix for some period, and all you need is fort of you Netflix subs to churn out for an extra three months and Voi LA four million subs times twelve months a year at thirteen dollars each leave your revenue. So that's and that's really harsh. And a company that's trading at seven point two times revenue,

which is where Netflix trades. All right, I'd love to take a bigger picture look at this field as we do get the advent of all of these new streaming services. How many do you think each household can legitimately pay for? What's the threshold? I mean, are there just going to be three big survivors that everge from this? Yes, So

the average household today it takes three point two. And when you ask them, they don't put Amazon Prime in there because they think they're paying for Prime subscription, not at Prime TV subscription. So it's three point to excluding Amazon Prime TV. Okay, so three point two. So then I think if you are one of the fort of American consumers that owns an iPhone, which is the wealth is you're going to add a service or two, no problem.

The problem is the other and that six of homes either A doesn't pay for TV at all because they're not they can't afford any TV, or they're gonna churn faster out of Netflix to substitute Disney this year, or Disney, like The Mandalorian is a huge show right now, Disney for three months, they're gonna watch The Mandalorian then go back to Netflix. They're going to be more cautious with their money and not just add an ad an ad.

And that adds to Netflix churn, which is horrible at a seven multiple of revenue for Netflix all let's which scares a little bit. Viacom and CBS UH just close their deal to this week now trading on their simple V I A C. I think you've covered both companies for a long time. You were there when they were together, when they were split, now they're back together. What's your view of this recombined viacom so, I think people are underestimating the margin expansion potential here. I think there's a

lot of costs they can take out. Obviously they understate that for employee benefits, but I think you'll see them take out third percent more costs than they've admitted to the street, which means that they're going to be able to grow the Ibada and EPs line. And I do think it's a stock that trades on EPs UM. I'll

be very interested. I think they're going to have a stronger streaming service together than they did a part, and I think they're going to basically dominate the TV if you like Fox, which is dependent on the linear TV ecosystem. I mean it trades are a huge higher premium to these two stocks. But these two, these two companies together have a much bigger portion of Comcast and Charter and

Altiice's bundle. Just real, quick ten seconds. Do you think that Netflix has a chance of going out of business if it does not adapt to the modern environment. I think more likely as they start losing US subs, which are three times as profitable, and then they have trouble growing international subs fast enough that are profitable because their international subs they're adding today are three dollar subs in India,

so they can grow the revenue. But if they get marked down to not be a a stock um, bankruptcy is a long way. But I do think that the US profits are really buying the business helping the business today. A very uh thoughtful answer, analytical and thoughtful and insightful, Laura Martin, Thank you so much for being with us. Laura Martin is senior analyst at Native and Company. Joining

us here in our interactive broker studios. Well underneath the market calm is a growing concern that the repo market, the sort of plumbing of the financial system, has not been fixed by the FEDS temporary repo facility, and that going into year end we will see a lot more tumult.

Joining us here in our interactive broker studios David Kotalk He's chairman and chief investment Officer at Cumberland Advisors, and I was struck by this note that Sultan Posar of Credit Sweez put out where he was saying he thinks that people are underpricing the risk of a severe liquidity shortage that ends up driving the FED to have to buy coupon treasuries in another QUEWI four type move. Well, I think he's right. Um Zoltan does marvelous work. Number one.

He may not be known to all listeners, but he is highly skilled technical. He has huge capacity to understand the flows worldwide in this particular front end high grade market number one. Number two is it a very complex issue, so maybe we can simplify the issue and think of it in the following are we're used to banking systems, bank deposits, bank reserves, banks making loans. That's how we

think about the banks. There's a whole parallel system of liquidity management, and it's in repo or reverse repo, and it's an alternate form of cash management or financing or borrowing, and that's outside the bank channel, but it's linked to the bank channel, so it's intricate. Now we've got a set of rules that govern the banks, and they are creating a constraint for the banks to take all this

excess liquidity and use it in the repo market. And we saw that in September because the repo market had a problem at ACUP, so an interest rate on a riskless overnight security went to from to in a quarter. Think about that. It's not supposed to happen. Why didn't it happen? Why didn't the banks intervene? And we now have some understanding of why, but we haven't fixed the why all right, So without getting into the nitty gritty, I highly recommend that you seek out this credit sweeze

and pose our note. It's fantastic. There's a great story on the Bloomberg about it as well. I'm wondering what the consequence is as an investor in risk assets heading into your end. Do you think that people are not prepared for a sell off and risk assets that could ensue from this type of disruption. I don't know how prepared people are, at least what I do know is in the technical money management analytical community, there's a lot

of conversation about it. In the general press, in the general investment community, it's ignored because we're being inundated with impeachment and trade war and all the headlines. So you have you have two discussions going on at once. The narrow one is the unknown. It has risk of a shock.

What do you do if you have a fail you have a collateral that doesn't deliver, You overstep some limit, some threshold, and then you have a default, You have a k And therein lies a risk if the system is if the system fails, And the question and is how much will the central banks intervene in advance prospectively to avoid that. They'll intervene at once after the fact, but what do they do to avoid the shock? And how well, by the way, are we going to learn

from this FED meeting? Are they prepared for it? What are they gonna say? So? What do we know about I guess our listeners are probably saying, I'm just trying to frame the risk here. Is this a December nineteen kind of risk to the financial markets? Or is this is kind of what we saw in September of this year, which was it's kind of a short term thing, and and the FED kind of calm the markets and I'm

not gonna worry about it too much. I think market agents who are pricing securities are looking at this and say, at worst it will be a repeated September Paul one or two days. Everybody will get excited and then we'll go on to something else. And probably that's accurate. The

FED was caught flat footed in September. They've been warned. Now, if we get a spike in repo again, way above what market rates should be, and that's only a few basis points movement, what would it say says the FED failed, they had warning, they had a shock, and they didn't fix the problem. That would be more serious in my opinion. All right, let's shift geared a little bit to the outlooks.

Let's uh pass over the December potential turmoil or any other disruption, and when are you actually congratulations, got it totally right? Said that you went all in on markets. The market rallied quite a bit. Where are you now in terms of the cautious versus risk on spectrum heading into we raise some cash in the quantitative strategies, were

back in cash. In the regular managed et F accounts, we have cash reserved, and in the fixed income accounts we have a barbell and we are happy with some of the short end because we think we're going to be able to deploy it at higher interest rates. You had a little no doubt or tweet on how tight the triple spread was okay, and it went everywhere, So you were vibral viral with a triple B. So you think about viral dn quote unless you've been sick. Yeah,

but we don't want we don't want anybody sick. So you think about what your note said. What it said is we've got such a flood of liquidity worldwide, these spreads are not reflecting credit risk. Someday, sometime before the year, there's going to be credit risk repriced in the market, and we want to be in a place to take advantage of it. So do you have any kind of

recession outlooking one kind of outlook? Here, we're starting to get some signs maybe that's some stabilization in some of the European economies, but I'm just not sure if it's a green shoot or not. Now, well, we're in no recession, slow growth camp Paul. We've been there for a while

and there's no reason to change that. We think that there are enough shoots, whether you want to call him green or something else, to see rising labor income taking away from return on capital in the US saw a little and you did a deep dive in the productivity numbers, they reveal it. You look at the employment report that there are a number of signs that this labor market is finally tightening enough to begin to get upward costs of labor, and labor costs long time coming. But if

it's coming, that means capital profits get the pressures. All right, So David, real quick here thirty seconds, and then we'll let you go. What's gonna be the best performing as at Class I Like the US healthcare sector, it's terrific risk aside, policy risk aside, insulated from the trade war, and the sleeper might be in the energy patch, which is so beaten down and killed that it's got no room to go down anymore. It's on the floor, he plays.

David Kotak, thank you so much for joining us. David's chairman and chief investment officer of Coumbling Advisors, coming all the way up from Sara Sota, Florida, going against the migration that happens this time of a year. But he joins us here in a Bloomberg Interactive broker studio, and we appreciate that. Not a lot of action in markets today. However, if you do look at an index, the main index of Mexican stocks, you could see that they are up

one point three percent. This comes on the heels of an announcement of a U S m C, a agreement that Mexico, Canada, the US are all planning to sign today. The U S. House of Representatives is expected to take it up next week and pass it. Joining us now to understand the significance of this deal is Christopher Wilson, Deputy director of the Mexico Institute for the Wilson Center based in Washington, d C. Christopher, thank you for being

with us. Let's just get started in terms of who are the big winners from this deal and who are the big losers. Yes, thanks very much for having me. I mean, i'd say the business community in general is a winner. I mean, the American people and the people across North America are winners in a certain sense. And that big sense there is that having a deal now restores certainty to an area in which we've had so

much uncertainty over the last couple of years. Trade policy has been you know, a big focus point for markets for the last couple of years, and it will remain to be given everything that's going on with China. But this little piece of it across North America is basically

wrapped up now. It means that all of the companies who have built up a continental system of production across North America with parts and materials going back and forth across borders, so auto parts that you know, move across the border to then be put into a you know, fully assembled into a vehicle. Hundreds of billions of dollars of investments have been made to create that system, and the competitive it's the north of North America that comes

along with that system are now safe again. So that's the most important thing. Now some there are some more specific winners and losers. So the one of the bigger changes was again on autos in terms of an increase in rules for regional content. So you have to have a greater portion of an automobile made within North America and specifically made within the United States or Canada in

order to comply with usmc A rules. So that will create some a few new jobs in the US auto sector and potentially the Canadian auto sector as well, but it will make cars more expensive as a result. It will be a drag on the overall economy at the gain of sort of a much narrower sector. You know, we can look at agricultural sector as well. The United States will get a little bit more access to the Canada's dairy market, for example, So there's a in there.

There's also a modernization that's happening with the agreement. So it's a lot of little changes to update NAFTA for the twenty feet century. Is their provisions on data storage, e commerce, things like that. I mean, products now are increasingly being delivered as much via email as they are via truck, and we needed rules to govern that across North America. Things that just didn't exist in the original

NAFTA twenty five years ago. You know, it's interesting, Chris, since President Trump, you know, essentially scrapped NAFTA, calling it the worst deal of all time, We've had three years of uncertainty, three years of negotiations. This deal doesn't look that much different than NAFTA. It's NAFTA. I mean, this is you know, and that's why I say the most important thing that's happening here is just removing some of

that uncertainty. You know, there are important differences between NAFTA and U s m c A, but we have to start from a baseline that this is basically just the restoration of the certainty surrounding NAFTA itself. We still have free trade across North America. We will have protections for investors that are investing across the borders in North America, and that, you know, is way bigger than any of

the specific changes that are made now. It's it's absolutely important that Mexico had to undertake a labor reform, you know, for example, in order to comply with usmc A rules. That's going to be good for workers in Mexico. It may increase costs of productions lightly in Mexico. But you know, the bigger thing here is absolutely what's staying the same, much more than what's changing. All Right. I get the point that everybody wins in the business community community kumbaya,

hold hands, sing songs. But we are is hearing a bit of pushback from specific slices of different industries, in particular the U S and Canadian Aluminum group saying that Mexico is looking after its own interests with some of the requirements within US m c A. Is there anything legitimate here? Are there any industries where there is going to be a lot of back and forth and dissonance

in terms of the winners and losers. Yeah, Well, there was a you know, sort of last hour proposal to try to strengthen some of the rules around aluminum production that would have favored US aluminum producers, and Mexico was successful and sort of stopping that from moving forward. And so that's you know, what that specifically is about. There was another sort of ultimate our proposal regarding steel, and that one does stay in the agreement with the transition period.

But you know, there was basically concerns that you'd have partially finished steel and aluminum coming into Mexico from other countries. They would do just a tiny bit of work on it and then call that Mexican aluminum and steel on steel. Uh, Mexico you know was less successful, the US was more successful,

and vice versa on aluminum. So absolutely there, you know, there are winners and losers in this, but it comes down to those you know, sort of very specific sectors that you're bringing up there, Chris, what we have you want to get maybe your broader take on just how things are going in Mexico. You know, all we see, or a lot of what we see in the States is just you know, the stories about the extreme violence there and the government doesn't seem to be able to

had a handle on it. How how does that impact the economy of Mexico. Just the uncertainty and the violence and the you know, all the government issues. What's the real bottom line that you're seeing. Yeah, So, I mean, Mexico is just completing the first year with its new president, Andres Lopez over or president from the left, after many years of sort of center or center right rule in Mexico, and so there's a lot of changes under way in the country and a lot of you know, additional uncertainty

related to that. That's one of the reasons why U S m c A and having this wrapped up was so important for Mexico. Is you know, in the context of so much uncertainty, here's a little piece that's coming back. But yeah, Mexico. You know, twenty nineteen is going down on record as one of the most violent years historically in Mexico, and it's going down as a year with you know, almost zero growth in terms of GDP in Mexico.

So this is a very challenging year from Mexico. I think we should expect the government to be able to mobilize a little bit more in terms of investment in the coming year. Transitions are always tough in Mexico in terms of keeping government investor moving. Uh So that's a positive thing to look forward to. But this, you know, the bigger question is just the governing style of the current president and I think the a lot of the private sector in Mexico is very concerned about the future

of Mexico, in the Mexican economy. But you know, there's still a compelling case to be made that production in Mexico is you know, one of the most important ways for companies across North America to cut their costs and be more competitive. So that's that you know continental system of production that I was talking about, that's you know, that value proposition is still out there and it's still

bringing investment into Mexico. So it's it's a mixed story. Absolutely, there are big challenges domestically in Mexico, but there's also a strong logic to continuing to invest there, and we'll see. I think the companies who are already in Mexico who know how to operate in that complex business environment staying there, reinvesting their profits, growing their business in Mexico, while we see others maybe stay on the sidelines and wait and see.

Christopher Wilson, thank you so much for your commentary there. Christopher Wilson, Deputy Director of the Wilson Centers Mexico Institute. Time to check in with Bloomberg Opinion. We're joined by opinion calumnist Andy Brown. He's editorial director for the Bloomberg New Economy. Just held a big conference in China recently joins us here in a Bloomberg Interactive Broker studio. So Andy,

it's a trade day here. Today, we have some movement on the U S m c A. We've got some positive commentary coming out about the December fifteen China tariffs. But let's focus on something different as it relates to trade, maybe the trade in the past, which is the World Trade Organization. Tell us just summarize what the w t O is and what's happening to it right now sets the rules for global trade and provides the referees and umpires.

And what's happening today is that two of the three remaining judges on the appellate board, which is the w t O S Supreme Court, are going to retire and the US has frozen their replacements. And so without an appellate board, the work, the substance, the real arbitration work

of the w t O stops. Although in many ways, the w t O had been defanged a long time ago, right, I mean basically it had been losing importance over the past few years, correct, right, And so losing relevance in the sense that whole areas of global trade for instance e commerce, and not covered under w t O rules because the w t O came into came into being

before all that. That's the problem. It's also ossified in the sense that it can only proceed change the rules through consensus, unanimous decisions among all the members, and it's almost impossible to get that to to to work. The big problem really is the arrival of China, and China is quite simply playing by a different set of rules, and the w t O was not set up to to accommodate an economy of the size of China, which is not a liberal, free market, capitalist driven economy. It

is in many respects they call it. We call it a state capitalist system. Exactly what that is is not clear, but it's not free market. So give us a little bit of history about when China came into the w t O. What happened. So the Chinese economy starts opening up in in the nineteen seventy eight with dnshell Ping's reforms, and it's doing pretty well. The reforms unleshal animal spirits in China. The economies keeps growing, uh, and then you get to two thousand and one where China joins the

World Trade Organization and it just gets its growth is supercharged. Right, So you now remove a lot of uncertainty from China's trade and investment, and you get this wave of in esmen from the U S. So, you know, factories dismantle in in places like you know, the US Northeast and reassemble in places like Donguan in southern China, in Guangdong, and Guangdong becomes the factory floor of the world. That's the w t O. China has got more out of

global trade than almost any other country. That of course is the beginning of all the beginning of the new era of globalization, where you have global supply change which now start which now overwhelmingly go through China. All right, Andy, when you came into the studio here, I ask you, how big of a deal is this really? Because the w g O has been dead for a while, or

not dead, but dying and sort of losing relevancy. And you said, this is a big deal, And it's because it comes at a time when you're having difficulty coming to just simple trade agreements. But now you don't have the overseer to immediate any arguments. Can you explain what

the potential consequences could be? Okay? So you know this is this is what we the the w t O and the Appellate Court is the heart of what we call the rules based global trading order, and we do not now have a global set of rules that are enforceable. So we say, of course, we've just said that. You know, in many respects, this was coming for a long time. But in the absence of global rules, what you have

essentially is law of the jungle. Might equals rights. So you're going to have the US, China, the big players will essentially dictate the terms of trade increasingly through bilateral

trade agreements, which is going to disadvantage smaller economies. Is there talk within the global trade community of any type of replacement body that could function, as you know, kind of an arbiter, right, So the the EU would like to keep this arbitration mechanism going, and so they're they're putting in place a sort of a temporary patch or work around at in in Europe. Uh And we've just heard that the Chinese may be interested in signing up to that. Andy Brown, thank you so much for being

with us. It's really interesting to see how much change there is happening on the international trade front. And thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa A. Bram wits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio