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Instant Reaction: Netflix Beats on Earnings, Disappoints on Cautious Forecast
00:21:16
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- [00:00]
Tim Stenovec
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- [00:17]
Carol Massar
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- [01:53]
Tim Stenovec
Bloomberg Audio Studios Podcasts Radio News.
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This is a breaking news update from Bloomberg.
- [02:03]
Carol Massar
Instant reaction and analysis from our 3,000 journalists and 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, citing higher program spending. And then of course Carol, the cost of closing its deal with Warner Brothers Discovery.
- [02:33]
Tim Stenovec
Number of customers growing by almost 8% last year, topping 325 million subscribers. Let's get to our team who certainly follows it and of course our own Chris Palmeri who's been following this company in the ins and outs of the pursuit of Warner Brothers Discovery. Chris, they're out there on West Coast. Chris, you know you've know 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.
- [03:04]
Chris Palmeri
Well, first of all, obviously, investors have been really concerned about the Warner Brothers bid. The stock has lost a lot of money since the, since the, you know, 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 $60 million already on pursuing Warner Brothers. They're anticipating another 275 million in cost for that. They paused their share buybacks, which were considerable. They had $8 billion 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.
- [03:42]
Carol Massar
You know, I'm, I'm just looking at some of the headlines from here, and given, Chris, the reaction 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's spending on content.
- [04:09]
Chris Palmeri
Well, they do, in their letter to shareholders, sort of cite the broader case that they're no longer just competing against 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 9%. And by acquiring this great library and these facilities, Warner Brothers, they could really increase their production of stuff all around the world and get into some new business, more consumer products, more video games. And so that's their, that's their argument. HBO Max would give them the opportunity to offer different pricing plans. So somebody just wanted HBO programming. They could get that instead of Netflix. So, so those are the things they're talking about.
- [04:58]
Tim Stenovec
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?
- [05:07]
Carol Massar
One, like, if they get the deal.
- [05:09]
Tim Stenovec
If they get the deal, yeah.
- [05:11]
Chris Palmeri
Huge. I mean, it's, it's, it's, it's a massive purchase in the 70, 80 billion range. There's numbers that came out today, Warner Brothers projections of what their studios and streaming business are going to do out five years. And, you know, it's a, it's a, it's, it's a potentially huge boost. You know, Batman, Bugs Bunny, everything you could 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 there are even licensing shows they noted from Paramount 20 programs. So huge purchases of every variety.
- [05:52]
Carol Massar
Does Netflix, Chris, get, get these assets?
- [05:56]
Chris Palmeri
You mean do they ultimately win Warner Brothers? Is that what you're saying?
- [06:00]
Carol Massar
Yeah. That was quite a few chuckles.
- [06:05]
Chris Palmeri
Yeah. Yeah.
- [06:06]
Carol Massar
Well, to be expected with a question like that where you, you can't really see the.
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Tim Stenovec
It's either yes or no. Right.
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Chris Palmeri
Look, they're the favorable, like. Well, let's do the poly market prediction.
- [06:16]
Tim Stenovec
Exactly.
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Carol Massar
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.
- [06:23]
Chris Palmeri
Well, they're the favorite from Warner Brothers standpoint for sure. But there is certainly a community of people that think, smart people who think that Paramount's 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.
- [06:41]
Tim Stenovec
In terms of their subscriber numbers. Where does that, I mean this has been something investors have been concerned about, right? The sustainability of their growth. Based on what we got from the company. How does that push back on that argument? Or does it not?
- [06:55]
Chris Palmeri
It was pretty strong growth, 8% past 325 million. That was at 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. 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 1.5 billion last year. That's only about 3% of their overall revenue. But they said the number was going to double this year. That part of it's growing. So as long as they can keep the prices climbing and the, and the subscribers growing and ad sales coming, you know they're going to see that revenue growth.
- [07:45]
Tim Stenovec
I just want to, for, especially for those people who are listening on radio. Netflix shares are down about 4 1/2 percent. They've been as low as a 5% decline here in the aftermarket. This is after the company plans to boost spending on programs in 2026, crimping profits at the massive streaming company.
- [08:02]
Carol Massar
Hey Chris, before we let you pricing power that the company has you mentioned price increases that we could see. How much pricing power does Netflix have in the U.S. like, there are. There's no shortage of places to go for it for content. But, you know, Netflix, they're kind of the OG right?
- [08:17]
Chris Palmeri
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 cancellations 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.
- [08:49]
Tim Stenovec
All right, Chris, thank you so much. Really appreciate it. Chris Palmieri, 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. That.
- [08:58]
Carol Massar
Yeah. Let's bring in Eric Clark. He's chief investment officer of the Riavest Global Advisors. About $1.2 billion in assets under management. Portfolio manager, too, of the alpha brand's logo ETF. He covers about 200 consumer stocks, including Netflix. It's the 11th biggest holding in the logo ETF. Erik joins us from San Diego, which I understand it's like 69 degrees there. It's not like here, Eric, where the High today was 21 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 4% after hours right now. Are you buying more Netflix?
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Eric Clark
I will buy more Netflix tomorrow, absolutely. Because it's 75 here, by the way.
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Carol Massar
Oh, my bad.
- [09:43]
Tim Stenovec
Thanks. Thanks very much for that. We're done with this interview. All right. So why are you going to be buying tomorrow?
- [09:49]
Eric Clark
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 30% 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 just have to be patient, that's all.
- [10:24]
Carol Massar
Are you, are you saying that the Warner Brothers Discovery deal will happen? Netflix will get that.
- [10:33]
Eric Clark
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, etc. 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 Kingstowne, etc. And you know, HBO Max, etc. But you know, the assets in Warner are so powerful and they are in the best hands with Netflix. It's impossible to know about the regulatory stuff.
- [11:25]
Tim Stenovec
But Eric, what if Netflix doesn't get Warner Brothers? Do you still like Netflix going forward? Or do you think then there, this 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?
- [11:48]
Eric Clark
Well, I think they're just going to go back to the same playbook that has driven 17% 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 hard to know. But 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, you know, a stock that's 30% 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 tier is growing like a weed. So there's just a lot to like here. So I love this thing on a dip.
- [12:35]
Carol Massar
You know, I'm looking at the note, the most, the 10 most watched movies from the second half of 2025. Carol K Pop, Demon Hunters, Happy Gilmore 2, Frankenstein, My Oxford. I did not see one of these.
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Geetha Ranganathan
I know.
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Tim Stenovec
I was just thinking movies. Wait, the woman In cabin 10, a House of Dynamite.
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Carol Massar
Those are movies, not shows.
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Tim Stenovec
Oh, okay, okay.
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Carol Massar
And Even the top 10 shows didn't see a single one of them. Wednesday. Stranger Things 5, Untamed, Squid game. Stranger Things. Eric, this is interesting. The. The way that people watched 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. Different. Different seasons of stranger things were three of the top 10 shows most watched on Netflix. So is that. Is that an issue for Netflix moving forward? That's it for Stranger Things.
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Eric Clark
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.
- [13:43]
Carol Massar
Oh, so you're saying. You're saying, like, okay, Happy Gilmore 2 was in there, so maybe like, another version of a classic HBO show or another version of. Of classic Warner Brothers movies? Is that what you're saying?
- [13:57]
Eric Clark
I think there. I think, you know, you get a bunch of creative people in a room and they. 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.
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Carol Massar
Hard to.
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Eric Clark
Again, because you need the budget and nobody else has the budget.
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Carol Massar
Does. Does Paramount Skydance? If they get the assets, do they have the creatives? Do they have the budget to do?
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Eric Clark
I think they catalog.
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Carol Massar
What you think Netflix could do.
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Eric Clark
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 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.
- [14:52]
Carol Massar
Okay.
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Tim Stenovec
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?
- [15:06]
Eric Clark
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 in a lot of industries. Like, I 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 at 20. Even at 25 bucks. I mean, I go out to dinner in San Diego and you get a drink and a half and it's 25 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 83, 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, but for the same reason. And Spotify is off 35% too.
- [16:04]
Tim Stenovec
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 have just announced two new original podcasts with Pete Davidson, the. The comedian and NFL legend Michael Irvin. So, like, you know, we talk too about just podcasts 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?
- [16:33]
Eric Clark
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 5, 10, 10 times more content when I can listen to it in the car and, you know, listen to it on a bike ride 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 and 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.
- [17:25]
Carol Massar
Eric loves Netflix. Eric, always good to see you. Thanks for, Great to see you hanging out with us.
- [17:30]
Eric Clark
Come out here.
- [17:31]
Carol Massar
Yes. Yeah, we will, definitely.
- [17:34]
Tim Stenovec
I think the studio is about 10 degrees.
- [17:36]
Carol Massar
We were out there last year and it was actually like kind of June gloom when we were out in San Diego.
- [17:41]
Tim Stenovec
Was it kind of.
- [17:41]
Carol Massar
Oh, was, yeah. Netflix Shares, let's stay on this. The company shares fell in the after hours as much as 5.1% this after it forecast first quarter EPS below the average analyst estimate. The company also plans deposit share buybacks in an effort to accumulate cash to fund the pending acquisition of Warner Brothers. I want to bring in Bloomberg Intelligence senior media analyst Geetha Ranganathan. She joins us from Princeton, New Jersey where Bloomberg Intelligence headquarters are. Geetha, just your, your takeaway from, 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.
- [18:24]
Geetha Ranganathan
I know. And yes, content spending. So it was up about 7% in 2025. They're projecting about a 10% increase in content spend going into 2026. And then of course you have the costs related to the Warner Brothers deal. And I think it's not just the cost side. Right. Yes. Operating margin. The, the guidance, Tim, looks a little bit light. It's below 32%. I think the street was looking for something like closer to 33%. But also the ad revenue, you know, definitely not bad, but not gangbuster. 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 2025. They expect to double that going into 2026. Again, definitely not bad given that, you know, this company made its foray into ads just a few years ago as all of the other media giants. But again, not really a number to kind of get too, too thrilled about.
- [19:22]
Carol Massar
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, nice to get some new data from the company especially.
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Geetha Ranganathan
Yeah.
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Carol Massar
In recent quarters that, you know, they're not doing the same same sort of disclosures they have in the past.
- [19:39]
Geetha Ranganathan
No, absolutely. I mean, so really 2020, so you know, as we kind of zoom out and we just take a look at Netflix. So 2024 was all growth, right. They had about 42 million new subscribers. 2025 was all about pricing. Right. Huge price increases. Again, pretty stable subscriber growth. They obviously did add close to almost 25 million subscribers. But then 2026, as we kind of looked at 2026 here was like the big head scratcher, right? What is the big growth catalyst for this company going into 2026? 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 were probably expecting something closer to about two to two and a half billion dollars in 2025. So definitely I think fell slightly lower than, than general expectations.
- [20:31]
Tim Stenovec
You know, I always think about Giza like what's the next markets or how much more is there out there? In their company release they talk about, you know, we relish competition, work to earn more of our consumers attention and they say despite our success over the years, our share of TV time remains below 10% in the major markets in. And then they said, for example, according to Nielsen in December, our share of US TV time reached an all time high of 9%, 0.5 points year over year. Yet linear TV still comprises over 40% 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?
- [21:13]
Geetha Ranganathan
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, especially towards the end of 2025 and going more into 2026 is that you know, most of the marquee sports properties are now moving to streaming. So obviously you had the big launch of espn, you know, for the very first time in the history of television, all of the marquee sports are now available for people to watch on streaming. They don't have to subscribe to a pay TV 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 an Amazon, as you point, 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 premier platforms like a Netflix, like an HBO Max?
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Tim Stenovec
I've just seen so much junk is obsessed with YouTube.
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Carol Massar
Yeah, but not with the AI junk. I mean social feeds. Have you seen anything good, Geetha? I mean nothing good, nothing creative. It's like the junk with AI you're talking.
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Tim Stenovec
Oh you're not talking YouTube?
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Carol Massar
No, I was talking like the junkiest junk you can find out there?
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Geetha Ranganathan
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 some of the industry experts have basically projected that, you know, another two to two and a half years you will see the first high quality, 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.
- [23:06]
Carol Massar
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- [23:58]
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