Netflix Tops Wall Street’s Lofty Expectations, Raises Forecast

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2:13Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily, reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. It is Bloomberg Business Week Daily. That's Norm Melinda in for Carol Masser this afternoon. on this Netflix earnings day. We are seeing shares of Netflix actually move lower in the after hours after an initial bounce higher, down right now by 1.7%.

2:56The company did report results that exceeded investor expectations in every major metric, revenue growing to$11.1 billion, earnings jumping to$7.19 per share. The company also raised its forecast for full year sales and profit margins. It expects to generate up to$45.2 billion in sales and have an operating margin of 29.5%. Let's bring in Mark Douglas. He's CEO of the publicly traded advertising and marketing company, Mountain, ticker MNTN. He joins us from Miami. Mark, always good to check in with you. I want to focus specifically with you on the ad-supported element of this. I was telling Nora earlier, I'm old enough to remember when Netflix said they would never do ads.

3:44They would never do live content. They would never do news. They would never do sports. Now they do all of those things. And more. Is the ads business working? I think the ad business is off to a start. It can grow so much bigger. And, you know, it's obviously growing. I think they're saying that they expect a lot more growth. But it's also in a competitive space. They're competing with Disney, with Peacock, with Paramount, Warner Brothers. and those big spenders, those big brands, they don't really increase their budget. So if you want to come into that space, you have to take market share from someone else.

4:23Netflix is what I would expect over time is that whatever percentage of viewership they have is what percentage of the ad market they can get. So they have a lot of room to grow. It is working, but it's still relatively small compared to where it can be. I find it really interesting. We were discussing how people are willing to pay for these subscriptions, even if they do contain ads. I can literally remember when you would watch Netflix all the way through, no gaps at all, but it seems as though this is a really thriving part of their business here. Yeah. Well, I mean, why did they add the ads?

4:58Because their customers wanted a lower price point. And so it's a simple trade-off. We'll give you the lower price point if you'll let advertisers pay for part of your subscription. That's effectively what's happening. And so the customer is getting what they want and Netflix is getting the revenue they need, you know, in order to make that possible. So it is a win win. I'm not sure everyone that gets ads thinks it's a win, but it's certainly a win that they don't have to pay as much to get the content. So I'm looking at the different plans and pricing for Netflix here in the U.S. There's the standard with ads, there's standard, there's premium.

5:35So it starts at$7.99 a month. You can go for premium up to$25 a month. Again, this is here in the U.S. There are different intricacies to this because you can pay for extra members and the like. Netflix has gotten really good at, as my brother likes to remind our entire family, understanding if you're sharing an account. And now everybody kind of needs their own accounts. Yeah. Is there, from the perspective of actual growth here in a saturated market in the U.S., Is there a concern or is this by design that if Netflix raises the premium price, then there will be a small portion of the folks who don't want to pay$25 a month or whatever.

6:14And instead, they'll drop down to that ad supported model. Is that the strategy? Yeah, I think. Yeah, I think worldwide, Netflix, maybe last quarter, the quarter before essential the last time they were reporting subscriber numbers, they said the number one, you know, kind of tier that people were buying was the ad supported tier. I think it was as much as half of all new subscribers. And so people want it. They want that price point. I think what's really interesting is the way to think of it is Netflix is building a backlog of future revenue. So in other words, they bring on the subscribers that they are essentially under monetizing.

6:54They're charging them$7.99 and they're getting relatively few ads. And as Netflix increases the ad load and essentially makes more money, that is just like pure, like that's going to flow directly to the bottom line. I would expect Netflix's earnings to outstrip their revenue growth literally for years to come. It's somewhat similar to the password backlog where they knew all these people were sharing the passwords. And at any time, they can just kind of kind of get more serious about that. And all of a sudden it produced all this additional revenue. That's what's going to happen with Netflix is advertising.

7:31And I think I have never seen a company this large that I would say should be treated as a high growth stock. But that's the potential in the ad business. from mark one thing that was interesting to me as we're parsing through this earnings was the fact that netflix boosted its full year revenue primarily due to u.s dollar depreciation what's your takeaway from that well i mean the the their global business i mean i i think that's for financial analysts to really to really look at i mean obviously they don't want to be fluctuating the price points based on you know the way financial markets are valuing the dollar and and other things.

8:10But I think most investors are going to look at the growth in revenue, growth in earnings, continue expansion in national. And I think the most important value for Netflix, which is not really explicitly measured in numbers, is they, through surveys, they are the first place people go when they turn on their TV, is they turn on Netflix. And the amount of power that gives this company is, it's almost hard to state that that's how they can turn, you know, like fights into like, like numbers that rival some of the biggest sporting events or turn WWE into, you know, big show on Netflix where one has been as big as another channel.

8:55And if I'm an investor, I'm going to be as long as Netflix is the first place people go, it's going to be the first stock I want to invest in that. I think that's the biggest correlation. Hey, Mark, since you are focused on the ads business, in your view, what's a more profitable subscriber for Netflix? Is it the one who's paying $7.99 a month for the ad-supported version, or is it the premium subscriber at$25 or the standard subscriber at$18? I think the premium is probably the most profitable, but I think then the ad-supported has the potential to become the second most profitable. I don't think it's there yet, because they simply are not monetizing all those entertainment consumers at the level they could be.

9:40But when they are, they're doing$7.99 on that price point. Who knows? It might be$8.99 next year or something like that. And they can make probably equal to that in terms of ad dollars per user and maybe even a bit more than equal to that in ad dollars per user. And you see, that's what Amazon did with Prime, where they just flipped the entire customer base and the ad supported. So that ad supported in terms of volume, because most of the subscribers I think will be ad supported over time, is the most profitable in terms of just share dollars right now. It's probably the premium at$25. Mark, I mean, when you think about Netflix historically, they were initially felt like the leader, but you're seeing a lot of these other companies in here trying to additionally monopolize the space.

10:23But that being said, we did see some news earlier that Comcast is raising the price of its Peacock streaming service by$3 a month. Very fitting today when we have Netflix earnings. How are you thinking about Netflix as a potential leader right now in this space? Yeah, I mean, losing that leadership position is going to be hard for them because they just have to keep investing in content. And they're profitable and very profitable so they can afford to keep doing that. But I think what you're seeing happening is the other networks are fighting back. Peacock with Love Island, just massive show over the last month.

10:57From what I know, did incredibly well in terms of revenue generation. I think it's the number one reality show in the world. Plus, they have Bravo and others. You have Disney with all the children's content, Star Wars content, ESPN now going to live sports. I think all the networks have gotten way more serious about competing and they're bringing out their own hit content. And but but as long as Netflix is number one, I think it's hard for them to lose that spot. Probably the only company that can really, truly challenge them is Disney. Absolutely. It's interesting. We were just talking about Love Island.

11:34I am a I'm a watcher of Love Island, so I see how they were able to skyrocket here. Somebody who I'm co-anchoring with today went to like a Love Island premiere. A watch party. Watch party or on Friday. You hosted a watch party of my own two days later. Meanwhile, I've never even seen an episode of whatever you guys are talking about. Mark Douglas, always good to see you. Fly on up here to New York next time so we can hang out in the studio. Mark Douglas is CEO of the publicly traded advertising and marketing company, Mountain. The thing about AI for business, it may not automatically fit the way your business works.

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14:42economy is holding up, just lifting stocks this afternoon, as we heard from Charlie. This coming just a day after speculation about the Fed share really rattled markets. Better than estimated retail sales and a drop in jobless claims pointed to economic resilience, driving the S &P 500 toward fresh all-time highs. Let's bring in Molly Smith. She's Bloomberg News economics editor. She joins us here in the Bloomberg Businessweek studio. I want to start with retail sales because a big rebound in June, a broad advance, 10 out of 13 categories posted an increase. Does this answer all questions about the health of the U.S.

15:15consumer? Are we all good? God, I wish it was that easy, Tim. It's not? I wouldn't be here if it were that easy. All right, explain. So I like to caveat by saying that retail sales is, I would say, a relatively narrow look at consumer spending. that this is a report that mostly captures just spending on goods, like physical stuff. But that's really just that's a third of overall consumer spending in our economy. I think this is a really important point. The consumer power is the economy, but services are what they spend their money on. Bingo. OK, yes. So not to say that a third of consumer spending is nothing, but it is not the majority of where consumer spending is really directed at.

15:54So that's one thing. Second thing, these are not inflation adjusted. So when you see these increases, you can kind of do a little bit of the math since we did just get the CPI to see where prices were rising or not. But generally, if you see a number that's up, it could be up because prices are up or because actual spending activity is up or both. So in this case, there's probably a bit of a mix of that. And either way, though, the takeaway from economists was definitely positive that, you know, we just had two months of declines in retail sales coming into June. So to see a rebound, especially of this magnitude, was definitely reassuring in some ways, you know, that maybe tariffs are not totally sapping consumer demand, at least as of yet.

16:35But not the end all be all here, which you've clearly spelled out for us here. What were some of the highlights that you saw in this print? I think I don't know if I would call it a highlight so much as a surprise that that motor vehicle sales were up as much as they were, especially because we saw the administrative data from Wards Automotive Groups showed that car sales dropped again in June and the CPI report showed that car prices were down. So that to me would spell, you know, an overall negative for car sales. Economists are saying probably a seasonal adjustment issue because I'm not really sure how else you would get a positive number out of that.

17:11But there was also this pull forward in the earlier part of the year because consumers were very worried about what tariffs would do to automobiles. Is that part of this equation at all? Is that why it's surprising, too? I think that there's probably still, you know, there's been so many, obviously, as we know, whiplash with tariffs. Are they on? Are they not? Is it delayed? What date? So I think, you know, there was a bit of a pullback in June when like we had, you know, put to rest the idea of 100 plus percent tariffs on China. You know, that was like a pact that was reached in early May and that we've had a bit of this pause until the now we had this announcement in the past week that the real many more significant tariffs are going to kick in next month.

17:49At least that's the plan right now. So who knows? We could be going through another one of those, you know, lulls right now with the tariff talk that could be boosting spending and sentiment in the meantime. Well, let's talk about the job market right now. Of course, we got that weekly print that we always get, which is jobless claims data that came out today. We saw that the estimates were 233 ,000, but it actually came in at 221 ,000. So a slight miss here. But what are you really seeing when we think about the broader economy as it relates to jobless claims? Well, it's a good thing when we see a miss on jobless claims.

18:22I want to point that out. These fewer people are filing for unemployment. So that's a good thing. Yeah. Assuming that we're in the camp of not wanting people to lose their jobs. So that's good. And at that level of overall claims of where the initial ones have been coming in, in this like 220 ,000 area, that's very much in line with like the pre-COVID economy and would suggest like a pretty solid labor market overall. Granted, where more of the concern is happening is in continuing claims. So these are people who are continually receiving unemployment benefits, whereas the other number is just new filers.

18:57So the continuing claims number has kind of been flirting with around like that 2 million number for a while now, kind of like up around the highest levels since the end of 2021. That one has definitely been trending in a worse direction. So for a while, it used to be bad news is good news. Where do we sit now? What do we say? Oh, gosh. I want to say that good news is good news. I mean, it's I think, well, a lot of it is because you're thinking from the perspective of like what happens to Fed rates. Right. So, I mean, right now, all of this data is telling you that, like, the economy is solid and that this is also supporting why we're not expecting to see rate cuts in July, at least July for now.

19:40Who knows? September still seems to be a wild card. OK, so so on this, I just want to end with you on the Fed and play some sound from one of the Kevins who is vying to be the next chair of the Fed. Kevin Warsh, former Fed governor, was on CNBC earlier today. I think the president's language is this could be a golden age. And frankly, I think they all could be right. Good policies could advance this U.S. economy. What we call A.I. in a couple of years, we'll just call business. and AI is going to make almost everything cost less. And the U.S. can be a big winner. If I were the president, what I'd be worried about is a central bank that doesn't see any of that, a central bank that is stuck with models from 1978, governance from a prior period, and don't recognize we could be at the front end of a productivity boom.

20:28And if I were the president, I'd be worried that they might not see it. Kevin Warsh, former Fed governor on CNBC earlier today. Molly, I want to ask you about this idea that a central bank with this dual mandate in Kevin Warsh's view might be stuck on old models and old priorities. What's your view on this? I mean, I still think the priority for the Fed is definitely the dual mandate, as you said. So that's ensuring price stability and maximum employment. And I think those are still good goals to have, no matter if you're in 1970 or if you're in 2025. There are a lot of central banks that don't have both of those.

21:03You know, just have an inflation mandate or an employment mandate, but not both. So I think that, you know, and that's also something that for us comes from Congress. That's not the Fed's own idea. This is mandate from Congress as to what they're meant to achieve here. That said, I mean, yeah, the economy is rapidly evolving. AI certainly has a lot of promises, but I don't think that's really had any widespread impact yet in terms of like taking out jobs that were, you know, at a really widespread level here. I think it's just so far been like pretty concentrated. And like we haven't yet seen all of that.

21:37And of course, when those things are going to be happening a bit more notably, yes, the Fed wants to be acting forward looking. But like you can't also be like, you know, acting in advance of like if this is still perhaps years or decades away from now, who knows? All right. Good place to end it. Molly Smith, Bloomberg News Economics Editor, joining us here in the Bloomberg Businessweek studio. This is the Bloomberg Business Week Daily podcast. Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station.

22:13Just say Alexa, play Bloomberg 1130. Let's talk about commercial real estate today. We had ProLogis shares that gained in yesterday's session. Though they're down today, the Industrial Real Estate Investment Trust industry and that company in particular, that company delivered a beat and raised earnings report for the second quarter and beat consensus expectations for the second quarter there. That's industrial commercial real estate. And that can certainly tell us one thing. For a view on the office market, we bring in John Gates, CEO of Leasing Advisory Americas at JLL. They offer real estate and investment management services around the world.

22:47So it's got a great view on different economies and if we're indeed getting back to the office. Talk to us, John, a bit about what the landscape is like right now for the office space in the United States. Are people coming back to the office? They are. Thank you for having me, by the way, and good afternoon. Yes, unequivocally, we see increasing numbers of organizations ask their people to come back and, in fact, tell them to come back to the office an increasing number of days a year. It's been more of a step function, I would say, than a leap, if you will, that's been happening and building for quite some time.

23:20John, where are we compared to, let's say, January 2020, though? You know, a year, if you said 2020, we're getting closer, but we're not in the same place. So 54 percent, I think, of the Fortune 100 have said you're in the office five days a week. And that was probably 90 percent then. But hybrid policies, you know, have people in the offices three to four days a week. So it's somewhere in between, but far closer than we were a year ago. What about from the perspective of inventory and how much leased inventory you have versus what you had back then? There's a lot of ways to segment buildings.

24:00For that question, I think the easiest way to do it is the new higher quality product. and then everything that's, say, pre-2015. And the first category is leasing very, very well at record rents. And occupancy levels are very high and vacancy levels are low. We don't have a lot of construction. We're going to run out of space. The older product is a different story. And leasing volumes there are nowhere near as high. And that's where the majority of any increasing vacancy is coming from older product. John, I cover commercial real estate stocks for our U.S. equities team here at Bloomberg News.

24:37And we talk a lot about the bifurcation in quality office space in the United States. You have the class A buildings, you've got buildings that are lower tier. And of course, you see a lot of these big corporations going for the higher quality buildings. As we look at the broader country and what it looks like for the office real estate space, where are you seeing areas for opportunity? Well, I think well-positioned assets that are a little older, meaning a good location and good bones and a good footprint, because they would trade at a really meaningful discount. So you have in the old days, we called that a normal value add play, but you invest some money, you're below brand new replacement cost, and you've got a very leasable building because you've spent a lot of money on it.