Instant Reaction: Netflix Disappoints Again with Slow Growth

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1:59We are focused on Netflix. We're going to bring up the trade for you because we did see the stock bouncing around in the after hours. I remind you that it's down more than 20 % year to date, down more than 30 % since hitting a recent high back on April 16th. That's when it reported earnings last time, and there was disappointment about revenues and call it so two quarters in a row. Quick check on some of the numbers in terms of Netflix. And we did see that, as we mentioned, second consecutive quarter of slowing sales. The company projected revenue of$12.9 billion and earnings of$0.82 a share. So again, a second consecutive quarter of slowing sales growth.

2:38And so investors have got to be having some questions about, you know, where does growth come from and what's the future for Netflix? Although, let's point out, still the giant when it comes to streaming. It is still the giant. I want to bring in a great roundtable to kick off our coverage. We've got Felix Gillette with us, Bloomberg News Media and Entertainment Editor. He's here in the Bloomberg Interactive Brokers Studio. Also joining us, Eric Clark, the CIO of AccuVest Global Advisors. He focuses on consumer stocks, including Netflix. He also manages the Alpha Brands Consumption Leaders ETF.

3:05Eric, I want to start with you because in the Alpha Brands Consumption Leaders ETF, ticker LOGO, the fifth biggest holding after NVIDIA Broadcom, Eli Lilly, and TSMC is Netflix. After a report like this, are you buying? Are you selling? Are you holding? What are you doing? Hey, Tim, great to see you. You know, this is a continuation of our conversation last quarter. We, you know, it's a consumer utility and I have nothing bad to say other than, you know, quarter to quarter, things are going to bounce around. We still believe in the story. We still believe in the growth opportunities. It's summertime, so viewership might be a little lower.

3:48We're all out having fun at the beach. And, you know, they bought back, you know,$4.7 billion a stock. There's still$27 billion left on the authorization. So that's the biggest quarterly buyback in history. So I'm happy to see that they took advantage of the weakness. That's what I was hoping and expecting them to do. To me, that sends a little bit of a signal. But, you know, every quarter is a little bit noisy. I don't think anything's changed with the story. You know, in many ways, it's a stock that was outside of the tech and the AI theme. And, you know, they've discarded everything that isn't tech and AI up until the last two weeks.

4:26And so, you know, this utility now at 21 times looks pretty attractive as a stable, predictable business with big free cash flow and a big buyback. When does a utility with second consecutive quarters of slowing sales growth, when does that trend become worrisome? Does it have to be three? Does it have to be four? Does it have to be more? What does it have to be? Well, I, you know, I think it's less about that and just more about when we get into the fall, when engagement starts to rise again, we know that they're pretty comfortable with ad revenue rising. That's high margin business, free cash flow or, you know, free cash flow generation, really good margin still creeping up.

5:06So I'm not worried about a dime here or five cent there. In the end, a utility has a very good defensive range of earnings. And that's what we see with Netflix. We've just transitioned from a go-go growth stock to more a growth at a reasonable price stock into the core. So in some ways, we've changed the shareholder base over from one kind of growth investor to a more stable core investor. I want to bring in Felix Gillette. He's Bloomberg News Media and Entertainment editor. He's also the author of It's Not TV, The Spectacular Rise, Revolution, and Future of HBO. He joins us here on set. So Eric keeps saying utility over and over again.

5:45But when I think of utility, I think I only have one utility, like, you know, the provider of my water, the electricity or internet into my home. In my home, I have, oh my God. Well, now I, now I pay for Fox one, thanks to the world cup. So that's another 30 bucks or whatever. But I got Netflix, I got Paramount, I got HBO max. I got all of these things right now. And I, I don't know. Like, do you agree that Netflix is a utility? Well, I mean, I think at some level, Hollywood is still a hits business, right? And, you know, Netflix hasn't had huge hits so far this year. I mean, I think it's that simple.

6:18And you think it's also these things are very cyclical. I mean, think of the year Netflix had in 2025. They had the last season of Stranger Things, which was huge. They had, you know, the last season of Squid Games, which was huge. They had, you know, K-pop Demon Hunters, the biggest movie in the history of the service. And so coming off that, there's a little bit of a hangover. And I think every other streaming service would probably look at Netflix's engagement and their numbers and they'd kill for it. But compared to Netflix's 2025, yeah, the engagement isn't as good as it was last year. And, you know, I think, you know, they'll probably bounce back.

6:55They've had modest successes. They've had animated movies like Swap that have done well, just not as well as K-pop Demon Hunters. And, you know, I think that combined with making the bold move to try and go out and buy Warner Brothers Discovery and then, you know, at a certain point losing out to Paramount Skydance like that, those two things combined, you get a narrative of, oh, what's wrong with Netflix? But in some ways, you know, it reminds me a lot of like what happened. I forgot they were going after that. Isn't that funny? Investors didn't like it. Yeah, I know. When they were going after it.

7:28Anyway, I interrupted. Go ahead. Well, I was going to say, it reminds me a little bit of like, you know, in the previous era, what happened with HBO. If you remember, you know, when HBO was at the top of the previous era of home entertainment, 2007, when The Sopranos ended, everyone was like, oh, my God, what's going to happen to HBO? People, the competitors were, oh, it's called, let's call it HBO-ver. You know, that was the nickname that year. And everyone was, oh, it's a crisis. And then, you know, a little bit time passes, along comes Game of Thrones, right? Yeah, Richard Plepler says, hold my beer.

7:56Yeah, and so it's like, you know, I think nothing's radically changed about Netflix's programming strategy. What do you make of they're going to post their What We Watch report yearly versus semi-annually? Is that a big deal, Felix? Yeah, I mean— Why do they do that? Yeah, I think that shows a little bit of a lack of confidence, you know? And, you know, scaling back what they share with all of us, I think, you know, there's been a lot of reporting, including by Lucas Shaw here about the drop in viewership on the second seasons of some of their hit shows. And so, yeah, I think they're feeling a little bit sensitive about that.

8:31And they're also going through this phase now where they're kind of throwing things against the wall. You know, they're trying podcasts, video podcasts. They brought in some big names, Jay Shetty, people of that caliber, and they're going to see if that works. You know, can they drive up some of the daytime viewing, which hasn't been great for the service? um you know yeah like who's who what are you thinking no it's just i'm i'm thinking like why are you watching netflix in the middle of the day some people can't i know i know everybody has different work schedules and stuff but um like netflix it's so much has changed in a dozen years i mean netflix used to they used to i mean sandvine used to tout these numbers that like at any given moment in the evening netflix accounts for like x percentage of all traffic on the internet because that's what that's the only thing there was to stream right and that picture has changed so much there's a lot of choices yeah um eric clark do you come on back cio over at acuvest global advisors um do you buy if the stock is down it is about five percent or so do you find this a good entry point then 8.4 oh forgive me so it's down even more yeah well the options markets we're predicting this.

9:44So, you know, lots of things happen from an options markets to somehow mirror what people are playing. It's easy to push things around. But yes, I would like to buy a little bit more. I'm not going to get crazy. We're going to just nibble. When the company using the biggest buyback is nibbling, then I'm certainly going to be nibbling. And again, I always ask people, what's going to make you churn your Netflix? You know, everybody, and I would love to see Netflix do better, higher quality content. They have a big enough library at this point. They don't have to just flood the, their library with stuff.

10:23Now let's focus on quality number one and let's add more sports and live entertainment number two, and that'll right the ship in my opinion. So yeah, I would love to take advantage of it down here. It's just too cheap. And again, it's to me, utility and a staple is kind of synonymous with the same thing. And I don't know what it would take. They've raised prices 5 % a year on average since they started this in 08. So that's a nice little tailwind as well. And it's still the cheapest game in town from an entertainment perspective. So there's just a lot to like, even if it's out of favor right now.

10:56And now it's cheap. Felix, what do you think of Eric's quality comment? Because when I think of I think I subscribed to all the streaming services. And when I think of the one that has sort of the lowest number of overall titles but the highest quality, honestly, Apple is doing a really good job with that. Yeah, I would agree with that. And I would also say Apple really aggressively markets their shows. And when they have a new show that they believe in, they put a lot of marketing power behind it. Their star powers are unbelievable. They have great casting. But they also let you know that a show is coming.

11:28I think with Netflix, sometimes they just put stuff up there and you're going to find it. And sometimes I'm amazed that a new season of a show I've watched previously is out. And I'm like, I didn't even know that. Maybe because the discovery on your homepage or whatever is not, or your home screen is not. Yeah, that's probably my kids messing it up with their shows. Yeah, it probably is. But that's also Netflix's fault. I mean, that you're not seeing it. Yeah. No, but I agree. I go to some of these streaming platforms and I'm like, God, that's so much stuff. And I get off. But Apple, it just feels very clean.

11:58it's you know it's a fewer few choices or fewer choices I don't know you have to run soon Felix so we're gonna have a few more with you and then we're gonna keep keep Eric in with us the HBO side of this I mean years ago who was it was it Ted Sarandos who said we want to become HBO before or was it Reed Hastings it was Ted Ted said we want to be HBO before HBO becomes us yeah has Netflix actually become HBO it doesn't feel like it has no I think they became much more like CBS you know they became like the everything for everything for everybody And I think now if they had to say who they want to become, I mean, clearly YouTube is occupying that space now.

12:36And they're worried about YouTube because look at the engagement numbers. I mean, YouTube keeps growing at a faster rate than everybody else. And that's the one service out there that really is growing its audience faster than Netflix. And I think so you see Netflix doing podcasts, doing video podcasts. Now they're going to throw in some short form video from, you know, Condé Nast and BuzzFeed, which I don't know. That seems, you know, a little bit desperate at some level to get that daytime engagement up. But I think that's who they want to become now rather than Adrian. Hey, everyone knows if you want to get daytime engagement, the Jerry Springer show.

13:10It's what we all used to watch when you're homesick from school and the price is right. So there you go. Everyone knows. What about overseas, though? Is that still growth opportunities for them? Yeah, and I think that's, you know, at some point, yeah, the U.S. market becomes pretty saturated. And, you know, they stop sharing their subscriber numbers, so we have to rely on the third-party estimates. But, yeah, I think, like, the U.S. market, there's not too much more to grow there. And so you have to look for opportunities overseas. And they do select, you know, the World Baseball Classic in Japan where they get out and they see these opportunities to get more people involved.

13:45I think they're going to bring back free trials in some markets. So, yeah, I think you have to look at the global audiences around the world, and that's where their opportunities are. We're talking with Eric Clark, of course, over at AccuVest. I want to bring into the conversation Geeta Ranganathan. She is Bloomberg Intelligence Senior Media Analyst joining us from Princeton. Geeta, your reaction? The stock is down here a lot in the aftermarket. Do investors have it right, in your view? Yeah, I mean, you know, coming into this quarter, obviously, a lot of cautiousness, you know, very, very muted sentiment, a pretty low bar.

14:23But I think investors were definitely kind of hoping for something, you know, at least with the guidance on the operating margin front. And we didn't necessarily see that. So this really kind of feeds into this whole bearish thesis and, you know, further spooks investors about what the direction is going to be growing forward and how this company is going to reinvigorate growth. I mean, to be fair, Carol, we've seen this movie before multiple times. And every time we've seen management kind of pivot and lay out new strategies, the most I think the one that really comes to mind was in four years ago, back in 2022, when we saw negative subscriber growth and then we saw them kind of lay out a plan with advertising and the password crackdown with page sharing.

15:09I'm just not sure that this time they have, you know, such clear cut levers that would necessarily move the needle and really kind of, you know, calm and soothe investor fears. Yeah, you know, it's interesting, too. I was just looking at some stuff on the terminal. I mean, Netflix began testing free trials for people who have never subscribed in a number of markets around the world. Geeta, is that a sign of a little desperation or just smart? Maybe a little bit of both. But I think, you know, just kind of given, you know, the metrics that we're seeing right now, this whole concern around engagement, the fact that their revenue guidance for the third quarter came in lower than expected, the fact that they're not taking up their operating margin guidance, all of these, again, kind of point to maybe it's a little bit of desperation.

15:58And, you know, we've seen over the past few weeks concerns about, you know, the slowing engagement and Netflix kind of trying to experiment with different things, you know, maybe becoming an aggregator, having streaming bundles on their platform, integrating more live linear content. And all of that basically shows that, yes, you know, maybe something is broken slightly within their system. You know, the model might be slightly broken and they have to do something to really kind of juice up, you know, the growth here. All right. We're going to hang on to Gita. Eric, thank you so much. This was really fun.

16:34We really appreciate it. Always, always. Eric Clark, CIO of AccuVest Global Advisors, joining us from San Diego, staying with our Gita Ranganathan. We want to bring into it this conversation Ed Ludlow, too. He is, of course, host of Bloomberg Tech. He's out there on the West Coast in San Francisco. Come on in on the conversation when it comes to Netflix. Investors disappointed here. Yeah, really disappointed. And like, you know, Gita's done such a good job of explaining not just the numbers of the quarter gone and the outlook but like history of where netflix went and where it got to i see three things right like what's the story here netflix is trying to convince the market that there is like this second act beyond us being focused on subscriber growth and it's like three buckets one become a broader entertainment platform so not just tv and movies live sports video podcasts youtube creators um etc games but the whole point is like netflix is still something you watch in the evening?

17:29What about during the rest of the day? And like reading through the letter and Lucas's write-up and reporting, it's so clear. Second budget is, guys, use AI to expand margins. Netflix isn't the first to say that. And then they seem to be really trying to say, hey, we're building out a real advertising business here. If I was to sum up what's the story, it's those three things in a bucket together. Yeah, Ed, I completely agree with you there. And one point of that, I guess, tied all together, I want to throw it over to Geetha, which is YouTube. I mean, what Ed is describing minus sort of the AI and original content is YouTube.

18:06And for years, Netflix has talked about YouTube being a competitor. But what do people watch when they're not watching Netflix and they're on their phones? They're on Instagram. They're on TikTok. And Geetha, they're on YouTube. Yeah. And that's exactly what the Nielsen Cage report is telling us month after month. So we've seen YouTube numbers, the share of TV viewing time stay pretty constant, Tim, at about 13 to 14 percent. Meanwhile, Netflix numbers are the ones that are going down. And, yeah, you can talk about, you know, how maybe the war and maybe, you know, the World Cup and the Olympics are all kind of eating into Netflix's share of viewing time.

18:44But then that's the same story that holds good for YouTube as well. And we haven't seen those numbers really move. So I think this is what really, really worries investors, because if you have a glut of AI generated content on YouTube, where will those Netflix numbers land? And I think that's the real big worry. Yeah. So is that what it means, Gita and Ed? First to you, Gita, when they say the entertainment in their in their letter, their investor letter, the entertainment industry remains dynamic and competitive. I mean, there is so much. Ed, come on in. And I mean, coming at all of us in terms of choices and how we spend our time.

19:22And for some of us, increasingly, you know, maybe we're putting our phones down and we're actually going outside and doing stuff. Yeah. And, you know, they go on to say in that reference to the industry-maining dynamic, we plan to stay ahead by leveraging technology to improve the service, improving monetization. I think that's the ad side of it. And delivering more entertainment value. It's been so interesting. like you know i i just i reflect you know earnings is always great to get into the numbers it's good to give size and scope i i really hope the gita will tell us about you know the margins and the buybacks and their cash flow because like for ages netflix would say judge us on traditional financial metrics some of those are really good you know uh it's hard to say you know the the reaction is serious in the other hours just from the world cup right there was a podcast that i've been listening to for a long time the rest is football it was on spotify i listened to it as an audio only podcast football meaning soccer absolutely loved it um hosted by gary linica for the world cup they committed to putting it live and in video daily on netflix that was a really interesting product to kind of track the arc of over the course of the world cup but like i didn't tune into it live i just like at the end of the day listened to it or watched it as a podcast when I had free time.

20:38So, you know, Netflix is trying to do something really difficult, change consumer behavior a little bit as it relates to them.

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