Instant Reaction: Netflix Beats on Earnings, Disappoints on Cautious Forecast

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. 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 is saying even though they largely beat Wall Street estimates, they issued a cautious forecast for the months ahead, setting higher program spending. And then, of course, Carol, the cost of closing its deal with Warner Brothers Discovery.

1:42Number 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 Palmieri, who's been following this company, and the ins and outs of the pursuit of Warner Brothers Discovery. Chris, they're out there on the West Coast. Chris, you know, you 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. Well, first of all, obviously, investors have been really concerned about the Warner Brothers bid.

2:17The stock has lost a lot of money since October when it first came out that 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 concerned about all this, there's certainly enough in there for that. You know, 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.

3:06What'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 is spending on content. 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.

3:54And so 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 those are the things they're talking about. 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 in one move. If they get the deal, if they get the deal. Yeah, 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 for Warner Brothers projections of what their studios and streaming business are going to do out five years.

4:34And, you know, 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 they're even licensing shows they noted from Paramount, 20 programs. So huge purchases of every variety. Does Netflix, Chris, get these assets? You mean, do they ultimately win Warner Brothers, you think? Is that what you're saying? Yeah. That was quite a few chuckles. Yeah, yeah. To be expected with a question like that, where you can't really see the answer.

5:20Hey, it's either yes or no, right? Look, they're the favorable. Right, this is like, well, let's do the polymarket prediction here. Exactly. But they are the favorite, no question about that. It's the board has said this is a better offer. 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. In terms of their subscriber numbers, where does that – I mean, this has been something investors have been concerned about, right?

5:56the sustainability of their growth. Based on what we got from the company, how does that push back on that argument, or does it not? It was pretty strong growth, 8 % of the past$325 million. That was at the year end, that was in line with what investors were forecasting. Stronger numbers were the sales growth, which any company would kill for a double digit like that. They said where it's coming from, 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.

6:35We 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. So that part of it's growing. So as long as it can keep the prices climbing and the subscribers growing and the ad sales coming, you know, they're going to see that revenue growth. I just want to, especially for those people who are listening on radio, Netflix shares are down about four and a half percent. They've been as low as a five percent 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.

7:12Hey, Chris, before we let you go, 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 content. But, you know, Netflix, they're kind of the OG. Right. 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 got just about the lowest churn rate of subscriber cancellations of any of the big ones.

7:52So 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. 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, though. Yeah, let's bring in Eric Clark. He's chief investment officer of the RIA, AccuVest 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.

8:21It's the 11th biggest holding in the Logo ETF. Eric 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. Don't rub it in. Yeah, I don't even know why you guys 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? I will buy more Netflix tomorrow. Absolutely. Because it's 75 here, by the way. Oh, my bad. Thanks. Thanks very much for that. We're done with this interview. All right. So why are you going to be buying tomorrow?

8:58Well, 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.

9:32So you just have to be patient. That's all. Are you saying that the Warner Brothers discovery deal will happen? Netflix will get that? that one is a little tough because there are the unknowns of the regulatory part i 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.

10:12You 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 Kingstown, et cetera. And, you know, HBO Max, et cetera. 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. But Eric, what if Netflix doesn't get Warner Brothers? Do you still like Netflix going forward? Or do you think then 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.

10:52So I'm just curious if they don't get it, Netflix does not get it, then what? Well, I think they're just going to go back to the same playbook that has, you know, 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. You know, it's hard to know. But, you know, 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 a stock that's 30 % off the highs with strong free cash flow, I know they will continue to grow margins.

11:36They 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. You know, I'm looking at 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. I know. I was just thinking, wait, The Woman in Cabin 10, A House of Dynamite. Those are movies, not shows. Oh, okay, okay. 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.

12:14The way that people watch 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, different seasons of Stranger Things were three of the top 10 shows most watched on Netflix. So is that an issue for Netflix moving forward? That's it for Stranger Things. 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. Oh, so you're saying you're saying like, OK, Happy Gilmore 2 was in there.

12:56So maybe like another version of a classic HBO show or another version of classic Warner Brothers movies. Is that what you're saying? 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. hard to say again because you need the budget and nobody else has the budget does uh does paramount skydance if they get the assets do they have the the creatives do they have the budget to do with the catalog what you think netflix could do i i 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 i look at this like a private equity owner if 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?

13:58And that's clearly Netflix. It is not Paramount Sky. Okay. 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? 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 AI, 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.

14:38I 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 it's, there's still a lot of value there and, uh, 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, to love about a business like this. And I'm feel the same way about Spotify too. Similar, you know, similar business, slightly different category, but, but for the same reason and, And Spotify is off 35 % too. You know, it's interesting too.

15:15They talk about, you know, we've already begun to launch video podcasts from our partnerships with Spotify, The Ringer, iHeartMedia and Barstool Sports. And I've just announced two new original podcasts with Pete Davidson, the comedian and NFL legend, Michael Irvin. So like, you know, we talked 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? No, I think it's a big opportunity. I don't know about you guys, but I can consume five, 10 times more content when I can listen to it in the car and listen to it on a bike ride or whatever.

15:56It's not just about reading anymore. People want audio books. They want music. They want videos. They want podcasts. 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 mix and more engagement, better profitability. There's just a 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. Eric loves Netflix.

16:35Eric, always good to see you. Thanks for - Great to see you. Hang out with us. You guys gotta come out here. Yes, yeah, we will - I think the studio is about 10 degrees. We were out there last year and it was actually like kind of June gloom when we were out in San Diego. Was it kind of June gloom? Oh, it 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 to posit share buybacks in an effort to accumulate cash to fund the pending acquisition of Warner Brothers.

17:10I want to bring in Bloomberg Intelligence senior media analyst Geetha Rangunath. And she joins us from Princeton, New Jersey, where Bloomberg Intelligence headquarters are. Geetha, just your takeaway 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. 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 cost related to the Warner Brothers deal.

17:49And I think it's not just the cost side, right? Yes, operating margin, the guidance of 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 gangbusters. 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 versus all of the other media giants.

18:27but again, not really a number to kind of get too, too thrilled about. 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 when in recent quarters they're not doing the same sort of disclosures they have in the past. No, absolutely. I mean, so really 2020, so as we kind of zoom out and we just take a look at Netflix. So 2024 was all about subscriber growth, right? They had about 42 million new subscribers. 2025 was all about pricing, right? Huge price increases.

19:03Again, 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.

19:37So definitely, I think, fell slightly lower than general expectations. You know, I always think about, Gita, like what's the next markets or how much more is there out there? And 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 which we operate. 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.

20:11You 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? 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 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 have 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.

20:47They 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 pointed out, but also equally for a YouTube to grow. And this is where you have 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 i've just seen so much junk is obsessed with youtube yeah but but not with the ai junk no social feeds have you seen anything good geetha i mean i've seen nothing good nothing creative it's like the junk with ai you're talking oh you're not talking youtube no i was talking like i'm the junkiest junk uh you can you can find out there.

21:46Not 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 another two to two and a half years, you will see the first high quality, fully AI generated movie come out. So again, have to wait and watch, but definitely a possibility and definitely something Netflix is preparing for.