Instant Reaction: Netflix Misses, Reed Hastings Steps Down

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2:23Brad Stone:Focus is on Netflix. Just out with its latest quarterly results, the company beating estimates, though. Reed Hastings, of course, one of the co-founders, is stepping down from the board after 29 years to pursue philanthropy and personal interests. But again, we should point out, in terms of the company, we can talk about that in just a moment, did report revenue that beat analyst estimates in the first quarter, buoyed by strong subscriber growth, engagement, keeping subscribers there, and bringing them in. That's important.

2:50Emily Chang:The guidance, though, is what has people concerned. Second quarter earnings per share of 78 cents is what Netflix is guiding for. The estimate was for 84 cents. I want to bring in Geetha Ranganathan, Bloomberg Intelligence Senior Media Analyst. She joins us from Bloomberg Intelligence Headquarters in Princeton. Geetha, there are two elements that we want to talk about here. One is the light guide that disappointed analysts, but also Reed Hastings moving away. Which one is a bigger way on the stock in the after hours?

3:16Brad Stone:Yeah, thanks so much, Tim. And it's definitely the lighter guidance. So I think not only were we looking at the second quarter guidance, which of course is lighter, both on the revenue side as well as on the EPS front, but we were also anticipating some kind of take up for the full year revenue guidance. So remember, the quarter before they had said 12 to 14 percent for the full year, and they basically just came out this time and reaffirmed that same number. And I think the street was really looking for the recently implemented price hikes to contribute to, you know, maybe at least 100 basis points of improvement in revenue growth.

3:54Brad Stone:The same goes for operating margin. I mean, when the guidance first came out for operating margin at 31.5%, that was considered to be pretty muted. And I think the street was pretty disappointed last time around. And they haven't, they continue to be pretty, I think they're still kind of taking a conservative approach, but definitely the street is going to be pretty disappointed on this. So what do we want to do? Does everybody want to push them on the call with analysts to say, wait, give us a little bit more color around this. Are you being conservative? Is it as easy as that, Keita? So I think there are a couple of different things here happening, Carol, especially with the second quarter.

4:28Brad Stone:So the reason why their revenue guide fell a little short of analyst expectations was because they did implement a big price hike in the second quarter of last year. So they're obviously lapping those increases. So that's one thing to kind of keep in mind. And then the second thing is on the EPS front and the reason why we're seeing a little bit of pressure in terms of guidance for EPS and operating profit is because they do expect very, very heavy content amortization in the second quarter. So, you know, they think that that would ease a little bit in the second half. But in the second quarter, it's going to be pretty heavy, which might be part of the reason why they're still kind of taking a little bit of a conservative stance.

5:06Brad Stone:And, you know, we've seen them kind of really invest in a lot of different pieces of content, most notably sports, whether, you know, it was the MLB opening day game or the World Baseball Classic, and you have a couple of boxing matches coming up. And so I think all of that, with all of that, they're kind of taking probably a slightly more measured, cautious tone.

5:24Emily Chang:We don't get actual subscriber numbers anymore, unfortunately. But the company, as you mentioned, boosted its standard plan without ads by$2 to$20 a month. That was in March. Any indication based on these numbers or doing some quick back of the envelope math, what that did in terms of churn or maybe pushing people to the advertising tiers that are less expensive?

5:46Brad Stone:Yeah, so historically, Tim, what we've seen is, and we've seen this in multiple price increases that Netflix has done over the past four years or so, is that churn has been pretty low. It is actually, for Netflix, it's actually the lowest across the board. It's about 1.7%. You compare that to about 6 % to 8 % to 9 % for some of the other services. So they've historically seen very, very low cancellation rates. Of course, there is the possibility, you know, with the price increase that there could be a little bit of tearing down, as you just pointed. I'm not sure it necessarily had a huge impact, at least for the quarter that is reported.

6:21Brad Stone:But maybe they are factoring in some of that for the second quarter, which is why we're kind of seeing that lighter than expected guidance in terms of revenue growth. Huh. OK. I mean, listen, I feel like, you know, when we talked about Netflix right in the last how many months, the story that gave and gave and gave over the past year was Warner Brothers discovery. I mean, is there any rethink that that was a mistake or now that has nothing to do with what we're seeing here? So you bring up a really interesting point, Carol. And I think, you know, when they announced the deal, people were kind of, you know, flummoxed and they were like, why are you doing the deal?

6:54Brad Stone:Is it because you need it or is it just a nice to have? Is it because this is, you know, a once in a generation, once in a lifetime opportunity for you guys to get hands on an asset that will probably never again come to the market? What is it? And I think, you know, people were kind of looking at this first quarter report as, you know, providing some more answers to that. But I think we have more questions than answers at this point, because, you know, we're not necessarily seeing a great acceleration in the revenue numbers, in the operating margin numbers, which is exactly what they needed to show in order to, you know, basically assuage investors that did not need Warner Brothers discovery.

7:30Brad Stone:So this kind of it's it's it kind of leaves investors, I think, a little bit, you know, hanging a little bit.

7:36Emily Chang:What about the Ben Affleck acquisition?

7:38Brad Stone:That is a great acquisition. So, you know, and I think we can, we will continue to see more of this going forward. So that is, you know, I think as we kind of ponder about whether AI is going to be a positive or a negative for some of these media companies, I think we're definitely going to see Netflix kind of flip the script and be more of an AI winner. And that, you know, the Ben Affleck company interpositive acquisition, which was basically for$600 million. I think it's a really smart discipline move. which again helps them really kind of hone in on ai and make it you know make it a positive

8:11Emily Chang:but there's this balance that and maybe the ben affleck element helps because he is a creator he's a hollywood creative um more than more so than an executive but the scary thing is i think for a lot of people in hollywood is like what does it mean for their own jobs and is it existential

8:27Brad Stone:if ai can do what they're doing yeah and i think you know netflix has said this many times and and And just the fact that, you know, Ben Affleck is obviously he represents Hollywood and the creative community. I think the company itself is really more about offering creators better tools for storytelling. So I don't think it's necessarily replacing them. And that's the same story that Netflix obviously has been saying, too. This is just to help them do their jobs better. This is not necessarily to replace them. So we'll see how it all, you know, it's still early days, Tim, and we'll see how it plays out.

9:00Brad Stone:But, you know, so far they're saying the right things, I guess. 20 seconds. The company is going to be OK with Reed Hastings off the board? I think so. I think he's kind of been in the background now for a while. It's really just been Ted Sarandos and Greg Peters running the show. And I think I think they will they will be fine. All right. Cool stuff.

9:20Emily Chang:I want to bring in Eric Clark. He's AccuVest Global Advisors, CIO. He's also the portfolio manager of the Logo ETF, which has Netflix as its second biggest holding. He joins us from inside for some reason, even though he's in beautiful San Diego, California. Eric, thanks for going into the office today to actually talk to us. Do appreciate that. We want to just get your quick reaction on Netflix down 9 % right now. Carol mentioned some of the headlines. The light guide certainly has investors a little concerned. Reed Hastings stepping away. big deal, but maybe not as concerning to investors. What's your quick reaction?

9:58Emily Chang:Well, Carol said it earlier, the stock's up 40%. I mean, it went down 40 % from the highs in September, and then it went up 40 % or 42 % since the lows at$75. So short-term, any stock that runs 40 % into an earnings print better be an absolutely perfect print. But we don't care. you know, short term noise in a quarter has never bothered us. It's as long as the dominant theme of any company is still intact, you ride through some of the noise quarter to quarter, and you take advantage of that. And we certainly the stock was down 40%. And we added to it a number of times to beef the position up pretty meaningfully, because we do believe in this long term.

10:45Emily Chang:And we've been getting paid to do that. So sometimes you just have to be willing to look through short-term noise. And we did come hot into the print.

10:52Brad Stone:Yeah, listen, I think based on, was it the end of last year? This looks like it's the number two holding in your ETF, the logo ETF. Roughly 5.8%, but you can correct me. You're going to add to that position or is, you know, is this kind of near the top of how much you want in the portfolio?

11:12Emily Chang:Well, by flexibility, we can go higher. I don't know that, you know, on a small print, on a small pullback like this, I don't know that there's a reason to add to it. I think, you know, the goal is that there's been a lot of names that have come down. There's been a lot of turbulence under the surface. So we have a pretty full position in Netflix. Sometimes we trade around it. So, you know, if I got the opportunity to do that, I could certainly do that. But, you know, our goal is to find what are the next trillion dollar brands? Who else joins the trillion dollar club? Walmart joined not long ago.

11:46Emily Chang:And Netflix only has to do about 13 % revenue ongoing and generate good free cash flow. We even capped the margin assumption at 35%. We capped the content spend at 20 billion, driving some more share buybacks. And you get to a trillion in market cap in 2032. too. So big picture, there's a lot more upside to go. You just have to go through different, you know, noisy quarters in a market that can be volatile. That's a more than doubling of the market cap in the next six years. You think that happens? I do. I do. Without Warner Brothers Discovery? I don't know. I completely agree. I think it would have been great to have that big content library.

12:31Emily Chang:But, you know, again, at what cost? They've just saddled Paramount with a pretty significant debt load. So they can do lots of other things on the content spend. They're going to clearly do more on sports. You know, the gaming is probably more of a free call option. I think going forward, it's a little hard to know, excuse me, how that's going to go. But if they just do what they've continued to do, ratchet up margins a bit, use AI to enhance the business, um, draw viewership in, you know, Netflix is still the benefit of it's the place we go first for content search. And then we go out from there.

13:12Emily Chang:Well, there's nothing new on, on Netflix. Okay. Now I'll go to HBO. Okay. Now I'll go to Amazon or Apple. So there, you know, and at 27 bucks a month, it's still an incredible value to the average consumer for all the entertainment that you get. And obviously I do agree. We have a 10, we have an$8 billion revenue estimate from the ad tier in 2032. And I think your prior guest was talking about somebody having 10 billion. So I think there's just a lot of things that you can, a lot of levers to pull for, for, for Netflix on the free cashflow, on the margin, on the AI side, which is still a little bit of an unknown.

13:48Emily Chang:So I think dips are to be bought here. Yeah, go, go ahead. Well, Reed Reed Hastings, he has Powder Mountain in Utah. He's off skiing and creating this. David Weston got to go to Powder Mountain last year and talked to Reed Hastings. I would like to do some skiing at Powder Mountain.

14:04Brad Stone:I bet you would.

14:06Emily Chang:An issue at all for this company that Reed Hastings, and look, he hasn't been CEO or co-CEO for a time at this point. Not an issue to you that he's exiting the board when his term is over? Not an issue at all. And he still has$2 billion worth of stock. So he's pretty vested in in keeping up with Netflix and being comfortable enough to to walk away while still having, you know, last I checked, 21 million shares. He's he's committed to Netflix success, similar to to Ballmer with with Microsoft success. And look how it's worked out for Steve Ballmer with all the things that he's done with with Microsoft stock.

14:42Emily Chang:I should note, I do believe Reed Hastings is a board member of Bloomberg LP, the parent company of Bloomberg Radio and Bloomberg Television. So full disclosure there.

14:53Brad Stone:Yeah, no, we like to do that. Having said that, all right, so let's talk about the folks that are behind the helm. And let's just remind everybody, first of all, we're talking to Eric Clark, AcuVest Global Advisor, CIO. He's also a portfolio manager of the Logo ETF. Netflix is the second largest position in that ETF. Right now, we're looking at Netflix shares continuing to trade near their lows in the aftermarket, down about 9%. This is after the company's revenue did beat estimates. We did have that in the first quarter, but revenue did go up 16 % in the first three months of the year to$12.3 billion.

15:30Brad Stone:That was a slight beat. Earnings per share,$1.23 compared with estimates of$0.76. cents. In the current quarter, though, the company forecasting earnings per share of 78 cents a share. That's less than the 84 cents predicted by Wall Street analysts. So that is the backdrop for those earnings. We're headed off to the analyst and investor call in a little while. Eric, what do you want to listen out for? What would you want to be asking on that call? You are an investor in the name. What would you be asking of the co-CEOs and their C-suite team?

16:02Emily Chang:Well, I think sports in there, I mean, they're, they're obviously not going to give you a ton of clarity or granularity on sports because they don't want to tip their hand. But it's clear that sports has been a very big win for them. So I expect them to, to talk more about double downing on, on those kinds of differentiated opportunities. and just trying to be as mindful about their spend and the quality of the spend is really what I would ask. Let's face it, for a while there, they were in fill the library up mode and people kind of critiqued some of the quality content that they created. Now they have the ability, they have a large library.

16:44Emily Chang:Now they have the ability to really focus on quality content, which certainly drives a lot more viewership and engagement. So again, at$27 a month, there are very few other services that give people more delight and more entertainment. And the business is so predictable and consistent. In the last couple of months, every day the market was down with some of the Iran headlines. Netflix and Spotify were usually up on the day because of the stability of the business model. So it isn't just the growth that we are making it such a big weighting. It's the stability of the model that that is important, too.

17:23Emily Chang:You know, you're just going to have some of this volatility on the earnings.

17:27Brad Stone:Yeah. But what's interesting is we're in an environment when I think about the model, YouTube dominant global video program, roughly two point seventy four billion monthly active users as of early 2026, leading U.S. TV streaming with over 12 percent of TV viewing time driven heavily by users over 50. Daler viewership can include 70 billion shorts views, top creators, you know, we can get into that. But this is from Nielsen. But people are watching YouTube and I realize it's an older or skewed older, but I just wonder, you know, do the streaming models, do they have it right? And to be fair, they have a lot of people watching.