Big night of earnings reports: Tesla, Netflix, United, oh my! 7/19/23

0:00Right now on Fast. Netflix chilled with the stock dropping sharply after hours despite a jump in subscribers as the password sharing crackdown picks up steam. We'll go inside the numbers. Plus, Tesla posting record quarterly revenues, even though margins drop nearly 10 percent. Shares stuck in neutral right now. The instant analysis straight ahead. And later, AI coming to Apple shares spiking on reports they are working on their own version of ChatGPT. Should investors worry when a single headline can send a stock to new record highs? And a Carvana comeback, the used car company pulling off a major debt deal in the back of its monster stock rebound.

0:32Is this a rebound for real or just a fresh coat of paint on an old jalopy? I'm Melissa Lee. This is Fast Money. We're live from the Nasdaq MarketSite on the desk tonight. Courtney Garcia, Karen Feinerman, Dan Nathan and Guy Adami. We start off with Netflix shares under pressure, the streaming service missing revenue estimates, giving sales guidance for Q3 that was lower than expected. Julia Borson is here with all the details. Julia. Yeah, we see Netflix shares down over 4 percent in after hours trading. The company's revenue miss comes despite its adding about triple the number of new subscribers as expected, about 6 million.

1:05The company also guiding to higher than expected subscriber additions in the same range going forward, mainly thanks to its rollout of paid sharing. Now, all of this comes despite the trend of lower than expected revenue per user, which is on track to continue. The company does seem bullish, though, on new initiatives, writing, quote, we expect that our revenue growth will accelerate more substantially in Q4 23 as we further monetize account sharing between households and steadily grow our advertising revenue. The company noting the work ahead on the ad business is significant, but they say they're confident that over time they can develop a multi-billion dollar incremental revenue stream from ads.

1:45Now, the strike was only mentioned once as Netflix updated its 2023 free cash flow estimate from at least$3.5 billion to$5 billion for the year, reflecting lower cash content spend due to the WGA and SAG-AFTRA strikes. Now, Netflix co-CEOs Ted Serrano and Greg Peters are sure to face some questions on this topic of the strike and how well-positioned they are to ride it out. Melissa? Julia, we've been focusing on how well-positioned Netflix is because of the strike, because of their production overseas, because of their bank of content, already, but how will they be impacted if they have to pay more in terms of, you know, royalties to these actors, you know, as a result of this?

2:30Well, that all depends on how the negotiations turn out. I think there is some assumption that they will have to spend some amount more. The question is whether it's, you know, it's dramatically more or not. When it comes to the kind of increases that the actors and writers are looking for, to a certain extent, it's increases along with inflation. There's things like that. But then for the streaming business, there is an assumption that they do, that both of these guilds do want higher compensation. So I think it all depends on where it nets out. But that's a separate question from how long the strike lasts.

2:59I think if it only lasts a couple of months or a shorter period of time, the impact will be less significant. Once it starts to last potentially into early next year, if it lasts that long, then it could really impact Netflix's ability to grow subscribers or even retain subscribers in the key U.S. market, which is where its subscribers are most valuable. All right. Julia, thank you. Julia Borson, in a reminder, 6 p.m. is when Netflix holds its investor presentation, if you can call it that. Dan, what did you make of this quarter? It's fine. I mean, the subscriber number is really good, right? So they're expecting 2 million that came in at 6, and operating margins were better than expected.

3:34I think all those issues that you're talking about here, you know, with the strike, we just won't know for a while. But when you talk about what they're saying about revenue growth reaccelerating next year, I mean, the street has 13 percent year-over-year growth with 29 percent expected earnings growth. The stock trades about 30 times. We've been saying this. I know Karen bought it in the hole. That's what they say back in the day, late last year, because it had never been this cheap and you thought they'd get some stuff right. Well, they seem to have gotten the stuff right on the subscribers front.

4:01The content stuff is going to continue to be a bit of a headwind. And the truth is, when you look at that expected earnings growth, I think a lot of analysts are expecting the capturing, the sharing of passwords, whether it be through an ad-supported tier or not, is going to be good for earnings. Now, the interesting thing, I'll just say this, out of the nearly 60 analysts that cover the stock on Wall Street, only half of them have a buy rating on that, which is really interesting to me. And the fact that the stock is only down 4 % on that guidance and that miss leads me to believe that people, at least investors, are positively predisposed to this game right here.

4:34I don't think you have to buy it here, but it wasn't a disaster by any means, especially for a stock that's up 60 % of the year, up 200 % from its lows. Right. That to me is the most relevant thing going into this earnings. That bar was set so high. And on many metrics, they met it. The subscriber, as you said, was great. However, if you look at the geographies, each one was down a little bit on revenue per subscriber. So that's where that miss comes from. I mean, there's a lot to like about this, except for how expensive it has gotten. And, you know, I've been wrestling with this one so much because they're doing everything right.

5:07but it is far from cheap. I just feel like they couldn't have put up a number that would have supported this run. You know, it was just too, you know, it was less than 300 four months ago. I mean, they had a run, and then they had another run on the back of the strike because people believe that it was so well-positioned. Exactly, yeah, and that's what I was going to say. The bar was just set far too high on this, and that's exactly what you're seeing right now, is they had almost 6 million new subscribers, which is absolutely fantastic, But if that's really not translating into the kind of revenue that the street is expecting, which is what's happening, it's going to price lower.

5:41And I think this is one of the companies that has just really ridden up this ride this year with the people going back toward risk assets. But it just can't be justified to a certain extent. And it's already been priced in what's happening with your ad supported tiers and with the crackdown subscribers. So, you know, I think at a certain point in time, you just have to take a step back. Guy, Dan had referenced the fact that he would have thought the stock would be lower on the back of what they guided to. So that would be bad news, good price action. Do you agree? And if that's the case, does that bolster a bullish view of Netflix?

6:15Yeah, I'm trying to wrap my head around. Obviously, the revenue miss, which is slight, is concerning. And they're obviously saying it's a back half of the year story, which they'll make up ground, which I get. Here's the question, though. You know, if they reported this quarter with the stock trading, you know,$75 to$100 lower, what would the price action have been? So we're looking at through the lens of what the stock is doing, which I totally understand. Let's just take a step back. Stock's up 160 %-ish in the course of a year. It was$180 stock or so this time last year. We almost, and this is what I was hoping for, filled that gap that we had from January of 2022.

6:53You can go back and look that that ridiculous move to the downside. So that gap fill is in place. Now people will say, all right, they'll start to look at valuation given the run. And at 30 now, two times or so ish. I think it's sort of self first asked questions later. But I think Dan's point is spot on. This was a fine quarter. And if you believe him in the back half, it's still Netflix world. We're all living in it. But you've seen this stock, you know, have huge moves to the upside and now back to the downside. The question is, what's your reentry point? And I'm trying to look for the chart.

7:26But quite frankly, it's somewhere, I think, just eyeballing it between 410 and 415. All right, let's get a reaction now from Fast Money friend Gene Munster of Deepwater. Gene, nice to see you. Your take here. What's your number one question about this quarter? I think Guy just said taking a step back, I'll take a step forward here and think about the dynamic in the month of October and the month of May of next year. is Netflix, everything is working with the password crackdown and the ad model. We saw it in this surge in the number of subs. That's impressive. But when I think about going forward, we're going to start to anniversary that.

8:03That was October of last year. They started the ad model. And in May of this year, the password crackdown. This is what has been powering the business. And we look at the guidance, and that was muted a percent below. This is a growth story that they've been pulling every lever. They're not going to be able to pull the lever to the same degree in 2024 as they are doing that today, and investors should be aware of that. There's another vector to Netflix's business that's going to emerge over the next two to five years. A year ago, Netflix first mentioned TikTok as being negative to some of their engagement.

8:37That's the creator economy. I think we're just in the cusp of this. I think traditional content companies are going to have to navigate and embrace what is a more fractionalized, targeted, creator type of content economy. And I think Netflix needs to address that. So my view is this quarter is great. But I think if you fast forward a year from now and five years from now, I think it's going to be a bigger headwind for Netflix. Gene, it's Karen. Thanks for being on. Do you think that phenomenon you just talked about, the creator economy. How does that pair up with the sort of distress that so many other streamers are under right now and how they may consolidate?

9:16And you'll see less competition to Netflix from that phenomenon. The cost of creator economy is almost nothing. If you look at what production costs were 10, 20 years ago, five years ago, they were much higher. And so the creator economy has had some difficulties, but there's been some, I think, just a surge in the amount of, I think, overall, it's going well for them. I think that the tools that some of these platforms, like Threads, for example, Twitter just announced ways that the creator economy can make money on Twitter, I think they will improve. So I'm a believer that with almost no cost, people can create their own content.

9:55That was the moat around content historically, is the creation cost. But I think that, yes, there are ebbs and flows to it, Karen, but I think that the trajectory around creator economy, it's just going to be one of those topics that seems obvious. And we're going to be talking a lot more about it in the years to come. Gene, are you talking about this, you know, in terms of competition, just being time spent away from Netflix? Because they've talked about time spent away from Netflix for a variety of reasons, gaming, you know, whatever it is, they've cited that in their conference calls in the past.

10:28So is it that or is it truly that people will choose to watch this free content on whatever platform versus content that Netflix has to pay for. Well, I want to emphasize I'm an old man. I'm 52 years old, and this type of content is less appealing to me, this hyper-focused content. But what I'm saying, Melissa, gaming is another vector that Netflix has talked about. I'm saying there's a whole other category of content that is TikTok times 100 in terms of these. And I think it's going to steal share away, attention away from how Netflix is going to be selling their subscribers. All right. Gene, thanks for seeing just a bit for Tesla.

11:10Let's get to Tesla in the meantime. Earnings, the EV maker posting record quarterly revenues beating on the top and the bottom lines, but shares are stuck in neutral here in the after hour session. Phil Lebo joins us from Dallas to take us inside the numbers. Phil. Melissa, much better than expected numbers. It's not reflected in what you're seeing with Tesla shares after hours in terms of how they're trading. But the numbers were better than many people were expecting. When you look at the earnings in terms of profit as well as the revenue, 91 cents a share was the earnings for the second quarter.

11:39Street was expecting 82 cents a share. Revenue better than expected at$24.93 billion. But the big question was, what would be the margin squeeze in the second quarter? Remember, they've been coming down. the gross auto margins steadily over the last year, year and a half. And as you see, they came in at 18.2%. Why is that significant? The street consensus was 16.9%. The whisper that a lot of people said, well, look, if it's around 17.5, that's what we would be expecting. 18.2 % better than expected. And then there's the question of whether or not they would raise their guidance in terms of full year deliveries.

12:16Remember, their guidance has been to deliver 1.8 million vehicles this year. They're about halfway there through the first two quarters of this year. They reiterated that guidance of 1.8 million, even though the street right now is at 1.84 and a lot of people expect them to raise their guidance down the road. They're not doing it at this point. As you take a look at shares of Tesla this year, heck of a run this stock has had, especially over the last three months. Remember that the conference call with Elon Musk starts in about 15 minutes and you can bet there will be a number of questions, not just about the price cuts and the competition that's out there.

12:51But I bet, Melissa, there's going to be more than a few questions about AI. Gee, I wonder what he's going to say. Yeah, and full self-driving. Phil, thanks. Phil LeBeau. It almost feels right now, Guy with a stock doing what it's doing, which is basically nothing in the after-hours session, that it's sort of a hold-your-breath moment to see how they are going to talk about automotive margins, X credits for the back half of the year, because that's what the stock is counting on a pickup, some sort of troughing into the back half of the year. Yeah, and that's what Gene talked about last night, I believe, and that's what I'm sure he'll talk about again.

13:27And good for Tesla, by the way. They cut prices, but they were able to make up for those price cuts vis-a-vis this margin number by the fact that they've become a more efficient company vis-a-vis their gigafactories, their supply chains, all the different things. You know what, you got to give them credit without question, because as a lot of people thought, sub-17, it was coming in, it did not. Now the question is, and Gene can answer this, is this the trough margin? Are they going to start to sort of build on economies of scale type of thing? And does it trough here and continue to go back the other way?

13:59I don't know the answer to that. And I think that speaks to exactly what you're talking about in terms of the price action. Clearly, the market is sort of struggling with that right now as well. That's funny. Guy just said you got to give credit. I mean, I think investors are giving credit since since the stock gapped down 10 percent when they reported Q1 in late April. Stock is around 100 percent. OK, like think about that. Think about that in market cap terms. It's a nine hundred and twenty five billion dollar market cap company. And as far as I'm concerned, if the headline that some of you guys are reading is like it was a much better quarter because they beat by 10 cents.

14:30I mean, if you think about how many times they've had to cut prices just to get to where they are as far as deliveries. And if you Think about, you know, wait times have gone down. Backlog has gone down. You know, I mean, like some of these things with the margins, I don't think the consensus was 16.9. I think it was higher for gross margins, X credits. I know a lot of folks came in at 19 percent last quarter. I think consensus was closer to 18 or so. So to me, it's just the fundamentals aren't really getting better right now. So you have to have a lot of faith that the margins are going to trough and that you're going to see greater demand and they're going to have more pricing pressure.

15:06What if the wait times and delivery times, what if they're coming down because they're more efficient and they're better at manufacturing? I don't think so. I think it really is about demand. I don't know. I mean, like you tell me. I mean, you know. What do you think of the stock market? I wonder, too, how much of that, right? So they're going to obviously getting more efficient, which is great for them. But also they have a lot more demand, right? I mean, you have all of the regular car companies who are coming out with their electric vehicles. And it is going to put pressure on their customers as we look forward.

15:31And I think from a valuation standpoint, the problem with Tesla is when you look at the eight largest companies right now that have really been leading this whole rally, they are the only one of them who has four profit margins that have come down. All of the other ones are increasing. And so, you know, when you're trying to justify how high these valuations are, you have to expect there has to be a trough, which is what you're talking about. And if it's not there, I just don't think you can justify it at 70 times next year's earnings. Guy? No, it all makes sense. I mean, you see the bull argument.

16:00You see the bear argument. Clearly, you know, I've been off sides in this in terms of trying to figure out where it should go. I think the fact that it is not doing anything in the after hours, it goes back to your earlier point. Good news. Now you wonder about the price action. It's had a historic run. Clearly, we have seen this stock sell off. It would make sense, I think, for a number of different reasons for people to start taking some money off the table, especially, you know, if the broader market were to ever give something back, Tesla is not going to be spared from that. So there's something here, I think, for both sides.

16:33All right. For more on Tesla's results, let's bring in our panel tonight. Tasha Keeney is Director of Investment Analysis and Institutional Strategies at ARK Invest. And Gene Munster is back. He is, of course, the managing partner of Deepwater Asset Management. Tasha, I'll start off with you. Do you think that we've seen the lows for gross margin X credits from Tesla? Yeah. You know, I think, as Tesla said, I would expect credits to be, I mean, they already are a smaller picture than what they once were. And that's going to dwindle over time. You know, we've modeled Tesla's future gross margins based on rights law.

17:06We know that they are decreasing cost per vehicle, which is very important. Of course, I actually think the Cybertruck is going to help with that. And we know that, you know, the first vehicle was produced. So or is coming out. So I think longer term, you know, we actually think gross margins could be about 50 percent if you look at the five year forecast. So that's not just driven by electric vehicles, by the way, It's driven by AI, which you all touched on. So, you know, we think Tesla is going to be a leader in autonomy. We think they could take a very attractive take rate off of gross revenues, off of an autonomous ride-hale service.

17:39And that's really going to be the story today. I think not enough people are talking about Tesla is, you know, it's one of the most important AI stocks to be talking about at this very moment. So the gross margins of 50 percent in five years, is that built on this notion that it is an AI company and that you need to have that robo taxi part of the business in order to achieve that? If you took that out, I mean, is that basically going to to to not inflate, but make those margins look a lot better because the auto margin is, in fact, going to be continued to be low? No, I think auto margins will also improve as, again, vehicle cost decline.

18:18You know, we've modeled rights. The law says that for every cumulative doubling in production, you get a corresponding reduction in price. If you look back over the past hundred years, this models what the auto industry has done extremely well. We think it'll be the same thing with electric vehicles, with Tesla. Yes, I do think that autonomy longer term is going to be driving Tesla's margins. I think it's the most important thing that they are focused on and that they should be focused on. And hey, they're in a great position. I mean, if you look at what they reported, you know, Miles in full self-driving are over 300 million, cumulative to date.

18:53Compare that with competitors like Tesla and Waymo that have autonomous projects. That's in the low millions. And Tesla's averaging over 2 million miles per day at this point in full self-driving, even more when you look at the total fleet, what's not in full self-driving. So they have a data advantage that is unparalleled in this industry. And I think it would be extremely hard for anyone to catch up with them at this point. Right. And, Gene, I think that you're, you know, you're the same belief in terms of Tesla, the long term story. But right now we're very concerned, given where the price the stock is, about the short term story.

19:26Do you think that we will get indications tonight on this conference call that we are seeing the trough in margins at this point? And if we don't, what happens to the stock? I think the CFO is going to outline the trajectory of margins going higher. I think that it's going to be this year. It might be in 2024. but I think he's going to talk about that kind of vector going higher, and I think that that is going to be enough. If I'm wrong, and they say expect margins to be flattish for the next year, the stock is going to go down in the near term. So I think right now we have essentially a third of the results.

20:01I mean, this is all good, but as you said, Melissa, at the top of this topic, is that this is all about the conference call and the commentary about margins. Most investors don't have the patience to wait around for two, three years. They want to know what's going to happen near term. I would add another important topic that wasn't covered with the panel related to this in terms of what's the stock going to do and what could get it moving. Cybertruck's a big deal. The Ford F-150 is a huge deal. That is, they sell about 600 ,000 of those a year. Ford is acknowledging that they are worried about this vehicle.

20:34Investors, when they get on the road, this is like nectar for growth investors is to see a new type of technology that is getting out into the world. So I think you're going to see that. And I want to just preface that with a piece. I think the Cybertruck is going to be late. I think that what they said in their shareholder deck, they said expect it in the back half of the year. Previously, they had said the third quarter. Technically, the third quarter is the back half. But based on that tweak to the language, I say it comes out in the end of the year. But another month here, another month there, it doesn't matter.

21:07They announced it in November of 2019. Investors have been waiting a long time. And I think the stock goes up when the Cybertruck comes out. Yeah. Tasha, just also to focus on the shorter term. I know you have a longer term view of the stock. But shorter term, you know, just looking through the investor deck quickly, short term uncertainty was a phrase that came up repeatedly throughout Tesla's commentary when it came to, you know, managing cash flow and just sort of managing its business. Did it strike you that Tesla's being a little bit more conservative than it normally is? You know, I think if you look back five years ago, yes, Tesla has gotten more conservative over time.

21:44You know, I would even say that I think investors likely welcome that. You know, we see that certainly in their forecasts. They're sticking to, you know, the long-term targets and the targets for this year, as Phil mentioned, that they laid out. So I don't think that's a point of concern. And, you know, I'd agree with Gene. I think the Cybertruck is really crucial here. You know, we think it could be as mainstream as the Model Y, if you look at Google Trends data. So, you know, I think a lot of analysts are expecting that volumes, you know, won't be as high as they will be. I think it'll surprise.

22:16And again, we know it's a very innovative design, designed, very cost effective to produce. So I would look out for that this year. All right. Thank you, Tasha Keeney of ARK. We appreciate it. And Gene, let us know if you hear anything on that call. Gene Munster. Will do. Dan? They make great bullish points. And, you know, the stock is up a lot in the last few months. Well, I don't believe that, you know, the fundamentals have gotten that much better. I don't believe the demand picture has gotten that much better. So, you know, I'm clearly the offsides are on the wrong side of this. And it's really interesting, though, in three months how you could have been very much on the right side of this fundamental move.