Fast Money 10/18/23

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast money. Here's what's on tap tonight. Netflix and Thrill, the streaming giant popping on better than expected earnings, adding more subscribers than expected, raising prices in the U.S., U.K. and France and boasting about the ad supported tier will go inside those numbers coming up. Plus, Brokerage Blues shares of Morgan Stanley clocked down nearly 7 percent today. The staggering stat from their CFO about how much cash their clients are hoarding. That's ahead. And later, closing in the tenure getting ever so close to hitting 5%, the move rattling the mortgage market in stocks.

0:37So are rates close to peaking, or is this just the start of a major move higher? I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Steve Grasso, and Guy Adami. We will drill down on that rip-hiring rates and the ripple effects in the markets in just a few minutes. But we begin tonight with Netflix shares soaring up 12 % after hours. Netflix getting a boost from subscriber growth in a new ad tier subscription. CNBC's Julia Borsten here to take us inside the numbers. Julia. Melissa, that 12 percent jump of Netflix shares, that all comes down to the company adding 8.76 million subscribers.

1:13A huge subscriber beat three and a quarter million more subscribers than anticipated. This all or in large part thanks to a successful crackdown on password sharing. The company is saying, quote, the cancel reaction continues to be low, exceeding our expectations. And borrower households converting it to full paying memberships are demonstrating healthy retention. Now, the company also saying that the adoption of its ads plan continues to grow with membership of those plans accounting for 30 percent of signups, up 70 percent quarter over quarter. To push more subscribers to his ad plan, Netflix is keeping the price of his ad-supported and standard plan the same, but they just announced that they are hiking the price of the basic plan by$2 to$12 a month and the price of the premium plan by $3 to$23 a month.

2:03The company is saying it has a, quote, exceptionally strong fall and winter schedule coming up. They also say they're working to what they call fuel the fandom with new consumer products and experiences. They talked about developing what they're calling Netflix House, a physical flagship destination to offer food and retail tied to their shows. We'll see if we hear more about that in the call, which starts in an hour. Melissa. All right, Julia, thanks. Julia Borson holding on to the 12 percent gain here in the after hour session. Lots to like here. They're also raising their fiscal year 23 cash flow estimate by a billion and a half dollars.

2:38That's a huge raise here. It's a huge raise. I mean, there was tons to like. Obviously, that subscriber number was huge. Even the U.S., which you think would be more saturated. And it's the most profitable market that had some nice growth. Europe, Middle East, Africa, very big growth there. The cash flow was very, very good. It's interesting. They are just really pulling away from the streaming pack in terms of their the momentum is still there in terms of subscribers. But also the business model is still there. Right. The generation of free cash flow. That's sort of the they're the the only one.

3:11There's a lot to like. I don't know what what the right price is exactly. They've not been great historically at guidance. The one thing I found hilarious about this entire release was the revenue exactly hit the street. Just the revenue. Nothing else. I don't know how that works. Their guidance is all over the other side. And the ads beat dramatically. Yes, that's a very good point. Thank you for bringing that up. Because that was what weighed on the stock a lot. Remember that an executive said, you know, it's harder than we thought. They had that executive change there. So that was a nice surprise.

3:41And then, of course, when you raise prices and your costs don't go up, that's a giant benefit for margins. And guess what? There's more of those subs coming. I mean, I think if you think about the$100 million in sharing accounts, whatever you want to call that, there's a cadence and a sequencing for getting those folks online. And based upon the success they've had, I think this is what analysts are going to be able to put into these numbers. But, Karen, you hit the – I mean, it's all about free cash flow. When you consider that Paramount, Disney, Warner Brothers, anybody who's in this business will combined lose$8 billion or essentially have that kind of negative free cash flow.

4:17And these guys went from$5 billion guide to$6.5 guide. It's all about free cash flow. And at a time when maybe the writer's strike goes on, maybe it doesn't significantly longer. But that also seems to favor Netflix. And at a time when they've said they're probably going to be around. They've been 17 billion or so in terms of that, in terms of spend on content. They could spend more. And, you know, I mean, things like, I don't know, Beckham guy. You watch Beckham? I love Beckham. It's awesome. No, it's trending. It's hot. This is still a stock that came from$485. So I think the bar was set pretty low for them to step over it.

4:53I would have bet against this. I think this was pretty impressive. Having said that, lower highs since that 485 top. They had to beat 387 on a price. They did after hours. So slightly higher, higher, low, if you will. Yeah, I said that right. Slightly higher, low. It makes me a little more bullish for the setup. But if you look at the 50 % retracement, that's 414. A lot of wood to chop. It's interesting that Steve makes a point. We're back where we were, I believe, on October 10th in terms of price. So a lot of work. Here we are back there. And the last couple of days haven't been particularly good.

5:29So you're probably right. A lot of expectations were low. They beat Street. That stuck out to me as well. You beat ads by$3 million. Your revenue is in line. Like something doesn't mesh. Maybe Rich Greenfield can figure that out for us. With that said, everything else is pretty good. So maybe this recent low on decent volume will be in for a period of time. Does this auger well for the other streamers, or does it just prove that Netflix is beating everybody's pants off? I think the latter. Pants off, that's the option? I think so. Not pants on. The new series. Color me some of the people. I was kind of hoping to be able to buy this lower.

6:05I mean, I definitely thought it was going to go lower on this print. And so they've also announced a$10 billion pension repurchase. And so that's something that I think is not necessarily, you know, something they need to go ahead and do with their capital. But it's something that I think is really impressive and it shows where the free cash flow is. I don't think that we're hearing this kind of progress in other businesses. And the other dynamic here is every one of those other companies I mentioned before has a legacy cable business that's dying. And there's a lot of money being spent to figure out what to do with that or at least try to salvage the best part of those assets.

6:36And they don't. Netflix doesn't have to worry about that. Pants off camp guy. Pardon me. Oh, in terms of, sorry, I was, you know, you had me thinking about this. Yes, I think it's Netflix world. Everybody else lives in it. So they're just beating their competition right now. And this speaks to that. I mean, if Disney bounces on the back of this, it's probably somewhat misguided. Again, let's see to the extent that there's a conference call guidance, how it reacts. But at least the knee-jerk reaction, obviously, is pretty good. The two tailwinds were password sharing, the crackdown there. So obviously we see that has more legs to go on that side of it.

7:09And the writer's strike. For me, that was a that was a tailwind for Netflix. We have to be closer to the end on both of those than the beginning for obvious reasons. So I think that's why it shocked a lot of people. But I think those tailwinds are probably dissipating. All right. For more on Netflix, let's bring in analyst Rich Greenfield, the co-founder of Lightshed Partners, who's been listening into our conversation. So, Rich, let's first, you know, if you can walk us through sort of the technical aspect of the of the quarter, And that is the big pop in ad revenues and then the inline in overall revenue.

7:38Can you sort of walk us through that math? Look, I think the reality is Netflix is focused on growing average revenue per member. They call it Arm. It's basically ARPU and every other company. It doesn't matter where the revenue comes from. I mean, they're offering an ad tier now. They're telling you about 30 percent of subscribers are taking it. For Disney, I think on the last call, they said about 40 percent of their subscribers are taking the ad tier. I mean, remember, Melissa, most people like most people who have the moochers who are the password sharers that are now shifting over. Most of them are still choosing ad free.

8:10Like people are used to Netflix being ad free. They're used to Disney Plus. I mean, I think people like ad free content. You'll see more and more advertising based subscribers. It will take time. But I think the real message is here is investors shouldn't care where the revenue comes from. Advertising or subscription, however it works out. The key is Netflix is now growing revenue, double digit. Margins are going back to 20 percent, generating six and a half billion for free cash flow, while everybody else is literally running for cover under pressure from activists trying to stay alive, like cutting back on programming spend, trying to raise price dramatically to improve profitability.

8:53Nobody else is investing. I mean, it really feels like Netflix this quarter is running away from the pack. So he's in the pants off camp. Yeah. Yeah. But so it's Karen. Thanks for being on today. Obviously, you were you've been very bullish. You had a big number, a big target rather going into this print. How do you get there? How do you think about how to value this business? I think the reality is, is you're seeing it right. They are dominating. I mean, they're almost at 250 million users globally and they're just getting started. I mean, they still only have 40 plus million ish subscribers in Asia.

9:30That number is going to be hundreds of millions over time. So there is still a tremendous amount of long term runway. But I think the big news today, I mean, I know everyone's focused on earnings, but that really is the smaller story in my mind. The big news is John Lasseter, the chief creative officer of Pixar, who's created almost all of the films that you, your family and friends love, is now working long term with Netflix. Skydance Animation has moved its animated films over from Apple TV Plus to Netflix exclusively for years and years to come. That is a, you know, animation is the one category Netflix has not done a good job in.

10:10and I think they would admit it, this is a huge, bold move. There's two animation companies, right? There's Disney and there's Universal. Universal has certainly taken that crown over the last few years. I think it would have been unimaginable to put Netflix in the same category as Disney and Universal Illumination from an animation standpoint, and I think today you can do that, Karen. So, Rich, if you look at Netflix, they're the pure play. They're the leader of the pack. They're running away from the herd, as you just said. Who is the first in that herd that's chasing them? I mean, look, Disney's by far the best position to be number two.

10:51I think the real question is, what exactly is Disney trying to create? You know, obviously, Bob Iger spoke on CNBC in that, you know, sort of epic David Faber interview from Sun Valley several months ago, you know, talking about sort of how they're going to strategically shift. You know, are they keeping ESPN and ABC? They're obviously buying Hulu soon for Comcast, probably for a much bigger price than the nine billion Disney would like. I mean, this is a pretty important strategic asset to Disney. It's hard to imagine it's not a 13, 14, 15 billion type number to Comcast. And so what do they do with Hulu?

11:28How do they fold it into Disney Plus? What happens to ESPN? How does that go over the top? Like there's whether or not Disney focuses on what they're good at, which is family entertainment, or they try to be much, much broader and try to take on Netflix globally. I think that's still the big unanswered question facing Iger and Disney over this next 12 to 18 months that investors are really trying to figure out. And look, it's why Disney stock is at a 12 or 13 year low is I think people are really struggling to figure out what does Disney look like in one, two, three years? What's the earnings power where it is today?

12:06It feels like there's a lot of pressure. Someone mentioned before I came on sort of the challenges facing the linear TV business, you know, cable and broadcast networks. That pressure isn't going away. It's going to intensify over the next couple of years. And so Disney would be that strongest challenger. But I also think you can't count out WBD. I mean, I think, you know, David Zaslav, you certainly have a great brand in that content. The question is, is do they have the balance sheet and can they, you know, they're reducing leverage. But can they get to the point where they can actually build and invest?

12:39Rich, always great to get your take. Thank you. Thank you. First Greenfield, LightShed Partners. So Disney a second. Tim, how are you feeling about it these days? I think the valuation of Disney makes sense. I think there's also extreme cost control focus, and that may not be what you want, as they have no choice. I think they're Disney's reliant and has to plan around significant transactions, though, and that's a big deal. And so the question is, does Netflix want to be on offense here? Because it almost seems like they could be. And, you know, animation is at least staying in the same lane.

13:14How about gaming? How about other places where at one point we thought maybe Netflix would be? is this their time just to stay focused on what they're doing and build a pile of cash? Because that's what it feels like they're doing. I think it would be interesting to see them get into some of these other growth areas, too. Would you want to see Netflix enter a game? If Netflix said on the conference call or the videocast, whatever you want to call it later on, it happens at 6 o 'clock, that it was getting into gaming, do you think the stock goes higher tomorrow morning than where it is now? Higher.

13:38An additional part. Because they talk, I mean, remember years ago, I think Reed Hastings talked about the two obstacles in front of him were sleep and gaming. So it's hard to combat sleep, but you can combat gaming. So I think the market would give them more than a pass on that. I think they would champion that. Yeah. Yeah, I agree with that. You're searching for hours during the day to occupy eyeballs. But what I found interesting is the Comcast angle of it, because we've talked about Hulu. And if Hulu is worth greater than was suspected, then that's definitely a bullish call on Comcast. So Comcast is thrown in that would you rather rather.

14:12No? Early? 514. The first day back. Sorry, guys. All right. Let's get to Tesla here. The stock is hovering around the flat line despite an earnings miss and a big drop in margin. CNBC's Phil O 'Bose got the details. Phil. Well, it's a little bit higher after hours, Melissa, despite missing on the top on the bottom line. And that's because the gross auto margins, excluding zero emission vehicle credits, appear to have come in slightly better than what the street was expecting. Let's do the numbers and then the numbers within the numbers that people are really paying attention to. Earning 66 cents a share in the third quarter, Tesla was shy of expectations of 23 cents a share.

14:51Revenue, light of expectations, but not by a lot. 23.35 billion versus 24 billion. Gross auto margins, excluding credits, expected at 17.5%. Came in by most calculations at 17.9%. And then you have these numbers. Adjusted EBIT margin at 16.1%. That's down from 23 % a year ago. 7.6 % operating margin. It was 17 % a year ago. and operating cash flow of$3.34 billion. Then there is the question of deliveries. And we just got some news within the last couple of minutes. First of all, when they put out the release, they reaffirmed their guidance of delivering 1.8 million vehicles this year, which means they need to have a fairly strong fourth quarter, a record fourth quarter, we should say, a record quarter for deliveries.

15:35And then the Cybertruck announcement. The company said in the release that they are on schedule for deliveries this year. And just a few minutes ago, Elon Musk tweeted out that they will do a delivery event at Giga Texas on November 30th. So as you take a look at shares of Tesla, keep in mind that the real news is going to come here in a few minutes, Melissa. That's when the conference call begins. And a lot of questions that Elon Musk will be facing regarding pricing pressure, particularly in China and in Europe. Now, I should point out, during the last conference call, remember, they do the questions from investors, handpicked questions, if you will, and the pricing questions didn't really come up until well into the call.

16:15Let's see how quickly they address it this time around and what kind of news we get. And again, that starts at 530. Yep. Phil, thank you. Keep us posted. Phil LeBeau. It is a peculiar move in terms of the after hours, not really a big movement as we normally see from Tesla. What do you make of this quarter? It's amazing how low vol it is when you consider. And by the way, if you look at the chart, also where it tested in these after markets, and I realize it's after markets. But this uptrend from January 3rd is very much intact with multiple tests along the way. So the fact that they're holding deliveries in line is, I think, the most important part.

16:49The price cuts, I believe, are not as significant as they should be. This is a company also that's going to have$850 million in free cash flow in that quarter. So it's a company that's generating free cash in a business that, again, this sounds a little bit like Netflix with other streamers, right? It sounds a little bit like the other EV guys can't make money here. I'm not a champion of this stock, mostly because I think the valuation at this point is not something I get behind. But it's hard to argue with. They're consistent here. They're talking about deliveries over necessarily worrying about pricing and margin because they ultimately could sweat people if they want to.

17:18That's right. It's interesting. I'm looking at total gross margin, X regulatory credits came in. Now, my number might be wrong, but 16.3 % the street was at 17.6. I don't know if that's correct. I'm sure Gene will know if and when he's on. But it's a margin story, and it's a free cash flow story. Free cash flow was disappointing. Margin seemingly so as well. But if that margin number is wrong and it's close to what Phil said, maybe the market's giving them a pass. The X credit always causes a ripple in this whole analysis. But, I mean, if you think of whatever the margin level is, if you think that most of the price cuts are in now, that there aren't that many more price cuts to come, then maybe margins have hit a trough.

17:58And that's the bold case. And the cost of each vehicle has decreased, you know, in terms of the commodities, the batteries, et cetera. All that has come down. Well, also, if you're making more product through the same, you know, you leverage a lot of overhead, even if costs move up a little bit. So I know that wasn't this quarter, but we expect them to make a lot more cars. Do we care about Cybertruck? I mean, you know. Yeah, I think you do because the margins are going to be bigger on there. They're coming from a very low bar. But to your point, you're sacrificing, and your point as well, they're sacrificing margins for bigger share.

18:32But now with the UAW, that headwind has taken Ford and GM out of the EV business. It's Tesla. Well, it hasn't taken them out of the business. Oh, they lose money hand over fist. They're bleeding. They're hemorrhaging. Their margins are terrible. It's Tesla's game to lose. The strike didn't do that. I mean, they were I mean, your point is well taken that they're distracted and that these are businesses aren't making money. But I think they're going to be real competitors. I think the whole the whole argument against Tesla for me is valuation and competition. I realize they're far ahead, but, you know, I'm not ready to give up on Detroit and EV.

19:05The one thing in the Tesla release I thought was interesting was the deposits, which the street was looking for 1.03, came at 894. And so I'm wondering, why is that? Is it fewer deposits? You know, you need a smaller deposit. How much has that translated historically into sales? How good of a read is that? Yeah. I don't know. We'll have much more on Tesla's quarter in just a few minutes. The conference calls will get underway in about 10 minutes' time. We'll also have Gene Munster on to give us his analysis. Meantime, let's get to the unstoppable 10-year. Yields today closing in on 5%, topping out at 4.93%.

19:42That, again, is the highest level since 2006. Today's spike pushing rates on a 30-year fixed mortgage to 8%. Homebuyers have not seen that number since 2000. As you'd imagine, all this taking a toll on the builders. XHB down over 2.5%. And everything surrounding the housing trade, RH, Wayfair, Sherwin-Williams, Masco, you name it, they all got hit hard, too. Gold, a rare bright spot in the market, dominated by losses today. It is now up by nearly 5.5 % this month, just$30 away from$2 ,000 an ounce. Guy. I think it's just getting started. I'll shelve that for a second. The bond market is absolutely the story.

20:20Rick Santelli was on here a couple weeks ago, said a close above 4.75, which sort of set the path to 5%. We saw a pullback after the Middle East situation a couple weekends ago to 455. And now here we are, 491 or so. This is not good. And again, Japanese trying to defend their bond market, their currency. They're selling treasuries. The Fed's not buying treasuries. Who's buying our debt? Somebody is, but at a much higher yield. And that's what you're seeing. Yeah, I couldn't agree more. Gold's going a lot higher, a lot higher. Gold's traded great through a difficult period. I'll go back to us through the mortgage market and just talk about that Mortgage Banking Association index of mortgage applications that are in.

20:57is now 15 percent, the all time low after the great financial crisis. You tell me what's going on in the housing market. I don't care about lack of supply. I'm telling you prices come down when you can no longer afford one half the house because it was all about monthly payments. It was all about really what you could afford to live on. And I just, you know, these numbers speak for themselves. I think what's going on in the bond market is, you know, somewhere around 5 percent, we're going to run into a little resistance. It's not going higher forever. Guy's arguments about central banks are dead on.

21:25And at some point, the economy is not going to look like 6 percent growth in the third quarter. That's not helping this on top of Treasury. But this was a big day and equities gave ground by the end of the day. So so when you look at Treasuries and when you look at rates, you have to the Fed has to actually say they're going to stop. And they're not saying that they have no they're invested interest in saying they're not going to stop. They have to continue to fight inflation. But when you see the Fed stop and you know that cut is coming, it's sooner rather than later. You're going to see rates crater from here.

21:58And that will put a boost into the equity market. So I'm not... But higher for longer, you're saying, is not higher for longer. You said sooner than later. I think from August 30th, we've seen treasuries increase by 84 bps. So what is the Fed doing at this point? The market's done it for them. Market's done a lot. The question is, higher for longer, as we were saying yesterday, is a gear, is a choice for the Fed. And it is something that I think, rather than cutting, is at least everything they've told us. You may be right. I just don't think we all know that the Fed only controls the short end.

22:33Right. The Fed doesn't control the long end. So the issuance is a problem for me. That's where I have the biggest problem here. But I do think that the markets overcorrect, they overshoot. And I think that rates are in the process of overshooting with everything that's going on in this volatile world. Well, just let me counter with one thing. The higher the rates, the higher the issuance will continue to go to fund the higher rates. It's a vicious cycle. But people will start to buy that 10-year. Once we start to cut, people are going to start to buy the 10-year. And it's inversely correlated, obviously.

23:06Coming up, major profit problems for Morgan Stanley. Shares sliding as investment banking revenue plummets. How the results stack up against the competition. And here's a hint. It's not good. And the action in two names catching your traders' eyes elevates out with results while Spirit Air Systems gets some help from Boeing. The details behind these move straight ahead. Don't go anywhere. Much more fast in two.