Netflix’s Big Ad Warning, and Counting Down to ARM’s IPO 9/13/23

0:01Live from the Nasdaq market side in the heart of New York City's Times Square this is fast Money. Here's what's on tap tonight. A streaming glitch. Shares of Netflix dropping as its finance chief warns its new ad tier hasn't beefed up its revenues quite yet. Will the company be able to figure out this one piece of the streaming puzzle or shares in for a permanent chill? Plus, armed and ready, we are counting down to the biggest IPO of the year. What can we expect when armed trades tomorrow and what kind of precedent will it set for future deals? And later, D.C. takes on A.I., Elon Musk, Mark Zuckerberg, Sundar Pichai among the tech execs on Capitol Hill today as lawmakers explore potential regulation of this industry, what they had to say and what they hope to accomplish.

0:41I'm Melissa Lee coming live from Studio B at the NASDAQ Market Site on the desk tonight. Bono and Eisen, Karen Feiderman, C. Grasso and our special guest tonight, Lori Calvacina, head of U.S. Equity Strategy at RBC Capital Markets. Welcome, Lori. We start off with some breaking news on the RMIPO. Leslie Pickers got the details. Leslie. Hey, Melissa. Arm pricing its IPO at$51 per share. That is at the high end of the range, implying an offering size of about$4.9 billion and a fully diluted valuation of$54.5 billion. All of that according to a source familiar with the matter. Earlier in the hour, we were told that Arm and its advisors were leaning toward a$52 per share IPO pricing, and that was pretty much baked in, but over the course of the hour with those pricing discussions, ultimately took a more conservative approach at that$51 per share, which is at the high end of the range, but not above it.

1:38So$51 per share for this offering. I'm told by a person familiar with the matter that there should be a release out momentarily that says that$51 number. But again, largest IPO in several years, and it will be a much anticipated debut when it is listed on the NASDAQ tomorrow morning. All right. Leslie, thank you. Leslie Picker, again, top of the range. It's already gotten a buy rating from Wall Street. Not really surprising. Wall Street loves to jump all over this stuff. New Street initiating it with a buy rating, a$59 price target. What do you think this means for new issues in the pipe? Yeah, I mean, there's a lot of clamoring for new issues.

2:17We haven't seen that happen before. Specifically with this one, there's a lot of buzz around the semis. There's a lot an AI company, and I think that's sort of, they're getting thrown into the mix. People are excited, genuinely, genuinely excited about tech. So I think tech IPO, everything mixture, it's a confluence of events. So I think it's good for the IPO market. Not necessarily, I wouldn't be jumping on this one right now. I think that IPOs just have the propensity to pop on the day that they come out, which is great, but I think they always recede from there, But it's great for the IPO market.

2:55All right. We'll have much more in arm a little bit later on in the show. Meantime, let's get to Netflix here. Shares getting chilled in a big way. Get it. After a warning from its CFO, the stock dropping more than 5 percent, closing near the lows of the day. Even as the S &P and Nasdaq posted gains, the drop coming after finance chief Spencer Newman said its ad tier hasn't materially contributed to revenues yet. Newman also lowered margin guidance for the third quarter. Netflix was the worst performer in the Nasdaq 100 today and the fifth worst in the S &P. Shares are still up 40 percent in 2023, but they are down 15 percent from the highs of the year.

3:30So in a week where Disney's legacy challenges have been front and center and fears about the bundle are all taking center stage, where do Netflix issues fit into this puzzle? Karen, what do you think? I think, well, Netflix is by far, by far in the strongest position. And so, I mean, you could make a case this is actually a positive in that they can afford to have the ad supported tiers move more slowly or not gain as much traction. But you think about Disney just announced right there. You have to think that Netflix is going to be as good as anybody at rolling out an ad supported tier. So it's just Netflix valuation is very high relative to the others.

4:10But I think it deserves it. It's a premium company. It deserves that. I'm tempted to buy some. I've been waiting and waiting and thought I missed it a couple of weeks ago. So I would be a buyer here. Could it trade lower? Of course. But I think it's I think it's sort of we talk about demand delayed versus denied. I think that delayed and they deserve this multiple. Part of this is just a mixed problem. Most of the growth comes from international. Internationally, the average revenue per member is lower. And so that's the way the business is right now. Yeah, I mean, but you still have the growth.

4:47And I think that's really the issue when it comes down to margins. So I tend to agree with Karen that you probably might want to get in here if you have been wanting to own the stock and really haven't gotten a chance. It's gotten away from you. But it seems like it's basing. And I don't really see a catalyst for a move higher in the near term. And I think that's really why you're starting to see the price action that we saw today, which is essentially the things that we thought were going to be tailwinds, the password sharing crackdown and the ad supported tier aren't materializing in the way that we expect them to.

5:15And so there's likely just going to be a long pregnant pause, if you will. And I think that, you know, you won't have to rush out and buy the stock necessarily tomorrow, but I think it will provide an entry point. But with that said, there has been some decent resistance at that 450 level. So I would kind of wait for it to establish a price point before jumping in. So I feel like we're hearing the same story over and over and over again when it comes to these mega cap growth stocks where the fundamental stories are still intact. And as you point out, premium stories, they're very much intact long term, but we have these short term valuation and crowding problems.

5:47I feel like we're still very much in the early days of seeing some of that rectified. We just have to let this play out. So I feel like there's longer term opportunity, but shorter term trepidation. Yeah, I mean, to Lori's point, it almost seems like investors got ahead of themselves in the expectations that they had in terms of these catalysts, like the ad supported tier. It's still there. The story is still there, but it's not happening as quickly as had been anticipated. And that's sort of what we're getting at. Yeah, and I think the story was the password sharing, and then it was the writer's strike.

6:19That was a tailwind to it. To Bono's point, we're running into that area technically back from February 2022. But I think that we're running out of catalysts to push the market higher there. So I would be neutral to negative on price action going forward. I do think, though, some of their competitors were weakened by what happened. Yes. And so that's important. We talked about them being the beneficiary of consolidation or some just leaving the business. So I think that dynamic is accelerating. Right. And the fact that Netflix, and this is going to be a shock compared to what we were talking about, you know, way back when, when it was always debt.

6:53The problem that Netflix has is debt. That is not a problem with Netflix anymore. And that is a great advantage that Netflix has compared to its competitors. It is well capitalized. The balance sheet is good. Yeah, but I think it would be punished a lot more if you were having stagnant growth or more stagnant growth with that debt load. Right. So I agree. But that sort tends to cut both ways. If you're using debt to kind of propel growth forward, I think it's understandable and investors are willing to tolerate that. If you start to have stagnating growth and you still have a more challenged balance sheet, I don't think the premium valuation would hold up the way that it has recently.

7:26But that's not Netflix. Yes, right? I mean, that's not Netflix. And Netflix's balance sheet is in good shape. It is in good shape at this point. Yeah. It's changed dramatically. Correct. I'm saying that if that had not been the case, the slowing growth would probably be more than a problem. The other thing that Netflix also, the CFO said, was that they weren't going to pay a lot for live sports. That's just something that they cannot see being worthwhile in terms of how much they would have to spend to get that live franchise, which I thought was interesting. If you look at the Jets game on Monday Night Football, I think that was the largest viewed game on ESPN.

7:59So we still are a live TV biased audience, but it depends on we don't want to watch it live. We want to tape it. Sports, you have to watch it live. And I think it's only increasing. So I think that could be a mistake for them not to dabble in that area. All right. Well, our next guest has one of the highest Netflix price targets on the street. Let's bring in Evercore ISI's Mark Mahaney. Mark, great to have you with us. What's your perspective on what Netflix guided on today? I think the two negatives were the gradually less than 300 bps of operating margin expansion. This is what the company has done historically.

8:37And the CFO went out of his way to say that they're not going to grow at that fast of a clip going forward. So the most bullish estimates out there would have had that in there. I don't know what the real guidance is, but it sounds like it's maybe two to three points of margin expansion going forward. There's certainly plenty of levers for that. And there's a little bit of debate over some of the commentary around pricing or ARPU or what they call ARM, average revenue per member in the fourth quarter and whether that was a little soft or not. I actually thought the language was extremely vague, so I didn't read a lot into that.

9:07I think if you're going to say something specific, I pay attention to it. If it's vague, I don't. But the real key was the operating margin, cautious or slightly less bullish commentary. I felt like that was sort of glass half full, glass half empty perspective. I mean, the CFO was sort of making the point that sometimes you don't want to grow it that bright because you want to favor growth as opposed to maximizing margins. So you view it as a negative. Yeah, I mean, in terms of where it what it means is that there's probably less upside to 20 bucks in earnings in 2025. That's how I think about this.

9:44treats kind of at 1930. I think bulls, real bulls on the stock are higher than that, higher than 20, probably closer to 21. So maybe you trim down that 21, maybe that low 19s gets trimmed up or something like that. Let me also step back on Netflix. You know, near term, this writer's strike, I'm sorry, it's a negative for Netflix. Now it's less of a negative for Netflix than the other streamers of the studios, but it's a negative for Netflix for two reasons. It does create these kind of content holes, these content gaps, and it also pushes out when they can implement the next price increase. And so I worry about Netflix near term is kind of having a little bit of an air pocket.

10:17But longer term, I really like these new initiatives, the paid sharing, which is now well known by the market. But what I think is still underappreciated is the rollout of this ad supported offering. They just took their TAM and they expanded it. It's hard to say by how much, maybe it's 10 percent, maybe it's 30 percent, but they took their core product, cut it by 30 percent. That means you're going to get a lot more incremental subs in international markets. And that's one of the big takeaways from our survey work. So I want to be long for that reason. Markets, Karen, thanks for being on. So I know you've been bullish.

10:46You're very bullish now. What do you think is the right multiple for clearly they're number one by a very wide margin? But at some point, things get too expensive. And I'm wondering, did it come down enough to jump in here? I know you have a much higher price target. Yeah. And just to put it in context, you know, amongst the mega caps, I mean, my favorites here, actually Uber, Amazon, and Meta. I mean, I really like these. They've got some nice product cycles with those three names right here, right now. I think you're a little bit further out with Netflix, so it's not a top pick for me. But I think you can look at Netflix really easily, as you can for like the last 12 months.

11:21That's when I upgraded it. You can look at it on PE, Gap PE. And if you can do$20 in Gap earnings, what's the market going to pay for that? I think the market probably paid 25 times earnings. It's currently paying more than that now. I assume a little bit of a fade in the multiple. But this is a company that's going to give you kind of mid-teens revenue growth, some margin expansion, and they're going to be buying back stock. That gives you kind of this earnings algorithm, if you will, of 20 to 25 percent. I think the market pays 25 times for that. So I see this path to 500. Does that make it a screaming buy here at 410?

11:50No, but somewhere, you know, solidly below 400 probably would make it a really aggressive buy. What are some of the data points that you look at, Mark, to gauge whether or not there will be more trade down or even cancellations for Netflix is, you know, there are mounting concerns about the consumer. We've heard it from a lot of retailers about the trade down effect. I don't know, maybe Netflix is like toilet paper. You can't live without it. But it does seem like, you know, you're paying for it and you might scrutinize what you're paying for in the future. Boy, there's a lot of things. I could hit that a lot of different ways.

12:22I'll just, When we do our survey work, you know, what we see is kind of a mature U.S. market. I mean, you know, you see the satisfaction scores are lower in the U.S. than they are in international markets. The indications of churn are higher. I just think you've got 80 million users of Netflix in the U.S., 80 million households. So you've got the vast majority of the households. The growth has to come in international markets. So that's where we do all this survey work. What I'm seeing, what we're seeing so far is that kind of the pushback on the implied price increase, which is really what, you know, the paid sharing crackdown was, kind of the cancel rage is starting to come down.

12:58And then we look at these markets like Mexico or Japan or Germany or the U.K., satisfaction rates are higher. And it's partly because I just think there's less at-home entertainment options if you leave the U.S. That doesn't hold for every market, I know. But for the vast majority of markets, it does. And that's where the secret sauce is for Netflix. and then you layer in these lower price points, the ad-supported offering. I just think there's another leg of growth here to Netflix. And I'll throw one other idea by you, which is that we haven't had a mega hit out of Netflix in the last, I don't know, 12 months or something like that.

13:28Like, when's our next Squid Games? But you know what? Netflix is a hit factory. I don't know what the next hit is, but they've got so many shots on goal that every 12 months or something, you know, we're going to find something really exciting that just blows out through the zeitgeist. So I just want to be long in front of that, too. Yeah. And it doesn't matter where. I mean, the writer's strike doesn't impact that, right? I mean, Squid Games came from South Korea. So, Mark, good point on that. Thanks so much for joining us. We do appreciate it. Always good to get your perspective. Mark Mahaney.

13:56So in terms of the big tech stocks, LaRoy, do you view them as defensive, the ones that are executing, the ones that people love, the ones that are in the top, you know, whatever of tech stocks? They're somewhere in between defensive and cyclicality. You typically want to own these stocks when economic growth is sluggish. And unfortunately, I think that's the price we pay for having a short, shallower, skipped recession. I'm actually still overweight the tech space, even though I think there are tactical problems with the growth trade we've got to go through. And one of the reasons I'm reluctant to drop that overweight, you know, for just sort of a short-term trade is because I do think the economic environment is not going to be that fabulous for a couple of years or so.

14:31So I think people, you know, you've got to let this play out. You've got to let the valuations correct. You've got to go through, you know, some of these glitches in the narratives. And then you're going to want to own them for the longer term. And I think, you know, GDP is still expected to be less than 2 percent for the next couple of years. So you've got some time you're going to want to be in these things. All right. We've got a news alert here on the UAW negotiations. Phil Lebo's got the details. Phil. Melissa, I'm going to show you what's going on right now. UAW President Sean Fain is holding one of his regular Facebook Live broadcasts, if you will.

15:01It's not a broadcast, but it's on Facebook Live, where he updates the membership about where things stand with the negotiations with the big three. Remember, we are just over one day away from the deadline of 11.59 p.m. Thursday night. And Sean Fain has been very clear. In fact, we talked with him on Squawk Box this morning. If there is not an agreement, they're not just going to extend these contracts. As they have sometimes done in the past, there will be strikes. And where might they strike? Increasingly, it looks like they're going to do targeted strikes. Targeted strikes would mean that you have fewer members of the UAW who go on strike.

15:35But if you hit a key place like a transmission or an engine plant, and three really stand out for the big three, you're talking about Ford's engine and transmission plant in Livonia right outside of Detroit here. GM has a transmission plant in Toledo. And then you've got the Stellantis transmission and engine facilities down in Kokomo, Indiana. Stellantis, by the way, within the last hour releasing a statement saying, Our focus remains on bargaining in good faith to have a tentative agreement on the table before tomorrow's deadline. The future of our represented employees and their families deserves nothing less.

16:12As you take a look at shares of Ford, GM and Stellantis, and all of them, by the way, have been moving a little bit higher, not a lot, but a little bit higher over the last couple of days, as some investors believe that we are close to seeing the bottom in terms of an impact, even if there is a strike. Now, if it's a long-term one, it's a far different story. Keep in mind, when you look at those engine and transmission facilities, Melissa, you're looking at maybe 12 ,000 workers, maybe 12 ,000, not just at those facilities, but who are part of engine and transmission production, but they could have a huge impact in terms of shutting down the broader companies.

16:49How long can it go on, the strike at the transmission plants, before it affects other, you know, manufacture the entire vehicle. In a day or two. Like a day? Day or two. In this day and age with just-in-time manufacturing, yeah, it won't take long. All right. Phil, thanks. You bet. Phil Lebeau. How important is this, Karen, to GM? I think clearly it's weighing on the stock. Is it fully priced in? I kind of hope so. It's the expectation now, I think, right? More likely than not, we are going to see a strike. I think it just depends on how the duration of the strike more than how what they end up paying ultimately.

17:31Yeah. Although part of and we'll get to the airlines later, part of AAL's American Airlines guide lower was the labor costs associated with the pilots agreement. Yeah, this is a problem that you have with GM, both GM and Ford. And if you look at it as a whole, as Adam Jonas did, it's not a lot of money when you look at it on a percentage over global labor costs. But it's still an overhang for the stock that you don't get with a Tesla or a Rivian. And if you look at the one month and three month performance for GM Tesla Rivian, you can see why Rivian and Tesla have outperformed. Coming up, shares of Moderna getting a booster shot.

18:04The stock rising as the company proves it's about more than just the COVID vaccine, what the CEO had to say about the drug maker's next big thing. But first, you're looking live at Capitol Hill, where top tech titans took center stage to talk everything AI and regulation. A top meta-executive joins us for the tick-tock on what happened. Much more Fast Money in Two.

18:30I think the probability of there being some sort of AI regulatory agency that stands on its own, similar to the FAA or FCC, is likely at some point. You think so? I think so. Now, the reason that I've been such an advocate for AI safety in advance of sort of anything terrible happening is that I think the consequences of AI going wrong are severe. So we have to be proactive rather than reactive. That was a stern warning from Elon Musk on what could potentially go wrong with AI. He spoke with our Eamon Javers today as top tech titans, met with lawmakers on Capitol Hill to discuss the future of the technology and potential regulation.

19:08For more on what's ahead for AI, let's turn to Eamon, who's with Meta's president of global affairs, Nick Clegg. Eamon. Hey, Melissa, that's right. I'm with President Global Affairs of Meta, Nick Clegg. And Nick, you just emerged from this meeting and just a few steps from where we're standing here. You told me just before we went on the air that there were some surprising conversations between the tech CEOs in that room. Tell me what happened behind closed doors. I think first it was a pretty sort of new precedent to have so many different companies who, you know, in their day jobs are competitors with each other sitting around the same table, not just amongst themselves, but with obviously politicians, senators, and folk from civil society.

19:48Some are more pessimistic about AI, others are more optimistic. But I think everybody recognizes this is a foundational technology. It's not like a new app, it's not a new piece of hardware. This will pervade everything. This will affect and touch every single aspect of our lives over time. And therefore, if you want to do anything about it, if you want to get the best out of it while mitigating against the worst, You've got to do that together. And I think this is an important process because everyone's trying to kind of feel their way to work out where the guardrails should be, where the regulations should play a role.

20:20So what was the most surprising thing that happened in that room between some of the – I mean, you had Mark Zuckerberg, obviously your boss, you had Elon Musk, we had Bill Gates, we had some titans in that room. Yeah, I think the most striking thing is everybody recognizes that the U.S. is in the lead. The U.S. is clearly in the lead. these big American companies who've got the finance, they've got the data, they've got the computing power, they've got the data to build these large language models. And they're doing so with far greater innovation than anywhere else in the world. So then the question is, how do you maintain American leadership?

20:51And one thing that certainly people like us at Meta and many others around that table feel is that the more you can, not always, sometimes it's not sensible to do so, but the more you can share that technology, the more you can open source it so that people start operating on the kind of standards and values that you've enshrined in that technology, the better it is for American leadership going forward. And we were told that Mark Zuckerberg made that point in the room about open source. What else did Zuckerberg tell that group? Well, I think that we have to recognize that if you want to innovate safely, actually doing it openly is the best way that you can get researchers and others to stress test the models that you're producing.

21:33So, for instance, not only Meta, but many of those companies in that room, we'd all submitted our latest large language models to DEF CON in Las Vegas a few weeks ago so that hackers could try and do their best or rather do their worst to try and break the systems and stress test them. So through that kind of process, that culture of open innovation, of which there's a great long American tradition, you actually make the systems not only more ingenious and cutting edge technologically, but you make them safer as well. Do these tech CEOs get to spend much time with each other like they did today?

22:05I mean, it seems like they're all embedded in their own silos. They've got enormous staffs around them, entourages everywhere they go. Do they get to do this kind of face-to-face interaction? No, not them. Of course, they see each other, and they see each other at conferences and meetings and so on. But I think it was a pretty unusual thing, and it was particularly unusual that it's not just the tech CEOs being brought together, but also folk from very different perspectives, from civil society and so on, and, of course, leading senators. I think that was unusual, and it's the kind of right approach at this early stage.

22:36Because if senators are going to regulate, they need to be quite open in receiving input about where they should regulate. Right. I think Melissa Lee back in studio has got a couple of questions for you as well. Melissa, go ahead. Take it away. And, Nick, you're speaking from a position of power, basically. I mean, you're one of the biggest tech companies in the United States. Do you think that if there were a social media regulatory agency, standalone agency at the time that Meta was Facebook and was, you know, being created, that we would have these social media, you know, giants today in the United States?