Netflix’s Earnings Report… And TikTok’s Time Crunch 4/18/24

0:02Live 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 gets chilled. The streaming client adding more than twice as many subscribers as expected, handily beating profit and revenue estimates. So why are shares dropping? We'll look for some answers. Plus, a date with Destiny. Last week, we brought you an interview with the founder of the Destiny Tech 100, a new closed-end fund that lets retail investors get in on still private companies. But is the product full of promise or plagued with pitfalls. We're digging in.

0:33And later, Tesla tests the key$150 level. Wells Fargo hits a more than two-year high. And United Air keeps flying higher. We've got all the trades on all these moves coming up. I'm Melissa Lee coming to you live from the studio. Be at the NASDAQ. On the desk tonight, Tim Seymour, Dan Nathan, Steve Grasso, and Katie Stockton, founder and managing partner of Fair Lead Strategies. Welcome, Katie. Thank you. And we start off with Netflix's volatile moves after announcing that it will stop reporting subscriber numbers and average revenue per viewer on a quarterly basis. The streaming giant, though, did beat top and bottom line estimates.

1:04The conference call is underway. CNBC's Steve Kovac has been listening. And Steve, what's the latest? Yeah, and a little more color on the call from that decision to stop reporting subscribers. But first, let's go over the big results. Netflix beating expectations again on the top and bottom lines and just blowing away expectations on those subscriber additions. The momentum and growth from cracking down on password sharing continues. Subscriber ads came at 9.33 million. That was compared to the just four and a half million the street was expecting. But don't get too used to judging Netflix by subscribers.

1:34Companies saying today it will stop reporting quarterly subscriber numbers and average revenue per membership starting next year with its first quarter 2025 earnings report. Netflix's reasoning for that, it says revenue and engagement are better metrics of its success, not the number of subscribers. Also because of the variety of pricing plans, share plans and ad supported tiers it offers now. As for guidance, revenue for the second quarter was a hair lighter than expectations. Nine point four nine billion dollars. That would be up about 16 percent compared to the year ago quarter. We're about 15 minutes to the call.

2:09A little more commentary on the subscriber disclosures there. Co-CEO Greg Peters basically saying you can no longer multiply the cost of subscription by the number of subscribers because of so many plans. It's better to look at engagement and just overall revenue, Melissa. All right, Steve, thanks. Steve Kovach, it does make sense here. And on the second quarter revenue number, we were expecting a decline because of just typical seasonality. But this was still worse than had been expected. Tim, what did you make? It was a miss. It was a miss for a company that's been, let's be clear, I'm sure Katie's got a view on the charts.

2:43It's great having you. But it doubled in four months. So a stock that's also done not a whole lot going into those numbers has been kind of flat. It's still a cash flow machine relative to the other media stocks out there. Valuation, certainly we've talked about this all the time. It's probably grown into a growthier valuation. And when I look at their international opportunities and the critical mass they have, and we talk all the time about structurally why they may be more efficient in terms of their content creation and why their model works. So we've all grappled and gotten snarky on different reporting requirements, who's changed kind of the rules of the game, who's changed the metrics we look at.

3:20Even Apple, right? I mean, Apple was doing this. So I'm not too bothered by it, but I'm not a Netflix analyst day by day. Whenever something changes the metrics, you think they're hiding something. So I think that's what the analyst community always thinks. But Tim mentioned revenue. They make more than all the others lose combined. That's a huge number for them. So they're still the mainstay. They're still the elephant in the room, if you will. I want to know password sharing. How far along are they on password sharing? What's the percentage of it? Are they almost done there? What do they have left?

3:57And the ad tier, that has not rolled out through all the different segments. Password sharing has. So that would be what I would be concerned with. Yeah, ad-based subscriptions was like 65 % sequentially up, you know, so that's something that I think folks were initially kind of, I don't know, not that optimistic about. And it's a very high margin sort of business, especially if you're capturing people that were using multiple passwords and the like. And so that represented, I think it said, 40 % of all new net ads. So that's good stuff there. You know, margin improvement, I think, is pretty impressive.

4:25And if you think about it, I mean, year over year, there was an easy comp, I think, versus last Q1 or so. But, you know, up 35 % expected for this year in earnings, 15 % expected sales growth trading about 35 times. You know, we talk about a lot of stocks that, you know, they have a peg that looks a little bit off. And then if you look at it versus a multiple of sales. I want to explain peg, Dan. Well, it's a P.E. to growth, Tim. Oh, yes. No, but it's no. Oh, because you're R.P.U. No, you can be the peg guy now. No, it's a great metric, and I'm not messing with you. I don't people. You know, I barely knew it.

4:57No, but it's funny. I mean, we talked about, like, how inexpensive Netflix got when it declined 75 % from those. And I think a lot of us on the desk bought that stock down there in the hole. It gets a little harder up here, but on a peg basis, it looks fairly reasonable for a company growing like this. Out of the charts. You know, it's outperformed pretty consistently since 2022 after that big swoon lower. And I think a pullback or correction more accurately would be welcomed in this name. It has outperformed and it has that upside momentum longer term. So when you get the pullbacks, it could even honestly fill that gap from January, which would mean and this would require weaker tape than we even have right now.

5:35But that would be a move down to about 500 for Netflix. I think that would be bought up right away. You know, one thing, and I think Kovac just said this, is like they're explaining the change in the metrics because they have lots of different plans. We talked a few weeks ago about some of the stuff that they're doing in live, right? So this summer, they're going to have this fight with Mike Tyson and one of the Logan guys or one of these guys, you know, and it's going to be a live, you know, kind of pay. Like, can you imagine what the subscriptions? We're talking about they just beat nine and a half on a five million estimate.

6:06Into that, you might see a huge run up. You might see a huge run up in ad base. I don't know. Just for this one. Just for that one. I mean, think about that event. I mean, it's only going to be on Netflix. And I think it's really interesting for their advertising revenue stream, which so far has been nothing. But I think it will actually be something. And I think that's one of the drivers or a catalyst or at least a fundamental part of the Netflix story that the analyst community hasn't really been able to do much. Where do we get from, you know, crawling to actually walking or whatever sequence we want to do there?

6:38I also think that what inning are we in terms of paid sharing? I mean, it's hard to really know if we're halfway through this. Great. Yeah. I mean, and again, I've read a bunch of the street over the last couple days into these numbers. I think it's very mixed. I think there are people that think they're very early in the paid sharing dynamic. Yeah. Yeah. Who are the Logan brothers? Well, it's like these YouTube. Jake Paul. Logan Paul is one of them. That's right. I just got it mixed up. Isn't Logan Paul one of these guys? I don't know. It's not a 10-10 match. I think he's just fighting. It's just one guy against Mike Tyson.

7:12Think about this. If you're some kid and you've been on your parents thing and they crack down on passwords and you want to watch that fight, you're going to figure out how to subscribe to Netflix. Then you're probably going to forget to cancel it. Yeah, yeah, yeah. In terms of the Netflix story, though, I mean, isn't part of the story the weakness of the others? I mean, isn't that what we've seen more and more underscored by every comment that Paramount makes, that Disney makes? I mean, Disney said, we're going to play to be number two. And we're going to do password crackdowns, too, just like Netflix.

7:39They're trying to get to profitability and streaming, and that's been part of the driver for the stock is they've actually given you visibility into that. I don't know, Steve, you had something to say. No, she was pointing at you, so I'll wait for you to finish. We're on the air for another 53 minutes, so I better have something. Okay, all right. And I can talk for 53 minutes straight. As we know. Somebody help me out here. No, I actually think the operating margin, which they set for 24 percent, they set the bar a little bit high. And I think that's part of the reason why I think the expectations were so high.

8:09Disney is definitely the second player. So if there's anyone who's going to make it, it's Disney. We still talk about Disney's the king of content. I don't know where that conversation went, but I think we should be talking more about Netflix now as far as when they're going to increase pricing. because now you have that ad tier. So it gives them a little bit of a buffer where if you want to have a cheaper account, it's ad tier. You want to pay? They have the unlimited to go out to the upside. Katie, the gap from last quarter, it went from just below 500 up to 550. And then it just kept on going, right?

8:41Yeah, it didn't look back, but a very strong tape at the time. Right. And so, like, if you were to see, wouldn't 550 were at 590 in the aftermarket? I'm just saying, let's say this 5 % pullback in the S &P turns into a 10%. The stock could be down at 550, maybe testing that gap. And given, like, I think we all sound fairly positive on the fundamental setup here. Would that be a good level, you think, to start picking up? It depends, I think, on the top-down influences. So we're expecting an oversold bounce. And I don't think Netflix will be excluded from that, especially if it gaps down tomorrow, which it's looking like.

9:12And that 550, so the gap does have support at its upper boundary and also its lower boundary. So my playbook, I would say, would be for a bounce off of that upper boundary, perhaps, and then something that goes for a retest and maybe fills that gap. So a short-term buyer might benefit from it, but maybe an intermediate-term buyer might benefit. She's looking for$500. I love it. I wouldn't rule it out. Yeah, it just really depends. One thing out of the earnings is they increased their credit facility to$3 billion from$1 billion. That's kind of a big increase. Right. Right. And so once upon a time, that was part of the Netflix bear case, right?

9:47They're spending money. They're levered up. It's something they got a lot of debt. I don't know if that enters the picture at all right now or if now is the time to spend money now that they are in the pole position in the streaming wars. Now's the time to to sort of push them out even more in front of the rest. I wouldn't take that approach. If you're already winning, you don't have to exacerbate it by spending more money, giving less metrics. I think that's not a winning scenario to up your spending and give less data. I don't think it's a recipe for success. Yeah, I mean, that balance sheet is pristine, and you make the great point.

10:19We were really worried about how much they were spending on all that content, whether they were going to be able to monetize it, and how long they were going to have those cash flow losses, right? It was a big suck, and I remember every quarter of it. Remember they would guide to. What does that stand for? It's not like peg or arco. What's that? Suck. I was talking about metric. No, I mean, on the sentiment of the story, do you know what I mean? And sucking enthusiasm out of it or whatever. Now, if you look at this thing, it's got a$260 billion, and it's going down right now, and they have$7.5 billion in cash.

10:50They generally have cash. They have$14 billion in debt. And look at Disney's balance sheet. I mean, it's a disaster. There's a$200 billion equity. They have some cash, but they have$47 billion in debt. We know where that comes from. So when you think about how they might be limited in content going forward, I mean, Netflix seems like a good spot. I don't think they would be opening. It's hard to know whether a credit facility could be inferred to have some greater kind of strategic thought around it. And we've asked often, when is Netflix possibly going to do something more aggressive in gaming or in other parts of the sports world?

11:23I don't think they're probably we've talked about how they're not locking into a traditional, you know, a professional sports league and signing on for the long haul there. But it's interesting, you know, why they're adding to a credit facility at a time when they are generating more free cash flow. I think the gaming world is still wide open for Netflix. And with the engagement they have and the subs they have and the global reach they have, I think that moves the needle. We will get more on Netflix's conference call with Rich Greenfield of Lightshed Partners a little bit later on in the show.

11:52But meantime, the Dow eking out a gain today while the S &P and Nasdaq both extended their losing streaks to five days. It is the longest stretch of down days for the S &P since October. And the chip stocks continue to get checked with Taiwan Semi and Micron leading the group's losses today. The SMH ETF has now underperformed the broader market by 8 percent since hitting a record in early March. So where are stocks going from here? Of course, we'll turn to Katie for that. What do you see? Well, you know, the semis tend to exhibit upside leadership during strong tapes and downside leadership during weaker tapes.

12:24So the downside leadership from SMH and the likes and Micron included is somewhat concerning from, I'd say, more of a short to intermediate term perspective. We have seen a very good run from the major indices, from the semiconductor benchmarks in stocks. So I think to see some kind of retracement is very healthy. And I do think this is the beginning of something a bit more significant. That said, with this five-day-plus downdraft, we do have oversold readings in market breadth that we haven't seen in some time actually since the October low based on something called the McClellan oscillator. It's a little bit maybe obscure to some folks, but it's derived from advancers and decliners and up and down volume.

13:06And it tells us that what we've seen is getting a little overdone, right? So we should have some kind of relief rally, and that might be something that people will sell into. And then becomes our corrective phase. And think about our seasonal timing right now. We're coming into May. Dell in May, period. And if you look at things like the VIX and other metrics that measure market sentiment, the VIX has kind of turned the corner. It's coming off of its lows. It's been in this low volatility cycle for some time. So we feel that the sentiment has shifted meaningfully. There's another index called the fear and greed index.

13:42that had been at these extremely greedy levels, which is a contrarian reading for the market. So that's what we think needs to be alleviated. And the only way usually to do that is either through sideways prolonged action or a proper corrective phase. So to get to that oversold sentiment data, we need a little bit more from the market. So in terms of the oversold condition, according to the McClellan oscillator, that's for the broader indices. Does it also apply to SMH and to some of the individual components like an NVIDIA? I mean, SMH and NVIDIA are in corrective phases right now. That's right.

14:17So we would expect tech and the mega caps, including NVIDIA, to do best in the very near term during an oversold bounce. But it's super top down when this happens. When the market gets more fearful, they sort of throw all the stocks in together and they treat them all as a group or as an asset class. So it makes more sense when you're thinking about getting hedged, year exposure or reducing exposure. You may want to reduce more on the opportunistic higher beta names, but to just get hedged from a top-down perspective, maybe using inverse S &P 500 ETFs or something of that nature, usually it's the best way to navigate it as opposed to going to the individual positions and scrutinizing them.

15:00And when you look at CTA accounts, we all follow that on this desk, I would assume. They've exhausted, too, to the downside, so that you would think there's going to be a bounce. The only thing I'm bearish about is that we usually don't test the 50 and not test the 100 or the 200. Now, the 200 is at 4670-ish or thereabouts. I'm looking for a test of the 200-day. So that bounce could be faded, and then we wind up there anyway. Yeah, and there's a breakout point of roughly 4810, right? That was where the S &P 500 reached a new all-time high above that level. Former resistance often becomes support going forward.

15:37It also happens to be very close to a Fibonacci retracement level on the chart. So that 48.10 to about 48.20 is a significant level. It'd be great to see the market hold up there. It's not very far from current levels, but if we do see a good bounce, which we're looking for, then maybe we're talking 8 to 10 percent even. How do these technicals line up with what we are hearing from the Fed and the Fed more recently. Kashkari today was saying the Fed may not cut rates until next year. And Williams just today said, you know, it's not his base case scenario that there will be a rate hike. But if the data warrants it, that's what we'll do.

16:15That's on the table now. It's a great point because the fundamentals are driving some of the technicals, although the technicals folks, I mean, I'm not sure. Do you do you refer to this as funny as well as Carter does. But but I think that's a great point. I think you have a case where higher rates have certainly injected more volatility into the markets. But some of these levels we're talking about in terms of the peak of the semiconductors and whatnot were also inspired by, you know, those Nvidia 4Q numbers, I think, were released February 6th or 7th or 8th, and the market basically gapped up to that.

16:45Semis have come all the way down to the top of that gap. So they've given a lot back. If you look at the Nasdaq. So if you're following triple Q's, they're on a relative basis to the S &P. They're flat from October 16th, which was that big market pivot day. So the leadership that you want to see from the market, we haven't really had it. I think it also comes. There's a lot of different things. Steve talks about CTAs. And maybe that helps you on some level if you think about where things might be a little bit oversold. But if you look at hedge fund gross exposure and that's basically adding up their shorts and their longs.

17:15But they're at 90th percentile. I know this sounds weird. The bottom line is I think people are still very complacent on where risk could be. Yeah, it's interesting. Katie, you mentioned the 4 ,800 level. That was the prior high. 4 ,600 was that July 2023 high that we sold off 11 percent from. I think we get back to probably in that 4 ,600 range. It's probably a bit oversold there. That would be a 12 percent peak to trough decline. Last year we had 11 percent. Every year we pretty much have a 10 percent. So I think that's coming to the theory. And I think we're better served focusing on the indicators during a corrective phase as opposed to levels.

17:49You can use levels as a gauge of risk, but it's when we do see that oversold indication and then we see stabilization, we call it support discovery. That's enough to lead to upturns in those indicators. That's where we feel we have opportunity. To Melissa's question on yields, really, you know, we do actually have a short term breakout in yields. But at the same time, we have a sign of upside exhaustion from the DeMarc indicators. So we're looking for a two-week pullback in yields. And that would sort of align with an oversold bounce, perhaps, in equities. But then for it to roll over again in equities and then maybe one more push higher, maybe not all the way to 5 percent resistance, but somewhere closer to it.

18:29Coming up, TikTok nearing midnight as lawmakers speed up the clock on divest or ban bill. The risks facing closed-end funds and some fast movers catching our traders' attention. We'll lay out how to play the moves higher. But first, Tesla's stall continues as more analysts unplug from the EV maker, where Wall Street sees risk and where the stock might be able to find some support next. Don't go anywhere. Fast Money is back in two.

18:55This is Fast Money with Melissa Lee, right here on CNBC.

19:04Welcome back. Tesla hitting a new 52-week low today, closing just below 150, a share of the move coming after a longtime bull downgrading the stock to a hold and slashing his price target to 123 from 189. That is 18 percent lower from today's close. Deutsche Bank's Emanuel Rosner had a buy rating on Tesla since 2021. But after the EV maker canceled plans for the cheaper Model 2 earlier this month, he sees more pressure on volume and pricing, lower earnings for years to come. He also makes the point that if the The company is going to shift to robo taxi. That's a much sort of a longer term payoff.

19:38And who's going to own the stock in the meantime? Will there be a transition of ownership to investors who have a longer term time horizon, maybe value investors at this point? And that transition will be a painful one. Well, there's no question it does seem to be now consensus, not only that folks should be downgrading their price targets, but that there's no real catalyst for Tesla in the next 18 months and that you're looking to maybe end at 25 before you start to see some reacceleration and some other dynamics. Has the company, have they refuted, has anybody confirmed whether the Model 2 is?

20:11I was going to say, it's likely or it looks like they are going to cancel. But Elon Musk called the Reuters report, which initially had that out there as a lie. Yeah, a lie. Or some other, definitely. And any other company CEO that says a report is a lie, we would say, okay, that report's not true. But for some reason with Elon Musk, there is still a doubt and a belief that the Model 2 will be canceled. Well, if the Model 2 is being canceled, again, the inference was that it's because there's a competitive landscape, especially in China, that it just doesn't make any sense right now. And if that's the case, well, first of all, we can already connect those dots.

20:45We kind of know what's going on with China demand and the competitive landscape there. So I don't think it's cheap enough yet for value. I think you've had incredible demand destruction. So picking up on that Model 2, if he commits to a Model 2, the analyst community has seen that only as robotaxing. So if he commits to a low-priced Model 2, then he gives some sort of a margin guidance on it, pricing guidance on it. But this is definitely 30 percent Elon Musk, the board, and 70 percent demand destruction at this point. So you've got to figure out what happens with full self-drive. Is he going to be there?

21:21Is he going to develop with Tesla or not? But remember, the last time we flirted with 100, the stock shot up to 300, too. If he doesn't get this, what is it,$60 billion or something like that? Just to be clear, that would be a percentage of the current market cap. If he doesn't get$60 billion from what? This pay package. The pay package, okay. So, like, think about that. That's like 15 % of the market cap right now. Why would he deserve that? Like, think about this. We have been in a runaway bull market for basically three and a half years, and this company has gone sideways to down. You know what I mean?