Netflix Continues to Dominate

0:05Earnings season is here. This week's Motley Fool Money radio show starts now.

0:25Everybody needs money. That's why they call it money. The best things in life are free, but you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm on in Chakavalu. Joining me are two of my favorite fools, Jason Hall and Matt Frankel. Today, we'll talk about the results of Crypto Week. We'll tell you which bank impressed us the most when big banks reported earnings. We'll also make bold earnings season predictions. and we'll, of course, talk about the stocks on our radar. But first, Netflix reported earnings and did a classic beat and raise.

1:05Fill us in on the details, Matt. Yeah, so you're right. They did report very solid revenue and earnings. Revenue was up 16 % year-over-year. Earnings per share was up 47 % year-over-year. That's really strong, and it was mainly due to the subscription pricing increases that Netflix implemented earlier this year in January. We are seeing the stock under pressure a bit. As you correctly pointed out, it was a beat and raise. They raised their full-year revenue guidance. But their new third-quarter guidance is projecting operating margins to compress a little bit compared to the second quarter. Now, there's some good reasons for that.

1:41Netflix, their original content slate is much heavier in the second quarter of the year. There's a lot more production costs amortized into that number. There are reasons for it, but that is keeping the stock under pressure despite an otherwise pretty excellent quarter. A couple of things stood out to me there, Matt. First, even though those pretty strong revenue and earnings growth numbers did happen, total hours streamed was only up 1 % in the first half of the year versus the same period year over year. Second, management pointed out that the bulk of its new content was coming out in the second half of the year, but also cautioned us a little bit as you were talking about on the impact of operating margins.

2:23I don't want to say it's a disconnect, but I do think it's notable. And it also supports a lot of what you're saying that this is getting into that monetization phase versus just the pure growth phase. We're definitely making that transition. I think we can say that Netflix has pretty clearly won the streaming wars at this point. It's no longer reporting subscribers each quarter because it's shifting from the massive growth phase to the massive profitability phase. Cracking down on passwords is an example of that, right? That hurt subscribers, but increased profitability. Or actually, it would help subscribers, but depending on if they cancel or not.

3:03In any case, what can we expect out of Netflix, the business, in the next five years, Matt? Well, for starters, I wish they would continue to report subscriber numbers, especially after major price increases like the one we saw, so we could see if it is or is not having an impact. But I think over the next five years, we'll see a focus on two big things in particular, advertising and their highest value content. And I'll expand on both of those. So the Netflix ad suite, which is their proprietary ad platform, the rollout was just completed during this past quarter. So it's not a material driver of revenue right now, but it really could be in 2026 and beyond.

3:41And in addition to, when I say high value content, in addition to the, I mean, Netflix is well-known for its TV series, for its movies it's producing. It's really doubling down on live programming and really just desirable content like the Happy Gilmore 2 movie that's coming out. There's the live shows like that boxing match that's coming up, the Canelo fight that's really... People used to pay$70 to watch that on pay-per-view, and now it's on Netflix. So, they're going to really double down on this high-value content because it makes those increasing subscription prices seem more and more worth it to all of its subscribers.

4:18Matt, you and I actually, we talked about this on the Motley Fool member live stream Thursday night. Netflix is really in the driver's seat in the streaming world. And as you just mentioned, with live content, which is extremely valuable for the ads here, but also just as a powerhouse international content producer, I think it may be the best monetizer on a global basis ahead of even Disney. Now, if not in scale, but certainly in the content that it can monetize better than anyone else. We also heard management talk about AI in their content. They're testing something out in content in Argentina, their first one where they're kind of producing some stuff, some scenes with AI.

5:02And that's in addition to all the personalization and all the care that they take within the Netflix interface that always gives us great recommendations and keeps us kind of sucked into that ecosystem. So, that's definitely will be interesting how that evolves over the next five years. But moving on to the stock, we saw that even a beaten raise, Netflix stock fell about 5 % as we're taping due to the high expectations priced in. Are you buy, sell, or index on Netflix the stock over the next five years, Matt? I'm torn. On one hand, I do think, as you mentioned, this is the clear winner in the streaming business.

5:42The fact that growth is being primarily driven by price this year just shows the pricing power of the business with revenue up 16 % year over year. But on the other hand, the stock's trading at 43 times forward earnings. It's a relatively mature business in terms of subscriber count anyway. And it already has a 25 % net profit margin. So it's going to have to grow a lot to justify where it's trading right now. I think it can still outperform the market over the long term, even though as Matt noted, this is not a cheap stock and it's a mature business. To me, the two biggest reasons that stand out are even though it's mature, it's still relatively early and fully optimizing how it can monetize advertising, especially as we see more and more of that high value live content coming onto the platform.

6:31It's a major player outside of the US and it's still really tapping that international market. And if we think about the utility value, even with the price increases, this is still the streaming service that most people would say it's the last one that they're going to cancel if they have to start canceling these services. And that says a tremendous amount about how deep their pricing power is and the ecosystem that they've built, how strong it really is. As a Netflix shareholder myself, every time it's been climbing to new and new heights, the stock, you get nervous. But then I just see how well they're executing and how well they're executing in relation to other streamers and how they can kind of vulture content and kind of make their ecosystem bigger and bigger.

7:23And, you know, I think, Jason, you were talking about how or one of you was talking about, you know, they've got boxing. They've got different kind of events. They've got NFL stuff. You know, I even heard an ad for Happy Gilmore 2 on a podcast. And you think, well, yeah, you know what? They're making it an event. They want people to come in and subscribe because, hey, you know, they want their favorite movie from 30 years ago. They want the sequel and they can't get that elsewhere. Let's move on to big macro. There is a whole lot of debate about interest rates, both within the Fed and outside of the Fed.

8:00We've seen President Trump lobby for lower interest rates. We've seen Chairman Powell kind of be a little secretive on what he's going to do, he and the Fed will do, and kind of holding the line. We've seen other Fed governors speak out, kind of split on what they want or what they predict. what are your predictions on interest rates a year from now, Matt? First, it's worth pointing out that Jerome Powell will not be chair of the Fed a year from now, most likely. The market's median expectation right now for July 2026, it's for a full percentage point of rate cuts compared to the current level.

8:37There'll be a federal funds rate range of 3.25 % to 3.5%. I think once the Fed starts cutting, it will happen in a more aggressive manner than the market seems to think. So I'm going to go out on a limb and say a total of 1.5 % in cuts between now and next July. And that would put mortgage rates, assuming that mortgage rates and other types of risk-free interest, like the Treasury yield and things like that track, I would say mortgage rates are going to be about 5.5 % at this point next year. It's a bold prediction, but I think it's completely possible. Yeah, so just for clarity's sake, Powell's term expires, I believe, in May of next year.

9:16So, Matt, I think you're right. This is going to be the post-Powell period. And directionally, if not precisely, I agree with Matt. I'll also note that if interest rates are not lower, that's probably a good thing for the economy and for our portfolios with one gigantic caveat. And that is that if broad tariffs become a reality, it's a different paradigm because we end up with high inflation because of a combination of both higher prices for goods, but also less supply. Because it's going to be harder for companies to bring goods into the U.S. with those higher costs on the table. I think that's a very low probability event.

9:57And the most likely thing is that we probably will be in a lower interest rate environment because hopefully inflation will continue on its current trajectory of mostly cooling off. And the Fed will start making those moves because it is really holding back major parts of the economy, like housing. Matt mentioned interest rates there. But maybe a more important thing to mention, Anand, is what I'm doing about it, what investors maybe should be thinking about doing. Uh, in my case, mostly nothing different. I'm not close to retirement. I'm not close to paying for a large expense, like, uh, sending a kid to college or, you know, some other thing I've been saving and investing for.

10:38So time is still my ally. And now I have increased the cash that I carry, um, and my bond exposure over the past couple of years is interest rates have gone up. Uh, but that as much as anything is because of where I am in, again, that paradigm of my investing career. But I'm unlikely to reduce those things even if we do see rates come down. So I think the bigger thing is thinking about where you are as an investor and what makes sense based on your goals and less about trying to get ahead of this as an investor or trading on it. Netflix famously disrupted Blockbuster. Pretty impressive. But after the break, talk about the stuff that's trying to disrupt dollars and gold.

11:18Stay right here. This is Motley Fool Money. As an investor, I'm buried in data and making sense of it all is hard. That's where Claude helps me every day. I regularly give Claude a company's financial statements going back a few years and ask it to flag anything that looks like an outlier, line items moving in a way that didn't match the trend around them. It surfaced a lot of things I probably have skimmed past before. Things like expenses growing faster than revenue or margins quietly improving while the headline numbers look flat. Claude doesn't tell me what to think. It helps me see just where to look closer.

11:52That saves me time, helps me find more opportunities to invest, and more risks to avoid. Claude is the AI for minds that don't stop at good enough. It's the collaborator that actually understands your entire workflow and thinks with you. Whether you're debugging code at midnight or strategizing your next business move, Claude extends your thinking to tackle the problems that matter. And with Co-Work, Claude actually builds real spreadsheets with working formulas, not just a CSV dump that leaves me with 90 % of the work undone. For problems worth solving, get started with Claude at claude.ai slash fool.

12:24That's claude.ai slash fool. And check out Claude Pro, which includes access to all of the features mentioned in today's episode. Claude.ai slash fool.

12:42Welcome back to Motley Fool Money. I'm Anand Chakavalu here with Jason Hall and Matt Frankel. Congress declared it crypto week. And believe it or not, Congress delivered. The first major standalone cryptocurrency bill is now passed by both the House and the Senate. And as we're taping, It's ready for the president's signature. It was called the genius bill, Jason. But is it a good idea? Yeah, I think it's definitely a good idea to get a regulatory framework in place for stable coins. And that's what this did. The name is an acronym for Guiding and Establishing National Innovation for U.S. Stablecoin.

13:22What does it do? In short, it requires stablecoin issuers to hold equivalent dollars in reserve. In other words, for every$1 in stablecoin that it issues, it must own$1 in reserve. This doesn't just mean actual dollars in a bank account. It can include things like treasuries, highly liquid short-term treasuries. This is a good first step to helping protect both consumers and investors. If we go back to 2022, Terraform Labs, TerraUSD was UST is the token. It broke its peg because it wasn't actually backed by the US dollar. That event wiped out, I think, around$45 billion in investor value in just a few days.

14:09Terraform Labs never recovered. Investors never recovered. Terraform Labs actually ended up filing for bankruptcy in early 2024. Now, there's more to it than just the asset backing requirement. There's rules around preventing illegal activities, including money laundering and other things. Now, detractors say that this soon-to-be law, we're waiting for the president to sign it, doesn't go far enough. But it's a step in the right direction to regulate crypto, where it probably intersects with the most people. And that's not where it is as an investment, but as a tool for consumers. Yeah. I don't have that much to add, except that stablecoins do have a lot of utility in terms of seamless money transferring, cutting down on fees and things like that.

14:52But the reason they haven't gained more traction than they have is really because of what this bill just did, because there weren't that many regulatory guidelines. It wasn't that perceived as a safe way to move money around by a lot of investors and just a lot of consumers, because, like Jason mentioned, the Terraform Labs bankruptcy. There's a lot to like about this from a consumer protection standpoint, it's not really significant for investors, but just in terms of the companies that rely on stablecoins to move money around, it's a big deal. Genius Bill is farthest along, but it was actually just one of three pieces of crypto legislation making its way through the congressional snake.

15:30Tell us about the others, Jason. Yeah, there's two more that have made it halfway through Congress. The first one I'll talk about is the more straightforward. It's called the Anti-CBDC Surveillance State Act. In short, it prohibits the Federal Reserve from creating a digital currency without explicit authorization from Congress. I don't want to get into the politics of this one. You could easily fall into that. But proponents of it say it's about privacy and protection from government surveillance and control. Detractors say that it limits the tools of the Fed while simultaneously giving too much control of the future of money to a very tightly concentrated group of very private businesses and individuals.

16:19I think to some degree, both are probably directionally right, but it's clarity that I think that the market needs. Speaking of clarity, the act that probably matters more is just that it's called the Clarity Act. This is the other one. This is one of the biggest challenges for crypto in the U.S. has been that lack of clarity over which regulatory agency has oversight. And I think that's played a massive role in why we've seen grift and fraud over the past decade, but also limited institutional investment because of the risk of not knowing what regulators were going to do. So here's what it does.

16:59The Clarity Act puts the SEC, the Securities Exchange Commission, in charge of regulatory oversight for things, mostly on the investor side, regulatory disclosures, capital raises. These are things that the SEC already has expertise in with companies that have to file disclosures and has that existing framework in place to be able to oversee it. Now, the CFTC will have oversight of things like intermediaries and exchanges. This matters a lot for all market participants, whether you're a developer, a crypto developer, a broker dealer, maybe an institutional investor managing billions of dollars in assets, or just a retail investor with a few hundred bucks or a few thousand dollars at risk.

17:44Getting this framework in place so that there is regulation and regulators that have explicit roles, I think is really important. And I would actually add that the biggest regulatory dues might not be any of these three pieces of legislation. The Office of the Comptroller of the Currency, or OCC, they clarified in a letter sent back in May that national banks may now act as crypto custodians. That paved the way for, I mean, we've seen it with fintech so far, like SoFi announced that crypto is coming back to its platform. But it really paves the way for even bigger institutions to add some form of crypto trading or crypto activities to their existing platforms.

18:23Like Bank of America could add it to Merrill Lynch, potentially. There's a lot of implications that that clarification letter could have. Well, let's put the rubber where the road is. What are your personal allocations in cryptocurrency, starting with you, Jason? Jason? It's about 2 % of my portfolio. And like Matt's going to mention in just a second, I have some indirect exposure through financial companies that are going to profit from crypto if it does become more mainstream. Yeah, my current allocation is very low, but it's not zero, but it's very low. I do have a lot of crypto adjacent stocks.

19:02I think SoFi stands to benefit if crypto does well. PayPal is a big stablecoin issuer. And Block is well-known for owning a lot of Bitcoin. So, I guess I do have a lot of indirect exposure through that as well. I guess I do have indirect exposure. I don't really consider those the crypto, but they are right there indirectly. 3 % of my portfolio is currently Bitcoin and Ethereum. I put a total of about 1 % of my portfolio in them around 2020. Since then, they've done really well. I've sold most of it, so the 3 % remaining is earned, quote-unquote. For what it's worth, I'd be interested in maybe buying again during the next crypto winter.

19:46We know that it's a very volatile segment. Up next, we'll see if JP Morgan is still king of the banking hill. You're listening to Motley Fool Money.

20:18We'll be right back.

20:27Loaded with features that let you dive deeper into the market. Visualize your trades in a new light on Thinkorswim Desktop with robust charting and analysis tools. All while you uncover new opportunities with up-to-the-minute market news and insights. Thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more at schwab.com slash trading.

21:06Welcome back to Motley Fool Money. I'm on in Chocobaloo. There are six U.S. banks with at least$1 trillion in assets, and they all reported earnings this week. So it's a particularly good week to have Matt and Jason on because they've followed banks closely for years now. Matt, it's time to play best worst. Which of the six banks had the best quarter? Your choices are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley. Surprisingly, I'm going to have to go with Citigroup. I think it's the first time I've answered that question in that way, when you've asked me what bank had the best quarter.

21:47Very surprising. Yeah. They had strong investment banking results, but that's pretty much industry-wide. But they had excellent growth throughout the business, unlike their peers. Just to give you a couple examples, Citigroup's revenue grew by 8 % year over year, while most peers were about flat year over year. Their efficiency ratio improved by more than 300 basis points year over year. That was rare in the industry this quarter. We're seeing more aggressive buybacks, 8 % growth year over year in tangible book value. The intrinsic value of the bank is building. Credit card revenue was up 11%.

22:19Citigroup's one of the biggest credit card issuers. Consumer deposits were up by 5 % at the end of the quarter. Most were seeing declining deposit bases. Net interest income grew by 7%, and most did not. So just really good numbers compared to the peers. I'll push back a little bit. I think, objectively speaking, JPMorgan Chase probably had the best quarter, but it shouldn't be a surprise. This continues to be the gold standard. Sure, a little bit of a bleed off in deposits, but mid-single-digit loan growth and the returns that it generates are absolutely exceptional. But I think through the lens, Matt, that you're probably looking through, and I agree with, against expectations, yeah, I agree that it's Citi.

23:01The expectations have been so low. Even if we look at things that weren't great at Citi, increasing credit loss reserves, it was for a good reason. Loan portfolio growth, not concerns about credit quality. So those are real positive things. Now, there is still a long way to go. If you look at the profitability metrics, like return on equity is still high single digits. You want to see that above 10%. So there's progress there, but Jane Fraser held CEO, she held firm. Look, 10 % is still our goal. And that's not the endpoint. That's just the next step on the path a year from now is to get to that double-digit level of returns.

23:44Jane Fraser, I really think she has things headed in the right direction for City. It sounds like JPMorgan Chase and its CEO, Jamie Dimon, still MVP, but most improved player, City Group, which has been waiting literally more than a decade for that turnaround, getting to two. Let's talk about the worst quarter. Matt, which one had the worst? I'd have to go with Wells Fargo, and not necessarily their fault. Investment banking was really a highlight for all of the banking industry so far this quarter. Wells Fargo is the only one of those six you mentioned that does not have a strong investment banking operation.

24:24It's a very small part of their business. It's not that surprising it would underperform. Also, they lowered their full-year forecast for net interest income. They had been previously calling for growth in the 1 % the 3 % range. Now they're saying it's going to be roughly flat versus 2024. So Wells Fargo, I think by default, just because they don't have an investment banking division, gets it. I agree with Matt. And as Matt mentioned, I really want to emphasize this. I don't think it's because Wells had a bad quarter. The quarter was fine. The results were good, lacking that investment bank uplift that the others did, as he noted.

25:00I also want to point out that I think the lower forecast for net interest income probably says more about the state of the borrowing consumer and small business than it does about the quality of Wells' business. Having the bank's kickoff earnings season is somewhat helpful because they give us a macro feel for how the economy overall is doing as we look into future earnings of other companies. What were your takeaways, Matt? Yeah, I saw a few somewhat conflicting signals. Generally, across the board, we saw loan defaults, loan delinquencies trend lower, which is better than expected, especially compared to the expectations of a couple of years ago.