The Market’s New High Is Anything but Blah

0:04The stock market is hitting a new all-time high, and things are anything but blah in the world of investing. This is Motley Fool Money.

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. Welcome to Motley Fool Money. I'm Jon Quast, filling in for Travis Hoyam today, and I'm joined by Fool Contributors Lou Whiteman and Fool Analyst Asset Sharma. Guys, we're going to talk about so many things today. We're going to talk about earnings and the market being at an all-time high. But first, we really wanted to hit this big earnings result. So earnings season is underway. And it's not a member of the Magnificent Seven, but Netflix is an honorary member, I suppose we could say, of the Magnificent Eight.

1:11It's really the first big, big company that's reported this earnings season. Came out yesterday with financial results for the first quarter of 2026. And the stock is down today. we have price increases during the quarter. Growth seems to be slowing down. Co-founder Reed Hastings is stepping down from the board of directors. Guys, what stood out to you from this quarter?

1:36Lou Whiteman:So I'll say for me, you know, the quarter, it was a beat, but it was kind of a blah beat, right? Because a large part of that beat was this$2.8 billion termination fee they received from Warner Brothers Discovery. Look, hey, that's great. That's real money. I wouldn't turn down$2.8 billion, but probably that's not sustainable, guys. I don't want to predict your future, but we're probably not going to have a big deal termination. It was more in line other than that. And guidance, again, I think was fine. It wasn't well. I mean, revenue is up, but it's going to grow by 13 % in the current quarter after 16 % in the just completed quarter.

2:13Lou Whiteman:That's not what analysts had hoped for. But hey, I hate to sneeze on 13 % growth. I think Netflix is who we thought they were, and I think it's fine. Maybe it's not that high mega growth business it was a decade ago or five years ago, but it's hard to get too upset about what I saw awesome. Yeah, Lou, I had to pick apart some of the results, pulling out the big cash numbers they received from the Warner Brothers deal termination fee. Looking at the rest of the quarter, yeah, it was strong, but we've come to expect that Netflix isn't ever going to be the really vigorous growth engine it once was.

2:55So investors are slowly re-rating this business. I still think it's going to be quite a vibrant long-term hold for those who understand the business, understand the content business, and just how entrenched it is. I thought the engagement numbers looked good. I mean, engagement hit an all-time high this quarter and they did 70 live events in the quarter plus gaming initiatives so we see netflix branching out into some new things and people are only watching more they added a bunch of international members through japan through the world baseball classic so i thought all of that was nice color in the types of things that netflix needs to do to more slowly but surely grow that audience, grow the hours that people are watching.

3:43Ad revenue is something that we have often talked about as integral to the story going forward. They're projecting that ad revenue is going to basically double in 2026 versus 2025. I think the rough number is something like$3 billion. So here we have a business which the market was disappointed in because the expectations for this year just aren't as fast and I think as fruitful as the market wants. But it's not a big re-rating. I think the stock maybe is down about 10 % or was opening at that as we tape. So basically, the market's like, we're going to adjust this price around the margin. Still a great story here.

4:22And there's a little bit of angst over Reed Hastings stepping down. But truth be told, it's been like this honorary seat, sort of a spiritual advisor seat for quite a while. This doesn't change anything on the ground. And I think the lessons that he imbued his management team with over the years, they're well taken. And these folks know how to operate the business going forward.

4:42Lou Whiteman:Yeah. I mean, look, I hate to be that guy, but I'm going to blame the market here, not the company. Okay. Because look, I'm not going to say the Warner Brothers discovery deal was a good idea. It looked like a huge, huge undertaking, but I think this is the smartest management team in the business. And I don't think they were just empire building or something like that. I think they were telling us something that just the path from here is harder and they needed to look at hard choices or figure out how to grow. And look, I think what we're seeing is, another way of saying it is we're a mature business now.

5:16Lou Whiteman:We are not the business that we once were. So I think, Asad, I think you're exactly right. I think this is a market beater from here. I just don't think it's a market destroyer anymore. And I think the market needs to adjust to that. And maybe the shareholder base needs to turn over a bit. This is a really, really well-run best of breed company, but they have conquered a lot of the worlds they can conquer. So it is going to be slow and steady. Again, I think beating the market, but just, I don't know. I think at some point we just have to say this isn't the Netflix of old. It's still a great business though.

5:51Yeah. And having said that, maybe it's a great risk reward proposition going forward because so many of its peers, you know, as John said, it's like outside the mag seven, it's just outside. Well, a lot of those businesses are fraught with risk right now with all the change going on in the world, trying to stay on top of each other in this race to build out capacity for AI. Maybe a Netflix is a sure proposition and maybe the market doesn't have this monster performance that we've seen in the past several years. Then if you get a good, I don't I know 8 % to 10 % to 11 % to 12 % return out of Netflix every year with less risk.

6:25Not so bad. Works for me. I want to shift gears just slightly here. At the beginning of earnings season, we always have this very heavy information from the banks coming out. In this first week here of earnings season, we've already seen Goldman Sachs, Bank of America, Bank of New York Mellon, Charles Schwab, Truist, Fifth Third. and we could bore our listeners with the raw numbers, but I thought it better to talk about maybe the broad takeaways we could have at this point. Circling back to Netflix, you see that pricing that they did take during the quarter that didn't really impact the numbers.

7:00That'll play in more in the coming quarters. But I kind of look at that and I wonder, oh my goodness, is the consumer able to pay higher prices right now with so many things going on? But Lou, maybe these numbers are showing us that the consumer is okay.

7:14Lou Whiteman:Yeah, I'm not the first one to say this, but bank earnings is a pretty good window into the economy, right? You know, banks touch Main Street. They touch corporate America so much. And look, for all of our fears, and I think the worries are justified, the earnings suggest that household finances and corporate finances in aggregate are holding up surprisingly well. Guys, I never want to accuse anybody in a market together of collusion, but it was really weird. If you look at these calls this week, Jamie Dimon at JPMorgan Chase, Charles Scharf at Wells Fargo, Brian Moynihan at Bank of America, Jane Fraser at Citi, all in that opening quote you put just under the results in the press release, they all led with the word resilient.

8:00Lou Whiteman:Resilient, resilient, resilient. That is what the message that, and look, I don't think they had a conference call beforehand and said how we're going to do it. I think that's all their messaging. And I think, look, if you look at it, there's still reason for worry. I think there's still reason to watch this space closely. We've talked about the K-shaped economy, and there are definitely households that are struggling and things are getting worse. High gas prices are out there. But at the same time, layoffs are at kind of historic lows. The unemployment rate is, you know, in an area that in history would suggest is pretty healthy.

8:36Lou Whiteman:I don't know, guys. I think resilient, holding up. I think that we got what we wanted out of the banks in terms of a barometer on the economy. Asa, do you agree with that? Yeah, I totally agree. The only quibble I have is not with what Lou said, but this adjective of resilient. So I spent like a career as a parent teaching my kids to be resilient. I don't want to have to listen to these CEOs telling me how their banks are resilient. Tell me about your business model. But I get where they're coming from, right, John? You have such a hard wall to climb when you're a big diversified bank. So if economic activity slows, you have to find a way to beat the market, to have your earnings show that growth.

9:19How you do it a lot of times is through trading activities. And if engagement for Netflix is the way they move the needle, with these banks, it's finding higher volumes of trading for their trading services, higher volumes of lending. But you need economic activity for that. And you almost need a little bit of volatility in the economy. We saw Goldman, I think, do fine across his trading businesses and the investment banking business was there. But truth be told, if we didn't have so much dislocation in this economy, they would have done better. And we saw the same with Schwab. Schwab had a 34 % rise in daily average trades, but probably still just disappointed investors.

9:59They wanted to see more. When the economy is pushing along, these banks tend to have more opportunities to do well. And I think it's just a difficult environment for all of them right now. But the base of it was, come back to that word that I don't like, is resilience. You know, they were able to push through. And I think the floor stayed in for these banks, even though we had a lot of uncertainty, especially towards the end of the quarter with the Iran war.

10:28Lou Whiteman:From here, I'm still worried, guys. My base case has been, and look, none of us knows. But I think everything going on that we almost have to have a mild recession or we have like we're really, really headed towards something this year, hopefully mild. So we'll see. But I like the actual data better than me just guessing or spitballing. And I appreciate that, you know, things aren't as bad as they could be, if nothing else. And there's some solace on a Friday in that, right? For sure. And I think that we're going to touch on that a little bit later in the show, Lou. So thanks for teasing that.

11:03When we come back, we have some trends to talk about in digital advertising. This is Motley Fool Money.

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12:32Welcome back to Motley Fool Money. Guys, this is very interesting. Meta Platforms, the company that owns Facebook, Instagram, and more. According to a recent report from eMarketer, this is a third-party research group, Meta's digital ad revenue is on pace to surpass Alphabet this year. Now, you look at Alphabet. This is Google. This is YouTube. These are just incredible powerhouse digital advertising brands. And Meta's digital ad revenue expected to hit$243 billion this year, and that would be higher than Alphabet. This is just, I mean, wow, Asit. I think here we have a really fun changing of the guard.

13:15I think that Meta is almost better suited for the digital advertising age than Alphabet is. Alphabet, of course, controls search. And they have YouTube, which is this amazing ad property. But what Meta has done over the years is two things. One, they've diversified all of their platforms through acquisitions. So they have multiple paths of attack. You have Instagram, you have WhatsApp, you still have Facebook, it's still around. And they've also simultaneously invested a lot of money. I always accuse Zuckerberg of burning up cash and so does the rest of the market. But one of the byproducts of his really big spends on the metaverse has been this great leap in the advantage they have in technology and being able to monetize you and me, whoever's on their platforms.

14:03So, the AI investments turned out to be fruitful for this one thing. And now they're doubling up on infrastructure investments and inference investments, custom silicon. So, they've got eyeballs in place and they've got a better machine to monetize those eyeballs. Their ecosystem is just a little bit more purpose-built than Alphabet's broader ecosystem, which has to do two things now. They have to monetize this, but they also have to compete with AI because that is simultaneously helping their search business and undermining it.

14:33Lou Whiteman:I mean, Meta, great business, but let's not get too panicked about Alphabet, even if we're crossing a threshold here. Both are growing. That's sort of interesting to me. Meta is just growing faster. Two years ago, we were debating whether or not Alphabet's ad business was vulnerable to AI, whether or not this was all just going to collapse. Now we're talking about from just this number going from$196 billion to$239 billion in one year. That's still pretty good, even if they're getting passed. And eMarketer, let's note, they're projecting continued growth through 2028 at least. And I think 2028 doesn't mean anything other than this is just kind of where they cut off.

15:12Lou Whiteman:So the takeaway for me is what we already know. These are two incredible money printing machines. One may be going a little faster right now, but neither looks like the gas is running out. And what they do with the cash, always debatable. That is changing. But the good news is they're starting from a position where they are generating all this cash. Yeah, I think it's so interesting that we forget sometimes that this is a prevailing trend that the linear advertising dollars are moving to digital channels because they can be better measured. And to your point, this isn't a zero sum game because the entire market is growing.

15:54And you said these are two money printing machines. But let's talk about one more money printing machine when it comes to digital ads. The number three player continuing to take share is Amazon. Amazon is interesting because most of us missed that they were really learning the demand side of the digital advertising business for many years. Many of us were focused on the fact that they had this great closed ecosystem with Amazon.com and vendors who wanted ad placement. But in the meantime, Amazon really was trying to figure out how they could monetize similar to the smaller platforms that often sit on their servers.

16:35And I think once they figured it out, they did something that surprised many observers and probably surprised the trade desk, which has been a very interesting investment to hold. Speaking of digital advertising, in that they didn't decide to be a walled garden, sort of like Meta. Now they're extending their ecosystem and capabilities outside of the Amazon.com sphere. And they're partnering with many other businesses. And to your point, John, they're really good at measurement. That's one of the crucial things that Amazon can provide you if you want to advertise on their ecosystem. First of all, the channels are very direct.

17:11So folks aren't going anywhere once they're on that ecosystem. But the tools that they've developed are surprisingly robust. The data that they give you back for every dollar you spend on a click, right now it's equal to the efficacy you get out of the Trade Desk platform, which is why investors rightly perceive there's a big threat over there on the Trade Desk side. But like everything else Amazon does, I've just been a little surprised at how fierce of a competitor that company is. And once they decide to take margin within an industry, they'll stop at nothing until they learn that business very, very well.

17:47And they've got a deep, deep, deep balance sheet so that they don't make any mistakes. The mistakes they make along the way are very constructive, and they're going to take that margin. Yeah, they're cutthroat.

17:58Lou Whiteman:And we'll see how that works. And it's funny because this comes at the same time that there's reports that big Amazon sellers are beginning to boycott the advertising platform because the costs keep coming up. They just added a fuel surcharge. This feels sort of mafia. Like, go ahead, make my day with this. You know, but again, it's a different business. Maybe, you know, I don't know. I could go either way. Is it stronger or weaker than kind of meta and alphabet people go there because that's where the eyeballs is versus because you have to? It feels like the one thing about Amazon that's weird is that outside of Amazon's ecosystem, some of the ads at least could end up going against your partner sellers.

18:41Lou Whiteman:You know, like, oh, you think you want this, you can get it from my partner, but here's an ad about something. So there is sort of a tension and there is sort of this captive audience that you have to manage, which makes it different, but very impressive. And yeah, Amazon, I would never want to be a partner with Amazon, guys, because it feels like nobody ends up with margin. And whatever that says about the partnership opportunities, it really, really does speak to the strength of Amazon's business. You know, as we close this out, Alphabet may be losing some ground in digital advertising, but it's gaining some ground, according to a new report from SimilarWeb.

19:21when it comes to Gemini, this is the generative AI tool. It's taking share from ChatGPT. This has already been a trend, but it's continued to go on. Pretty interesting.

19:34Lou Whiteman:Yeah, I don't know what to make about this though, because if we think first mover advantage matters, well then, opening a hi-hat had that and didn't. I think we're so early here. I don't know if we can read into market share. I said, I don't know if you have any thoughts into that. Kudos to them. It's nice to see winning, but is it sustainable? Who knows? Yeah, but one thing is, it's harder to get back that market share once you've lost it for OpenAI. So yeah, let's keep our eyes on that one. When we come back, we're going to celebrate a very little known holiday. You're listening to Motley Fool Money.

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21:35Welcome back to Motley Fool Money. We like to have a little bit of fun on our Friday shows. and today is blah, blah, blah day. And I am serious about that. This is an actual day. It was founded to turn meaningless chatter into meaningful action. And I thought that was kind of interesting from an investing perspective. There is so much noise out there on a daily basis. It is compounding, it feels like every day. But what are investors actually supposed to listen to and what are they supposed to ignore and then opposed to what are they supposed to take action with? So here's the game that I have for us today, Lou Asit.

22:15There are some news items from popular companies this week. And I'm just going to basically read the gist of the headline. And you guys are going to tell me whether this is blah, blah, blah, or if this is actually something that we should pay attention to. And so first up, we have Rocket Lab. RKLB is the ticker symbol there. It is making an acquisition. It bought Minarik for$155 million. This is laser optical communication terminals. Asit, what do you think? Blah, blah, blah, or should we listen here? I think it's important to listen, John, because it's indicative of what you need to do in this space.

22:54So the company that Rocket Lab acquired, Minarik, I hope I pronounced that correctly, they are helping satellite constellations communicate with each other, via lasers. And this is sort of a diversification of both supply chain and revenue for this business. We see this a lot in the space race because the more concentrated you are, the more vulnerable you are to those government contracts, which can make or break a business. So I've seen in general, and I follow the lunar space, a lot of branching out into services. How do we become more of a total solutions provider and less of a one trick pony?