Will Netflix Go All-Cash for WBD?

0:05Earnings season has begun, but the drama at Netflix is where we're going to start. Molly Fool Money 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. Welcome to Motley Fool Money. I'm Travis Hoyam, joined by John Quast and Lou Whiteman. Guys, we got to start with the drama at Warner Brothers Discovery this week. Paramount is begging the EU for help. Netflix has reportedly considered changing its bid to all cash. Remember, there was a piece of that value that they're saying that shareholders are going to get through the spinoff of the cable assets. The early trading at Versant has not gone very well.

1:07That's a spinoff from Comcast. Lou, what's going on here? Because it seems like there's a lot of moving pieces. The board at Warner Brothers is pretty resistant to Paramount. And depending on how you look at it, they either make sense or you just want the most money and that's where they should go. So I'm going to make a bold prediction here because you're right. There's a lot going on, a lot of moving pieces. But really, it's very simple. one of two things is going to happen. Either Netflix is going to end up buying Warner Brothers Discovery or there's not going to be a deal done. All right. You don't think Paramount can actually get a deal done?

1:42Look, Warner Brothers Discovery's board has already decided what they think. And for the upstart acquirer to try to poison the well in Europe and try and just kind of salt the fields, that's not going to help. Going score search really only helps when you are the bully, when you are the one that can dictate terms. If you're an underdog, you can't overwhelm this opposition. I don't see this going well. I think this is only going to get uglier. It's possible that what Paramount's trying to do will work and the deal will get blocked. But it is going to be a long time, I think, before the WBD board says, oh, you know what?

2:21Never mind. Paramount is the right choice. What is the thinking there? because it seems like you should just take the higher bid and if Paramount actually has the higher bid, that's what you do. But there's execution risk here. So what is the argument for just sticking with Netflix through thick and thin? Well, for one thing, higher bid is sort of up for the bait because as you said, the Paramount bid is for the whole company. The Netflix bid is the whole company minus the cable assets. So, it kind of comes down to what you might think those cable assets are worth, what is going to give a shareholder more value.

3:02The other side of it, you never know in the back, just behind the scenes. It could be relationships, it could be golden parachutes, or it could just be... You're saying there's egos involved in Hollywood. There are. And it could simply be, and we've talked about this offline, Paramount is a much smaller company than either of these. They are doing everything they can to look big and to present themselves as a good option. But look, there's risk anywhere you go here. I think there's real risk there. And Netflix, look, this is a big deal for them, but they can handle this. They are more, I think, of a known entity, a trusted partner.

3:40If all else is equal, I can see the board saying, let's go with this. Let's go with this trusted partner. Whatever the cable upside is, we're preserving it for our shareholders and get a deal done. The analogy that we were talking about was taking the higher offer on selling your house, but you're selling to somebody that isn't yet approved for a mortgage. So, you know, you just increase the risk of that deal actually closing. I want to just bring some stats in here for Versant, which is the spinoff from Comcast that started trading about a little less than a month ago, that is a$4.8 billion market cap.

4:15The shares have gone from about$45 per share down to$33 per share. So that's sort of the, you know, maybe these cable assets aren't worth anything. Paramount has actually argued that the equity will be worth zero, which 4.5 billion isn't nothing though. Yeah. It's something. Yeah. Uh, John, what are your thoughts when you look at this deal? Because there's just so many, not only egos involved, but weird financial implications as well. Now I get it for, for Paramount it's homecoming in the streaming service space and Paramount's running out of dance partners. I mean, there's consolidation happening and you know, Paramount doesn't want to be the smallest player.

4:54So I get why it wants Warner brothers, but you know, it's very hard for it to pull off because it is such a small player. Netflix is going to be a lot easier. It's going to have much easier access to the capital to get this deal done. I'm still not convinced, though, that this is a great move for Netflix. And I will give an example here of Disney acquiring Fox back in 2019. Disney stock has underperformed since it did that move. And a big part of that is how much leverage it took on to make it happen. And so, you know, this would be a big move for Netflix. I don't know where it's going to come up with all the cash either.

5:33Maybe some debt in that mix, maybe some equity. I'm not sure where that all comes from, but it's the one that can get the deal done for sure. And it's going to be able to do it a lot faster. I think that's what it's trying to do by potentially switching that bid to all cash. Get the deal done as quickly as possible before too many people ask questions or a dark horse comes in with a competing bid. Well, let's talk about some of those potential downsides if Netflix does get this deal done and they do it with cash. So let's say they have to take on a whole bunch of debt. Your analogy is that, yeah, Disney kind of hamstrung itself for a while there.

6:08They paid down some of that debt. The operations have gotten a little bit better coming out of COVID. But, you know, there are downsides of having that interest payment and that leverage. Maybe you can't bid on the next big football deal coming up. By the way, that's going to be in the next few years. You know, Disney's big advantage in the media space right now is they have all these theme parks. Netflix is trying to kind of move into this physical experience world. Do you still have the cash to do that? Build out a$5,$10,$15 billion theme park if you've got$80 billion worth of debt. Is that the risk that you just reduce your flexibility?

6:46Or what should you be worried about if you're a Netflix shareholder taking on a bunch of debt, John? I think that that was the exact word I was going to use is flexible. You're just so much more flexible when you don't have a high debt burden. And when you are generating a lot of cash, you can, you have a lot of options on the table. You boost that debt up, you take the options off the table a little bit. And I'm not saying that it can't be a market beating stock, but your attention really becomes more divided on maintaining and running the business rather than how are we going to invest into growing the business for the next big thing?

7:22I don't want to be too Pollyanna here, but let's look at this. For one, the original deal was about $60 billion in borrowings for Netflix. They've already signed deals to get rid of the bridge on about$25 billion of that, which is going to help their interest rates. They generate$7-8 billion in free cash flow a year. Disney, it was a third of that or a quarter of that back in 2017 when they announced the Fox deal. I'm not going to say this is easy for them. Obviously, I agree that no debt is better than debt, but I think they can handle this. And look, yes, I think what Netflix is telling us is they need this.

8:04I mean, look, they wouldn't be doing this if not, I mean, this isn't a luxury. They are looking at the world. Yeah, Travis, they may want to compete for sports. They've done a pretty good job transitioning from a world where everyone was desperate to sell them their content because it was added revenue to nobody wants to sell them that content because everybody's got a streaming service. They've done a good job adjusting to that, going to Korea, going elsewhere to find content, but that's hard. And I think, I trust this management team. It's the smartest management team in the business. I don't think they would be doing this for empire building, doing it willy-nilly.

8:39They know, yes, this is going to change our profile, But I think, you know, as a shareholder, or I'm not a shareholder, but if I was a shareholder, I would trust this management team to set the course. And they are saying, this is something we really need to make our lives easier to make the company better versus this would be fun to own. And that seems really shocking to me because even when this deal was announced, I think we talked about on Motley Fool Money that this seemed like a defensive move from Netflix. and they have not been playing defense for 20 years. And what they really need to think about and investors need to think about is that it's not really paramount that they're probably worried about.

9:21It's YouTube. And the sort of random deal that came out yesterday that caught my eye was Sesame Street is gonna now be on YouTube. And if YouTube is already very popular for kids, there's more people streaming YouTube than Netflix. There's more revenue at YouTube than Netflix. But if the default for Sesame Street, for sports, for, you know, award shows now moving to YouTube, that seems like an issue for Netflix. What do you think, John? It's so crazy to even imagine that we're underestimating YouTube right now because of how big it is and how popular it is. But I think that that's the case. And I think that's the case with a lot of Google things.

10:05We'll probably talk about this later in the show, but it has such a massive scale in reach and distribution that there are a lot of options at Alphabet's disposal. And I think that the Sesame Street with YouTube is just another example of that. Quick question for both of you. I'll start with you, Lou. At what point is Netflix stock a no-brainer? Because I'm starting to get interested. We're down about 33 % from the highs,$400 billion market cap. Where do you start going, man, this is too cheap to pass up? I mean, there is risk here. I think if you're a long-term investor, though, I do think Netflix, like I said, they have the best management team.

10:42They have a huge, huge customer base. I think if you've got a long enough time horizon and you're willing to ride out the volatility, I don't know when it isn't a no-brainer. So, I think if you're interested in buying, then, yeah, I do think whatever happens in the next six months, a year, I don't, I like the chances of them making it work in the long run. I'd say it's probably lower to be a no-brainer. I think it's probably a brainer here, though. I mean, if you take some time to look at it, assess the risks that we are talking about, it could probably turn out to be a good investment today. When we come back, we're going to talk about the changes at Tesla and FSD.

11:22You're listening to Motley Fool Money. I'm Kyle Wood, host of Fun Facts Daily. We all know the Winter Olympics have thrilling competitions, but the history of the sports is more odd and interesting than you might realize. Like, archaeologists have found skis that are over 8 ,000 years old, meaning that people in Russia and Scandinavia were skiing before the Great Pyramids were built in Egypt. Fun Facts Daily is covering all the stuff you never realized you always wanted to know about the Winter Olympics and hundreds of other topics. So follow Fun Facts Daily wherever you get your podcasts.

12:01Welcome back to Motley Fool Money. FSD has had an up and down year for Tesla. RoboTaxi's began testing in Austin last summer. By now, we were supposed to see FSD driving fully autonomously all across at least the US. That clearly hasn't happened. But the big news this week, Lou, is that pricing is changing. They're getting rid of this$8 ,000, you own FSD forever, to go into a monthly or yearly subscription. So I think the most common would probably be paying$100 per month for FSD. What should we take away from this, not only for people who own a Tesla, but also Tesla shareholders? So I'm going to focus on the shareholders because if you're a customer, you either have it or don't.

12:39But think about it this way. You very rarely see a company trade$8 ,000 upfront for$8 ,000 over what, six and a half years or so, which$99 a month is. You don't do this because you want to. You do this right after NVIDIA at the Consumer Electronics Conference came out with basically what looks to me like Android for autonomy, where instead of like this closed system and everybody has to develop their own iOS, you know, you suddenly have just a system that anyone can take on. that changes the costs of the economics for everybody in the industry. And I think it puts Tesla on the defensive. I mean, look, this price has always been just kind of a bogey that changes.

13:25It was as high as 15, as low as five at various points. This has always been aspirational. I think to charge 8 ,000 for it. We have a long history in the automotive business of things that are, perks or safety features that just become standard over time. They become commoditized. And I think that's what's happening here. And Tesla is on the defense of realizing, okay, it's going to be harder to get eight grand for this in the future. Let's get what we can. And the$99 price point is an easier sell, I think. Yeah, John, the interesting thing is that the$99 option was there. So they're just taking away the other option, which it just seems a little bit strange from an optics perspective, but is this a big deal or just kind of a nothing burger in the long run?

14:11Well, as Lou points out, who knows if this is the final offer either. I mean, there are many, many changes to Tesla's pricing over the years. So who knows if this is the final deal, but yeah, it is. I think it is more of a nothing burger. I mean, Tesla is interested in the monthly subscriptions. And you do look at Elon Musk's new pay package. There is incentives tied in there to how many subscriptions that they have. And I don't know, maybe this is a way that it boosts monthly subscriptions and helps them reach that milestone. Maybe not. I guess that's up for debate. But certainly, yeah, I get Lou's point and it's well taken.

14:51Let's move on to Google. We talked a lot about them on Wednesday, if you want to go back to the Wednesday The Motley Fool Money Show. But since then, and the announcements just keep coming so quickly from Google, they announced personalized AI. So Jim and I can now understand your personal context. So if you use Gmail, photos, your YouTube history, and more, some of the examples were things as simple as what are the best tires for my car? Do you know what I mean? Put in what your car is. The AI has to figure out based on your history, what your car is. And then I love this one. What's my license plate number?

15:23Because I couldn't answer that question for either of our vehicles. Meanwhile, Claude showed co-work, which can clean up your desktop. That was the first example. John, does Google get AI better than anybody else? They seem much more incremental, but the products, when I look at these announcements, they just seem like, oh, I can actually see myself using that. Whereas like Claude, I don't have a messy desktop. Give me a better example. Well, I think it's a little bit strong to put it that way, Travis, that Google gets AI better than the other players. What I do think that Google has that is extremely valid here is that it can execute at a higher level because of how many billions of people are already deeply embedded into the Alphabet slash Google ecosystem.

16:10Yeah, I believe it's nine products with over a billion users right now. That's incredible distribution and scale. And so if you're looking to do personalized AI, and I think that a lot of these players do want to do this, but Google can execute better because it does have more personalized information about you. And so I think this is really Google's advantage here. I mean, Chad, I think I agree with you. I mean, look, let's be honest. Some of it's a parlor trick. Most people, Travis, you may not know what your license plate is. I don't either. I I take a picture of it when I need to pay something later.

16:44But I do know what kind of car I have. And I can Google and search right now best tires for a Honda Insight or something like that. So, you know, whoop-de-doo. But like John said, Google is playing to its strength. It has been spying on my email and my photos and everything to suggest products forever. This is just a natural extension. Hopefully, AI makes them better. I love the fact that I like one team in English soccer. They think I must want to buy stuff for every team in that league. It's like you buy a toilet seat once and Amazon thinks you want toilet seats forever. Yeah, but I mean, look, they're playing to their strengths.

17:18I thought the Claude Coworks thing, I thought that was actually pretty ingenious, whether you need it or not. Bottom line here, what's really going on, everyone is experimenting. Everyone's trying new things. Everything's flexing. Google is this consumer-focused company, so they can do all these things that seem really cool and relatable. I don't know if anyone is better at it, but I think what this does show, it keeps coming back to this, is that as all of these companies try to get their AI out to the world, Google's real advantages, they have so many more just natural avenues for monetizing.

17:54They are in so many homes, so many phones, so many consumers already. It is just a much more natural thing to see them adding AI as a bolt-on versus a cloud or OpenAI or all these trying to basically have to win every customer from scratch. And I think that the proof of that, Lou, is just how quickly, for example, Gemini is gaining market share right now. I mean, this company launched Bard. Does anyone remember Bard? That was a stumbling right out of the gate. Even the launch of Gemini was terrible. They had those images that were just completely inaccurate that was a huge black eye. And that was Gemini.

18:35People forget that. Yeah, for sure. But how quickly Google has been able to recover and take market share because it does have the advantages of distribution, vertical integration. Now, OpenAI is making deals to try to better compete, but Google just has such an amazing amount of muscle that it can flex here. So this isn't a prediction because I think that, yeah, I already talked about Google's natural advantages, but I think that the important thing there is how quickly this can change. I don't think anything is set in stone yet. This is still the Wild West. And so I think Google looks great right now.

19:09Maybe it will two years from now, or maybe it'll be another even crazier ship. When we come back, we're going to talk about stocks that are either values or potentially value traps. You're listening to Motley Fool Money.

19:24little happy headed for.

19:30Then my only worry was for Christmas what would be my door.

19:47Welcome back to Motley Fool Money. One of the things we often talk about as investors is values versus value traps. So let's see what Lou and John think about some of the potentially down and out companies that might be great values that we look back on being obvious opportunities in hindsight. They also may be value traps. Let's start with a really popular one today. That's Adobe. John, I want to start with you. $127 billion market cap. The price earnings multiple on a trailing basis is just 18. This is a company that has grown revenue over the last three years at a 10.5 % clip, but shares are down 57 % from their high.

20:24Is this a value or a value trap right now? I think it's a value. I'm so glad you brought this to the table, Travis. I don't normally look at Adobe, so I wasn't really familiar with the numbers at the moment. But as you point out, it's down a lot. Trading at 13 times its free cash flow, and you look at some of the things going on with Adobe's business. Gross margin is at an all-time high. That's a strong signal. We also have double-digit revenue growth. Granted, it's just a hair north of 10%, but that's still double digits at this scale. The share count is down because, as I mentioned, the free cash flow, and it does have things to reward shareholders.

21:01So, I think this is a value stock right here today. Yeah, the obvious concern is AI is going to eat their lunch. And to some extent, I think we've seen this. The bull case for Adobe a few years ago was all of us normals were going to use a cheaper version of their product. Yeah, the Canvas of the world or even like Gemini to make images. And yeah, that business has been wiped out. If I am not a professional user, I'm just going with a nano banana or whatever. But I do think that the professional class that relies on Adobe, Adobe is applying AI to that. And I do think that they can stay ahead of the wolves, at least for now.

21:38I don't know if this is going to be a home run stock, but I do think the market is overreacted. And I do think it can be a long-term market beater just on the strengths of their products and their ability to serve customers that are really, the free stuff is going to have to get really, really good before professional users abandon Adobe. I think that's the thing I struggle with the most with Adobe is, I think you're absolutely right. I use Canva. I use some of these free tools. I do not use Adobe products. But Dan behind the glass does because he is much more of a professional producer than I am, when I make a video.

22:14My question would be, can they increase the number of people using their products, Lou? Is that a fundamental challenge? And if you can't increase that number, really the only lever you can pull is price increases. And if that's the case, then what do you want to pay for a stock like that? Are we at that territory? Because this isn't 10 times earnings, it's still almost 20 times earnings. But as John pulled out, is that they are a cash flow generating machine and that they can... And, you know, I mean, I think I think you can win that way over time, too. Again, I don't see this as being a slam dunk, but I do think that whatever the bogey is, seven percent market average year, I do think over time they can outperform the market.

22:55All right, let's go to another one that has gotten a lot of attention. The trade desk down 74 percent. And this is just in a little over a year, just crazy decline for the company. price earnings multiple on a forward basis is still over 20 enterprise value to sales is six Lou is this getting to be a value or is this a value trap where this can still fall so I I am a longtime holder who has not sold or added to the trade desk I think it is a market beater from here but kind of similar to Adobe I I don't think we're getting back to where it was before I think I was wrong I saw this huge opportunity and I saw them just capitalizing on it.

23:35And I didn't factor in the fact that, yes, Amazon and a lot of other people were going to come into this market opportunity too. I think the trade desk has great products. I think the products are getting better every day. I think they can hold share and slowly grow share. I do think that it is value here, but I just think that it's always going to be, they're going to be elbowing with other deep pocketed competition. So it's not going to be as gaga, as easy as just to the moon as we once thought it was. Yeah, I think that's a really good way to put it, Lou. I would agree. I would lean value here, but I'm not screaming value necessarily because of the fact that its revenue growth has slowed down.