Instant Reaction: Netflix Disappoints Again with Slow Growth | Bloomberg Daybreak: US Edition

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Learn more at the hartford.com/risiskmmitation. >> Bloomberg Audio Studios, podcasts, radio news. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3,000 journalists and analysts around the world. >> We are focused on Netflix. We're going to bring up the trade for you because we did see the stock bouncing around in the after hours. I remind you that it's down more than 20% year to date, down more than 30% since hitting uh a recent high back on April 16th. That's when it reported earnings last time and there was disappointment about revenues and call it so two quarters in a row. uh quick check on some of the numbers in terms of Netflix and we did see that as we mentioned uh second consecutive quarter of slowing sales. The company projected revenue of 12.9 billion and earnings of 82 cents a share. So again a second consecutive quarter slowing sales growth and so investors have got to be having some questions about you know where does growth come from and what's the future for Netflix although let's point out still the giant when it comes to streaming. >> It it is still the giant. And I want to bring in a great round table to kick off our coverage. We've got Felix Gillette with us, Bloomberg News, Media and Entertainment Editor. He's here in the Bloomberg Interactive Broker studio. Also joining us, Eric Clark, the CIO of Acuvest Global Advisors. He focuses on consumer stocks, including Netflix. He also manages the Alpha Brands Consumption Leaders ETF. Um, Eric, I want to start with you because in the uh Alpha Brands Consumption Leaders ETF, ticker LGO, the uh fifth biggest holding after Nvidia Broadcom, Eli Liy, and TSMC is Netflix after a report like this. Are you buying? Are you selling? Are you holding? What are you doing? Hey Tim, great to see you. Um, you know, this is a continuation of our conversation last uh last quarter. We you know it's a consumer utility and I have nothing to bad to say other than you know quarterto quarter things are going to bounce around. We still believe in the story. We still believe in the growth opportunities. It's summertime so viewership might be a little lower. We're all out having fun at the beach and uh you know they bought back uh you know 4.7 billion of stock. There's still 27 billion left on the authorization. So that's the biggest quarterly buyback in history. So I'm happy to see that they took advantage of the weakness. That's what I was hoping and expecting them to do. Um to me that sends a little bit of a signal, but you know, every quarter is a little bit noisy. I don't think anything's changed with the story. You know, in many ways it's a stock that was outside of the tech and the AI theme. And you know, they've discarded everything that isn't tech and AI up until the last two weeks. And so, you know, this utility now at 21 times looks pretty attractive as a stable, predictable business with big free cash flow and a big buyback. >> When does a utility with second consecutive quarters of slowing sales growth, when does that trend become worrisome? Does it have to be three? Does it have to be four? Does it have to be more? What does it have to be? Well, I you know, I think it's less about that and just more about when we get into the fall when engagement starts to rise again. We know the they're they're pretty comfortable with ad revenue rising. That's high margin business, free cash flow or, you know, free cash flow generation really good margins still creeping up. So, I I'm not worried about a dime here or or 5 cent there. In the end, a utility has a a very good defensive range of earnings, and that's what we see with Netflix. We've just transitioned from a go-go growth stock to more a growth at a reasonable price stock into the into the core. So, in some ways, we've changed the shareholder base over from one kind of growth investor to a more stable, you know, core investor. >> I want to bring in Felix Gillette. He's Bloomberg News media and entertainment editor. He's also the author of It's Not TV: The Spectacular Rise, Revolution, and Future of HBO. He joins us here on set. So, Eric keeps saying utility over and over again, but when I think of utility, I think I only have one utility, like, you know, the provider of my water or electricity or internet into my home. In my home, I have Oh my god. Well, now I now I pay for Fox One thanks to the World Cup. So, that's another 30 bucks a month or whatever. Um, but I got Netflix, I got Paramount, I got HBO Max, I got all of these things right now. And and I I don't know like do you agree that it is that Netflix is a utility? >> Well, I mean I think at some level Hollywood is still a hits business, right? And you know Netflix hasn't had huge hits so far this year. I mean I think it's that simple. And you think it's also these things are very cyclical. I mean think of the year Netflix had in 2025. They had the last season of Stranger Things which was huge. They had you know the last season of Squid Games which was huge. They had um you know K-pop Demon Hunters, the biggest movie in the history of the service. And so coming off that, there's a little bit of a hangover. And I think every other streaming service would probably look at Netflix's engagement and their numbers and they'd kill for it. But compared to Netflix's 2025, yeah, the engagement isn't as good as it was last year. And you know, I think uh you know, they'll probably bounce back. They've had modest successes. is they've had, you know, animated movies like Swap that have done well, just not as well as K-pop Demon Hunters. Um, and, you know, I think that combined with making the bold move to try and go out and buy Warner Brothers Discovery and then, you know, at a certain point losing out to Paramount Sky Dance, like that those two things combined, you get a narrative of, oh, what's wrong with Netflix? But in some ways, you know, it reminds me a lot of like >> thought they were going after that. Isn't that funny? >> And investors investors didn't like it. Yeah, I know. They were going after it. >> Anyway, I interrupted. Go ahead. >> Well, I was going to say it reminds me a little bit of like, you know, in the previous era what happened with HBO. If you remember, you know, when HBO HBO was at the top of the previous era of home entertainment, 2007 when The Sopranos ended, everyone was like, oh my god, what's going to happen to HBO? People, the competitors, oh, it's called, let's call it HBO over, you know, that was the nickname that year. And everyone was, oh, it's a crisis. And then, you know, a little bit time passes, along comes Game of Thrones, right? >> Yeah. Richard Pller says, "Hold my beer." >> Yeah. And so it's like, you know, I think, you know, nothing's radically changed about Netflix's programming strategy. Um, >> what do you make of they're going to post their what we watch report yearly versus semianually? Is that a big deal, Felix? >> Yeah, I mean, why do they do that? >> Yeah, I think that shows a little bit of lack of confidence. Okay. You know, and uh, you know, scaling back what they share with all of us. I think, you know, there's been a lot of reporting, including by Lucas Shaw here about the, you know, drop in viewership on the second seasons of some of their hit shows. Um, and so, yeah, I think they've feeling a little bit sensitive about that. And they're also going through this phase now where they're kind of throwing things against the wall. You know, they're trying uh podcast, video podcasts. They brought in, you know, some big names, J Shetty, people of that caliber, and they're going to see if that works. you know, can they drive up some of the daytime viewing, which hasn't been great for the service? Um, you know, yeah. >> Like, who's who what are you thinking? >> No, it's just I'm I'm thinking like why are you watching Netflix in the middle of the day? >> Well, some people can't. >> No, I know. I know. Everybody has different work schedules and stuff, but um like Netflix, it's so much has changed in a dozen years. I mean, Netflix used to they used to >> I mean, Sanvine used to tout these numbers that like at any given moment in the evening, Netflix accounts for like X percentage of all traffic on the internet because that's what that's the only thing there was to stream, >> right? >> And that picture has changed so much. >> There's a lot of choices. >> Yeah. >> Um, Eric Clark, do you come on back, CIO over at Acuvest Global Advisors, um, do you buy if the stock is down? It is about 5% or so. Do you find this an a good entry point then? >> 8.4%. >> Oh, forgive me. So, it's down even more. >> Yeah. Well, the options markets were predicting this. So, you know, lots of things happen from an options markets to to somehow somehow mirror what's what people are playing. It's easy to push things around, but yes, I would like to buy a little bit more. I'm not going to get crazy. We're going to just nibble. when the when the company using the biggest buyback is nibbling, then I'm certainly going to be nibbling. And again, I always ask people, what's going to make you churn your Netflix? You know, every everybody and I would love to see Netflix do better, higher quality content. They have a big enough library at this point that they don't have to just flood the their library with stuff. Now, let's focus on quality, number one, and let's add more sports and live entertainment, number two, and that'll write the ship in my opinion. So, yeah, I would love to take advantage of it down here. It's just too cheap. And again, it's to me, utility and a staple is kind of synonymous with the same thing. And and I don't know what it would take. They've they've raised prices 5% a year on average since they started this in '08. So, that's a nice little tailwind as well. and it's still the cheapest game in town from an entertainment perspective. So, there's just a lot to like even if it's out of favor right now and now it's cheap. >> Felix, what do you think of Eric's quality comment? Because when I think of like this I I think I subscribe to all the streaming services and when when I think of the one that has sort of the lowest number of overall titles but the highest quality. Honestly, Apple is doing a really good job with that. >> Yeah, I would agree with that. And I would also say Apple really aggressively markets their shows and when they have a new show that they believe in, they put a lot of marketing power behind it. Their star power is unbelievable. >> They do. They have great casting, what you know, but they also they let you know that a show is coming. I think with Netflix sometimes they just put stuff up there and f you know, you're going to find it and sometimes I'm amazed that like a new season of a show I've watched previously is out and I'm like, I didn't even know that. is maybe because the discovery on your on your homepage or whatever is not or your home screen is not. >> Yeah, it's probably my kids messing it up with their shows. >> Yeah. No, it probably is. But that's also Netflix's fault. I mean, that's that you're not seeing it. >> Yeah. No, but I agree. Like I go to some of these streaming platforms and I'm like, God, there's so much stuff and like and I get off. But Apple, it just feels very clean. It's, you know, it's a fewer cho few choices or fewer choices. I don't know. >> You have to run soon, Felix. So, we're going to do a few more with you and then we're going to keep uh keep Eric in with us. Um the HBO side of this, I mean years ago, who who was it? Was it Ted Sarandos who said, "We want to become HBO before or was it Reed Hastings?" >> It was Ted. >> It was Ted said, "We want to be HBO before HBO becomes us." >> Has Netflix actually become HBO? It doesn't feel like it has. >> No, I think they became much more like CBS. You know, they became like the everything for everything. Yeah. >> And I think um you know, now they had to say who they want to become. I mean clearly the you know YouTube is occupying that space now and they're worried about YouTube because look at the engagement numbers. I mean, YouTube keeps growing at a faster rate than everybody else. And that's the one service out there that really is growing on its audience faster than Netflix. And I think so you see Netflix, you know, doing podcast, doing video podcast. Now they're going to throw in some short form video from, >> you know, Kai Ness and Buzzfeed, which I don't know, that seems, you know, a little bit uh desperate at some level to to get that daytime engagement up. But I think that's who they want to become now rather than playing. >> Everyone knows if you want to get daytime engagement, the Jerry Springer show. It's what we all used to watch when we were homesick from school and the price is right. So there everyone knows. >> Um what about overseas though? I is that still growth opportunities for them? >> Yeah. And I think that's you know the at some point Yeah. the US market becomes pretty saturated and you know they stop sharing their subscriber numbers. So we have to rely on the third party estimates. But yeah, I think like the US market, there's not too much more to grow there. And so you have to look for opportunities overseas and they do selective, you know, the World Baseball Classic in Japan where they get out and they see these opportunities to get more people involved. I think they're going to bring back free trials in some markets. Um, so yeah, I think you have to look at the global uh, you know, audiences around the world and that's where their opportunities are. >> Um, we're talking with uh, Eric Clark of course over at Acuvest. I want to bring into the conversation Gita Rangan. She is Bloomberg Intelligence senior media analyst joining us from Princeton. Um Gita your reaction the stock is down here a lot in the aftermarket. Do investors have it right in your view? Yeah, I I mean you know coming into this quarter obviously uh a lot of cautiousness uh you know very very muted sentiment a pretty low bar but I think investors were definitely kind of hoping for something uh you know at least with the guidance uh on the operating margin front and we didn't we didn't necessarily see that. So this really kind of feeds into this whole bearish thesis and uh you know further spooks investors about what the direction is going to be going forward and how this company is going to reinvigorate growth. I mean to be fair Carol we've seen this movie before uh multiple times and every time we've seen management kind of pivot uh and lay out uh you know new strategies. the most uh I I think the one that really comes to mind was in uh 4 years ago back in 2022 when you know we saw negative subscriber growth and then we saw them kind of lay out a plan with advertising and uh you know the password crackdown with page sharing. Um I'm just not sure that this time they have you know such clearcut levers that would necessarily move the needle and really kind of uh you know calm and soothe investor fears. Yeah, you know, it's interesting too. I was just looking at some stuff on the terminal. I mean, Netflix began testing free trials for people who have never subscribed in a number of markets around the world. Ga, is that a sign of a little desperation or just smart? Maybe a little bit of both, but I think you know just kind of given um you know the metrics that we're seeing right now, this whole concern around engagement, the fact that their revenue guidance for the third quarter came in lower than expected, the fact that they're not taking up their operating margin guidance. All of these again kind of point to maybe it's a little bit of desperation and we and you know we've seen o over the past few weeks um concerns about you know the slowing engagement in Netflix kind of trying to uh experiment with with different things you know maybe becoming an aggregator having streaming bundles on their platform integrating more live linear content and all of that basically shows that yes you know maybe something is broken uh slightly within their system you know the model might be slightly broken and they have to do something to really kind of uh juice up uh you know the growth the growth here. >> All right, we're going to hang on to Gita. Eric, thank you so much. This was really fun. We really appreciate it. Always always Eric Clark, CIO of Acuvest Global Advisors uh joining us from San Diego. Uh staying with our Gita Ranganathon. We want to bring into it uh this conversation Ed Lello too. He is of course host of Bloomberg Tech. He's out there uh on the west coast in San Francisco. So, um, come on in on the conversation when it comes to Netflix. Investors disappointed here. >> Yeah, really disappointed. And like, you know, Gas has done such a good job of explaining not just the numbers of the quarter gone and the outlook, but like history of where Netflix went and where it got to. I see three things, right? Like what's the story here? Netflix is trying to convince the market that there is like this second act beyond us being focused on subscriber growth. And it's like three buckets. One, become a broader entertainment platform. So, not just TV and movies, live sports, video podcast, YouTube creators, um, etc. games. But the whole point is like Netflix is still something you watch in the evening. What about during the rest of the day? And like reading through the the letter and Lucas's write up and reporting, it's so clear. Second budget is guys, use AI to expand margins. Um, Netflix isn't the first to say that. And then they they seem to be really trying to say, hey, we're building out a real advertising business here. If I was to sum up what's the story, it's those three things in in a bucket together. >> Yeah, Ed, I I completely agree with you there. And and one point of that, I guess tied all together, I want to throw it over to Githa, which is YouTube. I mean, what Ed is describing, minus sort of the AI and original content is YouTube. And for for years, Netflix has talked about YouTube being a competitor. But what do people watch when they're not watching Netflix and they're on their phones? They're on Instagram. They're on Tik Tok. And Gita, they're on YouTube. Yeah, and that's exactly what the Neielson Gage report is telling us quarter, you know, month after month. So, we've seen YouTube numbers, the share of TV viewing time stay pretty constant, uh, Tim, at about 13 to 14%. Meanwhile, Netflix numbers are the ones that are going down. Uh and yeah, you can talk about, you know, how maybe the war and maybe, you know, the World Cup and uh the Olympics are all kind of eating into Netflix's share of viewing time, but then that's the same story that holds good for YouTube as well. And we haven't seen those numbers really move. So, I think this is what really really worries investors because if you have a glut of AI generated content on YouTube, where will those Netflix numbers land? And I think that's the real big worry. >> Yeah. So is that what it means? Um Gita and Ed uh first to you GA when they say the entertainment in their in their letter, their investor letter, the entertainment industry remains dynamic and competitive. I mean there is so much um Ed come on in. I mean coming at all of us in terms of choices and how we spend our time and for some of us increasingly you know maybe we're putting our phones down and we're actually going outside and doing stuff. >> Yeah. And you know they go on to say in that reference to the industry meaning dynamic. We plan to stay ahead by leveraging technology to improve the service, improving monetization. I think that's the ad side of it and delivering more entertainment value. Um it's been so interesting like you know I I just I reflect you know earnings is always great to get into the numbers. It's good to give size and scope. I I really hope the Gita will tell us about you know the margins and the buybacks and their cash flow because like for ages Netflix would say judge us on traditional financial metrics some of those are really good you know uh it's hard to say you know the the the reaction is serious in the after hours just from the World Cup right there was a podcast that I've been listening to for a long time the rest is football it was on Spotify I listened to it as an audio only podcast football meaning soccer absolutely loved it um hosted by Gary Lica For the World Cup, they committed to putting it live and in video daily on Netflix. That was a really interesting product to kind of track the arch of over the course of the World Cup. But like I didn't tune into it live. I just like at the end of the day listened to it or watched it as a podcast um when I had free time. So, you know, Netflix is trying to do something really difficult, change consumer behavior a little bit as it relates to them. 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