The Netflix Warning to the ENTIRE Stock Market.

hey everyone me kevin here boy oh boy

netflix has been the canary in the coal

line of four markets when we had the q4

results and the q1 results in the first

quarter of the year and the second

quarter of the year boy oh boy netflix

absolutely crushed the stock market

because we got not only big old minus

twenty percent moves in the price of

netflix and plummeting of this stock to

the point where it was in the four

hundred dollars then was in the 300 and

bill ackman's like i'm going all in on

netflix and netflix has a temporary

rally but then it proceeds to crash all

the way under 200

uh and boy oh boy netflix has also

therefore then pushed the stock market

lower and lower and lower netflix has

been this company that everybody likes

looking forward to

mostly to see okay how bad is this

earning season going to be because if

netflix does terribly oh boy everyone

else is probably going to suck as well

and we've got some good news from the

canary in the cold mine instead of

sucking to the tune of losing 2 million

subscribers they only lost

970 000 subscribers which is still

absolutely horrible

but it's half as bad as what the market

expected and so while the market was

also expecting 17 percent implied

volatility suggesting the stock could

have gone up or down 17 percent showing

you how uncertain the market was about

these earnings the stock ended up going

up eight percent in after hours which is

actually phenomenal and this is the kind

of canary in the coal mine we actually

want to see a happy canary in the coal

mine now earnings per share going

forward uh unfortunately the going

forward estimate wasn't as good as what

we were hoping for q3 earnings per share

we ended up getting a guide of two

dollars and fourteen cents versus two

dollars and seventy one cents

but this half as bad news on that

earnings or that subscriber number was

really cheered by markets now is this a

company that tells us anything else

about the consumer is this company a

trade for the stock market is it a

currency play or is this a fundamentally

good company that should be invested in

all of those questions that i just

stated are what you're going to learn in

this video so let's go right into the

depths of this video the first thing

that you need to know is this is

earnings or the press release from

netflix for their earnings release and

we need to know that wall street has an

expectation that netflix is going to

provide and for an eps of 10 and 88

cents for this company

10.88

for this company which is currently

trading for roughly 220

means that the company is trading for a

uh price to earnings multiple a p e

ratio of about

20.22

now a general rule of thumb that i try

to follow is that you want to see a

company growing their earnings at

roughly the same number as the price to

earnings multiple now i don't want to

lose you here but let's just put it this

way okay

right now netflix is not really growing

their earnings they're not expected to

grow their earnings any more than this

year

1.2 percent in 2022

and

8.2 percent in 2023 and finally they'll

get to 18.3 percent in 2024 at least

that's what wall street is expecting

maybe they'll exceed expectations let me

show you how this works and then we'll

move on to less nuanced numbers here

because i know numbers can get

overwhelming but just to give you a very

simple understanding let's take 2023 for

example here and let's say that in 2023

they end up growing their earnings at 10

well 10

into this price to earnings multiple of

20 means you have about a ratio of two

right you're paying twice as much for

price to earnings multiple as the rate

at which the company is growing a peg

ratio of two is a tool for us to try to

compare to other companies personally i

really like that right now companies

like tesla and google are sitting

between the 1.3 to 1.5 ratio in terms of

a peg which in my opinion provides a

better value than what we could see for

netflix's ability to grow their earnings

but is this potentially just short term

is there maybe a reason why netflix is

having trouble growing their earnings

well the answer to that is yes and i'm

about to fully explain that to you

because there are some things here that

quite frankly are beyond netflix's

control but that lack of control could

end up being a very very nice positive

tailwind

helping out netflix going forward so

we'll talk about that so jumping on over

here to their press release there are a

few things that we want to pay attention

to

most important is there is a risk in

this company of what i call tech memory

so tech memory means that when you have

a tech company you're used to a company

growing at like 30

every single year and that lets people

pay really high valuations for these

companies uh and unfortunately tech

memory is something that you do not want

to have and so therefore i think that's

a risk at netflix is that people think

oh this is such a high growth company it

really isn't anymore they're not really

growing that incredibly anymore uh

they're growing really under 10 in fact

you could see that here

year over year their growing revenue is

about 9.8 in q1 year over year that has

slowed to 8.6 in q2 and they're

expecting that to slow even further to

just 4.7

revenue growth in q3 year over year

that's not great because now you're

paying a lot of money for a company that

isn't really able to grow revenues as

well as it should and there are quite a

few reasons for this but first i want to

start with this as a potential reason

here in the asia pacific region

revenue grew 23 percent

year over year excluding foreign

exchange we'll talk about foreign

exchange a bit that's actually great

when we think about that for a moment

it's like wait a minute why is there

headline forecast that they're going to

be growing less than 5 percent but

they're growing 23 percent in the aipac

region well what this means is that the

u.s and canadian markets and maybe even

the euro markets are growing

substantially slower than the apac

regions but the asia pacific regions are

really important to pay attention to

because the average revenue per customer

is very different i want you to think

for a moment how much do you think the

average revenue per customer is

in the united states canada

and europe

and then how much do you think the

average revenue is

now compared to the asia-pacific region

okay well think about those numbers now

i'm going to give you the first one in

the united states and canada we're at 15

and 95 cents uh in average revenue per

membership okay average revenue per

membership

15.95

per month i'm going to skip the euro for

a moment how much do you think

the asia pacific region is is it 10 less

20 less 30 less well folks it comes in

at just

8.83 cents so it's almost

half as valuable so yeah you're growing

substantially more here

but that's only half as valuable as the

growth that you have in the united

states and canada

the same is true hate to say it for

latin america which latin america is

where netflix is now testing their whole

like hey pay us a little bit extra and

we'll allow you to share your password

plan which personally i think is like

dude if i was in latin america and i

wasn't making a lot of money i would not

even pay an extra dollar per month to

share my password i would just share my

password now maybe they have like

special tools for being able to limit

password sharing but that's very

difficult to do in fact to limit

password sharing the bloomberg terminal

for example gives me this biometric

authenticator that i have to carry

around and i even put an apple air tag

on it because it's so annoying when i

don't have it and i lose it so and

that's also why i've tethered it to this

backpack here it's so so that way it's

like really obvious where it is because

i need it so it's very difficult it's

almost impossible for me to share my

bloomberg login password but netflix

come on they're not going to put people

through that crap anyway this is also

not profitable enough to send people

biometric authenticators right so i

don't know how they're going to pull

that off but if you look at latin

america

unfortunately they're not faring much

differently their average revenue per

user on a monthly basis is eight dollars

and 67 cents so even though you are

seeing growth in the asia pacific

regions and latin america you're not

actually growing into a more profitable

customer and if you're losing we don't

have a car we don't have the count of

this netflix doesn't give us the account

of this but if we're losing more of

these customers and gaining more of

these that's not great because you could

lose one customer here and you could

gain two customers here and this would

basically be a wash yet on the headline

it would be like oh yay netflix is

growing uh not necessarily right so

that's really important to remember is

that netflix is now i hate to say but

there's a chance that covet has somewhat

saturated netflix's growth in the

profitable regions and so now you're

kind of expanding into the unprofitable

i shouldn't say unprofitable but the the

less uh profitable regions right because

you're still producing the same content

to maintain your u.s users now you're

just let's say dubbing it in in you know

indian languages or or whatever

so uh netflix did increase their prices

by the way uh in march on march 30th

they increased their prices uh a buck to

a couple bucks depending on which plan

you were in and netflix suggests that

that has actually led to churn remaining

slightly elevated

they do argue in their earnings call

that is very typical for churn to be

elevated after uh you raise prices now

something else that i noticed here is

that their uh asia-pacific average

revenue uh per user in the aipac region

was minus two percent uh and they say us

that actually has to do because of india

so uh whereas korea and australia helped

actually boost uh their average revenue

per user in the aipac region which the

apac region again is already 50 percent

of the united states right but what's

wild here folks is that

india is where they're seeing a massive

amount of user growth

but they're having to sell the service

at a cheaper price than even in korea

and australia and to some extent this

makes sense just considering you know

average average per household income per

capita income or household or per capita

income those are two different things

right per capita is per head uh and uh

there could be multiple heads in the

house right anyway so okay uh now we've

got a touch on foreign exchange so we

know we're growing but we're growing to

uh not such a desirable uh or i

shouldn't say desirability but to a

lower income demographic now we've got a

shift to another big thing that's really

hurting netflix but could end up being

really good for netflix and could end up

creating a big opportunity for you as an

investor i do want to mention though

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okay so what do we want to take a peek

at here

regarding some of the issues that

netflix is running into keep in mind

we're also going to be talking about

trade desk towards the end of the video

trade desk is a company that i'm a big

fan of but we've got some bad news for

trade desk that came out from netflix uh

at least it's offset by yes your ability

to use that coupon code for 50 off up

until july 28th okay enough of that now

let's focus on what we have on screen

here so what we have here is fascinating

so first they mentioned that we have

high exposure to this unprecedented

appreciation in the us dollar because 60

of their revenue comes from outside of

the united states and so even though

they're forecasting only five percent

revenue growth we saw that earlier when

i made the sad face

that actually would be 12

revenue growth if they had a neutral

currency

so let me briefly explain that without

trying to get too complicated basically

if all of the growth that happened

around the world was happening in u.s

dollars

netflix would actually be growing

revenue at about 12

but unfortunately because they're taking

money in let's say uh ruby's and they're

taking indian rubies in and so they take

the rubies in and then they have to at

some point at the end of the day or week

or month or whatever convert it to

dollars those dollars are coming over

less valuable than what they're actually

charging for in a dollars set originally

because this price is set that's

somewhat compared to dollars originally

but by the time it actually comes over

netflix sees less dollars and so

as long as the dollar keeps going up

netflix is probably going to continue to

have pain

but there is also a chance of an

opposite approach happening here now we

just did a big lecture yesterday on what

i call the great dollar short and this

is potentially shorting the dollar

because there's a chance that the dollar

might actually fall once we start seeing

that inflation is more transitory but

that's a whole different topic or for a

different day maybe i'll make a video on

that maybe not but it's in the course

member live stream from yesterday in

case you want to see it and so what's

wild here is that if the u.s dollar

starts falling so the dollar goes down

then instead of having headwinds for

netflix you're actually going to see

tailwinds for netflix as a falling

dollar actually makes them more

competitive because again

60

folks that's more than half of their

revenue comes from outside the united

states that's going to be really

critical going forward but then you have

to ask yourself is netflix still worth

it

if you're paying 20 times earnings for a

company that even on a currency neutral

basis is only growing revenues not even

bottom line

by 12

and that's obviously in this ideal

scenario of being able to to have you

know currency neutrality which we just

don't have okay so risk number one with

netflix is let's just do a quick recap

okay risk number one is that you have

what i call the tech

memory right

in terms of like the broader market hey

like broadly netflix is great it's a

great canary in the coal mine that says

broad and smiley face sorry it's cut off

but anyway uh in terms of actual like

netflix itself you have tech you have

headwinds of the tech memory which is

not great so one tech memory that's

people paying tech valuations for a

company that's not growing as fast

anymore unfortunately you have a dollar

issue with a strong dollar right these

are your downsides

uh for netflix so down and flx because

it's not a tech company i mean like to

some degree it still is it has

technology obviously but it's not

growing like an emerging tech company

right

strong dollar hurts them the next issue

that you have

is ads

uh and then obviously uh the one that we

also mentioned which i didn't include on

this list is the fact that you're having

more growth

more growth

at

lower

average revenue

per membership right so these are four

big dangers that you have and we've

talked about most of these but we

haven't yet talked about this one here

and that folks is a biggie because see

netflix now has partnered with microsoft

sadly not trade desk even though the cfo

of netflix went over to trade desk trade

desk was not able to uh lure in netflix

which is unfortunate and so good news

for microsoft though microsoft got the

partnership with netflix it is an

exclusive partnership in fact i can show

you where that exclusivity is in the

earnings call they are still partnering

with amazon

you can see that here in the earnings

call they're still partnering with

amazon for aws so that's actually good

to know for

uh for amazon but here you go will ads

be sold exclusively on microsoft the

answer to that is yes and they chose

microsoft because of their technical

capacity for go-to-market opportunities

privacy and there was briefly a mention

of gaming but this was not developed on

by any of the uh

by by any of the executives it was more

that was a question that was asked of

like hey like what other opportunities

could we see in the future here it is

can can the partnership with microsoft

involve cloud and gaming and perhaps

other things over time and they

mentioned that yes but we didn't get any

other kind of color on that so i thought

that was like an interesting potential

direction with this partnership with

microsoft but but for me that's what i

just call like noise it's the icing on

the cake i can't value that i'm just

gonna like okay cool maybe whatever but

what we have to talk about is ads ads

are everything

uh when a company that has

no ads when you pay for their membership

is deciding to do

the following

our lower priced advertising supported

offering will complement our existing

plans which will remain ad-free

okay so

what they're trying to do is make money

from people who are price sensitive

so this is what every company wants to

do every company wants to be able to

sell you the product for the absolute

most of the money that you're willing to

pay

so for example if you are willing to pay

ten dollars for something but the price

is eight dollars the company lost two

dollars because they didn't capture that

eight dollars if somebody else is only

willing to pay six dollars for something

then the company loses that potential

six dollars if it's profitable obviously

to sell it at six dollars

best case scenario the company is able

to say let's sell the ten dollar product

to the person willing to pay ten let's

sell the six dollar product to the

person willing to pay six that way

they're getting most customers right and

so that's really what netflix is trying

to do here they're trying to say hey

look if you want to pay 15 bucks a month

and have a you know premium quality and

no ads great you can do that but how

about we now introduce a new feature

which we don't know the pricing of this

yet so i'm speculating this we're going

to introduce something at let's say 4.99

and it'll be supported by ads okay great

maybe you'll be able to get a larger

base here right but what i question is

how much value are you actually going to

have in what's known as in the

advertising world cpm clicks per ml

right

this is how ads are charged and uh the

way you can kind of think about this

is very simply

think about youtube okay youtube pays

about let's just say on average

somewhere around ten dollars as a cpm

for some content like maybe finance it

could be 18 it could be 20 it could be

25

but for generic entertainment it's

usually between 5 and 15 so let's just

go with

ten dollars as a cpm

if netflix

now gets one million users let's get rid

of the dollar center let's say they get

a million users and each of these users

watches a hundred ads well that equals

100 million ads right

well 100 million ads

divided by

a thousand which is how we get to this

cpm right so now we have to divide 100

million by a thousand which if we take

three zeros off of that would bring us

down to not ten million not one million

but a hundred thousand

one hundred thousand

one hundred thousand there we go paid

mill slots basically

times the ad rate of 10

means netflix would stand to see about 1

million dollars of revenue

so

if you had

1 million users

watching 100 ads which is three ads a

day

maybe netflix would make a million

dollars

let's now assume that all of that is 100

profit

let's compare to their net income oh

their net income in this quarter was 1.4

billion dollars and it was 960 or the

forecast is 961 million dollars so a big

decline there in net income forecast but

wait a minute

even if a million new users

watch a hundred ads so three ads a day

that's only an extra one mill which is

like less than one tenth

of one percent of their net income

assuming this is all profit after the

microsoft split

and when i say microsoft split i don't

mean stock split i mean like

microsoft is going to take some of the

money as a commission for placing the

ads right

okay so in my opinion

that's really low

and there are some serious risk factors

about netflix going to an ad supported

model

the first risk factor is that what

happens if people like me

pay 15 bucks a month for netflix because

i am but then i'm like dude you know

what i'm watching so little netflix let

me just go down to the 499 option

and then when i watch netflix i'll just

watch the three or four ads or whatever

the random time i watch netflix see the

beautiful thing about this model is they

make 15 bucks whether i'm watching or

not here yeah they make 4.99 whether i'm

watching or not but that's cpm they only

get presumably if i'm watching and if i

ain't watching and they're charging you

4.99 or a buck 99 or worse they're

giving it to you for free then the ad

play for cpm ain't working unless people

are constantly watching

so i am personally not enthusiastic

about people going to this

or netflix going to the cpm model

because it could lead to downgrading by

by existing higher revenue users and it

could also mean that even if people

watch a lot initially when they taper

off and watch less i don't see this

actually moving the needle on their net

income i think it's a terrible idea

and i don't know how they're going to

continue to support their crazy expenses

which they have

on on on production which their expenses

for production are going up they

mentioned a 10 to 15 percent impact

because of covet but look at this they

grew total revenues uh in the second

quarter compared to the first quarter at

1.3 percent but their cost of revenues

went up

9.4

the technology uh division also went up

almost 10

their gna stayed roughly stable at about

a three percent increase and so we're

seeing a company here that is spending

more money

on on one hand so you're spending more

money to produce content

but on the other hand you're also

potentially selling this product to a

less valuable user base the asia pacific

use region latin america

and you're also

going to this ad-supported model which

in my opinion has very little chance of

being anywhere near as profitable as a

monthly subscription because the monthly

subscription doesn't rely on people

actually watching remember folks the gym

membership model what does the gym rely

on the gym relies on you

not going to the gym it relies on you

not using the service it just wants you

to pay the 30 bucks a month and not go

because then the gym isn't overpopulated

that new guests are like oh these

machines are available and you pay a

sticky subscription and you spend your

money now look balance sheet-wise we're

decent here we've got about 7.8 billion

dollars in current assets minus about

6.3 in current liabilities not

considering deferred revenue that gives

them about 1.5 billion of free cash if

they burn about 300 per quarter uh in

millions that's uh that's about five

quarters of cash eventually if they keep

burning money the way they do uh on

their cash flow statement here

eventually they are going to uh need to

raise money but because so far they've

been cash flow negative

now i do want to briefly just touch on

the trade desk partnership so obviously

they uh partnered with microsoft and not

trade desk i do think this is bad news

for trade desk because uh

you know and look trade desk and netflix

i want to be clear about this both of

them could end up doing very very well

because we might just be at a nasdaq

stock market bottom we could be right

there and all of these companies are

going to do better so by no means do i

want to like make this video and like

poop on netflix and say oh it's not

going to make you money it's just is it

a fundamental play or is it a trade

right timing is a trade fundamentals is

like do i really have high conviction in

this company me personally i don't it's

not a company i would invest in what

about trade desk well this miss on the

netflix deal is not great because there

was a lot of opium built into the stock

price on that and i know that's not

fundamental that's a trade and that

trade did not work in that sense uh but

what does it mean going forward well

it's probably gonna be harder to get

that disney partnership now they already

have a partnership with disney but they

don't have a disney plus partnership

although i think disney plus is gonna be

a little smart and they're gonna watch

to see what happens with netflix i don't

think the cpm model is going to work and

disney would be very smart to go yeah no

we ain't doing the cost per ml you know

cost per ad model that's crazy anyway my

thoughts thanks so much for watching

we'll see in the next one