Closing Bell - Closing Bell Overtime: Netflix Reports Q2 Numbers With An Update On Its Ad Business; Managing Red vs. Blue Portfolio 7/18/24

Episode Date: July 18, 2024

Netflix shares fell immediately following its Q2 earnings report but slowly pared the losses over the next hour. Former NBC Entertainment Co-Chair Ben Silverman breaks down what the latest numbers mean and the broader state of the entertainment industry while DoubleVerify CEO Mark Zagorski, a ad partner of Netflix, breaks down the ad tier. Plus, Evercore’s Julian Emanuel on managing a red vs blue portfolio as the election draws closer.

That bell marks the end of regulation. United Wholesale Mortgage ringing the closing bell at the New York Stock Exchange. Hudson River Park doing the honors at the NASDAQ and stocks lower across the board today, though NASDAQ outperforming the index's worst day since 2022. That was yesterday. And while small caps got hit the hardest for a change, that's a scorecard on Wall Street. But winners stay late. Welcome to Closing Bell Overtime. I'm John Fort with Morgan Brennan. Well, Netflix results already out. We're already going through them for you. That's going to kick off big tech earnings after a major rally so far in 2024 in that name. We're going to bring you those results momentarily. And we've got a great lineup to analyze those results, including content expert Ben Silverman and the CEO of ad tech company and

Netflix partner Double Verify. Plus, market strategist Julian Emanuel joins us to break down the sectors that would benefit from a Democrat or Republican win in the 2024 election as questions swirl about Biden's future and Trump gets ready to speak at the RNC this evening. As we await Netflix results, let's bring in our panel, Paul Hickey of Bespoke Investment Group and Mark Mahoney of Evercore ISI. Mark covers Netflix with an outperform rating, $700 price target. Mark, hold on. Those results are out. So before I go to you guys, let me get to Julia Boorstin on those Netflix results. Julia. Netflix beating on the top and bottom line, reporting earnings per share of $4.88. That's ahead of estimates of $4.74.

Revenues also coming in ahead of estimates $9.56 billion ahead of estimates $9.53 billion. And then looking at the subscriber numbers here, the company far surpassing expectations with 8.05 million subscribers versus the 4.8 million that was estimated. We do see shares dropping about 4% in after hours trading. We're going to continue to dig through here and get back to you with more. John? Looking forward to that, Julia. And while we wait for more of those insights, let's get to Paul and Mark. Mark, a little surprised that based on these numbers, which sound like they beat at least the headline expectations, the stock is down. But there's always the whisper numbers and the question of what it has to hit in order to justify the

valuation where it is here. I think that's right. It's also one of the stocks, I call them the super six that have traded up space 30 to 60% year to date. So if you were going to look for a high bar stake, a high bar stock, it's right here. It's with Netflix. These subscriber numbers pretty much hit the whisper that was out there. The revenue came in a little bit light. So versus the whisper. So the question is going to be, are they having any issues ramping up advertising? I think they are. I think I'm pretty confident they'll be successful with the long term. It just may not grow as quickly as the street and frankly, the company would like. This looks like a pretty decent print to me. And if you're a bull on Netflix, you probably got greater confirmation in the bull thesis.

What I haven't seen yet, unfortunately, is the guidance that they gave of the guidance. Yeah. With that stock down about four and a half at the moment, let's get back to Julia Borsten, who has it. Julia. Yeah, the guidance is really the reason why we see this stock now down 5% after hours trading. The company saying that it sees its third quarter revenues at $9.73 billion. That is below the consensus estimate of $9.82 billion. Also guiding to third quarter earnings per share of $5.10 versus $4.75 estimated. So the earnings would be above estimates, but the revenue's looking at below estimates. And this is a company that is really beating expectations on subscribers, consistently

looking back at the past couple of quarters. So the question is, if the company is beating expectations and subscribers, why is its revenue guidance for the third quarter below estimates, especially considering that it's going into Q3 with so many more subscribers than anticipated? It really seems like that's at the heart of the stock trading lower right now. OK, Julia, thank you. Paul Hickey, I'll go to you on this one, especially as it does look like they also say that full year revenue guidance is going to be 14 to 15 percent. That's up from 13 to 15 percent. But we do know Q2 and Q3 do tend to be seasonally the weaker quarters for Netflix in general. Yeah, exactly. I mean, former President Trump once said something about walking down Fifth Avenue. He could do whatever he wanted and people

would still love him and vote for him. Netflix could say whatever they want in their July report and the stock goes down. Historically, they've only gone up in reaction to the July report 23% of the time in its history as a public company. So it normally declines in reaction to earnings. And for most other quarters, it also does as well. The only quarter where it typically reacts positively is after reports in January. So these are all short-term moves. I mean, you just look at a long-term chart of Netflix, and it shows that these one-day reactions aren't too much to get excited about and or worry about.

And the longer-term picture is Netflix is still the dominant player. And others, as other companies are looking to exit the space or struggle, it's in the pole position. So I think in short term reactions, we shouldn't overreact to them here. OK, that makes sense if we're just talking about Netflix. But Mark Mahaney, the Nasdaq overall has had a couple of rough days, especially yesterday. And I wonder to what degree a name like Netflix that has had such strong performance overall was part of the Magnificent Seven to an extent that that group is still together and the members aren't going solo. Is this going to give the market any confidence given this guidance number? I don't think so. And finally, this thing is kind of on its own. I think the term is sui generis in Latin, but, you know, whatever. There's no real read through, except that just from a stock perspective, look, the bar's high. And again,

you've got these any names that have materially outperformed the market year to date. Google's in that list. Meta's in that list. Amazon is in that list. Spotify is. It just tells you you need to have clean, beat and raise numbers for the stock to hold. I think just for the stock to hold. That's where the bar is on some of these names. So, you know, I like Netflix as a stock. It's not one of my top picks because it's not dislocated. Now you bring it down to 600. I'd get a lot more enthusiastic about it. But I still think it's a great running away with the pack story. What I want to hear on the earnings call is let's talk sports. Let's talk about gaming. Let's talk about this advertising

revenue ramp. That's what I think long term bulls are really focused on. And if they do that, you'll probably find a lot of people buying the stock tomorrow on this kind of correction, just like they did in the March quarter. Yeah. Paul, I mean, I realize we saw everything kind of take a breather with the exception of energy with this market today. All the major averages finishing lower, the S&P 500 down seven tenths of one percent, the Nasdaq down seven tenths of one percent, even the Russell taking a breather after the dramatic rotation we've seen of the past call it weak now, tech really leading to the downside. How does this set us up for this next stage for tech earnings, for broader earnings, for this market rotation?

How does it speak to that? So I think the rotation that we've seen will continue, but you called it a dramatic reversal. The Russell 2000 closed 4.4 standard deviations above its 50-day moving average on Tuesday. That's not only the most overbought reading in the Russell 2000's history, it's the most overbought reading that any major U.S. index has ever had. So that type of move that we've seen in a five-day period was truly unprecedented. And when you've seen 10% moves in the Russell 2000, what you've seen is you've seen longer term, six to 12 months later, the Russell has performed very well. Six months later, a median gain of over 11%. Over the next year, 16%. But over the next week, the median return of the Russell 2000 following those moves

was a decline of 3.5%, with gains only a third of the time. And even the S&P 500 tended to be weak in that short-term reaction. You can't have dislocations like we've seen in the last week without causing problems and some unsettledness in the market in the short term as people square up their positions. Longer term, as you asked, Morgan, we are in what is historically the weakest three-month period of the year, starting from the middle of July to the middle of October. So that's something for investors to be aware of, as the S&P was at overbought levels for every day since the 1st of June through today. Okay. Paul Hickey and Mark Mahaney, thanks for kicking off the hour with us.

Thanks. Thank you. With shares of Netflix down about 2% right now. Let's get back to Julia with more on Netflix. Julia. Morgan, some more detail here from the company as it really pivots to focus more on the ad business. The company announcing that it is going to be phasing out the basic plan.

That's the basic ad free plan starting now in the U.S. and France. They've already started that in the U.K. and Canada. They note that doing that phasing out the basic plan has increased the ads member base by 34 percent sequentially in Q2. But here's an essential thing here. As they move away from this ad supported basic plan and really push people to adopt ads. They point out that advertising is sort of a near-term challenge, long-term opportunity. They said, we do not expect advertising to be a primary driver of our revenue growth in 2024, 2025, saying the near-term challenge and medium-term opportunity is that we're scaling

faster than our ability to monetize our growing ad inventory. They talk about investing and the tech capabilities and that they go on to say we're confident that advertising will be a key component of our longer term revenue and profit growth. But they're describing here the challenges near term. Back over to you. All right, Julia. Thank you. Can I ask a question real quick? Just Julia, is that them essentially saying they now have more space to sell ads and they have people willing to buy them at a price that they'd be willing to sell them at? I mean, is that the way I should read that? Well, I think it's also what you're getting at here is there's a disconnect between the ad inventory that they have in terms of the number of people who are subscribing to the ad supported option and the advertising itself that is a good fit for those audiences. Now, one thing I've heard a lot from the ad industry,

from executives who wanted to buy advertising is for a long time, they wanted to buy more ads on Netflix than Netflix could serve for them. And so there was a disconnect in that way. But here, it sounds like they are they are scaling faster than their ability to monetize the ad inventory. So I'm sure there'll be some questions about it on the call, but just to try to dissect that language, it seems like that there maybe is a disconnect between the supply and the demand. And it sounds like the demand maybe is not quite meeting the supply. But again, this is one of those things where the ad industry is watching and waiting to make sure there's an audience that's large enough for the ads they want to buy. Okay. Julia Boorstin, thank you. Something we're going to dig into more here through the next

hours. We do count down to that conference call in just about 35 minutes. Let's turn now to Mike Santoli for a look at the market action. How earnings season could either confirm or change the narrative around this market rotation. Mike. Yeah, Morgan, it suggests that this rotation away from the big Nasdaq type winners and into the rest of the market has at least some fundamental grounding. So this is the earnings revision trajectory for each of these different indexes. So it's the percentage of earnings estimate changes that are up among all those changes. And so you see right here, the NASDAQ has been vastly stronger, the NASDAQ 100,

than either the S&P 500 or the Russell. But the NASDAQ 100 has curled lower, so just becoming less positive on an incremental basis, whereas for S&P and Russell, they're actually positive off of lower bases. So that implies some kind of convergence of earnings growth, or at least not so much a hyper-concentrated supply of reliable earnings growth in those NASDAQ 100 names. So it does indicate that that's part of

the story here for why money has flowed to the rest of the market, though it has done so in such a fast-twitch way. It's unclear. It's all about repricing earnings expectations, a little more about market mechanics. The exposure is getting really lopsided in favor of the big Mag 7-type names, and all of a sudden that dam breaks and people have to rush for the rest of the stocks. I mean, you just touched on this, but that's my question for you. How much of this is technicals versus fundamentals? Is it a situation where the fundamentals now have to catch up to the technicals to confirm this rotation?

Yeah, they do. And they kind of always the market is always going to attempt to sort of price in the marginal move in the fundamentals. But the problem is it often overshoots along the way in either direction. So I think that's what we're in right now is figuring out how much of this is really just tactical positioning that got flushed out in one direction and how much of it is actually going to be either confirmed or refuted by, you know, the bulk of the earnings reports we're going to get over the next several weeks. All right. And we'll see you again in just a little bit, Mike. Thanks. Meantime, Intuitive Surgical and PPG earnings are out. Stocks moving in opposite directions. Kate Rooney has the numbers. Kate. Hey, John. Yeah, let's start, Intuitive Surgical, and PPG earnings are out. Stocks moving in opposite directions. Kate Rooney has the numbers. Kate?

Hey, John. Yeah, let's start with Intuitive Surgical. Shares, you can see, up more than 6% after a strong beat here in Q2. EPS, we'll start with that number. 24-cent beat coming in at $1.78 for the quarter. And then the top line also stronger than expected, $2.01 billion. That was a beat. Procedures, the Da Vinci procedures grew 17 percent.

Compare that to a year ago. And then more of a mixed picture if you look at PPG Industries. The guidance also looking light. EPS, though, was a beat. $2.50. That was a two-cent beat. And then revenue was a miss. $4.8 billion there.

And then Q3 EPS looking like at the midpoint, it's going to be a miss there. Two dollars and ten cents to 220. That was lower than the street was expecting. Shares down more than three percent here after hours, guys. Back to you. All right. Kate, thanks. Huge one year run for Intuitive Surgical back when people were on the weight loss drug craze. Kate, thanks. Now we're going to have much more on Netflix earnings and the stock reaction throughout this hour. Up next, former NBC Entertainment co-chair and Hollywood producer Ben Silverman is going to join us with his take on the Netflix quarter and the company's content strategy. Plus, Chris Heisey from Bank of America is out with a new prediction for the market for the second half and beyond.

His bullish thesis may surprise you. Also, the term he uses for it, he's going to join us to break that down. Overtime is back in two. Welcome back. Netflix delivering a beat on its top and bottom lines just moments ago. Sure is falling, though, on late third quarter revenue guidance. Joining us is Propagate content chairman and co-CEO Ben Silverman. He was also formerly co-chairman of NBC Entertainment and executive producer of The Office. Propagate Content will release also a movie titled Incoming on Netflix in August. It's great to have you on, Ben. And what I love about having you on, on the heels of Netflix earnings, is that you can inject some insight into the content piece of this puzzle, which we know is an area where so much spending has happened in recent years. When you look at Netflix and

what's been doing particularly well, it isn't just their original content. It's also their licensed content, too. So how does it speak to the picture we're seeing and the spending landscape? Well, I think we had a big retrenchment. We obviously had a strike, which actually delivered a lot of bottom line positive results for many of these big companies. But I think watching what's going on with the Paramount sale that will hopefully conclude with David Ellison and Skydance is going to be really great for the content market in general, because we've had a couple of the traditional players sitting on the sidelines really cutting, you know, way too much in my mind, because they're going to need original

content to compete. And then you have other players, specifically Apple and Amazon and Disney, who are in multiple businesses that their content drives, right? The content of the services business inside Apple drives so much other business for their hardware and other elements of their company the same way that Amazon's Prime business drives more usage and more purchasing through their storefront. And I think Netflix actually is going to be the really most pure play player in the space and only has upside in starting to monetize their content through commerce outside of their consumer commerce and growing subscribers, but in building brands up the shows they own. And then licensing has always been part of the television ecosystem.

You know, the days of hitting the holy grail of 100 episodes off a broadcast so you could syndicate your shows, which, you know, helped me a lot in my life, now have moved into the streaming wars and the content acquisition of licensed content like Suits, like The Office, like Friends, has really driven up new opportunities for rights holders and studios that own those. But you need original content to keep the customer happy. Okay. How does live programming and sports factor into this as Netflix begins to dip its toe into that realm? Well, I think Netflix is starting to look a lot like TV, right? They're starting to look like TV in general. They've got kids programming. They've got foreign language programming.

They've got young adult programming. They've got dramas language programming. They've got young adult programming. They've got dramas, comedies. And now the next piece of that, obviously, is live sports and live events. And I think they've dipped their toe in it and now are going further as they invest in the NFL and other potential sports franchises down the road. And I think that you'll see what they've done so well. We make Untold for them arguably the best non-scripted sports documentary series in the road. And I think that you'll see what they've done so well. We make Untold for them arguably the best non-scripted sports documentary series in the world. And I think they've done really well with sports adjacent content. So they felt confident enough to go

into live content. And I think you'll see more of it. So Ben, here's my question about the business and give me your perspective as somebody who's sort of in it. It seems like the answer on revenue to, hey, these subscription plans are high price and the services want to continue raising the monthly fee was, well, now that there is an ad supported version, people won't turn off of the service entirely and just come for the series that they like, they'll turn down to the ad-supported plan, and all this revenue will come in from there. But it sounds like this quarter we're hearing that Netflix has more ad inventory available than they have buyers at the prices that they want to charge. So how does this get resolved?

Does Netflix have to be choosier about the amount of content that it buys or does it have to stop raising subscription prices if the ad market goes through a slowdown? Well, I think the market will dictate. But one of the elements is that Netflix has really kept a big premium on how they charge for ads that are very much like traditional television ads. And they'll have a lot more runway. And I heard what your teams were saying prior about, you know, their forecast for this coming later in their lifecycle. But you've got to think about scale, right? Netflix will have tremendous scale, but it's nowhere near Amazon scale today, right? Amazon scale is much bigger because of how that prime customer is subscribing at a huge volume that they don't really tell us about. And when you think about it, when Netflix gets to 400 million global subscribers or whatever the numbers will be based on this incessant growth they seem to be able to deliver on, they're going to be able to monetize those

audiences and those consumers. And if they're trying to hold on to $100,000 CPM, cost-permitted advertising, or if they're going to migrate down to $50,000, it's all found money. It's all new incremental cash for this company and for all these companies who hadn't allowed a single dollar of advertising revenue into their business. And I guess it's about the matchup for them today. I think they're probably holding pricing on the ads because they're losing the potential subscriber revenue. And once that calculus works for them, they will unlock, I think, even more value through it. Televine was built, they'll sell. Yeah, we'll see how long it takes those lines to cross.

And of course, what they say on the conference call. Ben Silverman, thank you. Thank you. Well, still ahead, we're going to talk about Netflix's evolving ad tier strategy. Talk more about it with the CEO of Netflix ad partner, Double Verify. And more twists in the presidential race today as President Biden's future on the ticket is called into question again and as former President Trump gets ready to address the RNC. Up next, Evercore's Julian Emanuel breaks down the red

and blue portfolios with a look at which parts of the market stand to benefit from the 2024 outcomes. Welcome back to Overtime. Former President Trump to give his keynote speech tonight and accept the GOP nomination at the Republican National Convention. This comes as more reports question President Biden's future on the Democratic ticket. Let's bring in Julian Emanuel, Evercore ISI's chief equity derivatives and quantitative strategist, who recently published a note on what a Biden or Trump win could mean for your portfolio. Julian, before we go into the politics part, I got to back up and talk about the overall market for a minute, because exactly a month ago we had you on when you raised your S&P target to 6,000.

Right now we're at around 55, 45. You said the growth trade still had more room to run. Since then, we've seen this rotation out of the MAC 7 into small caps. But then that looks shaky now for a couple of days. Can the S&P hit 6,000 while rotating into small caps if that continues? We actually think so, John. The internals of the market are very healthy. Things that people sort of the second derivative advancers over decliners. Very, very healthy. And frankly, some of this action away from the mag seven as sort of uncomfortable as it has felt is ultimately, we think, going to be healthy.

Look, if you look at the last several months, we've literally gone up in a straight line until the last three or four days. So to us, you know, we're not bothered by this pullback here. We think ultimately it's going to be a buying opportunity. But frankly, when you look at the political situation and the backdrop, the escalating record rhetoric in light of this straight line move and the rotation, which has unnerved some investors, there's likely to be more volatility before that next high value buying opportunity emerges. Yeah, Julian, I mean, Netflix is sorry. NVIDIA is arguably the poster child of the rally. We saw it get smacked a couple of days ago when former President Trump made some comments about Taiwan. And then there's President Biden, who faces criticism for not being pro-business enough. Depending on who's winning, is there

enough stability in the market to march higher with that kind of consistency? Well, we think so. And actually, if you think about it, right, we all know that the only thing that Democrats and Republicans seemingly have been able to agree on for the last year or two is being tough on China. Now, in a lot of ways, it's surprising that that rhetoric hadn't amplified until now. Obviously, the fact that the Republican convention is this week. And as you mentioned, former President Trump is going to accept the nomination tonight. And obviously, the issues going on within the Democratic Party have been catalysts for upping of that rhetoric. But again, the stocks themselves might not have responded in the way that they've done the last couple of days if they hadn't advanced so much in the last really several months to begin with.

It's not just who assumes the Oval Office coming out of the November election. It's also what the makeup of Congress looks like. Right. So we just we just had it up on the screen right there. Red versus blue portfolio. I would add purple in there, too. And historically, there's this narrative in the market that if you have that uncertainty is good, right, for the market. And if you have a government that is mixed Republican versus Democrat, maybe a Congress that's the opposite party of the president, that's good for the market. Is that actually true? How does that factor into how you're gaming out the different investing possibilities here? In the panoply of investment memes, that could be one of the biggest misnomers there are. And I

would suspect four years from now when we're talking about this, people will still be amazed. But if you look at 100 years worth of market history, unified government, when you have one party in control of both houses of Congress and the White House, outperforms divided government by almost 300 basis points per year. It's really quite simple, but very effective. What's the bond market telling us? And how is that, I guess, giving its cue to the equity market here as you do start to see the possibilities priced in? Well, what's interesting is is the narrative a couple of weeks ago when it was clear that Trump's candidacy was gaining momentum in the eyes of investors, certainly coming off of that debate on June the 27th was the inflation story was going to take hold again. Bond yields would go higher. And

actually, that didn't happen, partly because the CPI on the 11th surprised to the downside, which we think is going to be part of the unfolding story. But really, because again, there's the push pull between an economy that is slowing and a Fed that is ready to cut rates. And so for us, the bond market is actually not telling that much of a story and is probably one of the places that are perhaps more stable than otherwise we're seeing in the volatility in the equity market. All right. Julian Emanuel of Evercore ISI. Thank you. Thank you. Thank you. Speaking of politics, get the QR code. There it is.

That leads in very nicely to the latest installment of my On the Other Hand newsletter. This week's debate is President Biden's plan to cap rent increases at 5 percent annually. A good way to help Americans fight inflation or is a government overreach? You can scan that code or type in CNBC.com slash OTOH to join the conversation. Well, after the break, searching out yields, Mike Santoli looks at the setup for dividend stocks and if they could see a boost as Treasury yields do pull back. And check out pool supplies company, Leslie's. It's getting crushed today. Another potential red flag for the consumer comes, what, a couple weeks after its peer also warned. It slashed its full-year outlook, citing weather and concerns about big-ticket discretionary spending.

Shares down more than 30 percent today. Overtime, we'll be right back. Welcome back. It's time now for a CNBC News update with Deirdre Bosa. Hi, Dee. Hey, Morgan. President Biden is, quote, soul-searching now about dropping out of the presidential race. That is according to a Reuters report, which says the president is taking calls to step aside seriously

and that multiple Democratic officials say his exit is just a matter of time. NBC News has not independently confirmed the report. Meanwhile, the president's student debt relief plan designed to lower monthly payments for millions of borrowers has been blocked. An appeals court granted a request by seven states to put on hold parts of the debt relief plan that had not already been blocked by a lower court judge. And the deadpan master of sitcoms, Bob Newhart, has died. The accountant turned comedian first gained fame with his 1960 Grammy winning record, The Button Down Mind of Bob Newhart, the first comedy album ever to hit number one on the Billboard charts. He went on to star in the Bob Newhart Show in the 70s and Newhart in the 1980s.

His publicist said the legendary comic died this morning in Los Angeles. He was 94 years old. Back to you guys. All right, Deidre, thank you. Let's turn now to Mike Santoli with a look at where investors are looking for yield in this market. Mike? Yeah, John, interesting to look at how treasury yields at current levels stack up against reliable dividend stocks. And that's what this chart shows from our friend Jim Paulson. It's a 10-year treasury yield minus the yield on the S&P 500 dividend aristocrats. These are companies that have a long and consistent record of raising their dividends. You see it's at a pretty extreme high in terms of that differential.

Now, Jim is saying that this means there's somewhat downward pressure perhaps on treasury yields from here, given the alternatives and given maybe it brings some buying into bonds. Also interesting to look at the action in various different baskets of dividend stocks. And that's what this shows here. The div B, as they say, is a high dividend basket of stocks that is really screened for the absolute level of yield. And that's up about a three percent yield. Those shares have actually performed better than the dividend aristocrats have, which go by the symbol NOBL, which is kind of interesting. Basically, people are willing to grab for the higher current nominal yield

as opposed to the potential future yield growth from those aristocrats, guys. All right. Mike Santoli, thank you. You're our aristocrat. Up next, much more on Netflix results and insight into its ad revenue with the CEO of Double Verify, which ensures the streaming giant's ads are seen by real people and not bots. Plus, will the Bulls keep marching on Wall Street through the end of the year? Well, coming up, Merrill and Bank of America private bank chief investment officer, Chief Heise, lays out his second half playbook. Stay with us.

Welcome back. Here's another check on shares of Netflix, down about 1.5% in overtime, but well off lows. The company's saying its ad tier grew 34% over last quarter, but saying in its shareholder letter, the near-term challenge is that, quote, we're scaling faster than our ability to monetize our growing ad inventory. Joining us now is Mark Zagorski, CEO of Double Verify. Double Verify is one of Netflix's partners in its advertising tier, responsible for fraud protection and verification. Good to have you, Mark. So give me your take on the situation. It certainly sounds like Netflix has more space to sell ads than it has buyers at a price that Netflix is willing to charge them.

So what does that mean for the velocity in growth of this business? Yeah, I think you nailed it there. Really, what they're saying is, look, we're doing well, but we've got more to sell. And I think they're making some moves around getting in a place where they can sell through better. They announced some relationships recently with some programmatic technology companies, specifically Magnite, to help them move more inventory, not in direct sales, but in what's called the programmatic marketplace, which I think is a smart move for them, right? They've got a lot of volume. They're growing nicely in subscribers and ad support subscribers now, you know, looking at 40 million plus in that tier. So now it's about monetization. And it's, this is a, you know, this is a new game for them. There have been players out there who've been

selling ad space across TV and TV-like networks for years. And they've been doing this for only a handful of quarters. So there's some work to be done. But the good news is they're showing really solid progress on the subscriber growth. I think that's impressing everybody. They've been able to maintain CPMs pretty well as well. Talk to us about the trade offs and the difficulty here for Netflix in really charting this out strategically, because it seems to me like, yeah, they could take in a lot of a lot of ads if they wanted to. But if they're trashy ads, if they don't really meet the consumer where they are and if they aren't appropriate to the program that the consumer is watching, that actually ends up hurting Netflix not only in the long term, but maybe even in the medium term. So what's the need, the needle that they have to thread to do this right, both on that score and the long tail, and also making sure that fraudulent activity doesn't happen in the ad space? Yeah, they really do need to balance the quality of

the experience with the monetization of the experience, right? And what that means is relevant ads that are distributed relatively equally across the program so that people aren't saturated with ads and they feel like it's a good experience for them. The great news for Netflix is they have tons of data on their consumers and on the subscribers. They're probably the best in the business with understanding the details of what their users have been watching over the last few years. That means they can tailor those ads to those consumers, their specific demands around the kind of content that they're around. That's a good thing. They can balance that

experience. The challenge is going to be, and this is a whole new world for them, is they're not just competing against other streamers in the space, the Disneys and the Amazons of the world, but they're competing against other technology companies, too, that are vying for those consumer ad dollars. And folks like Facebook or YouTube, these are new players and they're new to this space. So, Mark, if we just look out over, to use the term that Netflix used in its release today, the medium term, what does a fully ramped ad-supported model, what do those economics look like for Netflix as it does go through this transition? You know, I think when you look at the

opportunity for them, it's going to be the fastest growing, I think, revenue driver as a percentage of their revenue moving ahead. Now, the numbers are still relatively small in comparison to their subscriber revenue, but advertising revenue is really profitable, right? You know, you're able to actually drive really high margins out of that ad revenue. I think they're going to continue to lean in on that, not just due to the fact that, you know, it's a nice additional line item, but it allows them to penetrate markets and market segments, not just of consumers, but global markets in which the price point is too high. And consumers have reached kind of a subscription fatigue of paying a full loaded Netflix ad subscription or non ad supported subscription fee. OK, Mark Zagorski, thanks for joining us.

Thanks for having me. And of course, the Netflix conference call is just kicking off. So we'll continue to monitor that. private bank chief investment officer, Chris Heisey, on why he is still upbeat on stocks for the second half of the year and why this might be more of a buffalo market than a bull market. And D.R. Horton, the biggest winner in the S&P 500 today, the homebuilder beating Wall Street's earnings estimates, announcing a $4 billion stock buyback authorization. Be right back. Welcome back. It was another brutal day for stocks with the S&P posting its worst two-day slide since April. Meanwhile, the Russell

2000 lost nearly 2%, but it is still the week's outperformer. Joining us now is Chris Heisey from Merrill and Bank of America Private Bank. Chris, it's great to have you on. Is this market still by? Yeah, it's still by. You know, if you have a three or four or five week type of time horizon, you know, perhaps you just hang in there and cash and get your five and a quarter, five and a half percent. But if you think a little bit past that, we're about to go from a stage that we think is a holding pattern right now where positioning and rebalancing tries to figure out what's the next step, what's the next catalyst into next year, which you should still see a good profit cycle. Kick this what we call Buffalo market back into a bull again. OK, what's a Buffalo market? Well, it's just our way. We use this almost six, seven plus years ago to depict an environment which is still in the bull family, but it's heavier. It has a thicker mane. It tends to roam over quite a long period of time.

It gets tired after long, wild rides itself, but it still moves across the prairie. And that's where we think we are right now after such an extraordinary first half. Chris, should we believe the signs of rotation into smaller stocks out of the mega cap tech stocks? Yeah, John, you know, much of all of us asset allocators, investment managers have been looking for more participation, have been waiting for this rotation. But usually when you get a rotation, it starts off as a rebalancing. First, you get the systematic movement from the institutional side of the business. And then ultimately, there needs to be a catalyst to go from a rebalancing episode where you see some profit taking the areas that drove the market into other areas that have been significantly underperforming. There needs to be the second

category that comes through later in the year, which is you need to see a little bit of bright side of the equation, which is really earnings growth or at least an understanding that that area is bottoming out. We're not there yet. So as much as we all like to see that, we have to be a little bit more patient. Are there sectors to focus on? That's the interesting part here. Again, communication services and technology have led the way. As their second derivative begins to slow down, there's the propensity in some cases they may miss an earnings result here or there. That will kickstart a little bit more money going into other sectors. But those other sectors are

going to have to show that they, too, are going to begin to show some earnings growth. So industrials, parts of health care. There's going to be industry groups within the sectors that provide that. But as a whole sector, it's hard to say that one sector or the other is now starting to be that driver. I would say this, however, financials are exhibiting that component where you get multiple expansion and a little bit of earnings growth. And that power together is what kickstarts more attractive money coming into those sectors like financials. Is disinflation a positive for the market or is it a potential headwind? And I ask that knowing that we're coming through airlines earnings where we're seeing

that pricing impact, that pricing power wane. It's such a good question, Morgan. Traditionally, when you lose that pricing power, you have to make it up with volumes. If you lose volumes and you lose pricing power, your revenues drop. it up with volumes. If you lose volumes and you lose pricing power, your revenues drop. That's the equation. If you can create efficiencies, create better operating leverage while you're losing some of that pricing power, then you can maintain your profit cycle. And those are the companies over the next 12 to 18 months as we slow down and we normalize in the economy, in the consumer, and the corporate space that will begin to outperform. So it'll be a company by company, industry by industry period for the foreseeable future, which does create more rotation through the market.

All right. Chris Heisey from Maryland Bank of America, private bank. Thank you. Thanks. Let's get back now to Julia Boorstin for some more clarity on Netflix's ad business. Julia. Yeah, just digging in a little bit more here, John. Netflix is basically saying that it doesn't yet have sufficient ad inventory for it to be meaningful for the company, especially in the context of the larger revenue piece that's coming from subscribers right now. And it's not sufficient yet to meet advertiser demand. Now, what's at issue right here is that first, Netflix is slowly building up its ad-supported

subscriber base. They're talking about quarter-over-quarter growth, but it's still relatively small. But they also are talking about very slowly introducing new ad formats and also testing them, being cautious not to overwhelm or alienate subscribers with too many ads. So in effect, what this means is that the ad inventory and opportunity will scale slowly on the supply side. And John, what they're saying here is that by next year, they expect to have sufficient supply, both in terms of different formats and also in terms of ad supported subscribers, to meet advertiser demand and for it to start to make a difference in terms of their revenue and margins. Great clarification. Demand is outstripping supply. Julia, thank you. Now, earnings from a pair of Dow components and a whole bunch of regional banks could move the

market tomorrow. Your Wall Street look ahead is next. Welcome back to Overtime. The trading week comes to a close tomorrow with another barrage of big earnings. Dow Components, American Express and Travelers are the big names to watch before the bell. But there are also several regional banks set to report, regionals, financial, Fifth Third, Huntington and Comerica. And that's not all. Oil field services, Halliburton, SLB will also release their quarterly results, which really kicks off for the energy sector. Here's something else to watch. My exclusive interview with Transportation Secretary Pete Buttigieg on the outlook for infrastructure spending and more. That's cool. Looking forward to that. Also, curious about this Netflix move well off the lows. It's now down about half a percent as that call gets ready to get underway.

Really understanding what's happening here with ad supply and demand as there are questions about the endurance of the consumer will be interesting here. Definitely. And just Julia even coming on a few minutes ago to talk about the fact that supply is out. Demand is outstripping supply here as they do ramp this model. And as the company did add more subscribers than expected this quarter as well, it definitely sets the stage for more tech earnings to come in coming days. And also underscoring what Double Verify was telling us about the care that Netflix needs to use

in introducing these ad formats to consumers. They want to make sure they get it right. They want to make sure they get it right, and they can afford to get it right as well, especially with free cash flow, $1.2 billion, it looks like, for the quarter, too. Well, it was a down day for the markets. That's going to do it for us here at Overtime.