Motley Fool Hidden Gems Investing - Netflix, Comcast, Southwest Airlines

Episode Date: January 26, 2023

If you attempted to fly Southwest Airlines over the holidays, you're not going to be surprised by their latest earnings results. (0:20) Tim Beyers discusses: - Southwest's $220 million loss - Why the airline has "a more fundamental problem" - Comcast's growing subscribers (and costs) in its streaming service, Peacock (11:00) Ricky Mulvey talks with Catie Peiper about Netflix's international expansion and programming strategy.  Companies discussed: LUV, CMCSA, NFLX, WBD Host: Chris Hill Guests: Tim Beyers, Catie Peiper Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Start your free trial today. We've got the latest in entertainment, airlines, and entertainment. I know I said it twice, it's just that kind of show today. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Tim Beyers. Thanks for being here. Tim Beyers. Thanks for having me, Chris. Partially caffeinated, ready to go. Let's do the show so you can get fully caffeinated. We're going to start with Southwest Airlines. Let me just say that anyone who flew Southwest over the holidays or knows anyone who flew Southwest over the holidays is probably not surprised by the fact that

in the fourth quarter, Southwest Airlines posted a loss of $220 million because of the utter cluster that was that airline over the holidays. And they're trying to right the ship, but the results are the results, Tim. And this can't be a surprise to anyone, whether they flew Southwest or not. No, I mean, Southwest should count itself lucky that it's not paying for trauma therapy for some of these people. I mean, to be fair, 17,000 flights, or to be more specific, 16,700 flights canceled. Now, we know the numbers are bad. The fourth quarter loss was compared to a $68 million profit during the same period in 2021. The revenue of $6.17 billion was up more than 22 percent but i mean this is southwest has a more fundamental problem like its systems

and the system failures that we saw help cause some real chaos and if you know anything about airlines that even if you're not using the classic large airline hub and spoke system which southwest does not it's point to point it's a point-to-point airline still when flights start getting canceled the chaos backs up, and things back up very, very quickly, and that's what happened here. Now, the good news here, Chris, is that Southwest is forecasting better results coming for the current quarter. The booking trends are up and apparently look positive. Projecting first quarter revenue to be up 20% to 24% over last year, with capacity up 10%, and capacity is essentially meaning how many seats we have to sell. Southwest is forecasting that it can handle an increased

level of demand. Theoretically, that means, Chris, that they have invested to fix some of these system problems they have, the fundamental IT problems they have. I think we all hope so, because we're going to have spring travel upcoming here. But my message from this, Chris, is I think it could have been a lot worse, but these numbers are not surprising. It could have been worse. And I think you're absolutely right to key in on sort of the next thing investors should be watching is, well, what is this spring break season look like specifically for airlines in general, but specifically for Southwest? There's a version of the future where they come out two months from now and update their guidance for the current

quarter. But the type of systemic change that needs to happen at this business, it seems like is not going to necessarily happen quickly. If part of the problem here is we have an antiquated booking system that makes it really hard to handle these types of incidents, that's the kind of thing that takes time and money to replace. No doubt. And because there are some calcified systems, like airlines have this. Airlines have some hardened systems that are in place. They have labor contracts. They have fuel costs that they do not control. So there are some things that are calcified that Southwest has no control over. But to your point, the thing they do have some control over is how they forecast and how they handle those bookings

and how they factor in the changes they need to make to that booking system. So you would hope that the guidance is modest coming into the next quarter, but I would be very cautious here because the things that they don't control, for example, fuel costs, those are unlikely to be going down anytime soon. So I would rather be pleasantly surprised and buy after I'd seen the stock rally a little bit more on business news that actually made me feel good that things were moving in the right direction rather than sort of try to go bottom fishing here. I don't feel good about bottom fishing with Southwest Airlines, Chris. Let's move on to Comcast then,

because fourth quarter profits and revenue came in higher than expected for Comcast. Peacock, their streaming service is up to 20 million subscribers, although I will point out with the higher subscriber number, we also saw in this latest quarter, higher losses in the Peacock division. Much higher. Revenue increase was up to about 6% to $9.9 billion. That was for the NBC Universal division, but the Peacock business, the adjusted earnings fell more than 36%, and Peacock had a loss, an adjusted loss of, I'm sorry, NBCUniversal of $978 million. Peacock's losses were extraordinary. Now, To be fair, what seems to be happening is NBC Universal is scaling up that business,

investing heavily, and I'm sure they had to pay a pretty hefty premium for having broadcast, at least on their Spanish language channels like Telemundo, the FIFA World Cup. The World Cup was pretty popular and it was an incredible tournament out in Qatar. But also, I mean, the Premier League is getting more and more popular. So Premier League football, you know, over in England is getting more and more popular. I'm sure that contract is going to get more and more expensive. So, I mean, my takeaway on this, Chris, is my, you know, me and the spending that I have on sports ball is going up. I'm going to have to pay a little bit more to watch some sports ball here.

But overall, Comcast as a business, I think it's interesting. I mean, they did lose 26,000 broadband subscribers during the period, and some of that was due to the impact of the hurricane, Hurricane Ian. But, you know, their earnings did decline about 5%. But this is, it's certainly not a terrible business. I would say it's a business that is investing. the broadband decline is a little bit concerning. Peacock is going to be the one to watch here, just like with all of these streaming services. And to be fair to Comcast, Brian Roberts and his team, I think, have done a good job of forecasting the investments they've been making. This loss is

large. This loss is not out of line with what they had previously forecast in terms of the losses they were projecting for Peacock in 2022, and they say that they expect those losses to peak this year. Now, if you and I are sitting here 12 months from now, and that narrative has changed for the worse, then I think what you're talking about gets even more dire for Comcast. But right now, say what you want about the overall business or different divisions within the Comcast empire. None of this should be a surprise to investors. No, it shouldn't be. And the signaling here is that as Comcast ramps up these investments, if we follow the signals, Netflix had a price increase and introduced an ad tier. Disney Plus has introduced a price increase. It follows that

Peacock is going to get more expensive. Maybe at the ad-free tier, maybe they start there and add some additional subscription pricing there. But it wouldn't surprise me if, say, the ad tier, which is presently $4.99 a month, goes up to, say, $6.99 a month. It's trending this way, but they have to capture the subscribers first. So, yes, I agree with you. Brian Roberts has been very clear about the forecasting here and the investment required. But look for Comcast sooner rather than later to start leveraging the footprint that it's growing here. 20 million subscribers. Now it's the next step is to start raising some prices steadily, maybe not aggressively. It's also going to be interesting to see what they do with the 2024 Summer Olympics,

which I will just add, they have already started promoting on NBC, watching the playoff football, whatever game was on NBC. Summer Olympics, we're a year and a half away, and they're already promoting them, as they should, by the way. Just start signaling that now, and maybe that becomes an opportunity where there's a version of Peacock, or maybe it just drives subscribers, or maybe there's a more premium version for people who are hardcore Olympians. There's no doubt that's going to happen. I mean, Peacock has a very vibrant set of, particularly in sports, like they have premium sports programming for the NFL

related to Sunday night football during the NFL season. They have premium programming for the Premier League. And to your point, when they held the FanFest, the Premier League FanFest just last weekend, and they had Olympic sprinter Noah Lyles pick his favorite Premier League football team. So are they promoting the Olympics? Yes, in fact, they are, Chris.

Shout out to Alexandria's own Noah Lyles. Always a fan. Tim Byers, great talking to you. Thanks for being here. Thanks, Chris. Netflix added 7.7 million subscribers in its latest quarter, meaning Reed Hastings is leaving his job as co-CEO on a high note. But is this streaming giant making some long-term missteps? Ricky Mulvey caught up with The Motley Fool's Katie Piper

to talk about the company's international expansion and its less-than-forgiving programming strategy. I mean, I'm a fan of TV. I work in TV. I watch everybody's things. People have very different tastes, and I have no disdain for whatever those things are. What is quality? What is good versus not? That's all subjective. I just want to super serve the audience. That came from Netflix's chief content officer, Bella Bajaria, in an excellent piece in The New Yorker by Rachel Syme. Katie Piper, that is just one example that leads me to ask the question, has Netflix changed or lost its way? Excellent question. Great to be here talking with you again. I think that the better question is, has Netflix changed their goal from being

sort of a cultural leader in the space to being a profit engine, which is more in line with what a lot of the other streamers like Amazon Prime have really always set their identity around. So is Netflix kind of becoming more like other streamers and less of this industry-leading cultural example that it has been? It's a surprise we're doing TV again, because the content officer has been dunked on by, I think, Twitter and a number of people. But I mean, she came from the reality show, brought reality shows essentially properly to streaming. Before that, she was responsible for essentially getting the rights to shows like The Mindy Project, working with creators like Michael Schur. So she has a deep understanding

of the landscape and was also perhaps being reflective of the audience versus herself. So I want to give Bella some credit. But I think there is a lot of worry with Netflix that now they're starting to raise prices. They're cracking down on password sharing. The days of hyper growth are over. So now you have to look in the corners for spare change, if you will. Yeah. I mean, we're seeing that reflected at Netflix across the board. There have been a lot of internal memos leaked in the last year about how they've updated their language around not guaranteeing that they won't lower, take salary cuts to certain employees during tough times. That used to be something they explicitly said they wouldn't do. They also just have gone through

numbers of layoffs in the past year, including de-staffing their Tadum website, their fan streaming website, which had only just launched right before they did their layoffs. So there does seem to be a very important pivot that they're making. I think the thing to underline is that this may not be bad news for investors. And that's probably what everyone at the C-suite level at Netflix is thinking about because all of these things are intended to grow their revenue line and their profits. But we don't actually have that yet. And the flip side that I always like to think about is many investors are also Netflix customers. And we're already feeling the pinch of higher subscription costs or getting ads if we select the ad tier instead.

So we're already feeling the changes of a service that we've grown to build our lives around in many cases, but have not necessarily seen that increase in profits. Yeah, that's interesting that you bring it up. It's not like a company like Heiko, which is building very specialized replacement parts for aircrafts where the investors aren't necessarily buying the product. But with Netflix, that's got to be a case where I'm sure they're getting plenty of voices and opinions over the cancellations and the way that they've been handling content. I mean, I think one big complaint that I've heard and that I think can make sense, though, is that Netflix is making this big push into international expansion

and at the same time possibly leaving behind their American consumer, which is their richest customer base. And that might hurt them in the long term, especially as people are more prone to jump between different streamers. Yeah. And there's an argument to be made on both sides. I think if we let history kind of lead by example, two good streaming examples that have already done this and moved back from it are Amazon Prime and HBO, who had also pursued aggressive international expansion and are now scaling back to look more specifically at core markets like Germany, the UK, Japan, where they can penetrate more deeply. So much more of a deep penetration in specific markets as opposed to a broad penetration, which Netflix is in over 190

markets, I believe at this point. So it's very spread thin at the moment. One thing that I do think is interesting though, that a lot of other streamers are not doing is Netflix is still pushing very hard to invest in India, which is not a place that other streamers are focusing on. And where if you were to look at the numbers, you wouldn't necessarily see the reason why, but I think they're doubling down that if they can unlock that market, that's huge. That's a huge potential market. And they may be willing to take second or third or even fourth place in American markets if it means that they can unlock India instead. I think that's, is it the largest population? I'll have to Google that. I think it just surpassed China though. I could be wrong.

But on the topic of innovation, I think there is an art, like we're seeing more reality shows that have different essentially countries that they're based off of. Like Love is Blind is one example where you have an American version, French version, Japanese version. I don't want to admit why I know that off the top of my head. But there is this idea, though, that Netflix has lost some of its innovative backbone, and it's reverting to the mean in terms of mediocrity. We're not going to try something new. Let's just put that 70s show on again as that 90s show. Yeah. I think you've really put your thumb on what is the most concrete shift in terms of how they program. Historically, we think of Netflix as being that company that has really

leaned on their access to user data to lead the kind of shows that they innovate. House of Cards is a really prime example of that. They knew that their users were tapping and binging dark and gritty shows and political dramas. And they said, hey, we're going to produce our own that mirrors this user data that we're seeing. And they've done this with other things. Stranger Things is also another show that they used a lot of that user data to help ideate around. And it's resulted in a lot of great headlines, Emmys, but not necessarily revenue. Netflix is always very tight-lipped about how many subscribers they're actually generating around these shows. And anecdotally, there's usually a lot of stories of people who will temporarily subscribe to binge

it, maybe catch up on anything else that they've been meaning to get out of the way that's still on Netflix and then they'll unsubscribe again. And they just sort of rotate through. This is something that a lot of streamers are dealing with, but it would be something that Netflix is considering if they're thinking about, do we invest in this expensive original content that we produce versus traditionally the much cheaper option, which is go buy something to license that has already been produced in a different country and bring it over. And that's what we saw with game. A research firm called Antenna, to put some numbers behind the claim, 55% of Netflix subscribers ended up canceling their account within a six-month window, which I found that

surprising, but I guess makes more sense as you start to have more options. We were talking before and you brought this up, that the metrics that Netflix uses, well, I should say in my opinion, the metrics that Netflix uses to keep and cancel shows may have some faults to it. there's basically, it's a 28-day viewing period that determines essentially if you live or die as a show on Netflix. And yet, many of the shows that they found to be the most successful, thinking of The Office, thinking of Friends, that 70s show, or not that 70s show, but rather, let's say The Office and Seinfeld, if you use that measure of how many people watch the show within a 28-day period, when it first premiered, those shows would have been dead in the water.

So I wonder if that ends up discouraging innovation and creates, I wonder if they end up having more missed opportunities because of that very short decision cycle. Excellent point. Notably, both of, actually all three of the shows that you referenced did not get produced by Netflix. They now just are restreamed through Netflix. And so Netflix didn't have to absorb any of the risk behind those shows. Not anymore. And I'm saying that like, that's what made those shows successful. Okay, sorry. Yeah, no, no, but I would agree. And I would say that what is difficult about that, and it's similar to what other streaming services are measuring their shows by HBO.

For one, they're looking at completion rate. What percentage of viewers completed watching the entire show? And then that will help them determine what gets renewed. There's a lot of critics out there that say that this is leading towards mediocrity and also towards companion viewing as a behavior. So companion viewing is when you just put a show on in the background and then you're

working, you're on your phone, maybe you're cleaning or cooking. So it's something that you can pay attention to, get distracted from, come back to, you haven't really missed a beat versus really intense viewing. I would argue House of Cards is one of those where you really didn't want to miss a beat. And so you had to invest the time and energy to thoroughly watch it. And I think their data right now between completion rate, it's easier to complete a companion viewing show, a time investment show. Also, the number of subscribers and viewers they have is leading towards that companion viewing programming. Katie Piper, anything else you want

to chat about with Netflix or should we end it here? I just am going to say I still keep my Netflix subscription because every time I get tired of it, they come up with something new, like just at the very 11th hour. We'll see where it goes. It's the old AM radio caller thing. I hate the program and I listen every day. Katie Piper, always great chatting with you and appreciate your time. Thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Thank you.