Motley Fool Hidden Gems Investing - Netflix, YouTube Put Ads Up Front

Episode Date: May 15, 2025

More 18-to-34 year olds are watching Netflix’s cheapest tier than any U.S. broadcast or cable network. (00:21) Tim Beyers and Ricky Mulvey discuss: - Walmart’s response to tariff uncertainty. - Netflix’s booming ad business. - How YouTube is capitalizing on points of “maximum attention.” Then, (17:39) Motley Fool Senior Analyst, Karl Thiel, joins Mary Long to dive into the executive order on prescription drug prices and questions for pharmaceutical companies. Companies discussed: WMT, NFLX, GOOG, GOOGL , NVO Host: Ricky Mulvey Guests: Tim Beyers, Mary Long, Karl Thiel Engineers: Dan Boyd, Rick Engdahl Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

Walmart is trying to hold the line. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today over the internet by Tim Byers. Tim, good to see you. Good to see you too, Ricky. where's the caffeination level you usually come in with that oh i'm well caffeinated ready to go so caffeinated he forgot that he was caffeinated anyway the nation's largest private employer reported this morning that's walmart a few notable business results talking about their e-commerce business overall same store sales but the big story here tim is is tariffs chief financial officer, John David Rainey, went on CNBC and said, quote, we're wired for everyday

low prices, but the magnitude of these increases is more than any retailer can absorb, end quote. And Walmart's a pretty big retailer. The market right now says we're seemingly at the end of this tariff story. The CFO of Walmart says we're not. Listeners may be sick of hearing about this tariff story, but what does this all mean for investors? It is nowhere near over. Nowhere near it. David Rainey is right. Walmart is a proxy for the wider economy. And if Walmart is under pressure to raise prices, it's going to have broader effects on the economy. We know this. It's going to hit across the U.S. Remember here, the tariff war with China, Ricky, is only on pause. it's on pause. So it could very well resume 90 days from now. And that would have dramatic and

very consequential and unpleasant effects on the U.S. economy. So the level of uncertainty tied to tariffs and American economic policy just hasn't gone away. And Rainey is making that point. And he's right to do so because of just the way that we think of Walmart as proximate of the american economy i appreciated in the earnings call saying basically this was ceo doug mcmillan but basically saying we're not going to raise prices across food to make up for the loss on some finished goods because you know we have a responsibility to provide food to americans cheaply however when you think of products like bananas and coffee that's not grown in the united states and folks might see some increases in the coming months one notable story here is is the

e-commerce business for Walmart. Business rose 22% on the year. It was the first quarter of profitability. This is notable to me, Tim, because this is the second biggest e-commerce business in the U.S. behind Amazon. Even for a giant, it's really hard to make a profit, even for Walmart, which is a pretty darn efficient company. I'll pose it to you. Why is it so tough to make a profit selling things on the internet, even for a giant like Walmart? Because it's incredibly difficult to differentiate on the internet. Walmart sells a lot of everyday common goods. Thankfully, Walmart does have a brand advantage that extends into its e-commerce business. E-commerce is just another distribution channel for Walmart, but we think of them as everyday

low prices. It's really an everything store that's a lot like Amazon. I often think of Walmart as Amazon, but cheaper. A lot of things that I can get at Walmart are a little bit cheaper. The last few quarters have seen tailwinds for this company, including in the e-commerce channel. And that's because prices have been and continue to be high around the country. So Walmart has provided shoppers with some amount of relief here, particularly in grocery. I think we've seen this a lot in recent quarters from Walmart. It's less clear whether this company can keep providing relief, though. And that sort of speaks to the comments that the CFO, Rainey, made above. But we should continue to think of it this way, Ricky. Walmart is not the kind of company that

sells something so unique that it can make margin on the uniqueness of what flows through the distribution channel. They have to make money by getting really efficient, really smart, and priced really well in the distribution channels where they operate, and that includes e-commerce? Well, goods at Walmart can be cheap. The stock is pretty expensive. As a rule breaker, Tim, you think about the snap test. What happens if Thanos snapped his fingers and made this company disappear? Walmart absolutely passes this. Millions of people would feel an immense amount of pain if Walmart were to suddenly go away. But right now, it's also trading at a historically high valuation. And part of that is the uncertainty we talked about earlier. You're

seeing investors rush to safety, the stock is now at like 60 times free cashflow. Historically, it's about half of that. When you look at the enterprise value to revenue, which is we take all the equity and debt and divide it by the revenue, it's up by more than half from one year ago, up by more than 50%. If you're holding a defensive, maybe a cyclical stock like this, if you're an investor, should you be sweating this a little bit? I mean, I think we can fairly say that Walmart has been performing exceptionally well and has earned the premium for which it trades. So, not sweating immediately. Having said that, I do think this is a premium valuation. But again, let's go to the numbers. If we look at the most

recent quarter, U.S. store-level comps, so same-store sales up 4.5%. That is extraordinary when you consider the scale of Walmart's network, the number of stores that are operating in the U.S. 4.5% system-wide is immense. Having said that, Walmart does trade for 1.2 times revenue and a 1.4% free cash flow yield. To put that in perspective, Ricky, we're talking about the market expecting Walmart to deliver higher than average free cash flow growth. This goes to your 60X multiple as well for several years into the future, much higher than average. That may not be achievable given what Rainey said about tariffs and the wider economic impact that Walmart is facing. They may not be able to pull that off. So this remains a really good business, but I think

today's buyers of Walmart might be prepared to hold for a decade or longer, collect your dividends as cash, and then reinvest when multiples get closer to their historic levels. This is not the kind of business that I would be inclined to sell. But I might be just more careful with it, Ricky, especially if I was adding. I'd be buying in smaller amounts, prepared to hold for a really long time. And I might not automatically reinvest the dividends. I might just harvest the cash and wait for some better prices to add shares. A moderated response from the caffeinated man. You've got to give Walmart some credit, really growing its e-commerce business and also a 50% increase in its ads business. So it is getting higher margin dollars through the door

that the Bulls deserve some credit for. Let's move on to upfronts. Big ad discussion here. So upfronts is when now streamers, traditionally it was just TV networks, but now CBS isn't even there. They go to advertising buyers and say, this is what you can sell ads on. These are our shows. These are the live sports coming up. Netflix was there with a fairly small crowd. I think it was about 500 people there but to me the big headline from netflix's presentation tim is that the ad supported tier has 94 million monthly active users that's grown by more than 20 million people since november and to put this into context the ad tier of netflix reaches more 18 to 34 year olds than any u.s broadcast or cable network i am surprised that that is not espn netflix ad tier

beating espn is that surprising to you not even a little bit and that may be because i have been binge watching netflix for a show that makes me feel 15 again which would be cobra kai i love everything about this show and the nostalgic feels i'm getting from it i i'm biased towards that show but i i think its success reflects something important that netflix has quite a lot of family-friendly, kid-friendly, popcorn-worthy programming that pulls in younger adults. So you would think, and I don't think you're wrong, I do think that ESPN, as an appeal for that 18 to 34 demo, is absolutely right. But I also think that Netflix is well-suited to that similar demo. So that's why I'm not surprised by it. And again, they have a very long-tail

content strategy so lots of programming to suit any taste which also makes them suitable for a lot of different demographics there's just room to penetrate really across the age spectrum so yeah not surprised by the 18 to 34 numbers there for netflix are you on the drive to survive train are you watching that i am not and i have been completely to be fair i have been completely sucked in by cobra kai because 1984 and the you know and the karate kid is like i mean i was 15 years old i was completely sucked in by that i still get chills with the you know joe bean esposito you're the best you're the best around great stuff man i cannot get enough of that well maybe netflix will be able to serve you up an ai based ad based on your love of that cobra kai show because maybe

Netflix also unveiling how they're thinking about ads into the future. And the basic promise is that we have this fabulous algorithm that can recommend shows to people based on their viewing habits, what they're tuning into, what they're not watching. And we can use that same tool for your ad buying experience. That part seems like a, like a winner to me. If I were buying ads, I'd love to hear that. The part that sounds a little scarier to me is this offer of like shoppable mid-rolls an AI driven dynamic product placement inside of hit shows like squid game. So if you want your

product to appear in a show like squid game, we will make it appear regardless of not even regardless of what happens to the story. We will simply make that appear. Tim, that part sounds a little scary to me. Yeah. I mean, you hope that your product does not appear right after the murder scene, but maybe, I mean, I guess if you have murder equipment, maybe you do want that. hopefully you're not selling murder equipment on Netflix. No, more important than the AI tools, I think, is the vastness and variety of the content library, I think. I doubt that the AI is going to immediately have margin impact. I think scale is what matters for Netflix here. You want more content that has appeal to advertisers here.

And if this continues, scale does mean there will be big winners and big losers, and Netflix gets to price its ad inventory according to the perceived value of the viewer. So like you mentioned Squid Game, the ad rate for Squid Game is going to be high. There's going to be a premium for that. If you are talking about a lower-tier show, then obviously the ad rate is going to be much lower. There's a variable margin that Netflix can flex here. To me, that's the important part. They probably have a lot more pricing power built into that ad tier than we give them credit for. I don't think that really has much to do with the ai i if for advertisers consider squid game is a show that

is about how money makes people do awful and terrible things at all scales of the wealth ladder but you know what if we can sell within it we're gonna sell within it when you look at netflix overall this is one that um you know analysts are very rosy about and you think about the future growth levers, it seems like ads would be the most important. If you're an investor in Netflix, is this the most important thing you should be paying attention to right now? I do think so. I mean, I certainly think that the expansion of the advertising tier, especially worldwide, is the most important thing. Having said that, operating margin is going to be an area to watch because operating margin expansion has been

on the menu for Netflix for a while now. I would be watching for it coinciding with revenue growth in overseas territories. If we get expanding operating margin plus big growth in non-U.S., non-Canadian territories, I think we're really on to something here because those two together signal pricing power in emerging markets, which is really hard to get. If they do end up getting that it would be a very good sign for the long-term health of the business and to be fair i mean remember it wasn't that long ago that netflix management said we think we can triple this business within a few years and this would be one of the ways you do that let's wrap up with with youtube and to be honest i'm annoyed that you wanted to talk about alphabet in youtube today

because i would like to buy some alphabet stock when i am permitted to but because you're on the show today because we're friends, Tim, I will talk about alphabet only for you. So I want you to know that this is just for you, not the listener YouTube presented at the upfronts. And you wrote about this on the Motley Fool live blog, which members can find on their homepage. Highly recommend you check that out. It's a great place to get analyst insights in what's going on in the market. You wrote about this. YouTube's strategy seems to be, we're going QVC with more products placement and also we're going to get really good at placing ads at cliffhangers in various videos yeah it might be a little bit annoying but i'm just going to say here this is payback time son

i mean given how many times you've had me talk about toast when i was trying to buy shares this this i mean this is justice this is absolutely justice but youtube does believe you're right about this youtube believes there's valued advertisers in placing ads at points of maximum attention on the programming being broadcast. Like you said, viewers are locked in, it's near a cliffhanger or a moment in the programming, and then boom, we're just going to hit you with an ad right at that moment when you are glued in to the next moment. Would that be annoying? Yes, I think it would be annoying. Will it be the kind of thing that will drive up ad prices? That's a Maybe there is a logic to it, but more importantly, this is the sort of thing that allows YouTube to

price ad space at a premium, which they do need to do. YouTube is the dominant streamer for viewing hours. Now, it's a tough comp because you don't have to pay to watch YouTube. You just have to watch ads. It's kind of interesting to see where it fits into Alphabet's business model because, you know, this was according to analysis from that Matt Bellany at Puck did with Allen company found that last quarter, basically YouTube did 1.3 billion in operating profit. And that's also to Netflix is 3.3 billion. So Netflix making more profit, YouTube makes more money. And a lot of that Tim is because YouTube actually pays more money to creators than Netflix does to the professionals making their shows. But when we're talking about the just ad strategy

for YouTube's business. How meaningful is this for Alphabet as a whole, as a $2 trillion company? I mean, it might be very meaningful in this way because it could prove to be the thing that disconnects YouTube from a reliance on search. So if you have, for example, these peak points ads where you have a cliffhanger and then you come in and you insert an ad right at the moment of maximum attention. That does not rely on a search term. That does not necessarily rely on a keyword. That is relying on the underlying program. And if YouTube figures this out and gets better at selling premium advertising disconnected from the parent ad business, it adds a creative value that would allow YouTube to stand on its own, which might be very important, Ricky, because

it may be that regulators decide that YouTube must be on its own because Alphabet has to be split up. So we don't know yet, but I like that they are experimenting with ad formats and ad tools that are disconnected from search. That's probably a good thing. We'll leave it there. Tim Byers, appreciate your time and your insight. Thanks for being here. Thanks, Ricky. All right. Up next, Motley Fool senior analyst Carl Thiel joins my colleague Mary Long to break down the prescription drug pricing executive order and the questions that big drug makers are facing. A prescription for a weight loss drug will cost you about $1,000 per month more in the U.S. than

it will in Europe. During a press conference earlier this week, President Trump rolled out an executive order that attempts to bring that price down to the lowest level across developed countries. In other words, this order calls for drug companies to treat the U.S. as their most favored nation when it comes to drug pricing. I had a whole lot of questions when I was learning about this and hearing about this earlier this week, so I called up somebody who I thought would have some answers for me. That's Motley Fool analyst Carl Thiel. Carl, thanks for coming to us with all the answers on this very tricky, complex topic. I am very glad to do it. So we'll start you off with what's obviously a very easy question. How exactly does international

drug pricing work? Trump says, he said in this press conference that the U.S. is subsidizing other countries' drugs. How? What's the basis of that? Yeah. I mean, so that's a great launching point because I do think it's actually pretty incontrovertible that the U.S. is subsidizing other countries' drug prices. Looking at it broadly, there are essentially three pharma markets in the world. There's the U.S., there's Europe, and there's Asia. Even though the U.S. represents about 4% of global population, it's about 43% of all global pharma sales. It's an even higher percentage of profits. Europe is twice the size and only 23% of sales. And Asia is obviously a much, much higher part of the population, is only 21% of

sales. So, the thing is, drugs here cost somewhere on the order of two to four times what they do in Europe. In China, prices can run something like 10 times. And the way that it's evolved over the years is that the U.S. is essentially the profit center for global drug sales, and a lot of the rest of the world is important, but is sort of gravy to companies. They're really coming here to make most of their money. And a lot of that just has to do with the kind of healthcare systems that we have. A lot of Europe has single-payer systems or multiplayer systems that are nevertheless government-run. They're just working on a very different status quo than we are. So, you talk about the healthcare system. As I'm listening to this press conference and trying to

wrap my head around this executive order, one of the things that comes to my mind is that, wait, hold on. Aren't there these players, these middlemen called PBMs, pharmacy benefits managers, and they negotiate the drug prices that we pay? How do these lesser-known characters, the PBMs, actually fit into this picture of drug pricing? And how does that system differ from the single-payer or, in some cases, multi-payer system that you see predominantly in Europe. Yeah. So, this is kind of unique to the United States that you have this extra layer called pharmacy benefit managers or PBMs. One thing you've been hearing quite a while is that a lot of drug executives, big pharma executives who have themselves had a lot of

negative press have been pointing the fingers at PBMs as the middlemen who are really responsible for high prices. Rob Davis, the CEO of Merck, gave a rant about that in Merck's most recent call, but he's certainly not the only person to point it out. The reason it matters here is that the administration is concerned that targeting drug companies alone won't work. Let's say that most favored nation pricing actually works, which is a pretty big if, as I think we'll talk about shortly. But if companies had to make the best of a bad situation, if drug companies had to make the best of a bad situation, they would likely just preserve their high list prices and just offer bigger rebates. And as understood right now, that would satisfy most favored nation pricing as long

as net pricing comes down. And so what you would have is pharmacy benefit managers taking that spread between list price and rebated price and profiting off of that. So, part of the idea is that you need to take a bite out of this part of the industry that's also adding costs to the end consumer. Let's talk about how this most favored nation pricing would work in practice, at least with the knowledge that we have now, because part of this press conference was effectively President Trump saying, and Robert F. Kennedy will kind of figure out the details here. We don't have maybe all the details, but in theory, how might this work? How can an executive order from an American president mandate the pricing power of individual companies, especially

those that are headquartered and based overseas, not on American soil? That's the multi-billion dollar question. It can't is the short answer. I will say that a lot of what people are talking about when they talk about this proposal right now is not what just got announced, because that's fairly short on details. It's going back and assuming that the attempt to do this during the first Trump administration back in 2020, that this will largely be a repeat of that. So when people are going into details, what they're really often doing is pulling up the details of the 2020 proposal and assuming that it's similar to that. But what's different this time around is that it's actually much broader. It's aiming, you know, that proposal was really

aiming at companies selling into government programs, so Medicare, Medicaid. This is aimed at companies selling drugs in the private market, so private companies selling drugs in the private market. To do that, there is no enforcement mechanism, which is why it's basically right now just a request that companies lower prices along with a series of threats. In order to actually make a system that work, you'd have to pass new laws. That means you need the cooperation of Congress, and it means that you need to pass muster with the courts. Neither of these things are guaranteed. In fact, the first Most Favored Nation proposal back in 2020 was shut down by the courts pretty quickly. Yeah, this would be a long time in the making. Should this actually move

forward? Let's just play the theoretical game. I understand that it's a theoretical game, I'm asking you to crystal ball a little bit here. But should this actually go forward? Is there a way to redistribute the profits that pharmaceutical companies are already seeing and still have American customers pay less? Or is it just an inevitability that, hey, if this actually moves forward, has some teeth, it is an inevitability that pharmaceutical companies will lose some of the profits that they've come to expect. If it moves forward the way as envisioned, then certainly companies would see their profits go down. Yeah, that would be pretty hard to get away from. Ultimately, what you'd like to do and what President Trump even made some comments about

is that the real goal would be to have prices go up in Europe as they come down here so that in the end, the profit picture isn't all that changed for drug companies. However, there's no real mechanism to make prices go up in Europe. I mean, I do think it would be a good thing if Europe was to shoulder a little bit more of the cost of innovation that the entire world benefits from, ultimately, from companies. But there's just no clear mechanism in this to make that work. You know, if it were to happen at all, it would have to be a sort of a starve the beast kind of game where you drive profits down so badly that you make innovation go away and you slowly put pressure on Europe to bring some of their compensation up. But that's something

that would probably play out over decades, if at all. Pharmaceutical companies are one thing, but there are other healthcare companies that I can see potentially being affected by changes in this industry moving forward. There were a lot of fascinating quotes from this press conference. One that stuck out in my mind was Trump's promise to get rid of the middlemen. Again, that's PBMs, largely. UnitedHealthcare, CVS, they both operate PBM businesses. They're vertically integrated healthcare companies. Does that insulate them at all from this promise to get rid of the middlemen in drug pricing, or does it leave them actually more vulnerable to this changing landscape. If the goal is really to go after PBMs,

then there's no way that that insulates them, because it is an oligopoly, basically. United Healthcare runs OptumRx, CVS has Caremark, and Cigna has Express Scripts. That's like 80% of the PBM market right there. If you're going to deal with PBMs, you're going to deal with these companies. They're not insulated from it. A big part of the reason that there's this focus on PBMs is because of the way the industry has evolved. What will happen is, a company will set a list price. That's seldom the price that an insurer or anybody else is actually going to pay. What happens is, companies set a list price, and then they negotiate rebates with these PBMs. The bigger the rebate, the bigger the profit for the PBMs is. They take

a part of that rebate for themselves. There's this incentive to have a system with really high list prices and really big rebates. You see this become incredibly counterintuitive. There was a case when a biosimilar to Humira was launched back in 2023. There were two versions of it launched by Amgen. One was offered at a 5% discount to the Humira price, and one was offered at a 55% discount. Everybody took the 5% discounted one because that one came with huge rebates. That's the somewhat counterintuitive, I will say, incentives in this industry. And that's why there's a lot of focus on PBMs right now. And that's why a lot of drug company executives are pointing the finger in that direction. And they're not wrong. I mean,

that's not the whole picture, but that is part of it. Carl Thiel, thank you so much for the insight and for helping to demystify this very complex industry and new executive order. All right. Thank you. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers, advertisements, or sponsored content, and provided for informational purposes only. To see our full advertising disclosure,

please check out our show notes. The Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.