Motley Fool Hidden Gems Investing - Party On Netflix!

Episode Date: January 22, 2025

Great earnings push Netflix to new all-time highs. With the leading streamer and the market at high valuations, what should investors expect over the next few years? (00:14) Jim Gillies and Dylan Lewis discuss: - Netflix’s record subscriber additions, new all-time highs, and how price increases feed into its advertising plans. - The market’s Shiller PE ratio as the Trump Administration takes over, and how high valuations affect expectations around returns. - What updates from Interactive Brokers and Schwab say about where investor minds are at. (17:17) What would it take to live a hundred healthy years? Fool analyst Sanmeet Deo talks with Jonathan Swerdlin, co-founder of Function Health, about the overlapping future of artificial intelligence and human health. Companies discussed: NFLX, TKO, GOOG, GOOGL, AMZN Premium Motley Fool members can catch the full AI Summit replay here: https://www.fool.com/premium/4056/coverage/2025/01/15/ai-summit-replay You can become a premium Motley Fool member at: www.fool.com/sigup Host: Dylan Lewis Guests: Jim Gillies, Sanmeet Deo, Jonathan Swerdlin Producer: Mary Long Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Netflix accounts and brokerage accounts surge. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool Canada analyst Jim Gillies. Jim, been a busy week here in the States. How are things going in the Great White North? It's cold this week. It's about minus 20 Celsius where I am. which is about minus four Fahrenheit, I believe, for you American types.

I'm very glad I took last week as kind of a mini ski vacation because this week would be kind of gross. I was deeply jealous. I saw some of the reports on X from your time away from work. I'm glad you got that. That cold weather, probably a nice time to be staying inside, maybe firing up the streaming services, watching some Netflix, maybe to celebrate what we saw in what were objectively fantastic earnings and an incredible update from the company this week. Shares up 10%. The headline for me, looking at the numbers, 19 million subscribers added over the holidays. The global subscriber base, over 300 million now. If Netflix were a country, it would be the fourth largest in the world, Jim.

Yeah, this was a ridiculous quarter. And if this quarter from Netflix is a harbinger of the broader earnings season yet to come, boy, I think we're in for a treat. This really was a spectacular quarter. Revenue up 16%, operating profit margin up six points to 27%. First year, it's been over $10 billion. As you mentioned, they've added about 18.9 million new members in the quarter, total global streaming memberships up to almost 302 million of the ads, ads, double meaning there. About 55% of signups in the most recent quarter were for the ad-supported tier, the much cheaper tier. Membership on ads plans, like being added, grew 30% quarter over quarter. They're really continuing to push the button on live events as WWE has come on board

with Raw and their premium live events, WWE owned by TKO Holdings. Just from a personal standpoint here i'm just gonna suggest to the membership or the leadership at netflix that uh you know uh the nhl streaming rights in canada are up after next season and uh amazon prime is already doing one game a week and there's rumors they might want to take a run at them i'm just saying if you can throw 500 million a year at the wwe for for uh raw and premium live events the nhl will take your money i think that would be like the ultimate gillies streaming bundle right there right well Well, it would let me get rid of actually my Rogers Sportsnet subscription, which I have for hockey. And that used to be the home of WWE, and now they moved over. They have indicated that

they're going to be hiking their prices, I think as of today, in the US, Canada, Portugal, and Argentina. Not sure what Portugal and Argentina did to get included in that list, but the standard membership, at least in the US, is going, I believe, from $15.49 to $17.99 a month. So I think a 16% increase. The ad-supported tier is going from $6.99 a month to $7.99 a month. That's up 14%. For everyone saying inflation is dead, I give you Netflix. They generated about just shy of $7 billion in free cash flow for the year, which is flat year over year. That means that Netflix is presently trading with their 10% uptick today. They're trading for about 60 times free cash flow on an enterprise value basis. This is not a cheap stock. However, I asked the question

in a different Foolish venue this morning, who dislodges Netflix from their perch? What I like to call this is a breakfast problem. A breakfast problem, think of the great American breakfast, eggs and bacon. The chicken is involved, the pig is committed. Netflix is the pig. They are committed. They are all in the stream. Amazon's got other things beyond Prime. Disney's got other things beyond Disney+. Apple's got other things beyond Apple TV+, HBO, etc. Netflix is kind of the kingpin. And of course, it's been a few years now, maybe as long as a decade, where most TVs now come with remote controls. There's a built-in Netflix button. They have kind of won this perch. and so you know 60 times free cash flow that is expensive but you know in the absence of them and

and i think they're predicting about eight billion dollars this year for free cash flow again and not to rain on any parades i don't want to rain on any parades here if markets do get wobbly at some point in the future i there's probably not much that stops this from trading at 40 times cash flow or free cash flow or 30 times free cash flow but for today it is it shoot the lights out and and it it really really is a great a great quarter i'm glad you localized that breakfast metaphor for our primarily american audience of listeners there i think that was helpful to your point netflix i think double the disney plus core audience um when you look at the overall portfolio all their streaming properties may be a little bit different but

they have a handsome lead over most of the other streamers out there and i think on the one end when you look at their price hikes, it would be easy to say, okay, like how long can Netflix continue to crank this lever? And I'm instead going to try to take this in a different direction because I'm starting to see some things swirl here with this business. And I want to get your take. Do you think that the ad supported tier for them gives them pricing power to be able to increase what they do outside of ad supported and maybe even encourage some of those people that are currently on those premium plans to go ad-supported because that's a more viable business for them long-term. Yes, I do. I live in a house where I am happy to pay for no ads. I'll leave it at that.

And my significant other would probably throw me out into the snow and the cold if I suggested dropping down to an ad-supported tier. So we won't do that. I just think because, as I framed it in terms of what I call the breakfast problem, and they are the pig in in in in this case i think they just think differently than the other players in the streaming service who i'm sure are very eager to compete but yeah like the the ad tier gives them well first off you know prime kind of forced us into ad tiers which you know frankly was a little bit irritating i enjoy the fact when i'm watching amazon prime where they they just randomly slap in an ad in the middle of the movie and the ad is for amazon prime i'm like dude i'm already

watching. I'm here. I'm here. You don't need to do this. But I really like how Netflix framed in their earnings release. I really like how they framed it. They said, we want to be the first place that members go for entertainment. Their competition, in other words, as they see it, is not Prime, Disney, Apple TV+. It is anywhere else you're going for entertainment. I love the fact that they talk about they are still less than 10% of television viewing in every country they operate in. That says, boy, there's still a long runway for streaming for Netflix. There are more worlds to conquer for Netflix, in other words. There's probably a little bit of a thing I can point in there where sometimes you miss the great growth stock and you kick yourself after the

fact. What I like to say is, David Gardner famously bought Amazon in 1997. Jim Gillies bought amazon in 2010 i think jim gillies in 2010 is doing just fine jim gillies in 2010 is doing just fine on that you know so um you know because the secret is in the holding frankly and i come away saying this is a great quarter there are more worlds to conquer for them this growth story has not played out yet but you know the growth they're predicting is in the mid-teens revenue and then maybe a little bit more because they're they're getting some operating leverage on that going from a 27% operating margin for 2024, they're predicting 29. Free cash flow is kind of stagnant, but a lot of that's because they're doing a lot of content spend and probably going

to be doing more. That is why they're jacking prices as well. I was super impressed. I am hopeful this is a harbinger for the rest of earnings season. Well, I think a lot of investors, Netflix shareholders, and just generally investors would be happy to hear that because Netflix hitting a halftime highs. Nice to know that there's some growth avenues ahead of it, even at that point. And I think really, I mean, if we take a step back on the market overall and the market that the new Trump administration in the United States is inheriting, the market is at historic levels. And I think to hear that there is earnings growth potential, that there's growth for some of these large companies is important

because as we check in on the market with Trump's second term beginning this week, the Shiller PE ratio over 36 times right now. And Jim, this is the highest it has ever been at the start of a presidency. Yeah, it is. I am a believer that markets, and I've just literally said Netflix, great quarter, great future, looks pricey today. Yeah, I'm of the opinion that markets look a little pricey. There was the Wall Street Journal article today or yesterday talking about make America cheap again kind of thing, kind of lamenting the high valuation of markets, specifically talking about the Shiller PE and saying the Trump II administration is the highest ever. Of course, the previous highest ever was Biden four years

ago. Last four years have been okay for stocks, frankly. So, you know, we've gone from the previous highest ever to the current highest ever. The previous highest before Biden was Trump 1, right? And Clinton is way back in the, you know, from 92 to 2000. Clinton's, you know, about 20 times on the Shiller PE as opposed to today, which was 36, 37 for Trump too. Look, you can't get away from the fact that historically, high starting valuations do tend to translate into lower forward gains. And there's an argument to be made that maybe Biden was still coming in where there was some COVID overhang on earnings, and so earnings had been depressed. And so, although a case-shiller, it's a long-form, a long-dated metric.

I'm old enough to have been investing during the tech bubble and the subsequent deflating of said bubble. And I well remember that it was a frustrating decade and a bit. It took, I think, 13 or 14 years for the S&P to recover where it maxed out in March of 2000. I find it interesting in that aforementioned Wall Street Journal article, the president who doesn't get mentioned about, doesn't have the Shiller PE ratio is George W. Bush, who of course started his presidency in the wake of the tech bubble starting to implode and ended his presidency in the middle of the global financial crisis. He's probably happy to get out of the way. I think there's probably a non-zero chance that just simply where we are starting the trump to uh presidency that uh

gains going from here uh will will be below historical long-run averages i'm not calling for drops or anything but i think they i think they might be disappointing i know there have been a few shops that have said you know very low single digits there's been a few shops that have said you know below zero on real returns from here over the next five to ten years i'm not smart enough to make such bold predictions. I'm just saying, historically, price you pay does matter, valuation matters, and when you pay higher valuations, we have a lot of history behind us that says future returns are not that great. But you also have something in the White House now that is maybe somewhat unique, and that is Donald Trump is probably

the president who most, you know, brings in the stock market health and gains as to his own personal, um, edification might not be the best word, but you know, like he, I think he pays the most attention and we'll take credit for it, which is kind of silly because no president can take real credit for, for it. But, but I think he will identify with it, you know, going up more than other presidents would have. And he certainly signaled that it's going to be a business friendly, business focused administration. And so all that's to say, maybe you get a little bit more gains from here. So we have that read on the market and the Shiller PE has been followed for quite some time, has been back tested for quite some time and has been followed and is a very

known measure. I want to pair that up with what we saw from Schwab and Interactive Brokers this week. They reported and they gave us numbers about their businesses, revenue, net income. Those are interesting. Those are fine. I like talking about these companies because they give us a read on what's going on with investors, Jim. And when I put their numbers together, what I see is a pretty sizable increase in the amount of margin activity that a lot of average investors are using and a sizable increase in the amount of trading activity and commissions being collected on trading activity. And so pairing that up with where we are valuation-wise, I see a fairly rich market and one where it seems like we're getting a little bit speculative again.

Oh, it's party on, dude. Yeah, no, it's, I was going to drop party on Garth, but I figured, you know, a Wayne's World reference in this day and age is probably not that. Oh, that plays, that always plays. Okay, okay. I'm not going to sing Bohemian Rhapsody for you though. I'll go you one better too. There's an article in the Wall Street Journal today that says, the headline is, more men are addicted to the crack cocaine of the stock market. They're talking about gamblers' anonymous meetings filling up with people hooked on trading and betting, option trades numbers are soaring through the roof. Our colleague, Jim Mueller, who heads Motley

Fool Options was shaking his head because over 50% of these options trades are daily options. This is speculative activity and there's a lot of that. There's higher margin accounts. And, you know, it's just people are excited because of the whole, you know, as I said, party on dude kind of attitude. And look, we've seen this before, maybe not to the extent because it has been, it's so much easier today than it was, say, in the tech bubble, even in the global financial crisis or heading into that. There are so many avenues that you can trade. I know we're talking about going down the road of 24-hour trading, which I don't know that we need that, but I'm also someone that thinks we don't need DoorDash. If the words old man and curmudgeon are not going through your head right now, I've not done my job. Jim Gillies encourages you to get off of his lawn, right? Exactly. I'm an old man shouting at clouds. In all seriousness, yeah, we see this in excited markets, and we have probably going back to the Dutch tulip bulb nonsense from the 17th century or whatever. This is human nature. People are people. And as much as we like to preach, and I certainly like to preach, look, when down markets are your friends, you want to be a big investor when

people otherwise don't like what you're investing in. Now, whether that's individual stocks that maybe go through their own company-specific trial and tribulations, whether that's markets, anywhere you want to go. I think you want to always keep a weather eye on the idea that price matters and the higher valuation you pay. History has generally shown that two things. One, trading is hazardous to your wealth. Famous paper. But everyone wants to get rich quick. Getting rich slow is easy, but everyone wants to do it quickly. So trading is hazardous to your wealth. And we also know that historically speaking, the higher valuation you pay is inversely correlated with the future returns you earn. Don't shoot the messenger. That's what we

see in the literature. Wise words to live by. And I think a helpful reminder for everything we're seeing in the market right now. Jim, thanks for joining me today. Thank you. coming up next on the show what would it take to live a hundred healthy years pool analyst sandmeat dayo talked with jonathan swerdlin co-founder of function health about the overlapping future of artificial intelligence and human health how about a 30 second overview what is function health for our listeners that may not know well function is a new health platform it's functionhealth.com and $4.99 a year twice a year you get comprehensive lab testing all the results from the lab tests go into this dashboard in that

dashboard we use technology to tell you what's actually happening inside your health and what the things are that you can be doing to improve it. We take the very best that's out there in AI and across all different modalities to make sure that you are on top of your health and you're taking control of it. And it's five times more robust than what you get in a doctor's office with the testing. So it's kind of a new era of medicine that people are stepping into in the joint function. So function health is empowering us to live 100 healthy years. So can you see someone born today, can you expect them to live to 100 healthy years? And what are some of the AI driven developments that will kind of help extend lifespans?

Well, when we say 100 healthy years, what we're saying is healthy years, 100 of them, right? And so that means if you solve for quality, you solve for quantity. And it's a commentary on how we're living. So aging is not a fixed destiny. It's actually something we can really influence. There are some genetic limits that we've seen that understand how long somebody can live for. Once you get above 100, regardless of how you lived, you sort of run into sentences. You run and into the body, hitting its limit. And that's kind of fact of life. Now, we may be able to hack that,

but right now we don't have that science and technology. There's this concept of longevity escape velocity where for every year you live, you're adding one year and one day to your life. And at that point, you effectively can live forever, ideally. But we're not quite there yet, but we may get there. And so you certainly want to take care of your health today so you can reach that if that's your goal.

As I said, aging is not a fixed destiny. it's something we can influence and the first benefit of ai in health to us is and broadly speaking every people widely agree on this is early detection it's ai enabling us to understand the wrong combination of things the wrong trends as well as what things are working and what are not and oftentimes this is layered in the complexity of biology in a sense that humans never could do this now in a lab sometimes they can but that would have to be one by one by one by one by one. So how do you create these repeatable process of this kind of research into an individual? And so that's what AI can do. And it can guide us into getting so far ahead of

disease that the powerful impact is that we're never detecting cancer late. That we're not dying of a heart attack because we knew that we were on track for that. And it's only recently we have tech that can really do that. We recently had a woman who's 51 years old. She's a mother of four down in Florida. And she discovered through function that she had stage three B ovarian cancer. Ovarian cancer is considered the silent killer, which means you don't get symptoms until you're really further down the road. But at the behest of her daughter, who's really health conscious, said, mom, I really want you to get on function. You really need to understand what's going on with your health. And she did. And she found that out. And now she's alive. She might

not be alive if not for that. And I think that's a tribute to having the tools to be able to look under the hood and understand it and do that. Not just for one person, not just for some wealthy person who can afford to go to the best doctor in the whole world and run all the scans and do all the things and spend tens of thousands or hundreds of thousands of dollars. But this is like, can somebody do this for a thousand bucks or five hundred dollars yeah some can somebody do it for ninety nine dollars and that and that's what technology can do and so you know further down the road with ai humans will get to take advantage of precision medicine that's coming and that'll require a lot of data and access to everything in one central place but even right now early

detection is the first thing but one of the cool things about ai is you can't always predict what it's going to be able to accomplish and what we're really excited about is just being on the edge, because we know one thing is true, that in order to leverage AI in the future, you're going to need data. If you didn't have data on your health and you try to apply AI, you're effectively looking at like a WebMD with an LLM. And it'll tell you why you might have a sore thumb, right? Why you might get this headache, but it's not really going to go deep with you. So this is that moment when biology is going online and AI is making that possible to understand and then apply and where i mean i i think this is the golden era this is the like we're just entering

it right now the next 15 years are going to be the most exciting years and health the new patient the consumer health will create the biggest industry that we've ever seen because it's the most durable problem it's it's something we already are spending tens of thousands of dollars in our lives on yeah it's a and it's a thing that you know what's the lifetime value of an individual what's the value of my life what's the value of my loved one's life right now in an insurance system things like that we're not properly valuing that we don't have free market dynamics and in this new ecosystem where there's free market dynamics people really get to value this yeah as you describe function health and what what you're doing your vision and and all of this

technology and ai um you know for me as a as a person who cares a lot about my health and wellness I jumped on function health and became a member and started, you know, using the system. But as an investor, I'm like, this is exciting stuff. This is going to be huge market. This is gonna, you've described so many of the ways it's, it's a need and it's going to grow. But like, where do I go? You know, like you're a, you know, healthcare, serial healthcare entrepreneur investor. What are you looking for in a potential investment in the healthcare space? Yeah. Well, I mean, it's funny. I actually, you know, I use the word healthcare sparingly because I think healthcare has a lot of baggage it's these big robust institutional systems that don't move very fast they don't

apply technology at the speed that traditional tech companies do and function as a tech company what we are uh building is not another doctor's practice we're creating as a health system of the future yeah and the health system of the future doesn't just leverage human capital the health system of the future leverages technology so when you ask me about health care investments it's hard for me to say what i'm looking at it i i am very interested in how do we take the world's best technology and apply it to our lives that's the problem i'm solving for my life that's my life's work it's just looking at a human being and saying life is pretty mysterious and i know one truth and that truth is that human beings should not suffer and we shouldn't die

preventable death and we can solve that with technology man that's amazing that's it that's the number one experience we all we live through our bodies the healthy person has you know a thousand dreams. The sick person has one dream. It's upstream of everything we want to do in our lives. So I don't have particular investment advice except for to say like invest in the technology companies. Now, Function Health is a technology company because that's who's going to lead the future of health. Yeah. Are there any publicly traded companies that interest you that you've seen that are being very innovative in healthcare? Nothing that I could particularly comment on. I mean, I think when you look at companies like Google and Microsoft and Amazon,

I think those are the places where innovation is happening. I think healthcare has been this siloed experience. They haven't really played in that space yet. And I think if you pull the thread, you'll realize that, as I was saying, medicine is becoming data science and doctors are not necessarily data scientists. The role of the human in healthcare is going to shift and it's going to be technology. And so you have to look at who's leading that technology and it's ultimately these tech companies. So for my own investments, I look at tech companies and I invest from that perspective. Because I don't think that modern healthcare is prepared for what's coming.

And what's coming is going to unlock what feels like a paradise. It's going to be so, it's going to look at, compared to today, I think what we have today in medicine, despite our best efforts, despite all the brilliance of the researchers and the doctors and everyone out there, it's going to look caveman because it's so hard to scale, you know, paying attention to the individual. Yeah. Yeah. You know, it's like with the big tech companies, you know, with Google doing so much AI research

and i think they were doing some stuff in healthcare amazon has their pharmacy they also have like telehealth platforms do you does it worry you about with with big tech getting involved in healthcare when it comes to you know our data privacy of data and then also just are they getting too much power are they getting too much of of a very sensitive thing well it's funny it's like do you want the company that's like 50 years old managing all your health data Are you thinking they're the best at security and privacy? Probably not. They have to basically scaffold their system.

So you build a system in 1980, and then you build another system, and you stack them, and another system, another system, and you ultimately have this stack of systems. And you're just hoping. You're just hoping that it's all going to come together and be secure and be private. I'm actually very concerned for older companies and their privacy and their security on this kind of data, because it's getting to the point where they have a lot of vulnerabilities. Those are not new systems. they're having to constantly try to retrofit whereas new companies like ours we're using the

best right away the very very best and we don't have all that legacy baggage you know you walk in your doctor's office oftentimes it's a clipboard and a pen yeah you know we're talking about sense and data on a piece of paper and we're talking about systems that are barely modern so i do i worry about some of the older systems whereas i think that you know the companies like google and amazon and companies like ours that are coming out now we get to use the very best of technology today and the very best encryption and data security and privacy we've done. Fools, that was a shortened segment from a conversation that aired last week during our AI Summit, a virtual members-only event. If you're a Motley Fool Premium member and you

missed the event last week, you can catch replays on the Motley Fool site in our media hub. We will drop a link in the show notes for you to catch it as well. That's it for today's show. As always, people in 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 anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Motley Fool only picks products it'd personally recommend to friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.