Motley Fool Money - 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

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Netflix accounts and brokerage accounts surge. Motleyful money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motleyful Canada analyst Jim Gillies. Jim, in 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 4 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. are 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 going to suggest to the membership or the leadership

at Netflix that, you know, the NHL streaming rights in Canada are up after next season. And 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 raw and premium live events, the NHL will take your money. I think that would be like the ultimate Gilly streaming bundle right there, right? Well, it would let me get rid of actually my Roger's 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 U.S., Canada, Portugal, and Argentina. I'm not sure what Portugal and Argentina did to get included in that list, but the standard membership, at least in the U.S., is going, I believe, from 1549 to 1799 a month. So I think it's a 16% increase. The ad supported tier is going from 699 a month, 799 a month. That's up 14%. So for everyone saying inflation is dead, I give you Netflix. They generated about just shy a $7 billion in free cash flow for the year,

which is flat year over year. And 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. And breakfast problem, think of, you know, the great American breakfast, eggs and bacon, right? 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 Plus.

You know, Apple's got other things beyond Apple TV Plus, HBO, etc. Netflix is kind of the kingpin. And of course, you know, it's been a few years now, maybe as long as a decade. Where most TVs now come with remote controls is a built-in Netflix button. Like they have kind of won this perch. And so, you know, 60 times free cash flow, that is expensive. but in the absence of them, and I think they're predicting about $8 billion this year for free cash flow. Again, 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, 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 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. 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 they, because, as I framed it in terms of what I call the breakfast problem, and they are the pig 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, 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 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 Plus. It is anywhere else you're going for entertainment. I love the fact that they talk about, you know, 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 to, you know, there are more worlds to conquer for Netflix, in other words.

and there's probably a little bit of a thing I can point in there where sometimes, you know, you miss the great growth stock and you kind of kick yourself after the fact. What I like to say is, you know, David Gardner, you know, 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, 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 is 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 getting some operating leverage on the, you know, they're 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, They're jacking prices as well.

I was super impressed. I am hopeful this is a harbinger for the rest of earning season. Well, I think a lot of investors, Netflix shareholders and just generally investors would be happy to hear that because Netflix hitting a whole-time 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, the market is at historic levels.

And I think to hear that there is earnings growth potential, that there's growth for some of the large companies is important because as we check in on the market with Trump's second term beginning this week, the Schiller 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 Schiller PE and saying, you know, the Trump II administration is the highest ever. Of course, the previous highest ever was Biden four years ago. Last four years 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 won, right? And Clinton is way back in the, you know, from 92 to 2000. Clinton's, you know, about 20 times on the Schiller PE as opposed to today, which is 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 me made that

maybe Biden was still coming in where there was some COVID overhang and on earning. And so earnings had been depressed. And so the, although a case Schiller is a, it's a long. 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 in a bit. It took, I think, 13 or 14 years for the S&P to recover where it maxed out in March of 2000. And I find it interesting in that aforementioned Wall Street Journal article. The president who doesn't get mentioned about, you know, doesn't have the Schiller PE ratio. That 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.

So, you know, 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 presidency that gains going from. here will be below historical long run averages. I'm not calling for drops or anything, but 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 10 years. I'm not smart enough to make such, you know, bold predictions. I'm just saying, you know, 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 edification might not be the best word. But, you know, 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 it. But I think he will identify with it 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 Schiller

PE has been followed for quite some time, has been back-tested for quite some time and has been followed and as 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' gym. 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

evaluation-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, Wayne's World reference on this day and age is probably not that plays. That always plays. Oh, 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. And they're talking about gamblers, anonymous meetings filling up with people hooked on trading and betting. Option trades numbers are soaring through the roof. And, you know, our colleague Jim Mueller,

who had Smatley Fool options, was shaking his head because over 50% of these options are like daily options. Like, this is speculative activity. And there's a lot of that. There's higher margin accounts. And, you know, it says 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. Like, there are so many avenues that you can trade. I know we're talking about going down the road of 24. our trading, which I don't know that we need that. But I'm also someone that thinks we don't need DoorDash. So, you know, I mean, like if the words old man and curmudgeon are not going through your head right now, I've not done my job. But yeah, Jim Gilles encourages you to get off of his lawn, right? Exactly. You know, I'm an old man shouting at clouds. In all seriousness, yeah, like we

we see this in excited markets and we have probably going back to the Dutch tulip bulb nonsense from what the 17th century or whatever. Like, like this is huge. 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 really aggressive in, you know, when you want to be a big investor when people otherwise don't like what you're investing in. Now, whether that's individual stocks, it 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 just, you know, 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 100 healthy years? Pool analyst, San Mate Deo, talked with Jonathan Swardland, co-founder of Function Health about the overlapping future of artificial intelligence, and human health. The old adage goes, it isn't what you say, it's how you say it,

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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. you know, 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 is empowering, you know, 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 self 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 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 know, you effectively can live forever, ideally. Right.

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, people widely agree on that. 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. So how do you create these repeatable process of this kind of research into an individual? And so that's what AI can do. 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 was 51 years old. She's a mother of four down in Florida. And she discovered through function that stage 3B ovarian cancer. Revereign cancer is considered a silent killer. Yeah. 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 the, 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, 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 skins 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 $500? Yeah. Can somebody do it for $99? And that's what technology can do. And so 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. I mean, 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 something we already are spending tens of thousands of dollars in our lives on. 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 and 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 you're doing, your vision and all of this technology and AI, you know, for me 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 a huge market. This is going to, 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 health care, serial health care entrepreneur investor. What are you looking for in a potential investment in the health care space? Yeah. Well, I mean, it's funny. I actually, you know, I use word health care sparingly because I think healthcare has a lot of baggage. It's these big robust institutional systems that don't move very fast and they don't apply technology at the speed that traditional tech companies do. Function is a tech company. What we are building is not another doctor's practice.

We're creating as a health system of the future. And the health system of the future doesn't just leverage human capital. The other system of the future leverages technology. So when you ask me out health care investments, it's hard for me to say what I'm looking at it. I am very interested in how do we take the world as 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 is one dream. It's the 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 in their technology companies. Now, functional 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 that you've seen that are being very innovative in health care? Nothing that I could

particularly comment on. I mean, I think when you look at, you look at companies like like Google and Microsoft and Amazon, I think those are the places where innovation is happening. I think healthcare has been a silo experience. You know, 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 when I, you know, 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 what 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 health care, Amazon has their pharmacy. They also have like telehealth platforms. Do you, does it worry you with big tech getting involved in health care 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 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? Like, are you think 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 this is 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 into a 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. 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 worry about some of the other 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. Fools, that was a shortened segment from a conversation that aired last week during our AI summit, a virtual member-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, we're selling anything based solely on what you hear. All personal finance content follows Motleyful editorial standards. It is not approved by advertisers. The Motleyfell only picks products.

It would personally recommend a friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.