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Micron Gives Bullish Forecast, Even as Pay Raises Crimp Margins · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 3: Radio. News.
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  Speaker 4: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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  Speaker 4: you get your podcasts or watch us live on YouTube.
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  Speaker 5: Micron, the chip maker, that's kind of the hot name
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  Speaker 5: over the past couple of years at this point, because
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  Speaker 5: it makes memory chips, gave an upbeat forecast for the
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  Speaker 5: current quarter, thanks, of course, to this AI building frenzy.
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  Speaker 5: So let's bring in right now our semiconductor analyst, Jake Silverman.
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  Speaker 5: He is here with us in New York. Micron gave
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  Speaker 5: this upbeat forecast. The stock, however, is down about 1.9%.
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  Speaker 5: Was this all priced in? Did people anticipate how positive
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  Speaker 5: this would be?
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  Speaker 3: Yeah.
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  Speaker 6: I think there's an element of pricing in, or I
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  Speaker 6: would say more like expectations have kind of caught up
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  Speaker 6: to the company to some extent. I think there were
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  Speaker 6: a few things that were telegraphed prior to the quarter,
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  Speaker 6: which is first of all, last quarter, they already talked
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  Speaker 6: about these long-term customer agreements that they have. They call
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  Speaker 6: them strategic customer agreements, SCAs.
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  Speaker 3: So there's these.
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  Speaker 6: Long-term contracts, their take repays. So not like the contracts
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  Speaker 6: of a few years ago, where it was just one
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  Speaker 6: year volume commitments didn't really mean a lot. Um, So
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  Speaker 6: I think there's not a lot of incremental that the
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  Speaker 6: company can offer. At the same time, when you think
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  Speaker 6: about things like products that are really important for AI,
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  Speaker 6: like high bandwidth memory, there's already an expectation that there's
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  Speaker 6: going to be price increases. So I think them mentioning that,
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  Speaker 6: we do think there might be some underrating of how
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  Speaker 6: much price can go up for some of those products,
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  Speaker 6: but they're still not the volume drivers for the company.
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  Speaker 6: And so as a result, I think there's not as
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  Speaker 6: much that the company could really say to sort of
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  Speaker 6: dispel some of the downside. Meanwhile, the upside is somewhat
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  Speaker 6: limited now because you can only have so much so
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  Speaker 6: many price increases. You can only have so much margin
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  Speaker 6: expansion from here.
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  Speaker 3: All right.
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  Speaker 2: We were just talking about this Broadcom anthropic deal, circular deal.
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  Speaker 2: As a former analyst, my radar goes up big time.
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  Speaker 2: The market doesn't seem to care. How is the market
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  Speaker 2: thinking about these circular deals? Because they seem really strange
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  Speaker 2: to me.
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  Speaker 6: Yeah, I mean, I think there's certainly some skepticism around it.
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  Speaker 6: But ultimately, I think what investors want to know is
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  Speaker 6: how much of this capacity is really, truly committed. How
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  Speaker 6: much can Anthropic afford to actually pay for it? So
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  Speaker 6: how much is actually being cash outlays versus what can
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  Speaker 6: the companies offer in terms of stocks to sort of
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  Speaker 6: offset some of the large cash potential commitments they'd have
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  Speaker 6: to do? I mean, I think if you looked at
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  Speaker 6: the prospectus from Anthropic, they were talking about just north
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  Speaker 6: of $ 500 billion in terms of commitments over several years.
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  Speaker 6: So I think some of these financing agreements are kind
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  Speaker 6: of necessary in order for them to reach that, because
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  Speaker 6: they're clearly not going to raise $ 500 billion in their IPO.
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  Speaker 6: I mean, look, of course there's reasonable skepticism, I think,
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  Speaker 6: just in general because you tend to just want to
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  Speaker 6: have a company have that cash and just be committed
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  Speaker 6: to actually putting it down as opposed to doing some
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  Speaker 6: sort of, I guess, I don't know if you'd want
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  Speaker 6: to call it exotic financial arrangement, but something of that sense.
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  Speaker 2: It just feels like one of those things we're going
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  Speaker 2: to look back on if this thing goes sideways.
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  Speaker 7: And say, there it was.
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  Speaker 2: Yeah. Yeah.
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  Speaker 7: I mean, it was one of many, you know, kind
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  Speaker 7: of flags.
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  Speaker 1: Is there a historical precedent for this?
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  Speaker 5: I mean, is there something that we can point to
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  Speaker 5: as this has happened before and it ended this way?
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  Speaker 6: I mean, there were vendor financing agreements in 2001, but
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  Speaker 6: it was a little bit before my time, so I
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  Speaker 6: couldn't get into the.
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  Speaker 2: Dude, I was right smack in the middle of it.
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  Speaker 2: We were slinging stock at some bonds all over the place.
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  Speaker 1: Well, we know how that ended.
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  Speaker 7: Yeah, thank you very much. I signed... Well, we'll get
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  Speaker 7: into it. So, again, going back to Micron, I mean.
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  Speaker 2: What's the constraint on a Micron out there? Is it
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  Speaker 2: getting memory? Is it they don't have enough fab, but
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  Speaker 2: what's going on up there? Yeah.
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  Speaker 6: I mean, so the market itself is capacity constraint. So
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  Speaker 6: in 2000, like 22, 2023, um, the entire industry was
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  Speaker 6: burning tens of billions of dollars on aggregate. And so
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  Speaker 6: what ended up happening was, um, they're just decided the
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  Speaker 6: company's decided not really to invest in additional capacity. They
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  Speaker 6: can increase supply via like technology upgrades and stuff, but
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  Speaker 6: it's not enough. And suddenly when you have this inflection
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  Speaker 6: point from AI, the supply and demand mismatch just balloons.
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  Speaker 6: And it's continuing to get worse near term. So there's just,
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  Speaker 6: if you listen to the call, you'll hear that the
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  Speaker 6: company talked a lot about increasing construction CapEx and really
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  Speaker 6: increasing their CapEx year over year, all the way through,
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  Speaker 6: increasing all the way through into the end of the
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  Speaker 6: second half, sorry, the second half of fiscal 2027. So
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  Speaker 6: they're addressing that, right? They have several fabs that they
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  Speaker 6: plan on bringing online and they're not the only ones.
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  Speaker 6: SK Hynix does and Chinese competitors are increasingly leaning into
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  Speaker 6: the potential to increase their capacity. But the way we're
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  Speaker 6: kind of viewing it is now like a lot of
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  Speaker 6: these fabs are really coming online at the end of
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  Speaker 6: 2028 for meaningful capacity.
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  Speaker 7: And so therefore we.
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  Speaker 6: Assuming AI demand stays strong, which it looks like it will,
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  Speaker 6: those vendor financing agreements and stuff like that comes into play.
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  Speaker 6: Does that support the demand in terms of expanding gigawatt
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  Speaker 6: capacity for AI data centers? But you still need fab
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  Speaker 6: capacity for memory to play.
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  Speaker 3: Into that as well.
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  Speaker 1: Okay. So 2028 is when we're going to get some
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  Speaker 1: more supply.
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  Speaker 6: More meaningful supply.
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  Speaker 1: More meaningful supply.
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  Speaker 5: What does that mean between now and then, especially if
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  Speaker 5: you are a consumer and you need to buy something
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  Speaker 5: that is electronic and requires chips?
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  Speaker 9: Yeah.
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  Speaker 6: And to clarify, I mean, we're going to get some
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  Speaker 6: of those initial wafer starts at the end of 2028.
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  Speaker 6: It's more like a 29 story. But to your question,
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  Speaker 6: I think you're just going to have to you're going
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  Speaker 6: to have to pay a little bit more. There's just
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  Speaker 6: not really an option. I think Samsung mentioned $ 100 increase
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  Speaker 6: in at least some of their SKUs this morning. So
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  Speaker 6: I think we're going to, in a while away before that,
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  Speaker 6: you know, I think we're just going to have to
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  Speaker 6: pay more for our phones.
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  Speaker 1: That sounds like inflation, Paul.
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  Speaker 8: Yeah, absolutely.
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  Speaker 7: I mean, it's just everywhere you look.
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  Speaker 2: Which one of the big chip makers is, is one
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  Speaker 2: chip maker better positioned than the others?
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  Speaker 7: I mean, I've got NVIDIA, AMD, Avgo, all those things.
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  Speaker 6: I mean, I think NVIDIA has the ability to lean
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  Speaker 6: into their supply chain. They always try to be the
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  Speaker 6: first to everything, adopting things like co-packaged optics, HBM4. They're
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  Speaker 6: really leaning into networking and their ability to have this
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  Speaker 6: massive supply chain and all these wafer commitments from TSMC.
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  Speaker 6: But you're also seeing the hyperscalers really wanting to remove
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  Speaker 6: that dependence on NVIDIA and lean into their ability to
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  Speaker 6: design their own chips. Even OpenAI is doing that, right?
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  Speaker 6: So I think they're all kind of well-positioned in a
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  Speaker 6: rising tide lifts all boats, but I do think some
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  Speaker 6: of the companies that are helping these hyperscalers design their
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  Speaker 6: own chips are probably going to get a little bit
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  Speaker 6: more of that benefit at least near-term, and then we'll
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  Speaker 6: just have to see long-term how that shakes out, but
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  Speaker 6: it doesn't mean NVIDIA isn't well-positioned.
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  Speaker 1: Stay with us. More from Bloomberg Intelligence coming up after this.
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  Speaker 4: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 4: weekdays at 10 a.m. Eastern on Apple CarPlay and Android
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• 7:33
  Speaker 4: you get your podcasts or watch us live on YouTube.
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  Speaker 7: Here's another deal in the tech space.
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  Speaker 2: It kind of screams out a circular deal. And if so,
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  Speaker 2: should I be concerned about it? Chipmaker Broadcom has agreed
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  Speaker 2: to lend Anthropic PBC as much as $ 42 billion to
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  Speaker 2: lease its.
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  Speaker 7: Chips. So, okay.
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  Speaker 2: We're seeing more and more of these, and I guess
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  Speaker 2: it's okay. Let's check in with somebody who knows this
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  Speaker 2: stuff well, Sarah Fryer, Bloomberg Managing Editor for Technology Coverage. Sarah,
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  Speaker 2: talk to us about this Broadcom deal. What's the background here?
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  Speaker 2: What are both parties trying to do here?
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  Speaker 9: Sure. So, of course, in order to grow in AI,
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  Speaker 9: you need chips and you need financing for those chips.
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  Speaker 9: And so the chip providers, particularly NVIDIA, but in this case, Broadcom,
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  Speaker 9: have come up with novel financing arrangements so that the
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  Speaker 9: leading AI labs can continue to build out their data
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  Speaker 9: centers and advance AI. Now, you're right. It is an
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  Speaker 9: instance of Broadcom finding a way for Anthropic to get
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  Speaker 9: money so that Anthropic could then purchase its chip. So
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  Speaker 9: that is what's known as circular financing. We've tracked altogether...
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  Speaker 9: over $ 1 trillion in these types of circular financing deals
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  Speaker 9: are largely driven by NVIDIA. And so that is something
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  Speaker 9: that gives the market pause when thinking about how these
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  Speaker 9: companies are growing and whether the AI boom is something
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  Speaker 9: that is just so dependent on these deals turning into
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  Speaker 9: benefits for others in the economy as well.
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  Speaker 5: Sarah, just explain to us why circular financing could potentially
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  Speaker 5: be problematic. Is it the idea that if one company
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  Speaker 5: doesn't hold up its end, everything falls apart?
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  Speaker 9: Well, it's that the companies are essentially guaranteeing their future
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  Speaker 9: business by doing these deals. They're doing it this way
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  Speaker 9: as opposed to having Anthropic find the money from somebody else.
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  Speaker 9: This is so expensive to build out the artificial intelligence
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  Speaker 9: boom that you really need, in order for it to
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  Speaker 9: be supported, you really need buy-in from the entire economy, right? from,
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  Speaker 9: you know, every business, everyone who is thinking about the future,
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  Speaker 9: if they're thinking about AI, then maybe we'll get a
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  Speaker 9: return on investment. But as of now, you know, Anthropic
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  Speaker 9: is not growing its business as quickly as it is
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  Speaker 9: spending money. And so that is something that, you know,
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  Speaker 9: we really need to see that these tools that are
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  Speaker 9: ultimately being created, the the systems that are being put
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  Speaker 9: into companies now that are not just tech companies that
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  Speaker 9: are used for use cases that are not just coding
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  Speaker 9: are actually leading to a return on investment in order
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  Speaker 9: to support this massive spending.
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  Speaker 3: All right.
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  Speaker 2: There are very few AI bears out there, but the
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  Speaker 2: ones that are out there, that's exactly what they're saying, Sarah.
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  Speaker 2: They're saying, hey, these companies are spending money and financing
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  Speaker 2: it in questionable ways to And you have to be
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  Speaker 2: an extraordinarily bullish outlook to think that they will ever
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  Speaker 2: generate a return.
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  Speaker 7: On that investment.
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  Speaker 2: How's the feeling in the Valley out there? Is it
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  Speaker 2: more of just a trust me kind of thing? We
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  Speaker 2: know what we're doing?
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  Speaker 9: Well, a lot of it is being clouded by this
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  Speaker 9: AI race, this tools race, where you really have to
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  Speaker 9: feel like if you're anthropic, you have to be open
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  Speaker 9: AI to the forefront. You have to beat China to
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  Speaker 9: the forefront. You want to make sure that you are
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  Speaker 9: still investing in future capabilities of these models. There's a
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  Speaker 9: race to super intelligence or AGI, the notion that AI
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  Speaker 9: eventually will be able to replace human thinking and human tasks.
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  Speaker 9: So that is the North Star for these companies. And
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  Speaker 9: when they see success in an area like coding, they
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  Speaker 9: see that AI models can replace a lot of junior
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  Speaker 9: level computer programming tasks and beyond, it's easy to extrapolate
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  Speaker 9: that in your mind to be something that will eventually
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  Speaker 9: apply to everyone's job. But that's just not possible or
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  Speaker 9: possibly yet. You know, I don't know that I can
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  Speaker 9: trust AI to do my job, for instance, at least
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  Speaker 9: not yet. So I think that it's just a lot
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  Speaker 9: of thinking about if that is to be the case,
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  Speaker 9: if AI is going to replace pretty much every job
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  Speaker 9: that requires a computer, then do we get to a
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  Speaker 9: point where we really need to have a lot more
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  Speaker 9: computing infrastructure? We really need to have a lot more
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  Speaker 9: sophisticated models. So it's this thinking about building now for
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  Speaker 9: the future, but that future has to materialize in order
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  Speaker 9: to make it worth it.
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  Speaker 1: Stay with us. More from Bloomberg Intelligence coming up after this.
• 12:36
  Speaker 4: You're listening to the Bloomberg Intelligence Podcast. Catch us live
• 12:39
  Speaker 4: weekdays at 10 a.m. Eastern on Apple CarPlay and Android
• 12:43
  Speaker 4: Auto with the Bloomberg Business App. Listen on demand wherever
• 12:46
  Speaker 4: you get your podcasts or watch us live on YouTube.
• 12:50
  Speaker 5: Speaking of the markets, Microsoft had itself a banner third quarter.
• 12:55
  Speaker 5: Ryan Lestelka has been writing about this. He's our Bloomberg
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  Speaker 5: Equities reporter. He tabulated it at a trillion dollars. That
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  Speaker 5: was how much its market cap increased, which is just
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  Speaker 5: kind of mind-boggling.
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  Speaker 2: Yeah, and it's funny because people were concerned that, gee,
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  Speaker 2: the software, that maybe AI is going to displace some
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  Speaker 2: of their business. So it really struggled for a while.
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  Speaker 2: At one point, the stock was down 23% year-to-date before
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  Speaker 2: it put up that great earnings number.
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  Speaker 8: Yeah.
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  Speaker 5: Well, July through September, it just went parabolic. And so
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  Speaker 5: let's bring in Ryan Vlastelica now for a little bit
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  Speaker 5: more on Microsoft and what folks are saying about the company.
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  Speaker 5: We've talked about the performance, this incredible move, adding a
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  Speaker 5: trillion dollars in market cap, up 37.5% for the quarter.
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  Speaker 5: How are analysts and investors thinking about the company's prospects, Ryan?
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  Speaker 10: Well, there's been a real change in sentiment towards Microsoft,
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  Speaker 10: a change in sentiment towards the better. Like you said
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  Speaker 10: earlier this year, Microsoft is really getting hit by these
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  Speaker 10: two major concerns. You mentioned the sort of overall software
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  Speaker 10: weakness that we were seeing earlier this year as people
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  Speaker 10: sort of debate What are AI native offerings going to
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  Speaker 10: mean for the growth outlook of these legacy providers? And
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  Speaker 10: at the same time, there was a lot of concern
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  Speaker 10: about Microsoft's aggressive spending on AI. When is that going
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  Speaker 10: to pay off? What is that doing to its cash flow?
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  Speaker 10: So on and so forth. But in late July, they
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  Speaker 10: had a very strong earnings report that really helped to
• 14:20
  Speaker 10: address both of these issues. They had the strongest cloud
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  Speaker 10: computing growth in, I think, four years, which is really
• 14:26
  Speaker 10: a reflection of the kind of AI demand it's seeing.
• 14:30
  Speaker 10: And it gave some positive comments about it's just legacy
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  Speaker 10: software businesses continuing to do well. So address both of
• 14:36
  Speaker 10: those issues. And like you said, the stock rose more
• 14:39
  Speaker 10: than 30% last quarter. That was its biggest quarterly gain
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  Speaker 10: since the late 90s.
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  Speaker 7: And this is real money, folks. This is not like
• 14:47
  Speaker 7: a pink sheet OTC stock.
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  Speaker 2: This is a $ 3.
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  Speaker 7: 8 trillion market cap.
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  Speaker 1: That pays a dividend, no less. That pays a dividend.
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  Speaker 2: Ryan, what's the message from the company about some of
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  Speaker 2: their legacy software businesses that may have some competitive threat
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  Speaker 2: from AI?
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  Speaker 10: Well, I mean, the company remains very optimistic about these businesses.
• 15:07
  Speaker 10: It's really saying, you know, it introduced new versions of
• 15:12
  Speaker 10: its co-pilot AI product that it is integrating into all
• 15:16
  Speaker 10: of these legacy software businesses. So it does see a
• 15:18
  Speaker 10: big market there and it sees a big opportunity to
• 15:21
  Speaker 10: expand in those areas as And we are seeing investors
• 15:25
  Speaker 10: really sort of gravitate into the stock. Like you said,
• 15:27
  Speaker 10: it pays a dividend. The valuation is below its long-term average.
• 15:31
  Speaker 10: The growth outlook remains very strong and durable with double-digit
• 15:35
  Speaker 10: growth in both earnings and revenue expected over the next
• 15:39
  Speaker 10: few fiscal years. So the setup here looks pretty positive,
• 15:42
  Speaker 10: whether you're looking at it from a growth perspective, from
• 15:44
  Speaker 10: a valuation perspective, or as an AI tailwind beneficiary kind
• 15:48
  Speaker 10: of perspective.
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  Speaker 5: Yet investors still want more because they want to see
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  Speaker 5: that kind of performance continue. What are some of the
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  Speaker 5: things that they're watching for, that they're looking for Microsoft
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  Speaker 5: to execute on?
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  Speaker 10: Well, people are watching CodePilot. They want to see more adoption,
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  Speaker 10: more capabilities. Of course, this is a very competitive area.
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  Speaker 10: We saw Meta come out with Muse, which garnered a
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  Speaker 10: ton of attention. OpenAI came out with its own AI
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  Speaker 10: agent product. Anthropic has its own services. All of these
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  Speaker 10: things are out there. There's so much competition. that there
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  Speaker 10: is a real sort of back and forth about who
• 16:21
  Speaker 10: is in the leadership position right now, who is seeing momentum,
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  Speaker 10: who is at risk of losing market share. There's so
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  Speaker 10: much volatility in there. So I think, you know, as
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  Speaker 10: investors I spoke to said, like they are going to
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  Speaker 10: need to keep proving this pretty much every quarter until
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  Speaker 10: we kind of get through this transition period and we
• 16:37
  Speaker 10: get a greater sense of what things are going to
• 16:39
  Speaker 10: be like in a market where AI has really proliferated.
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  Speaker 7: Ryan, how are investors feeling?
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  Speaker 2: Thinking about the capex story and the free cash flow
• 16:47
  Speaker 2: story at microsoft because just you know back to 2023
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  Speaker 2: their capex was maybe 30 billion dollars this year it's
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  Speaker 2: going to be forecast to be 190 billion next year
• 16:58
  Speaker 2: 217 billion so what was a great free cash flow
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  Speaker 2: story ain't so great anymore how's the market dealing with
• 17:05
  Speaker 2: that and what's the company saying Well, one.
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  Speaker 10: Thing I would say is that while free cash flow
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  Speaker 10: has really been diminished because of all of this spending,
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  Speaker 10: Microsoft is still expected to have positive free cash flow
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  Speaker 10: on an annual basis. That makes it sort of distinct
• 17:18
  Speaker 10: among the other major spenders. We did see Meta, Alphabet, Amazon,
• 17:23
  Speaker 10: all of them are free cash flow negative. So this
• 17:26
  Speaker 10: is certainly a point in Microsoft's favor. Someone said it
• 17:28
  Speaker 10: was the adult in the room because it's spending, but
• 17:30
  Speaker 10: not going into the red because of it. But certainly
• 17:34
  Speaker 10: the most recent results we had, the strong cloud computing
• 17:37
  Speaker 10: growth that helps to justify this level of spending. But
• 17:40
  Speaker 10: I do think just the numbers, like you said, they're
• 17:42
  Speaker 10: so big. There's so many questions about when are we
• 17:45
  Speaker 10: really going to see this pay off? What is the
• 17:46
  Speaker 10: longer term growth outlook related to all the spending? How
• 17:50
  Speaker 10: much can it translate into revenue? into earnings growth? What
• 17:54
  Speaker 10: is the spending outlook? Are we still going to be
• 17:56
  Speaker 10: seeing these kinds of huge CapEx numbers as you look
• 17:58
  Speaker 10: out several years? These are some big questions out there,
• 18:01
  Speaker 10: but at least for the moment, people feel like Microsoft
• 18:03
  Speaker 10: is making a great case for its strategy.
• 18:06
  Speaker 5: And I'm glad you point out the fact that it's
• 18:07
  Speaker 5: kind of on its own in terms of the hyperscalers
• 18:11
  Speaker 5: that is free cash flow positive compared to some of
• 18:13
  Speaker 5: the other big names. Having said that, what is the
• 18:16
  Speaker 5: sentiment like in terms of what it announces for CapEx
• 18:19
  Speaker 5: when it does report earnings in about two weeks time,
• 18:22
  Speaker 5: three weeks time? I mean, do people want to see
• 18:24
  Speaker 5: a continued increase in that CapEx budget or are they
• 18:28
  Speaker 5: going to react negatively to that?
• 18:31
  Speaker 7: That's a great question.
• 18:32
  Speaker 10: I do think it really comes down to how much
• 18:34
  Speaker 10: they're able to make the case for itself as far
• 18:36
  Speaker 10: as the ROI on all the spending. If they're able
• 18:39
  Speaker 10: to make a case that all of the spending is
• 18:41
  Speaker 10: translating into revenue growth, into earnings growth, into improved efficiency,
• 18:45
  Speaker 10: I think people will be you know okay with them
• 18:48
  Speaker 10: continuing to spend at the pace they have been but
• 18:50
  Speaker 10: if you see any sort of crack in this narrative
• 18:52
  Speaker 10: any sort of hiccup i do think people will you
• 18:54
  Speaker 10: know look at this and say what are they getting
• 18:56
  Speaker 10: for all of this spending and we could see the
• 18:58
  Speaker 10: stock pull back on account of that the same way
• 19:00
  Speaker 10: we saw with meta and alphabet when they reported last
• 19:05
  Speaker 10: earning season but of course meta then comes out with
• 19:07
  Speaker 10: news and they're able to show like look we developed
• 19:09
  Speaker 10: this product that's doing well there's a lot of optimism
• 19:12
  Speaker 10: about its ability to monetize it going forward and we
• 19:14
  Speaker 10: saw cinnamon shift again to the positive so again things
• 19:17
  Speaker 10: are very fluid in this market there's so much competition
• 19:21
  Speaker 10: and people are really just sort of um you know
• 19:23
  Speaker 10: eager to make sort of trades just based on what
• 19:25
  Speaker 10: is the latest uh you know sign of momentum latest
• 19:29
  Speaker 10: sign of growth and you know caution.
• 19:31
  Speaker 1: Stay with us more from bloomberg intelligence coming up after this.
• 19:38
  Speaker 4: You're listening to the Bloomberg Intelligence Podcast. Catch us live
• 19:42
  Speaker 4: weekdays at 10 a.m. Eastern on Apple CarPlay and Android
• 19:45
  Speaker 4: Auto with the Bloomberg Business App. Listen on demand wherever
• 19:48
  Speaker 4: you get your podcasts. Let's check in with Geetha Ranganathan.
• 19:43
  Speaker 4: She's the Bloomberg Intelligence analyst. She covers all the media stuff. Hey, Geetha,
• 19:46
  Speaker 4: I'm looking at Netflix. Stock's down 21% year to date.
• 19:50
  Speaker 4: I was not expecting that.
• 19:51
  Speaker 2: Talk to us about kind of what the street call
• 20:06
  Speaker 2: is on this company right now? Because when I covered it, Alexis,
• 20:09
  Speaker 2: this stock went up every single year.
• 20:11
  Speaker 7: What's going on?
• 20:12
  Speaker 3: Yeah.
• 20:13
  Speaker 8: The street narrative right now, Paul, is that there is
• 20:16
  Speaker 8: just no new growth catalyst on the horizon. And that's
• 20:20
  Speaker 8: making people pretty nervous. So we have these Nielsen gauge
• 20:24
  Speaker 8: numbers that come out month after month, which tell us
• 20:26
  Speaker 8: exactly where Netflix stands versus its peers in terms of
• 20:30
  Speaker 8: you know, share of U.S. TV viewing time. And we've
• 20:32
  Speaker 8: seen that kind of almost consistently slip through this year.
• 20:37
  Speaker 8: Of course, granted, they've had to contend with some pretty
• 20:39
  Speaker 8: big headwinds, whether it was the World Cup, whether it was,
• 20:42
  Speaker 8: you know, the Olympics, all of that. But even then,
• 20:46
  Speaker 8: it's pretty, I think it's spooking investors, especially as you
• 20:49
  Speaker 8: see kind of YouTube consolidate its lead and really reach
• 20:53
  Speaker 8: record highs. And that's really the biggest problem that they're
• 20:56
  Speaker 8: facing right now.
• 20:58
  Speaker 5: So when it comes to content, they'll be spending a
• 21:00
  Speaker 5: lot more on acquiring content. Is that going to put
• 21:03
  Speaker 5: a strain on the finances?
• 21:06
  Speaker 3: You're right, Scarlett.
• 21:08
  Speaker 8: So they have actually increased their content budget by 10%
• 21:11
  Speaker 8: this year. Remember, that compares to about a 5% to 6%
• 21:15
  Speaker 8: increase in the previous year.
• 21:17
  Speaker 3: So definitely a big step up this year.
• 21:18
  Speaker 8: We're seeing a budget, a total content budget of about
• 21:21
  Speaker 8: $ 20 billion increase. And again, that's the part that is
• 21:24
  Speaker 8: scaring people because they're like, okay, you've increased your content
• 21:27
  Speaker 8: budget pretty substantially. Why are we not seeing this translate
• 21:31
  Speaker 8: into those big sleeper hits like a Squid Game, like
• 21:34
  Speaker 8: a Stranger Things? We're just not having those water cooler
• 21:37
  Speaker 8: hits anymore despite you spending so much on content. So, yeah, that,
• 21:41
  Speaker 8: you know, the big concern is that is definitely going
• 21:45
  Speaker 8: to weigh on margins. And remember, Netflix has really gone
• 21:47
  Speaker 8: from a subscriber story to a revenue and a margin story.
• 21:51
  Speaker 8: We've gotten to the 31, 32 percent operating margin. The
• 21:55
  Speaker 8: street wants to see Netflix get to 40 percent margins.
• 21:58
  Speaker 8: The question is, can they get there and how soon
• 22:00
  Speaker 8: will that be?
• 22:02
  Speaker 7: So I think you called it perfectly there, Geetha.
• 22:05
  Speaker 2: This story has evolved from a subscriber growth story, which
• 22:08
  Speaker 2: is easy for the market to understand and to value.
• 22:12
  Speaker 2: But now it's this is a I'm not going to
• 22:14
  Speaker 2: call it a mature media company, but it's a lot
• 22:16
  Speaker 2: more mature than it was a few years ago. And
• 22:18
  Speaker 2: now the question is, why do I pay 19, 20
• 22:19
  Speaker 2: times earnings for this when Disney's at 15 times? I mean,
• 22:23
  Speaker 2: is that kind of the conversation we're having now?
• 22:26
  Speaker 3: That is exactly the conversation.
• 22:28
  Speaker 8: But I think investors are also a little bit hyper-focused
• 22:32
  Speaker 8: on this U.S.
• 22:33
  Speaker 3: Engagement number.
• 22:34
  Speaker 8: So granted, yeah, their total engagement hasn't necessarily grown dramatically.
• 22:42
  Speaker 8: But you have to remember, as he said, they are
• 22:43
  Speaker 8: trying to kind of broaden, as Ted Sarandos said, they're
• 22:46
  Speaker 8: kind of trying to broaden their investments across different content genres.
• 22:49
  Speaker 8: So live entertainment, they said, yes, they're spending about a
• 22:52
  Speaker 8: billion or even maybe slightly more on that this year.
• 22:54
  Speaker 8: Doesn't really do a lot for engagement because you're only
• 22:57
  Speaker 8: going to watch that title once, right? You're not going
• 22:59
  Speaker 8: to go back and watch it like twice. you know,
• 23:01
  Speaker 8: like comfort food television. So there are a few trade-offs there.
• 23:05
  Speaker 8: But the one thing that I do want to highlight,
• 23:06
  Speaker 8: Paul and Scarlett, is that, you know, we're really focused,
• 23:10
  Speaker 8: I think, a lot on U.S. We're not giving them
• 23:12
  Speaker 8: enough credit for their international performance. Remember, US is less
• 23:17
  Speaker 8: than a third of their business. They still have pretty
• 23:19
  Speaker 8: good momentum internationally. And we somehow have to see them
• 23:24
  Speaker 8: kind of show that and show that a little bit
• 23:27
  Speaker 8: more convincingly and investors have to get on board with
• 23:29
  Speaker 8: that part of the business.
• 23:31
  Speaker 10: Right.
• 23:31
  Speaker 1: But I mean, they want to monetize.
• 23:34
  Speaker 5: I mean, they're able to monetize their US base much
• 23:37
  Speaker 5: more than they can some of their international subscribers. Which
• 23:40
  Speaker 5: of the international markets has the potential to turn into
• 23:43
  Speaker 5: a more lucrative base similar to the US market?
• 23:47
  Speaker 8: Yeah, that's a great point. I mean, you just look
• 23:49
  Speaker 8: at our pool for Netflix in the U.S. at about
• 23:51
  Speaker 8: $ 15 to $ 16 versus like $ 4 in the rest of
• 23:55
  Speaker 8: the world. So, yeah, that tells you the whole story.
• 23:57
  Speaker 8: But the one, you know, as part of that interview
• 23:59
  Speaker 8: with Lucas Shaw, one of the markets that Netflix is
• 24:01
  Speaker 8: focusing on a lot this year has been India. There's
• 24:05
  Speaker 8: a lot of eyeballs there, obviously. They don't have an
• 24:08
  Speaker 8: advertising tier. So I think potentially if they introduce an
• 24:11
  Speaker 8: advertising tier, that is something that could take off in
• 24:14
  Speaker 8: a pretty big way. But they did, Ted Sarandos did
• 24:17
  Speaker 8: point to a lot of momentum with their content titles
• 24:20
  Speaker 8: and a good, healthy increase in the subscriber base. So
• 24:23
  Speaker 8: I think they're looking at a lot of the Asian markets,
• 24:25
  Speaker 8: which has been relatively under-penetrated for them as their next
• 24:29
  Speaker 8: big chapter of growth.
• 24:31
  Speaker 2: So one of the unknowns left, I think, at least
• 24:34
  Speaker 2: for me, is sports. And how do you think the
• 24:38
  Speaker 2: company is going to proceed there? Because they've been very
• 24:40
  Speaker 2: reticent to dive into that live sports business, given the
• 24:43
  Speaker 2: programming costs.
• 24:44
  Speaker 8: Yeah, absolutely, Paul. So, yeah, they've been very, very disciplined,
• 24:48
  Speaker 8: I think. They've made some bets, again, very calculated bets,
• 24:51
  Speaker 8: very disciplined in terms of, you know, even with the NFL.
• 24:55
  Speaker 8: They did increase their investment, but nothing crazy just yet. Again,
• 24:59
  Speaker 8: I think the big question on everybody's mind has been,
• 25:01
  Speaker 8: you know, if the NFL does end up repackaging a
• 25:04
  Speaker 8: lot of its current media deals. You know, will Netflix
• 25:08
  Speaker 8: actually make a big, bold bet? I think the question
• 25:11
  Speaker 8: then again comes back to this whole engagement question. Again,
• 25:14
  Speaker 8: when you have a sports game, yes, you can drive advertising. Yes,
• 25:17
  Speaker 8: you can drive some signups. But it really doesn't help
• 25:20
  Speaker 8: you much with that engagement metric because, you know, people
• 25:22
  Speaker 8: are only going to watch it once.
• 25:24
  Speaker 3: So, again, it's a tough balancing act.
• 25:27
  Speaker 8: So far, they've said and they've shown that they're going
• 25:30
  Speaker 8: to be pretty disciplined when it comes to sports. So,
• 25:32
  Speaker 8: you know, we don't necessarily see them doing anything very
• 25:35
  Speaker 8: dramatic on that front.
• 25:37
  Speaker 5: So, Ted Sarandos made clear why they pursued Warner Brothers'
• 25:41
  Speaker 5: discovery and then backed out after the price got to
• 25:43
  Speaker 5: a certain point. Do you think that Netflix's M &
• 25:47
  Speaker 5: A ambitions have been snuffed out? I mean, are they
• 25:49
  Speaker 5: going to look to maybe make another acquisition?
• 25:53
  Speaker 8: I think they're going to have to. I think the
• 25:55
  Speaker 8: street almost expects them to. So, you know, after that
• 25:58
  Speaker 8: Warner Brothers deal obviously fizzled out for them, you know,
• 26:01
  Speaker 8: there were so many rumors of them looking at Lionsgate,
• 26:03
  Speaker 8: which is a pure play studio. Again, fits really nicely
• 26:06
  Speaker 8: with their portfolio, has a lot of titles, could potentially
• 26:09
  Speaker 8: serve really good even as an AI player for them
• 26:12
  Speaker 8: to train their models. You know, again, those didn't really
• 26:15
  Speaker 8: go anywhere. But I would say, you know, the investment community,
• 26:18
  Speaker 8: I think the next big asset that we are all
• 26:20
  Speaker 8: really focused on is NBC. Now, NBC is going to
• 26:24
  Speaker 8: be split off from Comcast mid-2027. There's a lot of expectation.
• 26:29
  Speaker 8: There's a lot of, you know, kind of excitement surrounding that.
• 26:33
  Speaker 8: The only problem here is, yes, you do have a
• 26:35
  Speaker 8: great studio with Universal. You do have that streaming asset
• 26:38
  Speaker 8: with Peacock. The question is, does Netflix really want to
• 26:41
  Speaker 8: get into the theme park business?
• 26:43
  Speaker 3: Maybe they do. Maybe they don't. So that's a little
• 26:45
  Speaker 3: bit of a wait and see.
• 26:47
  Speaker 4: This is the Bloomberg Intelligence Podcast, available on Apple, Spotify,
• 26:52
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• 26:56
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