Everyone me kevin here boy oh boy netflix has been the canary in the coal coal line of four markets when we had the q4 results and the q1 results. The first quarter of the year and the second quarter of the year boy oh boy netflix absolutely crushed. The stock market because we got not only big old minus twenty percent moves in the price of netflix and plummeting of this stock to the point where it was in the four hundred dollars. Then was in the 300 and bill ackman's like i'm going all in on netflix and netflix has a temporary rally but then it proceeds to crash all the way under 200 uh and boy oh boy netflix has also therefore then pushed the stock market lower and lower and lower netflix has been this company that everybody likes looking forward to mostly to see okay how bad is this earning season going to be because if netflix does terribly oh boy everyone else is probably going to suck as well and we've got some good news from the canary in the cold mine instead of sucking to the tune of losing 2 million subscribers.

They only lost 970 000. Subscribers. Which is still absolutely horrible. But it's half as bad as what the market expected and so.

While the market was also expecting 17 percent. Implied. Volatility. Suggesting.

The stock could have gone up or down. 17 percent. Showing. You how uncertain.

The market was about these earnings. The stock ended up going up eight percent in after hours. Which is actually phenomenal and this is the kind of canary in the coal mine. We actually want to see a happy canary in the coal mine.

Now earnings per share going forward uh. Unfortunately. The going forward estimate wasn't as good as what we were hoping for q3 earnings per share we ended up getting a guide of two dollars and fourteen cents versus two dollars and seventy one cents. But this half as bad news on that earnings or that subscriber.

Number was really cheered by markets now is this a company that tells us anything else about the consumer is this company. A trade for the stock market is it a currency play or is this a fundamentally good company that should be invested in all of those questions that i just stated are what you're going to learn in this video. So let's go right into the depths of this video. The first thing that you need to know is this is earnings or the press release from netflix for their earnings release and we need to know that wall street has an expectation that netflix is going to provide and for an eps of 10 and 88 cents for this.

Company 1088. For this company. Which is currently trading for roughly 220 means that the company is trading for a uh price to earnings multiple a p e ratio of about 2022 now a general rule of thumb that i try to follow is that you want to see a company growing their earnings at roughly the same number as the price to earnings multiple. Now i don't want to lose you here.

But let's just put it this way okay right now netflix is not really growing their earnings they're not expected to grow. Their earnings any more than this year. 12 percent in 2022 and. 82 percent in 2023 and finally they'll get to 183.

Percent. In 2024 at least. That's what wall street is expecting maybe they'll exceed expectations let me show you how this works and then we'll move on to less nuanced numbers here. Because i know numbers can get overwhelming.

But just to give you a very simple understanding. Let's take 2023 for example here. And let's say that in 2023. They end up growing their earnings at 10 well 10 into this price to earnings.

Multiple of 20 means you have about a ratio of two right you're paying twice as much for price to earnings multiple as the rate at which the company is growing a peg ratio of two is a tool for us to try to compare to other companies. Personally. I really like that right now companies. Like tesla and google are sitting between the.

13 to 15. Ratio in terms of a peg. Which in my opinion provides a better value than what we could see for netflix's ability to grow their earnings. But is this potentially just short term is there maybe a reason.

Why netflix is having trouble growing their earnings well the answer to that is yes and i'm about to fully explain that to you because there are some things here that quite frankly are beyond netflix's control. But that lack of control could end up being a very very nice positive tailwind helping out netflix going forward. So we'll talk about that so jumping on over here to their press. Release.

There are a few things that we want to pay attention to most important is there is a risk in this company of what i call tech memory. So tech memory. Means. That when you have a tech company.

You're used to a company growing at like 30 every single year and that lets people pay really high valuations for these companies uh and unfortunately tech memory is something that you do not want to have and so therefore. I think that's a risk at netflix is that people think oh. This is such a high growth company it really isn't anymore they're not really growing that incredibly anymore uh they're growing really under 10 in fact you could see that here. Year over year their growing revenue is about.

98 in q1 year over. Year that has slowed to 86 in q2 and they're expecting that to slow even further to just 47. Revenue growth in q3 year over year. That's not great because now you're paying a lot of money for a company.

That isn't really able to grow revenues as well as it should and there are quite a few reasons for this but first i want to start with this as a potential reason. Here in the asia pacific region. Revenue grew 23 percent year over year. Excluding foreign exchange.

We'll talk about foreign exchange. A bit that's actually great when we think about that for a moment. It's like wait a minute. Why is there headline forecast that they're going to be growing less than 5 percent.

But they're growing 23 percent in the aipac. Region well what this means is that the us. And canadian markets. And maybe even the euro markets are growing substantially slower than the apac regions.

But the asia pacific regions are really important to pay attention to because the average revenue per customer is very different i want you to think for a moment how much do you think the average revenue per customer is in the united states canada and europe and then how much do you think the average revenue is now compared to the asia pacific region. Okay well think about those numbers now i'm going to give you the first one in the united states and canada we're at 15 and 95 cents uh in average revenue per membership okay average revenue per membership 1595 per month. I'm going to skip the euro for a moment. How much do you think the asia pacific region.

Is is it 10 less 20 less 30 less well. Folks it comes in at just 883 cents. So it's almost half as valuable. So yeah you're growing substantially more here.

But that's only half as valuable as the growth that you have in the united states and canada. The same is true hate to say it for latin america. Which latin america. Is where netflix is now testing their whole like hey pay us a little bit extra and we'll allow you to share your password plan.

Which personally i think is like dude. If i was in latin america. And i wasn't making a lot of money. I would not even pay an extra dollar per month to share my password.

I would just share my password now maybe they have like special tools for being able to limit password sharing. But that's very difficult to do in fact to limit password sharing. The bloomberg terminal for example gives me this biometric authenticator that i have to carry around and i even put an apple air tag on it because it's so annoying. When i don't have it and i lose it so and that's also why i've tethered it to this backpack here.

It's so so that way it's like really obvious where it is because i need it so it's very difficult. It's almost impossible for me to share my bloomberg login password. But netflix come on they're not going to put people through that crap anyway. This is also not profitable enough to send people biometric authenticators right so i don't know how they're going to pull that off.

But if you look at latin america. Unfortunately they're not faring much differently their average revenue per user on a monthly basis is eight dollars and 67 cents. So even though you are seeing growth in the asia pacific regions and latin america. You're not actually growing into a more profitable customer and if you're losing.

We don't have a car. We don't have the count of this netflix doesn't give us the account of this but if we're losing more of these customers and gaining more of these that's not great because you could lose one customer. Here. And you could gain two customers here and this would basically be a wash.

Yet on the headline. It would be like oh yay netflix is growing uh not necessarily right so that's really important to remember is that netflix is now i hate to say. But there's a chance that covet has somewhat saturated netflix's growth in the profitable regions and so now you're kind of expanding into the unprofitable. I shouldn't say unprofitable.

But the the less uh profitable regions right because you're still producing the same content to maintain your us. Users now you're just let's say dubbing it in in you know indian. Languages or or whatever. So uh netflix.

Did increase their prices by the way uh in march. On march 30th. They increased their prices uh a buck to a couple bucks depending on which plan you were in and netflix suggests that that has actually led to churn remaining slightly elevated. They do argue in their earnings.

Call that is very typical for churn to be elevated after uh you raise prices now something else that i noticed here is that their uh asia pacific average revenue. Uh per user in the aipac region was minus two percent uh and they say us that actually has to do because of india. So uh. Whereas korea and australia helped actually boost uh their average revenue per user in the aipac region.

Which the apac region again is already 50 percent of the united states right. But what's wild here folks is that india is where they're seeing a massive amount of user growth. But they're having to sell the service at a cheaper price than even in korea and australia and to some extent this makes sense just considering you know average average per household income per capita income or household or per capita income those are two different things right per capita is per head uh and uh. There could be multiple heads in the house right anyway.

So okay uh now. We've got a touch on foreign exchange. So we know we're growing. But we're growing to uh not such a desirable uh or i shouldn't say desirability.

But to a lower income demographic. Now we've got a shift to another big thing. That's really hurting netflix. But could end up being really good for netflix and could end up creating a big opportunity for you as an investor.

I do want to mention. Though these sorts of fundamental analyses that we're doing right now we try to do almost on a daily basis. When the market is open in the course. Member live streams linked down below.

We take videos or earnings reports from maybe a couple weeks ago or recently that i don't cover on the main channel. And we try to get as much of the recent information that people aren't talking about out in a course. Member live stream setting. Where we're going through these releases.

Together. We're doing fundamental analysis. Together and that way too rather than just listening to me uh with sort of conclusions you can actually see how to do it yourself. And that's the whole purpose of the programs that i have on building your wealth link down below is teaching you how to make money in real estate and investing so join those you get lifetime access to the programs you get access to the live streams on building your wealth and we constantly add new content so check those out link down below there's a coupon code that does expire on july 28th which is the same day we get a gdp read.

Which that'll be quite remarkable okay. So what do we want to take a peek at here regarding. Some of the issues that netflix is running into keep in mind we're also going to be talking about trade desk towards the end of the video trade desk is a company that i'm a big fan of but we've got some bad news for trade desk that came out from netflix uh at least it's offset by yes your ability to use that coupon code for 50 off up until july 28th okay enough of that now let's focus on what we have on screen here so what we have here is fascinating so first they mentioned that we have high exposure to this unprecedented appreciation in the us dollar. Because 60 of their revenue comes from outside of the united states and so even though they're forecasting.

Only five percent revenue growth. We saw that earlier when i made the sad face that actually would be 12 revenue growth. If they had a neutral currency. So let me briefly explain that without trying to get too complicated basically if all of the growth that happened around the world was happening in us.

Dollars netflix would actually be growing revenue at about 12. But unfortunately because they're taking money in let's say uh ruby's and they're taking indian rubies in and so they take the rubies in and then they have to at some point at the end of the day or week or month or whatever convert it to dollars those dollars are coming over less valuable than what they're actually charging for in a dollars set originally because this price is set that's somewhat compared to dollars originally. But by the time it actually comes over netflix sees less dollars. And so as long as the dollar keeps going up netflix is probably going to continue to have pain.

But there is also a chance of an opposite approach happening here now we just did a big lecture. Yesterday on what i call the great dollar short. And this is potentially shorting. The dollar because there's a chance that the dollar might actually fall once we start seeing that inflation is more transitory.

But that's a whole different topic or for a different day. Maybe i'll make a video on that maybe not but it's in the course. Member live stream from yesterday in case. You want to see it and so what's wild here is that if the us.

Dollar starts falling so the dollar goes down then instead of having headwinds for netflix. You're actually going to see tailwinds for netflix as a falling dollar actually makes them more competitive because again 60 folks that's more than half of their revenue comes from outside. The united states that's going to be really critical going forward. But then you have to ask yourself is netflix still worth it.

If you're paying 20 times earnings for a company that even on a currency neutral basis. Is only growing revenues not even bottom line by 12 and that's obviously in this ideal scenario of being able to to have you know currency neutrality. Which we just don't have okay so risk number. One with netflix is let's just do a quick recap.

Okay risk. Number one is that you have what i call the tech memory right in terms of like the broader market. Hey like broadly. Netflix is great it's a great canary in the coal mine that says broad and smiley face sorry.

It's cut off. But anyway uh in terms of actual like netflix itself you have tech. You have headwinds of the tech memory. Which is not great so one tech memory that's people paying tech.

Valuations for a company that's not growing as fast anymore. Unfortunately. You have a dollar issue with a strong dollar right. These are your downsides uh for netflix so down and flx because it's not a tech company.

I mean like to some degree. It still is it has technology obviously. But it's not growing like an emerging tech company right strong dollar. Hurts them the next issue that you have is ads uh and then obviously uh the one that we also mentioned which i didn't include on this list is the fact that you're having more growth more growth at lower average revenue per membership right so these are four big dangers that you have and we've talked about most of these.

But we haven't yet talked about this one here and that folks is a biggie because see netflix now has partnered with microsoft sadly not trade desk. Even though the cfo of netflix went over to trade desk trade desk. Was not able to uh lure in netflix. Which is unfortunate.

And so good news for microsoft though microsoft got the partnership with netflix. It is an exclusive partnership in fact i can show you where that exclusivity is in the earnings call. They are still partnering with amazon you can see that here in the earnings. Call.

They're still partnering with amazon for aws. So that's actually good to know for uh for amazon. But here you go will ads be sold exclusively on microsoft the answer to that is yes and they chose microsoft because of their technical capacity for go to market opportunities. Privacy and there was briefly a mention of gaming.

But this was not developed on by any of the uh by by any of the executives. It was more that was a question that was asked of like hey. Like what other opportunities could we see in the future here it is can can the partnership with microsoft involve cloud and gaming and perhaps other things over time and they mentioned that yes. But we didn't get any other kind of color on that so i thought that was like an interesting potential direction with this partnership with microsoft.

But but for me that's what i just call like noise. It's the icing on the cake. I can't value that i'm just gonna like okay cool maybe whatever. But what we have to talk about is ads ads are everything uh when a company that has no ads when you pay for their membership is deciding to do the following our lower priced advertising.

Supported offering will complement our existing plans which will remain ad free okay. So what they're trying to do is make money from people who are price sensitive. So this is what every company wants to do every company wants to be able to sell you the product for the absolute. Most of the money that you're willing to pay so for example.

If you are willing to pay ten dollars for something. But the price is eight dollars. The company lost two dollars because they didn't capture that eight dollars. If somebody else is only willing to pay six dollars for something then the company loses that potential six dollars.

If it's profitable obviously to sell it at six dollars best case scenario. The company is able to say let's sell the ten dollar product to the person willing to pay ten let's sell the six dollar product to the person willing to pay six that way they're getting most customers right and so that's really what netflix is trying to do here they're trying to say hey look if you want to pay 15 bucks a month and have a you know premium quality and no ads. Great you can do that but how about we now introduce a new feature which we don't know the pricing of this yet. So i'm speculating this we're going to introduce something at let's say 499.

And it'll be supported by ads. Okay great maybe you'll be able to get a larger base here right. But what i question is how much value are you actually going to have in what's known as in the advertising world cpm clicks per ml right this is how ads are charged and uh the way you can kind of think about this is very simply think about youtube okay youtube pays about let's just say on average somewhere around ten dollars as a cpm for some content like maybe finance. It could be 18 it could be 20 it could be 25.

But for generic entertainment. It's usually between 5 and 15 so let's just go with ten dollars as a cpm if netflix now gets one million users let's get rid of the dollar center. Let's say they get a million users and each of these users watches a hundred ads well that equals 100 million ads right well 100 million ads. Divided by a thousand.

Which is how we get to this cpm right so now we have to divide 100 million by a thousand. Which if we take three zeros off of that would bring us down to not ten million not one million but a hundred thousand one hundred thousand one hundred thousand there we go paid mill slots basically times. The ad rate of 10 means netflix would stand to see about 1 million dollars of revenue. So if you had 1 million users watching 100 ads.

Which is three ads a day. Maybe netflix would make a million dollars let's now assume that all of that is 100 profit let's compare to their net. Income oh their net income in this quarter was 14. Billion dollars.

And it was 960 or the forecast is 961 million dollars so a big decline there in net income forecast. But wait a minute even if a million new users watch a hundred ads. So three ads a day that's only an extra one mill. Which is like less than one tenth of one percent of their net income assuming this is all profit after the microsoft split and when i say microsoft split.

I don't mean stock split. I mean like microsoft is going to take some of the money as a commission for placing the ads right okay so in my opinion. That's really low. And there are some serious risk factors about netflix going to an ad supported model.

The first risk factor is that what happens if people like me pay 15 bucks a month for netflix. Because i am. But then i'm like dude. You know what i'm watching so little netflix.

Let me just go down to the 499 option. And then when i watch netflix. I'll just watch. The three or four ads or whatever.

The random time i watch netflix. See the beautiful thing about this model is they make 15. Bucks whether i'm watching or not. Here yeah they make 499.

Whether i'm watching or not. But that's cpm they only get presumably if i'm watching and if i ain't watching and they're charging you 499. Or a buck 99 or worse. They're giving it to you for free.

Then the ad play for cpm ai. N't working unless people are constantly watching. So i am personally not enthusiastic about people going to this or netflix going to the cpm model. Because it could lead to downgrading by by existing higher revenue users.

And it could also mean that even if people watch a lot initially when they taper off and watch less. I don't see this actually moving the needle on their net income. I think it's a terrible idea and i don't know how they're going to continue to support their crazy expenses. Which they have on on on production which their expenses for production are going up.

They mentioned a 10 to 15 percent impact because of covet. But look at this they grew total revenues uh in the second quarter compared to the first quarter at. 13. Percent but their cost of revenues went up 94.

The technology. Uh division. Also went up almost 10 their gna stayed roughly stable at about a three percent increase. And so we're seeing a company here that is spending more money on on one hand.

So you're spending more money to produce content. But on the other hand you're also potentially selling this product to a less valuable user base the asia pacific use region. Latin america. And you're also going to this ad.

Supported model. Which in my opinion has very little chance of being anywhere near as profitable as a monthly subscription. Because the monthly subscription doesn't rely on people actually watching remember folks the gym membership model. What does the gym rely on the gym relies on you not going to the gym.

It relies on you not using the service. It just wants you to pay the 30 bucks a month and not go because then the gym isn't overpopulated that new guests are like oh. These machines are available. And you pay a sticky subscription.

And you spend your money now look balance. Sheet. Wise we're decent here we've got about. 78 billion dollars in current assets minus about.

63 in current liabilities not considering deferred revenue that gives them about 15. Billion of free cash if they burn about 300 per quarter uh in millions. That's uh that's about five quarters of cash eventually if they keep burning money the way they do uh on their cash flow. Statement.

Here eventually they are going to uh need to raise money. But because so far they've been cash flow negative. Now i do want to briefly just touch on the trade desk partnership. So obviously they uh partnered with microsoft and not trade desk.

I do think this is bad news for trade desk. Because uh you know and look trade desk. And netflix. I want to be clear about this both of them could end up doing very very well because we might just be at a nasdaq stock market bottom.

We could be right there and all of these companies are going to do better so by no means do i want to like make this video and like poop on netflix and say oh it's not going to make you money it's just is it a fundamental play or is it a trade right timing is a trade fundamentals is like do i really have high conviction in this company. Me personally i don't it's not a company. I would invest in what about trade desk. Well this miss on the netflix deal is not great.

Because there was a lot of opium built into the stock price on that and i know that's not fundamental that's a trade and that trade did not work in that sense uh. But what does it mean going forward. Well. It's probably gonna be harder to get that disney partnership now they already have a partnership with disney.

But they don't have a disney plus partnership although i think disney plus is gonna be a little smart and they're gonna watch to see what happens with netflix. I don't think the cpm model is going to work and disney would be very smart to go. Yeah. No we ain't doing the cost per ml.

You know cost per ad model. That's crazy anyway my thoughts thanks so much for watching we'll see in the next one.