Welcome back everyone. Today on the Joseph Carlson
Show. We're finally getting back to
earnings season after a long weekend.
We have an important earnings coming up today that is Netflix.
Now, Netflix is important for a couple of reasons.
One of them is for me personally.
I own $90,000 of the stock. It's one of my most significant
bets. So obviously, I care about the
company and its report. But Netflix is also one of the
major tech companies kicking off this earnings season.
They're going to set the tone, so to speak.
Now Netflix is not the only one reporting earnings.
We have Netflix aftermarket closed today.
But then looking further along this week on the calendar, we
have Ally Financial going to go over that earnings report and
share a few thoughts on it, as well as Intel and American
Express. American Express lets us know
how Visa, MasterCard are going to do.
Now again, the major focus is going to be on Netflix and I'll
be giving you predictions on how many subscribers I think they're
going to gain today and what the outlook looks like for 2025.
Now, of course, we also have some big news to get into.
Trump has taken office officially.
Yesterday was the inauguration and there's a lot of talk about
Trump and tariffs. He's been going on about how
he's going to stick it to these different countries.
He's going to make them pay. He's going to make things even.
And the tool of his choice to do that is tariffs.
Taxing the imports on other countries products does have an
impact on pricing. And today we're going to be
looking at the different countries and products that are
likely going to be impacted the most from the tariffs.
And there's a lot of investors concerned of whether or not
tariffs 'cause inflation, we're going to be discussing if they
do in fact cause inflation and if so, how do we protect our
portfolios against inflation. And then finally, over the past
couple of years, as we've all been living our own lives, busy
with the endeavors that were involved in Walgreens has had a
secret battle being waged, a secret war, so to speak, with
Walgreens and a digital refrigerator cover company.
We'll be going over all the details of this bitter battle
between Walgreens and this fridge company.
Now we start off today looking at the upcoming earnings of the
week. In order to do that, the best
view is with the calendar that I have on Qualtrim.
If we go to qualtrim.com, this is the website that I develop.
It's part of the Patreon membership.
We have this new feature here. You can look at a 5 day week
calendar. It shows the current day
highlighted there in blue just like Google Calendar.
And then you have the company's reporting earnings organized by
market cap underneath with before market open and
aftermarket close. Now looking at Netflix
specifically today and what I think they're going to do, we
can take a look at some of the expectations.
If we click on Netflix here, it opens up this drawer and we have
this feature here called what to watch for it is AI generated.
This is where Qualtrum feeds the AIA bunch of data specific to
their financials, their last earnings report, and then it
summarizes what are the most important things based on the
commentary of the CEO that investors should be watching
for. And it highlights some of the
biggest key performance indicators to look at.
For example, one of the things we know about 2024 that
management has said is that the content slate was a little bit
uneven. There's some months where they
came out with a lot and some months not a lot, and that was
mostly because of the writers strike.
Now, they say the strategy includes a consistent drum beat
of big title releases across various regions.
That drum beat means that every single week, every single month,
they're going to be consistent big releases from Netflix in
2025. They're expanding into new
entertainment formats. The company is actively
investing in new initiatives including gaming and live events
such as a Tyson Paul fight WWE broadcast.
The expansion represents incremental growth
opportunities. On the earnings call today,
you're going to hear Netflix CEO's talk about this diverse
content slate and going into the live events, you're going to
hear a lot of analysts ask about this in the Q&A.
They're going to want to know how did things go with the Tyson
Paul event? How do they go with WWE?
How many new subscribers did these big live events gain?
Were they really profitable and bringing in a lot of
subscribers? What's the churn rate after the
event ends? That's a lot of the questions
they're going to get on this call.
The next thing of focus is the advertising tier, advertising
grow trajectory. The ad plan's membership base is
growing and the company expects substantial year over year
increase in AD revenue, suggesting a strong growth
opportunity that could become more integral part of their
revenue stream in the upcoming years.
Right now, the ad revenue is not the most meaningful part of
Netflix's revenue, but with the way that it's growing, how fast
it's growing, it should really become meaningful over time.
Now, with Netflix's earnings report today, the biggest single
metric that investors are going to be paying attention to is
that subscriber number, the thing they always pay attention
to. But today, it's more important
than usual because it's the last time they're reporting that on
their regular quarterly reports. Now they're going to give
updates down the road when they hit certain landmarks, right?
If they hit like a 50 million subscriber landmark, but they're
no longer going to be reporting every single quarter how many
subscribers they gained and lost.
And against the expectations, it's going to be a blackout.
So the way that I look at this is this is the final hoorah of
Netflix's subscriber number before going into the abyss,
before going into the dark. And this sets the tone for all
of 2025. If they miss on this subscriber
number or it comes in low, that means that they go into this
abyss after having missed their subscriber number.
And then investors will be concerned about their subscriber
gain the entire rest of the year.
So it's especially important that they do well this quarter
today. Now I have a couple thoughts on
what may happen in terms of predictions.
We have the different ranges here.
If Netflix has less than 0, if they somehow lost subscribers,
that would be a doomsday event. The stock would be down 25% at
least. That would be, I think, a
reasonable down day. It'd be down 25%, maybe 30%.
If they really lost subscriber last quarter after what they put
out in content, that would be a significant problem.
Investors would be incredibly concerned.
Management would have to, you know, deal with that issue.
I don't think that's going to happen.
I think the chances of that happening are incredibly,
incredibly slim. If they only gain 1 to 4 million
subscribers, that's going to be a really weak quarter.
It'll be great that they didn't lose.
They're not shrinking, but I still think that's a -, 10% day.
Really sad. If that happens, I'm going to be
very bummed out about this earnings and the performance of
the company. If they gain between 5:00 to
7:00, that's just kind of a meh day, not the worst.
It's not a doomsday event. They still grew, but that's not
the fastest growth either. That's as fast as they grew last
quarter. Nothing special.
The stock might flounder around. I can't see it trading too much
on that. It may go down a little bit if
that's the case. I think where we get to the
happy medium is somewhere around 8 to 10 million subscribers.
If that happens, I'm happy as an investor, I'm satisfied.
The company's growing. They're on track.
That's more than they gained last quarter, not as much as
they gained last year in Q4, but I think that would be a solid
quarter. So I'd be happy with anything
above 8 million subscriber gains.
Where I'd be really thrilled with the company's performance
if they're able to do this is 11,000,000 plus.
If they get over that 11,000,000 mark, double digit subscriber
gain, you know, this is that would be significant growth.
They're headed towards 300 million subscribers.
I would be super happy if that's the case.
So this is basically how I break it down and my reaction to these
different subscriber number options.
Now, my guess is, if I have to guess, I think it's going to be
over 8 million up to 11 + 1,000,000.
I think it's going to be somewhere in this range.
I'm leaning more towards 11,000,000 for a couple reasons.
First of all, they had the Jake Paul Mike Tyson event.
Nobody likes Jake Paul, everyone knows that, but everyone watched
that event and a lot of people signed up for the Netflix
service to watch that fight. Some of them of course
cancelled, but many of them will keep it because they see all the
other great content. Then of course you have the NFL
live events. That was a huge event on Sunday
broadcasting two NFL games. I think that caused a lot of
sign ups as well. Then you had Squid Game season 2
released the day after Christmas, which went viral all
across the world. So we have some major, major
content releases that just makes me believe they can get into
that double digit, the 10 million plus.
So again, we'll see what happens.
In terms of my Netflix investment, I haven't sold a
single share. I'm going into this with my full
stake in the company and I'm willing to hold it through a
downturn. I've proven that once before.
I can prove it again if we have a bit of a bump now.
Next up, we have Wednesday before market open.
We have Ally Financial is one of the companies reporting
earnings. This one's more interesting
because there's a lot of different financial companies
that have already reported earnings and I think it's going
to be good. I think Ally Financial will be
on the top and bottom line, they'll put out a strong report
simply because of the reports from all the major banks.
The indication right now is that is that the customer is strong,
the economy strong. Things look very bullish
overall. So when you're looking at other
financial companies like Ally Financial or Sofi, I think
investors right now are expecting a good quarter and I
think they're going to get it. A huge amount of Ally
Financial's balance sheet is based on paying off car loans,
used car loans, and it looks like consumers are doing that.
They're able to afford their cars, they're able to pay for
them. So I think the trends with
credit performance and charge off is going to be good #2 is a
net interest margin. This quarter.
The management has indicated that while near term
fluctuations are expected due to changes in deposit pricing and
interest rates, favorable margin dynamics from the shift towards
high yielding auto loans and reduction in low yielding assets
may support net interest margin expansion over time.
So we can look to see the trajectory of the net interest
margin, super important metric for banks.
Another thing specific to Ally Financial is their accounting
changes. They say a shift from the flow
through method to a deferral method would allow for a
smoother earnings path by spreading the recognition of EV
tax credits throughout the life of the leases.
So it's no longer going to be the lumpy tax credits all in one
quarter. They're kind of doing this
amortized schedule type of thing where they flow out through
quarter after quarter. And the predictability of the
loss rates and delinquencies. Management has noted even though
the long trend remains strong, there's going to be some
volatility in this. So expect this to be a little
bit volatile this quarter. Again, most of the companies
we're looking at in the fintech space, I expect their earnings
to be strong. Ally Financial is no different.
Even though they're working with auto loans of used cars, I still
building that consumer group is stronger than usual.
When we look at the other notable earnings this week on
Thursday, we have FICO. This is one of the most
incredible stories of a company over the past five years.
It's been a true compounding machine with unmitigated pricing
power and we have a couple different factors to look for.
I want to highlight two of them. As they grow, they keep their
margins very high and they try to raise their margins.
This leads them into extensive share repurchasing.
This is the story behind FICO. They grow the revenue, they grow
the margins, and they funnel that money back into share
repurchases. The company reported a
significant 31% year over year increase in free cash flow to
607 million. FICO has been actively returning
capital to shareholders, but it highlights an issue here.
It's repurchasing shares at higher average prices.
Investors should observe Fico's free cash flow generation in the
current quarter and any potential further share
repurchase activity as these factors contribute to
shareholder value. One of the big issues I have for
FICO is that the share repurchase strategy works
particularly well for companies that are undervalued.
So if a company is trading on a low PE ratio, the share
repurchases really bump up their earnings and grow their earnings
per share over time at a rapid pace.
But the PE ratio that Fico's trading at means that the share
repurchases are less impactful. Now, again, my guess is that
Fico's earnings are going to be strong.
There's still the de facto default that everyone uses for
home origination and the home sales, even though they slowed,
they've kind of bottom out and in some places they're starting
to speed back up. Now at the same time, Thursday
before market open, we have Intel giving us a look at their
earnings, showing us what's been going on for the past three
months. Intel has a lot of problems to
solve. They're focusing on cost
reduction and improving efficiency, maximizing the X86
franchise value, deployment of the advanced nodes,
restructuring impact for financial outlook and
advancements in AI and foundry businesses.
It again leads me to the same conclusion.
Intel right now is a mess. The company is so complex.
They have their hands in so many different things and they're not
executing that well on any individual thing for this
company. They're being beaten out by
NVIDIA and AMD. I think the AMD right now is
stealing their lunch. They are losing contracts with
different big companies all the time and it's a turn around
play. Turn around plays are very
difficult. If you're invested in Intel, I
think you need to be careful. The last company we'll look at
reporting this week is American Express reporting Friday before
market open. And I am very bullish going into
this earnings. I think it's an easy call.
They're focusing on expanding and refreshing their product
line. It notes here that from the CEO,
American Express has refreshed 40 products globally within the
year, aiming to enhance value for existing members and attract
new ones. The card fee revenues grew by
18% last quarter. The company's ability to acquire
3.3 million new cards with a particular focus on millennials
and Gen. Z is a testament to the success
of their strategy. American Express is growing in
market share with the younger crowd.
And then finally, an area that they're expanding into is dining
technology. The focus on expanding dining
capabilities shown by acquisitions of Rezi and Talk
presented significant growth opportunities.
Since dining is one of the fastest growing T&E categories
and strategic investment area for differentiation, investors
should assess how these developments might influence
customer spend and engagement, especially amongst younger card
members. So American Express has
identified this somewhat niche area of growth in dining
technology. They're putting significant
investments behind that. I think their earnings are going
to be great, but we'll have to wait and see.
Now. Next, we get to the news that
Trump has finally taken in office.
Once again. You may have heard the news.
Now the big question for investors is what does this mean
for various stocks? And one of the biggest points of
contention have been the impacts of tariffs.
And based on what Trump has talked about for the past couple
of years, he is implementing tariffs at least to some degree.
China's the largest furniture exporter in the globe.
In 2023, thirty, $2.4 billion in furniture was imported into the
US 29% of that came from China alone.
So in terms of furniture exports, China's the biggest
country, but Vietnam is also not small.
They're actually just behind China, which is kind of
surprising. I want to have guessed that.
But a lot of furniture comes from Vietnam.
So they may gain some business if we have some severe tariffs
on China that we don't have on Vietnam.
Another big industry that could be impacted by the tariffs is
the beauty industry. For example, Elf Beauty makes
around 80% of its products from that region, so this is a huge
percentage of exposure to China. Mexico creates a lot of cars,
bear and avocados, so we can see that impacting various
companies. I don't invest in the auto
industry anyways, so this isn't going to impact My Portfolio too
much. Canada's a huge exporter to the
US as well, so that would have a big impact.
So we could see how this impacts different industries.
The auto industry outside of the US could become more expensive.
We have different various food prices going up.
We have beauty products, home furniture and toys that are sold
on Amazon and other places may go up in price.
Now how does this affect your portfolio is a different
question. Overall, this is going to be
spread out across lots of different products, but most of
them that I look at won't have a direct impact on My Portfolio.
Now the big question or concern that many investors have is what
does this mean in terms of inflation?
A lot of people believe that if something becomes more
expensive, that's inflation. That just means that inflation
happened. That's not really the full
story. When we look at different
comments like this one's from so-called experts, we have one
of them here saying all of these actions are inflationary.
You have to pay the piper somewhere.
And this is the sentiment that a lot of people share that I
completely disagree with. I don't believe that tariffs in
and of themselves are inflationary.
And I think the people that believe that tariffs in and of
themselves are inflationary don't understand what creates
inflation. When we look at what Scott
Besson said on this subject, I think he's the most accurate.
He says that tariffs can't be inflationary because the price
of one thing goes up. Unless you get people more
money, they have less money to spend on the other thing.
So there is no inflation. The inflation comes through
either increasing the money supply or increasing government
spending. Over the past 20 years, the only
times that we've had big inflation spikes is when we gave
people trillions of dollars from the government.
We loaded people with cash to spend immediately at a time
where there wasn't much production of goods and
services. So we increased demand
dramatically while shutting down supply.
Any time you have that type of equation where you're increasing
demand and closing off supply, you're going to spur a lot of
inflation. And that's what we had in
2020-2021. We saw the inflation ramp up as
people got trillions of dollars of spending money.
Student loans were halted, everyone had excess capital, and
there wasn't a lot of goods and services because supply chains
were shut down. And I don't believe there's any
reason to believe that some items being slightly more
expensive because of tariffs are going to have anywhere the same
impact as giving away trillions of dollars.
Now, even though I don't believe that these tariffs are going to
cause a huge spike in inflation, it is true that inflation
happens all the time. Every single year things get a
little bit more expensive and the value of the dollar gets a
little bit less buying power. And they're natural hedge
against inflation with two different things.
One of them is having a revenue that can pass along the cost to
customers and another one is having pricing power.
And I'll show you examples of each of those.
So first of all, we have the companies that pass along the
cost to the customer. These are companies like
MasterCard. If you look at MasterCard, Visa,
American Express, these companies make their money by
taking a percentage of all revenue, all the different
digital transactions. Inflation means the prices of
things go up. MasterCard makes more money
because they're charging a percentage based.
So this company is very much a natural hedge against inflation.
Another company that is a natural hedge against inflation
is Costco. Prices of goods and services go
up. Costco passes those costs right
along to the customer. They try to get the lowest price
possible, but either way they're going to pass along that cost.
The other type of company that's good inflation hedge is one that
has pricing power. Simply put, they offer products
and services so good that they can price things however they
want because they have a value surplus.
Amazon can do that with their Amazon Prime membership.
They raised it and no one really noticed.
And Netflix can do the same thing with their subscription
service. They continually raise the
prices over time above the rate of inflation because their
product and service is so good that very few people cancel.
So to me, whether or not tariffs cause inflation or the extent
that they do doesn't really matter.
My Portfolio across the board is well prepared for inflation,
whether it happens or not. Now, finally, we get to the news
of this silent and bitter battle that's been fought for the past
couple of years. For years you've been living
your own life, involved in the news and politics of the day.
And while all that's going on, Walgreens has been at war,
fighting against a company that is a digital refrigerator
display company. I'm not joking.
This is it's not a joke. It's not satire.
This is real news. This company that creates these
fridge covers, I can give you an idea of what they look like.
We have a picture of them here. So normally you go to the
grocery store or you go to Walgreens and you just see clear
glass and you get to see what's inside of the fridge.
Well, Walgreens management said that works too well.
It's too good of a system. It's too well proven.
Customers like it too much. They like being able to just see
what's in the fridge so they can open and grab what looks
appetizing to them. So because it's not broken and
it works so well, let's try to fix it.
And the goal here was to basically make it so that you
can advertise on your fridge panels so that they could turn
this into an ad revenue thing where they could sell ad space
and different animated things and make money that way.
They saw that Amazon is making a fortune through advertising
revenue. Walgreens wanted in on that
money. They instead wanted to advertise
on the real estate of their fridges, and along came this
company that offered that solution.
This company came along offering these smart doors that obscured
shoppers. You have the fridge's actual
contents, replacing them with virtual rows of Gatorade, Bagel
Bites, and other goods that promised were inside.
When proximity sensors detected passerby's, the fridge doors
would start playing short videos of Hawking Doritos or urging
customers to check out with Apple Pay.
Problems started in December 2023 when all the screens went
blank. At first, the outage didn't
arouse suspicion. These Internet connected fridge
panels, developed by Chicago startup called Cooler Screens,
frequently flickered, crashed or showed the wrong product.
Every so often they caught fire, but store managers were stuck
with them as part of a 10 year contract with Walgreens for
split revenue of the ads. So this business came in, they
advertised this great product that would cover up all the the
fridges with these new digital displays.
They had problems like flickering, going blank or
Catching Fire and they got in with a 10 year agreement.
So Walgreens has been stuck with these things, dealing with this
horrendously terrible technology making their stores worse for
everyone. Cooler Screens had installed
10,000 smart doors at hundreds of US locations like this one.
It planned to install 35,000 more.
By this point, Walgreens had already tried to pull out of the
deal and get rid of the doors, blaming what it said was glitchy
hardware and software. But Cooler Screens had
temporarily prevented their removal by prior June by suing
Walgreens for breach of contract, seeking $200 million
and demanding its screens stay in place.
Unreported until now. Over the ensuing months of legal
battling, during which Walgreens had counter suit for monetary
damages, Cooler Screens chief executive officer decided to try
a different form of push back. So the CEO of this digital
screen company, in this bitter legal battle between these
companies, he decides a new tactic, and that's to simply
make all the screens go blank. He intentionally inflicted
damage on Walgreens business. The team secretly cut the data
feeds of more than 100 stores in Chicago.
The dozen or so smart doors affected in each of these stores
either glazed over with a white pixel or blacked out altogether.
So they just shut off the screens on all these
refrigerators. Customers could no longer see
where the Coke and Red Bull and Hot Pockets and Heineken SAT and
either assume the fridges were out of order or found themselves
rummaging through them one by one.
Some staffers pasted pieces of paper on opaque screens that
read, for example, a sort of drinks or coffee.
Others filed service requests with the company cooler screens,
which have been marking all incoming complaints as resolved
without fixing anything. These scumbags, these guys
running this company, first of all, they they sell Walgreens on
this software. They say it's going to be great.
They say that we're going to split the ad revenue.
You're going to be able to be like Amazon.
You're going to be able to advertise in your store.
Customers are going to love it. It's going to trend online.
Some of that kind of happened. There is some novelty to it.
Some of it went viral online, but then it was met with faulty
software having items marked here that weren't really in the
fridge, making customers upset. And then there was glitchiness
with the screens going black as they went back and forth suing
each other with Walgreens trying to exit out of this agreement.
This company went so far as to intentionally shut down the data
feed and make hundreds of Walgreens locations have a blank
door or it just turned completely black.
And then when Walgreens said, hey, we've got to fix this,
we're filling out these service requests, they literally just
marked them as complete without doing anything.
Now this story goes on from Bloomberg for like another 50
pages detailing out one of the most extensive battles I've seen
between two different companies, to the point where Walgreens
literally just started ripping the door screens off, replacing
them with standard glass, even though the judge told them not
to. They're willing to just do what
they want now and ask for forgiveness later rather than
deal with this company anymore. So as this company's dealing
with the normal challenges of being destroyed by Amazon,
having their entire business being taken over by by Amazon,
and dealing with stuff like lawsuits against the Department
of Justice for opioid prescriptions, all these various
challenges they're already dealing with, They also made a
massive unforced error by wrapping themselves into legal
battles with a refrigerator screen company.
I said for a long time, Walgreens is a terrible
investment. I don't know why people are
buying that stock when Amazon exists.
That's all for this episode. See in the next one.