This is a hard business content is not one.
Could you spend more content has to be good.
Netflix had a huge lead over everyone else, but eventually
the media industry realized that they needed to compete and they
have advantages, like they have Brands, they have sitcom
libraries, they have ad sales. So we look at the model and this
is the first time I can ever say is, you know, our confidence in
the forward model is so low on April 19th, the leading
streaming service Netflix reported their earnings and to
The astonishment of a lot of people including myself the
company reported that they lost 200,000.
Net subscribers at quarter and they forecasted an additional
loss of 2 million subscribers next quarter.
Now, after this, Netflix news of the company, basically crumbling
and the stock price going down 50%.
Plus there's been endless analysis on what Netflix needs
to do, what they need to change, how they need to compete with
HBO Max and how they need to compete with Hulu and so on.
And so, Earth. Lots of people doing specific
analysis of how Netflix needs to change their business model.
It's gotten to the point where it's almost like an
intervention, where all the online personalities have have
come together and said, Netflix, you gotta change in my expert
opinion and it pains me to do this.
I'm going to have to diagnose Netflix with key content
disease, but it doesn't mean it's terminal yet.
Critical here, for example, diagnosis Netflix with shizzy
content disease, he does believe that they have a chance to to
make it out of this though. Now critical here in the online
community might be right, maybe Netflix is content isn't up to
Snuff and the stock price. Certainly reflects that it's
down a staggering 72 percent from its November heís.
Just back in November, this stock traded above six hundred
and eighty dollars a share. Now, don't get me wrong, there's
a lot of reasons to uniquely criticize Netflix and their
business model. The companies clearly been
lacking in their Direction, but there's one more unique thing
about Netflix. That's very specific to the
Company. It is the first major company to
report ahead of the earning season they reported on April
19th. So this is before almost every
other company reports their earnings and that means that
Netflix is unique and being the first one to report and often
times, you really don't know what to expect because there's
no other company to gauge your earnings reports, based off of
Netflix is just going in, without any context.
Now that we've had a couple more companies report, their
earnings, I've noticed a common theme.
Name something that I think is a bigger concern than just
Netflix. I've noticed it.
We're in a Content bubble. That is starting to explode.
That's right. I believe are in a Content
bubble and that bubble right now is being pop.
Now, hear me out here. Let's consider the evidence.
One of my biggest Holdings is Microsoft and they just reported
earnings. Microsoft's earnings were
frankly, amazing. As usual as you would expect
with this company, they reported earnings that beat both in the
top line revenue, the bottom line earnings, and they're
growing their Microsoft cloud business.
Like, Crazy. Do you realize that Microsoft's
Cloud business? Has a revenue run rate of ninety
three point six billion dollars per year, just in their Cloud
business, they're almost revenue and over 100 billion per year
and to give that some perspective.
This ninety three point six billion is more in Revenue than
Microsoft did in its entire business in 2016, just five
years ago. So, Microsoft's Cloud business
has grown to be this Juggernaut and the company is doing
fantastic. Now, this was the headline news.
This is what everyone looked at is Microsoft's office, suite
doing well and their Cloud business doing well.
But after listening to the earnings call of Microsoft,
something caught my attention, Microsoft gives their forecasts
for next quarter. They say, in Windows commercial
products and cloud services, customer demand for Microsoft
365 and our Advanced Security Solutions should drive growth in
the low double digits that's consistent with their previous
growth. They say in surface, Revenue
growth in the low double digits. That's Stick with their history.
They say in Search and news advertising, we expect Revenue
growth of approximately 20 percent.
That's pretty decent growth, 20% growth, but here's where
Microsoft gets to the content portion of their business.
The gaming portion, remember that, Microsoft is a massive
gaming company. In fact, they're literally going
to be the second biggest gaming company in the world they say
and in gaming we expect Revenue to decline.
It's going to decline in the middle to high single digit.
Even by low engagement H year over year as well as constrained
console Supply. So they blamed some of this on
the fact that they're having problems making enough consoles,
but they also highlight something very important there,
lower engagement, that's the technical way of saying that
less people are playing video games.
Now, they say, we expect Xbox content and service Revenue to
decline to mid-single digits. Now, it's going to be growing at
mid-single digits. So the growth in the Xbox and
content category of Has basically dried up for the time
being low single digits is very slow growth.
So so far we know that Netflix is losing subscribers and
they're forecasting 2 million loss in subscribers next
quarter. But now we have Microsoft saying
that they're going to have lower engagement than anticipated and
the content and service revenue of the Xbox will decline to
mid-single digits. So this is where I'm starting to
think that we might have a general issue with a Content
bubble. Maybe these issues are broader
than just Netflix alone. Now moving on, we can look at
the next piece of evidence. Google reported earnings and
their earnings were actually a Miss.
They missed on the top line and the bottom line.
Now overall this wasn't a big Miss and don't get me wrong.
Google's doing great, this company is in great shape right
now and they just announced 70 billion dollars in share
BuyBacks. So they're going to be pouring
free cash flow into BuyBacks and I see this company as a very
strong by right now. Now aside from all that, there
was one interesting part about Google's earnings report.
The weak part of the company. In fact, the weakest part of the
company was YouTube. That's right.
YouTube had the slowest Revenue growth, YouTube missed, its
numbers by the biggest margin, the earnings of Google was
barely a miss, and this is mostly caused by investment, not
by operating income. So, I wouldn't read into this
EPS missed too much. The revenue was barely a Miss.
Sixty eight point zero, 1 billion versus sixty eight
point. One one, that's a hundred
million dollars out of a 68 billion dollar Revenue.
The cloud service is actually beat.
Google's cloud is growing like crazy. 5.82 billion versus 5.76.
That's good news for cloud, but then we get to The YouTube
portion of Google. Again, this is the content
portion of the company. Six point eight, seven billion
versus 7.5. 1 billion, the almost missed by a billion
dollars, that's a pretty substantial Miss.
Not to give this some perspective, YouTube is still
growing, but the growth rate was much slower than anticipated in
q1 of 2022. This is just the most recent
quarter, it grew by 14%, now the quarter before that YouTube grew
by 25% the quarter before that it grew by 43% the quarter
before that it grew by 83%. So we go from 83 to 43 225 to.
Now 14 the deceleration and growth of YouTube has been
pretty substantial. So after reviewing all three of
these earnings reports, I'm starting to see a common theme
Here. The part of the business that
struggling is content. That's the common theme.
Now, unfortunately, for Netflix, their entire business is
content, so their entire business is struggling for
Microsoft. Only a small part of their
companies content. Just Xbox in entertainment part.
So even though that part of the company gave really weak
guidance and it's clearly slowing down overall Microsoft
is doing just fine because that plays a small role and again
with Google overall the company's growing at a Brisk
Pace, 20% year-over-year clouds growing like crazy.
The big part of the company that was a weakness was the content
part of the company. Now after seeing the content
part of these companies do poorly, I was very interested in
how Warner Bros Discovery did. This is a new big content
Juggernaut that's going to be competing.
Eating with Netflix and Hulu and they just reported earnings
yesterday after hours. Well, wouldn't you know, the
company's down 7.5% today and that's with the market currently
in the green across the board. So, Warner Brothers Discovery is
following that trend of content not doing too well.
So I listened to Warner Brother discoveries earnings call.
And I was looking for anything in this earnings call where they
talk about churn or engagement or issues, keeping people
engaged to their content. That's what I was trying to find
out and here's a clip from that. All from Gunner, one of the
executives, talking about the struggles, they're facing with
engagement and turn but we want to get it right.
It's critical because, you know, you could have a record-breaking
number of people watching Euphoria.
But we want to make sure that when they finish Euphoria, if we
have the goods, if we have, all this great content on that, we
were ability, we have an ability to recommend to people, you just
finished Euphoria. Here's the other eight shows
that you would love whether it's Chip and Jo whether it's Oprah
whether it's 90-day fiance, or whether, or whether it's mink
store or another great HBO Max series, but we have some work to
do on the platform itself that will be significant, but we also
think that one of the big opportunities here is going to
be churned reduction. He says that when you finish a
show on HBO Max, they want to recommend all these great shows
that are somewhat similar to the one, you just finish to keep you
on the platform because obviously, Big opportunity a big
issue. They're facing is churn meaning
people. Leave the platform they
unsubscribe. This is the same exact issue
that Netflix is facing but Netflix is at a much bigger
scale. Turn is a serious issue for any
subscription company, especially competitive media companies.
Any highlights, how turn has been much higher recently than
they've ever seen before. There's meaningful churn on HBO
Max much higher than the churn that's on, that, that we have
seen. And so the ability for us to
come together, Is part of one of the Theses here that managing
churn, and we've seen this, because we've been added in
Europe for eight years as you begin to manage churn in a
meaningful way that provides a real real meaningful growth.
Did you hear the key thing that he said they're the turn on HBO
Max is much higher than the turn that we've seen before.
Now, it's interesting that HBO is also having turn issues after
all, HBO is supposed to be the highbrow entertainment with the
high quality, they don't have All the garbage shows on the
service like Netflix does remember, Netflix is doing
poorly because of its bad content.
Netflix has been funding, basically anything made by
someone with a pulse and even that seems to be spotty.
It feels like they're funding scripts written by being AI.
Everybody sees the HBO and Netflix are different companies
and they have different products HBL makes high quality stuff,
and Netflix, and many cases makes low-quality stuff.
But the thing that they seem to have in common is a common
problem, and that is churn. So we can try I to get into the
nitty-gritty and see what everyone of these individual
companies are doing wrong, but I think people doing that are
actually looking to nuanced into specific and they're not looking
at the glaring problem abroad. It is a Content bubble problem.
Netflix isn't struggling because it suddenly has low quality
content, that was the issue, then.
How do you explain HBO Max with their high quality content and
even a higher level of churn? The Netflix, if this was simply
a Content quality problem, then how do you explain Xbox having
significant deceleration? This is a gaming platform.
Games have literally never been better than they are today, is
it because Xbox suddenly doesn't have a good offering?
Well, I don't think so. I don't think it has anything to
do with that because we also have Google having YouTube being
the biggest part of their company.
That mrs. And YouTube has never had a year
where it's produced more or higher quality content than last
year. So personally, I don't think
this is an issue having to do with low quality content or high
quality content. I don't think it has to do with
the Xbox and particular verse 2, PlayStation, what exclusive
games they have. I don't think this has anything
specifically to do a tick. Talk either.
I think, overall, we are in a Content bubble because of a
significant lingering overhang from covid, Michael burry
tweeted about this problem and how it plays a bigger role than
what's going on specifically with these individual companies.
He says, quote, this is the problem.
The last 18 months, the government has given out 850
billion dollars in direct stimulus, checks four hundred
billion dollars in Cash out. Refinance has one plus trillion
dollars and forgivable Loans 250 to 500.
Two billion are fraudulent another four trillion dollars in
indirect Etc. What recapitalize has the
consumer now, higher wages, can't do that.
I think dr. Burr is 100% accurate.
With this tweet, people are given a free pass over the past
18 months. They were given endless amounts
of money. You look at these numbers in
there in comprehensible. The government gave away
trillions and trillions and trillions and trillions over the
past 18 months. That's so much money to why's
the consumer. That's a lot of money that makes
it so people can stay home. Not worried about work, sit home
and consume endless content through Xbox live through HBO.
Max through Netflix, through YouTube, through every other
source, every other podcast, every other Avenue and that
endless capitalization of the consumer, enabling them to stay
home and consume content endlessly, I think has led to a
lot of booming numbers and booming growth that simply can't
be sustained. So what's clear to me now is
that we're still The effects. The overhang of the covid,
lockdowns, the overhang of the mass of capitalization that
happened to Consumers. We're still seeing those effects
hit the companies and their earnings reports.
And what I see right now is the content portion of that starting
to diffuse. So now when I'm looking at the
different companies that I'm investing in, I'm trying to
determine which ones are going to continue to have that
overhang effect, which ones are going to get damaged as we
return back to app, Rico Vdara, when I look at Apple and
Microsoft, it's true that both both of them have their hands in
content. Apple has their Apple TV plus
they have apple music. But in reality, that is a pretty
small portion of their business. Apple has so many different
businesses that they're growing. That I don't think this company
is too exposed to content. Nothing to the extent of a
Netflix or an HBO. We have Microsoft, but the big
story with Microsoft is their cloud and their office tools,
that is what's driving the major growth and the profitability of
the company in consumer, I have one company that is heavily
focused on content. Is of course Disney and wouldn't
you know this is one of the companies that so far isn't
doing well. I'm currently down around 5,000
dollars on Disney, Disney has their earnings report, May 11th.
So we have some time to wait for this one and I assume that their
earnings report is actually going to be decent.
I think they'll beat their EPS number because their Parks
operation and I think they'll beat their revenue estimates
because again their parks are completely packed.
But the big story with Disney is there streaming services.
And in my opinion, I think there's a strong chance that
Disney will fall into some of the same issues.
As these other companies I think they're going to deal with a
heightened level of churn Disney has an advantage over
established dreamers like HBO and Netflix.
They have less subscribers as their total base.
So the fact that they have less subscribers is their total based
means that they have more room for growth.
So Disney will probably continue to grow at a Brisk Pace right
now but under the hood of Disney plus, if you're able to look at
their subscriber growth and their churn numbers, I would
make the strong assumption that they're facing a height level of
churn like every other streaming company.
So I'm Continue to hold Disney as of now because I think there
are Diversified company and their Parks operation.
I believe will put up very good numbers.
But having said that, I think that this year and this upcoming
season might be difficult for their subscriber growth and
outside of Disney, I don't hold any other companies that I
believe have their hand and content.
The core category doesn't restaurants don't.
Real estate doesn't, and financials don't.
So my big exposure to the content category is through big
Tech and Disney. So if you're investing right
now, I think that there's something important to keep in
mind the company. Annie's that have benefited from
the 2020 lockdowns. And from massive capitalization
of consumers are likely going to continue to get hurt over the
next year, whether that's in content or different categories.
I think the same theme will apply any company that benefited
from the lockdowns. And from covid is likely going
to see a precipitous deceleration and their growth.
That's all for this episode. I hope you enjoyed other than
that, I'll see you next time.