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Speaker 2: All Right, everybody, we're gonna stay with Netflix right now
Speaker 2: because the stock is down just about five percent here
Speaker 2: in the aftermarket. Kind of the red stickies, as we
Speaker 2: like to say, the big headlines at Bloomberg. This was
Speaker 2: a blowout number. I can feel like it shocked all
Speaker 2: of us. First quarter streaming paid net change in terms
Speaker 2: of the subscribers up nine point three three million. Timmy
Speaker 2: estimate was four point eight four million.
Speaker 3: That's not the only beat.
Speaker 4: First quarter EPs coming at five dollars and twenty eight
Speaker 4: cents per share. Estimates were for four dollars and fifty
Speaker 4: two cents. The company also out with second quarter EPs,
Speaker 4: the guidance for sixty eight versus it's a four fifty four.
Speaker 3: And then another big headline.
Speaker 4: We should note they're going to end reporting quarterly membership
Speaker 4: numbers next year. We got a great group of folks
Speaker 4: with us right now to help us break down these numbers.
Speaker 4: Paul Sweeney is co host of Bloomberg Surveillance. He joins
Speaker 4: us on the phone from New Jersey. Paul spent thirty
Speaker 4: years as a media analyst, also with US as Bloomberg
Speaker 4: News earnings reporter Red Brown. Hey, Paul, I want to
Speaker 4: start with you because I got to tell you, I'm
Speaker 4: pretty surprised by the reaction to these numbers, considering they
Speaker 4: were such it was such a blowout quarter. Why do
Speaker 4: you think the stock is moving lower in the after hours.
Speaker 5: Yeah, I think it's a little bit by the rumor.
Speaker 5: So the news people have been hyping up this quarter
Speaker 5: as a really big quarter because you know, the paid
Speaker 5: subscription was going to fuel subscriber growth. Yet again here
Speaker 5: that a big beat on subs last quarter. So the
Speaker 5: stock was up about twenty five percent since they reported
Speaker 5: in January. So it's probably just taking back some of
Speaker 5: those games. But you know, across the board, the subscriber
Speaker 5: numbers really really were impressive. One thing to note about
Speaker 5: that big subscriber beat to the last couple of quarters.
Speaker 5: These are kind of short term phenomena. As you know,
Speaker 5: the people that were sharing accounts now we're paying for
Speaker 5: their owns and that'll fade out over the next several quarters,
Speaker 5: and then the focus will become, i think, on the
Speaker 5: advertising side of the business as well.
Speaker 2: Yeah, it's interesting. Do you care, Paul to hear that
Speaker 2: they're going to end reporting quarterly membership numbers next year?
Speaker 2: It feels like it's something we focus on.
Speaker 5: Yeah, yeah, it really is, and that, quite frankly, that
Speaker 5: had been the primary driver of this stock really since
Speaker 5: it switched to this digital streaming format. That was the
Speaker 5: metric that moved the stock. The company really wants to
Speaker 5: get away from that and get more towards Hey, guys,
Speaker 5: just view us as you would any other company stock.
Speaker 5: Look at revenue, look at cash flow, look at profitability,
Speaker 5: all those types of things, and let's focus less on
Speaker 5: subscriber growth because, quite frankly, we pretty much got pretty
Speaker 5: much everybody that's out there, so it's really not so
Speaker 5: much subscriber story. It's more how much money can we
Speaker 5: make off each subscriber?
Speaker 3: Paul, one more to you.
Speaker 4: And then I want to bring in Red Brown, our
Speaker 4: earnings reporter who's been watching these numbers closely. Why would
Speaker 4: a company Is there any positive way to read in
Speaker 4: to a company like Netflix no longer reporting this. I mean,
Speaker 4: no question, the more data for investors the better. Is
Speaker 4: this a negative this is a negative sign?
Speaker 5: No? Oh yeah, I think. I think for an investor
Speaker 5: and an analyst, you always want more information, particularly when
Speaker 5: it's critical information in terms of what drives the growth
Speaker 5: of the business. And it's obviously just it's subscribers and
Speaker 5: how much revenue you generate off each subscriber. It's pretty simple,
Speaker 5: so I you take one of those data points away.
Speaker 5: But we've seen other companies in other industries do that,
Speaker 5: particularly subscriber based industries. They try to get you away
Speaker 5: from that number and get you back to where are
Speaker 5: Look how they are managing the business, and what they're
Speaker 5: telling you is we're not managing the business to maximize
Speaker 5: subscriber with We're managing the business to maximize revenue and
Speaker 5: profit per user. That's our management focus and that's how
Speaker 5: we look at it, and that's how we think you
Speaker 5: should look at it.
Speaker 2: Red Brown, come on in on it. We talk earnings
Speaker 2: with you all the time. You know, I'm watching Netflix
Speaker 2: shares that have been bouncing around in the aftermarket a
Speaker 2: lot of moves right now, This still lower down about
Speaker 2: three and a half percent.
Speaker 6: Yeah, I mean, I think what might be explaining a
Speaker 6: little bit of the negative movement too, as we saw
Speaker 6: them actually boost their full year outlook for operating margin.
Speaker 6: They beat EPs in the first quarter. Their guidance for
Speaker 6: the second quarter was ahead of estimates as well, But
Speaker 6: it seems like there's a little bit of a disconnect
Speaker 6: between the full year number. If you know, those two
Speaker 6: pretty healthy beats are not translating to the full year
Speaker 6: analysts investors might start to question maybe where in that
Speaker 6: back half of the year are things starting to slow
Speaker 6: down as well. So I think that might also be
Speaker 6: factoring in here a little bit to the negative price
Speaker 6: movement we're seeing.
Speaker 2: Let's speak a little bit to what Paul was saying,
Speaker 2: and I think it's a good point that we talked
Speaker 2: about it earlier. Just you know, this stock has been
Speaker 2: on fire this year, and you know, it looks like
Speaker 2: the numbers are are pretty upbeat, but it has been
Speaker 2: such an outperformer this year, and I just do wonder
Speaker 2: how much of that is at play as well.
Speaker 6: Yeah, I mean, if you look at what analysts are
Speaker 6: rating for the stock, that it's kind of topped out
Speaker 6: at the analyst ratings point at this point. So you know,
Speaker 6: even with these really impressive numbers, uh, maybe the it's
Speaker 6: just kind of a hit hit its ceiling for the
Speaker 6: time being.
Speaker 4: Hey, Red, it's so interesting, you know, I was saying
Speaker 4: as we were going into our beyond the bell our
Speaker 4: our coverage with TV as we you know, waited for
Speaker 4: these Netflix earnings, I was saying, you know, this could
Speaker 4: really set the tone for the quarter for a lot
Speaker 4: of the consumer tech companies that are set to report
Speaker 4: in the coming weeks. And yet yet we get a
Speaker 4: blowout number pretty much across the board, and we see
Speaker 4: a negative reaction like this, and I'm wondering how we
Speaker 4: can extrapolate this beyond Netflix.
Speaker 6: Yeah, it's a good question. I mean, people have been
Speaker 6: really focused on earnings this quarter, and a lot of
Speaker 6: analysts are saying, you know, focus on the numbers, don't
Speaker 6: buy unto the hype, and has really big implications for
Speaker 6: the stock market at general at the moment. So I
Speaker 6: don't know if if people kind of are on edge
Speaker 6: and looking for any excuse to sell at the moment, Yeah,
Speaker 6: it could. It could paint a pessimistic picture for the
Speaker 6: remainder of the quarter. Here probably for.
Speaker 2: Us to come on back in here. I'm just thinking,
Speaker 2: you know, we're getting ready for the analyst calls, and
Speaker 2: I feel like there's going to be a fair amount
Speaker 2: of questions, especially as you see the stock kind of
Speaker 2: bouncing around here. What's kind of the top one or
Speaker 2: two questions that you would want to be putting up
Speaker 2: on that call.
Speaker 5: Yeah, one revenue and one cost question. The revenue side
Speaker 5: is talk to us about the advertising component. How well
Speaker 5: is that catching on with subscribers. How many subscribers are
Speaker 5: going to the advertising tier, and that's a big thing
Speaker 5: because that's going to be one of the drivers going forward.
Speaker 5: And then a second one on the call side is
Speaker 5: where are we on our programming budget you need to
Speaker 5: spend more to drive more subscriber growth or are is
Speaker 5: a company at a good level of spend? Because if
Speaker 5: they are at a good level of spend, boy, the
Speaker 5: profits just really start churning for this company, and the
Speaker 5: free cash flow as well.
Speaker 4: I do want to bring in some of the advertising
Speaker 4: information that you mentioned, Paul in the letter. The company
Speaker 4: did come out and say that ADS membership grew sixty
Speaker 4: five percent quarter on quarter after rising nearly seventy percent
Speaker 4: sequentially in each of Q three twenty three and Q
Speaker 4: four twenty three. They're also saying that over forty percent
Speaker 4: of all sign ups in our ads markets, remember it's
Speaker 4: not fully rolled out, are coming from our ads plan
Speaker 4: for advertisers. The companies focusing on measurement solutions, including new
Speaker 4: partnerships with Kantar and Lucid for brand awareness and recall,
Speaker 4: and then Nielsen Catalina solutions for sales lift. Paul, I
Speaker 4: don't have to tell you because you've been covering this
Speaker 4: for years. How wild is it for us to talk
Speaker 4: about Netflix and measurement because this is a company that
Speaker 4: for years was like, we don't care about ratings, We're
Speaker 4: never going to share any numbers, We're never going to
Speaker 4: do ads, never, never, never, And here they are talking
Speaker 4: about Nielsen.
Speaker 5: Yeah, exactly, this is crazy. It's a great point. They're
Speaker 5: going to have to start the disclosing audience levels of
Speaker 5: some degree, but we already know that the advertising video
Speaker 5: on demand model is a very successful model. Advertisers are
Speaker 5: switching some linear TV broadcasting cable to the more digital platforms,
Speaker 5: and they've been itching to get to the streaming base
Speaker 5: of Netflix. So there will be a lot of advertisers demand,
Speaker 5: and you know, Netflix is going to have to provide
Speaker 5: the advertisers and their agencies with some data because system
Speaker 5: they can just get a sense of pricing and value.
Speaker 7: Yeah, you know.
Speaker 2: And the other thing is like I'm thinking about content, right,
Speaker 2: you know, original content versus licensing. And when we were
Speaker 2: talking with Githa rang an ant On earlier, she said,
Speaker 2: you know, one of the upsides is that they are,
Speaker 2: you know, doing a lot of licensing deals. They had suits,
Speaker 2: they just did something with sex and the City that's
Speaker 2: just coming out. I mean, when you think about it,
Speaker 2: Paul as an analyst and somebody who understands the space,
Speaker 2: I mean, cheaper to do a licensing deal versus creating
Speaker 2: that original content.
Speaker 5: It is generally speaking, it is much cheaper to license
Speaker 5: the show than to create it, particularly the shows that
Speaker 5: they make, which are extraordinarily high quality, and they have
Speaker 5: very big budgets and other good and that's the that's
Speaker 5: the investment part. The good is is it does drive
Speaker 5: subscriber growth. So I think most investors would say that's
Speaker 5: a good investment to make in original programming. We got
Speaker 5: to find a balance here and so and that's the
Speaker 5: same and that's true for the media companies. They have
Speaker 5: to find a balance on what they licensed to Netflix
Speaker 5: and what they keep on their own streaming services.
Speaker 4: Red Let's say you had a chance to ask management
Speaker 4: question today on the call that's coming up.
Speaker 3: What do you want to hear about?
Speaker 6: Yeah, I mean we're talking about programming and what's going
Speaker 6: to be driving growth in the future. I think there's
Speaker 6: a big question around sports. Yeah, what what level of
Speaker 6: investment are they planning on putting in that that area?
Speaker 6: We know it's highly competitive, it's really crowded, it's very expensive.
Speaker 6: They are kind of stipping their toe in with some
Speaker 6: of these combat sports. But yeah, it be we wwe
Speaker 6: the Jake Paul and Mike Tyson fight later this summer.
Speaker 6: We will want to hear kind of what is their strategy.
Speaker 6: They've been on the sidelines for a while now, and
Speaker 6: you know, have they been able to see the mess
Speaker 6: that sports streaming has been from, you know, paying billions
Speaker 6: and millions of dollars? Do they have a different strategy
Speaker 6: like they have in so many other cases in the market.
Speaker 2: I do wonder too, And I'm just looking at something
Speaker 2: like a Walt Disney in the aftermarket and Obviously, it's
Speaker 2: not just about streaming. It's just down slightly down about
Speaker 2: one tenth of one percent here, Warner Brothers, Discovery, same store.
Speaker 2: I mean, Paul, is there anything that you kind of
Speaker 2: extrapolglate when you look at something like a Netflix and
Speaker 2: then what it means for some of the other streaming
Speaker 2: services that are out there.
Speaker 5: I think it's actually all net positive, which is it
Speaker 5: just shows you the strength of the streaming business model.
Speaker 5: We now know when you look at Netflix's financials that
Speaker 5: it can be extraordinarily profitable, generate really high returns. So
Speaker 5: now the question is who else can join Netflix with
Speaker 5: those types of financial metrics? Ken Disney do it, Ken
Speaker 5: Warner Brothers, Discovery, Ken Powermount. That's kind of the question
Speaker 5: a lot of those investors are asking themselves. But they
Speaker 5: can be done here if you look at Netflix west In.
Speaker 2: Paul Sweeney, thank you so much. We so appreciate it.
Speaker 2: Our own Paul Sweeney, who has covered the media industry
Speaker 2: and did as a banker for many years, thirty years
Speaker 2: as a media analyst, so really great to get his insight.
Speaker 2: We're going to continue with Red Brown. We're also going
Speaker 2: to roll into it our Githa Ranganathan, who covers the
Speaker 2: media space for our Bloomberg Intelligence team. You know, getha
Speaker 2: you called it on the subscriber numbers.
Speaker 3: She really did. Can you remind everyone what she told
Speaker 3: us a couple hours ago?
Speaker 2: You said it was going to be a much higher number.
Speaker 2: It is a much higher number. Walk us through the quarter?
Speaker 2: And why is it that?
Speaker 7: Though?
Speaker 2: First of all, I'm assuming you're watching the stock in
Speaker 2: the aftermarket. It's down about two point six percent. It
Speaker 2: just has been bouncing around a lot. Walk us through
Speaker 2: the quarter? Maybe why you think, I mean, should investors
Speaker 2: be disappointed here?
Speaker 5: So?
Speaker 8: Absolutely right, Carol, it was a blowout quarter. I mean,
Speaker 8: I think it came in much higher than expected. We
Speaker 8: were kind of thinking maybe six seven million dollar seven
Speaker 8: million subscriber ads net ads range.
Speaker 7: This was, of course way above that. But I think
Speaker 7: what is really.
Speaker 8: Kind of causing a little bit of concern here is
Speaker 8: that they are going to stop reporting subscriber metrics altogether,
Speaker 8: and that I think is coming as a little bit
Speaker 8: of a disappointment. I mean, Netflix is out and out
Speaker 8: a subscriber story, or at least it always has been,
Speaker 8: and so this is kind of going to require a
Speaker 8: complete change in the mindset of investors, right, you know,
Speaker 8: this is this was always such an easy model to follow.
Speaker 8: You know, you just multiply subscribers by the monthly price
Speaker 8: that you pay, and you you, you know, you kind
Speaker 8: of have your whole model. But now they're going to
Speaker 8: stop reporting subscriber numbers. They're going to stop reporting the
Speaker 8: average revenue per user. So it's kind of going to
Speaker 8: it's it's definitely becoming. It's I would say, it's gone
Speaker 8: from kind of high growth to now more you know, uh,
Speaker 8: definitely a very profitable company, but obviously they do seem
Speaker 8: to be kind of signaling that subscriber growth that the
Speaker 8: party is going to be over at some point.
Speaker 4: Correct me if I'm wrong, Githa. But did Netflix used
Speaker 4: to report churn and then they stopped reporting churn and
Speaker 4: that was a really big deal to investors when that happened.
Speaker 8: That was a very very long time ago. Yes, they did,
Speaker 8: they would, they would mention it, and yeah, they did
Speaker 8: stop reporting it.
Speaker 7: But subscribers, again.
Speaker 8: This is the bread and butter of this whole streaming business.
Speaker 8: So I think it's it's definitely going to require people
Speaker 8: are going to take some time to kind of digest
Speaker 8: that getha.
Speaker 6: We've seen them they have started to give us a
Speaker 6: little bit more viewership on information over the past year
Speaker 6: or so. Do you think that that is part of
Speaker 6: them kind of trying to signal that, you know, ads
Speaker 6: are going to become a bigger part of our business,
Speaker 6: and you know how big of a part of their business.
Speaker 6: Do you think that will be in the next couple
Speaker 6: of years.
Speaker 8: Yeah, So right now, they haven't really given us any
Speaker 8: concrete metrics around advertising, I mean, other than the first
Speaker 8: number that they gave us in January, which was roughly
Speaker 8: about twenty five million active users. They did report something
Speaker 8: today by saying, you know that they've seen like forty
Speaker 8: percent of their new signups are actually on the adyar,
Speaker 8: but we don't actually have a concrete number. That said,
Speaker 8: I think what they're doing, they're they're they're still kind
Speaker 8: of taking pretty a pretty measured approach, but there are
Speaker 8: signals that they really are looking to get or to
Speaker 8: scale up their advertising business, and I think sports is
Speaker 8: obviously a big way that they're going to do that.
Speaker 8: You know, you obviously saw that the WWE deal. There
Speaker 8: are a few more things that are out there on
Speaker 8: the horizon obviously the NBA being a big one, and
Speaker 8: they if they make an aggressive bid for that, then
Speaker 8: that really tells us how serious they are about advertising.
Speaker 8: And I think potentially what they're what we're looking at
Speaker 8: in terms of advertising dollars if they get everything right.
Speaker 7: It has been a.
Speaker 8: Little bit underwhelming so far, but if they you know,
Speaker 8: if they're able to execute with the sports and the
Speaker 8: other live events expected to be at least ten to
Speaker 8: fifteen percent of their revenue by twenty twenty five, So
Speaker 8: you know, you're looking at a forty forty five billion
Speaker 8: dollar business. I think you're going to see four to
Speaker 8: five billion at least in advertising.
Speaker 2: It is kind of interesting, and you know, Githa, we
Speaker 2: all kind of kid. It's like, I only have so
Speaker 2: many hours to watch all this stuff, and so we're
Speaker 2: picking and choosing, and it seems like there's so much
Speaker 2: out there. I mean, the company said in their letter
Speaker 2: to shareholders, with more than two people per household on average,
Speaker 2: we have an audience of over half a billion, and
Speaker 2: then they go on to say no entertainment companies ever
Speaker 2: programmed at this scale and with this ambition before. But
Speaker 2: it does feel like, you know, and listening to you
Speaker 2: talk that, you know, them not reporting their quarterly membership
Speaker 2: numbers in the future, that they are conceding that there
Speaker 2: is just a point that we're going to max out.
Speaker 2: We can just only sign up so many people. And
Speaker 2: that means even on a global scale, right.
Speaker 8: Yes, on a global scale. So back in the day,
Speaker 8: you know, maybe even about three four years ago, they
Speaker 8: would always talk about this one billion number as their
Speaker 8: total addressable market. About two years ago, that's when the
Speaker 8: great Netflix reset and the Great correction happened, they kind
Speaker 8: of toned that down. They said, you know, it's probably
Speaker 8: closer to about four hundred five hundred million as the
Speaker 8: total addressable market looks like it's you know, probably even
Speaker 8: slightly smaller than that, you know, so they definitely are
Speaker 8: conceding that there is an upper limit, There is a
Speaker 8: ceiling to kind of the growth here.
Speaker 2: But is there something like I always laugh about this
Speaker 2: sometimes when we talk about some of these big tech names.
Speaker 2: We used to talk about this a lot. By Apple,
Speaker 2: We'd be like, Oh, it's a disappointing number, yet they
Speaker 2: still sell a lot of stuff, And I understand it's
Speaker 2: growth trends and trajectory. Can we still though, can see
Speaker 2: that Netflix still is kind of the big behemoth in
Speaker 2: this space.
Speaker 7: They absolutely are.
Speaker 8: They have completely cemented their dominance when it comes to
Speaker 8: this whole streaming wars. I mean, I think the streaming
Speaker 8: wars are pretty much over. They are the winner, There's
Speaker 8: no doubt about that. And now it's just about them
Speaker 8: kind of you know, getting into different verticals, kind of
Speaker 8: becoming that that you know, that one service they probably
Speaker 8: will you know, kind of absorbi absorb a lot of
Speaker 8: the other smaller streaming services. I think, just because they're
Speaker 8: licensing so much of content from them and they you know,
Speaker 8: it's just but at this point, it's definitely going to
Speaker 8: become you know, how much pricing power do they have?
Speaker 8: So right now we are at about fifteen and a
Speaker 8: half dollars for a standard plan in the US. How
Speaker 8: much upside is there? Can that go to twenty twenty
Speaker 8: five dollars? That is kind of the big question.
Speaker 4: So it's funny as you're saying this, I'm thinking to myself, Okay, well,
Speaker 4: you know, twenty years ago, all we wanted was all
Speaker 4: the card options for TV, and we kind of got
Speaker 4: that now and I think a lot of us are
Speaker 4: spending more on.
Speaker 3: All a combination of all these services.
Speaker 4: Given that you know, it's Paramount, it's Hulu, it's Max,
Speaker 4: it's Disney Plus, it's Netflix, just to name a few.
Speaker 4: I do wonder, getha, where the growth is for Netflix
Speaker 4: at this point. Is it in the ad supported model,
Speaker 4: is it outside of the United States? Where is that
Speaker 4: growth coming from? As the company matures, Is it raising prices?
Speaker 8: Yeah, it's actually tim it's all of the above, and
Speaker 8: it's just you know, it's going to be a very
Speaker 8: it's a very tough balancing act for them because they
Speaker 8: don't want to do anything too quickly and too rashly,
Speaker 8: which is why when they were kind of implementing their
Speaker 8: whole password sharing crackdown, they were very careful not to
Speaker 8: raise prices because you know, they didn't want to anger
Speaker 8: you know, existing customers. So again, it's going to be
Speaker 8: it's going to be tricky. They're kind of walking a
Speaker 8: tight trope here. But yeah, they are going to use
Speaker 8: all the different levels that they have to kind of
Speaker 8: keep profitability, which is their main metric right now, profitability
Speaker 8: and margins kind of climbing up.
Speaker 6: Githa. Before the report, in the analys, I was speaking
Speaker 6: to a lot of them made a big deal about
Speaker 6: the T Mobile partnership that they were working on. How
Speaker 6: do you see that factoring into the future. Do you
Speaker 6: think that that has been a successful program and do
Speaker 6: you can you expect to see them maybe do some
Speaker 6: some more types of those partnerships.
Speaker 7: Absolutely.
Speaker 8: I think that is going to become a critical critical
Speaker 8: factor for for Netflix if it really kind of wants
Speaker 8: to grow its subscribers. So what they did with T
Speaker 8: Mobile was kind of they're offering their ad supported plan,
Speaker 8: which is the seven dollars monthly plan to you know,
Speaker 8: select Tea Mobile members for free, and they're going to
Speaker 8: do a lot more of that.
Speaker 7: The having a low.
Speaker 8: Priced plan kind of really gives them a lot of
Speaker 8: flexibility because they can add subscribers. But then again, they're
Speaker 8: not necessarily losing our poop because remember they're the greater
Speaker 8: the subscribers they have, they can always kind of appeal
Speaker 8: to advertise the advertising community, so and kind of makeup
Speaker 8: or offset for any of that our poo differential from
Speaker 8: from their advertising dollars. I think that's going to definitely,
Speaker 8: uh play a much bigger role, not just in the US,
Speaker 8: but of course across the world as well. They're going
Speaker 8: to have of those kinds of telecom partnerships.
Speaker 2: Keitha, what do we, you know, kind of pull from
Speaker 2: this when it means to like Disney Streaming and Warner
Speaker 2: Brothers Discovery and some of the other services that are
Speaker 2: out there.
Speaker 8: So for all of those other services, I think subscriber
Speaker 8: growth is not the primary focus anymore. It's kind of
Speaker 8: moved now, Carol, to profitability, where obviously, again Netflix leads
Speaker 8: the back. A lot of these other services have made
Speaker 8: a good progress, I would say, really good progress when
Speaker 8: it comes to at least they're not profitable yet, but
Speaker 8: they're you know, moderating their losses. Disney obviously is the
Speaker 8: big one to watch for there, and now they have
Speaker 8: the model in place. You know, you've seen exactly what
Speaker 8: Netflix has accomplished. They all know exactly what they have
Speaker 8: to do. It's just going to be a question of
Speaker 8: how well they do it and can they get there
Speaker 8: quick enough?
Speaker 4: Githa, do you think there's any consumer confusion? I mean, okay,
Speaker 4: I know the answer to this is yes, and I
Speaker 4: just don't know how to solve it.
Speaker 3: The consumer confusion about where to watch something.
Speaker 4: Yeah, I mentioned Sex and the City and I was
Speaker 4: shocked to hear that that's on Netflix.
Speaker 3: It's an HBO show.
Speaker 4: Somebody in our smolcast chat mentioned in the office, well,
Speaker 4: I think that's now on Peacock, but it was on Netflix.
Speaker 4: Friends a former NBC show or No, Seinfeld is now
Speaker 4: on Netflix.
Speaker 2: I believe it's confusing.
Speaker 3: See is that right? I don't know, like you know.
Speaker 8: It is how discovery is the Biggest's not content or
Speaker 8: it's really just discovery is the biggest problem right now
Speaker 8: in the whole of you know, the streaming space. And
Speaker 8: at the end of the day, we're kind of looking
Speaker 8: for that one or what we're waiting for, is that
Speaker 8: one aggregator or reaggregator that can kind of take all
Speaker 8: the shows that you really want to watch and do it.
Speaker 7: I don't know who it's going to be. Is it
Speaker 7: going to be YouTube?
Speaker 8: Maybe it is. It could be Amazon, it could be Apple.
Speaker 8: But but we're all waiting for that. Again, I'm sure
Speaker 8: exactly it's going to happen.
Speaker 3: Roku doesn't.
Speaker 4: Okay, Roku does a really good job of that, but
Speaker 4: you've got to have be signed into everything on your
Speaker 4: Roku and plus that means you're only watching on TV.
Speaker 4: You're not watching it on the iPad or on like
Speaker 4: your phone.
Speaker 7: And there's still is friction.
Speaker 3: Yeah, there is still a lot of friction.
Speaker 2: Final thought, Githa, I'm just thinking of our invest our
Speaker 2: audience as we work through this. Netflix share is still
Speaker 2: down about three and a quarter percent here.
Speaker 8: Yeah, So I think the big question is really going
Speaker 8: to be, you know, on the call of you know,
Speaker 8: what how many subscribers do or how many you know
Speaker 8: subscribers do you think you've captured from the whole password
Speaker 8: sharing initiative. I think the numbers that they're originally identified
Speaker 8: was one hundred million households. I think people will definitely
Speaker 8: want to know what percentage of that has already been
Speaker 8: kind of captured, just given the strong subscriber metrics, and
Speaker 8: then they'll kind of try to figure out how much
Speaker 8: more Runway is left.
Speaker 2: Rockstar as always, Githa Rang and Nathan, thank you so much.
Speaker 2: Tech and media analyst at Bloomberg Intelligence, Red Brown, final
Speaker 2: thoughts for you just twenty seconds here. I mean stocks
Speaker 2: down in the aftermarket, but we'll see what happens tomorrow.
Speaker 6: Yeah, We'll see what happens tomorrow and for the remainder
Speaker 6: of the year, I think you know they put up
Speaker 6: strong financials and that could easily bounce back. You know,
Speaker 6: this quick reaction, but the investors love the short term.
Speaker 3: It depends on what they say on the.
Speaker 2: Call exactly, and it'll be interesting to do if some
Speaker 2: investors may say, well wait, it's a little bit cheaper
Speaker 2: than it was and I want the exposure red.
Speaker 7: Thank you.
Speaker 2: So also a rock star, yes, yes, induticking with Kemes
Speaker 2: a rock group here right now.
Speaker 3: Yeah, we had a great group.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 2: So the overall every trade it is lower on this Thursday.
Speaker 2: So too, though, is the Philadelphia Semiconductor Index. It has
Speaker 2: dropped more than ten percent folks since March seventh, so
Speaker 2: an official technical correction, if you will, and that has
Speaker 2: caught our attention.
Speaker 4: Meantime, A giant in the space just selling off shares
Speaker 4: of TSMC Taiwan Semiconductor at Manufacturing down about four point
Speaker 4: five percent right now, this as it's scaled back its outlook.
Speaker 4: Free chip market expansion, Carol cautioning that the smartphone into
Speaker 4: PC markets still remain weak.
Speaker 2: Yeah, I feel like we're all on notice. All right,
Speaker 2: let's get more on the group. Let's bring in Bloomberg
Speaker 2: News managing editor of Technology and Global Security. She's Lindawan
Speaker 2: and she joins us here in studio. All right, Lynn,
Speaker 2: let's start with TSMC investors definitely not happy with the results.
Speaker 2: It's the world's largest maker of advanced chips, cutting its
Speaker 2: expectations for twenty twenty four market growth. It sounds like
Speaker 2: bad news. How how do you read it? What does
Speaker 2: it really mean?
Speaker 9: Yeah, I mean it does put us on notice. Right,
Speaker 9: we're just starting to see the chips companies report. You
Speaker 9: got Intel next week, possibly Texas Instruments too, and so
Speaker 9: this is like a potential sign of what's to come
Speaker 9: in the coming weeks. It's a nuanced picture though.
Speaker 7: Right.
Speaker 9: The outlook was bad. It was definitively bad. They were
Speaker 9: talking about weakness and the PC market, weakness and the
Speaker 9: smartphone market. But that really outshadowed a very good beat
Speaker 9: on revenue, outlook on like potential sales, on the fact
Speaker 9: that AI has growth, and so like we've been talking
Speaker 9: the three of us have been talking about how nuanced
Speaker 9: the chips recovery and the chips room from AI has
Speaker 9: been for a few quarters. Now I would say this
Speaker 9: is like the most nuanced that I've seen it. It's like, up,
Speaker 9: that's right.
Speaker 2: Do they have it right? Or do they not have
Speaker 2: it necessarily right? Because you say it's nuanced.
Speaker 9: It depends on how you feel about AI and whether
Speaker 9: AI can make up for this ongoing slump in the
Speaker 9: PC market and in the personal and in the in
Speaker 9: the phone market. Right, yeah, Like can AI be enough
Speaker 9: to save these giant chip companies like Intel and TSMC
Speaker 9: like that remains to be seen, but it does make
Speaker 9: you question, you know, how you will see the fortunes
Speaker 9: of Nvidia diverge from like TSMC and the others that
Speaker 9: make you know, the chips that go into cars and
Speaker 9: phones and PCs.
Speaker 2: And Nvidia is at about six ten seven percent today, right.
Speaker 4: Yeah, Okay, more on in Nvidia in just a minute,
Speaker 4: But first I want to talk a little bit about
Speaker 4: asm R because I'm wondering if perhaps some investors might
Speaker 4: have seen this coming after ASML's results yesterday.
Speaker 9: Yeah, I mean they're both very nuanced pictures, and that's
Speaker 9: exactly why we brought ASML up in that TSMC story,
Speaker 9: because this is now the second company that has said, whoa, like,
Speaker 9: we're seeing a bit slower of a market than we
Speaker 9: thought we were, but are also but is also giving
Speaker 9: a great alex. So in ASML's case, there was something
Speaker 9: like a more than sixty percent drop in their orders,
Speaker 9: and that is a that is bearished definitively. And yet
Speaker 9: most of the story and the narrative around its earnings
Speaker 9: was like, but don't worry, that's just temporary. AI is
Speaker 9: going to lift us back up. Demanding all these other
Speaker 9: chip markets is going to lift us back up. I
Speaker 9: think it's like a short term versus long term picture, right,
Speaker 9: there's a lull in the short term. People are still
Speaker 9: drawing down inventory. An ASML's case, they make the chip
Speaker 9: machinery that makes the chips, right, so they're even further upstream.
Speaker 9: And you think about the chip plants that are being
Speaker 9: built in the US and Germany and across Asia. Those
Speaker 9: have a long lead time. So what they're banking on
Speaker 9: is that, yes, while we're working through inventory now, there
Speaker 9: will be a boom in the coming years as construction
Speaker 9: gets way.
Speaker 2: Well, Loser's demand on the other side, ultimately the end users, right,
Speaker 2: because I mean it's great, Like and let's go to
Speaker 2: the money that's being put in. We have Bloomberg News
Speaker 2: reporting exclusively about Micron technology. They're right, six billion dollars Intel, Taiwan,
Speaker 2: Semi have already right, or they also are going to
Speaker 2: accept some loans as part of all of this awards
Speaker 2: packaging that's coming out. Can we assume you can do
Speaker 2: a lot of investments if they build them, Will the
Speaker 2: demand come? Can we assume that demand's going to be
Speaker 2: there ultimately or it depends where we are.
Speaker 9: That's hard to saying, you know, And there has been
Speaker 9: this narrative around the fact that like the market is
Speaker 9: underestimating how much data center demand there is actually going
Speaker 9: to be an AI. We had an executive at a
Speaker 9: Bloomberg Intelligence AI summit not too long ago, just a
Speaker 9: few weeks ago. Come up and he's like at one
Speaker 9: of the hottest AI data center startups, and he was like,
Speaker 9: a year ago, we were talking about investments in the billions,
Speaker 9: and now we're talking tens of billions. Next year, we
Speaker 9: may be talking exponentially more than that, because that is
Speaker 9: what AI demand in data centers looks like. But you know,
Speaker 9: the TSMC story pointed out that we had today that
Speaker 9: some analysts are like pouring cold water on that idea
Speaker 9: and are wondering whether the forecasts will hold up and
Speaker 9: whether they may actually disappoint. That's a big question mark.
Speaker 9: It depends on how long the a the AI hype lasts.
Speaker 4: Okay, so that I was going to say it brings
Speaker 4: us to Nvidia, Yeah, go, okay, because that company our
Speaker 4: reporting earnings till next month, the twenty second of next month.
Speaker 4: They're always last, they are, but you know, it gives
Speaker 4: us lots of time to talk about I'm ahead of earnings.
Speaker 4: Shares are down from all time highs of nine hundred
Speaker 4: and seventy four dollars just a little bit ago, trading
Speaker 4: now at eight forty four. In recent weeks, we've seen
Speaker 4: some companies come out with their own chips to try
Speaker 4: to compete with Nvidia. Meta comes to mind, Intel comes
Speaker 4: to mind. Do these things hold a candle to what
Speaker 4: Nvidia it can do?
Speaker 9: I think in video is still seen as the leader
Speaker 9: in the pack, but you have seen these other upstarts
Speaker 9: challenge them. You have seen some established chip makers. We
Speaker 9: had one in the office not too long ago, that is,
Speaker 9: you know, coming out with its own chip and its
Speaker 9: own chip design. I think, you know, the challenge for
Speaker 9: in Nvidia now and going forward is how do you
Speaker 9: maintain that first mover advantage and keep it. It's honestly
Speaker 9: the same challenge that ASML is facing. How do you
Speaker 9: keep up and ahead of the competition on the chip
Speaker 9: machines too. Everybody is in this race to advance it.
Speaker 9: Then again, like the to be sure on in video
Speaker 9: earnings always is that everybody every quarter is like this
Speaker 9: is gonna be the quarter where they disappoint. They can't
Speaker 9: keep this up for this long and every quarter they
Speaker 9: defy expectations. So I think you have to, like, you know,
Speaker 9: brace yourself for the idea that they may be able
Speaker 9: to surprise on the upside.
Speaker 2: Again, Lynn, twenty seconds, what's the next focal point for
Speaker 2: you as you watch this space the chip space or
Speaker 2: the AI space, chip space, the chips space.
Speaker 9: More spending on the government side, Okay, more being allocated.
Speaker 9: What I'd really love to know is where the rest
Speaker 9: of the twelve billion dollars in US ships spending goes?
Speaker 9: After Microsoft, I mean after Micron, you still got a
Speaker 9: whole lot of money left, and you know, with the
Speaker 9: big companies out of the way, you could see a
Speaker 9: lot of smaller names crowded in that space and make
Speaker 9: a name for themselves.
Speaker 2: As they say, always right, follow the money, basically all right,
Speaker 2: Bloomberg News Managing Editor of Technology and Global Security, Lynn,
Speaker 2: thank you so much. Lindawan joining us here.
Speaker 1: You're listening to the Bloomberg Business Week Podcast. Listen live
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Speaker 4: Well sales have previously owned homes in the US fell
Speaker 4: in March from a one year high. Underscore is the
Speaker 4: lingering impact of high mortgage rates and elevated prices. Meantime,
Speaker 4: a great story by Bloomberg's Matt Bosler today on how
Speaker 4: rents are the Fed's biggest stumbling block when it comes
Speaker 4: to taming US inflation. Housing market of course incredibly important
Speaker 4: to the economy and investors, and there are cross currents
Speaker 4: out there for sure.
Speaker 2: Yeah, which is why we knew we wanted to check
Speaker 2: in once again with Kate Kaminski. She's chief operating officer
Speaker 2: of the privately owned and asset and real estate investment
Speaker 2: company Walton Global. They've got about three point three billion
Speaker 2: in assets under management, over ninety thousand acres under management
Speaker 2: here in the United States. She's with us once again
Speaker 2: from Scottsdale, Arizona. Kate, good to have you back. How
Speaker 2: are you.
Speaker 10: I'm great.
Speaker 2: How are you doing doing well? Try to keep up
Speaker 2: with everything that's coming up, and it sometimes feels cross
Speaker 2: currents are coming at us. Last time we talked late February,
Speaker 2: you said pretty excited about twenty twenty four. Are you
Speaker 2: still pretty excited about this year? Are you less excited,
Speaker 2: more excited? Tell me what's since February.
Speaker 10: Well, you know, looking at the March numbers that came out,
Speaker 10: I mean, we've definitely seen things plummet a little bit
Speaker 10: since since we last spoke. We're down about fourteen percent
Speaker 10: for new home starts, but if you look at it
Speaker 10: year over year, we're still up twenty one percent year
Speaker 10: over years. So I would say my sentiment hasn't changed
Speaker 10: from that perspective because we're still seeing you know, at
Speaker 10: least for Walton's business where we really focus in delivering
Speaker 10: land to new home builders. Companies like Horton put out
Speaker 10: their earnings today and I mean they just had one
Speaker 10: of their strongest quarters ever and so their stocks up.
Speaker 10: I think home builder sentiments up. There's definitely headwinds with
Speaker 10: what we're seeing with inflation creeping up, mortgage rates creeping up.
Speaker 10: I think they went over seven today, So we've got
Speaker 10: to get that under control. But we remain bullish on
Speaker 10: on the outlook in the new new home building space
Speaker 10: most definitely.
Speaker 4: So what happens if rates don't go down? What happens
Speaker 4: to your business over the next year, Kate? I mean
Speaker 4: there's been lots of talk this year, just in the
Speaker 4: last few weeks, actually a lot in the last few
Speaker 4: days that the Fed may not even lower interest rates
Speaker 4: this year. What does that mean for your business at
Speaker 4: Walton Global?
Speaker 10: Yeah, I mean we're we're reading the same economic data
Speaker 10: points and preparing for the fact that there may not
Speaker 10: be any rate cuts. We certainly hope that there will be,
Speaker 10: but especially given it's an election year, I think we're
Speaker 10: all we have to keep our seatbelt done and go
Speaker 10: along for this ride. But with that, you know, we're
Speaker 10: we're continuing to hold study in terms of transactions and
Speaker 10: think that this is actually going to catapult forward additional
Speaker 10: transactions for Walton's business because you know, what we focus
Speaker 10: on is providing future land supply to the new home
Speaker 10: building space, and really we do that through a just
Speaker 10: in time inventory approach, you knowing nothing you haven't heard
Speaker 10: about or we haven't talked about before, whereby the builders
Speaker 10: are not paying for that land today, they're paying for
Speaker 10: it in the future. And with Walton's approach, it's when
Speaker 10: they're actually selling a home to a third party. But
Speaker 10: so as builders continue to look to preserve cash they
Speaker 10: have on hand today, I think that there's going to
Speaker 10: be even more demand for these unique structures whereby they
Speaker 10: can defer land buying costs, even development costs. I think
Speaker 10: we'll start to see a lot more of that over
Speaker 10: the coming years, and especially this year, so that the
Speaker 10: builders can take capital that they have on hand, which
Speaker 10: they have a lot, and use that for things like
Speaker 10: continuing to buy down mortgage rates, because I don't think
Speaker 10: that that's going to be a program we see go
Speaker 10: away anytime soon. That's how we're going to get buyers
Speaker 10: into homes.
Speaker 2: Right, And as you did say earlier, US homebuilder sentiment
Speaker 2: holding at fifty one in April, so it came in
Speaker 2: line with forecasted numbers by the analyst community that was
Speaker 2: a little bit earlier in the week. Having said that, right,
Speaker 2: you guys do buy land and then homebuilders buy that land.
Speaker 2: Is there any changes in the types of activity that
Speaker 2: you were seeing or where they want to be building regionally?
Speaker 2: We've talked about regional variations with you before and like
Speaker 2: all of the activity that's happening down south, what can
Speaker 2: you tell us, and sometimes that information gets a little
Speaker 2: bit more nuanced and interesting.
Speaker 10: Yeah, you know, again, the data that came out on March,
Speaker 10: it's it's showing that that we saw that decrease and
Speaker 10: starts from February over March right across the country. So
Speaker 10: I'm not going to say that you know, there are
Speaker 10: there's one region in particular that that didn't see some
Speaker 10: softening from February to March. But again, looking at things,
Speaker 10: you know, over a year, we're still seeing continued increases
Speaker 10: strengthen in the numbers, which I think is leading to
Speaker 10: that you know, home builder sentiment and and good performance
Speaker 10: that we're going to see from these builders. In Q one,
Speaker 10: we continue to be extremely focused on that southern half
Speaker 10: of the US as we continue to see more companies
Speaker 10: relocate to these markets, job growth within those markets, and
Speaker 10: population growth, which is you know, at historic eyes. I
Speaker 10: think that the southern portion of the country is going
Speaker 10: to continue to be an area that that you know,
Speaker 10: we can can really look to for strong results.
Speaker 4: Kate again to remind every one of what you guys do.
Speaker 4: You manage land. You buy it from folks, you manage it,
Speaker 4: you hold on to it, and then you sell it
Speaker 4: to the large home builders, some of whom you've already
Speaker 4: mentioned during our interview. I'm wondering about the other side
Speaker 4: of the equation, going and acquiring that land right now.
Speaker 4: What are you what trends are you noticing? Are you
Speaker 4: able to buy all the land that you want to
Speaker 4: buy right now? Where are the opportunities? How are prices?
Speaker 10: You know, land price prices like everything have been rising,
Speaker 10: and it's getting more and more competitive to buy development
Speaker 10: ready land. And that's that's really the key key phrase there.
Speaker 10: I keep driving home this point as we have these interviews,
Speaker 10: but we're not seeing anything loosen in terms of restrictions
Speaker 10: on you know, development ready land across the US, municipalities
Speaker 10: looking to approve land, and then even more important the
Speaker 10: infrastructure injections, you know, spending to get servicing to that
Speaker 10: land for it to be developed on. But so, you know,
Speaker 10: all of these factors are making the the development ready
Speaker 10: lands supply even more and more constraint.
Speaker 9: You know, we've got.
Speaker 10: Around ninety thousand acres under management. That makes us one
Speaker 10: of the largest owners of development ready land and in
Speaker 10: the US. But we're we're continuing to look every week
Speaker 10: for new acquisition opportunities because we just think it's going
Speaker 10: to get tighter and tighter. But so we're certainly advocating
Speaker 10: for you know, how can we affect change to get
Speaker 10: land approved, mostly for high density residential development, to get infrastructure,
Speaker 10: you know, spending in approvals so that places you know,
Speaker 10: like here in Arizona where we have water challenges, we
Speaker 10: need to figure that out because the population continues to grow.
Speaker 2: Yeah, I was going to say how much climate change
Speaker 2: is impacting kind of all of what you do? Just
Speaker 2: got about thirty seconds left here. What can you tell
Speaker 2: us on that? That's certainly something we're thinking a lot
Speaker 2: about here at Bloomberg and got our Earth Day coming
Speaker 2: up on Monday, so kind of thinking about that too.
Speaker 2: How is that complicating the situation? And again just got
Speaker 2: about twenty seconds.
Speaker 10: Yeah, it's huge. You know, Florida just put some moratoriums
Speaker 10: on development to really figure out what's happening with wetlands
Speaker 10: in Florida, and so I would say that it's really
Speaker 10: region specific and the environmental impact within those markets. But
Speaker 10: there's a compromise here, and I think we need the
Speaker 10: government to work with the builders and developers and landowners
Speaker 10: to figure that out.
Speaker 2: Gota ron Kate, thank you so much. Kay Kaminski, CEO
Speaker 2: of Walton Global.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Can't just
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Speaker 4: Can I see this on the radio?
Speaker 2: Carol, Well, I don't know. You can always say it once.
Speaker 4: The rent, as they say, is too damn high and
Speaker 4: still increasing too fast.
Speaker 3: Just still here, okay, I'm still here. Here's what we mean.
Speaker 3: Here's what we mean.
Speaker 7: Okay.
Speaker 4: Yeah, when inflation peaked above seven percent back in twenty
Speaker 4: twenty two, it was relatively broad based to cross goods
Speaker 4: and services. In twenty twenty four, with inflation back below
Speaker 4: three percent, it's no longer the case. What's left of
Speaker 4: the problem is now mainly about housing.
Speaker 2: Interesting and the new issue of Bloomberg Business Week Matt
Speaker 2: Bosler and Jennifer Epstein right about the Fed's biggest stumbling
Speaker 2: block in taming US inflation. Matt is Bloomberg News US
Speaker 2: Economy reporter. He joins us here in a Bloomberg Interactive
Speaker 2: broker studio. Really timely story makes no sense. And we've
Speaker 2: talked so much about kind of what makes inflation sticky,
Speaker 2: laid all out for us and what you found in
Speaker 2: your reporting.
Speaker 11: Yeah, so, you know, we're used to kind of hyperventilating
Speaker 11: around the monthly inflation numbers when they come out every month,
Speaker 11: and the story is always like, oh, what happened with
Speaker 11: goods prices? They're falling, or oh, core services is looking hot.
Speaker 11: That must mean the labor markets too tight, and so
Speaker 11: on and so forth. But the truth is, if you
Speaker 11: really look at the numbers, like the kind of big
Speaker 11: underlying component that determines the trend of the overall inflation
Speaker 11: index always comes back to rental inflation. And so we're
Speaker 11: in a situation now where not only is that usually
Speaker 11: the most important, but it's especially the most important right
Speaker 11: now because it's also the component of inflation that has
Speaker 11: been slowest to come down compared to goods and services
Speaker 11: and food and energy. And so if you start to
Speaker 11: dig into those numbers, what's going on there, it looks
Speaker 11: really interesting on a regional basis, where you're seeing, you know,
Speaker 11: very high rental inflation still in like the Northeast and
Speaker 11: the Midwest. It's actually coming down very quickly in the
Speaker 11: West and the South, where in a lot of those
Speaker 11: cities they've been building a lot of housing over the
Speaker 11: last figure.
Speaker 4: Yeah, you increase supply and prices come to welcome to ECO. Well,
Speaker 4: I want to make sure I get this right.
Speaker 11: Supply and demand, supply and demand.
Speaker 3: Okay.
Speaker 4: So it actually brings me to a serious point because
Speaker 4: the fedcher has been asked about this several times over
Speaker 4: the last couple of years, probably more than several You
Speaker 4: follow kind of everything he has to say, but he
Speaker 4: doesn't have control over zoning, he doesn't have control over
Speaker 4: where homes are built. The FED really has a limited
Speaker 4: toolkit when it comes to this stuff. So what can
Speaker 4: the FED do to tackle rent inflation?
Speaker 11: Well, that's a really tricky question because typically the way
Speaker 11: they think about it is, Okay, if we raise interest rates,
Speaker 11: that will reduce demand in the economy, which will reduce
Speaker 11: demand for housing overall, because people have less money to
Speaker 11: spend on things like housing. But the problem is with
Speaker 11: housing in particular, sort of that relationship between interest rates
Speaker 11: and rental inflation. Kind of the sign on that relationship,
Speaker 11: whether it's a positive or negative correlation, can be a
Speaker 11: little ambiguous, because there's also reasons to think that, oh,
Speaker 11: maybe higher interest rates might you know, not be great
Speaker 11: for housing supply, right if you're trying to finance construction
Speaker 11: of housing.
Speaker 2: We just talked about that with a guest in the
Speaker 2: last hour, but go ahead.
Speaker 11: Right, And so there's things like that. I think most
Speaker 11: people still believe that on the effect is that you
Speaker 11: raise interest rates and that's going to slow housing.
Speaker 2: On the margin.
Speaker 11: But it's a lot harder to kind of make that
Speaker 11: case versus some other more clear cut kind of components
Speaker 11: of the inflation index where it makes more sense.
Speaker 2: What actually makes up the rent component specifically, is it
Speaker 2: rental any kind of housing like, just break it down
Speaker 2: for me.
Speaker 11: Yeah, So it's it's partly it's mostly multifamily housing. There's
Speaker 11: also a lot of you know, single family detached housing
Speaker 11: that is, you know, on the rental market. And so
Speaker 11: this has been kind of a story lately with some
Speaker 11: of the drama around the inflation numbers over the last
Speaker 11: few months and some of these emails that the BLS
Speaker 11: has been sending out to quote unquote Super YEARSS and
Speaker 11: so on and so forth. Part of the problem with
Speaker 11: trying to figure out what exactly is going on is
Speaker 11: that the BLS doesn't publish the weight of single family
Speaker 11: versus multifamily housing in the index. So you kind of
Speaker 11: have to guess.
Speaker 2: Because I guess I just just for a moment, like
Speaker 2: I just think about higher rate environment. You can't afford
Speaker 2: to buy a home, right because the mortgage rates are higher,
Speaker 2: so you end up renting more, and that just drives
Speaker 2: up rental prices even more. It's as simple as that,
Speaker 2: is it, or somewhat well.
Speaker 11: I mean, so that's part of the reason why it's
Speaker 11: not clear that raising interest rates will reduce housing demand,
Speaker 11: because that's one of the big countervailing effects that people,
Speaker 11: you know, speculate about. There's another kind of more interesting
Speaker 11: component of this interest rates and rental inflation conversation, which
Speaker 11: has to do with the way that the CPI numbers
Speaker 11: are constructed in particular, which is that, you know, we've
Speaker 11: been talking a lot about these measures of market rents
Speaker 11: on new leases right from Zillo Group or the BLS
Speaker 11: is even publishing their own now, and those show that
Speaker 11: rents have rental inflation has either slowed a lot or
Speaker 11: rents are outright declining in a lot of places. The
Speaker 11: problem is, the CPI numbers measure the average rents for
Speaker 11: all tenants, and I think it's something like ninety percent
Speaker 11: of tenants don't move in a given year, and so
Speaker 11: the CPI numbers are dominated by people who aren't moving,
Speaker 11: and so it takes some time for you know, those
Speaker 11: market rents to get into the kind of like average rents.
Speaker 11: And one theory that we talk about in the story
Speaker 11: a little bit is that high interest rates may be
Speaker 11: affecting the amount of time it takes for market rents
Speaker 11: to get into the average rent figures because there's just
Speaker 11: less turnover and so the housing stocks turning over less
Speaker 11: and therefore or you know, those market rents aren't being
Speaker 11: reflected in the full housing stock as quickly.
Speaker 4: I don't mean to ask a question that involves moving goalposts,
Speaker 4: but Carol and I do talk a lot about a
Speaker 4: two percent inflation goal and whether or not that is
Speaker 4: something that needs to be revisited. I think there are
Speaker 4: a lot of couch houses that I know yet. But
Speaker 4: what about just stripping out what happens when you strip
Speaker 4: out housing and so called supercore, because it actually is
Speaker 4: pretty significant, and now some analysts are stripping that out
Speaker 4: when they look at how inflation is moving.
Speaker 11: Yeah, so if you do that, inflation is basically back
Speaker 11: very close to two percent. This housing thing is really
Speaker 11: like the last, you know, big remaining piece of the issue.
Speaker 11: If we were stripping out housing, you know, on the
Speaker 11: core PCEE indicator that the FED likes to look at,
Speaker 11: we'd be talking about more like two point two two
Speaker 11: point three percent inflation. And you can imagine the conversation
Speaker 11: would be very different, given that we have five and
Speaker 11: a half percent interest rates really different.
Speaker 2: Thirty seconds left. Wrapping up, I'm just thinking about folks
Speaker 2: who are listening to us and watching us right now.
Speaker 2: What do you think is it that they have to
Speaker 2: kind of take away from this as they think about
Speaker 2: either the investment environment or ultimately what the FED can
Speaker 2: or can't do based on this data.
Speaker 11: So I think the big thing is to, you know,
Speaker 11: keep an eye on the rental inflation numbers when we're
Speaker 11: looking at the monthly inflation statistics in particular, and you know,
Speaker 11: think about kind of what's going to get us down
Speaker 11: back to kind of pre pandemic run rate for those
Speaker 11: rental inflation numbers. A lot of people are forecasting that
Speaker 11: that's going to happen any month now. They've been saying
Speaker 11: that for a couple of months, so we'll just have
Speaker 11: to see. But if that does happen in the next
Speaker 11: couple months, then you know, the inflation conversation could change
Speaker 11: again pretty dramatically.
Speaker 2: Yeah, which we've seen some big swings swings in it.
Speaker 3: All, right, exactly?
Speaker 4: Did I mention that Matt's story is featured in the
Speaker 4: forthcoming issue of BusinessWeek magazine. It's available now on the
Speaker 4: Bloomberg terminal and at Bloomberg dot com slash business Week.
Speaker 2: A great read. Mepos us Economy reporter at Bloomberg News.
Speaker 2: Here in our interactive broker studio, Matt thank you so much.
Speaker 1: A journal now about you let me drive?
Speaker 5: No, no, no, no, please go ju honey please, I'll do
Speaker 5: the driving.
Speaker 1: Gravel, let's mate, I want to dry it.
Speaker 4: It's a good question time.
Speaker 1: This is the drive to the clothes.
Speaker 3: Don com think we'll buy around.
Speaker 1: Each other down on Bluebird Radio.
Speaker 2: All right, everybody just got about eighteen minutes left to
Speaker 2: end the trading session, getting ready to wrap up the
Speaker 2: trading day and get to those Netflix earnings, which are
Speaker 2: definitely a focal point after the closing. About Charlie just
Speaker 2: breaking down the numbers, a bit of a mixed trade,
Speaker 2: but lower in particular on the Nasdaq one hundred, down
Speaker 2: about four tenths of a percent, and again on a
Speaker 2: day where we've seen some movement in US treasury yields.
Speaker 2: Al though, we're offesome of our highs. But as Charlie mentioned,
Speaker 2: looking at the ten, you're four point sixty three right
Speaker 2: now to your note, with the yield of four point
Speaker 2: ninety eight, it's so just shy of that five percent mark.
Speaker 2: But keeping an eye on that higher or high for longer.
Speaker 3: Well, let's get to our drive to the clothes.
Speaker 4: For that, we go to Burns McKinney portfolio manager at
Speaker 4: NFJ Investment Group, Burns, joining us from Dallas, Texas this afternoon.
Speaker 3: Burns, how are you.
Speaker 12: I'm doing great. Thanks, thanks for having me.
Speaker 3: Yeah, it's good to have you with us.
Speaker 4: What do you make of this rising rate environment? I mean,
Speaker 4: it's kind of funny for me to stay rising rate
Speaker 4: environment because that's the environment that we've been in for
Speaker 4: the last eighteen to twenty four months. But it does
Speaker 4: seem like investors are a little concerned that the Fed
Speaker 4: is not going to be cutting this year.
Speaker 12: That's definitely been the most prevalent narrative over the last
Speaker 12: week or so. You know, we've had three straight months
Speaker 12: of stubbornly difficult to tamp down last mile inflation, and
Speaker 12: so when you had Jay Powell earlier this week suggests
Speaker 12: that really the Fed's in no hurry to cut rates
Speaker 12: and suggested that rates might be higher for longer, you
Speaker 12: saw a convergence between, you know, what investors were thinking
Speaker 12: and what the Fed had been saying for a while.
Speaker 12: At the beginning of this year, we were talking or
Speaker 12: the market was expecting six or seven rate cuts, and
Speaker 12: really calendar to date, we've gone from that to about
Speaker 12: maybe one to two rate cuts. Now, the good news
Speaker 12: is on this front is that you know, we're seeing
Speaker 12: higher bond yields, but it really it hasn't derailed anything yet.
Speaker 12: You've still seen, despite the fact we've had a tough week,
Speaker 12: equities are up this year. It hasn't affected the economy
Speaker 12: so much. I mean, the jobs reports have been very strong.
Speaker 12: In fact, what's interesting is that despite the fact that
Speaker 12: there's a lag in FED policy, they started hiking rates
Speaker 12: two years ago, and in fact, over the last twenty
Speaker 12: four months, unemployment has been below four percent for over
Speaker 12: twenty four months in a row. The last time we
Speaker 12: saw a run that long for low unemployment was over
Speaker 12: fifty years ago. So jobs have been very strong, and
Speaker 12: really it just it buys the FED time and patience.
Speaker 12: It's sort of like, you know, if you're on a
Speaker 12: road trip, if your car's getting a little better mileage
Speaker 12: than you expected, then maybe you can make it a
Speaker 12: few more exits before having to take that stop. But
Speaker 12: what it does mean is higher rates for longer.
Speaker 2: I mean, we're just kicking off earnings. You know, we're
Speaker 2: kind of little bit on pins and needles awaiting those
Speaker 2: Netflix results coming up after the close of the belt
Speaker 2: because they're one of the big megacap names, right the
Speaker 2: tech names that we really kind of follow very closely.
Speaker 2: Having said that, you've got some names, especially within the
Speaker 2: value world, that you are finding interesting. Starbucks is among them.
Speaker 2: What is it about Starbucks that you find interesting at
Speaker 2: this point? And I'm just pulling it up on the
Speaker 2: Bloomberg stocks down about nine percent so far this year,
Speaker 2: and we're looking at what a forward looking pe of
Speaker 2: about twenty one, but we know that they've been going
Speaker 2: through some things.
Speaker 12: Yeah, we're looking for again, we're contrarians, and we're looking
Speaker 12: for the babies that've been thrown out with the bath water.
Speaker 12: Starbucks has been lagging of late, and as a result,
Speaker 12: what you're able to get is a growth name at
Speaker 12: a reasonable price. You noted this traded about twenty one
Speaker 12: times earnings over the last decade, it's averaged closer to
Speaker 12: thirty times earnings, and in fact, outside of that brief
Speaker 12: run during the pandemic, this is the cheapest Starbucks has
Speaker 12: been on a pe multiple basis over the last ten years.
Speaker 12: So you have that they've been very generous with shareholders,
Speaker 12: that their dividend payouts gone up by nearly twenty percent
Speaker 12: per year for a ten year run. That's a great
Speaker 12: way to keep up with the inflation. And in this
Speaker 12: type of market, you know, pricing power is paramount, and
Speaker 12: what they sell is they're the dominant player in an
Speaker 12: addictive product. So they've been able as a result of
Speaker 12: that consistently grow sales. And yeah, just I always like
Speaker 12: to look at stocks that you maybe have a little
Speaker 12: experience in. You know, when I'm on the road for business,
Speaker 12: I might stop in there for a brief water. My
Speaker 12: daughter does her homework there, my son meets up with
Speaker 12: his friends there. Now, I kind of like to describe
Speaker 12: Starbucks as the town square of the twenty first century.
Speaker 3: I mean, that's what Howard Schultz wanted.
Speaker 4: Like you're like, this is literally, like, you know, the
Speaker 4: thesis of Howard Schultz. The question is can they can
Speaker 4: they do it in a way that not not only
Speaker 4: satisfies customers but also their employees as they've had the
Speaker 4: labor challenges over the last couple of years, dock.
Speaker 2: Hasn't really gone anywhere in the last couple of years.
Speaker 2: And you know, I feel like I'm gonna, you know,
Speaker 2: mimic our something my husband saying, just because it's on sale,
Speaker 2: doesn't mean it's a deal. Like so, I'm just saying, right,
Speaker 2: unless there's the growth there, you know, how patient do
Speaker 2: investors need to be?
Speaker 12: Well, again, the fact that you know that the margins
Speaker 12: have been pinched a little bit over the last couple
Speaker 12: of few quarters. You know, that's one of the reasons
Speaker 12: why investors do get such a great evaluation. And you know,
Speaker 12: noting the fact that it's not just cheap on a
Speaker 12: relative basis, this is the cheapest it's been in a decade.
Speaker 12: And so you know, when you start off, you know,
Speaker 12: values what you get what you pay for it, and
Speaker 12: as a result, it just kind of you know, shifts
Speaker 12: that risk reward to the upside for investors. As far
Speaker 12: as getting an affordable starting point. You know, you've got
Speaker 12: a company that just efficient operations. You know, same store
Speaker 12: sales have continued to grow at three to four percent
Speaker 12: per year. It's been very consistent on that front. And again,
Speaker 12: you know, I mean there's very few companies that have
Speaker 12: really demonstrated the type of pricing power that they have,
Speaker 12: and so especially in an inflationary environment, that's the type
Speaker 12: of thing we're looking for. That and as I said,
Speaker 12: you's growing dividends. You know, in case things go sideways,
Speaker 12: you know, they'll they'll pay you.
Speaker 4: To Wait, hey, what about Crowncastle. This is a company
Speaker 4: that is it's a rate.
Speaker 1: Uh.
Speaker 4: They do infrastructure for wireless communications, think cell towers and
Speaker 4: the like. You're also bullish on Crowncastle.
Speaker 12: Why, Uh yeah, that's one again. I you know, I
Speaker 12: think that for one, you know, you just have to
Speaker 12: kind of bear in mind that you know, the the
Speaker 12: stock market's actually pricing in a pretty positive scenario. Investors
Speaker 12: aren't looking to play defense right now. I think, you know,
Speaker 12: no one's thinking about a recession now the way they
Speaker 12: were a year ago. And you know, in the case
Speaker 12: of Crowncastle, yeah, they're they own cell towers.
Speaker 1: Uh.
Speaker 12: They they pay a consistent six percent dividend deal, which
Speaker 12: is another great way to play defense. You know, as
Speaker 12: far as you have cellular service, I mean basically, you know,
Speaker 12: there is just a play on the rising demand for
Speaker 12: digital content. Five G in fact, is even more profitable
Speaker 12: for these guys, and it's the type of thing where
Speaker 12: they sign long term contracts with their clients and with
Speaker 12: automatic inflation escalators. And then nice thing for us is
Speaker 12: we don't have to be smart enough to know, you know,
Speaker 12: which streaming service or which you know websites are going
Speaker 12: to be the successful ones. It's kind of that pick
Speaker 12: and shovel play in the twenty first century, whereby you
Speaker 12: know they you know, regardless, people are gonna have to
Speaker 12: use their cell phones. I was listening to a radio
Speaker 12: show the other day where someone was hypothetically asked, what
Speaker 12: would you give up first? You're heating and air conditioning
Speaker 12: or your cell phone? And I'm not to say which
Speaker 12: side of the coin I'm going to be on on that,
Speaker 12: but the fact that people were even asking that question
Speaker 12: does significant does indicate that they do, you know, cell
Speaker 12: a very importantly.
Speaker 3: It depends on where you live.
Speaker 4: If you live in California, you don't need heater or
Speaker 4: air conditioning for a lot of them ask, So that's
Speaker 4: an easy ask anywhere else in the country, though you
Speaker 4: might have to.
Speaker 3: Yeah. I think twice about.
Speaker 6: That, Dallas.
Speaker 2: Yeah, I can't imagine. I mean, cell phones at this
Speaker 2: point are kind of almost I don't want to say
Speaker 2: they are.
Speaker 3: Utility, but no question are I think you can say that.
Speaker 2: Yeah, no doubt about it. Yeah, Burns, thank you so much.
Speaker 2: Fun to talk a couple of names with you. I
Speaker 2: really appreciate it. Burns McKinney's portfolio manager at NFJA Investment Group,
Speaker 2: joining us from Dallas, Texas.
Speaker 4: He also likes the Next Era Energy. We didn't get
Speaker 4: to talk to him about that. Next time he comes on,
Speaker 4: we'll chat with him about that. Likes Reed's healthcare industrials.
Speaker 2: Yeah, I'm looking at Next Era. It's going to report
Speaker 2: next week, guys, before the market on April twenty third.
Speaker 2: It is up about six percent. It's got a dividend
Speaker 2: yield of about three point two percent. But it's interesting.
Speaker 2: We've talked about the power grid and energy and utilities
Speaker 2: a little bit this week, so we'll see what they
Speaker 2: have to say. Ultimately.
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