WEBVTT - Netflix Sees Stronger Second Half 0:00:01.360 --> 0:00:05.680 This is Bloomberg Business Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:19.040 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:19.160 --> 0:00:22.639 All right, I knew when Netflix reported last night and 0:00:22.640 --> 0:00:25.560 we were breaking down the numbers, I knew that. Ultimately 0:00:25.600 --> 0:00:27.840 I wanted to get to Keeta Ringanathon, who follows this 0:00:27.960 --> 0:00:30.200 name so closely and picks it apart, goes through the 0:00:30.240 --> 0:00:34.080 details and really explains the story. She has Bloomberg Intelligence, 0:00:34.120 --> 0:00:37.360 Technology and media analyst. As I said, Geeta Ringanathon, she 0:00:37.479 --> 0:00:40.559 is with us on zoom from our Princeton, New Jersey bureau. Hey, 0:00:40.600 --> 0:00:43.400 geta stock's a little bit lower today, but if you 0:00:43.479 --> 0:00:45.800 looked at the aftermarket last night, it was getting killed 0:00:45.840 --> 0:00:48.720 Netflix like down ten to eleven percent, now down about 0:00:48.720 --> 0:00:53.120 four percenters. So initial stock reaction, what were they reacting to? 0:00:53.200 --> 0:00:55.320 And then maybe why did investors maybe rethink it a 0:00:55.360 --> 0:00:55.800 little bit? 0:00:56.920 --> 0:00:59.800 Yeah, thank you so much Carolyn Madison for having me so. Obviously, 0:00:59.800 --> 0:01:02.680 the nee jerk reaction, as always has been to the 0:01:02.680 --> 0:01:05.160 subscriber numbers, right, and so the one Q subscriber numbers 0:01:05.160 --> 0:01:07.680 came in a little bit lighter. The two Q revenue 0:01:07.720 --> 0:01:11.160 guidance wasn't looking too great either, and you know, that 0:01:11.360 --> 0:01:13.760 was kind of what prompted that initial sell off in 0:01:13.840 --> 0:01:17.039 the stock. I think as investors kind of had time to, 0:01:17.280 --> 0:01:18.960 you know, go back a little bit into the report 0:01:18.959 --> 0:01:22.280 and digest some of the other details. Remember, Netflix itself 0:01:22.640 --> 0:01:25.839 is pivoting away from, you know, just being a subscriber 0:01:25.920 --> 0:01:28.680 story to becoming more of a profitability story, becoming more 0:01:28.720 --> 0:01:30.800 of a free cash flow story, and I think they 0:01:30.800 --> 0:01:33.760 did absolutely spectacularly on that front. You know, if you 0:01:33.800 --> 0:01:36.640 look at the operating margins, they came in well above 0:01:36.680 --> 0:01:39.120 what they had projected. If you look at operating profits again, 0:01:39.120 --> 0:01:40.920 they came in very well. And where they really kind 0:01:40.959 --> 0:01:44.119 of stunned, you know, the street was with their free 0:01:44.160 --> 0:01:47.000 cash flow numbers. So over two billion dollars just in 0:01:47.319 --> 0:01:50.400 first quarter free cash flow. They upped their guidance for 0:01:50.440 --> 0:01:51.800 the full year to three and a half billion, and 0:01:51.880 --> 0:01:54.120 we think that that still is pretty conservative. It it 0:01:54.120 --> 0:01:57.120 could well go to maybe about four billion dollars just 0:01:57.120 --> 0:01:57.920 a free cash flow. 0:01:58.200 --> 0:01:59.760 I heard Jens surveillance this marrity, so I got to 0:01:59.840 --> 0:02:01.400 chee a little bit in terms of your thinking. But 0:02:01.600 --> 0:02:04.680 that's amazing, right for media company essentially. 0:02:05.480 --> 0:02:09.280 That is absolutely amazing for media, for streaming, and especially 0:02:09.320 --> 0:02:11.520 for Netflix. Remember, this was a company that was getting 0:02:11.560 --> 0:02:15.080 criticized left, right and center for not you know, not 0:02:15.200 --> 0:02:18.280 generating cash, for losing, for burning three and a half 0:02:18.320 --> 0:02:20.679 billion dollars in cash maybe just about four years ago. 0:02:20.919 --> 0:02:23.040 And how they've turned the story around has just been, 0:02:23.200 --> 0:02:26.119 you know, miraculous, And of course it gives I think 0:02:26.160 --> 0:02:28.919 the whole of the media landscape now a playbook. Right, 0:02:29.000 --> 0:02:30.880 this is what everybody wants to do. This is what 0:02:30.919 --> 0:02:34.639 everybody's aspiring to do. Get to those twenty percent operating margins, 0:02:35.080 --> 0:02:37.600 not only break even on their streaming business, but then 0:02:37.760 --> 0:02:40.800 really get out to churning profits and charning free cash. Remember, 0:02:40.800 --> 0:02:43.760 everybody right now is losing money in the streaming business. 0:02:43.760 --> 0:02:46.040 Whether it's Disney they're going to lose about three billion 0:02:46.080 --> 0:02:48.520 dollars this year, whether it's Paramount again two billion dollars 0:02:48.560 --> 0:02:51.040 in losses, Peacock three billion dollars in losses. So the 0:02:51.040 --> 0:02:53.480 fact that Netflix is going to throw out seven billion 0:02:53.480 --> 0:02:55.840 dollars in EBITDA and three and a half billion in 0:02:55.880 --> 0:02:58.359 free cash flow is is just marvelous. 0:02:58.440 --> 0:03:00.400 You know, media companies have always been fun. If you 0:03:00.480 --> 0:03:03.440 go back to kind of the likes of traditional cable companies, 0:03:03.480 --> 0:03:07.320 and we always talked about them not being necessarily huge 0:03:07.360 --> 0:03:09.800 money maker, Like how do we think about streaming. Should 0:03:09.840 --> 0:03:12.560 they be making money KITA in this environment or should 0:03:12.600 --> 0:03:14.600 they be as a class be making money? 0:03:15.520 --> 0:03:18.040 I mean, that is such an excellent question, right. I 0:03:18.080 --> 0:03:21.840 think after that initial dust settled from that streaming land 0:03:21.880 --> 0:03:23.800 grab phase and everybody was just kind of in that 0:03:23.919 --> 0:03:26.800 rush to get streaming subscribers, I think then this question 0:03:26.919 --> 0:03:29.440 kind of really started to evolve being you know, what 0:03:29.639 --> 0:03:32.880 is what is the endgame? What are the unit economics 0:03:32.880 --> 0:03:35.320 in this business? Is it ever going to be as 0:03:35.400 --> 0:03:38.720 good as the old TV model where we saw networks 0:03:38.760 --> 0:03:42.040 linear TV networks like a USA or a CNBC generate 0:03:42.400 --> 0:03:45.640 you know, thirty thirty five percent margins quarter after quarter, 0:03:46.320 --> 0:03:49.160 and so what we've kind of now, you know, obviously, 0:03:49.400 --> 0:03:52.680 with you know, companies spending handover fist when it came 0:03:52.720 --> 0:03:55.680 to content, you know, there was this question about whether 0:03:55.680 --> 0:03:57.120 they're ever going to be able to break even. I 0:03:57.120 --> 0:04:01.080 think Netflix finally has provided the intry with some sort 0:04:01.080 --> 0:04:03.440 of a template of how to go about it. I mean, 0:04:03.440 --> 0:04:05.800 obviously they did have a lot of bumps down the road, 0:04:06.160 --> 0:04:09.440 especially in their early innings. But I think now now 0:04:09.480 --> 0:04:12.680 that you know they're in a slightly more mature face, 0:04:13.000 --> 0:04:15.280 I think we do have this finally, this this kind 0:04:15.280 --> 0:04:15.920 of playbook. 0:04:16.240 --> 0:04:19.080 So that's my exact question for you. In terms of 0:04:19.160 --> 0:04:23.120 the cash flow, what do you anticipate Netflix pouring that 0:04:23.279 --> 0:04:26.600 cash into to increase profits even more? Are they going 0:04:26.640 --> 0:04:29.720 to lean into more content creation for those programs that 0:04:30.080 --> 0:04:31.599 are really cheap to produce. 0:04:32.360 --> 0:04:34.640 That's a fabulous question. I think what they said last 0:04:34.680 --> 0:04:36.880 night is yes, they're holding content. So they are curbing 0:04:36.920 --> 0:04:39.800 their content spending a little bit this year especially and 0:04:39.880 --> 0:04:42.039 also for twenty twenty four. They kind of gave some 0:04:42.080 --> 0:04:44.720 guidance there. But I think after that, you know, kind 0:04:44.760 --> 0:04:48.680 of everything becomes you know, fair game. So they talk 0:04:48.880 --> 0:04:52.040 not just about you know, necessarily TV shows or film content. 0:04:52.520 --> 0:04:54.760 They're going to expand into different categories. They're going to 0:04:54.760 --> 0:04:57.240 expand into gaming. They already are. In fact, they might 0:04:57.279 --> 0:05:00.279 look at different genres, you know, whether it's sports, pro gramming, 0:05:00.279 --> 0:05:01.240 and all of that is going to take a lot 0:05:01.279 --> 0:05:03.240 of money. So yes, they're definitely going to invest in 0:05:03.320 --> 0:05:06.640 more content, in more programming. But they also talked about 0:05:06.880 --> 0:05:10.280 return of capital. So they already bought back about four 0:05:10.360 --> 0:05:13.680 hundred million shares in the first quarter, and they're going 0:05:13.680 --> 0:05:16.440 to accelerate their whole share repurchase program. So this is 0:05:16.480 --> 0:05:20.760 becoming very much like a traditional, you know, low growths 0:05:20.800 --> 0:05:21.360 tech company. 0:05:21.360 --> 0:05:23.960 Really well, real quick on that, because you mentioned sports 0:05:24.000 --> 0:05:26.440 and I feel like the live stream of the Love 0:05:26.480 --> 0:05:29.120 Is Blind reunion was a good test run for them 0:05:29.160 --> 0:05:31.839 when it comes to live programming. Is it a big 0:05:31.880 --> 0:05:33.160 deal that that didn't go well? 0:05:34.680 --> 0:05:36.600 You know, and they addressed that yesterday a little bit, 0:05:36.600 --> 0:05:38.680 so they did talk about, you know, some technical bugs. 0:05:38.680 --> 0:05:40.560 It obviously is important for them to have all the 0:05:40.560 --> 0:05:43.599 infrastructure in places before they embark on something as ambitious 0:05:43.440 --> 0:05:46.800 as sports programming. I think they'll get there. I mean, 0:05:46.839 --> 0:05:48.839 obviously they are. There are going to be some kings, 0:05:48.839 --> 0:05:51.600 some hiccups on the way. I don't think it's as 0:05:51.640 --> 0:05:54.960 big of a deal. They did finally get the show 0:05:55.040 --> 0:05:57.520 up and running, and they're going to learn along the way, 0:05:57.600 --> 0:05:59.880 so you know, eventually they will have all the infrastructure. 0:06:00.400 --> 0:06:02.240 Isn't it funny though, Geita that you feel like the 0:06:02.240 --> 0:06:06.200 streaming services all this highly produced content you know, you know, 0:06:06.240 --> 0:06:08.159 you can watch it at any time, doesn't matter when 0:06:08.160 --> 0:06:10.120 you watch it. Is now kind of going back to 0:06:10.160 --> 0:06:13.840 the linear model of destination viewing or specific times, whether 0:06:13.839 --> 0:06:16.240 it's through sports or something like a live feed. 0:06:17.160 --> 0:06:18.640 Yeah, I mean that's kind of interesting, and I think 0:06:18.680 --> 0:06:20.480 what Netflix is really trying to do here, I think 0:06:20.560 --> 0:06:22.560 is just kind of build anticipation, create bus. I mean, 0:06:22.800 --> 0:06:25.279 if you look at reality series and something like you know, 0:06:25.400 --> 0:06:27.440 Love is Blind or I don't know, Nailed It or 0:06:27.480 --> 0:06:29.240 all those making competitions. I mean that's something that you 0:06:29.279 --> 0:06:32.320 typically have on in the background as you're folding laundry 0:06:32.400 --> 0:06:35.000 or kind of you know, unloading your dishwasher. But I 0:06:35.000 --> 0:06:37.839 think they want to just create the bus, create anticipation, 0:06:37.880 --> 0:06:40.120 so that you have this audience kind of coming in 0:06:40.160 --> 0:06:43.080 to watch it, almost like appointment television. So it's really 0:06:43.120 --> 0:06:45.479 just more ways for them to you know, have a 0:06:45.480 --> 0:06:49.560 captive audience, which eventually, hopefully they can sell to advertisers. 0:06:49.600 --> 0:06:53.080 At some point on that exact note, advertisers, they were 0:06:53.120 --> 0:06:56.080 going to roll out this ad supported model, What is 0:06:56.120 --> 0:06:58.800 the plan for that? Because I have not seen that yet. 0:06:59.600 --> 0:07:02.600 So the ad supported model is up and running. They 0:07:02.640 --> 0:07:06.360 did not give us necessarily any subscriber numbers around that, 0:07:06.680 --> 0:07:08.760 but they did give us some directional data points. So 0:07:08.800 --> 0:07:10.960 what they did say is that it is going according 0:07:10.960 --> 0:07:13.520 to plan. They probably I mean, by our estimates, they 0:07:13.520 --> 0:07:16.200 probably have about two twenty half million subscribers on that 0:07:16.240 --> 0:07:19.440 AD plan. There's still a lot more market to capture. 0:07:19.760 --> 0:07:21.680 But I think the really interesting point that they gave 0:07:21.760 --> 0:07:25.640 us is even though the plan is priced at seven dollars, 0:07:26.040 --> 0:07:30.560 they are actually making sixteen dollars per subscriber because they're 0:07:30.600 --> 0:07:34.160 able to attract all those advertising dollars. So essentially they're 0:07:34.240 --> 0:07:38.800 agnostic between an AD supported consumer or an AD free consumer. 0:07:38.800 --> 0:07:41.880 Because you remember the standard plan, the standard Netflix add 0:07:41.920 --> 0:07:44.040 free plan costs about fifteen and a half dollars. 0:07:44.280 --> 0:07:46.640 So the AD supported tier and the cracking down on 0:07:46.720 --> 0:07:50.600 password sharing, that's catalysts for the stock to move to 0:07:50.600 --> 0:07:52.640 the upside ultimately when they get it all in place. 0:07:52.840 --> 0:07:55.040 And I'm just worry coutely and should we be concerned 0:07:55.040 --> 0:07:57.680 about the delays here and kind of rolling this out 0:07:57.720 --> 0:07:59.240 or nah, not. 0:07:59.360 --> 0:08:02.560 Really, I picket it in the scheme of things. I mean, 0:08:02.560 --> 0:08:04.720 it's probably a few months out and they needed to 0:08:04.800 --> 0:08:07.200 kind of they need to execute well, and it was 0:08:07.360 --> 0:08:08.920 essential for them to kind of roll it out in 0:08:08.960 --> 0:08:11.920 a few test markets, get those learnings, and then kind 0:08:11.920 --> 0:08:13.960 of implement it. Was it was really interesting that they 0:08:14.000 --> 0:08:16.320 first rolled it out in Canada, and they pretty much 0:08:16.360 --> 0:08:19.160 look at Canada as kind of this proxy for the US. 0:08:19.200 --> 0:08:21.800 So they've got all their learnings from Canada. They know 0:08:21.840 --> 0:08:26.200 how exactly the audience reacted, the users reacted. They kind 0:08:26.200 --> 0:08:27.680 of know what to expect now when they do a 0:08:27.720 --> 0:08:30.080 much broader rollout in the US, which is by far 0:08:30.160 --> 0:08:34.439 their biggest market and where they need to execute really flawlessly. 0:08:34.600 --> 0:08:37.679 Hey, one last question. You know Netflix has been telling 0:08:37.720 --> 0:08:41.400 investors stop fixating on my subscriber model, take a look 0:08:41.440 --> 0:08:43.480 at like sales and profit. Are they right to do 0:08:43.559 --> 0:08:44.280 so in your view? 0:08:45.080 --> 0:08:47.760 I think so? I think investors and Wall Street has 0:08:47.760 --> 0:08:50.280 to pick a lane, right if you wanted. I mean, 0:08:50.320 --> 0:08:53.319 all along it was the subscriber story. Then last year 0:08:53.360 --> 0:08:55.920 you had the great Netflix meltdown, the great Netflix correction, 0:08:56.000 --> 0:08:58.160 and you know they said, okay, subscriber growth has hit 0:08:58.200 --> 0:09:01.360 a wall. Start focusing on our aftability metrics. And you know, 0:09:01.440 --> 0:09:05.560 investors rightly started focusing on profitability metrics. Nobody is chasing 0:09:05.600 --> 0:09:08.680 subscribers anymore, and so now when they are reporting plug 0:09:08.760 --> 0:09:11.200 you know, good profits and good free cash flow, we 0:09:11.280 --> 0:09:12.120 got to give them credit. 0:09:12.840 --> 0:09:14.280 This is why we want to talk to you. Gita 0:09:14.320 --> 0:09:17.400 ring Anathon. She's technology and media analyst at Bloomberg Intelligence, 0:09:17.840 --> 0:09:20.800 knowing all when it comes to Netflix. Joining us from 0:09:20.800 --> 0:09:23.200 our Princeton, New Jersey bureau. Gita, thank you. 0:09:23.920 --> 0:09:27.480 You're listening to the Bloomberg Business Week Podcast. Catch us 0:09:27.520 --> 0:09:30.880 live weekday afternoons from three to six Eastern Listen on 0:09:30.920 --> 0:09:34.959 Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, 0:09:35.240 --> 0:09:37.520 or watch us live on YouTube. 0:09:38.160 --> 0:09:40.280 All right, let's get back to Tesla because that is 0:09:40.360 --> 0:09:45.160 certainly a big focus for investors. Dot down just about 0:09:45.200 --> 0:09:49.080 one percent. Here in the aftermarket, we talked about the valuation, 0:09:49.200 --> 0:09:52.040 especially as the company continues to cut prices. We talked 0:09:52.040 --> 0:09:54.080 a little bit about margins, a little bit light based 0:09:54.080 --> 0:09:56.200 on what the street was expecting. So let's get to 0:09:56.200 --> 0:09:59.319 the valuation side of the story and the fundamental Esha 0:09:59.360 --> 0:10:01.840 Day is Bloomberg News Equity Markets reporter here in our 0:10:01.840 --> 0:10:05.560 Bloomberg Interactive Broker's studio along with gay couple Lot. She 0:10:05.600 --> 0:10:08.560 is Bloomberg News Auto reporter. She's on the phone in 0:10:08.600 --> 0:10:11.319 our Detroit bureau, and I do believe you know, Gabby, 0:10:11.360 --> 0:10:14.199 We've got to start with the fundamental story. What are 0:10:14.200 --> 0:10:16.400 some of the key takeaways that you see? We just 0:10:16.440 --> 0:10:19.240 were kind of running through the numbers with our TV colleagues, 0:10:19.280 --> 0:10:21.600 But what jumps out for you, hey, Carol? 0:10:21.760 --> 0:10:24.440 So yeah, I think going into this, we all knew 0:10:24.480 --> 0:10:27.440 that margins were going to suffer because Tesla has been 0:10:27.480 --> 0:10:30.679 implementing price cuts around the world. But I think a 0:10:30.720 --> 0:10:34.480 floor that the street had was twenty percent gross margin, 0:10:34.520 --> 0:10:37.920 and they came in with nineteen point three percent gross margin. 0:10:38.160 --> 0:10:40.560 So it's not a lot of difference, but that's sort 0:10:40.559 --> 0:10:42.559 of the floor that we thought they would try to 0:10:42.600 --> 0:10:45.840 stay above, and they did in this quarter. And if 0:10:45.840 --> 0:10:48.480 you look at I'm just going through the letter, Tesla's 0:10:48.559 --> 0:10:52.280 letter to investors, and the opening line talks about in 0:10:52.320 --> 0:10:56.560 this current macro economic environment, this is a unique opportunity 0:10:56.559 --> 0:11:01.040 for Tesla. It talks about how basically they are going 0:11:01.080 --> 0:11:02.520 to underprice their competitors. 0:11:02.840 --> 0:11:05.960 We see this right with I mean, China has done 0:11:05.960 --> 0:11:08.480 it right on steel and close and you know, so, 0:11:08.559 --> 0:11:12.560 I mean, we understand the strategy to be fair, yes. 0:11:12.360 --> 0:11:15.240 But I mean, I mean Tesla does. China is a 0:11:15.320 --> 0:11:17.679 huge market for Tesla, and I do have an assembly 0:11:18.240 --> 0:11:21.400 factory in Shanghai, but that I don't think, you know, 0:11:21.400 --> 0:11:23.400 it's not totally the same thing as like the China. 0:11:23.440 --> 0:11:26.040 I mean, Tesla still builds vehicles in America, I think, 0:11:26.840 --> 0:11:29.320 and employees people in the United States, and you know, 0:11:29.559 --> 0:11:31.800 DOES is doing this in the United States, a lot 0:11:31.800 --> 0:11:34.880 of it, so, including the cyber truck, which they just 0:11:34.880 --> 0:11:37.120 said also that it's on track to come lader this year, 0:11:37.200 --> 0:11:39.720 start production later this year, I should say. So it's 0:11:39.720 --> 0:11:43.040 really about thinking about you know, Elon Musk from the beginning, 0:11:43.040 --> 0:11:45.439 even when he was talking about going through production. Hell, 0:11:45.520 --> 0:11:46.920 we didn't think he was going to make it. He's 0:11:46.960 --> 0:11:49.600 always always always stressed that he was going to drive 0:11:49.679 --> 0:11:53.560 down cost, and now we're going to see him leverage that. 0:11:53.640 --> 0:11:56.000 And it's just a matter of if you've been doing this, 0:11:56.200 --> 0:11:59.600 you know, for a decade versus you know, GM or 0:11:59.640 --> 0:12:03.679 four or Stilantis or Volkswagen or whoever, who are kind 0:12:03.720 --> 0:12:06.120 of just now coming into this. Even though they're you know, 0:12:06.240 --> 0:12:09.360 legacy automakers with a lot of manufacturing experience, they don't 0:12:09.440 --> 0:12:12.400 Tesla has more experience than they do at building evs 0:12:12.480 --> 0:12:15.480 and that gives them the advantage to do that. I mean, 0:12:15.520 --> 0:12:16.120 that's part of it. 0:12:16.280 --> 0:12:18.160 So, and this is what's key. We're talking about, not 0:12:18.320 --> 0:12:21.400 just the cost when you say driving down cost, the 0:12:21.440 --> 0:12:23.320 cost of producing it as well as the cost of 0:12:23.320 --> 0:12:24.520 the actual vehicle both. 0:12:25.240 --> 0:12:27.440 Yes, I think yes, yes, I mean the way he 0:12:27.480 --> 0:12:30.400 can cut he's betting that. I mean, you see other 0:12:30.960 --> 0:12:33.520 I mean I cover Stalantis, right, So the CEO Stalantis 0:12:33.520 --> 0:12:36.040 will always brag about how he has a that you know, 0:12:36.160 --> 0:12:38.559 car sales around the world could drop forty percent, he 0:12:38.600 --> 0:12:41.120 would still make money. And that's because you have you 0:12:41.160 --> 0:12:43.160 take a lot of cost out of your manufacturing. And 0:12:43.200 --> 0:12:47.280 that's I mean, Tesla has sought to start producing batteries 0:12:47.320 --> 0:12:51.360 in house. They're talking about processing their own lithium to 0:12:51.400 --> 0:12:55.160 make batteries in Texas. They have you know, they make 0:12:55.200 --> 0:12:57.760 a lot of parts in house. You know, they're not 0:12:57.960 --> 0:13:01.959 like other car companies that buy all this stuff from suppliers, 0:13:02.200 --> 0:13:03.760 you know, down the supply chain. That's what we saw 0:13:03.840 --> 0:13:07.439 during the chip crisis, Tesla did. You know, everybody suffered 0:13:07.440 --> 0:13:09.680 in the auto industry, but Tesla did fair better because 0:13:09.720 --> 0:13:11.400 they did so much of this stuff in the house 0:13:11.440 --> 0:13:14.240 that they could be nimble. They could take a semi 0:13:14.280 --> 0:13:17.400 conductor chip and rewrite the code and make it function 0:13:17.559 --> 0:13:20.160 for another purpose or another thing inside the vehicle. 0:13:20.559 --> 0:13:20.760 Yeah. 0:13:20.920 --> 0:13:24.040 So yeah, well, Asha, I want to bring you in here. 0:13:24.120 --> 0:13:27.080 Tell me what you're thinking about the market reaction. Is 0:13:27.120 --> 0:13:30.320 there more disappointment than you anticipated. 0:13:30.960 --> 0:13:33.760 That's a great question. So, as Gaby mentioned, you know, 0:13:33.880 --> 0:13:37.080 the twenty percent cross margin was sort of the hard 0:13:37.120 --> 0:13:42.720 line that everybody was looking at. Investors are trying to understand, 0:13:43.000 --> 0:13:45.600 you know, this land craft that Tesla is kind of 0:13:46.120 --> 0:13:48.960 getting into, at what price is it coming for? 0:13:49.200 --> 0:13:51.920 So let's talk valuation, right because if you pull it up, 0:13:52.040 --> 0:13:55.520 I mean we've got Tesla at a current pe of 0:13:55.520 --> 0:13:58.520 about fifty two, a forward looking pe of almost forty six, 0:13:58.880 --> 0:14:01.360 and we know investors were and be focused on, especially 0:14:01.600 --> 0:14:04.120 with a company that's been cutting prices absolutely. 0:14:04.400 --> 0:14:06.760 So that margin is the like one of the big 0:14:06.800 --> 0:14:10.080 corner stores of the valuation that Tesla has. And the 0:14:10.160 --> 0:14:13.600 Tesla is valued at like, you know, forty seven fifty 0:14:13.640 --> 0:14:18.560 times earnings forward earnings when you talk about GM or four, 0:14:18.679 --> 0:14:23.160 that's about six seven times, So you know, the disappointment 0:14:23.240 --> 0:14:25.840 on margin is a big disappointment when it comes to 0:14:25.880 --> 0:14:29.000 Tesla compared to like any other automaker, because that that 0:14:29.200 --> 0:14:32.040 is sort of the corner store that's holding up the valuation. 0:14:35.560 --> 0:14:39.400 So if GM has to cut prices or four has 0:14:39.440 --> 0:14:43.080 to cut prices, that's still understandable. But Tesla, even though 0:14:43.080 --> 0:14:46.000 it has scale, doesn't have scale at that point where 0:14:46.040 --> 0:14:47.960 it can hold up the valuation. Can it bring in 0:14:48.040 --> 0:14:51.720 as much revenue, even more scale and really cut down 0:14:51.760 --> 0:14:56.080 the cost of making those cars to at some point, 0:14:56.280 --> 0:14:58.200 you know, drive these margins back up. 0:14:58.560 --> 0:15:01.920 Yeah, So, Gabby, should we be valuing Tesla differently than 0:15:02.080 --> 0:15:03.240 a GM or a Ford. 0:15:04.760 --> 0:15:09.680 Ooh, that's a very controversial question. Obviously, for years we 0:15:09.760 --> 0:15:11.920 heard Wall Street say that this was a tech company, 0:15:11.960 --> 0:15:14.520 not a car company. I kind of feel like both 0:15:14.560 --> 0:15:14.960 are true. 0:15:15.560 --> 0:15:17.120 How do you report on it? 0:15:17.160 --> 0:15:18.320 Like, how do you think about it? 0:15:19.880 --> 0:15:22.840 I take the technology company stuff with a grain of salt, 0:15:22.840 --> 0:15:24.640 because at the end of the day, they are making 0:15:24.760 --> 0:15:27.360 their still metal bashers. However much they don't make you 0:15:27.400 --> 0:15:29.240 want to escape. I mean yes, And you know, when 0:15:29.280 --> 0:15:31.800 you see Elon and I look at this investor letter 0:15:31.880 --> 0:15:35.840 and they talk about their strategy going forward, they're talking 0:15:35.880 --> 0:15:39.560 about we're still making investments in autonomy and vehicle software, 0:15:39.960 --> 0:15:42.080 so that speaks to the tech question you're talking about. 0:15:42.120 --> 0:15:47.040 Tesla believes that they you know, obviously they're quote unquote 0:15:47.200 --> 0:15:49.520 full self driving, which is not full self driving, but 0:15:49.560 --> 0:15:52.240 they're you know, autonomous features in the car that have 0:15:52.320 --> 0:15:55.240 gotten them into hot water with regulators. Nonetheless, they believe 0:15:55.360 --> 0:15:57.760 Elon still seems to firmly believe that that is a 0:15:58.840 --> 0:16:02.040 growing revenue source in future, along with other software services 0:16:02.040 --> 0:16:04.480 in the car, and that's something that all the carmakers 0:16:04.560 --> 0:16:06.880 are looking at now. They're trying to not just be 0:16:06.960 --> 0:16:09.600 metal bashers, but they also want to sell services to 0:16:09.720 --> 0:16:12.760 consumers through the car, which obviously pits them against Apple 0:16:12.800 --> 0:16:15.560 and things like that. There's one other point I wanted 0:16:15.560 --> 0:16:18.360 to make Carol. As we think about this, don't forget 0:16:18.400 --> 0:16:21.720 about China. I'm just looking at you know, there's been 0:16:21.720 --> 0:16:23.600 a lot of headlines about what's going on the auto 0:16:23.640 --> 0:16:28.080 market in China. Elon had a very interesting relationship with China. 0:16:28.120 --> 0:16:30.680 All the other automakers were forced to do joint ventures 0:16:30.680 --> 0:16:34.560 where there would be tech transfer with their Chinese competitors, 0:16:34.680 --> 0:16:38.520 not Tesla Tesla. Elon held out right he never did that. 0:16:38.640 --> 0:16:41.040 He came in and built a plant, you know, once 0:16:41.080 --> 0:16:45.760 he owned it himself quickly. Nonetheless, nonetheless, you see by 0:16:45.880 --> 0:16:49.040 d you see these other domestic Chinese car companies gaining 0:16:49.120 --> 0:16:52.760 share in the Chinese market, not just Tesla, but everybody 0:16:53.240 --> 0:16:55.360 is kind of feeling the pressure there from some of 0:16:55.360 --> 0:16:57.720 the you know, the Chinese car companies have matured and 0:16:57.760 --> 0:17:00.120 they're making some good product now, which is another say. 0:17:00.120 --> 0:17:03.520 To think about when we think about the valuation. And Maddie, 0:17:03.520 --> 0:17:05.399 I knew you wanted to ask that one thing when. 0:17:05.280 --> 0:17:09.480 Its Tesla Gabby Real Quick Inflation Reduction Act, they reported 0:17:09.520 --> 0:17:13.359 an increase in regulatory credits this quarter. How big of 0:17:13.359 --> 0:17:15.280 a deal is that for Tesla moving forward? 0:17:15.760 --> 0:17:18.480 Okay, well, I think it is going to be significant. 0:17:18.560 --> 0:17:22.680 And the CFO, Zaka Kirkhorn, talked about that last quarter 0:17:22.680 --> 0:17:24.639 and I'm definitely going to be watching for his comments 0:17:24.720 --> 0:17:26.959 this quarter. But just let's just make it clear in 0:17:26.960 --> 0:17:30.520 folks minds. Like one thing is the regulatory credits that 0:17:30.600 --> 0:17:33.200 is that's been around for years and that's basically when 0:17:33.200 --> 0:17:36.640 another car company can't meet the EPA's fuel economy rules, 0:17:36.880 --> 0:17:40.960 they can actually buy credit from Tesla, which has nothing 0:17:41.240 --> 0:17:43.680 Tesla does not make combustion engines, right, there's no they're 0:17:43.680 --> 0:17:46.840 all zero emission vehicles, right, So that has been another 0:17:47.000 --> 0:17:50.639 kind of revenue cushion. Margin cushion for Tesla is his credits. 0:17:50.640 --> 0:17:53.040 But as more car companies get electric vehicles, they don't 0:17:53.080 --> 0:17:55.520 need to buy from Tesla. I mean, you know, for example, 0:17:55.600 --> 0:17:59.919 Chrysler and now Stiland has had a huge deal with Tesla, 0:18:00.280 --> 0:18:03.159 and they weren't the only one. So I'm trying to 0:18:03.200 --> 0:18:05.600 look at it there the let's see regular and trying 0:18:05.600 --> 0:18:07.960 to look for regulatory credit. But basically, let me just say, yeah, 0:18:08.000 --> 0:18:11.840 IRA is a different deal. The IRA is about Biden administration. 0:18:11.920 --> 0:18:15.280 The federal government is paying companies to make batteries on 0:18:15.440 --> 0:18:16.000 US soil. 0:18:16.200 --> 0:18:16.400 Right. 0:18:16.480 --> 0:18:19.760 Tesla already has a completely scaled and they're going to 0:18:19.800 --> 0:18:23.040 expand it giga factory in Nevada, and they have one 0:18:23.040 --> 0:18:24.879 in Texa. They're building it. They have it in Texas. 0:18:24.880 --> 0:18:28.199 They're building batteries in Texas. So that's another source of 0:18:28.240 --> 0:18:31.080 government revenue. And it's all about how many batteries, how 0:18:31.119 --> 0:18:33.240 many kill a lot hours of batteries you made? Guess what? 0:18:33.440 --> 0:18:35.960 Like I said, they have first moved for advantage. Tesla 0:18:36.000 --> 0:18:38.119 has been doing this longer, and they're further along. 0:18:38.280 --> 0:18:40.280 This is what is like when it goes back to 0:18:40.400 --> 0:18:42.240 Esha's story that's on the Bloomberg and you should check 0:18:42.240 --> 0:18:43.600 it out. This is why you know, it's like, yeah, 0:18:43.640 --> 0:18:45.400 my valuation, I got it, I'm worth it. 0:18:45.840 --> 0:18:46.119 All right. 0:18:46.160 --> 0:18:48.240 Well, let's see what Ross Gerber has to make out 0:18:48.280 --> 0:18:50.760 of all of this. He's president. You have Gerber Kawasaki 0:18:50.800 --> 0:18:54.480 Wealth and Investment Management, a Tesla shareholder, a Tesla car 0:18:54.560 --> 0:18:57.840 owner once wanted a board seat and then did not. 0:18:58.160 --> 0:19:01.560 He's with us, back with us on Zoom from Santa Monica, California. Hey, Ross, 0:19:01.560 --> 0:19:03.919 good to have you here. I know you're looking at 0:19:03.960 --> 0:19:06.000 all the news coming out of Tesla's stock is still 0:19:06.080 --> 0:19:08.119 down I think about three or four percent here in 0:19:08.200 --> 0:19:10.000 the aftermarket. What jumps out for you. 0:19:10.520 --> 0:19:12.320 Well, what jumps out for me is what I've been 0:19:12.320 --> 0:19:16.040