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Speaker 3: So you have a global it collapse, right, just really
Speaker 3: putting a CrowdStrike front and center in that spotlight. Now,
Speaker 3: CrowdStrike stock is only down by about nine percent, and
Speaker 3: I say that because it was down as much as
Speaker 3: twenty percent not too long ago. This is a dominant
Speaker 3: supplier of software that protects businesses from ransomware attacks, and
Speaker 3: it was really thrust into the spotlight as it struggled
Speaker 3: to fix a faulty patch that led to cascading system
Speaker 3: wide failures that just paralyzed the operations of clients ranging
Speaker 3: from banks to global re tail giants to healthcare systems
Speaker 3: today and then for everyone else social media, which I'm
Speaker 3: sure was disastrous for influencers everywhere. Just a little history
Speaker 3: here on CrowdStrike. Guys, we're going to talk to mandyp
Speaker 3: saying more about what it means for the company, what
Speaker 3: it means for revenue and earnings in addition to what
Speaker 3: it means for their customers and do they wind up
Speaker 3: switching gears at any point. But here's some of the
Speaker 3: details and the history of CrowdStrike. It was founded by
Speaker 3: former executives of antivirus pioneer McAfee, and it launched back
Speaker 3: in twenty twelve, and now it has grown into the
Speaker 3: leading maker of a relatively new type of security software
Speaker 3: that's considered among the best defenses against ransomware and other
Speaker 3: hacking threats. It controls about eighteen percent of the eight
Speaker 3: point six billion dollar global market for so called quote
Speaker 3: modern endpoint protection software, just ahead of our rival Microsoft.
Speaker 3: And this is all according to market research firm IDC.
Speaker 3: So it is distinct from the older, more limited types
Speaker 3: of security software. And traditional antivirus was pretty useful in
Speaker 3: those early days of computing in the Internet, and this
Speaker 3: is basically where CrowdStrike is at. That's kind of your
Speaker 3: history of how CrowdStrike got to be so popular and
Speaker 3: so big in this market. That stock still down by
Speaker 3: about nine percent. Man Deep saying is joining us. He's
Speaker 3: much more details than I do on this. Bloomberg Intelligence
Speaker 3: senior technology industry analyst Mandy I guess my question is
Speaker 3: is CrowdStrike going to lose a bowload of customers?
Speaker 4: I don't think so. I think right now we are
Speaker 4: just learning that. Clearly this was something they shipped last night.
Speaker 4: It was an outage because of the changes they made
Speaker 4: to their software. So the good thing is it wasn't
Speaker 4: a breach. I mean, the last thing you want is
Speaker 4: a cybersecurity company getting breached themselves.
Speaker 5: So that's not the.
Speaker 3: Case, right, So plus time, yes, yeah.
Speaker 4: Yeah, But at the same time, the fact that this
Speaker 4: happened at the scale at which it did, and look,
Speaker 4: there will be liabilities. I mean, there will be fines.
Speaker 4: I think that I've heard GDPR findes because the outage
Speaker 4: was pretty big, there was lost business. So clearly the
Speaker 4: fallout from this would be, you know, it will impact
Speaker 4: their free cash flow for this year and also delay
Speaker 4: their deals. I mean, look, they are two weeks away
Speaker 4: from closing this quarter. A lot of these deals are
Speaker 4: signed at the very end of the quarter. I bet
Speaker 4: you they're not happening now given the outage.
Speaker 3: So if I'm a customer, so I'm Delta, Yeah, what
Speaker 3: do I say to CrowdStrike if I can't operate and
Speaker 3: I lose money for two days? Or I have to
Speaker 3: shell out cash to help customers who are really mad
Speaker 3: at me.
Speaker 4: Yeah, so that's where you know.
Speaker 3: That's where the finds are going to come in.
Speaker 4: And look, Microsoft also is involved here, so it's not
Speaker 4: just Crowdstrike's fault. The fact that this happened at the
Speaker 4: Windows operating system level, you have to ask yourself, could
Speaker 4: Microsoft has done something here in terms of preventing that
Speaker 4: sort of a change where the system would not book?
Speaker 4: I mean, Microsoft is the operating system layer, and anytime
Speaker 4: you change things at the operating system layer, it's like
Speaker 4: all your critical systems will be down. So the fact that,
Speaker 4: and that's the broader point here is if you have
Speaker 4: an agent based solution where you're installing something at the
Speaker 4: operating system layer, who's liable for that? Is it the
Speaker 4: operating system vendor or is it the software vendor? And
Speaker 4: that's where I think, I mean, everyone is saying, oh,
Speaker 4: they rolled back the changes, the outage is over, there
Speaker 4: will be a fallout in terms of who is paying
Speaker 4: the fines, and more than the fines for the lost business,
Speaker 4: there's somebody who is liable here, and it's CrowdStrike and
Speaker 4: probably Microsoft.
Speaker 3: So can you just explain it done that downy for me.
Speaker 3: Even more so, CrowdStrike says, hey, guys, I got a
Speaker 3: software updated. Microsoft's like cool, and then they press go
Speaker 3: what should they have done instead?
Speaker 4: I mean, this should have been tested one hundred times
Speaker 4: before you roll something like that out.
Speaker 3: Then they test it, they find the bugs, they fix it.
Speaker 4: There's a whole software industry just for testing changes. That's
Speaker 4: why cloud software it's great because you deploy it for
Speaker 4: all your customers with the click off a button. But
Speaker 4: that's your risk. I mean, when people used to do
Speaker 4: things in the on prem world, you had to ship
Speaker 4: a disk, the disc had to be installed it and look,
Speaker 4: not everyone would have done it overnight. In this case,
Speaker 4: all the customers got the change overnight and they were
Speaker 4: affected overnight. And some of them are running all machines.
Speaker 4: So even though crowd strikes says that they rolled back
Speaker 4: the update and it's going to automatically fix things, well,
Speaker 4: some people are running Windows two thousand, so it doesn't
Speaker 4: roll back that way because those people have to take
Speaker 4: some different steps compared to the ones that are running
Speaker 4: the latest version of Windows where it can be rolled
Speaker 4: back easily.
Speaker 6: Well.
Speaker 3: Really caught my eye is there is report that someone
Speaker 3: has issued a paper ticket in handwriting to get on
Speaker 3: a plane. I was like, oh, this is real now to.
Speaker 4: Get rid of systems are down.
Speaker 3: Oh man, So I know you're not going to give
Speaker 3: stock prices, but just looking at CrowdStrike down nine percent,
Speaker 3: it was down twenty percent. What kind of hit to
Speaker 3: the stock price is reasonable that we should really be
Speaker 3: looking at.
Speaker 4: I mean, look, we don't know the extent of liability
Speaker 4: they have in this case. Depending on that, I think
Speaker 4: fifteen percent is warranted. And some of their competitors are
Speaker 4: up Sentinel one Palo Alto Networks, So endpoint security is
Speaker 4: primarily four vendors. CrowdStrike is the leading one Sentinel Palo Alto.
Speaker 4: And there's a company, vis Security, that Google is looking
Speaker 4: to buy. There were rumors about that last week. Well
Speaker 4: guess what that validates? Why Google, a cloud player, is
Speaker 4: looking to buy a cybersecurity provider. So clearly, given it's
Speaker 4: a four kind of company race here, CrowdStrike fallout means
Speaker 4: the others stand to benefit here.
Speaker 3: What else are you looking at right now? I mean,
Speaker 3: I know this occupied most of your morning, but now
Speaker 3: we seem to be resuming somewhat as is operations with
Speaker 3: some question marks, But what else is on your mind
Speaker 3: right now? After this week? Or you've seen what I
Speaker 3: think the Nasdaq, the S and P, and the Nasdaq
Speaker 3: one hundred seeing its worst week since April? What do
Speaker 3: you think?
Speaker 4: I mean? Look, we got the print from Netflix last
Speaker 4: night at TSMC ASML, they all reported results and AI
Speaker 4: spends still continues to be robust. So with Google reporting
Speaker 4: next week, I think you may see a pretty strong
Speaker 4: print going by what happened this week, even though the
Speaker 4: market was down and everyone is raising concerns around valuation
Speaker 4: and just you know, the market risk. But I mean
Speaker 4: AI spend is still what's driving the market, and you
Speaker 4: want to see how Google does next week.
Speaker 3: When you say the AI spend part, how do we
Speaker 3: know about the monetization of it on the end user?
Speaker 3: Because that's going to be where the investment continues, right,
Speaker 3: Like you're going to invest a bowtload of money now, great,
Speaker 3: but then you actually have to make money off of
Speaker 3: it to then keep spending money on it. When does
Speaker 3: that start to come into play?
Speaker 4: Well, so I think you will see that in Google's
Speaker 4: result as well. They have launched their Gemini offering that's
Speaker 4: part of their Google One bundle, Microsoft has a GitHub copilot.
Speaker 4: They all run cloud businesses where they are deploying these workloads,
Speaker 4: the AI workloads. And look, the biggest driver of this
Speaker 4: is how big is the GPT five and GPT six
Speaker 4: going to be. If the models that are being trained
Speaker 4: are going to be much larger, ten twenty times larger,
Speaker 4: you need more compute. And if the companies are spending
Speaker 4: the capex to train these models, that means they are
Speaker 4: in it. I mean, these companies are the biggest spenders
Speaker 4: on capex, Your Microsoft, Google, Amazon. If they continue that path,
Speaker 4: they're telling you that we believe in it. And if
Speaker 4: one of these vendors blinks first, that's the big risk.
Speaker 4: Who says, Okay, I'm pausing spending on training cloud models
Speaker 4: now because we don't see the ROI we haven't seen
Speaker 4: that yet.
Speaker 5: Everyone is going big.
Speaker 3: And then to your point, like there is a no
Speaker 3: first mover advantage to not doing that right, Like Google's
Speaker 3: not gonna want to do it first, Amazon not gonna
Speaker 3: want to do it first, Like who does that first?
Speaker 3: And when that happens, So is there a possibility that
Speaker 3: they'll just keep spending because of that?
Speaker 4: Even if like there is fear pressure because and right
Speaker 4: now the GPUs are still supply constraints. So nobody wants
Speaker 4: to say, oh, I'm not raising my capex and I
Speaker 4: have enough of these GPUs because there are still a
Speaker 4: hot commodity. Well, time will tell, if you know, the
Speaker 4: market kind of stabilizes, their the supply demand equation gets better,
Speaker 4: and that's when you will see market reaction. But until
Speaker 4: that time, what TSMC told us, yeah, is they're still
Speaker 4: supply constrained. They have more demand to make those leading
Speaker 4: at chips, and so that's why I think the ai
Speaker 4: story continues.
Speaker 3: Yeah. They said also that that supply and demand imbalance
Speaker 3: is going to last what until twenty twenty six.
Speaker 4: Yes, yeah, well, I mean and couple that with the
Speaker 4: geopolitical risk. You know what's going on with the election situation,
Speaker 4: the former Trump, former President Trump saying he doesn't believe
Speaker 4: in Taiwan. So that's a chill point. If something happens
Speaker 4: to Taiwan and the relationships changes, then TSMC is not
Speaker 4: spending capex on expanding their capacity. Well, everyone wants TSMC
Speaker 4: to expand capacity, so that's a big risk in itself.
Speaker 4: It's TSMC is not expanding capacity of their notes amazing.
Speaker 3: You look really excited, by the way. I definitely heard
Speaker 3: Man Deep tag about this it thing and he was
Speaker 3: a little giddy. There's like something really interesting going on here. Mandy,
Speaker 3: thanks a lot, really appreciate it. Thanks for the hustle.
Speaker 3: Man Deep saying, Bloomberg Intelligence senior technology industry analyst, amazing stuff.
Speaker 3: Cannot wait for Google next week. That's going to be
Speaker 3: really great as well.
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Speaker 3: The next top story of the morning, aside from CrowdStrike
Speaker 3: and what's happening there, is what's happening in DC with
Speaker 3: President Biden. So the reports earlier from NBC said that
Speaker 3: Biden's family is starting to discuss his exit plan from
Speaker 3: the race. Shortly after that, the White House came out
Speaker 3: and said that that NBC report was wrong, but the
Speaker 3: clock is still ticking towards the DNC. Oh and by
Speaker 3: the way, the RNC just wrapped up last night with
Speaker 3: a ninety three minute speech from former President Donald Trump.
Speaker 3: Let's go to Nathan Dean. He's Bloomberg Intelligence, a senior.
Speaker 3: Let me get your title right, senior policy analyst joining
Speaker 3: us from there. Hey, Nathan, there's a lot to kind
Speaker 3: of get through right now. But before we kiss everything
Speaker 3: off here, let's just go to what's happening in DC
Speaker 3: and the White House. What is your take on the
Speaker 3: Biden campaign?
Speaker 7: So, you know, it really sounds like the pressure. I mean, look,
Speaker 7: I don't think he needs to be me to know
Speaker 7: that the pressure is on the White House right now
Speaker 7: and specifically on President of Biden to you know, make
Speaker 7: the decision to step aside. You know, we've seen reporting
Speaker 7: from Bloomberg News all throughout the week that not only
Speaker 7: do your you know, his general allies in Congress, but
Speaker 7: also you know, statements from you know, or the lack
Speaker 7: of statements from President Obama for example. But what we
Speaker 7: should note is the prediction right markets as of right
Speaker 7: now are fifty seven to twenty one in terms of
Speaker 7: Kamala Harris. Look again, these are prediction markets. To take
Speaker 7: it if you will. But we've put out a whole
Speaker 7: host of notes on the terminal this morning on healthcare, taxes, banks, evs,
Speaker 7: and TMTs, And the crust of the matter is is
Speaker 7: that if President Biden were to drop out of the
Speaker 7: race this weekend, and similarly, like Kamala Harris comes in
Speaker 7: the vice president to replace him, most of the policies
Speaker 7: are a status quo. There's really not a lot of
Speaker 7: difference between Kamala Harris and Joe Biden when it comes
Speaker 7: to policies. And so just in terms of trying to
Speaker 7: figure out the certainty in which sectors are being impacted,
Speaker 7: I think it just be a continuation of the same factor.
Speaker 3: So based on that, then what would be the big
Speaker 3: changes with President Trump? I mean, ninety three minutes last
Speaker 3: night we learned a ton tariffs and taxes.
Speaker 7: Is that what we're looking at exactly? So I would
Speaker 7: say tariffs and taxes are the top two. In fact,
Speaker 7: our chief equity strategist Gina Martin Adams put out a
Speaker 7: note specifically about that this morning, talking about what does
Speaker 7: that mean for markets in terms of taxes. If you
Speaker 7: go back to the twenty seventeen tax cuts and you
Speaker 7: do something very similar to that, you get a slight
Speaker 7: tailwind pushing earnings a little bit better in that if
Speaker 7: you get the tariffs, well, there's a lot of uncertainty there.
Speaker 7: So but I would say in terms of people thinking
Speaker 7: about how President Trump would implement this, it's almost short
Speaker 7: term versus long term. Short term tariffs. The power of
Speaker 7: the presidency is a lot more powerful when it comes
Speaker 7: to trade in tariffs. So look for that to be
Speaker 7: one of the first actions that the president would do
Speaker 7: if he were to win in say the first quarter
Speaker 7: of next year. The tax reform debate, however, goes through
Speaker 7: twenty twenty five. Remember that's when the individual tax cuts expire.
Speaker 7: So we have to see a the makeup of Congress,
Speaker 7: and b we're going to see a lot of debate
Speaker 7: over what the tax issue is. So if you're trying
Speaker 7: to model this out from a you know, timing perspective,
Speaker 7: trade and tariff's number one tax is number two.
Speaker 3: Yeah, and also, you know what it actually does to
Speaker 3: the equity market is a whole different story. Can you
Speaker 3: talk to me a little bit about energy policies. So
Speaker 3: clearly it's a drill baby drill situation for President Trump.
Speaker 3: On the flip side, though, the more you drill baby drill,
Speaker 3: the lower oil prices can go, which is not always
Speaker 3: happiness for oil companies and built drill baby drill.
Speaker 1: Yeah, you know, if funny enough.
Speaker 7: I was on a chat last night with some of
Speaker 7: our energy analysts when he mentioned drill BA to b drill,
Speaker 7: and a lot of the feedback I got from Bi's
Speaker 7: energy team was, look, there's a lot of policy things
Speaker 7: that President Biden can do, but also just remember the
Speaker 7: markets are moving in a certain way. Solar and win
Speaker 7: and renewable technology is continuing to get cheaper, and so
Speaker 7: you know, there are policies that we'll see on the
Speaker 7: energy side that certainly could make it easier for drill
Speaker 7: built drill.
Speaker 1: I know it's tough, right, it's hard.
Speaker 7: You know, there's certainly going to be policies to coming
Speaker 7: from the White House. But also remember is this policy
Speaker 7: a regulation or is it an executive order or is
Speaker 7: it legislation? And so I think that even though you know,
Speaker 7: I'm not an energy analyst, but at least, you know
Speaker 7: our group chat last night, a lot of our energy
Speaker 7: analysts think that solar renewables are here to stay.
Speaker 3: What about EV's Again the contradiction of Elon Musk contributing
Speaker 3: heavily to a super pac that's going to support Donald Trump.
Speaker 3: But then yesterday it seemed like when he was speaking,
Speaker 3: he was like, subsidies for EV's bye bye.
Speaker 2: Yeah.
Speaker 7: You know, I got that question from a client just
Speaker 7: this morning. You know, you know, President Trump last night
Speaker 7: essentially in a paraphrasing here said I dislike electric vehicles,
Speaker 7: and you know, we're going to do away with the
Speaker 7: electric vehicle tax credit that's part of the Inflation Reduction Act. Now,
Speaker 7: they could certainly do this as part of that tax
Speaker 7: reform debate that I mentioned to, and President Trump could
Speaker 7: use executive orders to adjust that EV mandate if he
Speaker 7: so chooses. But then he got Elon Musk saying I'm
Speaker 7: going to spend forty five million dollars a month to
Speaker 7: support President Trump in his presidency. So I think what
Speaker 7: I would happen here, what the EV tax credit is
Speaker 7: probably this is not going to be a day one issue.
Speaker 7: If President Trump were to win, let the issue fester
Speaker 7: for a little bit. Let's see if Elon Musk tries
Speaker 7: to get into the White House and starts whispering the
Speaker 7: President's ear, and then we'll see in maybe in the
Speaker 7: second quarter, how.
Speaker 1: Ultimately they want to move forward with this. So it's
Speaker 1: certainly keep in mind.
Speaker 7: But also I think the ev automakers also are just
Speaker 7: saying there's a lot of demand here, whether that tax
Speaker 7: credits with us or not, right, and.
Speaker 3: Really we're still revolving around tariffs and taxes, So there
Speaker 3: is that the priority all right here, Nathan, we really
Speaker 3: appreciate it. Nathan Dean joins us from Bloomberg Intelligence, a
Speaker 3: senior policy analysts. Let's go right to Milwaukee here with
Speaker 3: Emory Hordern, a chief political correspondent to anchor of a
Speaker 3: Bloomberg surveillance Henry. Last night I felt like a very
Speaker 3: historic event. I mean, ninety three minute speech, sweeping speech.
Speaker 3: Can you just give me some on the ground color
Speaker 3: as to what it's like having been there and being
Speaker 3: in Milwaukee.
Speaker 6: It was a ninety three minute speech. A lot of
Speaker 6: attendees were feeling it at some point in the end.
Speaker 6: Some of them may want to beat the traffic, but
Speaker 6: they were leaving towards the end.
Speaker 5: There. It was really the beginning part of the speech.
Speaker 6: That you felt it in the room, very silent, very somber.
Speaker 6: Foreign President United States explaining in detail what he experienced
Speaker 6: Saturday evening.
Speaker 5: When there was attempt on his life, and he.
Speaker 6: Said, it's too painful to talk about, so he's never
Speaker 6: going to talk about this again. And he was saying
Speaker 6: how he's thanks to God that he's still alive, and
Speaker 6: that was really the tone he was trying to set.
Speaker 6: And then he talked about uniting the country, not the
Speaker 6: Republican Party, uniting the country. He said, what is the
Speaker 6: point of having half the country?
Speaker 5: I want a victory of the entire country.
Speaker 6: But then the speech went on, you heard similar tropes
Speaker 6: that you'd hear from a Trump rally, and he veered
Speaker 6: off script a number of times, which basically meandered in
Speaker 6: and out, and which is why we ended up with
Speaker 6: a ninety three minute speech. Not sure how this would
Speaker 6: land exactly with the individuals back home. If it's slice
Speaker 6: and dice, obviously people are going to want to hear
Speaker 6: about that assassination attempt and potentially see a different side
Speaker 6: of the former president, even though he talked about a
Speaker 6: lot of things that categorically will were false and similar
Speaker 6: to some of the.
Speaker 5: Rhetoric that unnerves some independence. But in the room it
Speaker 5: was electric. These individuals.
Speaker 6: There are ones that already are motivated to go out
Speaker 6: and vote for Trump, but these individuals were so excited
Speaker 6: to be there. And we should note leading up to
Speaker 6: it was a really a event, a machismo event. You
Speaker 6: had Hull Colgan come out ripping his shirt open, calling
Speaker 6: Trump his hero, and you also had Kid Rock. It
Speaker 6: was the nostalgia of the eighties and the nineties really
Speaker 6: leading up to the former president to make this historic
Speaker 6: speech third third time he has been nominated by this
Speaker 6: Republican Party.
Speaker 3: Whole Colgan, I feel like at the end of the
Speaker 3: shirt ripping it kind of got caught there. But your
Speaker 3: point is well taken in terms of the unity theme.
Speaker 3: I appreciate that the beginning of the speech was very
Speaker 3: much focused on that. How did that evolve throughout those
Speaker 3: ninety three minutes?
Speaker 6: Well went back to the same president Chump that we
Speaker 6: know and we see and hear on in campaign rallies.
Speaker 6: He mentioned Biden only once. He did want to talk
Speaker 6: about the current administration. Potentially that was strategic because of
Speaker 6: course those news as you were just discussing that President
Speaker 6: Biden might step aside and his family is discussing this
Speaker 6: with him, what an exit plan could look like. According
Speaker 6: to NBC News, we do see a lot of pressure
Speaker 6: mounching on the sitting president going into the weekend.
Speaker 5: So he said the current administration.
Speaker 6: He's mentioned Biden's names once and said, oops, I'm not
Speaker 6: going to do that again. But he went after what
Speaker 6: he called he called it crazy Nancy Pelosi. So he
Speaker 6: had some of these similar attacks that we've seen, false
Speaker 6: falsehoods about a stolen election.
Speaker 5: He mentioned had an elector somebody's been quite fixated on
Speaker 5: for a number of weeks now in some of his rallies.
Speaker 5: So in the beginning, there was.
Speaker 6: This show of he I wanted to project unity, he
Speaker 6: wanted to talk about this life threatening event. He literally
Speaker 6: dodged a bullet, But then he quickly moved into the
Speaker 6: Trump that we've known over the course of his political career.
Speaker 3: All right, Emory, we really appreciate it. Thank you so much.
Speaker 3: I know it's been a terribly long week, but thank
Speaker 3: you so much for joining US Amrie Hardern, a chief
Speaker 3: political correspondent and co anker of Bloomberg Surveillance.
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch US Live
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Speaker 3: So Netflix stock is now up by about six tens
Speaker 3: of one percent. The highlights that added over eight million
Speaker 3: customers in the second quarter. I had topped expectations in
Speaker 3: every region around the world, and that included two point
Speaker 3: eight million new customers in the Asia Pacific region. Plus
Speaker 3: They're less expensive plan with ads accounted for almost half
Speaker 3: of new sign ups last quarter. The one quest question, though,
Speaker 3: was a cautious forecast. What was up with the third
Speaker 3: quarter outlook? Keetheramanganathan is Boomberg Intelligence analyst on US media
Speaker 3: and she joined US now from Princeton, New Jersey. Git
Speaker 3: what happened for them Q three outlook?
Speaker 8: Yes, so thanks alex So. The revenue guidance obviously came
Speaker 8: in a little bit softer than what the street was expecting.
Speaker 8: Street was looking at about fifteen percent revenue growth in
Speaker 8: third quarter, they're guiding to about you know, thirteen point
Speaker 8: nine percent. And I think really what investors are grappling
Speaker 8: with at this point we've seen kind of the stock
Speaker 8: bounce around a lot post earnings is because we're not
Speaker 8: sure whether the three Q guidance. Obviously they did guide
Speaker 8: to a moderation of subscriber growth. So just remember in
Speaker 8: the past four quarters. Obviously they crushed it in the
Speaker 8: second quarter with eight million subscriber ads, but in the
Speaker 8: past four quarters alone, Netflix has gained something like forty
Speaker 8: million subscribers. Wow, that is absolutely massive, And so I
Speaker 8: guess the question now is, of course we're going to
Speaker 8: see a moderation in subs but for the third quarter.
Speaker 8: I mean, is this just kind of them being conservative
Speaker 8: from a guidance standpoint, or is this, you know, kind
Speaker 8: of an inflection to a much more slower, mature growth profile.
Speaker 8: And I think that's what you know, investors are trying
Speaker 8: to parse out and digest.
Speaker 3: Right, So, like the law of large numbers, when are
Speaker 3: we going to learn the answer to that question?
Speaker 8: So you know, there are obviously a lot of different
Speaker 8: data points that investors track, search trends, you know, third
Speaker 8: party data, downloads, as it looks right now, it seems that,
Speaker 8: you know, all of the trends are still pointing to
Speaker 8: pretty good subscriber momentum. One of the things that you know,
Speaker 8: we typically look at is how is the content pipeline
Speaker 8: shaping up? And the content pipeline seems stronger than ever.
Speaker 8: You know, you have multiple hit shows that are coming
Speaker 8: to the platform in the third quarter, you know, whether
Speaker 8: that's Cobra Kai this week or you know, Umbrella Academy
Speaker 8: or Night Agent or Emily Embarrass So you know, they
Speaker 8: have all of their hit shows kind of coming in.
Speaker 8: They have a steady cadence of all of those titles
Speaker 8: kind of releasing, so content should do pretty well for them.
Speaker 8: And then remember they're also licensing a whole bunch of
Speaker 8: different content programs from you know, so many of the
Speaker 8: other media companies. So I don't think content will be
Speaker 8: a problem. The only issue that we need to kind
Speaker 8: of factor in alex is that it was third quarter
Speaker 8: of last year when they kind of kicked both the
Speaker 8: password sharing crackdown as well as the ad tier into
Speaker 8: high gear. And so we're kind of lapping that when
Speaker 8: we you know, come to this third quarter, and so
Speaker 8: that's kind of I think what they're saying, you know,
Speaker 8: please expect kind of that moderation and subscriber ads because
Speaker 8: most of that low hanging fruit has been already taken.
Speaker 3: Right, So then you're also coming up against a little
Speaker 3: bit of tough comps in terms of the adzel part.
Speaker 3: I mean that accounted for almost half of the new
Speaker 3: signups last quarter. Are advertisers paying up for that kind
Speaker 3: of exposure or not quite yet?
Speaker 8: Not quite yet. So one thing that they did point
Speaker 8: to was obviously the advertising portion of the business is
Speaker 8: I think going to be the biggest growth driver in
Speaker 8: the long term, but there is some short term pain
Speaker 8: to be experienced before we kind of see those long
Speaker 8: term gains. And the short term pain is that they
Speaker 8: need to invest in their technology. So they need to
Speaker 8: invest both in their programming and their technology. On the
Speaker 8: programming side, we've seen them make multiple investments, and those
Speaker 8: investments are really in different kind of genres, genres that
Speaker 8: appeal to live that kind of cater to that live
Speaker 8: audience aspect. So you know, whether it's the hot dog
Speaker 8: eating contest or whether it was you know, the roast
Speaker 8: of Tom Brady, or you know, a boxing match that's
Speaker 8: coming up with Mike Tyson or even the NFL Christmas Games.
Speaker 8: All of that are you know, content investments, and all
Speaker 8: of those makes sense from an advertising perspective, but they
Speaker 8: also need to make tech investments. Remember, they are that
Speaker 8: they are the first to the game in streaming, but
Speaker 8: they are the last to the game and advertising, and
Speaker 8: so it's obviously going to take some time for them
Speaker 8: to kind of play catch up. So it's only been
Speaker 8: about fifteen to eighteen months since they kind of have
Speaker 8: this advertising business started up, and it's you know, it's
Speaker 8: taking longer than expected because they don't necessarily have the technology.
Speaker 8: Technology that you know, Disney and Amazon and everybody else
Speaker 8: has taken tens of years to build and already have
Speaker 8: like a huge advantage over Netflix.
Speaker 3: So right, but the Netflix has their content. So it's
Speaker 3: like exactly chicken or an egg situation. A good point there, though,
Speaker 3: Can anyone catch Netflix in terms of content at this point?
Speaker 8: Not really? And you know this is where kind of
Speaker 8: the whole content flywheel and everything, you know, the brand,
Speaker 8: the subscriber base, I mean, it's success breeds success at
Speaker 8: this point because you have a subscriber base of two
Speaker 8: hundred and eighty million. Netflix has very much become the
Speaker 8: default option when it comes to you know, entertainment or
Speaker 8: when it comes to video entertainment programming, and so all
Speaker 8: of these other media companies, I mean, they're already struggling.
Speaker 8: They have a host of their own problems. They're finding
Speaker 8: out that one way to kind of alleviate some of
Speaker 8: their pressures is to actually sell programming to Netflix, and
Speaker 8: so they're kind of almost feeding the beast here, you know,
Speaker 8: the whole Netflix content flywheel. And so Netflix is really,
Speaker 8: I think in that is consolidating. It's kind of streaming dominance.
Speaker 8: So content absolutely they lead by a wide, wide margin.
Speaker 3: Before we let you go Warner Brothers Discovery, there's some
Speaker 3: rumors here of a potential split between the studio and
Speaker 3: streaming assets away from its linear TV assets. Is that real?
Speaker 3: What would that look like? What do you think?
Speaker 8: Well, there are rumors, you know, I think they could
Speaker 8: be real, just because I think management is extremely frustrated
Speaker 8: with the way that the stock has performed. It's been
Speaker 8: two years since the Warner Brothers merger happened with Discovery Communications,
Speaker 8: and this was really all about scale and kind of
Speaker 8: piecing together these businesses, both of which are were in
Speaker 8: secular decline, but obviously that merger has not done well
Speaker 8: at all, and I think this is kind of an
Speaker 8: admission of that. Part of it is because they have
Speaker 8: over forty billion dollars in debt. Part of it is
Speaker 8: because Ebita has been constantly declining. You know, when the
Speaker 8: merger happened, they promised fourteen billion dollars. This year, we're
Speaker 8: going to be at probably nine point seven billion. So
Speaker 8: obviously the Star price has kind of reflected that seventy
Speaker 8: percent down since the merger was first announced, so you know,
Speaker 8: they are obviously looking to some ways to kind of
Speaker 8: boost that. I don't think it's feasible though, And I
Speaker 8: say that because eighty five percent of the cash flow
Speaker 8: is actually tied to the linear network business. So you
Speaker 8: have the linear network business, which isn't decline but which
Speaker 8: is producing majority of the cash. You have the studio
Speaker 8: and the streaming assets, which are you know, the kind
Speaker 8: of the future and you know, the sexy assets, but
Speaker 8: they produce no cash at all. They are completely dependent
Speaker 8: on the linear TV network business to sustain them. So
Speaker 8: I don't know, it's going to be a little hard
Speaker 8: to execute, but we'll have to wait and watch this.
Speaker 8: Just a lot of noise right now with Warner Brothers
Speaker 8: and kind of the NBA talks and whether they're going
Speaker 8: to match Amazon's NBA deal. So a lot going on
Speaker 8: for that company.
Speaker 3: Right and there's still sort of we're recovering still from
Speaker 3: the Hollywood strikes from last year, and that's still kind
Speaker 3: of filtering through as well. Gita, thank you so much,
Speaker 3: Really appreciate the analysis. Eether Manganathan, Bloomberg Intelligence joining us
Speaker 3: on Netflix as well as that potential breakup for Warner
Speaker 3: Brothers Discovery.
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 3: Let's go to some earnings here, because America Express came
Speaker 3: out with earnings earlier. That stock is down almost four percent,
Speaker 3: the company is saying, and it's planning to increase spending
Speaker 3: on marketing, even as billing growth on companies credit cards
Speaker 3: slowed in the second quarter. Ben Elliott is Boomberg Intelligence,
Speaker 3: Consumer Finance analyst is joining us for this What was
Speaker 3: your takeaway on Amex's quarter.
Speaker 1: Yes, I think that the price action you're seeing today
Speaker 1: is because just the bar was set pretty high going
Speaker 1: into this quarter, and they didn't necessarily outperform. But I
Speaker 1: think a lot of the metrics are moving in a
Speaker 1: big good direction. They're still spending, still growing twice the
Speaker 1: rate of GDP, and AMX is still the envy of
Speaker 1: the industry. They have the best customers and they're the
Speaker 1: most likely to sort of outperform in any kind of downturn.
Speaker 1: So I think the outlook still looks good. I think
Speaker 1: people might have been a little upset that guidance was
Speaker 1: re rated higher, but it's really just for a one
Speaker 1: time charged our one time game, and so you know,
Speaker 1: there was no great outperformance, but the core business is
Speaker 1: still very solid.
Speaker 3: Talk about their premium card business, like, are people still
Speaker 3: willing to fork over a boatload of money per year
Speaker 3: for these premium fancy cards.
Speaker 1: Yeah, it's actually incredible. For twenty four quarters now they
Speaker 1: are a double digit gain in their card fees, right,
Speaker 1: so people are clamoring to pay Amex for the privilege
Speaker 1: of being the best customer out there. On the market.
Speaker 1: It's really kind of an incredible place for them to be.
Speaker 3: Who, like, who was doing it? Is it older people?
Speaker 3: Is it the young kids?
Speaker 1: Like?
Speaker 3: Who's doing it?
Speaker 1: You know, it's the young kids. Most of the growth
Speaker 1: is in gen Z and millennial sort of a middle
Speaker 1: growth tiers is in gen X and growth in the
Speaker 1: plus the demo is slowing down.
Speaker 3: So what happens in a slowdown then? So that's kind
Speaker 3: of the setup for AMX. If we do get a
Speaker 3: slow down, where does it leave AMEX If they're exposed
Speaker 3: to people that have more money? Is it okay?
Speaker 1: Yeah? So, as we saw in the FED stress test
Speaker 1: the past month, in a severe downturn, MX is one
Speaker 1: of the few banks that's still going to turn a profit.
Speaker 1: They have an incredibly low loss rate and their customers
Speaker 1: is extremely resilient, and you know, you have to think
Speaker 1: back to AMEX is driven primarily by spending. Eighty percent
Speaker 1: of their revenue is from people swiping the car and
Speaker 1: paying the gigantic seven hundred dollars fee for their platinum
Speaker 1: every year, and so they're not as relying on loans,
Speaker 1: and the loans that they do make are incredibly high quality.
Speaker 3: Okay, so fair enough so they do more tight underwriting,
Speaker 3: et cetera. To your point, the best of their peers
Speaker 3: in the Federal Reserves annual stress test. What is this
Speaker 3: bode then for the other guys like a Visa.
Speaker 1: Yeah, so Visa doesn't take credit risk, right, so they're
Speaker 1: more driven by just the total sort of retail spending
Speaker 1: volume out there. So they're a little bit I think
Speaker 1: more GDP plus growth, and Amex is rated just a
Speaker 1: little bit above GDP right now because they're relying on
Speaker 1: sort of one tranch whereas Visa and MasterCard are kind
Speaker 1: of exposed more to the aggregate.
Speaker 3: Then why is amex a stock down four percent? Is
Speaker 3: this just straight up like an expectations game.
Speaker 1: Yeah, so I think they missed a little bit on
Speaker 1: the top line number. But if you if you think
Speaker 1: about it from an operating leverage perspective, their expenses were
Speaker 1: down a little bit more than that, so they still
Speaker 1: have positive operating leverage. They're trading at a huge premium
Speaker 1: to peers, like a fifty to sixty percent premium. I
Speaker 1: think they're they're pushing twenty times earnings, whereas most of
Speaker 1: their peers are a ten x. So everybody has been
Speaker 1: the you know, MX has been the pre recession play
Speaker 1: for several quarters now, and so we get the soft landing,
Speaker 1: the recession doesn't happen, then maybe that valuation is maybe
Speaker 1: a little two premium.
Speaker 3: Interesting Also, the company in the quarter pursued like its
Speaker 3: consumer focus on travel and leisure. They it bought Talk
Speaker 3: for four hundred million dollars from squarespace. What does Talk
Speaker 3: do for AMX?
Speaker 1: Yeah, so every every sort of incremental bolt on acquisition
Speaker 1: is helpful as sustaining travel and entertainment. That's a really
Speaker 1: sort of a high margin part of their business. They
Speaker 1: typically negotiate swipe seas that are are really premium in
Speaker 1: that in that segment. So for every dollar that someone
Speaker 1: spends on you know, a premium for a legacy airline carrier,
Speaker 1: MX is getting, you know, more than they would at
Speaker 1: someone's like swiping out a sort of a retail point
Speaker 1: of sale. So like, you know, any sort of incremental
Speaker 1: gain they can make there is positive. But that's a
Speaker 1: segment of their business that's flowing down faster than other
Speaker 1: parts of the business. So you might see them sort
Speaker 1: of pivot more towards dining and goods and services and
Speaker 1: sort of some of the more, you know, the less
Speaker 1: discretionary spending that might be more resilient in the downturn.
Speaker 3: Fair Enough, before I let you go, I do want
Speaker 3: to get your take on Discover Capital one. So Discover
Speaker 3: is selling itself to Capital one. What what's your outlook
Speaker 3: for how this acquisition goes?
Speaker 1: Yeah, so the acquisition, you know, from a fundamental perspective,
Speaker 1: is on track. Discovers doing everything they need to do.
Speaker 1: They're managing well to the sale. They're they're ticking all
Speaker 1: the boxes that regulators are asking of them. The real
Speaker 1: question mark out there is what does a Biden DOJ
Speaker 1: have to say about the deal? And we'll find out
Speaker 1: later in the year. But then there's kind of a
Speaker 1: big question mark here, which is will Biden be in
Speaker 1: the White House come the January when the deal closes
Speaker 1: or it's lated to close, And so Trump win could
Speaker 1: sort of knock out any opposition that the DJ might have.
Speaker 3: What does a Capital one look like with Discover?
Speaker 1: Yeah, it's going to be really interesting. They plan to
Speaker 1: transition almost two hundred billion dollars in credit card loan
Speaker 1: volume onto the Discover network, So that still makes them
Speaker 1: sort of a distant fourth player. But I think you're
Speaker 1: going to find it much more competitive with their larger
Speaker 1: peers like these a MasterCard and Amex. And I think
Speaker 1: it's going to be it's going to be interesting. It's
Speaker 1: going to change the competitive layout in ways that I
Speaker 1: think are not yet really well understood, and it could
Speaker 1: be good for consumers.
Speaker 3: All Right, we really appreciate it, Ben Ben Elliott a
Speaker 3: Bloomberg Intelligence consumer finance analysts.
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Speaker 3: To Alex Steel false. We needs off today. This is
Speaker 3: Bloomberg Intelligence Radio. We are broadcasting to you live from
Speaker 3: the Interactive Broker Studio right here in Midtown Manhattan. We
Speaker 3: cover all the top news in business and politics and
Speaker 3: economics and finance. There are a lens of our Bloomberg Intelligence folks.
Speaker 3: They cover two thousand companies and one hundred and thirty
Speaker 3: industries worldwide. We also take you out of Bloomberg Intelligence
Speaker 3: sometimes to get the read on the overall market. And
Speaker 3: this time we go to Ken Leon. He's director of
Speaker 3: equity research at Cfrray Research and he joins us now
Speaker 3: for Netflix, so he can pretty much talk about anything.
Speaker 3: But this time we're talking about Netflix. You know, I
Speaker 3: look at a chart on the last kind of twenty
Speaker 3: four hours in Netflix, investors cannot make up their mind
Speaker 3: what they want to do with the stock, Like now
Speaker 3: it's down by one percent?
Speaker 9: Why so this is great to be here Netflix. We
Speaker 9: have a buy in a seven hundred and twenty five target.
Speaker 9: Reiterated that with our published note last night after the call.
Speaker 9: So for Netflix, it's the second time two quarters in
Speaker 9: a row where there's always a little blemish here. And
Speaker 9: it was really the guidance for Q three for revenue
Speaker 9: just very right below the consensus target. But when you
Speaker 9: look at the full year outlook for Netflix and twenty
Speaker 9: twenty five, but for even twenty four, they reiterated a
Speaker 9: target of six billion of free cash flow and fourteen
Speaker 9: to sixteen percent revenue growth that underscores along with operating
Speaker 9: margins in the second quarter that widened from twenty two
Speaker 9: percent a year ago to twenty seven percent, showing we
Speaker 9: believe a growth stock with solid top line growth and
Speaker 9: increased profitability, unlike all its peers.
Speaker 3: Yeah. So is it just like either they're going to
Speaker 3: come into tough comps in the third quarter because that's
Speaker 3: when they sort of cracked on a password sharing or
Speaker 3: is just a law of large numbers.
Speaker 7: No.
Speaker 9: I think this is a solid, high quality growth company.
Speaker 9: You know, there was a lot of sell off this
Speaker 9: week with the Max seven and other issues. Netflix is
Speaker 9: a high valuation metric that we still think supports the
Speaker 9: outlook in a seven twenty five target twelve months out.
Speaker 9: So I think particularly portfolio managers are thinking is the
Speaker 9: fundamentals there to support the high valuation. We think the
Speaker 9: answer is yes. In my career over four decades, I
Speaker 9: have never seen an industry so disruptive, which is movies
Speaker 9: and entertainment where you have a dominant get it right
Speaker 9: business model with Netflix and everyone else is losing money
Speaker 9: and trying to figure out what is their future in
Speaker 9: the new world of technology.
Speaker 3: Why is it so hard for Disney Warner Brothers Discovery
Speaker 3: Paramount to make a dent when it comes to Netflix.
Speaker 9: It's a great question, you know. Part of it is
Speaker 9: it's always difficult to transition from legacy to new platforms
Speaker 9: such as streaming. Second, it requires having talent on board
Speaker 9: to do all the hard, dirty work day by day
Speaker 9: of building an intelligent platform that gets the opportunity for
Speaker 9: global reach and customer personalization.
Speaker 3: Do you think that the streamer I mean, like the
Speaker 3: Warner Brothers and Disney and everything, at some point do
Speaker 3: they wind up becoming more solid enemies or will they
Speaker 3: always be frenemies either? Running out in a Boomberg Intelligence
Speaker 3: pointed out that now they're they're getting their content on Netflix,
Speaker 3: so they're kind of you know, I mean, like our
Speaker 3: streaming network isn't going to be as good, but we
Speaker 3: want our content out there. Now we're going to go
Speaker 3: and give it to Netflix. That just seems very odd.
Speaker 9: Yeah, So the world has changed, and it's really two
Speaker 9: tiers of players, the new big players or YouTube or
Speaker 9: Amazon Prime Video, Netflix and everyone else is trying to
Speaker 9: figure out, particularly on streaming, how can we play possibly partnering, bundling.
Speaker 9: But it's a position of weakness, you know, it's you know,
Speaker 9: very hard for these companies for content to keep subscribers.
Speaker 9: Think about this that if you're investing or thinking about
Speaker 9: wireless or cable TV and it's good days. You had
Speaker 9: very low customer churn. None of these companies published monthly
Speaker 9: or annualized customer churns.
Speaker 3: Yeah, so what does that? So what does that tell you?
Speaker 9: It tells you it's a very vulnerable business. You have
Speaker 9: to have engaging content, you have to have a lot
Speaker 9: of it. You need an intelligent platform in each country
Speaker 9: because cultures are different for personalization. So do we think that, yeah,
Speaker 9: Bobeiger Disney Reports will talk about getting to what I
Speaker 9: just said. You know, so you know Netflix is there
Speaker 9: and you know Disney's trying to catch up.
Speaker 3: So at some point do the likes of Disney like
Speaker 3: pull back capital? Does Warner brother Paramount pull back capital?
Speaker 7: Yeah?
Speaker 9: So the area that there's always this yan yang between
Speaker 9: content and distribution and where you have the more durable,
Speaker 9: recurring growth areas for many of these companies is in
Speaker 9: content for film or TV general entertainment. And what's stacked
Speaker 9: right above that is live sporting events. It's not distribution
Speaker 9: for these companies.
Speaker 3: Do when you pivot from live sporting events and they're
Speaker 3: on Netflix or Amazon Prime instead of say CBS, do
Speaker 3: they do advertisers pay the same Are they making the
Speaker 3: same amount of money or is it still sort of
Speaker 3: a model that needs to be proven.
Speaker 9: Well, advertisers have done two things in the last ten years.
Speaker 9: They've shifted enormous money for social media, whether it be Meta,
Speaker 9: whether it be Google with YouTube, et cetera. So what's
Speaker 9: left for traditional advertising on TV? It's smaller and it's
Speaker 9: being shifted to live sports the only one. It's kind
Speaker 9: of interesting here we have a whole and the stock
Speaker 9: is up from like thirty two to thirty seven. In
Speaker 9: Spox they're only live sports and news.
Speaker 3: What do you think we're going to hear when we
Speaker 3: move forward? In terms of Netflix talking about that ad
Speaker 3: supported tier.
Speaker 9: Though, well, what they're releasing they said, sequentially Q one,
Speaker 9: the Q one they had thirty percent growth in the
Speaker 9: ad pay plans. It's a lower rate and advertising revenue
Speaker 9: directly from the advertising sponsors. No one, Nope, they're not
Speaker 9: reporting it. It is reported by the other legacy media
Speaker 9: companies though, good question, gotcha?
Speaker 3: All right? So Netflix still by seven twenty five?
Speaker 9: Netflix is Netflix still winner and they're going to continue
Speaker 9: to gain share there we go.
Speaker 3: As long as they keep doing Bridgerton, We're good. Hey, Ken,
Speaker 3: thanks lot, really appreciate it. Have a great weekend. Thanks
Speaker 3: for joining Kenley on, Director of Equity Research at CFRA.
Speaker 3: Joining us on Netflix.
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