What's Happening With Netflix?

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool senior analyst Tim Beyers to discuss the latest earnings news. Netflix (NFLX -0.70%) soars 14% higher after global subscriber growth comes in much higher than Wall Street was expecting. Procter & Gamble (PG -0.16%) puts up strong quarterly numbers that fail to move the stock. Alibaba (BABA 0.88%) shares pop on a long-awaited sighting of founder Jack Ma. Tim analyzes those stories, and shares why U.S.-China relations are the key to chip maker ASML Holdings' (ASML -1.06%) year ahead.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on January 20, 2021.

Chris Hill: It's Wednesday, January 20th. Welcome to MarketFoolery. I'm Chris Hill. With me today is our man in Colorado, Tim Beyers. Good to see you.

Tim Beyers: Good to see you too, Chris. How is it going?

Hill: It's going pretty well. We've got some tech equipment news. We've got consumer goods in the news, but we're going to start with the stock of the day, and that is Netflix. Fourth-quarter revenue came in a little higher than expected. Profits were on the light side, but Netflix added 8.5 million global subscribers. That's about 2 million more than Wall Street was expecting and shares up 14% today.

Beyers: It's pretty impressive here. I think what we can say now officially is that in the streaming wars, Netflix is Coke [Coca-Cola], Disney+ is Pepsi [PepsiCo], everybody else can take a seat. I don't know who the RC Cola here is, Chris, but clearly, Netflix is the Coke. Just take a look at those 8.5 million subscribers. The thing that really stands out to me here, Chris, is that 83% of those subscribers are from overseas. This is something that really shouldn't surprise us, but I think does surprise the Street, because we think that Netflix is a U.S. company and they are. They do get a lot of their revenue and profit from the U.S., but they are increasingly seating programming around the world in foreign languages with local producers, local talent. But here's the other thing, it's really interesting. I haven't watched this yet, Chris, but I have a conspiracy theory about this. That part of the big jump here is The Queen's Gambit, and I've not seen it. I've not seen The Queen's Gambit. I have cheated and watched a lot of clips on YouTube, but apparently, this thing was massive in Russia because Russians like chess, and it was apparently a pretty big hit there. But I do think there's a lot of programming that hits here, and then it starts hitting in other territories, and The Queen's Gambit just continues to trend.

Hill: It is interesting, because what you just described is a scenario that we've seen play out previously with Netflix. We've certainly seen this play out with Disney+, and that is the idea that a big hit show that gets a lot of buzz is the kind of thing that can drive new subscribers. In the early days of Netflix, it wasn't an amazing advertising campaign that Netflix spent money on that got a lot of sign-ups. It was creating original programming that got a lot of attention and in the early days that was things like Orange Is the New Black, House of Cards, that sort of thing. So, maybe not a huge surprise that The Queen's Gambit is the latest version of that.

Beyers: Yeah, and they were working on this pre-pandemic, obviously. We keep wondering when will be the time when Netflix spends big on something they expect to be a viral hit, and then it flops, and then Netflix is in trouble. I think that discounts the value of the business model, which is Ted Sarandos saying, "I'm going to make 1,000 bets. I'm not going to make one big bet. I'm going to make 1,000 bets, and one of them is going to hit." I think that just keeps proving out over and over again, and this is why Netflix has now passed the 200 million subscriber threshold worldwide. That may be what's driving the gains here today as well. But Netflix, you underestimate this business to your peril.

Hill: I want to get to their guidance in just a second, but let me ask you about this, because this is something I've been thinking about over the past week or so. As the calendar flips to 2021 and we see more headlines of studios, particularly movie studios pushing back launch dates, release dates, that sort of thing, in part because they have to push back production schedules. If you go back to last spring, one of the big questions that Netflix in particular, others as well, Amazon Prime, Disney+, etc., they got this question too, but Netflix got it in a big way, which was essentially, "If everything shuts down, what does that do for your content?" Netflix and all the others said appropriately because it was the truth, "Don't worry. We got plenty of stuff in the pipeline. We got stuff that is in the final stages of production, we're good." Well, that was 10 months ago.

Beyers: Right.

Hill: I'm curious at what point should you and I feel any meaningful level of concern that this pandemic goes on and keeps productions shut down to the point where Netflix and others have to come out and say, "You know what? From a programming standpoint, the cupboard is going to be a little bare in terms of new programming, simply because productions have been shut down."

Beyers: Yeah, it's definitely something to look for, and we should be looking at Netflix's own promotion schedule. As they come out and they talk about new shows or they talk about new seasons, we should pay attention to that; however, and this is a big however, we have something here at The Motley Fool that we call Motley Fool Live. I think we've noticed that a lot of programming now is adjusting to this idea that, "Hey, we can make programming everywhere and anywhere." Now, to be fair, a lot of that's appearing on YouTube, but let's not discount the creativity of Netflix and others to make programming that can incorporate actors, others working from their homes. Not last night, but the night before, I just watched a found-footage hit from a few years ago called Cloverfield. Which by the way, is an amazing movie, but found footage, that's a genre in film making. I don't think we can discount the creativity here either, Chris.

Hill: The last thing on Netflix. In terms of their guidance, they said, "Starting next year, we're going to be cash flow positive." One of the things that's on the table for them in terms of capital allocation is stock buybacks, which is something they haven't done in a decade. 2011 was the last time Netflix was buying back stock. As a Netflix shareholder, are you excited about that, or do you look at stock buybacks and think to yourself, "I really hope the company figures out a different way to spend money?"

Beyers: Yeah, I would like them to figure out a different way to spend money here, because Netflix is richly valued, we know that. Then, in addition, the other guidance they gave is cash-flow neutral, 2021, not raising new capital from here on out. That is outstanding news. If you don't need to raise new capital, and you're going to be cash-flow neutral, and then ultimately cash-flow positive, don't go spending that too soon. Look, you can go into the candy store, it doesn't mean you have to buy something. Let's just hold off a little bit, make that balance sheet a little bit stronger, because here's the thing, in these times, let's take your last point, Chris. You have some studios that can't make some certain projects, that's going to open up some projects for Netflix to bid on. You're better off if you can bid on those projects when your balance sheet is fat. Don't go spend it too soon, we need you to fatten that balance sheet.

Hill: The second-quarter revenue for Procter & Gamble rose 8%. The consumer goods giant also raised their outlook due to higher demand for their cleaning products, both home and personal grooming. But in terms of the stock, shares of Procter & Gamble are basically flat. I was a little surprised by that, because this is not a stock that has taken off over the past year. It's basically flat for the past year as well.

Beyers: Yeah. Isn't this interesting, that when you look at these earnings -- and the blowout was meaningful, like, I'm looking at the adjusted earnings target that Wall Street was looking for, and it was $1.51 a share. Procter & Gamble came in at $1.64. That is meaningful. This is a COVID stock. We've been at home, we need more cleaning products, we're cooking at home. COVID is tailor-made for Procter & Gamble. I hate that that's true, because we all wish that COVID was gone, but it's funny to me that Procter & Gamble is not getting the tailwind here, because the results speak to just how necessary the Procter & Gamble product family is for those of us stuck at home with COVID. What's it going to take in order to drive the shares up here? I don't know. So, let's take your last point here, Chris. Maybe this is one where Procter & Gamble does have to get aggressive with buybacks, because if it's not going to move, where else do you put that capital?

Hill: I was thinking the same thing in part because we've seen, over the past four to six months, some of these consumer products giants exercise some pricing power. I look at P&G, on the face of it, this is a good quarter, but they're also pulling the levers you would want them to pull to move the stock higher. To your point, if what they've done so far isn't really moving the stock, then for a company like this, for a stock like this, then a buyback plan makes sense.

Beyers: It might make some sense to maybe hike the dividend a little bit here, put some more into R&D, and maybe look at -- I'm not Ron Gross here, but I'll put my Ron Gross hat on here for a second, and maybe look at a tuck-in acquisition or two because there are some consumer brands that have really been hurt badly during the COVID crisis here. This is an opportunity maybe to broaden the portfolio a little bit.

Hill: Shares of Alibaba are up more than 5% because company founder Jack Ma has made his first public appearance in three months. I should point out, this is not an appearance that he made out in public, this was a video that he filmed tied to an event. But look, I think if you're an Alibaba shareholder over the last few months, wondering legitimately, "Where's this guy been?" If it were moving up dramatically more than that, I would think it was a little overblown. A 5% tick up seems right to me.

Beyers: It does seem right to me too and can't we say, not to be too draconian about this, but aren't we just glad that it's not a hostage video?

Hill: [laughs] Yes.

Beyers: Honestly.

Hill: For a number of reasons, we're glad.

Beyers: For a number of reasons, because we were starting to worry that Jack Ma, something horrible had happened here, so he surfaced. It really is just a charity event. He's thanking teachers. It's nice. It's just a normal thing, and it wouldn't even be news if it weren't for the fact that he'd been missing for three months. Let's be clear, this does not mean that the scrutiny of Alibaba goes away, but he's the founder. The Chinese government did not like what he had to say a few months ago right before he went underground. The Chinese government has since said that they are going to pursue possibly some more strict regulatory oversight of Alibaba, and that could include breaking up different parts of the company. At the very least, they are taking some more strident action against Ant Financial, which is the payments part of Alibaba. The regulatory scrutiny doesn't go away. Sigh of relief to see Jack Ma is not completely out of the picture here.

Hill: We're going to stick, at least tangentially, with China on our final story, which is ASML Holdings. This is a company in the business of making chips, semiconductor chips, not the delicious kind. [laughs] Fourth-quarter profits and revenue for ASML came in higher than expected. But to go back to the guidance for a second, the company came out and was very clear that how they deal in 2021 has to do with the state of relations between the U.S. and China.

Beyers: There's so much chip manufacturing that happens throughout Southeast Asia. The ultraviolet lithography equipment that ASML produces. This is a European-based company. Their equipment is highly sought after for manufacturing the most advanced types of chips. Their equipment is heavily in demand and the results show it. They absolutely blew the door off of results. I think what they're signaling here, Chris, is like, "Hey, look. If you guys learn to cooperate, we can keep this up. If you can't learn to cooperate, please be aware that your mileage may vary if you hold our stock." First of all, I applaud them for being that transparent about it. Second of all, it's just a reminder that even though chip demand is very high, it's going to stay high for a really long period of time. If we don't have a thawing of relations between the U.S. and China, it's just going to get harder to watch the semiconductor market grow at the pace it's been growing. It'll be harder to keep that pace up.

Hill: I always like it when companies are direct with guidance. I've said before, if I were running a publicly traded company, I think I would be tempted to pull a Berkshire Hathaway and just say, "No, here's the earnings report. We're not doing any guidance of any kind," and yet when companies are this transparent, I always applaud it.

Beyers: I do too. What I like about this guidance is it's so much better than "We expect to be between $0.13 and $0.15 a share," which is meaningless. Instead, what they're giving you is the metric to watch and say, "Hey, there is a macroeconomic factor here." It's different to forecast that, and then come back and say, "Hey, you know that macroeconomic factor we told you about? Here's what's happening there." We've seen this a million times, Chris, somebody comes out and says, "Yeah, you know what, the weather patterns last quarter, they just weren't favorable to our business, and so shoppers decided not to come to our store." Really? Is that really the reason? Because I think it may have more to do with your products and less to do with the rain.

Hill: Well, and it goes back to something that we talk about all the time, which is when you're an investor and you're looking for guidance, it's not to say that there isn't value to be found or insights to be found from analysts' notes that come out from Wall Street firms. It is to say, however, that you should pay more attention to what is the guidance that the company itself is setting up, and in the case of ASML, they're very clearly saying, "Look, this is what we're saying is going to move the needle for us."

Beyers: I think that's fair to say. I think there are a lot of companies, honestly, that are looking for the same thing, they're just not saying it yet. But irrespective of that, right now, ASML has a very healthy business. They're absolutely killing it, and their product is very necessary for making the most advanced chips. There's going to be a lot more demand for this product. It's a better business if U.S.-China relations thaw a little bit, but it's still a great business even if they don't.

Hill: Tim Beyers, always good talking to you. Thanks for being here.

Beyers: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.