Netflix (NASDAQ:NFLX) outperformed last quarter on one of its key metrics, but the market didn't reward it. Meanwhile, 5G adoption helped boost Verizon's (NYSE:VZ) third-quarter results, and The Verge reported that Facebook (NASDAQ:FB) would soon unveil a new name for the company. Host Chris Hill has guest Tim Beyers on the show to analyze those stories, and to share his thoughts on a timely topic -- which Halloween candies are overrated, and which are underrated.
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This video was recorded on Oct. 20, 2021.
Chris Hill: It's Wednesday, Oct. 20. Welcome to Market Foolery. I'm Chris Hill. With me today, our man in Colorado, Tim Beyers. Thanks for being here.
Tim Beyers: Thanks for having me, Chris. Good to see you.
Chris Hill: Good to see you. We've got 5G news and yes, of course, we're going to talk about Facebook's attempt at a rebrand, but we're going to start with the latest results from Netflix. Profits came in higher than expected. Subscribers in the third quarter grew 4.4 million. That was solidly higher than expectations, and yet shares [are] down a little bit. Is this due to guidance for the fourth quarter? Is this because growth in the U.S. and Canada was just 70,000 people?
Tim Beyers: I think it's a combination of both, but let's be clear about where we are with Netflix right now. This is Netflix's Jerry Maguire moment. It is "show me the money" time. That's what it is. Show me the money. The good news here, Chris, is that Netflix was able to squeeze out a modest amount -- it was only $82 million -- but a modest amount of cash flow from operations during the quarter. But what this means, essentially, is Netflix is funding its business now. It's not going out to the debt markets and just raising new capital with abandon in order to fund shows. No, that's not what's happening here. The content obligations rose -- they basically doubled year-over-year because last year was a COVID quarter, lots of production shutdowns -- and still they manage to squeeze out some cash from this. The reason it's down is probably those subscriber numbers. Particularly here in U.S. and Canada, it feels like this is a slower growth business now. But here's the positive side of that. It is a way more efficient business than it was. Let's remember this is a company that's generating better than 20% operating margins, funding its business entirely from cash flow, and is the largest, essentially, direct-to-consumer entertainment provider in the world.
Chris Hill: In terms of the stock being down, I have to give credit to Bespoke Investment Group, because they had a great chart that they tweeted out, pointing out that in the past eight quarters, shares of Netflix fell the day after earnings on seven of those eight quarters. And yet, when you look at the stock over that whole time, it's basically doubled.
Tim Beyers: Isn't that interesting? I mean, talk about investing. If you try to invest at a point in time instead of investing consistently and holding over a long period, you are much more likely to feel the pain of just getting it wrong, whereas if we're just willing to stick it out ... and this is a business that's getting better.
I think the story here -- I haven't seen this headline yet and I'm not saying anyone should steal this, because it is a terrible headline -- but Netflix did get a little Squid-y with it. It's a terrible headline, it's awful, and I do get it, and I apologize for the pun. But Squid Game was massive, something like 142 million members were viewing this in 94 countries, I think. It was the No. 1 Netflix choice. That's amazing, and this is a Korean language show. It is highly popular in South Korea, but it's become a cult classic. This is the business that Netflix is in. You have a very long-tail business, you invest strategically, get some shows that nobody knows about, and then they become viral hits. We don't give Netflix nearly enough credit for being really good users of capital. They are really good users of capital.
Chris Hill: They are, and I know... look, it's natural to focus on the big number with respect to what Netflix spends every year in terms of their content. But to your point, they're very strategic about spreading their bets around. The old Hollywood adage that "nobody knows anything" is true when you look at over the past, let's just call it 12 months.
Tim Beyers: Yes.
Chris Hill: The two biggest hits, or certainly two of the biggest hits, are Squid Game and The Queen's Gambit, which nobody, including people at Netflix, would have predicted, these are going to be huge hits.
Tim Beyers: Murderball and chess are going to be the big winners.
Chris Hill: Let's move on to Verizon, because shares are up a bit despite third-quarter revenue coming in lower than expected. They raised guidance for the full fiscal year. Is 5G adoption helping to juice their sales numbers, because they certainly are promoting the hell out of 5G in their marketing?
Tim Beyers: Of course they are. I mean, this is what happens every time there is an upgrade in the network, and it took a while. Without going too far down a tech rat hole, Chris, whenever a company says, "We're moving from 4G to 5G or we're moving from 3G to 4G," that's a multiyear process, and there's always a lot of tech that's involved in staging that move to actual the next protocol, to 4G or to 5G. So it's happening, but it's happening slowly. But certainly there are 5G phones, there are 5G handsets, there is demand for that. There were some pretty big numbers on the postpaid subscribers here, Chris. I mean, they did awfully well in terms of generating, I believe it was 699,000 postpaid subscribers here. That was well ahead of expectations. That may be part of what's driving this higher here. Whether or not we're talking about pure 5G, I don't know that we are, but I'm not sure that it matters. What we're talking about is faster handsets, new iPhones, people upgrading, getting on the Verizon network -- an improved Verizon network -- and that does drive enthusiasm. Some of these phones really are true 5G phones. So yes, I do think it is driving it to a degree. The good news for Verizon is, we're going to keep seeing this because the 5G upgrades will keep coming.
Chris Hill: Yeah. Earlier in the week, Google had their event for the Pixel 6 phone. We talked a little bit about this on Motley Fool Money over the weekend. The early stuff I've seen in terms of reviews and from the consumer tech media was pretty positive. But I think if you're a business like Verizon, you're rooting for that. Google, considering they've been at this for I think six years, their market share for the Pixel is tiny. So if you're Verizon, you have to be rooting for them to increase that market share, give people more options, and get more people subscribing for Verizon services.
Tim Beyers: There's no doubt. I mean, you want a wider pool. There is no doubt about this. You want a greater penetration of very high-performance handsets. The reason why is because you can charge. You're more likely with a very high-performance handset where you really want to do more with that phone, you may upgrade to a higher-priced plan. One of the areas where Verizon was a little bit pressured here is on average revenue per user. It's down slightly, but it's still solid. It's like $43.08, I think was the number -- that's down just a little bit, and the reason for the pressure on this is subsidies and things like that, because you are talking about $1,000 handsets. But still, the bigger and better those handsets get, the more likely it is Verizon and its competitors can move you into a higher-priced plan where you have unlimited data or other add-on services that you want, and you're just willing to spend a little bit more. Verizon wants you in those big plans. So yeah. I don't think they are just rooting for the Pixel 6, I think they're rooting for iPhone refreshes every two years. As much as we bemoan Apple and its incremental upgrades with the iPhone, you know who loves it? Verizon. T-Mobile, they love it.
Chris Hill: The Verge is reporting that Facebook CEO Mark Zuckerberg is planning to formally unveil a new name for his company next Thursday at Facebook's annual AR/VR conference. The name change is intended to reflect the company's ambition to be known for more than social media. Tell me what you think.
Tim Beyers: Well, there are multiple things I think about this. Maybe this is just because of where my stupid brain goes. But I feel like this is the most epic trolling opportunity of all time. Because for those who do not know Facebook history, the original name of the company was Facemash. Would it not be the most epic trolling opportunity of all time if Facebook went back to that. They won't. They won't because that's back to the Harvard days, but here's the thing, Chris. Apparently part of this is that Facebook wants to better reflect its role in enabling the metaverse. For those who don't know what the metaverse is, it's basically a digital reality. It's like, you immerse yourself in a digital reality through maybe the Oculus headset or immersive video games, or whatever it is, and Facebook wants to own this space. As if $2 billion spent on Oculus in 2014 now makes Facebook lord commander of all things digital. I'm just not buying this at all, Chris, I think where this comes from more than anything, I think Zuck and some others really want us to forget that there are some dark sides to Facebook. A name change might steer people toward the more hopeful metaverse side of the narrative. I'm not sure I'm buying it, Chris.
Chris Hill: I think it's a smart move, because I think you're absolutely right that a big driver of this ... If I were in a communications role at Facebook, I would absolutely be saying all these things about "Oh no, we have greater ambitions and that's why...," and that may in fact be true. But it's also true that changing the name enables them to essentially de-emphasize Facebook the platform. It now becomes one portfolio of businesses for whatever this overarching company name ends up being. I have in the past criticized companies for one reason or another for changing their name. Sometimes it's just a name I think is dumb, like Tronc, and I get vindicated because they end up changing back. But more often than not, I'm wrong. More often than not, I've said, I don't think a name change is going to help this business and sometimes it actually does. So I'm curious to see what happens here. Oct. 28 is the date of this conference. It's entirely possible the name gets leaked before then. Because this got leaked, and I don't know about you, but one of the things I was thinking this morning was that day in 2015 when the news broke out of the blue that Google was changing its name to Alphabet.
Tim Beyers: Yes. This is exactly what I'm thinking about. Yeah. Keep going.
Chris Hill: All of us spend a couple of hours looking at each other -- back in the days when we would be in an office together -- saying, "Wait, is this real, is this a joke or is this real, because it's not April 1? What's going on here?" The company basically had to come out and say, "No, we're not kidding. This is real."
Tim Beyers: Yeah. Maybe this is a question that you can answer. Also, it does feel like -- to your point of Facebook changing this and trying to establish that they are greater than a news feed and the accusations of fake news, and toxicity, and other things. We are bigger than that. We are about making a better digital world. Whatever that name ends up being, do they follow the Alphabet model where we're still going to know Facebook -- because we're still going to know WhatsApp, and we're still going to know Instagram -- but there's going to be this holding company around it that is something greater?
Chris Hill: Yeah. No, I think that's -- for investors, that's going to be really important to know. Like, will this new name also be accompanied by a new corporate structure? Part of the reason analysts, once they got over the fact that Google was changing their name to Alphabet -- which really, that first 24 or 48 hours ...
Tim Beyers: There was consternation, I remember.
Chris Hill: There was consternation, there was scratching of heads, and there were plenty of jokes made. But when they unveiled the new corporate structure, unanimously, analysts were saying, "Oh, this is great, because this gives us more insight into the business and how it works." It was very intentional on the part of that company's management at the time. Curious to see if Zuckerberg and his team do the same thing.
Tim Beyers: I'd say, where this could go really right -- so let's play the positive side of this -- is if, to what you just said there: Here is our new name and our structure, and we're going to have reporting units that are called Facebook, Instagram, WhatsApp, and then Oculus and other services, so we can see it all broken out. Just like today when we look at Alphabet, I can see Google Cloud, I can see what it's doing and I can see its operating margin, and I can judge it as that part of the business. If that happens, if we get that from Facebook, I think you're right, Chris, I would predict this as a win. If it is purely narrative to say we're bigger than what we were, and we're about the metaverse now, and nothing material comes along with it, then I think it's a big missed opportunity.
Chris Hill: Last thing before I let you go because we're now in the zone, we are close to Halloween.
Tim Beyers: We're in it.
Chris Hill: Therefore, one of the annual traditions here at Market Foolery, getting overrated and underrated Halloween candy from you.
Tim Beyers: We'll see if our man behind the glass, Dan, is going to hate me for this. We'll see. I think the most overrated candy of all time is a Jolly Rancher. I'll tell you why. They're everywhere on Halloween. But they stick to your teeth, and the process of eating a Jolly Rancher is... you have to excavate your mouth after you eat a Jolly Rancher. It's horrible. It's horrible, Dan.
Dan Boyd: I don't know why you think I would be upset about you talking the most sense I've ever heard on the show ever. [laughs]
Tim Beyers: Good, good. I am appreciative of that.
Chris Hill: If that's overrated, what do you think is underrated?
Tim Beyers: I'm going to go Australia on you on this one, because our former Fool, Lynette Jackson, sent to our former office in Colorado -- we since moved downtown and someday we'll actually get to work in that office in downtown Denver -- but she sent us a box of Tim Tams. I don't know if you've ever had a Tim Tam, Chris, they call them biscuits, but it's basically a thin cookie that's chocolate. We're all friends here, so I will be honest, I could not stop eating them [laughs] and I ate more than my share than was deserved right there in the office. I was stuffing my face. Taking the share of other people in that office [laughs] from what they should have had. They are delicious. Tim Tams are amazing.
Chris Hill: You regret nothing. Yeah. A couple of times Scott Phillips, who hosts the Australian version of Motley Fool Money, came to Fool HQ, brought Tim Tams, yes. They're amazing. Maybe they do this, maybe this is an opportunity. I don't know if they come individually wrapped. They come in large packages like you would a box of cookies. If they do individually wrapped, then yeah, I would be all over those.
Tim Beyers: I mean, they're unbelievable. If they don't, my runner-up would be the 100 Grand Bar -- or back in my day the $100,000 Bar. Because you got a little nougat, you got the caramel.
Chris Hill: I'm right there with you on 100 Grand Bar. Tim Beyers, great talking to you. Thanks so much for being here.
Tim Beyers: Thanks, Chris.
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 Market Foolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. See you tomorrow.