Tesla and Netflix. Talk About Hot Topics!

In this podcast, Motley Fool analyst Tim Beyers and host Deidre Woollard discuss:

• Tesla's compressing margins.
• Robots with brains and Tesla's take on the AI universe.
• How Netflix is becoming a global television network.

Deidre interviews real estate industry insider Greg Robertson on the impact of lawsuits against the National Association of Realtors.

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 Oct. 19, 2023.

Deidre Woollard: Tesla wants to make cars cheaper and Netflix wants to make streaming more expensive. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst Tim Beyers. Tim, it's Tesla, Netflix day. How are you doing?

Tim Beyers: Fully caffeinated. Ready to go. Thanks, Deidre.

Deidre Woollard: You got to have to be fully caffeinated today.

Tim Beyers: Oh my gosh.

Deidre Woollard: I feel like I could devote hours to Tesla's earnings call. I had it on. I was listening to it out on a walk last night. I may have been laughing, I may have looked like a crazy person, but let's talk a little bit about the earnings first. The market did not like it, but revenue was up. Yes, margins are shrinking, but that was expected. What's happening here?

Tim Beyers: Well, the margins are shrinking by a lot. We should be clear. As I look at this, if I have it right here, the overall operating margin percentage last year Q3 of 2022, 17.2% down to 7.6%. That is 964 basis points. That is a lot, Deidre. I could see why. Because this is something that Musk has been threatening for a while. In fact, there was a point, if I remember correctly, and please do correct me if I'm wrong here, where he said we could just sell cars at cost and this would be what happens. You just get your Tesla, we sell it to you at cost, and then all of the add-ons and all of the features, because really it's the software that matters, things like full self-driving and other sorts of features, are the subscription that you will keep coming back for and keep paying for and generate huge margins for Tesla over time. Now that is entirely unproven and theoretical at this point. But Musk seems determined, Deidre, to drive his competitors absolutely insane by driving cost out of the EV market. In other words, just selling. It's almost Crazy Eddie style. It's low, low prices, everything must go. That really is where we're at here with Tesla. The bad news for those competitors and why I think the report is better than expected, Deidre, is that even on that low operating margin, Tesla is still generating cash flow. Part of the reason for that is they are moving inventory. As long as they can do that, as long as Musk can generate and squeeze real excess cash flow out of Tesla while keeping margins incredibly low, to the point where they can get out a really low cost electric vehicle, I think it's going to be a big problem for the rest of the industry. So I'm less concerned about those operating margins, but it does seem to be that that's what's causing a bit of angst on the street.

Deidre Woollard: Absolutely. You're right, he has said that before. He had a quote on this earnings call that I thought was really interesting. He said, ''If our car costs the same as a RAV4 for, nobody would buy a RAV4.'' Clearly he's thinking he can just get the cost down to an appropriate level and Tesla takes over. That seems like Musk's hyperbole. What do you think?

Tim Beyers: Oh, it's totally hyperbolic. If you had an Elon Musk truth meter and you just supplied that, you ran it under the comments that you were watching on YouTube, there would be spikes in different places, I would say the spike on this one is a modest spike, but not a huge spike. I don't think it's a lie here, but I do think Tesla does have a meaningful brand. If Tesla becomes way more affordable to the point where it's just pure parity, if you could have a gas car or have an electric and it's Tesla and the Tesla arguably costs you the same or lower, I think Tesla wins a lot of sales. I think he's hyperbolic, but not entirely wrong.

Deidre Woollard: Let's put your truth meter to the test. We're going to go in a different direction. Another comment from him around AI and full self-driving. First of all, he said that Tesla has, I believe he said, the best AI team bar none or something like that. But he also described the AI system inside the cars in full self-driving as baby AGI, which means artificial general intelligence. Given that AGI is still not even really a thing, how much is he overstating things here?

Tim Beyers: He's also overstating them by a lot. I love the baby AGI or that sounds like the next Musk child. That is really what it sounds like. AG Musk, I could see that coming sometime here soon. But it's way too early to make any kind of claims on generative AI as it relates to Tesla. Honestly, one of the most terrifying things I can think of is generative AI inside of a car where a car is inferring its own decisions about which way it should go. I would prefer that the car be programmed and the generative AI in this case is inferring how to execute instructions like play inside the sandbox. But I don't want a wild, unbound generative AI inside of a car because errors inside of cars lead to very bad things. They lead to catastrophic results. It's way too early. This one spikes pretty big, Deidre.

Deidre Woollard: Well, gear up because we got one more I think will really spike it, which is about the development of Optimus. That its humanoid robot. Musk has trotted this thing on stage a couple of times. Last time it walked. Now he says it can do yoga. Maybe that was a joke. Who knows? But one of the things he's telling us, and he told us this about the car too, is it'll learned by seeing and he said it has a brain unlike those parkour-doing robots over at Boston Dynamics. But he's refusing to give us any specific details about Optimus. The way I look at this, it's a non-factor for the financials sort of at this point or at least it's not a factor we can completely see. But is it a distraction for the core business or is this something that eventually plays out as a benefit for the factories? I don't think any of us want the Optimus in our homes really.

Tim Beyers: Right. I certainly don't. That would feel creepy. But what I will say is that this feels like a toy. It does feel like a distraction. Is it a terrible distraction? Tesla is generating cash flow. Don't take your eye off the ball. This is a company that is competing at a bare knuckles level, has a huge amount of cash, a very good balance sheet, is generating cash flow, and as long as those things are true, robots are no robots. Tesla is a competitor, a fearsome competitor that is dangerous to the rest of the industry. Cute robots notwithstanding. They don't even matter at this point. So I look at Optimus as like whatever. Is this because Elon liked his Transformers as a kid so he's naming it Optimus? I really don't know and I don't care. I recognize I'm being maybe a little bit uncommonly bullish on Tesla for this quarter because I've really hammered them on the operating margin. But as an investor, you have to be willing to be flexible on your thinking and here's how I'm going to be flexible in this area, Deidre, is that I think I'm just setting the robot off to the side. I'm looking at what he's doing, deliberately killing those operating margins. Driving costs down as far as he can drive them while still generating cash out of the business. If that trajectory can continue and he gets leverage points through things like AI or better robotics for better manufacturing and driving down the unit economic costs of producing cars, and that really hammers the mainstream car competitors, then Tesla will be fearsome and he is a fearsome competitor. So there is some serious hyperbole detected throughout this earnings report, but don't take your eye off the ball. This is a fearsome competitor that is doing some interesting things that are showing up in the financials right now. Whether or not this continues, now the other side of this, Deidre, is that he's driving down the cost right now. What if this isn't sustainable? What if the leverage points aren't there and the operating margin goes down to 3% and now all of a sudden all of the cash flow disappears, and then Elon Musk is telling us, "Don't worry about it, we'll make it up on volume," then we should really worry because that isn't how it works. You still have to be profitable at the unit economic level, but he seems to be driving toward it. As long as that's true, I'm very interested to see what happens here.

Deidre Woollard: I think you make a good point there, too, Tim, with the idea that some of the things that attract media attention are distractions, but we also don't need to focus on them. One of the things that they didn't talk a lot about on the call but was really important in the earnings was the growth of supercharger connectors, supercharger stations, and also home storage. Huge growth areas for the company that they don't talk about. They're still a very, very small part of things, but an area of consistent growth.

Tim Beyers: No question. As a network, the Tesla network, which includes those superchargers, that being essential for widespread adoption of EVs across this country and arguably around the world, that's a Tesla-branded supercharger network. Tesla is making this happen. That does have some brand value. Again, if you can get price parity with gasoline-powered vehicles, does Tesla become EV of choice in the market? I think the answer is could be, and that supercharger network will certainly help. There's a lot still to be done. Elon is so hyperbolic that I could be giving him too much credit right now. But I looked at those numbers, Deidre, and I said, you know what? Sometimes you have to tip your cap. If you are going to kill your operating margin by 10% points, which is essentially what happened, and you can still squeeze cash out of the business as a result, that's a feat that I am not willing to ignore.

Deidre Woollard: Well, the other question mark, of course, is yield Cybertruck.

Tim Beyers: Official vehicle of the zombie apocalypse.

Deidre Woollard: Another thing that hasn't gone well for them on stage that moment with the breaking glass will go down in infamy, but this was a subdued Musk on the call and he was saying it's going to take 18 months at least for the Cybertruck to be profitable. They talked a lot about the innovations that have gone into it. I've tried to sense what's happening here. Is he overpromising to underdeliver or is there something else happening with the production of the Cybertruck? They talked about some November deliveries. They're trying to get things out, but I'm still pretty skeptical here. What are you thinking?

Tim Beyers: Well, I'm skeptical, too, but I find it fascinating that just think about what you just said there. Is he underpromising to overdeliver? It's staggering that we can even say that because that's not even in the realm of what Elon Musk typically does ever about anything. He never underpromises and overdelivers. He always overpromises and underdelivers until he finally delivers. That has been the prototype forever. It's really interesting that this is happening. I just think this is one of those niche products that has a hardcore audience, but it's a small niche audience and we know it and since we know it's never going to be a really mainstream audience, Musk is going to deliver for those hardcore enthusiasts and he'll get to it when he gets to it. That's the way I read it, Deidre. They'll get to it, but it's not really a priority growth driver for Tesla. What's really the priority growth driver is that under 30,000 economy car, whenever they can get to it, that's the real emphasis for Tesla moving forward.

Deidre Woollard: Yeah, I think that's correct. Well, let's move on to Netflix. The market love this. First of all, because of the subscriber numbers, we've got nine million additions there. But the part of this that I really found fascinating was this idea that 70% of Netflix's members are now outside of the US. They've now got a foreign exchange hedging program because they've got exposure to 45 currencies, which just sounds a bit mind-boggling. But how does that change maybe how we think about Netflix as a whole?

Tim Beyers: This is something that's been true about Netflix for quite some time, that they have and I've characterized it this way, the world's first global TV network, where they have a global subscriber base and everybody is logging in and those 250 million or so Netflix subscribers around the world, they have direct relationships with Netflix. That is not the way the entertainment business typically has worked. It's been very desegregated. You have producers, and then you have distributors, and then local channels. Those local channels or cable subscribers, they will be the ones that have the relationships and they're different from the content producers. All of that stack has been compressed since really the beginnings of Netflix as a digital content company, but they've been international for so long now, Deidre, that they have a long tail of content and where they get a lot of value, and you could see it in the numbers this quarter. Where they get a lot of value is when a program or a movie starts in one territory and becomes a hit in other territories. Now very often it's US programming that gets exported to other territories, but it's come the other way. It has happened and it's continuing to happen like Squid Game was the big one, but there are other ones. There's content coming from South America, there's content coming from Asia, there's content coming from Europe. Every time that content travels from where it was produced to another location, there's an arbitrage opportunity and the margin gets fatter and fatter and fatter. This is a company that's on track to generate, according to management, over six billion in free cash flow this year alone. Now some of that, to be very fair here because we have to put a big caveat on it, is going to be because of unspent content money due to the writers' strike and the actors' strike. So we have to put that in context. Setting that aside though, you're still talking about a company that is generating billions upon billions of dollars in free cash flow at a time when the other streamers that are primarily US, with maybe the exception of Disney, which is a global brand, are struggling to generate consistent profits as a streaming business. Netflix does not have that problem. They haven't had that problem for a while now. I think the conditions for Netflix to keep growing profitably for a very long period of time are just outstanding. The tailwinds are blowing briskly, Deidre.

Deidre Woollard: They talked a little bit on the call and in the earnings about the growth of the ad tiers, which is great. That's impressive. But how long can they talk about this before they actually give us some numbers? Because every quarter I think they keep saying, it's growing. Still not material yet. When? What do you think?

Tim Beyers: That's hard to say, but I'll tell you what. The fact that they are raising prices on their most premium ad-free tiers should tell you that they love the idea of driving people to the ad tier. The reason I think they love it is because it's a very high-margin business. They don't need to get a lot. It's only, I believe, 6.99 and then they get the benefits of the ad revenue on top of that. So the combined average revenue per member that is on the ad tier must be absolutely awesome. It doesn't matter how much the revenue is, but the average profit for that member must be absolutely astronomical. That drives free cash flow. The fact that they're raising prices to move people into that tier is really interesting. There's an interesting stat from the report here, Deidre, that 30% of new subscribers came in on the ad tier. You have to believe that Netflix management is absolutely giddy about that. Not material yet. Will it be material in a year? Maybe. I don't know when we get the data, but we have enough anecdotal data to say this is going really, really well for Netflix.

Deidre Woollard: Well, there's so much that I liked in this report. There's one thing that this move I'm not sure I like so much. They've been doing these tie-ins lately. They've got the Scoops Ahoy ice cream, they've had these different pop-ups, now they're doing this Netflix House, which they're going to have, it sounds like, revolving kinds of exhibits and things like that. It's not parks. They've made it clear they're not doing what Disney or Universal does. They said there's limited CapEx, they're not throwing tons of money at this, but I don't know. I'm a little suspicious. Tell me, I'm wrong.

Tim Beyers: I don't know that you're wrong. I'm a little suspicious, too. However what do they call those rooms? Escape rooms. If you have puzzles and escape rooms and things like that and they're Netflix-themed inside these little Netflix Houses that give you an experience of the Netflix programming, you don't have to have rides, but you have to have something that is an activity and fun, then maybe there's something there. But I'm a little dubious about this, too. The beauty of Netflix is that it is a capital-light business model and they are investing in capital that has a very long tail that can generate profits even in very tiny niches just by being content that exists in one part of the world that finds its way into other parts of the world. The economics of this business are good and getting better. The one thing I don't want to see and the thing that could kill the thesis for Netflix is capital that gets wasted in the wrong areas. Here's one that we just want to be maybe watch cautiously, but the big one, Deidre, and the unanswered one is the gaming part of the business, which is still really new and not yet determined how Netflix applies capital to gaming over time is going to be a trend that we all as investors are going to want to watch because the economics of the streaming business for Netflix have been brilliant. The economics of the stream gaming business, we have no idea. But if it is anything like the economics of the streaming business, watch out. This will once again be one of the largest companies in the world.

Deidre Woollard: Well, thanks for your time today, Tim. This is great. Good to chat.

Tim Beyers: Thanks, Deidre. 

Deidre Woollard: The analysts you hear on the show have a whole other day job, providing premium coverage and recommendations for the Motley Fool suite of stock investing services. We're giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month, and access to Stock Advisor's full scorecard of companies, visit www.fool.com/mfmdiscount.

The National Association of Realtors is one of the country's biggest lobbying organizations. It's also, right now, one of the most troubled due to lawsuits and moves by Redfin and other big brokerages. I sat down with the industry insider, Greg Robertson, to break down what is happening. The National Association of Realtors has been one of the most powerful organizations in the United States for over a century and has over one million members. Now a series of lawsuits and some moves by top brokerages could change all that. I'm here today with Greg Robertson. He's been in the real estate services industry for several decades and he hosts the Industry Relations podcast about real estate from the inside. I just thought he was the perfect person to talk to about all of this and what it really means. Greg, break it down for us. What are the NAR lawsuits about?

Greg Robertson: Thanks for having me, Deidre. I appreciate it. NAR has 1.6 million members, so it's pretty up there. I think it's the largest trade organization in the country, if not the world. So it's a pretty big deal. There are several lawsuits going on and it all basically comes down to the issue of transparency. If you believe what NAR and others tell you, the way that we sell real estate, the way we transact in real estate here in the United States is the envy of the world. I actually do believe that, where you have buyers representation and you have seller's representation. What this all comes down to is the covenant of an MLS organization is really based upon two things, cooperation and compensation. Basically, you join this MLS organization and it breaks down to, if you help me sell your listing, I'll help you sell mine. It's this cooperation between and we'll both be paid basically. In the past, I think that a lot of consumers don't understand how compensation works within a real estate transaction, who gets the commission. In fact, some realtors would say or have been trained to say the seller pays all the commission. Well, that's not the case, it's actually the commission is split four ways. The selling agent gets a part of the commission, the selling broker gets part of the commission, the buyer's broker gets a part of the commission, and the buyer's agent gets part of the commission. If you've got 6%, for instance, it's not 6%. Usually, I think nationally it's lower. It's really 1.5, 1.5, 1.5, 1.5. But that money is coming out of the pocket of the buyer. It's part of that purchase price. Everybody wants that to be more transparent and in fact, they don't want to have a compensation that is actually like agreed upon. They just want to say it's all negotiable. Because what everybody is afraid of right now is that consumers don't view compensation or those commissions as being negotiable. These lawsuits are brought from that standpoint of we want to make sure that, especially buyers understand that all the commission is negotiable and that's really the root of it all.

Deidre Woollard: Well, part of it also is there's this concern that the perception is that the buyer's agent is a free service for the buyer, which as you just said, really isn't the case. Part of this is transparency and it seems like part of this also, you mentioned MLS organizations, multiple listing organizations. Part of this also is about the splits because the splits aren't always even and sometimes in the notes inside an MLS, you'll see that the other side may not get as much. So that's part of the concern, too. You've got public listings in a service, but yet there's all this stuff that maybe the consumer isn't aware of because it's things like agent notes.

Greg Robertson: Yeah, there could be possibilities. I think the government is also and others are worried about is that if a seller doesn't want to offer a commission that the other agents will collude not to show that property because they're not going to be paid on that. I'm not sure if they have a lot of hard evidence on that. To me, with Zillow and all the listing information now being on the Internet, I mean, if you want to see a house, you're going to tell your agent I want to see this house. If the agent knows that they're not offering a lot of commission on there, well, I just can't see it a scenario where you're going to stop somebody from, if they want to see a house, they're going to go see a house. But there is that concern. Again, making everything a little bit more transparent I think is a good thing to start happening for sure.

Deidre Woollard: If you don't have to be part of the organization, that's a shift. But I think a lot of agents who've been in the business for a decade or longer, they're used to being part of NAR, they're used to getting the services that they get. They may not want the disruption and the other aspect of maybe it becomes a little more complicated for them to access the MLS versus having everything in one place. Do you think that some of that just the like barrier to shifting might be part of why people don't change, they just say, "I'll just pay the stupid fee"?

Greg Robertson: I think so. It's inertia, they've been doing that the same way. I think and other people, I heard this on another podcast, they don't realize it's a really strong lobbying organization, NAR I mean. They were really instrumental in getting, let's say during the pandemic, of selling real estate being an essential worker. It's a big part of our GDP. Without NAR there, you could have a much different outcome of that. There's things that they do to help the real estate industry. I don't think your average agent on the street really knows or care about until it's taken away. I think there has to be some more education on that from NAR's part or others. There's other things like the word realtor, that is a trademark. You have to be a member of the National Association of Realtors to call yourself a realtor. But realtor is like Kleenex, or Xerox, or Crescent Wrench. It's something we use because it's so out there, it's just everybody knows that. But it's not, it's really a trademark thing. I can imagine the wordplay if you're not a realtor and everybody calls you a realtor, you're supposed to say you're not a realtor or the cards that you make or some of the marketing materials all say realtor on it. That's a little bit of a big whoop kind of thing. But still, nonetheless, I think something there. Then the local associations there might be, how do you file a grievance against another agent that did something wrong? Well, if you're not a member of the association that they are, you take them to court. I mean, there's ways that local associations can handle skirmishes in between other agents or brokers. Some rules have to be followed, there's the code of ethics. There's a lot there, and I know other places like I think in California, if you're not a member of CAR, it'll cost you $175 a year to get the forms, but it's 180 to join the association. [laughs] It's not as simple I think as, again, I look at all these things and I think from people looking outside in, it's like, oh my gosh, things are going to start happening. But I'm not really worried about the industry. There are other things I'm worried about what these things are bringing up, but not that. 

Deidre Woollard: 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. I'm Deidre Woollard, thanks for listening. We'll see you tomorrow.