In this podcast, Motley Fool analyst Jim Gillies and host Dylan Lewis discuss:
- Netflix's record subscriber additions and new all-time highs, and how price increases feed into its advertising plans.
- The market's Shiller PE ratio as the Trump administration takes over, and how high valuations affect expectations around returns.
- What updates from Interactive Brokers and Schwab say about where investor minds are at.
Motley Fool analyst Sanmeet Deo talks with Jonathan Swerdlin, co-founder of Function Health, about the overlapping future of artificial intelligence and human health.
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A full transcript follows the video.
This video was recorded on Jan. 22, 2025.
Dylan Lewis: Netflix accounts and brokerage accounts surge. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over airwaves by Motley Fool, Canada analyst Jim Gillies. Jim been a busy week here in the States. How are things going in the Great White North?
Jim Gillies: It's cold this week. It's about -20 Celsius where I am. It's about -4 Fahrenheit I believe for you American types. I'm very glad I took last week as a mini ski vacation because this week would be gross.
Dylan Lewis: I was deeply jealous. I saw some of the reports on X from your time away from work and I'm glad you got that. That cold weather probably a nice time to be staying inside, maybe firing up the streaming services, watching some Netflix, maybe to celebrate what we saw in, what were objectively fantastic earnings and an incredible update from the company this week. Shares up 10%. The headline for me, looking at the numbers, 19 million subscribers added over the holidays. The global subscriber base over 300 million now. If Netflix were a country, it would be the fourth largest in the world, Jim.
Jim Gillies: This was a ridiculous quarter. If this quarter from Netflix is a harbinger of the broader earnings season yet to come, boy, I think we're in for a treat. This really was a spectacular quarter. Revenue up 16%, operating profit margin up six points to 27%. First year, it's been over $10 billion. As you mentioned, they've added about 18.9 million new members in the quarter, total global streaming memberships, up to almost 302 million of the ads, double meaning there. About 55% of sign ups in the most recent quarter were for the ad supported tier, the much cheaper tier, membership on ads plans, like being added grew 30% quarter over quarter. They're really continuing to push the button on live events as WWE has come on board with Raw and their premium live events, WWE owned by TKO Holdings, just from a personal standpoint here. I'm just going to suggest to the membership or the leadership at Netflix that the NHL streaming rights in Canada are up after next season, and Amazon Prime is already doing one game a week, and there's rumors they might want to take a run at them. I'm just saying if you can throw 500 million a year at the WWE for Raw and premium Live Events, the NHL will take your money.
Dylan Lewis: I think that would be like the ultimate Gillies streaming bundle right there, right?
Jim Gillies: Well, it would let me get rid of actually my Ray Rogers SportsNet subscription, which I have for hockey and that used to be the home of WWE and now they moved over. They have indicated that they're going to be hiking their prices I think as of today in the US, Canada, Portugal and Argentina. Not sure what Portugal and Argentina did to get included in that list. The standard membership, at least in the US is going, I believe, 15.49 to 17.99 a month. I think it's about 16% increase. The ad-supported tier is going from 6.99 a month to 7.99 a month. That's up 14%. For everyone saying inflation is dead, I give you Netflix. They generated about just shy of 7 billion in free cash flow for the year, which is flat year over year. That means that Netflix is presently trading with their 10% uptalk today. They're trading for about 60 times free cash flow on an enterprise value basis. This is not a cheap stock.
However, I asked the question in a different foolish venue this morning, who dislodges Netflix from their perch? What I like to call, this is a breakfast problem. A breakfast problem. Think of the great American breakfast, eggs and bacon. The chicken is involved, the pig is committed. Netflix is the pig. They are committed. They are all instream. Amazon's got other things beyond Prime. Disney's got other things beyond Disney+. Apple's got other things beyond Apple TV+, HBO etc. Netflix is the kingpin. Of course, it's been a few years now, maybe as long as a decade. Where most TVs now come with remote controls, there's a built in Netflix button. They have won this perch. Sixty times free cash flow, that is expensive. But in the absence of them and I think they're predicting about $8 billion this year for free cash flow. Again not to rain on any parades. I don't want to rain on any parades here. If markets do get wobbly at some point in the future, there's probably not much that stops us from trading at 40 times cash flow or free cash flow or 30 times free cash flow. But for today, it is, let's shoot the lights out and it really is a great quarter.
Dylan Lewis: I'm glad you localized that breakfast metaphor for our primarily American audience of listeners there. I think that was helpful. To your point, Netflix I think double the Disney plus core audience. When you look at the overall portfolio, all their streaming properties, maybe a little bit different but they have a handsome lead over most of the other streamers out there. I think on the one end, when you look at their price hikes, it would be easy to say how long can Netflix continue to crank this lever? I'm instead going to try to take this in a different direction because I'm starting to see some things swirl here with this business. I want to get your take. Do you think that the ad supported tier for them gives them pricing power to be able to increase what they do outside of ad supported and maybe even encourage some of those people that are currently on those premium plans to go ad supported because that's a more viable business for them long term.
Jim Gillies: Yes I do. I live in a house where I'm happy to pay for no ads. I'll leave it at that and my significant other would probably throw me out into the snow and the cold if I suggested dropping down to an ad supported tier. We won't do that. I just think because, as I framed it in terms of what I call the breakfast problem and they are the pig in this case, I think they just think differently than the other players in the streaming service, who I'm sure are very eager to compete, but the Adtier gives them well, first off, Prime kind of forced us into Ad tiers, which frankly was a little bit irritating. I enjoy the fact when I'm watching Amazon Prime, where they just randomly slap in an ad in the middle of the movie and the ad is for Amazon Prime. I'm like dude, I'm already watching. I'm here. You don't need to do this.
But I really like how Netflix framed in their earnings release. I really like how they framed it. They said, we want to be the first place that members go for entertainment. Their competition in other words as they see it, is not Prime Disney, Apple TV+. It is anywhere else you're going for entertainment. I love the fact that they talk about, they are still less than 10% of television viewing in every country they operate in. That says, boy, there's still a long runway for streaming for Netflix. There are more worlds to conquer for Netflix, in other words. There's probably a little bit of a thing I can point in there where sometimes you miss the great growth stock and you kick yourself after the fact. What I like to say is sure, David Gardner famously bought Amazon in 1997. Jim Gillies bought Amazon in 2010.
Dylan Lewis: I think Jim Gillies in 2010 is doing just fine.
Jim Gillies: Jim Gillies in 2010 is doing just fine on that. Because the secret is in the holding frankly. I come away saying this is a great quarter. There are more worlds to conquer for them. This growth story has not played out yet. But the growth they're predicting is in the mid teens revenue and then maybe a little bit more because they're getting some operating leverage on, they're going from a 27% operating margin for 2024, they're predicting 29. Free cash flow is stagnant, but a lot of that's because they're doing a lot of content spend and probably going to be doing more. That is why they're jacking prices, as well. I was super impressed. I'm hopeful this is a harbinger for the rest of earning season.
Dylan Lewis: Well, I think a lot of investors, Netflix shareholders and just generally investors would be happy to hear that because Netflix hitting a halt time high is nice to know that there's some growth avenues ahead of it even at that point. I think really if we take a step back on the market overall and the market that the new Trump administration in the United States is inheriting, the market is at historic levels. I think to hear that there is earnings growth potential, that there's growth for some of these large companies is important because as we check in on the market with Trump's second term beginning this week, the Schiller PE ratio over 36 times right now. Jim this is the highest it has ever been at the start of a presidency.
Jim Gillies: It is. I'm a believer that markets and I've just literally said, Netflix, great quarter, great future. Looks pricey today. I'm of the opinion that markets look a little pricey. There was the Wall Street Journal article today or yesterday talking about Make America cheap again thing, lamenting the high valuation of markets, specifically talking about the Schiller PE and saying the Trump two administration is the highest ever. Of course the previous highest ever was Biden four years ago. Last four years has been OK for stocks, frankly. We've gone from the previous highest ever to the current highest ever. The previous highest before Biden was Trump one. Clinton is way back from 1992 to 2000. Clinton's about 20 times on the Schiller PE as opposed to today, which is about 36-37 for Trump too. Look, you can't get away from the fact that historically, high starting valuations do tend to translate into lower forward gains. There's an argument to be made that maybe Biden was still coming in where there was some COVID overhang and so earnings had been depressed. Although a case sheller it's a long dated metric. I'm old enough to have been investing during the tech bubble and the subsequent deflating of set bubble.
I will remember that it was a frustrating decade in a bit. It took I think 13 or 14 years for the S&P to recover where it maxed out in March of 2000. I find it interesting in that aforementioned Wall Street Journal article, the president who doesn't get mentioned about, doesn't have the Schiller PE ratio is George W Bush, who of course started his presidency in the wake of the tech bubble starting to implode and ended his presidency in the middle of the global financial crisis. He's probably happy to get out of the way. I think there's probably a non-zero chance that just simply where we are starting the Trump two presidency that gains going from here will be below historical long run averages. I'm not calling for drops or anything, but I think they might be disappointing. I know there have been a few shops that have said very low single digits. There's been a few shops that have said below zero on real returns from here over the next five to 10 years. I'm not smart enough to make such bold predictions. I'm just saying historically, price you pay does matter. Valuation matters.
When you pay higher valuations, we have a lot of history behind us that says future returns are not that great. But you also have something in the White House now that is maybe somewhat unique and that is Donald Trump is probably the president who most brings in the stock market health and gains as to his own personal edification might not be the best word, but I think he pays the most attention and will take credit for it, which is silly because no president can take real credit for it. But I think he will identify with it going up more than other presidents would have. He's certainly signaled that it's going to be a business friendly, business focused administration. So all that's to say, maybe you get a little bit more gains from here.
Dylan Lewis: We have that read on the market and the Schiller PE has been back tested for quite some time, and it has been followed and is a very known measure. I want to pair that up with what we saw from Schwab and Interactive brokers this week. They reported and they gave us numbers about their businesses, revenue, net income. Those are interesting. Those are fine. I like talking about these companies because they give us a read on what's going on with investor Jim. When I put their numbers together, what I see is a pretty sizable increase in the amount of margin activity that a lot of average investors are using and a sizable increase in the amount of trading activity and commissions being collected on trading activity. Pairing that up with where we are valuation wise, I see a fairly rich market and one where it seems like we're getting a little bit speculative again.
Jim Gillies: It's party on dude. I was going to drop party on Garth, but I figured Wayne's world reference in this day and age is probably not bad.
Dylan Lewis: That always plays.
Jim Gillies: I'm not going to sing Bohemian Rhapsody for you, though. I'll go you one better too. There's an article in the Wall Street Journal today that says the headline is more men are addicted to the crack cocaine of the stock market. They're talking about gamblers anonymous meetings filling up with people hooked on trading and betting. Option trades numbers are soaring through the roof and our colleague, Jim Mueller, who heads Motley Fool options, was shaking his head over 50% of these options trades are like daily options. This is speculative activity, and there's a lot of that. There's higher margin accounts, and it's people are excited because of the whole as I said, party on dude kind of attitude. Look, we've seen this before, maybe not to the extent because it's so much easier today than it was say in the tech bubble, even in the global financial crisis or heading into that. There are so many avenues that you can trade. I know we're talking about going down the road of 24 hour trading, which I don't know that we need that, but I'm also someone that thinks we don't need DoorDash. If the words Old Man and curmudgeon are not going through your head right now, I've not done my job.
Dylan Lewis: Jim Gillies encourages you to get off of his lawn.
Jim Gillies: Exactly. I'm an old man shouting at Clouds. In all seriousness, we see this in excited markets and we have probably going back to the Dutch tulip bulb nonsense from what 17th century or whatever. This is human nature. People are people and as much as we like to preach and I certainly like to preach, look when down markets are your friends, you want to be really aggressive and you want to be a big investor when people otherwise don't like what you're investing in. Now, whether that's individual stocks that maybe go through their own company specific trial and tribulations, whether that's markets, anywhere you want to go. I think you want to always keep a weather eye on the idea that price matters and the higher valuation you pay, history has generally shown that two things. One, trading is hazardous to your wealth, famous paper, but everyone wants to get rich quick. Getting rich slow is easy, but everyone wants to do it quickly. Trading is hazardous to your wealth, and we also know that historically speaking, the higher valuation you pay is inversely correlated with the future returns you earn. Don't shoot the messenger. That's what we see in the literature.
Dylan Lewis: Wise words to live by, and I think a helpful reminder for everything we're seeing in the market right now. Jim, thanks for joining me today.
Jim Gillies: Thank you.
Dylan Lewis: Coming up next on the show, what would it take to live 100 healthy years? Fool analyst Sanmeet Deo talked with Jonathan Swerdlin co-founder of Function Health, about the overlapping future of artificial intelligence and human health.
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Sanmeet Deo: How about a 30-second overview? What is Function Health for listeners that may not know?
Jonathan Swerdlin: Well, Function is a new health platform. It's functionhealth.com, and $499 a year, twice a year, you get comprehensive lab testing. All the results from the lab tests go into this dashboard. In that dashboard, we use technology to tell you what's actually happening inside your health and what the things are that you can be doing to improve it. We take the very best that's out there in AI and across all different modalities to make sure that you are on top of your health and you're taking control of it, it's five times more robust than what you get in a doctor's office with the testing. It's a new era of medicine that people are stepping into in the joint function.
Sanmeet Deo: So Function Health is empowering us to live 100 healthy years. So can you see someone born today? Can you expect them to live to 100 healthy years? What are some of the AI driven developments that will help extend lifespans?
Jonathan Swerdlin: Well, when we say 100 healthy years, what we're saying is healthy years, 100 of them. So that means if you solve for quality, you solve for quantity. It's a commentary on how we're living. So aging is not a fixed destiny. It's actually something we can really influence. There are some genetic limits that we've seen that understand how long somebody can live for. Once you get above 100, regardless of how you live, you run into sentencing, you run into the body head against limit, and that's fact of life. Now, we may be able to hack that, but right now we don't have that science and technology. There's this concept of longevity escape velocity where for every year you live, you're adding one year and one day to your life. At that point, you effectively can live forever ideally. But we're not quite there yet, but we may get there and so you certainly want to take care of your health today so you can reach that if that's your goal.
As I said, aging is not a fixed destiny it's something we can influence the first benefit of AI in health to us, broadly speaking, people widely agree on this is early detection. It's AI enabling us to understand the wrong combination of things, the wrong trends, as well as what things are working and what are not. Oftentimes, this is layered in the complexity of biology in a sense that humans never could do this. Now in a lab, sometimes they can but that would have to be one by one. How do you create these repeatable process of this research into an individual? That's what AI can do. It can guide us into getting so far ahead of disease that the powerful impact is that we're never detecting cancer late. That we're not dying of a heart attack because we knew that we were on track for that. It's only recently we have tech that can really do that. We recently had a woman who's 51-years-old. She's a mother of four down in Florida and she discovered through Function that she had Stage 3B ovarian cancer, Ovarian cancer is considered the silent killer. Which means you don't get symptoms until you're really further down the road.
But at the behest of her daughter who is really health conscious, said, mom I want you to get on Function. You really need to understand what's going on with your health, and she did and she found that out and now she's alive. She might not be alive, not for that. I think that's a tribute to having the tools to be able to look under the hood and understand it and do that not just for one person, not just for some wealthy person who can afford to go to the best doctor in the whole world and run all the scans and do all the things and spend tens of thousands or hundreds of thousands of dollars. But this is, can somebody do this for 1,000 bucks or $500? Can somebody do it for $99 and that's what technology can do. Further down the road with AI, humans will get to take advantage of precision medicine that's coming and that will require a lot of data and access to everything in one central place.
But even right now early detection is the first thing. But one of the cool things about AI is you can't always predict what it's going to be able to accomplish. What we're really excited about is just being on the edge because we know one thing is true that in order to leverage AI in the future, you're going to need data. If you didn't have data on your health and you try to apply AI, you're effectively looking at a web MD with an LLM, and it'll tell you why you might have a sore thumb. Why you might get this headache. But it's not really going to go deep with you. So this is that moment when biology is going online and AI is making that possible to understand and then apply. I think this is the golden era. We're just entering it right now. The next 15 years are going to be the most exciting years, the new patient, the consumer health will create the biggest industry that we've ever seen because it's the most durable problem. It's something we already are spending tens of thousands of dollars in our lives on. It's a thing that what's the lifetime value of an individual? What's the value of my life? What's the value of my loved one's life? Right now in an insurance system, things like that, we're not properly valuing that. We don't have free market dynamics. In this new ecosystem where there's free market dynamics, people really get to value this.
Sanmeet Deo: As you describe Function Health and what you're doing, your vision and all of this technology and AI for me, as a person who cares a lot about my health and wellness, I jumped on Function Health and became a member and started using the system. But as an investor, I'm like, this is exciting stuff. This is going to be a huge market. You've described so many of the ways it's a need, and it's going to grow. But where do I go? You're a serial healthcare entrepreneur investor. What are you looking for in a potential investment in the healthcare space?
Jonathan Swerdlin: Well it's funny. Actually, I use the word healthcare sparingly because I think healthcare has a lot of baggage. It's these big robust institutional systems that don't move very fast and they don't apply technology at the speed that traditional tech company is doing. Function is a tech company. What we are building is not another doctor's practice. What we're creating is a health system of the future. The health system of the future doesn't just leverage human capital. The health system of the future leverages technology. When you ask me about healthcare investments, it's hard for me to say what I looking at it. I'm very interested in how do we take the world's best technology and apply it to our lives. That's the problem I'm solving for my life. That's my life's work. It's just looking at a human being and saying, life is pretty mysterious and I know one truth and that truth is that human beings should not suffer. We shouldn't die preventable death. We can solve that with technology, that's amazing. That's it. That's the Number 1 experience we have. We live through our bodies. The healthy person has 1,000 dreams, the sick person has one dream. It's the upstream of everything we want to do in our lives. So I don't have particular investment advice except for say invest in the technology companies. Function Health is a technology company because that's who's going to lead the future of health.
Sanmeet Deo: Are there any publicly traded companies that interest that you've seen that are being very innovative in healthcare?
Jonathan Swerdlin: Nothing that I could particularly comment on. I think when you look at companies like Google [Alphabet's] and Microsoft and Amazon, I think those are the places where innovation is happening. I think healthcare has been a siloed experience. They haven't really played in that space yet. I think if you pull the thread, you'll realize that as I was saying, medicine is becoming data science and doctors are not necessarily data scientists. The role of the human in healthcare is going to shift, and it's going to be technology and you have to look at who's leading that technology, and it's ultimately these tech companies. For my own investments I look at tech companies and I invest from that perspective because I don't think that modern healthcare is prepared for what's coming. What's coming is going to unlock what feels like a paradise. It's going to look compared to today. I think what we have today in medicine, despite our best efforts, despite all the brilliance of the researchers and the doctors and everyone out there, it's going to look caveman because it's so hard to scale, paying attention to the individual.
Sanmeet Deo: It's like with the Big Tech companies, with Google doing so much AI research, and I think you were doing some stuff in healthcare. Amazon has their pharmacy. They also have telehealth platforms. Does it worry you with Big Tech getting involved in healthcare when it comes to our data, privacy of data, and then also just are they getting too much power? Are they getting too much of a very sensitive thing?
Jonathan Swerdlin: Well, it's funny. It's like do you want the company that's 50-years-old managing all your health data? Are you thinking they're the best at security and privacy? Probably not. They have to basically scaffold their system. You build a system in 1980 and then you build another system and you stack them in another system, and you ultimately have the stack of systems and you're just hoping that it's all going to come together and be secure and be private. I'm actually very concerned for older companies and their privacy and their security on this data. Because it's getting to the point where they have a lot of vulnerabilities. Those are not new systems. They're having to constantly try to retrofit. Whereas new companies like ours, we're using the best right away, the very best, we don't have all that legacy baggage. You walk in your doctor's office, oftentimes it's a clipboard and a pen. We're talking about sensing data on a piece of paper. We're talking about systems that are barely modern. I worry about some of the older systems, whereas I think that the companies like Google and Amazon and companies like ours that are coming up now, we get to use the very best of technology today and the very best encryption, data security and privacy of data.
Dylan Lewis: Fools, that was a shortened segment from a conversation that aired last week during our AI Summit, a virtual members only event. If you're a Motley Fool Premium member and you missed the event last week, you can catch replays on the Motley Fool site in our media hub. We will drop a link in the show notes for you to catch it, as well. That's it for today's show.
As always, people in 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 anything based solely on what you hear. For personal finance content follow us Motley Fool editorial standard. It is not approved by advertisers. Motley Fool only picks products it personally recommend to friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
