Netflix Stumbles on Earnings — While Warner Bros. Looks for a Buyer

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Welcome to Property Markets. I'm Ed Elson.
It is October 22nd. Let's check in on yesterday's market vitals.

The major indices were mixed throughout the day on trade uncertainty with China. The Dow managed to hit a new record.
Treasury yields fell on optimism for an end to the government shutdown.

Gold had its worst day in more than a decade, falling more than 5% from record levels. And Warner Brothers Discovery shares hit a 52-week high after the company said it was open to a sale.

More on that in a minute.

Okay, what else is happening? Netflix stock fell as much as 7% after its third quarter. Earnings missed expectations.

The shortfall was largely due to a $619 million settlement of a multi-year tax dispute with Brazilian authorities. But beyond that, it was a solid quarter.

Revenue rose 17% year over year to $11.5 billion, which was in line with expectations. It was also a record quarter for ad sales.

The streamer is on pace to more than double its ad sales revenue this year. And these earnings follow a very big day for streaming media at large.

As I just mentioned, Warner Brothers Discovery stock popped more than 9% after the company signaled it was open to a sale. And CNBC reported that Netflix could be a potential buyer.

Plus, HBO rolled out another round of price hikes on both its ad-free and its ad-supported tiers.

So here to help us break down all of this, we are speaking with Jason Dazine, Managing Director of Media and Entertainment Research at Citigroup.

Jason, good to have you on the program once again. Good to be here.

So we want to start with your initial reactions to Netflix earnings.

What were your main takeaways here? Well,

I think we got it maybe half right, I would say, going into this. We expected expected the company to miss results primarily on currency.

Not that the US dollar isn't weak year over year, but since they gave the 3Q guidance, the dollar has strengthened. And we got that part right.

The part that we missed and didn't anticipate was this one-time charge that they took down in Brazil, which hit them.

by about $600 million.

And that's really a dispute they've had down in Brazil going back to 2022. They took that $600 million hit, sort of recognizing all of those cumulative expenses in this quarter.

And that caused them to miss operating income, which is one of the street's primary metrics. So that's why the stock is down primarily after hours.
Yeah, down quite significantly, down 7%,

which seems a little surprising, at least to me, if this is sort of a one-off tax settlement. Were you surprised at all by the extent to which the stock fell?

Well, it is one-off, but I would say that remember, there's so many of these platform funds that are very fast money, right?

And the soft expectation on the street was that they would not miss the quarter and that they would raise their full year guidance.

So, if that was your narrative, sort of going into this quarter, and this one-time event means they don't really raise the full-year guide, you sort of didn't get it right.

And so, you're, you're, you're selling your position. So, yeah, beyond that, pretty solid quarter, revenue up 17%.

Record quarter for ad sales. Any takeaways on the business itself, especially maybe

the ad business, which I know they've been investing more into?

Yeah, I mean, the ads business is interesting in that it gets a lot of attention because it's one of the main inflection points, meaning something that's different for Netflix now than it was in years past.

But in the absolute sort of quantum of dollars, it's actually pretty small.

We think it, you know, last year probably did a billion dollars. They said they're on track to have it more than double this year, which is pretty much in line with our expectations.

So about call it 2 billion out of the 50 billion of ad revenue. So it's moving in the right direction, but 2 billion out of 50, you know, it's only going to be about 4% of their revenues this year.

Perhaps the juicier news is what's going on with Warner Brothers Discovery, which

appears to be open to a sale. Stocks up more than 9%.

And most interesting to me, CNBC reported that Netflix could be a buyer. They could buy WBD.
Any reactions to what we saw with Warner Brothers?

Well, we sort of penciled out all the math on what a Warner Brothers sale could be worth. And it was $20 to $28 was the range that we came up with.

The unique

facet of this that is maybe hard to digest, but really important for these strategics is think about

the five major apps that are out in the ecosystem today, right?

You've got Netflix as the winner, you know, Disney sort of in the middle, and then you have three, what I'll call loser apps, which is Peacock, Paramount, and Macs.

That three number is really important because it's an odd number.

And so when you see Warner Brothers put a for sale sign out there, whoever buys it, whether it's Peacock, which is owned by Comcast or Paramount,

someone else is going to be left with really out without the requisite scale to compete in the future of video delivery.

That puts sort of a scarcity value, I think, to Warner brothers and that's why i'm not surprised to see this stock up and i i won't be surprised uh if it gets sold um regarding netflix um you know i put very low odds that netflix ends up buying warner brothers and the reason is simple netflix is undeniably on the hunt for intellectual property But it's very expensive to go out and buy a full film studio, a full television studio, and sort of a loser app to sort of get your way to the intellectual property.

So I would put very low odds that Netflix ends up being the contender, the winner for this asset, and just focus on those three loser apps.

One of those, I think, will probably get it, and it'll put them in a better position to compete with Netflix. Who do you think the buyer would be? I know Comcast has been floated, also David Ellison.

Do you have any thoughts on who is the most likely? Yeah,

I guess when

Ellisons first bought Paramount, our assumption, and I think Wall Street's assumption was that the company would essentially become a scaled up Sony.

And by what I mean by that is just an arms dealer, meaning they would produce films and TV shows for other people's apps.

What that meant is the street expected Paramount to go out and sell the CBS TV stations they own, sell the CBS broadcast network, sell the linear cable nets, and just sort of keep the Paramount film and TV studio part.

What happened after the deal closed is they went out and paid a billion dollars for some sports rights. And then the Ellison started coming out and saying, hey, they're going for it, right?

They think that there's a lot of money to be made in the streaming business. And so that caused us to sort of totally recalibrate our thinking.

So we have a 60% likelihood that Paramount walks away as the winning bidder for Warner Brothers.

And then back up, the next most likely would be Comcast, but it's only 15% likelihood in our view. It seems, though, based on the dynamics you just described, where there is a sense of scarcity

and therefore a lot of demand, it sounds like Zazlov would want to sell. Do you think that's right? Oh, 100%.
So

I don't want to make this too long, but if I go back to the middle of 24,

you know, the buy side was asking every single media company, you know, we need to consolidate apps. We need to consolidate apps.
Can you participate in it?

They knew Warner Brothers couldn't do it because there was too much debt. They knew Paramount couldn't consolidate because they had too much debt.

And then all eyes landed on Comcast because they had a lean balance sheet. And what Comcast said is we don't want to buy any more declining linear cable networks.

And so the next thing that Comcast announced is they were spinning off their linear cable networks. It's a new entity called Versent.

And I want to say it was two weeks after that, Warner Brothers said that they were going to split up into two pieces.

Their linear cable nets would trade separately from studio and streaming. That was essentially hanging a for sale sign out around Warner Brothers' neck.

Essentially, Versent would buy the bad part of Warner Brothers, and then Comcast's parent would buy the streaming app and the studio.

That was the operating assumption everyone had until Ellison showed up. And I think what he's saying is, look, I'll buy the whole thing potentially today.

You don't have to go through this brain damage of splitting it into two. And now the onus is back on Brian Roberts at Comcast.

Does he want to buy all of Warner Brothers as opposed to just the part that he wanted?

Or let it go to Ellison? And I think for Netflix, the reason I put such low odds down there is they're not going to buy all of Warner Brothers, right? Just to get the good part of Warner Brothers.

So it's a little bit of a game of chicken is almost the way I describe it. Who's going to take the bad part of Warner Brothers to get the good part? Yes.

And the more temerity you have to swallow the whole enchilada, the more likely you are to get it.

We saw the stock decline in Netflix, but still trading at 53 times earnings, more than a $500 billion market cap. It is the juggernaut more than Disney Comcast, Warner Brothers Discovery put together.

Any thoughts on the valuations in streaming right now? Do you have any

thoughts on whether any of these are perhaps overvalued, perhaps Netflix? What do you make of the valuations in entertainment right now? Well, I think, let's see, how can I answer this?

What I would say is that the context is really important. So I'm going to give you just a little bit of context to understand how we got here in terms of valuations.

If you roll the clock back to 2024 with the big mega cap tech names, PMs that own those forever suddenly were confronted with a lot of risks that they never faced before. You You had the tariff risk.

You had government intervention in terms of breaking some of these big tech companies up. You had AI risk was a big new thing.
And you had recession risk.

So what portfolio managers said to their analysts is, give me a tech stock that has no recession risk, no AI risk, no DOJ risk, and no tariff risk.

And everybody landed on Netflix because it's sort of a tech company that didn't have any of those attributes. That caused the multiple to expand a lot during the back half half of 24 and into 25.

The period that we're in now is Netflix is just sort of growing into that very elevated multiple. So I'm neutral on Netflix.
I don't think it's particularly compelling value right now.

If I could just put a fine point just to illustrate what the buy side was saying,

in the spring of 24,

the bull case on Netflix was 25 times

25 earnings of $25 a share. So 25 times 25, 625.
By the time we got to the summer of this year, the bull case on Netflix was a 40 multiple on $40 a share for 2027. So $1,600.

And you have to ask yourself, why did we go from 25 times to 40 times? It's not that, I mean, Netflix was the winner 18 months ago, right? So what changed?

And what changed was tariff risk, recession risk, DOJ risk, AI risk. It was stuff around Netflix.
It wasn't Netflix related. Yeah.
Very, very interesting.

We could probably do a whole episode on Netflix with you. Jason Bazinay, Managing Director of Media and Entertainment Research at Citigroup.
Jason, really appreciate your time. Thank you.
Absolutely.

Thank you.

After the break, a look at OpenAI's new browser. If you're enjoying the show, give Profit Markets a follow.

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We're back with Prof G Markets. OpenAI just unveiled a new AI-powered web browser called ChatGPT Atlas.

Atlas users can access ChatGPT alongside any web page, allowing it to write or edit material in emails and documents.

Paid subscribers can also use agent mode, where ChatGPT will take over your keyboard and your mouse and start executing tasks on your behalf.

Currently, Atlas is only available for Mac users, but versions for Windows, iOS, and Android are expected to roll out soon. Most interestingly, Google stock fell more than 3%

on this announcement.

So here to break down this new product from OpenAI, the implications for Google as well, we are speaking with Alex Heath, author of the Sources Newsletter and co-host of the Access podcast.

Alex, thank you for joining us again on ProfG Markets. Thanks for having me, Ed.
So I haven't tried this yet, ChatGPT Atlas, but everyone's talking about it.

What did we learn about this new product, this new browser from OpenAI? What are the main features? It's mainly ChatGPT embedded in the browser.

So there's a sidebar where you can chat with it like you would in the ChatGPT app.

But the key difference is that it understands the context of your browser, can see what's in a tab, even agentically act within that tab, but also summarize it, infer what's in it, make connections across tabs, use AI to search your history,

all that stuff. As someone who uses these products a lot, I assume, do you think that it is a useful product? Is it a powerful product? I think the jury's out on how powerful it will be.

I think it depends on the implementation of particularly the reasoning models. There's this preview agent mode that they're allowing for people on the pro tier where it can do things, not just

read and summarize or infer things off of a page, but do things through a page. That's going to be really interesting to try.

This is a thing, this whole field of like AI browsers is a thing that's really heated up in the last six months or so. Perplexity has one called called Comet that I've used that I'm actually a fan of.

I've used it to do some pretty advanced agentic stuff and it works pretty well. And then the browser company had Dio before that.
And then there's a bunch of startups trying this.

Everyone has coalesced around this idea of bringing the chatbot into the browser because it has so much more context. And I think it's smart for OpenAI to do this.
It was only a matter of time.

The company you left out there would be Google. And of course, we saw a decline in the stock after this came out.

How is this different from what Google offers? How is this different from, say, using Gemini on Google Chrome? Yeah, so I have the Gemini button in my Chrome window I'm looking at here, and it's okay.

It's pretty basic. It can't really do things in the browser yet.

I think a company as large as Google has a lot of regulatory risk, privacy, safety, security risks that a startup like OpenAI is either not beholden to or willing to ignore.

And so Google's treading a little more lightly here, but everyone is going here.

I mean, I think within a year or two, I'd like everyone's browser is going to act more like the chat bot that we think of for AI today,

which will reshape the web, no question. But yeah, Google is behind.
I think it's what we saw. It was like $100 billion off the market cap.
Pretty wild. Probably an overreaction.

I mean, the OpenAI browser is based on Chromium, which is the open source substrate of Chrome, which allows you to take all of your Chrome context, your bookmarks, your logins, your passwords, your extensions even, and instantly port them over to Atlas, the ChatGPT browser.

So in a way, Google is, due to the open source nature of Chromium, it's kind of giving away

its market here. I was just going to ask you about that.
I was going to ask, one, what you thought of the stock dropping. It sounds like you think it was an overreaction.
And then, yes, this

Chromium situation, their open source engine that Chrome is built on, Google's Chrome is built on, but which

OpenAI clearly needs access to as well for their browser.

And if you have a relationship with Google like I do and like most of us do, and you want to port all of your data over to ChatGPT, it sounds like Google owns that relationship.

So I guess my question is, what level of leverage does Google have because of this Chromium?

infrastructure, this open source engine, and could they use it against ChatGPT?

The thing that I could see them doing is limiting Atlas's ability to interface with their web applications, so Gmail, Calendar, or at least give preference to Gemini in that scenario on their owned operated surfaces, so maps too.

I mean, think about they have so many products that have billions of users, YouTube, for example.

If they made it more difficult for a competitor, a Gentic browser to use those web apps, I could see that being an issue.

It would probably also be an antitrust issue, but that said, Google just got the out-of-jail free card from the government on antitrust essentially so maybe that means that they could do something like that i do think the stock was in overreaction just because um you know open ai is not like replacing chat gpt with this browser right this is a new app it's mac only to start eventually it will come to windows and mobile platforms but it's also you know all the features are restricted behind uh or all of them uh the the pro ones are restricted behind the the paid tier so it's not a full-on assault on chrome yet.

Not to say that it won't be, but

I mean, I think if OpenAI starts to replace Gmail, if it starts to replace Google Maps, that sort of thing, then Google has a real threat on its hands. But

no one has managed to unseat the duopoly. Really, it's just a monopoly, but I guess you could say duopoly of browsers with Chrome and Safari over the last 15, 20 years.

So maybe AI is that opportunity, but

I think it's early to tell. I do think what's obvious, though, is that we are going to have our chatbot interfaces integrated in the browser everywhere going forward.

You mentioned a few of these new browsers. Perplexity had their browser.
You mentioned the browser company, which I saw was recently purchased by Atlassian for more than $600 million.

How important, I mean, it appears that the browser wars are beginning. Yeah.
How important

are browsers?

How big of a deal are the browser wars? How important is it as a tech company to be the number one browser? It's critical.

I mean, if you think of Google's longevity and their success, I'm not sure where they'd be without Chrome. It gives them a tremendous data flywheel for search for their advertising business model.

It gives default status to Google search on a distribution surface that touches billions of people via Chrome and all the devices that Chrome is on.

So it's a massive distribution play and it's a massive data play.

And the most interesting thing about the Atlas browser, Ed, is that the data from your Chat GPT memory, your context and ChatGPT goes to the browser and then vice versa.

So the more you use the browser, the more ChatGPT knows about you, the better prompt responses it will give you in the chatbot.

And the more you use it in ChatGPT, the model will then be able to use your browser for you in a more personalized way. That's a real moat, that data and that context.

And the last time I was on the show, we were talking about advertising and OpenAI looking at advertising.

This is going to help them build a tremendous database of profiles on people to target advertising to, where not only now do they have your prompt history with ChatGPT, but they're going to have your browsing history.

And what does that give them in the long run? A tremendous data flywheel. If you had to bet Atlas versus Chrome, what are you betting on? I think it's too early to tell.

I think it's all execution at this point. I think OpenAI has to ship Atlas on all the other surfaces.
You can't just be on Mac. It needs to be on mobile.

And Chrome, you know, it's just people don't switch browsers every day. This isn't like some random app like Sora or to-do list or something like that.

Like browsers are really embedded in how we live and work and use the internet and use technology. So I think it will take a lot of time.
Not to say that OpenI doesn't have a shot.

Look, 800 million users, they send a push alert to every chat GPT user to go download Atlas. That's a powerful lever that they have.

But you still have to go take the effort to download something, install it, set it up. And to do that for hundreds of millions of people will take a lot of time.
So it's hard to say.

I do think calling the end of Chrome right now is very premature. All right.
Alex Heath, author of the Sources newsletter and co-host of the Access podcast. Always appreciate your time.
Thanks, Alex.

Thanks.

So

OpenAI's long-awaited browser is finally here. And with it, Sam Altman is clearly sending a message to Google.
And the message is, we are coming for your lunch.

A message which, by the way, many investors believe Google stock dipped nearly 4%

on the product announcement. The stock did rebound later in the day.
Looks like it could rise some more today on this news of a potential deal with Anthropic.

But clearly, many Google investors were very concerned about what Atlas could mean for Google and for the browser, Google Chrome, which is a fair concern.

But to Alex's point, let's just take a step step back and let's just remind ourselves of how dominant Google really is and how dominant it has been.

This company still has a 90 plus percent market share in the search market, which despite the arrival of ChatGPT, which everyone was so worried about, despite that, the market share has remained resilient.

In fact, as of May, Google search traffic was up 49%

year over year, and it was 96 times higher than traffic to ChatGPT.

In addition to the search business, which is still doing really well, they have all of their other businesses.

They own YouTube, which is, as we've discussed, the world's most popular streaming service. It commands more TV viewing time than Netflix and Disney Plus combined.

They're also leading in AI with Gemini, which, according to multiple benchmarks and according to prediction markets, is the best performing AI model in the world right now.

They have a digital ad ad network, which also maintains 90% market share. They own Waymo, America's largest commercial robo-taxi service, operating in five cities, testing in 17 others.

And then they own products like Google Drive and Gmail and Google Maps, products so intrinsic to the internet that OpenAI actually had to use them throughout their entire demo of Atlas.

All of this, and yet Google trades at around 27 times earnings, less than Amazon, less than Microsoft, and significantly less than Apple.

In fact, it is less than the average of the Nasdaq, roughly in line with the SP average. So, yes, OpenAI is clearly setting its sights on Google.

But does one live stream of a pilot product, one which Google could probably recreate and which is already quite similar to the browser they already have, does that really warrant the erasure of more than $100 billion in market value?

We don't think so. We were long Google at $200 a share.
Since then, the stock has risen to $252

per share, and we are still long Google today.

Okay, that's it for today. This episode was produced by Claire Miller, edited by Joel Patterson, and engineered by Benjamin Spencer.
Our associate producer is Alison Weiss.

Our research team is Dan Jalon, Isabella Kinsel, Kristen O'Donoghue and Humia Silverio. And our technical director is Drew Burroughs.
Thank you for listening to Prof G Markets from ProfG Media.

If you liked what you heard, give us a follow. I'm Ed Elson.
I will see you tomorrow.

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