Evercore ISI Senior Managing Director & Head of Internet Research Mark Mahaney joins Yahoo Finance Live to discuss growth for Netflix following disappointing first quarter earnings.
Video Transcript
- Continuing our coverage of Netflix, we're joined by Evercore ISI Senior Managing Director and Head of Internet Research Mark Mahaney for his take on the streaming giant's earnings as well as the other players in the space.
Mark, it's great to see you. We're still trying to process exactly what is happening here at Netflix and this sort of reframing that we now have to do in all of our brains, I guess, of this growth story. What is that process looking like for you? Is Netflix no longer a growth company, just full stop?
MARK MAHANEY: It's a growth company. But it's no longer a premium growth company. And I think that matters to the stock. So I refer to premium growth as a company that can generate consistent 20% plus top line revenue growth.
And once you fade below that, the valuation outlook, the valuation parameters, the multiples that the market's willing to put on the stock, can-- collapse is too strong of a word, but they can come down strongly. And that's what's actually happening with Netflix now.
It happens to all stocks. You can't maintain 20% growth forever. And I was surprised by just how quickly the growth slowed down at Netflix. The management team obviously was too. But that's what's happened here.
It's a good solid asset. It's still the global leader in streaming. They're going to be generating rising levels of free cash flow. So there's some good things here that are going to be lost in the trade off today.
Nonetheless, I think the stock probably trades in line with the market. We have a neutral in-line rating on it. I think it trades in line with market for the next 12 months.
- Mark, the decline here is shocking. The losses have accelerated throughout the session, last check, down close to 40%. My question to you is, is this a one day wipe out? Or when that closing bell rings, theoretically, we could see another 20%, 30%, downside risk to Netflix, just given how far, things slowed in the quarter.
MARK MAHANEY: Well, OK. It's awfully hard to know. I'm surprised that it sold off this much. This seems a little excessive to me. I think we have them doing something like $15 in earnings-- Sorry, $14 in earnings. We were at $15. Now we're at $14 in earnings next year.
I think if you put a market multiple on that, or something close to 20 times earnings, you know you see your path to kind of a $280, $300, stock, somewhere in that range. And that feels like right value to me. You bring the stock down to $20. And it's probably a long more than anything else.
And I also think that there's a lot of one-time items that are impacting here. I mean, there were issues with related to Russia. There are macroeconomic concerns in Latin America that are impacting the business. And they will comp against that.
So my guess is that the market is going to get too negative on Netflix before, and it may already be there. Brian, hopefully that answered the question.
- I want to ask about the ad supported offering that they're talking about. Is this going to be-- I mean, it's probably overstating it to ask if this is going to be the thing that's going to save Netflix. But how much is that going to help?
MARK MAHANEY: Well, I think it will help. This has been an amazing story. Netflix, amazing service, a really impressive management team with great vision. They invented streaming, practically. And then they had these correct pivots to international growth, original programming, local language originals. They've done all of that well.
I think they missed the need to roll out an ad model. It seems like they're scrambling to do it now. Although, scrambling and talking about rolling it out in 2023, I mean, you should be rolling that out now.
So I think they were a little bit behind the curve on an ad supported model. But that's about the only thing Netflix has been behind the curve on. But this was a mistake. I think rolling it out will help them but in moderation.
They're doing wonderfully well in the US. They don't need to roll out an ad supported solution here. It's in international markets where they need to do that. But you do that, the rev you're going to get per user is going to be a lot lower.
It's going to be incremental revenue, incremental profits. But you know, I think if they execute really well, it can kind of add 10% to the revenue pool in 3 years or something like that. It's not a reason to necessarily own the stock today.
- Mark, so Netflix was slow, I would argue, on rolling out this ad platform, as you mentioned, slow in tapping into those numbers of people, 100 million people, sharing accounts. Do you think the co-CEO structure at Netflix is working?
MARK MAHANEY: Gosh. That's a good question, Brian. I assume so. But maybe that's behind the slowness in the decision making. But I thought, as usual, Reed Hastings last night was pretty brutally forthright and honest, saying that he's long been opposed to an ad supported model, which is true. And I think he's kind of acknowledged that, under pressure, he's willing to consider introducing it.
So I think if you hadn't had a co-CEO relationship, I don't think this decision would have come around any faster because I think Reed's really been one of the people, kind of the last, possibly, to agree to this move.
- Mark, finally, quick pivot for us to Meta because this is another stock that people maybe are bracing themselves for in terms of earnings. You recently put on a short-term underperform on the shares. Do you think we're going to-- I mean, maybe not Netflix size ugliness, but do you think we're going to have an ugly quarter for Meta?
MARK MAHANEY: Well, I think the expectations bar is going to be super low. We try to highlight something very specific, which is that we thought the street revenue estimates for the June quarter were just a smidgen too high for a lot of different reasons.
But you know, I think we're going to start seeing signs of brand advertising weakness out of Western Europe. So that will impact them. I think currency headwinds are going to be a bit of an issue. And I just thought the street numbers, just for whatever reason, were just intrinsically too high for next quarter.
I don't think we'll see this kind of magnitude of trade off. And if they can convince people that they're moving towards what I call a post privacy ad attribution model then I think you could actually see this as the clearing event that allows bulls to really get behind Facebook.
I don't think it's going to hit a growth wall in the way that Netflix did. I think it's going to start showing really nice accelerating revenue growth through the back half of the year. That's my hope as a bull on Facebook.
- A lot of late nights coming up. We are in the middle of earnings season. Mark Mahaney, Evercore ISI Senior Managing Director and Head of Internet Research. Always good to see you.
