Chapter 1: What is the main topic discussed in this episode?
Earnings season has begun, but the drama at Netflix is where we're going to start. Motley Fool Money starts now.
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Chapter 2: What is the drama surrounding Netflix and Warner Bros Discovery?
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From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Travis Hoyum, joined by John Quast and Lou Whiteman. Guys, we got to start with the drama at Warner Brothers Discovery this week. Paramount is begging the EU for help. Netflix is reportedly considered changing its bid to all cash.
Remember, there was a piece of that value that they're saying that shareholders are going to get through the spinoff of the cable assets. The early trading at Versant has not gone very well. That's a spinoff from Comcast. Lou, what's going on here? Because it seems like there's a lot of moving pieces. The board at Warner Brothers is pretty resistant to Paramount.
And depending on how you look at it, they either make sense or you just want the most money and that's where they should go.
I'm going to make a bold prediction here, because you're right, there's a lot going on, a lot of moving pieces, but really, it's very simple. One of two things is going to happen. Either Netflix is going to end up buying Warner Bros. Discovery, or there's not going to be a deal done.
You don't think Paramount can actually get a deal done?
Warner Bros. Discovery's board has already decided what they think. For the upstart acquirer to try to poison the well in Europe and try and just salt the fields, that's not going to help. Going score search really only helps when you are the bully. when you are the one that can dictate terms. If you're an underdog, you can't overwhelm this opposition. I don't see this going well.
I think this is only going to get uglier. It's possible that what Paramount is trying to do will work and the deal will get blocked, but it is going to be a long time, I think, before the WBD board says, oh, you know what, never mind, Paramount is the right choice.
What is the thinking there? Because it seems like you should just take the higher bid and if Paramount actually has the higher bid, that's what you do. But there's execution risk here. So what is the argument for just sticking with Netflix through thick and thin?
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Chapter 3: What does Netflix's potential all-cash bid mean for shareholders?
There are. It could simply be. We've talked about this offline. Paramount is a much smaller company than either of these. They are doing everything they can to look big and to present themselves as a good option. But look, there's risk anywhere you go here. I think there's real risk there. And Netflix, look, this is a big deal for them, but they can handle this.
They are more, I think, of a known entity, a trusted partner. If all else is equal, I can see the board saying, let's go with this trusted partner. Whatever the cable upside is, we're preserving it for our shareholders and get a deal done.
The analogy that we were talking about was taking the higher offer on selling your house, but you're selling to somebody that isn't yet approved for a mortgage. You just increase the risk of that deal actually closing. I want to just bring some stats in here for Versant, which is the spinoff from Comcast. That started trading about a little less than a month ago.
That is a $4.8 billion market cap. The shares have gone from about $45 per share down to $33 per share. That's the Maybe these cable assets aren't worth anything. Paramount has actually argued that the equity will be worth zero.
Wait, $4.5 billion isn't nothing, though.
Yeah, it's something. John, what are your thoughts when you look at this deal? Because there's just so many not only egos involved, but weird financial implications as well.
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Chapter 4: How does the spinoff of cable assets impact Netflix's valuation?
Now, I get it for Paramount. It's homecoming in the streaming service space, and Paramount's running out of dance partners. There's consolidation happening, and Paramount doesn't want to be the smallest player, so I get why it wants Warner Brothers. But it's very hard for it to pull off because it is such a small player. Netflix is going to be a lot easier.
It's going to have much easier access to the capital to get this deal done. I'm still not convinced, though, that this is a great move for Netflix. I will give an example here of Disney acquiring Fox back in 2019. Disney stock has underperformed since it did that move. A big part of that is how much leverage it took on to make it happen. This would be a big move for Netflix.
I don't know where it's going to come up with all the cash either, maybe some debt in that mix, maybe some equity. I'm not sure where that all comes from, but it's the one that can get the deal done for sure, and it's going to be able to do it a lot faster.
I think that's what it's trying to do by potentially switching that bid to all cash, get the deal done as quickly as possible before too many people ask questions or a dark horse comes in with a competing bid.
Let's talk about some of those potential downsides if Netflix does get this deal done and they do it with cash. Let's say they have to take on a whole bunch of debt. Your analogy is that Disney hamstrung itself for a while there. They paid down some of that debt. The operations have gotten a little bit better coming out of COVID.
There are downsides of having that interest payment and that leverage. Maybe you can't bid on the next big football deal coming up. By the way, that's going to be in the next few years. Disney's big advantage in the media space right now is they have all these theme parks. Netflix is trying to move into this physical experience world. Do you still have the cash to do that?
Build out a $5, $10, $15 billion theme park if you've got $80 billion worth of debt. Is that the risk, that you just reduce your flexibility? What should you be worried about if you're a Netflix shareholder taking on a bunch of debt, John?
I think that that was the exact word I was going to use, is flexible. You're just so much more flexible when you don't have a high debt burden and when you are generating a lot of cash. You have a lot of options on the table. You boost that debt up. You take the options off the table a little bit.
And I'm not saying that it can't be a market-beating stock, but your attention really becomes more divided on maintaining and running the business rather than how are we going to invest into growing the business for the next big thing.
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Chapter 5: What are the implications of Tesla's FSD subscription model?
Obviously, I agree that no debt is better than debt, but I think they can handle this. Look, yes, I think what Netflix is telling us is they need this. I mean, look, they wouldn't be doing this if not, I mean, this isn't a luxury. They are looking at the world. Yeah, Travis, they may want to compete for sports.
They've done a pretty good job transitioning from a world where everyone was desperate to sell them their content because it was added revenue to nobody wants to sell them their content because everybody's got a streaming service. They've done a good job adjusting to that, going to Korea, going elsewhere to find content, but that's hard. I trust this management team.
It's the smartest management team in the business. I don't think they would be doing this for empire building, doing it willy-nilly. They know, yes, this is going to change our profile. But I think, as a shareholder, or I'm not a shareholder, but if I was a shareholder, I would trust this management team to set the course.
And they are saying, this is something we really need to make our lives easier, to make the company better, versus this would be fun to own.
And that seems really shocking to me because even when this deal was announced, I think we talked about on Motley Fool Money that this seemed like a defensive move from Netflix. And they have not been playing defense for 20 years. And what they really need to think about and investors need to think about is that it's not really Paramount that they're probably worried about. It's YouTube.
And the sort of random deal that came out yesterday that caught my eye was Sesame Street is going to now be on YouTube. And if YouTube is already very popular for kids, there's more people streaming YouTube than Netflix. There's more revenue at YouTube than Netflix. But if the default for... Sesame Street, for sports, for award shows now moving to YouTube, that seems like an issue for Netflix.
What do you think, John?
It's so crazy to even imagine that we're underestimating YouTube right now because of how big it is and how popular it is, but I think that that's the case. I think that's the case with a lot of Google things. We'll probably talk about this later in the show. It has such a massive scale and reach and distribution that there are a lot of options at Alphabet's disposal.
And I think that the Sesame Street with YouTube is just another example of that.
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Chapter 6: How is Google leveraging AI for personalized user experiences?
I'd say it's probably lower to be a no-brainer. I think it's probably a brainer here though. If you take some time to look at it, assess the risks that we are talking about, it could probably turn out to be a good investment today.
When we come back, we're going to talk about the changes at Tesla and FSD. You're listening to Motley Fool Money.
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Welcome back to Motley Fool Money. FSD has had an up and down year for Tesla. Robotaxis began testing in Austin last summer. By now, we were supposed to see FSD driving fully autonomously all across at least the U.S. That clearly hasn't happened. But the big news this week, Lou, is that pricing is changing.
They're getting rid of this $8,000 you own FSD forever to go into a monthly or yearly subscription. So I think the most common would probably be paying $100 per month for FSD. What should we take away from this, not only for people who own a Tesla, but also Tesla shareholders?
I'm going to focus on the shareholders. If you're a customer, you either have it or don't. But think about it this way, you very rarely see a company trade $8,000 upfront for $8,000 over, what, six and a half years or so, which is $99 a month. You don't do this because you want to.
You do this right after Nvidia, at the Consumer Electronics Conference, came out with basically what looks to me like Android for autonomy, where instead of this closed system and everybody has to develop their own iOS, you suddenly have just a system that anyone can take on. That changes the costs of the economics for everybody in the industry. And I think it puts Tesla on the defensive.
I mean, look, this price has always been just kind of a bogey that changes. It was as high as $15, as low as $5 at various points. This has always been aspirational, I think, to charge $8,000 for it. We have a long history in the automotive business of things that are perks or safety features that just become standard over time, they become commoditized. I think that's what's happening here.
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Chapter 7: What should investors consider about Adobe's current valuation?
So who knows if this is the final deal? But yeah, I think it is more of a nothing burger. I mean, Tesla is interested in the monthly subscriptions. And you do look at Elon Musk's new pay package. There is incentives tied in there to how many subscriptions that they have. And I don't know, maybe this is a way that it boosts monthly subscriptions and helps them reach that milestone, maybe not.
I guess that's up for debate. But certainly, yeah, I get Lou's point and it's well taken.
Let's move on to Google. We talked a lot about them on Wednesday, if you want to go back to the Wednesday Motley Fool Money show. But since then, and the announcements just keep coming so quickly from Google, they announced personalized AI. So Jim and I can now understand your personal context.
So if you use Gmail, photos, your YouTube history, and more, some of the examples were things as simple as, What are the best tires for my car? Do you know what I mean? Put in what your car is. The AI has to figure out, based on your history, what your car is. And then, I love this one, what's my license plate number? Because I couldn't answer that question for either of our vehicles.
Meanwhile, Claude showed Cowork, which can clean up your desktop. That was the first example. John, does Google get AI better than anybody else? They seem much more incremental, but the products, when I look at these announcements, they just seem like, oh, I can actually see myself using that. Whereas like Claude, I don't have a messy desktop. Give me a better example.
Well, I think it's a little bit strong to put it that way, Travis, that Google gets AI better than the other players. What I do think that Google has that is extremely valid here is that it can execute at a higher level because of how many billions of people are already deeply embedded into the Alphabet slash Google ecosystem.
I believe it's nine products with over a billion users right now.
That's incredible distribution and scale. If you're looking to do personalized AI, and I think that a lot of these players do want to do this, but Google can execute better because it does have more personalized information about you. I think this is really Google's advantage here.
I mean, John, I think I agree with you. I mean, look, let's be honest. Some of it's a parlor trick. Most people, Travis, you may not know what your license plate is. I don't either. I take a picture of it when I need to pay something later. But I do know what kind of car I have. And I can Google and search right now best tires for a Honda Insight or something like that.
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Chapter 8: Are PayPal's current challenges indicative of a value trap?
So, you know, whoop-de-doo. But like John said, Google is playing to its strength. It has been spying on my email and my photos and everything to suggest products forever. This is just a natural extension. Hopefully, AI makes it better. I love the fact that I like one team in English soccer. They think I must want to buy stuff for every team in that league.
It's like you buy a toilet seat once and Amazon thinks you want toilet seats forever.
Yeah. They're playing to their strengths. I thought the cloud co-work thing was actually pretty ingenious, whether you need it or not. Bottom line here, what's really going on, everyone is experimenting, everyone's trying new things, everything's flexing. Google is this consumer-focused company, so they can do all these things that seem really cool and relatable.
I don't know if anyone is better at it, but I think what this does show, I keep coming back to this, is that as all of these companies try to get their AI out to the world, Google's real advantage is they have so many more just natural avenues for monetizing. They are in so many homes, so many phones, so many consumers already.
It is just a much more natural thing to see them adding AI as a bolt-on versus a cloud or open AI or all these trying to basically have to win every customer from scratch.
I think that the proof of that, Lou, is just how quickly, for example, Gemini is gaining market share right now. This company launched Bard. Does anyone remember Bard? That was a stumbling right out of the gate.
Even the launch of Gemini was terrible. They had those images that were just completely inaccurate that was a huge black eye. That was Gemini. People forget that.
Yeah, for sure. But how quickly Google has been able to recover and take market share because it does have the advantages of distribution, vertical integration. Now, OpenAI is making deals to try to better compete, but Google just has such an amazing amount of muscle that it can flex here.
This isn't a prediction. I already talked about Google's natural advantages, but I think that the important thing there is how quickly this can change. I don't think anything is set in stone yet. This is still the Wild West. I think Google looks great right now. Maybe it will two years from now, or maybe it'll be another even crazier shift.
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