00:00 Speaker A

Some big earnings on deck, including Netflix on Thursday. The streaming giant is on a strong run to start the year. Our next guest, recently raising his price target on that stock to 1140. Joining us now is Eric Sheridan, Goldman Sachs research, co-business unit leader of the TMT Group. Eric, it is great to see you. So, let’s start right there on Netflix. Uh, earnings on deck, July 17th. Uh, interested to hear your expectations, with a stock, by the way, that has been on a run, Eric, up about 40% this year.

00:43 Eric Sheridan

Well, the stock is a reflection of the business. They’ve been raising price. They’ve been knocking the cover off the ball with respect to content. Uh, we would expect upwards of a three to five percent beat on revenue this quarter, and a lot of that is going to drop to the bottom line. So, you were still very much in an earnings revision, positive cycle for Netflix. You’ve got a content tailwind, you’ve got a competitive tailwind. So, there’s a lot to like about the business.

01:16 Speaker A

It sounds great, Eric. Yeah. So, why the neutral?

01:23 Eric Sheridan

Our neutral is a reflection of the valuation. You can buy a lot of stocks on my coverage list, including many of the biggest companies in the world, for well below 40 times one, uh, one-year forward earnings. Um, it’s not a negative call. We’ll have a sell rating if we’re negative on things from a risk rewards skew. Uh, but we think this is right around fair value in the 1200 plus or minus range.

02:01 Speaker A

I’ve always thought one real quiver they have, Eric, is that, is just the pricing power. Meaning, Netflix could keep raising prices on Josh Lipton. “I’m going to stick with them. I’m loyal, I’m locked in. The content’s great.” What’s your view on that?

02:27 Eric Sheridan

I can agree with that. Uh, that is already modeled in our work going out over the next five years. Is in developed countries, we already have an assumption that they are going to likely raise price somewhere around mid-single digits on an annualized basis. So, prepare for your subscription increases, because they are coming over the next five years.

03:05 Speaker A

Evercore’s Mark Mahaney, well-respected, well-known analyst like yourself, Eric. Here’s what, you know, he likes Netflix. He’s got an outperform, and I saw this this morning. Here’s what he told his clients. He says, “We view Netflix as one of the least risky stocks this quarter.” He talked about how the street’s Q2 revenue, operating income, EPS estimates called them reasonable, and he said Netflix has a very consistent recent track record of exceeding its revenue and operating income guidance. Your response to Mr. Mahaney.

03:40 Eric Sheridan

I think that’s all relatively fair. We previewed Netflix last week. I’m not going into this earnings thinking there’s going to be anything negative on the operating front, uh, that would shock folks. Um, I think after the run it’s had, which you highlighted in the lead-in, I think it just becomes a question of, is that where the incremental returns are going to come in your portfolio on a going forward basis? You’ve already made the 50% plus return year-to-date.

04:12 Speaker A

Let me, final question on Netflix. In the streaming wars, is that fight over? Do they have the gold and everybody else is just battling for second place?

04:24 Eric Sheridan

I think they won the war of the last 10 years, definitively. The how TV and movies were made, how TV and movies were distributed, they won. I think looking out over the next five to 10 years, what’s interesting to me is when I look at the media consumption habits of my teenage son, it’s YouTube, it’s Reels, it’s TikTok, it’s video games. He doesn’t like sitting down and watching a two-hour movie with his parents. Um, so they are going to have to continue to evolve and shift, uh, the strategy over time to meet where the media consumption habits go. But they definitely won the war that we’re coming out of.