Tesla Skids, Netflix Pops & US 'Goldilocks Scenario'

Welcome back to the end of the week, and what a week in markets it has been because quite a lot has changed over the course of the last 5 days. And we're going to divide this episode into 2 parts. Going to talk first half about some macro updates, and what I mean by that is US GDP absolutely crushed forecasts just the other day. Inflation remained relatively controlled, people talking about Goldilocks again. If you haven't listened to any previous episodes, I'm sure Piers will break down why he's a big fan of the Goldilocks tale here and why it boosts markets generally. And then we had the ECB kept rates on hold pretty much as expected, reiterated forward guidance, but did not push back against market expectations for earlier rate cuts. And then after we were kind of writing off Beijing saying, yeah, they're just letting the markets tank. And how badly Chinese equity markets have been performing. They've come out with the bazooka and gone, here's $300 billion worth of stimulus, cutting interest rates, trimming the reserve requirement ratio. And so in kind, the Hong Kong stock market, which we were very much pessimistic about in its recent performance, has clocked its best day in more than 2 months on Wednesday after that action from the Chinese government. And then the second half, we're going to just break down two stock stories, one good, Netflix, and one not so good, Tesla, who I think I had a look this morning, they were down, what, 12% they closed down yesterday. So pretty big moves. And, you know, on the flip, Netflix was up as much as 14%. So yeah, big moves.

Finally, your, your Tesla short is finally becoming less expensive.

Don't get me wrong, it's not that I short it, it's that I talk it down and then buy into it on dips, you see.

Right.

So I'm one of those— I'm a typical kind of, you know, banking philosophy. I'll just talk it down and then take the other side. All right, well, look, let's kick it off then with the headline US advanced Q4 GDP. And, and just so everyone's on the same page, so with GDP readings, there's 3 readings. The advanced reading is the first reading of the prior quarter. So it's always the most important one because at this point all we have are kind of factored, like model-generated estimates, whereas going forward in the preliminary and the final readings, they're just purely statistical revisions to that first reading, which is the one we've had this week. So is really important. Obviously, it's a key component for are we going to have a soft landing? What's that going to mean for the interest rate expectations? It came in at 3.3% versus expectations of 2%, which is a really big beat if you're not used to looking at these numbers. So what did you make of that when you saw that?

Well, I mean, we know that the US economy's been in this mode of outperformance, right? Resilience. That's been the story of the last 12 months. And so it's surprised in the least surprising direction. Better than expected is the mode of operation these days. So if it had been worse than expected, that would've been a bigger surprise, if you see what I'm saying. Yeah, the size of the beat's huge. And, you know, a lot of that coming from, you know, decent sort of personal spending was up 2.8%. And that's, you know, if you think about consumer spending, that's essentially two-thirds of the economy. So when you're thinking about that GDP figure, then yeah, two-thirds of it, uh, because we, we of course measure GDP in dollars, uh, so actually it did mean that because, and it was the last quarter of the year, so we've got full year figures for 2023 as well within this reading. And So in 2023, the US economy clocked $26.95 trillion. And yeah, stellar performance. And I think that, yeah, you, you've got to continue to be fairly shocked actually, but just how strong this thing is when you're thinking and living in Europe, or certainly when you're looking at China. You know, it's very, very much pointing in the exact opposite direction from a China point of view. You know, in the UK here, where for the whole second part of 2023, at best the economy was zero. And here you got the US, 4.9% growth in Q3, 3.1% in Q4. Um, and by the way, I should just point out something, a clever little trick. That the US do when you are reporting your GDP figures. The US report their figures in what's called an annualized way. So when they say that the economy grew 3.3% in Q4, it did not. It, if you took the growth rate in those 3 months and multiplied it by 4, they kind of give you an equivalent full-year growth if the economy grew at that rate for a full 12 months, right? When like the UK report their GDP, we don't annualize. We realize it. So we report it as in just the growth in those 3 months. So that's one slight caveat.

But why, why would you not follow that protocol of Optix if the US is the biggest economy, it drives the most investment, it has the most importance? I get like, let's be principled and report the true numbers, but I think, but that, I mean, put that to bed. Like wake up and smell the coffee, I'm afraid. Like you got to annualize that, surely. Your marketing department needs to push a little harder there.

It's very British, isn't it?

Yeah.

You got to kind of play it down, play it down. You know, let's not, we don't want to be seen to be being arrogant here. But yeah, anyway, back to the point, 3.3%, mega, like mega, mega. And you know, you've really got to start, well, so some camp, some parts of the camp are going, well, hang on a minute. We're thinking rate cuts throughout the whole of 2024, but the pace of growth here is like, wow, we may not get rate cuts at all for the first half of the year. There are potential consequences to rate cut expectations because this figure is so strong. But for now, it's been a great week. I was looking at stocks. And not just US stocks, but S&P hit new all-time highs, uh, this week and actually broke the previous high that was January 2022. But it's not just the US, right? And obviously a lot of that US growth is driven by the Mag Seven, or really we should call them the Mag Six now because there's been a casualty that we'll talk about later in the pod. But, um, but it's not just US stocks because if you check out like things like Nikkei 225, So that's the Japanese stock index, new all-time highs this week. Let's venture into Europe. The DAX, new all-time highs. The CAC, that's the French index. DAX being the German index, CAC French index, that's testing new, new all-time highs. Um, so, and, and that maybe just makes the point that if the US is strong, then the world is in a good place. Um, it is the dominant economy. Um, it is— it has the most influence on everyone else's economy because they're the biggest and their consumption is so massive. Um, and so yeah, if anything goes wrong in the US, the whole world's in trouble. But when it's on fire, then it's, uh, it's propping up everyone else at the moment. Imagine if the US economy wasn't performing well. Well, I mean, you know, the UK economy would 100% be in recession right now. So, you know, the US is kind of doing everyone a favor, but the question is just how long can it last? How long can the decoupling here, uh, continue? And, but yeah, for now, phenomenal, phenomenal numbers.

And the other thing that came out with GDP is core prices, so PCE, personal consumption expenditures, which the Fed look at for inflation. So the two big components everyone looks at being then the growth rate, but also what is inflation, key weighted factors for their policy decision-making kind of process. And that figure, it rose to 2% for the period while the headline rate was 1.7%, which both were relatively, I, I guess you could call it controlled or steady, which meaning that the economy is growing. But inflation is not going up. And so reinforcing this idea of soft landing, which is inflation is relatively tamed without triggering a recession with growth, i.e., Goldilocks scenario, positive, off we go.

Absolutely. I mean, it is the, it's literally the best of both worlds. Strong resilient growth. Dropping inflation. So the point there, and actually Yellen, who backed up these figures, Janet Yellen, Treasury Secretary, came out trumpeting how amazing they are, and they are. But one thing she did try and put to bed was this idea that, oh my God, inflation's going to go back up. She wanted to suppress that, what is an incorrect judgment, and that from exactly what you said. Ultimately, best of both worlds. She made the point, or maybe it was someone else who made the point, that we can still see the Fed cut rates even if the economy does stay strong. That's because of this nominal interest rate thing where ultimately the real— or sorry, the real interest rate is actually looking at the actual central bank rate minus inflation. And so if inflation's dropping and you keep the central bank rate unchanged, the real interest rate's going up. So we're kind of getting pseudo rate hikes here. And so there is justification for the central bank to cut rates to bring that real interest rate back down, where really they're just saying we want to try and— their policy shift could be we're moving to maintaining a steady real interest rate, which would require rate cuts. So they can cut even if the economy carries on being seemingly on fire, but the rate cuts would be certainly more modest. They'd be more cautious about it. There would definitely be fewer cuts if the economy stays strong.

Yes, I totally agree with your assessment about the US. Putting the world on its back at the moment, but there's obviously some other things that have played in a more positive fashion to support the, these moves that you mentioned across, so say the European indices.

Yeah.

We had the ECB this week, so they kept their interest rates steady. When we say interest rates, there's actually 3 of them, but it's the deposit rate that typically people refer to, and that's at 4%. They reiterated it would keep them high. For quote, sufficiently long duration to bring inflation to target. So that's pretty much a reiteration of their standard guidance. I think that is what Lagarde said when she was sipping champagne in Davos last week. But the point being here is that markets generally have been a little bit more aggressively priced in a dovish fashion against what central banks have been communicating, certainly for the US for some time and for the UK even, although that has changed slightly given some recent data points, but same case in Europe. So generally what you would have looked out for, right, in the past was, okay, this is all as expected. And then you wait for her to speak in a press conference and the market is much more dovishly priced than what she's saying, which is, look, we're not going to cut anytime soon. We're still very cautious about inflation. And then the market's pricing in multiple cuts and she doesn't say anything. So what does that trigger in your head from a trader's perspective? If she doesn't push back against the misalignment of how and what you as market participants are thinking against what they're saying, what does that signal?

Well, I think that with the ECB, it's a little more tricky. Lagarde's got to play, uh, I think her communication is more fraught with risks and danger. I think that they're historically very cautious. So in her head, I think she agrees with Markets, but what comes out of her mouth is different. They don't want to lose credibility is one. So they don't want to get it wrong. They don't want to promise the world. Right, we're going to cut X number of times in 2024. But when the time comes to it, things have changed and actually, oh God, actually we can't cut. Sorry, guys. So they don't want to kind of do that. Because so that's number one. Number two, you've got lots of different players around that ECB table. Don't forget there's 19 different countries and so economic conditions can vary pretty dramatically. So you may well have some of the ECB council basically saying, look, we don't want cuts at this point. You're obviously going to get the opposite side of the table. So I think the conversation's more tricky there. But mainly they don't want to overpromise and underdeliver. And so they end up— what comes out of her mouth is super cautious. So I don't believe it. Markets don't believe it. They are more confident in their own assessment and understand the kind of games that Lagarde's got to play. That would be my opinion.

So the bottom line being then, if she doesn't push back against how markets are priced, she agrees. So therefore, yeah, there's going to be sooner rate cuts than what they're implying through their official forecast, and therefore stocks go up.

Right. Simple.

Yeah. The other, the other strategy—

DAX new highs, right?

Yes. The other strategy they could use, I guess, is to toe the line, as you said, keep credibility, and then just use source comments via Bloomberg to then align themselves with actually, this is what we're actually thinking, even though we're saying that. But, you know, this is what I guess, as a student, or someone new to markets probably watching this, you're probably thinking, what? Like, why don't they just say what they need to say?

Yeah, it's a bit of a ridiculous theater, this whole monetary policy game. Um, but that's, that's what it is at the moment. So you've kind of got to play along.

Yeah. All right. Well, then we'll move on to the final one in the, in the kind of macro space, which is China. So we talked a lot. In the last episode, in fact, it's just a week ago, about how bad it's been for domestic stocks, both mainland and in Hong Kong, the lack of real, um, I guess, intervention coming by way of the Chinese government, which they typically would do. Um, it looks like enough is enough, and, and this week they've come in pretty heavy-handed, uh, and gone for the, the full across the board. Well, how they talked about it was a broad plan where they're going to guide money into sectors of national importance to boost the faltering economy. So is this surprising, or is this just a matter of time, do you think?

Well, it's surprising on the one hand, because as we were saying last week, the Chinese Premier talking in Davos last week said nothing And we were— that's where the kind of a bit more panic, I would say, set in. And then Chinese stocks, I mean, they got hammered off the back of that and trading like down to— we're talking about all these stock indexes at new breaking new highs, right? US, Japan, Germany. China's market, it's like a— it's like down at lows not seen since 2020. It's plumbing a like 4 or 5 year low. And so there is a huge, obviously, contrast there. So I think that we were so disappointed by the Davos speech that then, all right, they turned around and got the bat out and really delivered a pretty meaningful set of stimulative measures so that it came as a surprise because we'd got disappointed off that Davos speech. So yeah, there has been a knee-jerk snapback in markets, but look, there's still really, I would say, what's happened it. So I'm looking at like the Shanghai Stock Exchange, and off the back of that disappointment in Davos, it dropped to 2,748. Okay, um, bearing in mind that middle last year is up above 3,400. So 2,700— let's just round it— 2,750 was the low last week. It's now up to 2,900. So huge snapback, but it's still down on the year. You wouldn't say from a technical point of view that rebound has not broken any downward trend lines here. Whilst that was an important and necessary step, they need stimulus for sure. Actually, here's a measure. Well, I mean, why do I say that? There's strong evidence now that not only— look, we were obviously so worried about inflation in the West over the last few years, right? And all these rate hikes and great inflation's coming back under control now. In China, you never really had that inflation spike. And actually what's happening now, they have a straight up deflation risk. And looking at, I mean, one of the stats off the back of these US GDP figures. So the US economy in 2023 let's round it to $27 trillion. Okay, now China's economy grew at a, uh, you know, much slower rate than was expected. Okay, and their economy was at $17.7 trillion. Now the gap between the two, and the gap has been shrinking and shrinking and shrinking, and everyone's been going like for, for decades, couple of decades now, the prediction has been China will become the biggest economy in the world. It's inevitable. It's only a matter of time. And people starting to try and pick dates in the future. And is it going to be 2030 and all this, right? Um, and, and ultimately what's happened in 2023, the gap between the two has got bigger again. So the US economy has powered forwards at the expense of China and the gap is now at the largest since 2010. So you really have got this divergence and decoupling here as the US powers on and China's in a real problem place. So yeah, this stimulus that's come, you could say it's over. They should have gone earlier, many would say, which is why I think that the market reaction has been a positive one, but it's not that positive. So I think the jury is still out that It's a bit late and actually there's way more to do here. And this package they've delivered this week, I mean, fine, but give us some kind of guidance about, and this is the problem with China's policy, there's no guidance. They just do something and then they don't really tell us, right, what's our roadmap for 2024? What's our policy going to be for the next 12 months? And then that's, so it's hard.

If there's no roadmap. No guidance, then you can only go— so, so this is how I'm talking from like when I was on the desk and you were trading. So you would always say to me like, I don't know, what's the probability they're going to cut today? Because you'd get signals, like economic deterioration would kind of signal that something's going to happen. They're going to cut rates, they're going to cut the reserve requirement ratio, stimulus package, whatever it might be. So without forward guidance, you can, you can only look at back data, which is, well, what is the routine pattern here? And actually, looking back through all of the episodes, you could pretty much nail it down to like a time of day where generally they want biggest bang for their buck. So they don't make an announcement overnight in the Asia session. Normally they would do it just as a crossover of mid-morning UK as US are coming in, totally outside of their hours, so that they let the world know So if you're looking at backward looking, then they do always through necessity take action. So it feels a little bit like if oil goes down far enough, OPEC will take action. If the Swiss floor that they had in their currency, albeit they pulled it many years ago, but they would protect it. Isn't this just, well, it's almost like too big to fail. They've so committed to this policy now. That they have to, like, it seems like there's limited risk to that kind of catastrophic deterioration of China short term.

I agree, but it would be nice for them to just let us know that is going to happen. But I know what you're saying. I mean, look, they're not going to, obviously the economic growth situation in China is absolutely key and pivotal to Xi Jinping's whole strategy. He cannot let the economy go into a full-blown recession. So yeah, they'll come in. But the point is you get these figures out of the US and it just, it continues to defy belief at how differently the two giant economies in the world are performing right now. And actually, maybe a final point here, A good measure of this is the Big Mac Index.

Oh yeah.

Which is the, I was just reading in The Economist this morning. So this is The Economist's sort of, it's one of their kind of measures of kind of economic performance. And basically they just take the price of a Big Mac in every country and then using the exchange rate, right? What's the difference? And really it's trying to measure sort of purchasing power. Parity in a way. But right now, if you wanted a Big Mac in China, it's going to cost you 23 yuan. Okay, if you want one in the US, can you believe it's $5.69 now for a Big Mac on average in the US? Okay, now if you said, right, those are the same, that's the same value, 23 yuan is the same value as $5.69, then because that amount of money buys you the same thing. It's a Big Mac. So using those Big Mac prices, the exchange rate should be 4.04. The exchange rate is actually 7.2 if you look at money markets, meaning the yuan is now 44% undervalued compared to the dollar on that basis. And that's wildly out of line. And again, another measure that, well, hang on. A, the Chinese economy is really weak. B, the Chinese currency is majorly overvalued. This is perfect. Cue Donald Trump, enter stage left to start doing some China bashing throughout the election campaign, telling them that, you know, their manipulating currency markets to their own advantage. So listen out for some sound bites from good old Donald on that front in the months ahead.

Yeah, I almost think, as you're explaining all of this China part, that I actually think that China might want Trump in power irrespective of the economic consequence short term. If I think about it from a strategy perspective, from the government's handling for their own internal optics of the kind of the perception you're trying to build of your country's narrative in the global order. Yeah. They've had a really bad COVID handling situation. Their economy is pretty weak. What you need is this, you need to frame the most villainous character who is going to put trade tariffs on you, make life difficult on you. So then you can pivot to that as an excuse. And at the same time, that can accelerate your relationships with the likes of India, Russia, the rest by further fragmentation of that kind of divide between traditional West and this new forming bloc of powers. So yeah, I actually think that China wants Trump.

Yeah.

And therefore, if they want Trump, there's ways and means to ensure that that might well become a thing.

Right.

Through misinformation, all the other things. So yeah, I actually think that, yeah, there's a little sideline here. Yeah. Despite all of the, the kind of more definitive first order kind of reasons of why Trump might beat Biden. I think there's also a bigger thing at play here, which with all the conversations we've had of AI, this election is optimal to again, try to destabilize the West and use it to your advantage in the East.

Yeah, but on that final point, Trump is not going to, I mean, from a regulation point of view, he's anti-regulation, right? So from the AI race perspective, Trump getting into the White House is good news on the one hand for the US. They're not going to get blocked by regulation in this, in this game. Um, so that might play in badly to China's hope that regulatory factors will delay the West, giving them an edge. But yeah, there's like so many moving parts. It's, it's fascinating.

All right, well, let's go on to the stocks side of the conversation. So what do you want to go? You want to talk positive or negative?

I think let's end on a positive. Okay, it's always bad news first, right? Then, then you get the—

clear the slate. So as I said at the, the top of the episode, Tesla finished Thursday's session down 12%. That was after they released their earnings report midweek. So they narrowly missed earnings estimates. They warned that its rate of expansion will be notably quote, lower this year. Also, executives cautioned that they're approaching the limits of their efforts to cut costs in their current vehicle lineup. So is there anything else that you saw within the Tesla report that you think, you know, I, I'm always a bit remiss. 12% sounds like a lot for a company of that size. However, they are a unique case and they do swing around a lot. Um, and I saw a lot of people talking them down saying they're the worst performing of the Mag 7 or whatever it might be. They were the third best performer, up 106% last year. I might remind those bearish-minded people, but, um, so yeah, I, I'm, I'm too long in the tooth to get carried away by a 12% down Tesla these days.

But yeah, I mean, their stock is down 30%. In the last 1 month. So look, that, let's not avoid the point that that is shocking, right? Really, really bad and warranted because look, if you are a Tesla stock where you are, you know, you are, the multiples you are trading on are monstrously large, then anything that's not like smashing it out of the park means you're overvalued. So they definitely are not— they didn't smash it out of the park, right? All the numbers are kind of pointing towards deceleration in growth, and you can't, you can't have a deceleration in growth story and maintain, uh, super high, um, valuation. So I think that— and one thing that was interesting that, that again is kind of spooked markets a bit Musk loves nothing more than a super aggressively bullish forecast about how many units they're going to deliver in the year ahead. Okay. And he, like, I remember at the start of 2023, he said, we're going to do 2 million this year. You wait, you wait and see. We're going to put out 2 million vehicles. In the end, it was 1.8 million. All right. You might say, well, 90%. Decent, but look, they missed by 200,000 units, right? That, that's a big miss. Now, the really interesting thing was Musk and Tesla did not give a forecast for their unit output in 2024. For the first time, every year they're like, we're going to do this, and the market's going, wow, that's amazing, that growth.

Wow.

Bye-bye-bye. So I think that tells an interesting story. But I do think two, two more things on that point. It's like the perfect storm at the moment for Tesla. I think for a number of reasons. So firstly, if you think about price, right, we'll talk about margins. So one of the key sort of measures for the automotive industry broadly is what's called gross margin. It's such a capital-intensive business building, you know, any manufacturing firm is. And so we look at gross margin as the kind of key metric to tell us about, right, the profitability and the health of this thing. So their gross margin, I'm going to take out their regulatory credits. We won't go down that rabbit hole at the moment, but they have the, because they're an EV green company, they get regular. I'm going to ditch that for a sec. Their real gross margin is 17.2%, okay? Which is kind of at industry, you know, that's about, it's decent, but it's not standout in the industry. They used to have a standout gross margin, but Musk took the decision probably 18 months ago now to say, right, we need to cut costs. Well, sorry, we need to cut prices here. Because A, we've got a cost of living crisis and the reaction to the EV revolution has been that everyone's like, wow, these things are very expensive. And so it has hampered demand. The fact that EV vehicles are at a decent premium over and above petrol and diesel vehicles, right in the middle of a cost of living crisis, which has been driven by inflation and a massive uptick in interest rates. Okay. So the macro Climate has been incredibly challenging. They've cut prices, which has damaged margins. Right.

I'd also say that their product lineup is very limited.

Yeah.

So they don't have like a low-cost, super low-cost affordable option. They can just play around with the price on.

Yeah.

So much as well.

Well, apparently that is coming.

Well, I mean, yeah, that will come just like everything comes 2 years delayed, which is the problems right now though.

Well, actually, so their low-cost vehicle, apparently they're going to start production on that second half of 2025. They said 5 years ago they were going to start production on that. So is it going to come second half of 2025? They've been messing about with this Cybertruck thing. Is that going to be a massive distraction and a tangent that really dogs them going forwards? Possibly. But look, back to this perfect storm. Okay, you got macro conditions that are definitely not good, right? Let's drop price, undermining margins. That's number one. But on the demand side as well, you've got, I was, I read an amazing stat. So Hertz, biggest car rental company on the planet. They've sold 33% of their EV fleet and they've bought petrol vehicles to replace them. Which is the most remarkable stat in what is generally an overall story that the momentum of the shift to EV has actually quite dramatically dampened. I think this whole, the whole kind of green revolution has lost momentum in amongst this cost of living crisis. And that was like the standout.

Wow.

Hertz. They've literally gone and sold a third of their electric vehicles to replace them with petrol. So you have got this slight demand shift as well. And then obviously on top of that, competition. And so we've been talking about BYD in China becoming the biggest EV seller in the world now, overtaking Tesla. And so you've got this, it's coming from all angles in terms of headwinds for Tesla. And so it all translates into then what is looking like a deceleration in growth. And whilst they didn't give us a figure for the number of cars they're going to produce this year, Wall Street are predicting 2.2 million vehicles, which would be a 20% increase. The problem with that, Musk 3 years ago said, we're going to be on a 50% growth rate year on year for the next 10 years. And we're 3 years in and it's already possibly dropping to 20. So that's your problem with the valuation and your share price and why it's off 30%.

So if I was Elon Musk, I'd say we can do 50% for the next 7 years. And then the shareholders will go, how? And I'll say, give me more stock of Tesla. I will start to then pull some levers. Pull a rabbit out the hat like I always do. I always deliver. I'm the world's richest man. Like, let's just give me my 25% because I've sold down my stake to finance my terrible acquisition of Twitter. So, I mean, you got to, you got to applaud Elon here. Well, so that story used the situation to his benefit.

There's another element to it, but you could say, yeah, maybe he doesn't have enough skin in the game to care anymore. He owns 13% of Tesla now, having sold a massive chunk to buy Twitter. But his angle—

I wonder if people would be surprised by how little he actually owns, because I think most people assume that Tesla is Elon Musk.

Well, yeah, they are one and the same, right? But maybe not quite so much at an operating level anymore. But so that angle, because he said this on the call, He basically, and this was more about the direction of AI and robotics, right? Within Tesla. 'Cause Tesla, I mean, they're quite a phenomenal company, right? And they're sat on what potentially could be the, the biggest and best data set on the planet. So when you're thinking about AI, well, you need data and you need large language models and you need, you know, to train these AIs and, and they've got it, right? And they're also the, you could argue the global leader in robotics with this Optimus, um, kind of humanoid robot that they've built. But basically Musk is going, well, look guys, I can see this company Tesla, if we go down the AI robotics route, I can see this being the most valuable company in the entire planet. However, I'm not sure I'm prepared to do that with Tesla. I might spin and take the AI and robotics piece and do it somewhere else. I would like to do it in Tesla, but I'm going to need 25% of the company. It's genius.

You've got to love it.

It's genius. What do you do as a Tesla shareholder? What do you do? You're like, damn it. All right, fine. Because you'd rather have Musk and his AI and robotics plan in-house.

But that extra, like, what, 10%, 11%? That's going to cost you what from the market value valuation perspective? He's getting, what, $100 billion?

Yeah. I mean, he's saying all the right stuff. He's saying, you know, I want to be an effective steward of very powerful technology. So 25%, you know, would give me enough of a stewardship, you know, without me being, you know, owning the majority. Um, you got, you got to love it. You got, you got to love it.

If you, if you don't love it, you'd be consumed with hate. So yeah, I've gone through the full cycle. So, um, yeah, I, I'm going to have to give him a pat on the back. I'm liking how he's playing the 30% drop of his company over the last quarter, or last month actually. All right, we said we'd end on a positive. Yeah, that positive was Netflix. And yeah, their shares surged after they've just reported their best quarter of growth. So this is the opposite, right?

We just—

I think the sales, the sales number at Tesla at $25.2 billion. Not only was that below street estimates, it was the slowest pace of growth in more than 3 years for revenue for Tesla. And again, in the context that you were saying, that's really bad. Netflix, best quarter of growth since viewers were stuck at home in the early days of the pandemic, and their subscriber numbers were insane. I mean, against street estimates of 8.91 million, They clocked in at 13.1 million new customers, this is, and their stock soared.

Yeah, it's quite, it's, it's a great story, I think. And that's, that puts them at $260 million, um, in total. And it's a great story. It's, it's almost, it's a bit like Meta in some ways where Netflix and Meta got killed. I mean, I'm talking about the stock in 2022, um, in 2023. And well, so Netflix was a bit before. So Netflix peaked during the pandemic, of course. Um, user growth just went through the roof and it was phenomenal for them. And their share price peaked at $686, and that was in October 2021. Okay, $686. Then they plummeted and the low was June '22, was at $167.

Wow.

Okay.

What were they pre-pandemic?

Pre-pandemic. So in, let's say, back end of 2019, you're looking at about $267. Okay. So they went, yeah, in 2022, they're below pre-pandemic levels and it's because of the war. The battle, the streaming battle that was going on with the other competitors and basically Netflix going, right, we've gotta produce our own unique content. Let's get the checkbook out and let's just go on a spending rampage. In 2021, they spent $17 billion on new content. Okay. And everyone was like, oh my God, decelerating subscriber numbers. In fact, subscriber numbers started to drop just as they were spending way more than they'd ever done before, and the margins collapsed. And again, it's back to this idea of growth rates, and these super stocks are on crazy valuations because we expect phenomenal growth rates for the rest of mankind— for, sorry, for the rest of time, right? So yeah, they had a real problem. Anyway, they've really turned it around because they did the basic stuff that everyone was shouting at them to do, they end up like a bit like Meta, who Zuckerberg said, all right, fine, all right, fine, I'll cut costs then, you know, and he did. And what happens? Well, the share price goes back up. So Netflix, they really set about tackling their key problems, which was cracking down on password sharing. They've also introduced a subscription level that includes advertising, which grew at 70%. But that subscription level is phenomenal and they've increased prices. All three of those are very positive for their top line without increasing costs. So it feeds through straight to their bottom line and their margin was up 20%, I think it was overall. So, yeah, so the, yeah, the operating margin, I'll get the figure in a minute, but anyway, Obviously stellar. And I think the other point, when you look at the competition, Disney Plus is still operating at a loss. Okay. And Netflix are increasing their lead with regards to subscriber numbers, and Disney now are having to cut costs and they're having to sell or license some of their content. To Netflix, right?

So, so, so here in— I think it's the key to, to Netflix in the future. I think there's a few different things that they need to do, and I think that licensing thing is really interesting because their, their stock does command a premium relative to rivals. That being, I think they trade nearly 30 times their 12-month forward earnings. Walt Disney's like 20. Something like that. So what justifies that valuation? And what I was reading is that analysts were talking about the ongoing push to profitability at other streaming firms will force them to license more titles to Netflix, which may help them drive further. You're just basically then stealing their content. You, you, you almost, you've almost doubled down and you're so aggressive in the new content creation. They just cannot compete and therefore you just crush them in a very ultra-aggressive strategy. So that was one thing. The other thing is managing the forward-looking future of what can, how can we capture more growth and continuous growth? Video games and live programming. Yeah, that was the other thing. Video games, we've spoken about maybe 6, 7 months ago, I'm gonna talk about live programming. And I think that's the natural thing for me because I'm a normal consumer. I have Sky TV and it sickens me how much it costs because all I wanna do is watch some NBA basketball and then they've just gone and got rid of it. And now I have to watch Premiership football and I'm sick of it because when you pay for Sky and it's like 80, 90 quid a month and 70% of that stickiness or the value of your subscription is Sky Sports. 'Cause without Sky Sports, it's dramatically cheaper. Yeah. And then you're paying 10 quid for Netflix, for example.

Yeah.

So live programming, and the thing that came out this week alongside the earnings was Netflix has agreed to pay $5 billion to screen WWE's Raw. Which is one of the flagship titles out of wrestling.

Yeah.

And it's their first big move into live events. And I think this is really interesting from a content strategy perspective because one of the things that not only are you buying this community that's in the 100 million plus viewership, particularly North America, and at a time in the macro space where confidence is returning as well from a consumer base level. But porting the drama of the WWE characters into a documentary format. Some of the most successful original Netflix content has been taking sports.

Yeah.

And going behind the scenes and going into individual characters. And then just like you do with the Star Wars saga, when you spin off the different characters into sub-series. That's exactly what I've tried to do with sports and sports personalities that you could now do with wrestling. And wrestling is full of larger than life characters that most people know. The main one is tied into this deal was Dwayne 'The Rock' Johnson, who through, I think the company, I can't remember what they're called, TKO, I think he's managed to engineer some skin in that game where he's actually sold all of his The Rock rights, image rights, name rights, everything within like a 10-year deal, similar to the private equity firm that did with Enrique. So he, his upside could be in the north of $50 million on the back of this. And in 2023, Dwayne Johnson only earned half a million. So part of this, I think, and you know, his, just him alone, his Instagram following, I think it's 400 million. Anthony Cheung. He's like one of the top ones. But yeah, if you think about the Formula 1 Drive to Survive, there's the tennis one. Drive to Survive is consistently ranked in Netflix's top 10. It's one of the most binge-worthy measured content pieces that they have. So I know wrestling is not for everyone, but I think it was quite a neat move to go into a fairly matured marketplace in live entertainment, which I think is, you know, there's one thing like Tesla talking about AI and robotics and all, okay, they have this robot that let's look, let's be frank, it's naff at this point. It could be something interesting in the future. Yeah. But you've got to deliver. But at the moment, how do you deliver on live programming? Well, live programming is not really so much as you've got to create it. You just need to own the right to be able to show it. It's a much easier route to the outcome, if you like. Video games, a little bit different. There's this whole kind of integration software. There's, you know, it's more complicated, I'd say. So yeah, I thought, I thought that was interesting as well with Netflix this week. It's probably helped.

Yeah. And I, I think the other point, they've built this moat now Because basically, as I said, they spent an absolute fortune on content when interest rates were at zero and they debt-fueled it and they were able to borrow huge sums and invest aggressively. Now they've built their original content, but now interest rates are higher. There's no way they could do the same strategy now. That they did 4 years ago. Literally no way. Absolutely impossible. Point being then, the competition, well, they can't do it now either. And so from an interest rate point of view, yeah, they really took advantage. I'm not saying they were geniuses and knew that interest rates were going to go up and right quick, let's borrow huge sums now. I don't think that was the strategy. It's just worked out hugely in their favor. And so they've become this dominant player with the kind of, it's almost like the ladder's been kicked out underneath them now that debt costs a lot. And so it's just hard for the, hard to catch.

So to finish, they were trading at, I think you said like 230 pre-COVID, they dropped to what, 170, 180, they rose to 680. What are they today?

Uh, 5.62 as of the close last night.

They almost double what they were pre-pandemic then at this point.

Yes. And they're not far— they, they've only traded at a higher share price, um, during a 3, 4 month period in their history have they traded at a higher price than this, and that was the back end of 2021. When we had the COVID bubble in some of these stocks. So it looks like they're marching back to test their highs. Their highs was at $6.89. So yeah, it looks like probably this year, but this going on the evidence we've just seen in their earnings report, then there's a decent chance they'll look at retesting that COVID high. So yeah, another great turnaround story. I mean, it really is.

Cool. Well, we'll wrap it up there. Thanks very much for your time, Piers. And yeah, any questions at all, feel free to drop a comment wherever we share the episode. And yeah, we'll look forward to the next conversation next week. Have a great weekend, everyone. Yep.

Have a good weekend. See ya.