Why Ramsay is just the tip of the iceberg & Netflix headlines early results from US earnings season

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you are an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:00:32] Good Bryce Great to be with you for another episode. An exciting week for us here at Equity Mates and an exciting episode coming up. 

Bryce: [00:00:39] Yes, it is an incredibly exciting week. We launched The Dive.

Alec: [00:00:45] We did a lot of work went into this. A lot of work will continue to go into it because we're doing three episodes a week, which is the most frequent we've done. Is that how you say it? We're doing. Equity Mates takes on business news. We think business is this incredibly inspiring and interesting and sometimes entertaining world of big people and big companies working on hard problems. And we don't think financial news does a great job of telling that story. No, we think the day to day movement of indexes and commodity prices might matter to some people, but for most people, it sort of turns them off and pushes them away. And it doesn't give what matters to most investors. That's it. And so we want to do the business news podcast that we want to listen to. And we've launched with five episodes. We hope people have listened. If you haven't go and have a listen, we had a lot of fun making it and we hope you'll enjoy it because at the end of the day, who says business news needs to be on business 

Bryce: [00:01:53] and not me? Ren, that's for sure. And it's not just you and I behind the mic. We are very excited that Sascha, our producer head of production here, is actually hosting the show. And we've got a rotating line-up of hosts with her Darcy yourself, myself. And of course, we'll be bringing in some experts every now and then to help us unpack the big stories. When you've got the likes of Elon Musk roaming around in the world of business, there's always something entertaining to talk about. 

Alec: [00:02:21] So that's right. That's right. So look, go have a listen. That's going to be broader business. Equity Mates is going to be focussed on investing. So Bryce what we got today? 

Bryce: [00:02:33] Well, today, Ren, we're going to be having a look at where private equity is throwing their cash, particularly here in Australia, some big deals being done by some of the world's biggest private equity firms. And then after the break, we'll be having a look at the news of Netflix and going around and checking out what's been going on as earnings season kicks off in the US. Now we do usually focus on the big tech companies. We've chosen some companies that we wouldn't otherwise necessarily always talk about having a look at the impact of inflation on some of them and of course, closing out with a bit about Tesla.

Alec: [00:03:09] So, yeah, so you say that we're not going to do all the big tech companies? And then what's reporting saying that Tesla, you were not to all the big tech companies, but we're going to focus on Netflix and Tesla. Netflix not as big as it used to be, as big as it used to be, not as big as it used to be. But look, it's a lot of individual companies to talk about. And let's start at home in Australia. And the news of the week, the biggest leveraged buyout in Australian history or by a global private equity firm in Australian history, is on the table. KKR, the American private equity firm, is looking to buy Ramsay. Yeah, ASX, ticker R.H., say it is Australia's biggest hospital operator, a big healthcare player, not just in Australia. It actually only one third of its revenue comes from Australia. Its biggest market in terms of revenue is Europe. And KKR sniffing around. They are 

Bryce: [00:04:06] sniffing around. Ramsay Health Care eighteen point three billion market cap But they've put a pretty juicy offer on the table. They've produced a bid at eighty eight dollars a share now. At the time, Ramsay were trading at what? Sixty four bucks? Yeah. So a pretty decent premium there for shareholders. 

Alec: [00:04:23] Yeah. 

Bryce: [00:04:24] And obviously, as a result, Ramsay shot up about 24 per cent 

Alec: [00:04:28] is a bid that is ongoing and the Ramsay Foundation, said Paul Ramsay, the founder is dead, but the Ramsay Foundation owns 20 per cent of Ramsay Health Care. They are reportedly, according to The Australian Financial Review, reportedly supportive of the takeover. So if a big shareholder with 20 per cent is supportive, KKR probably have the odds in their favour. Yeah, especially with such a juicy bid price, but we wait and see. But look, that's not really the story as we say it like. That's what a lot of the focus has been on this week. But there's a bigger story that we wanted to unpack, which is that global private equity has turned its attention in a big way to Australia and especially after a pretty weak 2020 one, which is interesting because did you hear like we've got? It's that lawyers or, you know, like we just, you know, we sort of finance adjacent here at Equity Mates. Everyone was talking about how big an M&A year last year was. I feel like every year a big M&A, always a big issue in M&A or big year coming up. You're marrying into M&A royalty, so you'll hear all about it. 

Bryce: [00:05:36] Yeah, I feel like it's always a big year, but it's yeah, I have heard that. 

Alec: [00:05:42] Yeah. But the interesting thing was apparently last year for global private equity, there was only $1 billion plus buyout in Australia. KKR bought probe six. You had a probe said no later. It's the largest provider of outsourced customer experience and business process outsourcing services in Australia and New Zealand. Okay, so that was a billion dollar plus deal. There are a few that were a bit smaller than a billion BGH bought Village Roadshow. I do remember that one. Yeah, Village Roadshow, which has a whole bunch of theme parks and stuff under it. Don't think of it as just the cinema. Yes. But if you're going to say one company that got hurt by Covid, it's theme park and cinema operator and also quadrant bought Affinity Education Group, I think they were both about half a billion dollar deals, but there were a lot of near misses. Acutely tried to Buy Eiris Ticket IRA about TPG Capital tried to buy Smart Group a bit over a billion dollar market cap. BGH tried to buy Hanson Technologies. Carlyle tried to buy link work twice. So they're all still ASX listed companies because those deals fell through. 

Bryce: [00:06:53] It's so it's not like private equity wasn't trying. 

Alec: [00:06:56] No, no. Those were some pretty hefty, hefty deals there. I feel like in private equity, there's not a lot of points for trying. No, this time you have to get the deal on. You don't get the deal. It's pretty cutthroat. The story? So Ramsay, you know, let's assume that Ramsay's balance of probabilities likely to go through. Yeah. Takes one of our big health care companies off the public boards. Yes, and into private hands. But look, that's just the tip of the iceberg, I think is the key thing. But the key takeaway from this that a lot of private equity are trying to take a lot of other big companies off the boards. Yeah, it's pretty frustrating, but I think we'll get to that in a moment. We'll get to that in a moment.

Bryce: [00:07:37] So what some numbers. Between 2000 and 2020, the number of companies owned by private equity has grown five times from 1700 to 8500 globally. Globally, yeah. And at the same time, and we've spoken about this a number of times on the show, the number of publicly listed companies has halved three six thousand four hundred down to three thousand six hundred. Certainly happening here in Australia and over in the states. So opportunity for us retail investors 

Alec: [00:08:06] getting smaller and getting smaller. Yeah, yeah, which is not my first priority. And look, the driver of that is more and more money is going to private equity. So for private equity, are these big pools of money essentially that from institutions, endowments, high net worth individuals, and then these private equity companies have to go and find a way to deploy that money? 7.2 trillion assets under management today estimated to reach twelve point nine trillion by 2025. Wow. And so this is a story that we say in private equity. We see it in venture capital as well. Just more and more money needs to then get deployed because if I am the Yale Endowment or the Harvard Endowment and I give a private equity player money, I expect that money to be deployed. Yeah, sure. You know, want I just said, you need to go and create an opportunity because, yeah, I can hold that in cash. I give it to you to work it. 

Bryce: [00:09:03] Yeah. And not only work it, but they want the uber like return.

Alec: [00:09:06] Yeah, yeah.

Bryce: [00:09:06] And that's an incredible $7 trillion assets under management expected to hit almost thirteen, so an additional $6 trillion in the next three years. 

Alec: [00:09:15] Yeah. Chase. Yeah. So we spoke to Chris Massey from Montauk last year for ASX week. That episode will be in our feed on our website. And he was speaking about the opportunity in private equity. Yeah, they're super bullish. And they spoke about how it was a real winner. Take most market. They've identified the top five KKR, Blackstone, Carlyle, Apollo, Aries that owned twenty nine percent of the market. And then there's eleven thousand other private equity players that make up the long tail chain. Good news is and we'll get to this at the end. Good news. All those five are publicly listed. Yeah, so they might be taking companies off the boards, but I guess you could say he can get exposure through those companies. Not saying it wasn't 

Bryce: [00:09:58] that one taker were doing was they were investing in these companies. 

Alec: [00:10:01] Yeah, yeah, yeah. But let's talk about what's happening in Australia because this is a really interesting story. So Ramsay gets the headlines. RHC Australia's biggest hospital operator, eighteen point three billion dollar market cap it's going to. Probably get taken off and shareholders well, who own Ramsay will get paid in cash $88 a share. It's not the only one, though. So the next big name, I think, has to be crown. 

Bryce: [00:10:26] Absolutely. This one's been going on for ages. I think Blackstone have put in multiple bids. 

Alec: [00:10:31] Yeah, I think it's going for like 12 months. 

Bryce: [00:10:33] Yeah, an old mate packer. I feel like he's at a point now where he's ready to get 

Alec: [00:10:37] rid of it. So for people who haven't heard of Crown Australia's biggest casino operator, it's not because top two with Sky. Yeah, well, probably biggest. Yeah, yeah, definitely. Because maybe I'm going to caveat with asterisk without Googling big figures because it's got so it's got the new casino for high rollers in Sydney, Melbourne, and then it's got Melbourne's casino and that's got a big one over in Perth as well. Yeah, yeah, yeah. So massive casino operator has been put through the absolute wringer over the past year or so. I think three royal commissions in different so yeah, so many and I believe all of them royal commissions or enquiries, and I believe all of them found that Crown wasn't fit to have a casino licence. Yeah. Well, they're going to strip them of it. Yeah. Victoria, New South Wales and WA Western Australia. Yeah, I think all concluded that. And so Blackstone was amongst a number of buyers, but I think they've won or they're very close to winning. Yeah. Thirteen point ten a share. So similar story with Ramsay Blackstone hopes to take crown off the ASX boards. Yeah, pay existing Crown shareholders $13. Ten a share. That's another company that you won't be able to invest, invest in. Absolutely unrelated, but just to show private equity are throwing their cash around. Blackstone's also the biggest buyer and biggest seller of Australian property. No way. Last year they did 3-Point. They bought 3.6 billion and they sold five point commercial. Well, yeah, I don't think they're buying residential houses. 

Bryce: [00:12:09] I mean, I wouldn't be 

Alec: [00:12:10] surprised of the market. But yeah, so everyone reckons that Blackstone are getting a massive discount. Well, yeah, I have published the numbers. So Blackstone are paying eight point nine billion. The IFR suggest that Crown is worth between nine point four and ten point six. 

Bryce: [00:12:30] Yeah, and this is after, I'm pretty sure. So they came in at 13 10 per share for the bid, but that was, I think their original bid was like 12, 40 or something. So they've they've obviously come off of it still feels like they, according to some of the analysts, getting it, getting a decent deal. Hmm. It's been going on for 

Alec: [00:12:46] ages, but let's talk about some of it. We're not done yet. Let's talk about some other companies that have been taken off the boards by private equity this year after a week. Twenty twenty one. Another big company that I think we've done an episode on before because we didn't industry Deep Dive on IVF. So this is Australia's largest IVF provider virtuous, virtuous, virtuous, virtuous health ASX, ticker VRT. They've also been agreed to be acquired by a European private equity player. Cup vest There was a bit of a bidding war. BGH Capital were also interested. The last couple of months there's been a bit of a bidding war. BGH, his first bid was seven point ten a share cut. Vist have emerged victorious at eight point twenty five a share. Interesting. Yeah

Bryce: [00:13:36] First European player. 

Alec: [00:13:37] Yeah, apparently people were surprised because this private. I never heard of them, but apparently they don't. They don't come down under much. So Australia, all these other 

Bryce: [00:13:45] guys haven't been coming it down a lot either, but it's finally sort 

Alec: [00:13:48] of getting mentors. 

Bryce: [00:13:50] Well, I feel like, you know, five years ago, I I'm just speaking from personal experience. You haven't heard much of KKR or Blackstone kicking around here. I thought, 

Alec: [00:13:58] well, in 2018, KKR bought MYOB. They backed Green Cross, Brookfield bought Healthscope and Affinity Equity Partners locked up Scottish Pacific. Oh, in 2008. Yeah, not look sorry. I just did have that. The reason that I had that handy, that's not just something that I knew. Yeah, of course, of course, is because apparently, you know, when there's a sell off towards the end of 2018. Mm-Hmm. Apparently, private equity got very interested and obviously we've sort of been in a bit of a market sell off to start 2022 when I was shopping, and so ties are getting key to left, right and centre. Wow. And let's keep rolling because we're ripping through the time on this episode and we still got a lot more ties that are being kicked. So another company that has agreed to a deal unity group, yeah, familiar with them.

Bryce: [00:14:54] I've heard of them. 

Alec: [00:14:55] I think a few experts that we've spoken to on the variety of shows that we do have spoken about it. It's like a broadband, always a lot of like fibre, cable and yeah, broadband infrastructure. ASX Typekit, UW Well, they have agreed to a $3.6 billion takeover. From Brookfield and a New Zealand private equity player, Morrison and Co. Apparently Macquarie were also interested in having a crack there. Another billion dollar plus private equity deal and another Australian listed company taken off the board. Damn it. Well, to be honest, I'm not a 

Bryce: [00:15:32] shareholder in any of these, so I'm not affecting me right now. What about you? 

Alec: [00:15:37] What if we got a crown crown? No, Vertis, no unity. No. So well, actually, no. Sorry, you're wrong. We're both shareholders in Ramsey and Crown or ASX 200. Yes, sure. 

Bryce: [00:15:50] But we know that they're not in what is a 50 per cent of ASX is the top 10 miners and banks or whatever it may be. So knocking him out of

Alec: [00:15:58] shock probably matters to some. But there's one company that was going to go on the boards La Trobe Financial. You've heard of that? Yeah, big time. Yeah. So they were owned by Blackstone. The private equity play of Blackstone were looking at floating them on the ASX. But before they could get onto the ASX, Brookfield snapped them up for one point six billion. So La Trobe Financial, ah, I think they're Australia's largest or one of Australia's largest non-bank lenders. Yeah. They also have an asset management arm with $12 billion asset under management. Just a casual. Yeah. Yeah, they weren't quite acquired from public float as a public company, but they were going to be public and well, reportedly we're going to be public. And then they got acquired before they could backed it.

Bryce: [00:16:49] You've got here, Bain Capital looking after looking at angel payments. 

Alec: [00:16:53] Yes. So they're still listed. AML is still listed. So now we get into ties that were kicked but not driven away. How do you extend that metaphor? 

Bryce: [00:17:03] A. It's a company that's actually spoken a fair bit about it now in our community. 

Alec: [00:17:07] Yeah, they are 

Bryce: [00:17:08] a for those that are unaware, they're Aussie listed payments player around a billion dollars and they offer prepaid payment services in Australia, Europe and North America. In other words, they do gift cards. 

Alec: [00:17:21] It actually took me a minute to figure out what they meant by prepaid payment services. I was like, Is this another payments start up? Yeah, yeah. You know, like you can Afterpay or you can prepay. Yeah, but no gift cards. So. 

Bryce: [00:17:34] So they've been smashed over the last 12 months. I wouldn't say smashed, but pretty significant. Fall 50 percent in fall in share price over the last 12 months. So they're looking a bit vulnerable. And Bain Capital were interested in buying them out, but it looks like that deal has lost momentum. So for all those AML shareholders out there, it's going to stay on the boards for for the for the meantime, there was a 

Alec: [00:18:00] week in May in 2021 where AML fell like 4.5 percent. Mm-Hmm. I don't know what happened that way. This like last year. Yeah. 

Bryce: [00:18:09] And it just hasn't recovered, has it? No, I think I remember that got absolutely hammered. 

Alec: [00:18:12] Yeah. So Bain were having a look, but doesn't look like anything's going to happen. But again, tyres being kicked last one to talk about. I think people get the picture. Private equity. The Ramsey story is the story of the moment, but there's a bigger story at play here. There's massive pools of capital that need to find a home, and many of them are finding a home in Australia. The last one is a company that I've spoken about a lot, that I worked with. Cleanaway, yes, saw them this morning hanging out in our laneway, picking up the garbage. Nice. Yeah, $6.5 billion waste giant Australia's largest waste company. Obviously not as big as the Veolia is and Suez is of the world, but still significant. Still significant. KKR, the KKR that has come up a couple of times in this episode, they are looking at it reportedly looking at buying Cleanaway. Potentially Cleanaway are open to it. They're interested. Also, Cleanaway share price has retreated. Yeah, like full credit from apparently Cleanaway would be looking for about a $10 billion sales price, so like a meaningful premium to what they're trading at now. But it's important to know that Cleanaway and KKR have had a will. They won't. They love affair for about ten years now. KKR first tried to buy Cleanaway in 2011 before it was even called Cleanaway. It was still called Transpacific back then, but yeah, apparently KKR kicking some tires of some big waste trucks at the moment. 

Bryce: [00:19:41] Jay, what have what a long courting session? 

Alec: [00:19:45] Yeah, between the two, 

Bryce: [00:19:47] I feel like it. At some stage. It's a business I would be interested in taking off the table if I was in pay. 

Alec: [00:19:54] I think there's like the incredibly capital intensive businesses and they're building, you know, big recycling facilities. But importantly and I think why people are so interested in waste at the moment. Why Veolia and Suez were looking at merging is because scale matters here, because waste to energy is the next big thing in. Waste and inade a heap of waste to days base, but they can become really productive assets. Yeah, so expensive to build in a lot of volume in, but you can get a decent return, but they essentially burn waste to create energy. Yeah, it's not exactly the best use of resource because it's a better it's better than just putting it in a hole. But to produce something, you've got to mine the raw ingredients, manufacture it, ship it, sell it, use it, throw it out. You want to save that resource and recycle rather than burn it for energy. So it's not great, but waste to energy overseas is a lot more mature. Yeah. Yeah, yeah. In Australia, yeah. I'm not sure if they still do. But there was. They probably do. Germany would buy Italian general waste and to burn it to because I needed yeah. Yeah. So yeah, there's a bunch of waste to energy projects being built in Sydney, Melbourne, Perth, Queensland, Cleanaway are involved in a number of them. And so I think that's probably where the interest is coming from. But again, it's just another company that private equity is looking to take away from us poor retail investors. Yeah. Well, that's kind of 

Bryce: [00:21:27] the that's kind of the takeaway from this whole thing. Ren is we say we see fewer and fewer publicly listed companies, more and more companies being scooped up by private equity, more and more companies also staying private for longer or longer periods of time. The access that the everyday retailer is getting to some of these companies is the opportunity sets becoming smaller and smaller. So look, it's it's obviously great to say success stories in Australia. If these companies and if you were shareholders or still our shareholders in some of these companies, you might be handsomely rewarded with some juicy premiums when these guys do come in and take it off the table. But yeah, it's it's an interesting trend. So much cash out there. 

Alec: [00:22:11] So it's never been a better time to be a founder like venture capital has so much money, private equity has so much money and they all have mandates that they need to invest that money. And so I guess you could say more companies are getting funded. They're creating more products and services that help consumers. So maybe it's not good for retail investors, but maybe in a roundabout way, it's good for consumers,

Alec: [00:22:35] maybe private equity. If you want a marketing guy or what it's 

Bryce: [00:22:40] also done is taken the whole the concept of a unicorn and it just being this really rare and really difficult moment to get to as a business valuation. Every second company these days seems to be hitting unicorn status because there's so much money out there. 

Alec: [00:22:58] Well, then then they coined the term decker con, but then 10 billion is now a pretty like. It's impressive, very impressive, but it's not unique. Yeah, that's so. And so now they're doing senti cons $100 bill and then you've got really stripe space x ByteDance, I think, are probably the three. I can't think of any more top of my head. 

Bryce: [00:23:22] A coin is the new unicorn. 

Alec: [00:23:23] No setlists, doesn't it? SantaCon Santaco and something to aim for. So look to close to the private equity conversation. Whilst these companies are gobbling up many of these well-known companies, they are. Many of them are listed. The big private equity players are listed so you can do your research on them. The important caveat is that any one acquisition doesn't really move the needle when you know Blackstone buying crown. That's a big deal for us in Australia. Looking at our biggest casino operator getting taken off the board, Bryce needs to figure out where it's going to spend his Saturday nights now. But Blackstone probably has like 700 billion assets under management. 650 did just look it up. Yeah, you just knew that. I just knew that six hundred and fifty billion. So like, it's a it's a it's not wrong. It's not. Yeah, yeah, yeah. 

Alec: [00:24:12] But if you want to do your research on these companies, Blackstone is listed in the US. Pay X is the Tik-tok KKR. What do you reckon that ticker is? KKR Yeah. Carlyle also in the US secure Apollo Apollo, Aries Air. So they were the big five that Chris from Muntaka talk to us about in that episode last year, so you can go and check out that episode to read more about them, to hear more about them. The other big one that we mentioned a few times Brookfield listed in Canada, ticker Bay Brookfield. You may remember also tried to take another company off the boards in Australia with Mike Cannon-Brookes. 

Bryce: [00:24:53] Yeah, the AGL AGL.

Alec: [00:24:56] Yeah, so that one fell, but that was another that would have been private equity push. So look long in the short. Well, we can't really say long in the short of it because we're speaking for like twenty five minutes. The longer the longer the private equity are sniffing around, the longer 

Bryce: [00:25:11] it's become a 

Alec: [00:25:12] founder and the short of it that. The shorter the short of it is, become a founder, get listed on the ASX and then get acquired by private equity. True, true. 

Bryce: [00:25:21] Yeah. Well, it's interesting once so much cash out there. And yeah, hopefully there'll be some products available at some someday where we as retailers can get access to, well, you can, I guess, 

Alec: [00:25:31] through the list you can't through this list of 

Bryce: [00:25:32] companies. So love it. Nice one. So Ren. After the break, we're going to take a look at what's happening in earnings season that's just kicked off over in the US and go some of the go through some of the big players over there. So we'll take a quick break to hear from our sponsors and then pick it up. So Ren, the big news for last week was, and I know I did caveat by saying, we're not going to talk about the traditional tech companies that we always do. 

Alec: [00:25:59] We're going to start. I think I think we covered a number of companies that we don't talk about race true earlier section. So let's bring it back. So look, we're going to talk about Netflix and people might think we're going to talk about the 30 percent price decline that Netflix had. We're actually not. We're going to talk. We're going to celebrate Price's most successful tik-tok ever. He did an update on Netflix, and it now holds the record as his best tik-tok go over to our Tik-tok account.And what best tik-tok head over. Check it out. Let us see your feedback. So thanks, Netflix. Thanks, Netflix, for 

Bryce: [00:26:37] helping us deliver some incredible content. No, but look, yeah. Look, we could just go straight in to the results of Netflix and you know how the share price has tumbled, but I wanted to kind of bring it back a level Ren. You know, we speak a fair bit about investment thesis and the importance of having an investment thesis, writing your thesis down, understanding why you're investing in a company. And we've been fortunate enough to speak to some of Australia's best investors and also some of the best investors from around the world. And we've heard a number of different investment thesis for Netflix. And I feel like for some of those guys, that thesis is now broken. Hear me out and please add to this if you think I've missed any key points, but some of the main reasons we've heard some of our expert investors believe that Netflix is or was a good investment. So things like everyone has Netflix as their primary streaming service, so it's kind of like Netflix is always on every TV. And then after that, you've either got a mix of Disney Plus or whatever it may be. So Netflix should always be like the dominant player in streaming. Huge addressable market was another reason, and they sort of believe that the penetration of U.S. households is still quite small relative to how many people have the ability to have streaming services. So the potential for growth was massive. And then also the fact that they felt there was no threat from competition given how much money Netflix was throwing at new content, they were just literally outspending their competition. We know it's a race for content, and with that came good actors and high profile names and Oscar nominations and everything that sort of made it the premier content player. Anything that you can kind of think of that other investors would would throw in the investment thesis for Netflix 

Alec: [00:28:29] Best in class management team. 

Bryce: [00:28:31] best in class management. 

Alec: [00:28:32] Thank you. You're going to back anyone to stay ahead of the trend. It's Reed Hastings, Reed Hastings. 

Bryce: [00:28:35] That's a good one. So a lot of reasons that you could say, Yeah, that makes sense. Netflix great investment 200 billion dollar company. We're going to a trillion plus whatever it may be, but the glory days could be over. 

Alec: [00:28:49] Yes. 

Bryce: [00:28:51] Last quarter Q3, we saw that Netflix subscriber growth slowed and that the share price sort of reacted and everyone sort of got a bit worried. Reed Hastings came out and said, nothing to worry about here. Competition is starting to heat up a bit for a long time. Reed Hastings failed to acknowledge competition altogether other than Slate.

Alec: [00:29:11] What are you talking about? He was the most acutely aware of what he was actually competing against, which is everything. 

Bryce: [00:29:18] They never acknowledged that competition raid was always like, sleep is our biggest competitor. The attention? Yeah, yeah. But it was never sort of like, yeah, like coming out and saying, we're threatened by Disney or anything like that. It's it's widely written that they have they haven't really acknowledged how many the intensity of competition, 

Alec: [00:29:38] how many CEOs come out in the like. You know, how much to Brabender actually come out and say, I'm threatened by Kohl's or Aldi is really threatening me. Like, Is that? 

Bryce: [00:29:48] Well, I think that was Rookie of first first year I was at graduate at Woolworth's. They literally said, Ali is not a competitor.

Alec: [00:29:54] That's 15 rookie. That's the dumbest thing I've ever heard. I know, I know. 

Bryce: [00:30:00] But anyway, rookie, so it's all sort of come crashing down this reporting season. Last week, Netflix came out and said that for the first time in 10 years, they've actually lost subscribers 200000 net losses, and that's the first time since 2011 that they've lost subscribers. More worryingly, though, is that they expect to lose another two million subscribers this current quarter. Now, some of the main drivers for this, obviously, they've pulled out of Russia, so that was 700000 accounts lost and they lost 600000 in North America as well. Why it's a 200k net loss is because Asia was their only growing market, and they put on out just over a million subscribers in Asia. So net loss of 200k and the stock absolutely got pumped down 40 percent. But this kind of brings me back to the whole world, has the investment thesis broken for some of the big investors that we have been speaking to massive increase in competition and Netflix have absolutely acknowledged this. It's a huge saturation in some of the biggest markets. You think Disney, Warner Brothers, Paramount and then even Tik-tok YouTube, like, yeah, it's on. 

Alec: [00:31:12] If you're not talking to talking YouTube, then you're being naive. 

Bryce: [00:31:16] Yeah, yeah. Our attention has to go somewhere more and more people are turning to the YouTube's in the tik-tok and spending less time on on your traditional forms of entertainment and also non-paying subs. I found this fascinating. There are 100 million households that use Netflix that don't pay for it. So they have to 

Alec: [00:31:39] because it's like you get even without the whole password sharing thing, you get five accounts. 

Bryce: [00:31:44] I thought about this last night. I don't think that it counts.

Alec: [00:31:47] I think, OK, so like my housemate uses his parents Netflix, but has like an account there. Yeah. Does that count in that number? 

Bryce: [00:31:54] Know you'll like your payment allows for that. 

Alec: [00:31:57] So I think it's still paying. So yeah, 

Bryce: [00:31:59] I think it's me just literally giving you my log in.

Alec: [00:32:03] You say, you know, creating account, but I think I'm really going to change. I would never give you my log in because it would just ruin my recommendation. I don't want to watch your Scandi crime dramas. 

Bryce: [00:32:14] I use one of my mates, Stan accounts. And exactly that's happening. Like, I think we were both watching the same show at the same time. 

Alec: [00:32:20] That's OK. And so I go on and be like, Oh, look, I wasn't up to this plot. Yeah, yeah, it was awful.

Bryce: [00:32:26] So Netflix have acknowledged this as well, and they're going to try and do something about it, get these 100 million households actually paying. They've also raised their prices, which is something that they're doing to try and counteract what's going on. But anyway, it was just a good reminder for me that faces do break. The drain doesn't last forever and it can snap pretty quickly. This has happened in the space of sort of four months. And what was once touted as a $1 billion company is now absolutely no. 

Alec: [00:32:58] It might be a billion dollar company. Sorry, a trillion. Really? Yeah, it might go to a billion dollars. So I want to preface this with I have never owned Netflix. I really know I do.

Bryce: [00:33:10] You're one of the hundred million or, you know, no, your honour. 

Alec: [00:33:12] I'm talking about the show. I was like, Well, that's really surprising. I definitely watch Netflix, so I've never owned Netflix. I don't plan on getting in anytime soon. But let me just make the counter case. I think people have overreacted here. OK, so the share price fell about 30 percent on the back of a 200000 net subscriber loss. When they pulled out of, they opted to pull out of Russia. Yeah, and they lost 700000 subscribers on the back of that. Yeah. So if Russia had invaded Ukraine and Netflix had stayed in Russia, they would have had a $500000 500000 subscriber increase for the quarter because that's 700000 Russian. Yeah, movement wouldn't have happened. Yeah. So that's point one.

Bryce: [00:33:59] The guidance from them, though, was a 2.6 million increase. So it still would have got smashed. 

Alec: [00:34:05] So the second thing is, if you go back maybe a month, the biggest critique of Netflix is was that the U.S. and Canada was saturated, that everyone who was going to get a Netflix account had a Netflix account. Obviously, then the password sharing thing went up. And I think that's probably why, because they were so saturated in that major market. And the biggest critique was they couldn't add subscribers in Asia because it was too expensive as a proportion of income. Netflix subscriptions just didn't make sense compared to in the U.S. So where we are in Australia, they added a million subscribers in Asia. That's a really good response to that criticism that they were getting levelled out

Bryce: [00:34:48] a couple of months ago. Yeah, it's a great a great to both those points, still well below what even Netflix assumed would happen. So I think adding a million in Asia is probably like adding 10000 in Australia kind of thing. Like it's just 

Alec: [00:35:01] it's it's a good it's a good 

Bryce: [00:35:04] response, but I think it was well below expectation. But interesting on that point around cost. One thing that they are now looking to do is bring in an ad supported model so that you don't have to pay a full subscription to avoid ads. If you're willing to watch ads, then your subscription price will drop. 

Alec: [00:35:24] Yeah, which I think is smart as long as people get the choice. Yeah, yeah. And I would pay to not have the ads, for sure. Yeah, YouTube is killing me at the moment with the amount of ads, so I'm probably just going to upgrade to YouTube Premium. So well done. Both done it again. So, OK. So first thing was the loss was that Russia factor? Yeah. The second thing was they responded to their Asian criticism and like. If you think about where the next leg of growth comes from, Netflix, it's in terms of users, it's Asia. The third thing is just zoom out a little bit like if you look at a chart of the monthly subscribers, it still looks incredible. Like with where they're at now is probably like back to like halfway through 2021 or something. And like, they brought forward a lot of demand because of Covid. I know that the share price had a lot of future growth built into it, and there was expectations. And though those models now change because you can't keep projecting growth into the future, if they're losing subscribers and stuff like that, I get it. But it's like, is Netflix really a third less valuable than it was a few days ago? 

Bryce: [00:36:35] Or is it more in line with its valuation? 

Alec: [00:36:38] Maybe, maybe, yeah. But look, I actually don't believe in Netflix being a trillion dollar company when we spoke to Hamish Douglass. We pushed like we pushed back on him. Yeah, I think everyone is take a deep breath. I think a lot of the things that you started with still hold

Bryce: [00:36:54] a lot of the points, the positives of the thesis. 

Alec: [00:36:57] Yeah. Like Obama, Obama's doing David Attenborough style documentaries on Netflix. No one's going to get rid of their subscription when they've got that. 

Bryce: [00:37:04] Yeah, I think about this, though. Like, if that's what they have to start pulling out now to get people on, like, 

Alec: [00:37:09] how much do you reckon they paid him? I've no idea. I don't have a good meal. Yeah, I guess I as well A.T.M. 

Bryce: [00:37:15] That's that's pretty significant.

Alec: [00:37:17] Yeah, Bryce. Very significant. Yeah, sorry. If that's the

Bryce: [00:37:21] type of stuff that they have to keep doing to keep up. And then I think, you know, if you do zoom out, a lot of their competitors are growing at a faster rate as well. So that that's kind of something to keep in the back of your mind. 

Alec: [00:37:32] A lot of the commentary has been about just how good Disney is. It is just an incredible business story. Like I remember, maybe like three years ago, like people were questioning Disney's strategy of pulling out of cinemas and going direct to consumer with streaming. And like, they were really, I guess, like vertically integrating themselves and disrupt internally disrupting themselves. Yeah, that's the kind of case study that will be studied in business schools. Iger. Bob Iger. What a weapon

Bryce: [00:37:58] Anyway, that that's that's Netflix. Obviously, a couple of the other streaming streaming companies have been rolled up into the fallout from Netflix. We saw Spotify down 10 percent overnight at time of recording on the 21st of April. We saw Roku down and we saw Disney also down. Not surprising as investors think that similar sort of vibe might hit these guys. But yeah, 

Alec: [00:38:25] the one thing that I think is a watch out in this industry is do we start to see consolidation at some point because I feel like this is like this Netflix subscriber sell off. This subscriber reduction is a canary in the coal mine, for there's too many streaming services. Yeah. And I feel like at some point someone has to get the chequebook out and start consolidating. 

Bryce: [00:38:46] Disney buys Netflix Bold Prediction 2023. Wow. 

Alec: [00:38:50] That would be huge. I feel like competition regulators wouldn't or Apple through Apple buys Netflix. Yeah, but every time the tech companies price falls, it's like Will Apple by Zoom still sell it on? Will Apple? And I haven't done it anywhere near what Apple buys zip. Do you mean like nothing? Or is it all right? Well, look, it's earnings season. I'm mindful of the time. Let's just rip through a few ones. Bryce I know you're the retail whisperer. You love a retail story. So I wanted to tell you a story of the retail meme stock Bed Bath and beyond its earnings. So same store sales down 20 percent off. That's tough. Yeah. And their commentary was that an unprecedented amount of inventory is tied up in transit in ports. They just can't get stuff through the supply chain. So that story is still playing out in a big way. But this is a reminder the buy and hold investing doesn't always work, but you need to. The buying and holding individual stocks and buying and holding indexes are two different things. Yeah, yeah. Bed Bath and Beyond $1.6 billion market cap it at one stage had an $18 billion market cap. Well, it last was at one point six billion in 1996. JS yeah, wow. So it's it's it's really hurting. So if you bought and hold up to from one point six in 1996 to eighteen billion, you would have been happy. Yeah, wouldn't have been so happy on the way back to where you started. 

Bryce: [00:40:30] I wonder if this whole supply chain situation is making a lot of these businesses rethink their own supply chain and start doing a bit more vertical integration and really owning a lot more of the end to end. 

Alec: [00:40:43] I think the problem with that is it's not a vertical integration problem. It's not like if I owned the trucks, if I owned. Yeah, ships. It's just like the Port of Los Angeles is backed up so much. But I think a big thing that they are reconsidering is we've sort of lived through a generation of just in time inventory. You want to keep your working capital as low as possible and you want like you don't want stocks sitting in the back of your supermarket. Remember, that was such a big thing at Coles. I was like, How do we have nothing in the back? And it's just like straight onto the shelves, straight onto the shelves. But I think a lot of retailers are now thinking, we need emergency stock. Yeah, big time. And I think Bed Bath and Beyond made it this. This story is an example of that because if you stocks tied up import, you can't get it on the shelf. You same store sales fall, your share price falls. No one is happy you're done. Also, your customers aren't happy because they can't get what they need, and then they probably don't trust you to go back the next time and they go to a competitor. Yeah, that's 

Bryce: [00:41:45] fascinating. All I Ren just to close out to kind of trends that are coming through from reporting season inflation. We speak about companies. If you're thinking about investing during inflation, finding companies that can then have pricing power or have the ability to raise prices in line with inflation, often some of the traditional retailers are in that bucket. The Coles and Woolworths here in Australia, some of the retailers overseas, if if they can raise prices, they will. 

Alec: [00:42:14] That's interesting. I would definitely not have said that there. Anyway, let's let's keep rolling. But like I would say that Coles and Woollies find it really tough to raise prices because the competition is so sharp between them.

Bryce: [00:42:26] Yeah, but they do like it's happening. 

Alec: [00:42:28] Yeah, and especially because Aldi is there as a lower cost alternative. 

Bryce: [00:42:31] They're just that they are raising prices. So, yeah, anyway, and we're seeing it overseas. Johnson and Johnson have reported they're facing big rising costs, obviously due to inflation and the supply constraints that we've spoken about. They've lowered their guidance by $5 billion, but have have indicated that they're going to be raising prices across the board. Another one, Procter & Gamble. I think they're actually over in the UK from memory. They have reported quarterly earnings and revenue that have beat Wall Street expectations. 

Alec: [00:43:01] No, sorry. New York, New York.

Bryce: [00:43:02] All right. And they have suffered from higher commodity prices and freight costs, but they've turned around and have raised their prices and so have been able to meet earnings and revenue expectations. So just something to keep in mind. It's funny 

Alec: [00:43:17] how the inflation like that was the inflation story at the start of the year and everyone and last while as well it's transitory, the supply chains are tangled, you know, ports will get more efficient and will start will get more containers back in a row. All untangle and then oil prices became the inflation story. And that has been the inflation story. But this hasn't untangled. No, you're not going anywhere hasn't untangled at all. 

Bryce: [00:43:40] Yes, I remember speaking to Roger Montgomery Ogbizi late last year, and he was very committed to the idea of it being transitory. So I'd love to get him back on actually to hear his thoughts on how he's thinking about. 

Alec: [00:43:52] Well, you calling him out like that probably isn't a good start. No, no. Pulling him out. I'm not calling you pulled out Hamish Douglass, Roger Montgomery. You want to call out any of the big Australian investors. Interested? Apologies to both of you. So you're actually great supporters of the show. But just to 

Bryce: [00:44:08] just to close at Ren an interesting trend. The big investment banks overseas have all beat expectations in some form, beat revenue, beat profit, but a lot of them have done really well through their trading desks, their equity trading desks over the last quarter, making the most of what has been a pretty volatile market over the last few weeks, few months and all doing really well and subsequently have reported pretty good numbers. So that's just something to keep in mind as well when volatility hits the markets. These big boys go to town and their trading desks get very active and obviously do very well. So keep an eye on those. 

Alec: [00:44:45] Yeah. Nice one. Well, look, I think we probably have given a good nudge in terms of timing today. Thanks for those who stuck around with us. If you want to hear more of our voices, head over to the dive. Well, actually, you won't hear Bryce's voice yet. He's a bit shy to get on. But this one, this episode going out on Monday, 

Bryce: [00:45:03] it'll be out now on Monday. 

Alec: [00:45:04] So actually, Bryce debut episode for the dive will also be out. So plenty more to listen to. Head over. 

Bryce: [00:45:13] Yeah, if you want to know what's going on in the land of On-Demand groceries, think volet, think milk run here in Australia, some big names overseas. 

Alec: [00:45:21] We're unpacking it and just dive. So you head over there, give it a listen. Hopefully you like it. Let us know. And one thing before we go it is Anzac Day here in Australia. So a big thank you to anyone who is listening, who is serving or who has served. We appreciate your service and we we hope you have a good day. So I think that's it. 

Bryce: [00:45:41] Bryce Bryce one Ren will, as always, great to chat and pick it up on Thursday. Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group where on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.