Raphael Stevens

Two of the world’s biggest technology companies, Apple (AAPL) and Amazon (AMZN), are the subjects of fresh Wall Street research. We own shares of both, so we’re breaking down the analyst calls to see how well they gibe with our thinking as we approach their earnings releases next week. Morgan Stanley cautious on Apple ahead of earnings Investors may be getting Amazon’s core retail for free, says Jefferies 1. Morgan Stanley cautious on Apple ahead of earnings The news: One of the Club’s favorite analysts covering Apple expects its third-quarter results to come in lower than the Wall Street consensus when the iPhone maker reports July 28. Morgan Stanley’s Katy Huberty projects Apple to earn $1.10 per share on third-quarter sales of $80.6 billion. That compares to Street estimates of $1.16 per share and $82.5 billion in revenue. The firm also revised its price target to $180 per share, down from $185, and warned of “relatively guarded” macro commentary on the earnings call. Despite Huberty’s near-term caution, she’s hardly telling investors to stay away from the stock. In fact, she told clients to look for opportunities to buy Apple on any “pricing dislocations,” or dips to laypeople. Huberty maintains an overweight rating on the stock. “Apple remains a best of breed consumer electronics company able to invest through cycles, and with 60%+ of revenue more staples-like in nature, strong brand loyalty, and continued product/services innovation, we believe it is better insulated relative to peers during a downturn, which has resulted in 18 points of outperformance (vs. our coverage), on average, late in the economic cycle,” Huberty wrote. She’s referencing Morgan Stanley analysis that found Apple shares, historically, have gained 13% on average late in the economic cycle compared with a decline of 5% for the rest of the firm’s IT hardware companies. Those other companies include Dell Technologies (DELL) and Logitech (LOGI). Our take: This report struck us as a little mixed. But as for what to do with the stock, we hold an outlook similar to Morgan Stanley. As we communicated earlier in July during the Club’s “Monthly Meeting,” we are concerned Apple’s third-quarter results could be weak, which is in line with what Huberty is advising clients. Among our reasons for caution is Apple faced multiple Covid-related challenges in China in its third quarter. Those likely weighed on both supply and demand in the country, which is Apple’s second-biggest end market behind the U.S. All in all, Apple has warned it could see a sales hit between $4 to $8 billion in the third quarter because of supply constraints. Apple shares have had a nice little rally over the past month, up around 16% and outperforming the S & P 500’s nearly 8% gain in the same stretch. We continue to believe this is a name to own, not trade. However, for investors looking to add to their positions, we think it’s prudent to wait for weakness to do so, especially considering the stock’s recent strength and the upcoming earnings print. As Jim Cramer said on “Mad Money” earlier this week , “If you’re thinking about buying something that’s about to report, why not wait until you hear what they have to say?” 2. Investors may be getting Amazon’s core retail for free, says Jefferies The news: Jefferies analyst Brent Thill makes the case that Amazon’s current market valuation ascribes pretty much no value to the company’s core e-commerce operations. He explained his reasoning in a larger note, explaining that he sees Amazon shares “returning to outperformance in [second half of 2022] as top-line accelerates and profit improves, supported by a continuation of attractive growth at the highest margin businesses.” The analyst’s commentary on the retail business was particularly interesting. He arrived there using what’s known in finance as a sum-of-the-parts (SOTP) valuation. It basically values all the different parts of a company individually by applying multiples based on peer businesses, then adds them up to see what the entire enterprise could be worth. Amazon’s current market cap is just over $1.2 trillion. When Jefferies does its sum-of-the-parts valuation for Amazon, the firm determined the non-core retail divisions to be worth nearly $1.2 trillion: about $800 billion for Amazon Web Services, $328 billion for its advertising business and $40 billion for subscription services. “Our SOTP implies the current stock price is ascribing virtually zero value to Core-Retail, which is meaningfully below our Base Case estimate of $287B and results in a $29/share free option at AMZN’s current price,” Jefferies wrote. “This suggests the stock is already pricing-in meaningful headwinds from a recession/cost inflation, limiting downside and creating an attractive risk-reward.” Our take: We’ve warmed up to Amazon shares recently, believing the stock has almost seen enough pain. As we said last week discussing impressive Prime Day sales, we are tempted to upgrade our rating on Amazon from a 2 to 1, meaning we’d be buyers at its current levels. Our logic is not necessarily based on a sum-of-the-parts valuation like Jefferies employed. However, we are both looking closely at the retail side of things for Amazon. Stocks are forward-looking assets, and we think we’re approaching the point where the slowdown in retail sales is fully baked into Amazon shares. Amazon management still has work to do to correct some cost and over-expansion issues, and we should get an update next Thursday, July 28, when the company releases second-quarter earnings. But in general, we’re willing to be patient there. It’s not a one or two week process, and our big-picture reasons for owning Amazon — continued growth of cloud computing, benefiting AWS, and further e-commerce adoption — remain intact. (Jim Cramer’s Charitable Trust is long AAPL and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

China’s smartphone market could decline in the second quarter as the country experiences a resurgence of covid cases, analysts said. But Apple could fare quite well, the analysts said as it continues to attract users in the high-end of the market.
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The Transportation Department recorded 2,413 complaints against U.S. airlines in May compared to only 814 in the same period in 2019.
DOT recorded more complaints and cases of mishandled wheelchairs and bags compared with last year.
On-time arrivals in May 2022 were similar to the same month in 2019.

Travelers at LaGuardia Airport (LGA) in the Queens borough of New York, US, on Friday, July 2, 2022.
Angus Mordant | Bloomberg | Getty Images

Staffing shortages. Delays. Lost luggage. Massive lines. High fares. Air travelers in 2022 have plenty to complain about.
By many measures travel is worse than last year, but here’s how this year’s problems compare with before the pandemic:

The U.S. Department of Transportation recorded 2,413 complaints against U.S. airlines in May, compared with only 814 in the same month of 2019, according to a report published Wednesday.
Complaints relating to flight cancellations, delays and missed connections more than doubled since before the pandemic.
Compliments for these airlines rose to two received in May, up from one in May 2019.

This past May, just 77.2% of flights to U.S. airports arrived on time, down from 77.9% in May of 2019.
These numbers, the latest available, don’t include the chaotic summer rush which has forced airlines like United, Delta and others to trim their schedules. The difficulties also prompted an intervention from the FAA over congestion in some of the country’s busiest airspace. American and United executives will face investors Thursday when they discuss their operations on quarterly earnings calls.
Delta on Wednesday sent members of its frequent flyer program 10,000 miles because of recent disruptions if those customers flights were cancelled or delayed more than three hours for trips from May 1 through the first week week of July.
“While we cannot recover the time lost or anxiety caused, we are automatically depositing 10K miles toward your SkyMiles account as a commitment to do better for you going forward and restore the Delta Difference you know we are capable of,” said the e-mail, a copy of which was seen by CNBC.
The DOT also recorded a jump in complaints about baggage with over 516 baggage-related issues reported in May 2022, up from 190 three years ago. However, the rate of mishandled bags — lost, damaged, delayed, or pilfered — are actually lower than the same month of 2019, with 0.56 out of 100 enplaned bags in May, down from 0.63 per 100 bags in May three years earlier.

Mishandlings of wheelchairs and scooters across the two periods was similarly steady. While total mishandlings increased by 159 incidents, the percentage of such occurrences was similar, at about 1.53% in May.
The rate and number of mishandled bags as well as wheelchairs and scooters, however, was up from last year.
Read the May 2022 report here, and the May 2019 report here.
– CNBC’s Leslie Josephs contributed to this report.

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Every weekday the CNBC Investing Club with Jim Cramer holds a “Morning Meeting” livestream at 10:20 a.m. ET. Here’s a recap of Monday’s key moments. 1. What Netflix earnings mean for Disney 2. Halliburton has a cheap valuation 3. Bausch + Lomb chairman steps down 4. Quick mentions: AAPL, AMZN 1. What Netflix earnings mean for Disney Netflix (NFLX) shares were up Wednesday after the streaming service reported that it only lost 970,000 subscribers, which was better than the street expectations of 2 million. Not-so-bad news was good news to investors. What does this mean for Investing Club holding and fellow streaming giant, Disney (DIS)? Now that Netflix earnings is out of the way, Disney is in the spotlight. Cramer says we may see a run in Disney if the dividend comes back or the balance sheet gets better. The Investing Club’s take: Disney has many franchises and is entering new markets while Netflix’s growth may be “tapped out,” said Jeff Marks, the Club’s director of portfolio analysis. “Let’s stop conflating Netflix and Disney,” Cramer said in Wednesday’s Investing Club ‘Morning Meeting. Disney can strengthen its streaming by monetizing its famous characters. Netflix doesn’t have this leverage. 2. Halliburton has a cheap valuation Halliburton (HAL) CEO Jeff Miller joined CNBC’s Mad Money on Tuesday and said his company has an edge when it comes to technology and innovation in the oil sector. The interview followed Halliburton reporting better-than-expected earnings results for the second quarter. In its earnings call with investors, management also stressed the current energy market is less prone to the boom and bust cycles of the past and it expects stronger years ahead. We like Halliburton because it’s one of the leaders in its sector and has a cheap valuation. “If you’re looking for something to buy because you think you’re underinvested, and you agree with me that the rally is still on, my choice is Halliburton,” Cramer says. 3. Bausch CEO steps down Bausch + Lomb (BLCO) said Joe Papa has resigned as chairman of the board. He will remain CEO of the company until a successor is found. Bausch Health Companies (BHC) in May spun off eye-care business Bausch + Lomb from the rest of its pharmaceutical brands. Cramer called the timing of the long-awaited breakup a “major gaffe,” as we expected the company would breakup in a way that maximized shareholder value. Unfortunately, that didn’t happen . Billionaire investor Carl Icahn is now on the board of the company, likely to help direct ways to increase shareholder value, and we see this as a positive for the company. Right now, the Club has a 4 rating on Bausch Health — meaning we do not want to buy or sell until we hear more of the activist investor’s plans for the company and learn more of the outcome of the Xifaxan litigation. 4. Quick mentions: AAPL, AMZN Investing Club holding, Amazon (AMZN) had its price target lowered at Jefferies to $150 from $163, but maintained a buy rating. The e-commerce giant sees pressure from inflation and a looming recession, but the analyst suggests the stock has already priced in those headwinds. “I like it because I think retail will bottom,” Cramer said on Amazon. Fellow FAANG stock and Club holding Apple (AAPL) also had price target drop. Morgan Stanley went to $180 from $185. The analyst lowered the price target in anticipation that third-quarter earnings results next week will come in slightly below Street expectations. “If you don’t own Apple yet this close to when it reports, I think you got to wait and see,” Cramer said. But if you already own it, continue to hold and don’t trade it. (Jim Cramer’s Charitable Trust is long DIS, HAL, BHC, AMZN, AAPL. See here for a full list of the stocks.) “As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade” THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.”

Jim Cramer standing in front of the NYSE, June 30, 2022.
Virginia Sherwood | CNBC More

Netflix’s second-quarter results could turn out to be a pivot point for the company.
The results may have set a floor for Netflix’s subscriber losses, leading to a new period of sustained gains.
It’s also possible its maneuvers to restart growth will prove ineffective, and the second quarter will mark the end of the company’s heyday.

Co-founder and CEO of Netflix Reed Hastings attends a red carpet for the Netflix launch at Palazzo Del Ghiaccio on October 22, 2015 in Milan, Italy.
Jacopo Raule | Getty Images

Netflix’s second-quarter earnings results can be interpreted in two very different ways. The company’s future depends on which reading turns out to be correct.
The world’s biggest streaming company announced Tuesday that it lost nearly 1 million subscribers for the three-month period from April to June, marking the second straight quarter it lost customers. Still, that was less than the loss of 2 million the company had forecast and Netflix shares were up about 6% at $214 in midday trading Wednesday.

The second-quarter results offer a new bull case for Netflix investors. If the quarter serves as a “bottom” — the point at which the company stopped losing subscribers and started growing again, even if at a snail’s pace — investors have a new growth story. In the next quarter, the streaming giant forecast it would add 1 million subscribers. This may be the primary reason shares rose on Wednesday.
“With signs of stabilization in the subscriber base emerging, we believe the prospect of a prolonged period of subscriber losses is becoming increasingly unlikely,” Stifel analyst Scott Devitt said in a note to clients. Stifel upgraded its rating on Netflix shares to “buy” on Wednesday.
But the results, which some investors found good enough, may only lead to temporary relief. The bear case for Netflix is that Wednesday’s bump in share value is a “dead cat bounce” — Wall Street lingo for a temporary recovery after a substantial fall. Netflix faces intensifying competition from major players pushing into the streaming market, including Disney’s Disney+, NBCUniversal’s Peacock and HBO Max. That has raised questions about whether Netflix will be able to hold on to its dominance, particularly in the lucrative U.S. market.

The new case for growth

Previously, Netflix bulls have leaned in to the notion that the company would turn its massive global scale of 221 million subscribers into positive free cash flow by increasing pricing and reducing churn. This transformation from a money-losing venture to a free cash flow machine would enrich shareholders.
That’s now happened, or, at least, is about to happen. Netflix said in its shareholder letter it will generate $1 billion in free cash flow for 2022. In 2023, Netflix said there will be “substantial growth” in free cash flow.

And yet, shares are still trading 70% lower than all-time highs set in November.
A second wave of subscriber growth could be the company’s new narrative for investors. There’s reason to believe Netflix subscribers will once again surge ahead. The company announced it will crack down on password sharing and launch a cheaper advertising supported tier in 2023. Both of those initiatives may lead to more sign-ups.

End of its heyday

If Netflix’s subscriber growth doesn’t reaccelerate, the second quarter of 2022 will serve as the inflection point when it became apparent the company’s halcyon days were over.
“Where do its sub losses end, given strong competition from newer, lower-priced, deeper-pocketed streaming services?” wrote Needham analyst Laura Martin. “222 million global subs may turn out to be the peak subscribers for Netflix.”
This may prove to be the case if the company can’t turn enough of its password sharers into long-term paying subscribers. Netflix said in its shareholder letter that it’s encouraged by its early learnings from tests in Latin America that it can convert password sharers to paying customers.
In Tuesday’s conference call, Netflix Chief Financial Officer Spencer Neumann said the company planned to spend about $17 billion on content in 2022 and would stay in that “ZIP code” for the next “few years.” That’s a change from nearly every year in the past decade, when it has ramped up content spending to build market share. As its revenue growth has slowed, Neumann acknowledged spending on new programming will also moderate.
“Our content expense will continue to grow, but it’s more moderated as we adjusted for the growth in our revenue,” said Neumann.
It remains to be seen if Netflix can continue to expand its subscriber base without an ever-ballooning content budget — especially since the company typically raises prices each year. The worry is particularly stark in the U.S. and Canada, where Netflix lost 1.3 million subscribers in the second quarter, marking the third quarter in the last five when its customer base has declined.
“Given the risk of elevated churn with every price hike from here, the realistic worry is that the company will be hard-pressed to materially reaccelerate growth in these regions,” said Michael Nathanson, an analyst at research firm MoffettNathanson.
In coming years, investors may look back on this year’s second quarter as the moment Netflix either began its second growth act or its slow migration into a value stock.
WATCH: CNBC’s Jim Cramer on Netflix

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Europe is suffering under extreme temperatures and fires exacerbated by drought and winds.
“Yesterday was the busiest day for the fire service in London since the Second World War,” Sadiq Khan, the mayor of London, told Sky News on Wednesday.
Beyond the U.K., firefighters in France, Spain and Greece firefighters are fighting to keep back wildfires.

An aerial view shows the rubble and destruction in a residential area following a large blaze the previous day, on July 20, 2022 in Wennington, Greater London.
Leon Neal | Getty Images

Europe is suffering under an unprecedented heat wave, leaving firefighters in London dealing with a huge surge in emergency calls.
“Yesterday was the busiest day for the fire service in London since the Second World War,” Sadiq Khan, the mayor of London, told Sky News on Wednesday.

Fireman work next to buildings destroyed by fire on July 19, 2022 in Wennington, England. A series of grass fires broke out around the British capital amid an intense heatwave.
Carl Court | Getty Images

On a normal day, the fire service will get 350 calls, Khan said. On a busy day, the London fire service would get 500 calls. On Tuesday, the London fire service received more than 2,600 calls, Khan said. There were 41 properties destroyed in London due to wildfires and 16 firefighters were injured battling the blazes, Khan said.
“It is important for us to recognize that one of the consequences of climate change and these sorts of temperatures that lead to the fires you are seeing,” Khan said. “The challenge in London is we have a lot of grass, a lot of green spaces and a lot of that impinges on properties. And when you have not had rain for a long period, when the grass is incredibly dry, fires can start very quickly and spread even faster because of wind and that leads to properties being destroyed.”

The scene after a blaze in the village of Wennington, east London after temperatures topped 40C in the UK for the first time ever, as the sweltering heat fuelled fires and widespread transport disruption. Picture date: Wednesday July 20, 2022.
Aaron Chown | Pa Images | Getty Images

“A lot of the problems we have here today are a direct consequence of climate change, excess death because of the heat wave,” Khan said. “A lot of these problems can be solved by tackling climate change expediently, rather than kicking the can down the road.”
Beyond the U.K., firefighters in In France, Spain and Greece are fighting to keep back wildfires exacerbated by heat and dry conditions.

A wildfire broke out late in the late afternoon hours, on the 19th of July 2022 on Mount Penteli outside of Athens.
Iason Raissis | Nurphoto | Getty Images

“High temperatures and ongoing drought are two primary factors that contribute to wildfire conditions, and southern Europe has had both of those lately,” Alexandra Naegele, a researcher at the Woodwell Climate Research Center, told CNBC.

“Combined with high wind days, these conditions have resulted in the rapid spread of wildfires across the continent,” Naegele told CNBC. 

Firefighters guard while the wildfire burns the hills outside Tabara, Zamora, on the second heatwave of the year, in Spain, July 18, 2022.
Isabel Infantes | Reuters

“In the future, this kind of heatwaves are going to be normal. We will see stronger extremes,” said Petteri Taalas, the Secretary General of the World Meteorological Organization, part of the United Nations.

Firefighters gestures as they work to extinguish a wild fire in Drafi agglomeration, north of Athens, on July 19, 2022.
Aris Oikonomou | AFP | Getty Images

“We have pumped so much carbon dioxide in the atmosphere that the negative trend will continue for decades. We haven’t been able to reduce our emissions globally,” Taalas said in a statement published Tuesday. “I hope that this will be a wake-up call for governments and that it will have an impact on voting behaviors in democratic countries.”

Firefighters work during a fire that broke out in the Monts d’Arree in Brasparts, in Brittany, France, July 19, 2022 in this handout picture obtained on July 20, 2022. 
Julien Trevarin/sdis 29 | Reuters

The high temperatures have been influenced by a meteorological event called a “heat dome,” Alyssa Smithmyer, a meteorologist with weather forecasting company, AccuWeather, told CNBC. A heat dome has been causing the record-high temperatures in western and central Europe, she said.
“A heat dome is a term used when a widespread area of high pressure sits over a region or country and lingers for days or even weeks, trapping a very warm air mass beneath it. An area of high pressure will push air to the surface, and this process will warm the air through compression,” Smithmyer told CNBC.

Firefighters prepare to operate as the wildfire approaches in the region of Pallini. A wildfire rages for a second day in Mount Penteli near Athens in Greece causing extensive property damages.
Nicolas Koutsokostas | Nurphoto | Getty Images

The heat dome conditions make rain unlikely.
“Due to the influence of the high pressure, there is often minimal chances of precipitation or even clouds as the heat dome lingers over a region. As the high pressure lingers over a region for an extended period of time, temperatures can rise to extreme values,” Smithmyer told CNBC. “The lack of precipitation or cloud cover will further exacerbate temperatures under these conditions.” 

Smoke rises as a wildfire burns on Mount Penteli, next to the Eleftherios Venizelos International Airport, in Athens, Greece, July 19, 2022.
Alkis Konstantinidis | Reuters

Smoke billows from a wildfire at the border with Slovenia seen from Rupa, Italy, July 20, 2022.
Borut Zivulovic | Reuters

“The potential impacts of very high ozone pollution on human health can be considerable both in terms of respiratory and cardio-vascular illness,” Mark Parrington, a senior scientist from Copernicus, said in a written statement published Tuesday.
“Higher values can lead to symptoms such as sore throat, coughing, headache and an increased risk of asthma attacks. The Climate and Clean Air Coalition estimates that ozone pollution causes approximately one million additional deaths per year. This is why it is crucial that we monitor surface ozone levels,” Parrington said.

Firefighters try to extinguish a wildfire burning in Ntrafi, Athens, Greece, July 19, 2022.
Costas Baltas | Reuters

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Years of arguments about the streamer’s content investment are over as cash flow turns positive, apparently for good.
Cash flow could double or triple next year off this year’s estimated $1 billion.
But top-line growth is slowing, and the long-term ceiling for subscribers is significantly lower, analysts say.

A sign is posted in front of Netflix headquarters on April 20, 2022 in Los Gatos, California.
Justin Sullivan | Getty Images

A day after Netflix reported that its second-quarter slide in subscribers was much smaller than investors had feared, a different takeaway may sink in from the earnings report at the world’s largest streaming service: A years-long debate about whether Netflix is spending too much on content seems to be over now.
The key is that Netflix eked out a positive number for operating cash flow in the quarter, despite spending $1.3 billion more on content than it did in the first three months of this year, as it launched a new series of its “Stranger Things” franchise and wrapped up its $200 million “The Gray Man” action thriller. For the first half of the year, Netflix said it made $1 billion in cash flow – a number analysts say will double, and may triple, by 2023.

“Netflix’s revenue will grow 10% to 15% next year, but the content spend will grow zero,” said Robert Cantwell, manager of the Compound Kings Exchange Traded Fund in Nashville, which has 3.9% of its fund in Netflix stock as of July 19. “You’ll see $3 billion to $3.5 billion next year in free cash flow.”
Critics have long zeroed in on the fact that Netflix’s spending on new movies and TV shows has been more than its reported profits because of accounting rules that let the content investment be reported as expenses over several years. But that ended in the first quarter of this year, and was sustained in the second even with the extra spending.

Netflix said on its quarterly earnings presentation that it will keep content spending level at about $17 billion annually for the next couple of years. Two executives said spending would stay “in that zip code.” That’s up from $11.8 billion in 2020, and little changed from $17.7 billion last year. 
The company spent most of earnings call talking about its plans to add an advertising supported tier to its service offerings, letting Netflix cash in on households that don’t want to pay $10 to $20 a month for a subscription. Many of those households are using passwords belonging to friends or family, skirting Netflix’s rules. 
The combination of leveling off content spending and adding ad revenue is where the cash flow increase will come from, according to Cantwell and Evercore ISI analyst Mark Mahaney.

Mahaney says Netflix the company should reach $2.5 billion in 2023 cash flow and could reach $4 billion by 2024.
“If you generate $4 billion in cash flow, that’s [more than] a 4% yield,” said Mahaney, a longtime Netflix bull who now rates the shares as a market performer. “That’s solid. On 2023, it’s trading at 45 times free cash flow. That’s not so interesting.” 
Neither analyst doubts that Netflix’s ad strategy will work. Competitors like Hulu get about 15% to 20% of revenue from advertising now, Cantwell said, and Mahaney says Netflix should have made this move a couple of years ago. 
At Netflix, 20% of sales would be as much as $6 billion a year, for a company whose market cap is about $91 billion now. That revenue would carry gross margin higher than the 40% profit the company’s content business generates now, with less capital investment, Cantwell said.
Because it will take time to build up the ad business, it should contribute $250 million to $300 million to cash flow next year, Cantwell said.
The problem is, the extra cash flow still doesn’t change the fact that Netflix is making a transition from being one of the century’s best growth stocks – its 2002 IPO price, adjusted for stock splits, works out to $1.07 a share, and it went as low as 65 cents later that year – to being a play for value investors who look for fatter earnings and pay lower price-to-earnings multiples to get them.
At the peak, Netflix bulls talked about the company attracting as many as 800 million global subscribers, Cantwell said, up from 221 million now. That ship has likely sailed, he said, as many international markets have proven tougher to crack than some assumed. Netflix has already captured 73 million subscribers in the U.S, and Canada, more than half of the households in the two nations combined.
The cash flow won’t be big enough to really galvanize value investors until 2024 or later, Mahaney said.
“It’s a transition,” he said. “Growth is becoming much more moderate and cash flow is getting much more interesting.”
But growth has been Netflix’s calling card for years, and a reliable magnet to attract content creators, customers and investors alike. With growth slowing, the pace of new content addition leveling off, and its competitive advantages over rivals in technology having closed, the risk is that it will need to relax its newfound spending discipline to stay ahead of rivals like Warner Bros. Discovery’s HBO Max and Disney Plus, Cantwell said.
“The challenge is that it assumes Netflix can make content that has long-term library value, and that is one of the hardest bets to make about Netflix at this point,” he said. “You’re betting on them to make better content than they have.” More