Paramount Gets Warner Bros. Discovery, But Netflix Comes Out a Winner

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Warner Brothers Discovery has a buyer again. Molly Full Money starts now. (upbeat music) Everybody needs money. That's why they call it money.

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I'm Travis Hoyam joined today by Lou Whitman and John Quast and guys, our plans were all thrown out the window last night when we found out that Netflix is apparently not gonna be buying Warner Brothers Discovery. Paramount has swooped in again.

John, what did we learn and is this saga gonna finally be over?

“Are we gonna continue debating this for the next six months?”

Well, yeah, I think the saga is finally over

and I think that Netflix shareholders should breathe a deep sigh of relief. I didn't like this deal from the start for Netflix. And in my view, Netflix's business is humming along just fine.

Why settle itself with a mountain of debt to buy an asset that is inferior to itself? That simply didn't make sense for me. And I think that Netflix shareholders are coming out good here.

Now that Paramount is the winner for the Warner Brothers assets. - Lou, let's go through some of these details. Paramount Skydance is gonna be paying $31 to share for Warner Brothers Discovery. The prior agreement was $27.75 per share

from Netflix. That was cash. The difference between those two numbers is this spin-off of some cable assets that was in unknown value.

But could be more than the Delta there, $3.00 and $3.00 and a quarter. And it could be worth less. So is this actually a better deal for Warner Brothers Discovery?

Is it?

“Because it seems like we're increasing uncertainty”

with does this deal actually close? We'll get to some of the huge weight

that's hanging over this from a regulatory standpoint in a second.

But just from a number standpoint, why does this make sense? - You say that's uncertainty, but there was no certainty that the Netflix deal was gonna close.

So I think that that uncertainty, I think probably arguably Paramount has an easier regulatory hurdle here than Netflix just because they're not as big. - Right, right.

Just because Netflix is a dominant player, there is more of a financing on certainty just because Paramount is such a smaller company. But you do have some guarantees from the Ellison family for that.

So yeah, any M&A has uncertainty, there is certainty in cash. If you kind of make the uncertainty of who closes for what reasons a wash, because they're both questions there,

$31 in cash is $31 in cash that you can do whatever you want with. 2750 and a stub. You can argue what that stub is worth. It could be worth zero.

It could be worth a trillion dollars. It's obviously worth somewhere in the middle. But yeah, $31 in cash is cash. And I do think that that is the end of the day,

that almost always in these deals,

cash is going to get valued higher in terms of a fairness opinion or trying to figure out what's what? - I also want you to thoughts on some of these other details. There's the $31 per share in cash,

but there's what's called reading from the press release here, a daily ticking fee equal to 25 cents per share per quarter beginning September 30th, 2026, as well as a $7 billion regulation, a regulatory termination fee that would be payable

if regulators block the deal. That seems like this deal could get really expensive. And by the way, Paramount Skydance is only about a $12 billion company today. So his Larry, just Larry Ellison just swooped in and said,

hey, I'll write a blank check as long as we get this out of the hands and Netflix. - Yeah, I mean, basically I mean, it's fun to look at the relative size of these companies and certainly Netflix had a lot more they could do

if they wanted to because of their relative size of an inch. In a day if someone is willing to write big checks, that does even the playing field. I think the cleverness of Paramount here is I think some of those sweeteners,

“that's what might have been hard for Netflix to match”

or match in a way that was financially viable for them. I think Netflix shareholders should be happy, that Netflix isn't just going to say all in whatever it takes. I do think though, I trust this management team, I like the Netflix management team.

I do think that they weren't willing

milly here when they just went for this asset.

I do think it's both to, if not in need,

“I think it's both to, our life is getting harder”

with getting content and this is a source of content that we can just pay one price for and have. So I don't, I think this is more than a like to have for Netflix, I think they really did want it, but I don't think they're in trouble if they don't have it.

- John Netflix does now get to go back to being what they were. I agree with you that this was probably a headache that they didn't even really want to take on, but it was better than creating a new competitor with Warner Brothers Discovery and Paramount combining.

But now we are going to potentially have that competitors. I'm going to close likely until late this year, maybe even in the next year. But is a Paramount Skydance Warner Brothers discovery combination going to be a viable competitor

to the Netflix's, the Disney's of the world?

You know, we even still have NBC and Peacock out there. Is this going to be one of the big players and do they have the financial wherewithal to do that? Because it's going to be a complete saddle with that. - That's exactly the question Travis.

“And I think that Netflix is playing a very smart,”

competitive game here if it is playing a game. Listen, yes, it is going to have the assets. It is going to have the content from that perspective. Definitely is going to be one of the major players. But if I have a major competitor in a space,

I want that competitor to have less financial flexibility than I do. That is going to be an advantage for me. And so it's hard for me. I know we're not a cynical podcast,

but it's hard for me not to think that Netflix was playing chess the entire time here. It had basically won this deal and then it lets Warner Brothers go out and get a better bid and it does.

And then it says we're out. Almost like it wanted this to happen.

And the end result here is it gets 2.8 billion

and free money for the breakup. One of its main competitors now has more debt than it can, well, it'll be able to handle it in theory. But it's going to be definitely shackled to this debt for the foreseeable future

and have less financial flexibility than Netflix does. So I say Netflix has won this deal, hands down. - I need to push back just to this idea. I don't think that Netflix risked $80 billion just to try and break up a competitor.

I don't think that that was the goal.

“I think, look, I'm not dismissive of this new entity”

being a competitor, but there's a lot of competitors out there. I don't think Netflix made this move just because they didn't want to see Paramount and Warner Brothers discovery put together. I think they saw it as a way to add content

and they need content. And then again, they didn't need it as bad as Paramount so they walked away as they should. But I think that it, it would make a great script of succession or something like that,

but I don't really believe that's gonna be the next show. - And let's be honest, if I'm a Netflix shareholder and they did just put their balance sheet on the line in hopes that Paramount would be slightly more risk, risk one than them, I need to rethink my admiration

for that management team. I mean, you are really, really throwing the management team under the boss if you think they were playing that game. Just just it from my perspective. - Do you think, do either of you think

that it's gonna be possible in the next, let's say three to five years that we find some deal between Netflix and Paramount Warner Brothers discovery, whatever this entity is gonna be called,

where they go, you know, we're just gonna license of much of this content that we just acquired to Netflix because Netflix can write us the biggest check, John. - Sure, anything is possible.

And there are some assets here that I think that Netflix would have liked to have had its hands on, in particular, the DC Comics International Property. I think that Netflix couldn't do a lot of things like that a lot Disney.

So yeah, there is a possibility that it's willing to license this from the new entity. - The other potential winner here is potentially movie theaters. I think it's probably more likely that we'll see more movies in theaters with this combination

versus with one of those discovery going to Netflix. When we come back, we're gonna get to a flood of earnings news this week. You're listening to Molly Fulman. - Have you ever gazed in Wonder at the Great Paramount?

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- Welcome back to Molly Fulmani.

“We had a lot of earnings come out this week”

and the big one was in video that was obviously the one that drives the market about the S&P 500 and Nasdaq. John, what did we learn from in video and was it as bad as the market's 5% decline

in the stock indicates? - Well, I mean, really the investment community is wondering about future growth more than anything and long-term, right? So it just reported 73% revenue growth

in the most recent quarter. It's expecting an acceleration to 77% in the upcoming quarter that sounds good, John. - More than just good, I mean,

this was a small company we would say this is incredible.

This is a company with over 200 billion and trailing 12 month revenue, it's incomprehensible. Analysts were asking, you know, is it realistic to expect this kind of growth to continue and pointing out on the conference call,

listen, the hyperscaler is spending like 700 billion this year in capital book expenditures, much of that goes to Nvidia for its GPUs. So the question is, how realistic is it

“to expect growth on top of 700 billion in spending already?”

Well, we're getting some news today that open AI just secured the bag for 110 billion in funding, some of that from Nvidia, which is interesting, but open AI isn't raising this money to park it in the bank. It is going to be spending this money on infrastructure, on AI.

So yeah, I think that the capital expenditures can keep rising and Nvidia can keep growing, how much is the question? - Lou, my question here is around whether this was just the marketing certainty around how much of that revenue that John said that hyperscaler is going to be spending

over the next year, somewhere on $650, 700 billion dollars,

we now have sort of a matchup between what the growth of their spending is going to be in 2026 and what Nvidia is expecting to grow in 2026. Now the question, it's almost seems like it's already turning to 2027.

Are those hyperscalers going to spend a trillion and a half dollars? And this is going to be a continued growth story, or have we hit some sort of peak or were near a peak? Because when you look back at the capital spend that spending in the late '90s and early 2000s,

that was actually kind of the warning sign that we were, when you started decelerating, that was when companies like Cisco really, really took it on a chin. I don't want to get too caught up into those analogies,

but that is the real only historical comparison that we can make right now. - Yeah, certainly the market thinks so. It's a fun and interesting. If you look at Nvidia stock, it has had a great,

I mean, it's been a wonderful stock, right up 50%

over the past year, but basically flat in the last six months.

So it has done nothing in the last six months. And I think the exact conversation that investors have in it, there's nothing wrong with this business, but how much higher can it go? I think some of that, I mean, look,

meta in some of these companies using off-balance sheet, kind of it feels like we're getting to the point where we just can't go higher. Nvidia pushback at this though, so. But yes, 50% of data center revenue came from

the top five hyperscaler. So there is market concentration, but they talked a lot in this quarter about the diversity of demand coming from model builders, enterprises, sovereign customers are a big part of this.

So there could be other levers to pull here,

“but I think that's what the market is debating here.”

There is no question about the strength of Nvidia's business, all of the metrics are off the charts. I don't think they are relative to what they're doing now unreasonably valued, but how much more can we squeeze this as far as upside?

That is the debate, and I think it's a fair question. I think there could be an answer. I don't think it's set and stone, but I do think that yeah, there is just no way that the growth we have seen could continue indefinitely.

Even these cash producing hyperscalers, just don't have the cash to keep jumping the way they have. John, the other news that we've gotten in the past week is companies like AMD selling a whole bunch of chips to meta, you have Google, a lot of rumors about what

are they going to be doing with TPUs? Are they going to be trying to sell those to other companies maybe even form joint ventures? Is that another sort of headwind where you go, hey, 80 months ago, there was no competition,

and now there's at least some competition in the market. That could squeeze not only revenue, but margins eventually. I don't know if I call it a headwind yet. It is definitely a question, because, for example, you bring up the TPUs, that's not exactly new technology.

We've been waiting for that to kind of scale and really put any sort of measurable dent in Nvidia's business for a while now.

I think that if you're looking at it, though,

from an investment perspective within video,

you're looking at those profit margins. They're historically high.

“They're really incredibly high for a hardware.”

I know it has software, but we're selling a lot of hardware here. Those margins over 50% for a hardware business. That is really quite good. The question is, in the reason it's so high is because of supply and demand.

The demand is outpacing the supply. Can these other products come online meet some of that demand and finally bring it into more balance and then Nvidia's margins will compress to still good, but not what they are right now?

That's the question on everyone's mind. - It's definitely still a buyer's market. I mean, competition exists, but I don't anticipate Nvidia having any issues clearing out inventory.

And again, just the strength of this business. I'm gonna steal this from our colleague Tim buyers, but I thought he's brilliant, and I think this is such a neat stat. From year of year,

fourth quarter, fourth quarter,

Nvidia spent two billion more in R&D sales

admin expenses. That produced $28.8 billion in additional revenue. So about for every $1 new operating expense, $13 and 68 in additional sales, that's the way you run a railroad.

- Yeah. - And again, just for all of the oh no would can't go up forever, please, please appreciate what they have. And status quo seems pretty okay right now. - On the other end of the spectrum,

we have a company like the trade desk, John, this stock is down 83% from its highs.

“What did we learn this week and are they in trouble?”

- I think that we didn't learn in a whole lot. We learned that growth continues to slow down more than what we're accustomed to seeing, more than what we ever have seen with the trade desk. That's a question and what's really interesting about this

is the company is a digital advertising company, right? And it launched its AI platform Cokai 10 quarters ago. Okay, and this was supposed to be the big thing. Seven out of the 10 quarters since launch, revenue growth has decelerated.

Now, grain is pointing out, Jeff Greene, the CEO is pointing out that 100% of customers are now using this supposedly better version of the platform, but there have been some reports from customers

that it's too complicated and that might be contributing to the deceleration that they might not like it as much as they were expected to like it. And I think that Greene himself confirmed this on the fourth quarter call.

He said the complexity of our ecosystem is a mode for the trade desk, but that doesn't mean we have

“to hand the complexity back to our user.”

To me, this is him saying we have in fact great handed the complexity back to our users. And that shouldn't be what's happening. This should be simpler for them. It should be simpler to use.

And if it was, maybe they would not be decelerating as much as they are. - Lou, we also heard from Snowflake, what did we learn in the quarter?

- Decent quarter, but here's what I want,

this I find so fascinating, 'cause the narrative has been about how AI is gonna eat everybody's launch, right? That everybody is doomed because of AI. And Snowflake definitely falls into the category

of companies that are supposedly doomed. So, contrast that with their cash from operations and free cash flow. They had a $345 million free cash flow. Where did that come from, deferred revenue?

Deferred revenue is revenue that customers are paying for future performance or future obligations. But it doesn't, because it's in the future, it's not hitting the PNL shave right now. So, in one hand, you have the world, Snowflake is doomed

because of AI. And in another hand, what's actually happening is, customers are putting down hundreds of millions of dollars in cash to use Snowflake products in the future. I feel like the market should at least meditate

on that a bit and think about what that might say for Snowflake's prospects. - When we come back, we're gonna talk about potential other buyouts that would be interesting in 2022, if you're listening, they might be cool.

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