VIDEO: Our Questions About the Netflix-Warner Bros Discovery Deal

We didn’t expect to be shoveling snow just quite yet, but we have a jam-packed Pro Portfolio video today. 

First, we discuss the outcome of today’s September PCE Price Index and why it tips the scales that much further for a Fed rate cut next week. However, we share what we’ll be watching before the Fed meeting to determine the potential for the market to be underwhelmed by the Fed Chair Powell’s comments and what is seen in the updated set of economic projections.

Shifting gears, we discuss today’s November revenue report from Foxconn, and why it adds another layer of support for what folks refer to as the “AI trade.” We also share our thoughts on the Netflix  (NFLX) -Warner Bros Discovery  (WBD)  announcement, including questions we’d like to see answered before making any movement on NFLX shares. 

At the time of publication, TheStreet Pro Portfolio had no positions in any securities mentioned.

Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace, Friday, December 5. A couple housekeeping items just before we get started with the meat of today's comments. First and foremost, I hope you guys took a look at that note from Costco yesterday. The shares are rebounding nicely today as we talked about, that sub 900 closer to 890 level was a nice pickup point for folks who were underweight. I hope some of you took advantage of that.

And yesterday afternoon we published a note, Morgan Stanley, Bank of America, just sharing with you an updated look for the IPO market as we move into 2026, but also sharing that M&A looks a little bright. I'll have more to say on that, especially after the Netflix Warner Bros Discovery news this morning. But what I wanted to remind you is that we are going to continue to closely watch the shares of Morgan Stanley and Bank of America as the market continues to move higher, reason being they are increasingly close to stepping on that 4.5% position size.

And when that happens, or if they move past it in a nice move higher based on market developments or company-specific news or M&A deal news or IPO news, odds are we're going to bow to our portfolio discipline and take a little bit of those two off in the portfolio, ring the register, help build up our cash position as we continue to look for fresh ideas for the portfolio. So that's more of a heads up on something to watch for in the coming days.

But let's talk more about what's driving the market higher today. I think we can trace that back to the PCE price index data that was out for September. Yeah, I know, I know, very much in the rear view. I've made that comment before. And we've had more recent inflation data.

But here's the thing. The core PCE price index dropped to 2.8% on a year over year basis. Again, that's September. What's important is that was the lowest level since May. And it really-- it's the first real downtick that we have seen since the upward March in the year over year core PCE data that began in April, so again, not exactly as insightful as some of the more recent data.

However, because this is the Fed's preferred inflation metric, and given the jobs data that we saw earlier this week, which if you remember, Challenger Gray, job cuts ticked higher substantially on a year over year basis. ADP saw job losses, and the ISM composite PMI data for November signaled that the overall employment market continued to contract. So that, to us, along with this tick lower in the core PCE data for September, says that odds are the market is increasingly comfortable with the Fed delivering a 25 basis point rate cut, hence the market moving higher today.

Now, as we think about it, that's something we've been starting to increasingly suspect would be the case. But if the market is looking increasingly for that rate cut, expectations are high. It does mean that we're going to pay very close attention next week to two things. First and foremost, of course, what does not only Fed Chair Powell say, but what's the language he uses? That's the first one.

Second, what does the Fed show for expected rate cuts in 2026 when it shares its updated set of economic projections? Remember, the last time we got this back in September, the Fed telegraphed just one 25 basis point rate cut in all of 2026. So that's what we'll be watching.

And to the extent that the market is underwhelmed by Powell's comments, or we just continue to see one rate cut next year in the updated SEP that could lead the market to react something along the lines of a wet blanket, maybe potentially trading off. As we move into the Fed meeting, we're going to want to keep our eye on the oscillators to see if the market remains overbought.

Again, when it's overbought, a lot of expectations running high. That means it doesn't take much to disrupt the market in the short term. So we'll continue to watch that and prep you for it ahead of next Wednesday's Fed policy meeting outcome.

Now, let's turn to some other business for today. You know that each and every month we like to review the monthly reports from Taiwan Semiconductor and Foxconn. If you're a newer person around here, the reason we love these monthly reports is they're a nice update that allows us to track not only some of the key end markets, AI, AI chips, overall semiconductors given Taiwan Semiconductors position in that, what's it say about end markets for smartphones, tablets, and other IoT devices and, of course, AI servers.

So we really like to pour into these reports and really using both kind of side by side. And while we didn't get anything from TSM this week, on the month of November, we did this morning here from Foxconn. And they said that their November revenue growth rose 25% year over year. Two things, that's up from the mid-teens level that we saw in August, September, and October, again, on a year over year basis, so a bit of an acceleration.

What's driving this? This is the second thing. Cloud and networking strength, very strong year over year was the comment with AI servers in particular called out. This backs the recent comments we shared with you from Dell. It also supports our positions in Marvell and, of course, in NVIDIA. Key to this is that Foxconn says that it sees those shipments strengthening ahead. Tells us that 2026 is going to start on a pretty strong note.

And just real quick on Marvell, I just wanted to share with you that Citi reinstated coverage on Marvell shares today with a buy rating that follows, of course, a slew of other price target increases over the last couple of days, including our own, coming off the company's earnings report earlier this week. We're going to have a lot more to say on that, as well as other price target movements and rating movements for the rest of the portfolio in today's weekly roundup.

So stay tuned and be looking for that later today. Now, I just wanted to chat quickly about Netflix, Warner Brothers Discovery, and the reason being is we have or we've had at different times Netflix in the bullpen. It's something we keep our eye on. One of the reasons for that, even though we don't necessarily talk about it a ton, is that content is king, and we know that people will move for really, really good content.

And I think that thinking content is king is really nice for Netflix as they pick up the Warner Brothers Discovery library, as well as ongoing projects and things that will be coming out before too long. Remember, Amazon made a similar move along this front to shore up Prime Video when it picked up MGM Studios, although hats off to the folks at Amazon because they paid way less for MGM Studios than what Netflix is paying for Warner Brothers Discovery.

But before we really talk about that, there are a couple concerns out there just as I think on this. And to be clear, we're going to get a lot more answers in the coming weeks, the coming months, even the next several quarters, to be candid, based on when the deal is expected to close. But here are some of the concerns and the things that I'm kind of puzzling through. First is culture.

As we think about this, two very different companies with very different legacies, Netflix, yes, a real force in streaming. But they came out of the DVD business, and they've leaned into gaming. They've leaned into, of course, original content, go Stranger Things, and advertising. So Warner Brothers Discovery, an amalgamation of companies really with a history of old Hollywood movie production moving into streaming with some other efforts between Warner Brothers and Discovery.

So that's the first thing. Second, integration. Yes, I just mentioned that Warner Brothers Discovery is a amalgamation of various companies, Time, Warner, Discovery, and others. And if you remember, if you're old enough, like me, to remember the disappointment that was AOL Time Warner, that wasn't really an integration of AOL and Time Warner. It was an integration of AOL, Time, and Warner.

So Time and Warner were never really fully integrated, and I think it presented a lot more problems to the management team looking to integrate and realize some synergies across AOL and Time Warner. Could we see something like that again? Well, let's be honest, this is probably the biggest-- I mean, there's no question. This is the biggest integration, the biggest acquisition-- Sorry-- that Netflix has ever done.

We're going to see if they're up to the task. I think there's going to be a lot of moving pieces. There are a lot of areas inside of Warner Brothers Discovery that are going to be very new to Netflix. That doesn't mean that they can't figure it out, but it could present some challenges. And I think that we're going to learn a lot more on the integration front in the coming months and quarters, as I said earlier. There's also going to be some questions about what does Netflix do with HBO Max?

What does Netflix do with their subscription pricing tiers? What do they do for the pricing tiers for HBO Max? Do they bring them up? How are they going to integrate advertising and all of this? So a lot of questions. And for the time being, I think we're going to sit on the sidelines with the shares of Netflix.

We're going to wait for more answers. We'll keep close tabs on key support levels for the shares. But remember, just like there was a lot of enthusiasm when Brian Nichols was coming into Starbucks and the turnaround effort, that has taken a little longer than folks anticipated. We had our concerns about that, just given the size and scope and reach of Starbucks compared to Chipotle.

Something similar here. There's a lot to digest, and there could be some hiccups along the way. I think the first step to learning more is going to be when Netflix reports its December quarter results in January, maybe early February time frame. We won't get all the answers, but I think we'll start to get some. And based on what we learn, we'll revisit Netflix shares for the bullpen, potentially for the portfolio.

So the closing thought on this-- and this is going to bring us back to Morgan Stanley and Bank of America-- is that whenever we see big deals like this-- and I've talked about this before-- it tends to be a bit of a warning shot to other companies out there. You can see a quick game of musical chairs. There are other media properties out there.

Perhaps there might be places where Paramount looks to go now that it looks like they have missed out on Warner Brothers. There might be others as well. Maybe Amazon looks to do something to shore up. Maybe Apple is contemplating something.

So this could result in another boom, mini wave of M&A activity. We'll have to see. But the potential for it is another reason why we remain positive on the shares of Morgan Stanley and Bank of America headed into the first half of 2026.

Think of it this way. The deal was announced for Netflix Warner Brothers after we shared our note with you yesterday afternoon about Morgan Stanley Bank of America. This just gives us another reason to be incrementally confident about what lies ahead.

So folks, as I mentioned during my comments a few minutes ago, we do have the weekly roundup coming at you later today. We'll have some other content as well. So please continue to check your emails, your alerts. We want to make sure you get our latest thoughts.

And if we have any reason to make any movement with the portfolio-- candidly, I don't anticipate it today, but it's another reason to make sure you check your emails and alerts. We'll have a lot more coming to you over the weekend. And with that, let me get back to work. I'll see you soon.