Netflix Rises, Then Falls; Harley-Davidson Falls, Then Rises

In this Market Foolery podcast, Chris Hill and Seth Jayson from Motley Fool Hidden Gems discuss the earnings reports for a pair of beloved companies: Netflix (NASDAQ: NFLX) and Harley-Davidson (NYSE: HOG). But while the streaming media leader's shares got a brief bounce for signing up significantly more net new subscribers than was forecast, investors eventually took those gains away. And while the motorcycle maker's shares suffered after it revealed falling sales and profits, they wound up heading higher. What's going on here? The guys try to explain. And, as a bonus for fans of Chris' sidetracks and digressions, he's about to take part in the Marine Corps Marathon, which makes it a perfect time to pick Seth's brains, since he's a longtime distance runner. (Spoiler alert: Way too many of us are over-hydrating.)

A full transcript follows the video.

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This video was recorded on Oct. 17, 2017.

Chris Hill: It's Tuesday, Oct. 17. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Hidden Gems, Seth Jayson. Thanks for being here!

Seth Jayson: I used to live here.

Hill: [laughs] You're welcome back any time.

Jayson: Any time.

Hill: For those unfamiliar -- longtime listeners know Seth Jayson. For those who are relatively new, Seth not only is one of the advisors of The Motley Fool's small-cap service, Hidden Gems, he's also probably the most experienced marathon runner at the company. You've done north of 80 marathons?

Jayson: 82, 83.

Hill: Somewhere like that. And this coming Sunday, Oct. 22, is the Marine Corps Marathon, and I'm running it and I need all the help I can get.

Jayson: Is this your second?

Hill: This is my second, yes.

Jayson: Second time around.

Hill: And I need all the help I can get.

Jayson: I've made all the mistakes. I know stuff not to do.

Hill: [laughs] We'll get into that, but we have to start with some earnings news. We'll start with Netflix. Third-quarter report featured 5.3 million new subscribers. That was higher than the expected 4.5 million.

Jayson: And there was much rejoicing.

Hill: Well, we'll get to the rejoicing in a second. Most of the growth was in international. In terms of the stock reaction, after hours and early today, the stock hit a new high and then it sort of fell back to Earth a little bit. It didn't come crashing down, but --

Jayson: This is Netflix. A down day for Netflix is down 1% nowadays. It's not like the old days.

Hill: Yes, exactly. Again, this is against the backdrop of, over the past year, the stock has doubled.

Jayson: Yeah. And since 2012 or something, it's a 20-bagger or a 10-bagger or something. Let's put it this way: The number is at the bottom of the graph for so small that I couldn't tell if the price was $10 or $20 at the bottom.

Hill: So, what did you think of the quarter?

Jayson: I thought it was interesting, and I don't follow Netflix that closely all the time, since I missed my opportunity years ago, literally just because I just forgot to buy the shares. I went, "Oh, Netflix finally looks cheap," at one of those points, and then forgot. It was a bad move.

But Netflix is in the state of still hypergrowth and can almost do no wrong as far as investors are concerned, so long as they keep adding subscribers. I find the conference call interesting because it's all just talking about the shows that are coming up. The question for investors is, are they going to be able to consistently produce these amazing shows that people love so much? And I thought House of Cards absolutely sucked. It drove me nuts. But Stranger Things and Narcos and some of the others, I absolutely loved. House of Cards established Netflix as a creator of content, but a lot of other shows since then have proved that they have a decent formula, or have been very lucky a bunch of times. Which it is, we'll never know, I suppose.

This is important, because they're spending $6 [billion]-$8 billion a year on this stuff. None of that really shows up in the profit and loss statements. This stuff is amortized. It's expensed over time. So the cash flow here is negative because they spend so much every year getting this new content.

And no longer are they going to be getting those big movies from outfits like Disney and others. They have said the writing is on the wall, that stuff is going to go away. All those entities are going to go have their own streaming services, or they're working with Hulu because they're more involved with Hulu, and we're going our own way. And that's a question you can't attach numbers to, so the stock is going to trade on sentiment until such time as it doesn't.

Hill: [laughs] So you mentioned that the amount of money they're spending on content, and that's certainly one of the big headlines from Netflix when you look at the coverage from this quarter, the possibility that, in 2018, they could spend $8 billion on content. I look at that, and one of my thoughts is, yeah, but they also just announced they're raising prices.

Jayson: A buck or so, yeah. And you're growing your revenue at 30% or something. That doesn't seem to matter. But you're kind of on a treadmill. Can you ever get off that treadmill is the question. Do you ever reach the scale where it doesn't matter? And obviously, the folks inside Netflix must believe that they do reach that point. But I can't get the lines on the graph to cross myself, but maybe I'm just too stupid.

Hill: I look at it, and I look at the way that Reed Hastings, particularly on this call, one of the things from this conference call was, he and others were wearing branded Netflix gear, which, I've been saying for years --

Jayson: That ugly Stranger Things sweater?

Hill: Yeah. But I've been saying for years, why doesn't Netflix have a store? Why aren't they making a couple of extra bucks off merchandise related to these shows that they own?

Jayson: Pablo Escobar anchor nautical themes sweatshirts from Narcos?

Hill: Sure, why not? You'd buy one of those. You're a fan.

Jayson: Oh, yeah.

Hill: But I don't know. I look at this and think, I don't really see any speed bumps for the next couple of years, anyway. But to your point about the treadmill, that's where I think it gets sort of murky. And maybe if you're trying to see more than a year or two into the future of any particular company, you're making a mistake. But over the next couple of years, I don't know.

Jayson: We're in the kind of market right now where nobody is looking at the bad potential problems. No one is looking at this and saying, what happens if they pay a bunch of money to create this content and they have a string of flops? Right now it's only, well, everything can only be good. And the market in general is trading that way, but Netflix in particular. What are they, a couple of hundred times earnings?

Hill: Something like that, yeah. And also, you see people throwing out scenarios like, what if Amazon (NASDAQ: AMZN) decides they're going to offer up their own standalone streaming service? What if they take Amazon Prime streaming, they're going to spin it off, it's going to be a separate thing, and it's just $7 a month? And it's like, OK, yeah, they could do that, but until they do that, don't think that's necessarily a concern.

Jayson: And they haven't had as many hits. Maybe they do have a better content-creation engine at Netflix than anywhere else. But when I hear people talking about "We just get these folks on board and we let them be very creative," I tend to think that's probably happening at other places as well. I don't think anyone is like, you know how we're going to get great content? We're going to tell those directors exactly how to make their shows.

Hill: I think that's basically true at traditional broadcast television. I don't think that's necessarily true at places like --

Jayson: Amazon, Hulu.

Hill: -- Amazon, Fox, AMC, that sort of thing.

Jayson: Yeah, exactly.

Hill: Let's move on to Harley-Davidson. Their third-quarter profits and revenue came in lower than a year ago. And in terms of the stock, this is the mirror opposite of Netflix. As Netflix opened this morning at a brand-new all-time high and then dropped back down a little bit, Harley-Davidson opened this morning at a 52-week low and then has gone back up to the point where it's up about 3%-4%.

Jayson: Yeah.

Hill: I'm not trying to hate on Harley-Davidson, but what has happened in the last two hours to make people think, oh, no, it's actually much better than we thought?

Jayson: I don't know. Harley has a problem, which is, the folks who want to get on a big, huge motorcycle, that's a dwindling supply. And they acknowledge this in their call, talking about how they need to get new riders, and they have a lot of plans and programs to painstakingly create new riders. They've tried to reach out to younger generations with motorcycles that are less expensive, and the margins aren't as great. I think motorcycle sales were down 14%.

When a company like Harley is talking about inventory management, and they're talking about social-media hits and signups in Europe, you know things aren't going so well. They're trying to find new ways to market, and they're having trouble with their core consumer. And I'm one of those people. I always wondered why everybody was excited about Harleys for 10 or 15 years, because before that, it was kind of a niche thing. My uncle Charlie was always a Harley-type dude -- a big, hairy dude who rode Harleys. And then, all of a sudden, every middle-aged yuppie dude was growing a beard and buying one of those helmets and riding a Harley. And now that's fading. Some of them are just getting too old to hold those giant motorcycles up anymore.

Hill: A year or two ago on this podcast, I think it was because we were talking about Harley, I think it was Bill Barker who made the point in, talking about the brand appeal, he made the point, what other brand out there is so beloved that people are literally tattooing the brand on their bodies?

Jayson: Bieber.

Hill: [laughs] Well, we were trying to stick to publicly traded companies, but yeah, if you want to go Justin Bieber, you can do that. I think one of the things with Harley Davidson, and this is the opposite of something we've talked about most recently with airlines, if part of the bull case right now for airline stocks is the price of fuel is not as expensive as it used to be, for a pretty decent amount of time, part of, not the main, but part of the bull case for motorcycles in general and Harley-Davidson in particular, was the price of gas going up. And it's one less compelling argument to buy a motorcycle, if all of a sudden gas is under $3 a gallon in perpetuity.

Jayson: Yeah. I'm not sure. Maybe there are coincidences that prove otherwise, or people might say they do. I'm not sure the price of gas matters all that much for some of these leisure vehicles. I have watched the RV industry pretty closely, expect high gas prices to put a major crimp on RV sales. And they don't generally do that, and even the folks inside the RV industry said it's not so much high prices; it's volatility that spooks people. But right now, RV shipments are near all-time highs, and motorcycles aren't. So that tells you people are spending their leisure-vehicle money in a different place right now.

Hill: I would be far more interested in a motorcycle if I lived somewhere outside the city. I think if I lived somewhere in the country, I would be more likely to.

Jayson: I got over them a long time ago. I used to ride every day. It was my commuting vehicle.

Hill: Really?

Jayson: After nearly being killed enough times I said no more of this.

Hill: Wait a minute. Was this when you were in Minnesota?

Jayson: Yeah, between college and grad school.

Hill: Even in the winter?

Jayson: No. In the winter I did not commute on the motorcycle. Little bit tough.

Hill: [laughs] OK, probably just as well. As I mentioned at the top, this Sunday is the 42nd Marine Corps Marathon. It will be my second time running.

Jayson: It's making my stomach hurt that I'm not going.

Hill: But you're being smart. We talked about this before. You have a little bit of a knee injury, and you're not going to push it.

Jayson: Yeah. I've been injured for, like, two years, and I'm finally getting over the last one. Rolling injuries. I deferred -- a few weeks ago, I told you I deferred because my knee was feeling pretty good, but I decided I didn't want to be working up to a marathon on a knee that felt 80%.

Hill: That's a good move. Last year, it was pretty darn hot today at the marathon.

Jayson: When you finished, what was it, about 70?

Hill: Oh, no. When I finished it was about 80.

Jayson: That's actually pretty warm.

Hill: Yeah, it is actually pretty warm. [laughs]

Jayson: I've run many marathons in that kind of temperature, but I'm fairly advanced.

Hill: I was going to say, this was my first time ever running a marathon, and I crossed the finish line, and 10 minutes later I was on a stretcher on my way to a medical tent. So I looked at the forecast. At the moment it's not forecast to be quite that warm.

Jayson: No. Four-hour finish. It would be somewhere around 70 degrees, it's said.

Hill: Yeah, let's assume, for the sake of this conversation, that I'm going to be over four hours.

Jayson: The average time at Marine Corps is usually about 4:20. I'm going to go out on a limb and say -- I actually wrote an app that can predict this pretty well for most people. If you throw in the temperature and a recent race performance, it can predict your marathon time according to the temperature. I'm going to guess that most people are, in the four-hour range, they're going to have to add about 10 minutes. In my experience, as a three-hour-type marathoner, if it was going to be 80 degrees, I was probably going to run more like a 3:08 or something.

Hill: So I was curious about hydration, because that's obviously the big tip that you hear.

Jayson: I wish weathermen would quit telling people to hydrate.

Hill: [laughs] In investing, we talk about conventional wisdom all the time. It seems like, when it comes to running, conventional wisdom is, if it's hot, make sure that you hydrate out there.

Jayson: Well, when it gets warm here in the summer, people say that, and it's actually a really dangerous piece of advice. Tim Noakes sort of wrote the book on running, the book The Lore of Running, which is this giant, thick book that I have, referenced really exquisitely on all these kinds of issues. And he was one of the first guys to raise the alarm on overhydration or hyponatremia, which results from people drinking too much, and a lot of it is because they're being told "Just keep drinking, keep drinking, keep drinking." And you can only sweat so much.

What happened, years ago, Noakes found that a huge percentage of Ironman finishers were overhydrated at the end. And hyponatremia is actually a very serious condition that kills people every year, whereas so-called "dehydration" -- I'll make the scare quotes for all of you out there -- the Army did tests on soldiers years ago and found that you couldn't actually dehydrate people and then march them in the desert. You couldn't even kill them, really. They generally would collapse and quit doing the work and become irritable, but it never turned into this life-threatening situation.

So the simple thing to remember is, when you're in a race like this and it's warm, drink when you're thirsty and that's it. Don't try to drink ahead of your thirst. Don't drink because your legs are cramping, because there's no connection between leg cramps and any sort of state of hydration, and it has nothing to do with loss of salt or anything like that. It's because you ran too fast. You drink when you're thirsty. And if you feel really lousy on a warm day, you need to take walk breaks. And if you feel really lousy, you need to sit in the shade for a while.

Now we were talking about your experience last year. I thought you just had -- Chris had explained what happened -- I thought he just had postural hypotension, which is, right when you stop running, your blood vessels are all dilated on a hot day, and all of a sudden you don't have the pumping action of your leg muscles helping constrict your vessels and move your blood around, and you feel faint. And if this happens, get your head down, get your feet elevated, and usually it fixes the problem pretty quickly. But then, you told me they actually tested your blood last year.

Hill: Yeah. And, actually, the last episode of Market Foolery last year, I talked about this in an episode that I think is titled "Scenes From a Medical Tent." It was basically, they put me on a stretcher, they get me over to a heat tent where they start packing my body in ice, and then they took some blood just to test it, and they found my sodium levels were quite low. And they said, "Oh, we have to get an IV in this guy."

Jayson: And to be clear, that's not because you lost too much sodium. It's because you put in too much liquid. Your body is actually really good at regulating your sodium loss through sweat, and if it senses that you're getting down on sodium, your sodium level in your sweat will vary. All of this is in Noakes' book, and his book Waterlogged is on this very issue.

Then, we talked -- I didn't realize this had happened -- they did all the right things by testing you. What often happens in the end of these races is, they just assume that if you feel crummy, you're dehydrated. This is why people say, "Hydrate, hydrate!" Well, if they started sticking more water in you at this point, they can actually kill you, so it's really good that they're on the ball at the end of Marine Corps.

Hill: Marines know what they're doing, generally.

Jayson: Yeah. We talked, and you said you were drinking too much, because you felt crummy, your legs were hurting, and you kept drinking.

Hill: And I kept sweating and I thought, God, I'm losing so much fluid. So at water stops, and there are water stops at the marathon every two miles or so, they hand out water and they hand of Gatorade. And for the second half of the race, I was double-fisting. I was taking one of each, and I just thought, I have to get more fluids in me.

Jayson: Gatorade itself won't stave this off. Even the sports drinks with salt in them, that won't help. You can make yourself sick with too much water even by drinking those.

Hill: Pepsi shareholders don't want to hear you say that.

Jayson: Yeah, well, that's actually part of the issue. The sport-drink companies had the research that showed this years ago, and they chose to ignore it because it wasn't convenient to selling their product to races. But the short of it is, drink when you're thirsty. You'll know if you're dehydrated because you'll be really, really thirsty. Now, last year, you finished, was it five hours-ish?

Hill: Just under five hours.

Jayson: What are you shooting for this year?

Hill: If I can come in under 4:30, that'd be great.

Jayson: I would pad that out a little, and do not be afraid to take some walk breaks if you feel lousy. That's the most important thing. I've been there. I've drunk too much water and liquids when I felt lousy. Luckily for me, and I'll say lucky -- I start to feel uncomfortable. My stomach starts to slosh and I feel bloated, and I have to pee. So I get a very early signal from my own body as to when I need to quit. But some people don't get that.

Hill: Last thing when it comes to liquids. Last year during the race, there's a part in Washington, D.C., of this course that goes over Hains Point. And is the Blue Mile, which we've talked before about -- one of the truly great things about the Marine Corps marathon is how inspiring it is. Not just the crowds that are there cheering you on, but the other people who are running. There are always people who are running with a sign on their back in honor of someone, and there are often runners who are in the military, and they've got prosthetic legs or limbs or that sort of thing. So it was this odd occurrence where the first part of Hains Point is the Blue Mile, in honor of fallen soldiers.

Jayson: And it's just sign after sign after sign of people we've lost in wars.

Hill: Yes. And last year, I couldn't help but notice that every single one of them was younger than me, which is incredibly sobering. That's the first half of Hains Point. On the way back, the opposite experience, in that somehow, out on Hains Point, which is somewhat remote, there were these two women who had set up a card table and taken it upon themselves to hand out Dunkin' Munchkins and mimosas.

Jayson: I never pass those up.

Hill: Really? Because these two women looked like they had imbibed a few on their own. They were having a great time at 10 in the morning when I was going by them. So don't overhydrate, but maybe, if I have the chance at a mimosa again?

Jayson: I think you can't skip the stuff that makes the race fun, even if you're shooting for a [personal record]. My first Boston, I was unfamiliar with the "kiss a Wellesley woman" situation in the Wellesley Scream Tunnel, which is that there's all these college women out, and they're screaming like crazy. It's so loud that your hair stands on end. That's amazing. And lots and lots of them have these signs that say, kiss me, I'm from wherever, kiss a college woman. And I was running by and I thought, oh, that's kind of demeaning. And then I thought, well, these are women at Wellesley College. If they're holding the sign, this is a thing they want to do because it's funny or tradition or whatever. And I decided I was going too fast, and I decided, you have to do this, or your race isn't going to count.

Hill: It's part of the experience? Really? Is that how it works? [laughs]

Jayson: In my mind, I think you shouldn't be allowed to win the Boston Marathon unless you've gone ahead and kissed a Wellesley woman on the way through. Men and women, either side, I think you should have to do that, like you should have to stop for your mimosas, or whatever.

Hill: I was going to say, because the Boston Marathon course also goes by my alma mater, Boston College, and there are frequently students handing out beers.

Jayson: And I take every one of those. [laughs] You have to have fun. To me, the race doesn't count unless you also had fun.

Hill: All right. Seth Jayson, thanks for being here. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Chris Hill owns shares of Amazon and Walt Disney. Seth Jayson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, AMC Networks, Netflix, and Walt Disney. The Motley Fool recommends Dunkin' Brands Group and PepsiCo. The Motley Fool has a disclosure policy.