Core Viewpoint - Both Netflix and Spotify have experienced significant stock declines of 25% to 30% since mid-2023 due to disappointing earnings results, but one company is identified as having stronger long-term competitive advantages that may present a better investment opportunity heading into 2026 [1][2]. Company Performance - Spotify's stock fell after its second-quarter earnings revealed a worsening operating margin and negative earnings per share, with further declines following CEO Daniel Ek's resignation and weak fourth-quarter guidance [4]. - Netflix's stock also declined after its second-quarter earnings, as management indicated that strong results were primarily due to favorable foreign-exchange rates rather than increased consumer engagement. The stock faced additional pressure from a one-time Brazilian tax and concerns over its proposed acquisition of Warner Bros. Discovery [6]. Competitive Advantages - Both companies have been able to raise prices, indicating competitive advantages, with Spotify implementing price changes in 2023 and 2024, while Netflix has consistently raised prices since 2014 [8]. - Spotify's premium pricing includes additional content, such as audiobooks, but it lacks a clear advantage in music content due to the standardization of access to songs across platforms, limiting margin expansion [9][10]. - In contrast, Netflix has developed a unique content library through original productions and exclusive licensing, allowing for greater margin expansion as it amortizes costs over a larger subscriber base [11]. Financial Metrics - Netflix's operating margin is projected to expand by 1.6 percentage points for the year, despite recent challenges, while Spotify has less flexibility to control costs and expand margins [12]. - Netflix shares are valued at less than 30 times analysts' consensus estimates for 2026 earnings, making it a more attractive investment compared to Spotify, which trades closer to 50 times 2026 estimates [13]. Future Outlook - Analysts expect strong earnings growth for Spotify in the coming years, but its high valuation poses risks if estimates are revised downward. Conversely, Netflix may not have the same growth expectations but offers more confidence in achieving targets, potentially driving its stock price back toward all-time highs in 2026 [14].

Industry Overview - Linear TV is experiencing a decline due to the rise of streaming services, indicating a significant shift in consumer behavior and media consumption [1] - The film industry is also struggling to maintain relevance in a world dominated by streaming and social media, with the global box office reaching its peak in 2019 [1] Investment Strategy - The focus is on investing in companies with strong qualitative attributes, acquiring them at attractive prices based on fundamentals, and holding them for the long term [2] - The investment approach involves managing a concentrated portfolio aimed at minimizing losses while maximizing exposure to high-potential winners [2] - Companies may receive a 'Hold' rating if their growth opportunities do not meet the investor's threshold or if their downside risks are deemed too high [2]

Financial Data and Key Metrics Changes - Quarterly revenue grew by 53% year over year from $12.4 million to $19 million, exceeding guidance [6][27] - Net income improved by nearly $3 million year over year, reaching $800,000 or $0.01 per share [7][28] - Adjusted EBITDA increased by over $4 million year over year from negative $1 million to positive $3 million, marking the highest adjusted EBITDA in company history [7][28] - Adjusted free cash flow was $2.9 million, representing the sixth consecutive quarter of positive adjusted free cash flow [29] Business Line Data and Key Metrics Changes - Subscription revenue was $9.3 million, a decline of $1.7 million from last year but a sequential increase from Q1 [29] - Content licensing revenue was $9.3 million, an increase of over $8 million driven by significant new business from AI licensing [29] - Gross margin improved slightly to 53% from 52% a year ago, with reductions in content amortization [30] Market Data and Key Metrics Changes - The company has entered into new and expanded multiyear wholesale distribution agreements in Asia, Latin America, and the U.S., which are expected to boost subscription revenue [8] - The dataset licensing for AI training has grown substantially for three consecutive quarters, including licensing about 9 million tokens of code for the first time [10][11] Company Strategy and Development Direction - The company aims to have three solid revenue pillars: subscription business, licensing business, and advertising business, with expectations for steady growth in subscriptions and rapid growth in licensing [37] - The company is focused on becoming a dominant AI video licensor, with plans to license more video and data than in 2025 [24][25] - The company emphasizes the importance of its extensive library of over 1 million hours of content and its ability to structure data effectively as competitive advantages [19][21] Management's Comments on Operating Environment and Future Outlook - Management believes the market for high-quality, ethically sourced video and audio content is durable and growing, with estimates of industry-wide needs ranging from billions to tens of billions of hours [14][15] - The company is confident in its ability to navigate the evolving landscape of AI and media, focusing on meaningful information while disregarding distractions [22][23] - The company maintains a strong balance sheet with $31 million in liquidity and no debt, positioning itself as a high-performance outlier amid technological revolution [25][31] Other Important Information - The company paid dividends of $10.4 million in June, including a special dividend of $5.8 million, resulting in a dividend yield of about 6.5% [31] - The company expects third-quarter revenue in the range of $15 million to $18 million and adjusted free cash flow for 2025 in the range of $11 million to $13 million [32] Q&A Session Summary Question: Why is the company in the core media business? - Management stated that the subscription video on demand business is strong and global, representing the core of the company, and that all revenue streams work together synergistically [36][37] Question: What are the expected cost increases as the company pivots towards high-growth licensing? - Management indicated that the primary costs would be related to storage and delivery, but overall costs would remain manageable due to existing revenue-sharing arrangements [40][41] Question: What is the significance of licensing code for AI training? - Management explained that while video is the primary focus, the inclusion of code in licensing is a unique opportunity that reflects the value of owning and controlling intellectual property [49][50] Question: Is the company exploring other types of video content for licensing? - Management confirmed that while the focus remains on building a factual entertainment library, there is potential value in other types of video content, particularly if they are not freely available [53][55]

Core Insights - Netflix exceeded Wall Street's expectations for Q2 earnings, reporting earnings per share of $7.19 and revenue of $11.079 billion, surpassing analyst consensus [1] - The company raised its full-year revenue forecast for 2025 to a range of $44.8 billion to $45.2 billion, up from the previous target of $43.5 billion to $44.5 billion [2] - The increase in revenue forecast is primarily due to the depreciation of the U.S. dollar and strong business momentum from member growth and ad sales [3] Financial Performance - Netflix has stopped reporting subscriber numbers, stating that other metrics provide a better financial performance picture; however, subscriber growth was noted to be ahead of forecasts [4] - Total viewing hours increased by 1% in the first half of 2025 compared to the same period in 2024, with subscribers watching over 95 billion hours of content [5] - Netflix shares have risen over 40% in 2025, closing at $1,274.17, slightly below the all-time high of $1,341.15 reached in June [6]

Core Viewpoint - Carnival and Disney are both strong investment options, with recent stock momentum suggesting potential for continued growth [1] Group 1: Carnival - Carnival is the world's largest cruise line operator, benefiting from a resurgence in the cruise industry, with strong demand leading to record operating results [3] - In Q1, Carnival reported revenue of $5.8 billion, a 7.5% year-over-year increase, driven by higher capacity and pricing, and ended the quarter with $7.3 billion in customer deposits, surpassing last year's record of $7 billion [4] - The company achieved adjusted EPS of $0.13, reversing a loss from the previous year, indicating improved financial consistency, with expectations for continued growth from new initiatives like Celebration Key and new ship deliveries [5] - Carnival is guiding for full-year EPS of $1.83, representing a 29% increase from 2024, while reducing total debt by $4 billion to $27 billion, which supports a higher valuation as it trades at a forward P/E of 13, significantly lower than Disney's 20 [6] - The combination of value and growth potential makes Carnival an attractive long-term investment [7] Group 2: Disney - Disney has faced challenges in recent years, with stock down 7% over the past five years, but recent trends suggest a potential turnaround [8][9] - In fiscal Q2, Disney reported a 7% year-over-year revenue increase and a 20% surge in adjusted EPS, driven by strong performance in streaming, with Disney+ adding 1.4 million customers [10] - Growth in Hulu and ESPN digital properties, along with strategic bundling efforts, are contributing to positive momentum, with a target EPS of $5.75 for fiscal 2025, a 16% increase from the previous year [11] - Disney's diversified profile and globally recognized brand provide a strong foundation for future growth, particularly in streaming media [12] Conclusion - While both Carnival and Disney present compelling investment opportunities, Carnival is viewed as having greater upside potential due to its undervalued growth story [13]