Latest news with #MaryLong
Yahoo
02-06-2025
- Business
- Yahoo
Nvidia's Big Number
In this podcast, Motley Fool analyst Tim Beyers and host Mary Long discuss: Market relief about some Trump trade saga news. A rose and a thorn from Nvidia's latest report. Another trade-related announcement that affects the semiconductor supply chain. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Before you buy stock in Nvidia, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Nvidia wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $651,049!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $828,224!* Now, it's worth noting Stock Advisor's total average return is 979% — a market-crushing outperformance compared to 171% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of May 19, 2025 This podcast was recorded on May 29, 2025. Mary Long: When Nvidia speaks, the world listens. Unless, of course, there's something else to pay attention to. You're listening to Motley Fool Money. I'm Mary Long joined today by Mr. Tim Beyers. Tim Beyers, joining us on Motley Fool Money twice in one week. Thanks for being here, Tim. Tim Beyers: Thank God. I'm fully caffeinated and ready to go. That's too many times. Mary Long: Got to have something to keep you going. Luckily, we don't have any shortage of things to talk about today. Of course, we've got earnings from Nvidia, which dropped its results yesterday after the bell. Typically, the morning after Nvidia drops results, we clear the show. We spend the whole time talking about that. Today, though, another story seems to be stealing some of Nvidia's spotlight because the US Court of International Trade, which is made up of three judges in Manhattan, ruled that Trump's tariffs are effectively illegal. Tariffs, having been the big story of the past, God, I feel like we're in a bit of a time warp. I don't even know how long it's been, but at least since early April, Tariffs having taken up most of the news since then, this is obviously a pretty big deal. Trump's tariffs were issued on the basis of this 1977 law that allows the executive branch to implement commerce controls in the case of a national emergency. Trump had said, hey, the trade deficits that the US has, that constitutes a national emergency. Now, this court says no dice. This is, again, yet another chapter in this, will we, won't we, up and down, back-and-forth tariff saga that's been going on since Liberation Day. Neither of us are legal experts, Tim, but you are a stock expert. What in the world does this latest tariff change mean for investors? Tim Beyers: Oh, this answer is going to be so snarky. Snarkiness alert, because the only real answer here is that it changes nothing until it changes something. That's a terrible trite answer. But what I mean is that we have to have a ruling, and this ruling will be challenged. The short-term intact impact, I should say, is probably be a delay in implementing some tariffs, and that's likely to be very good for some importers, certainly. But we need to know, will countries on the other side of these reciprocal tariffs that were announced on Liberation Day, just because we've deemed them illegal for now, will they pause their own tariffs? Is the so-called deal that is coming with the EU, is there still something to be done there? We really just do not know. This is a line in the sand. I am certain that the President is not very happy about it and will fight this and so we'll find out. What I think we're seeing in the market, though, just to put this in investing terms, Mary, sometimes we have these things called a relief rally. This feels like a relief rally like, oh, man. Tariffs were not good for a number of companies. There were a number of companies that were manufacturing, for example, in Vietnam, like, this means that the Vietnamese market is back open for manufacturing, fan-free fantastic. Like, that is the definition of a relief rally. Hey, baby, this is awesome. We have ourselves a big summer moment. We all jump in the pool and have fun, but we don't know that that's going to be the case yet. Expect court challenges, expect legal experts to weigh in, and then we'll see what's real. Mary Long: Despite continued uncertainty, the market is up a bit on this news, seeing a bit of this relief rally that you mentioned. Market's also being lifted by Nvidia. Let's talk Nvidia. Tim, you and I were at Venture X as co-working space yesterday afternoon, and we got to talking a bit about those results then. Of particular interest to you yesterday was the company's free cash flow. Nvidia posted $24 billion in free cash flow this quarter. That is, obviously a very big number. But the thing about Nvidia is they're always dealing in big numbers. This is a company that's used to triple-digit revenue growth. Why is this big number catching your eye? Tim Beyers: Well, consider what it would mean if Nvidia can keep the pace we've seen here at 24 billion a quarter, the company would be on track to deliver 96 billion in organic free cash flow this fiscal year. That's close to a 3% forward-free cash flow yield. To put that in context, Mary, the market average, the average for the S&P 500 is 3.3%. If we take that as real, you could make the argument that Nvidia is trading pretty reasonably. I have not made that argument, by the way, but if you wanted to make that argument, you could, if there's enough evidence that 96 billion in current year FCF is actually achievable. I recognize that's a big if. It requires growth to continue at the pace we're seeing, and just for context, the Data Center business, which is driving all the results at Nvidia right now. Data Center revenue was up, I believe it was 73% year over year. You need to see very high growth rates. But let's say it's real because the context here, Mary, is that, according to S&P Global Market Intelligence, our friends at Capital IQ, the average consensus estimate for free cash flow for this fiscal year is 103 billion, 96 billion is underselling it. That is insane. These are not Pollyanna estimates. If that's true, this might be a very good year to be a Nvidia shareholder. Mary Long: You're very impressed by the free cash flow. But as we were talking before we started recording, you mentioned that you've got a gripe with something else within the Nvidia results. What might that gripe be, Mr. Beyers? Tim Beyers: I just don't understand why Nvidia pays a dividend. I think we just have to stop. You just have to say, look, I know. It's a 1-cent-per-quarter dividend. We're not even going to pretend that we can't, it's the thing that, like, that thing that you do that you only do it because somebody sometime at some point, said, you should do that. You're like, but I don't want to do that. I really hate doing that. It's like they're begrudging, paying a dividend. Then don't do it. Don't do it. It's only 1 cent a quarter. Let's put it this way, Mary. At some point, you just shouldn't be allowed to say you pay a dividend. If your dividend yield is 0.03%, that's not a dividend. That's just insane. Look, you either pay one and investors can look forward to it, and they can take that capital and reinvest it how they want to maximize their returns, or you do the other thing you do. If you care about shareholder returns, you reinvest the money back into your business, and you grow faster in order to deliver returns for shareholders that way. But I just find it, it is utter nonsense, Mary. It's so outrageous. Just please stop. Either do it for real or stop. Mary Long: Not too long ago, Nvidia stock dropped on the news that it would no longer be able to sell what's referred to as H20 chips to China. These H20 chips were specially made to comply with US export controls to China. Then the Trump administration made changes to those export controls and bibbidi-bobbidi-boo, it became illegal for Nvidia to sell those special chips to China. The company incurred a 4.5 billion dollar charge from excess H2O inventory this past quarter, and it warned that it expects to lose about $8 billion in the second quarter revenue, as well. Tim, whenever I hear about this story, I cannot get the image out of my head of just a pile of chips that took up so much time and energy and material, and brainpower to build, just sitting in a pile and something about that image makes me so sad. Am I putting too much weight in this? Is there really nobody in the whole world that wants to buy these chips? Tim Beyers: Maybe not. I'm not so sure that's a bad thing. These chips were effectively optimized for the Chinese market, so why would they be useful somewhere else? Nvidia needs to ensure that it builds according to what its customers need. If that means creating chips that can't easily transfer from one market to another, then so be it. It's not like there isn't enough global demand for what Nvidia offers, Mary. Go back to that cash flow number that we were talking through. They are doing just fine. Look at it this way, with the write-down in place and the expectations of write-downs to come in place, if Nvidia finds even a tiny sliver of a fraction of those chips being sold somewhere else or maybe refactored to fit in a slightly different market, and not all of them are sold maybe it's like $500 million. Well, that's $500 million nobody was counting on. I think it's probably immaterial at this point. But then if they do find a way to capture some value from what we thought was 12.5 billion of lost value, well, then look out. That will be a nice little catalyst. Mary Long: Immaterial, perhaps, but interestingly, Jensen Huang really seems to be focused on. Tim Beyers: He's bothered by it. Mary Long: He's bothered by it, for sure. Last week, he called US Chip export controls a failure. Granted, of course, Huang himself has admitted that the biggest impact of a lot of these restrictions that we've seen have been the erosion of Nvidia's competitive position. Another Huang quote from this most recent earnings call is that "China is one of the world's largest AI markets and a springboard to AI's success." I want to double-click on that with you, Tim. China is important to AI if you ask Jensen Huang. How important is China to Nvidia? These H20 chips aside? Tim Beyers: Well, it's fast-growing. The worry from Jensen, and I think he's right to express it this way is it's one of the markets where consumption of AI infrastructure is likely to continue at a very brisk pace. It's a fast-growing territory. But in terms of pure numbers right now, it's the fourth largest geographical revenue contributor for Nvidia in fiscal 2025, and that was behind the US, Singapore, and Taiwan. China would argue that you should include Taiwan in your calculation of Chinese revenue because they don't recognize that Taiwan is not part of China. But I would say it's the potential growth rates, and Nvidia doesn't want to miss out on that. Is it important? Yes, it is important. Now, to be fair, we are dealing with a court challenge to come about what's going to happen with tariffs. It's not the same thing as export controls. But if we start to loosen restrictions, will that have an impact here? I don't know. But it's an important market, but it's not the end-all-be-all market. Let's be clear. The US is far and away still the biggest market for Nvidia. Mary Long: I want to take a beat to tie together the latest on tariffs in this court challenge that we're seeing there with the latest from Nvidia. Importantly, shortly before Nvidia's earnings, news broke about a new Trump administration announcement from the Commerce Department, and this announcement orders a number of companies to stop shipping goods to China, even if they'd previously been permitted to do so. This largely falls in the realm of chips. This report basically says if you don't have a license to sell chip software to China, you cannot sell to China and if you do have a license, it's now under review. The heart of this announcement are three companies, Cadence Design Systems, Synopsis, and another that's a subsidiary of Siemens. These companies are center stage because they're the top makers of electronic design automation software or EDA software. Let's start by connecting these dots. What is EDA software, and why does the Trump administration not want China to have it? Tim Beyers: You've defined what it is. It's design software. Essentially, it's the tooling you use to create chip designs that are then brought to life in manufacturing. But it's bigger than that. EDA is critical in that it allows for the testing and verification of a chip or a series of chipsets in the design phase. What you're doing is you are generating designs. You are running those designs through paces, because what you don't want, and you can imagine this because chip manufacturing is so sensitive and so expensive, Mary, that if you were to run a bunch of chips through manufacturing, you imprinted circuits on wafers, and then you were done, and then you had a run, and you had chips that were failing straight off the line. By the way, failure rates in wafers used to be much higher. It used to be measured, it probably still is measured this way. I'm not as up-to-date on my chip manufacturing lingo, but we used to call them yields. The yield on the wafer was so important. You had a bunch of chips manufactured out of this wafer, and if you had a 70% yield, for example, 30% of the chips on that wafer would have failed. You don't want yields that high. You would like the yields to be much better than that. EDA is a way to not only design, automate your designs, automate your tests, but test and verify in that design phase, so you have a very high level of assurance before you go to Taiwan send me and say, let's go. Let's get into production. Now, the second question you have here is why doesn't the Trump administration want China to have it? I'm guessing, but I would say that the administration isn't so keen on Cadence and Synopsis, providing tools to Chinese, chip designers, manufacturers, because they want to make it as difficult as possible to reliably replicate high-performance chipsets. They don't want to make it easy for China to compete in essentially the AI Cold War, the war for technical supremacy in AI, and Cadence and Synopsis, by virtue of the tooling that they provide, are a critical part of the value chain here of developing very high-performance chips. Mary Long: Very likely as a byproduct of all this trade and tariff talk and the back and forth there. Jensen noted on Nvidia's earnings call that he expects Nvidia to build everything from chips to supercomputers in the US by the end of the year. That's very likely music to Trump's ears, and unsurprisingly, it sets the company up well to avoid problems with the current administration in the future. But the end of year is fast approaching Tim. What would this process actually look like? How much manufacturing does Nvidia currently do here versus overseas? Is the end of the year a legitimate timeline to move everything over here? Tim Beyers: How many times have you said something that you know when you're talking, this person really wants to hear this and I'm going to tell them what they want to hear. You and I have both done that, Mary. I know you have because I know I've done it. I know I've done it. Jensen Huang is telling the administration what they want to hear. This is hype, I would say. Now, will there be truth to it? I would expect that there will be agreements to manufacture chips at onshore facilities being stood up, particularly by Taiwan Semiconductor. I'm certain that's true. I think for sure, he's telling at minimum, a half-truth and probably a truth in context. But will there be actual production? I would say, no, not much production, if any, production. Now, to be fair, I think it would be super interesting for Nvidia to pen a number of good agreements, including an agreement with Intel, because Intel is making real investments in its foundry business, and it needs signature customers. If there's a deal to be had there, I am very certain that Lip-Bu Tan over at Intel would love to talk to Jensen and have a real conversation about how they could handle significant portions of Nvidia's production needs right here on US shores. But how much of this is going to be done by year-end? No, come on. I appreciate Jensen is playing the game, but he's playing the game. Mary Long: Did I catch a reckless prediction from you just now, Tim? Is that what that was? Tim Beyers: That's probably a reckless prediction, yeah. Probably. Mary Long: Well, then that's a good place to end it. Tim Beyers, thanks so much for the time for helping to demystify so much of the uncertainty and to dig into Nvidia's earnings with us this morning. Tim Beyers: Thanks, Mary. Mary Long: As always, people on the program may have interest in the stocks they talk about and Motley Fool may have formal recommendations for or against throw buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see y'all tomorrow. Mary Long has no position in any of the stocks mentioned. Tim Beyers has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool has a disclosure policy. Nvidia's Big Number was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
05-05-2025
- Business
- Yahoo
Is Starbucks Serving Up Promise or Peril?
In this podcast, Motley Fool analyst Asit Sharma and host Mary Long discuss: What to do with 2 extra minutes. Earnings from Starbucks. What's cooking at Wingstop. Then, Motley Fool analyst Yasser el-Shimy joins Mary for a look at Warner Brothers Discovery, in the first of a two-part series about the entertainment conglomerate and its controversial CEO. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Before you buy stock in Starbucks, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Starbucks wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $623,685!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $701,781!* Now, it's worth noting Stock Advisor's total average return is 906% — a market-crushing outperformance compared to 164% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of May 5, 2025 This video was recorded on April 30, 2025 Mary Long: A dollar saved is a dollar earned, so a minute saved is what? You're listening to Motley Fool Money. I'm Mary Long joined today by Mr. Asit Sharma. Asit, good to see you. How are you doing? Asit Sharma: I'm great, Mary. How are you doing? Good to see you. Mary Long: I'm doing well. We got reports from Starbucks today, that's the coffee chain that most listeners are probably pretty familiar with. They're in the midst of a turnaround. They dropped earnings yesterday after the bell. I want to kick us off by focusing on Starbucks' measurement of a different currency, not dollars, but time, Asit. A big focus of Starbucks' turnaround is returning the chain to its golden age of being a neighborhood coffee house. But as a part of that, there's also a focus on efficiency. Management seems to think they're making good progress on that efficiency front. The company shaved two minutes off its in store wait times thanks to the help of a swinky ordering algorithm. If you had an extra two minutes in each of your days, what would you be doing with that time? Asit Sharma: Well, I'm not giving it back to TikTok and YouTube shorts, I'm done with you guys. I'm grabbing the cast iron bookmark, breaking out of that house, and I'm getting two minutes extra to read Orbital by Samantha Harvey, which is my Middle Age men's book club read of the month, and I'm behind, I need it finished by Saturday. Mary Long: It sounds like you're being very productive with those extra two minutes. Asit Sharma: Living my best life. Mary Long: There's a detail here that's very interesting to me because notably, this algorithm that's shaved off these two minutes of order times is not powered by artificial intelligence. Instead, it follows an if then structure. This is fascinating to me because it seems like every other company is going out of their way to highlight its AI capabilities, build themselves as an AI company, even if they don't really play in the tech space. What does it say about Starbucks that they seemingly have an opportunity to do that with the rollout of this algorithm and yet they're not? Asit Sharma: Well, on the one hand, I think they would love to be able to float some great AI stuff to the market, but truthfully, everyone knows that it's going to take more than AI to solve Starbucks' problems, so let's get real here and go back to some very elementary type of algorithmic thinking to solve some of the throughput issues they have. Mary Long: Again, Starbucks seems pretty proud of these shorter wait times, but that doesn't necessarily seem to be translating into great sales numbers quite yet. I'm going to call out some metrics from the report, including same store sales, which is closely watched here, and you tell me how you're interpreting these numbers. Do they spell to you, Asit Sharma, promise or peril for the coffee company? We'll kick things off with same store sales. In the US, that's down about 3% for the quarter. What do you say, Asit, promise, peril, something in between? Asit Sharma: I think that's an easy peril. This is the trend at Starbucks. They're losing a little bit of traffic. They're trying to turn it around to get people to come back into the stores or come back to the drive throughs. They have a strategy for this, back to the good old days. We can chat about this. But this is emblematic of Starbucks larger problem, so this is a peril call, easy. Mary Long: Two hundred and thirteen net new store openings in the second quarter, bringing the total store count to nearly 40,800 around the world. Promise, peril, something in between? Asit Sharma: Promise. I like that. Brian Niccol, turnaround artist. Let's slow this puppy down. Why should we be expanding when we don't have the unit economics right? Why should we be expanding when CapEx, capital expenditure is one of the things dragging this company down? Most people don't realize Starbucks has a pretty big debt load because it has invested so much in its stores over the years. Why don't we try to figure out how we can solve some of our problems with operating expenses versus capital expenditure? Let's also try to renovate stores at a lower cost. All of this points to taking it very easy on that new store development, so I like that, it's promise. Mary Long: Just to be clear, you're saying that that 213 net new store openings number sits right at the sweet spot of, Hey, you're still growing, but it's at a small enough clip that it's not distracting from the real focus, which is improving throughput at existing stores? Asit Sharma: Yeah. It's also a signal that the new management isn't taking the easy way out. Conceivably, one way you could solve Starbucks' problems would be to take on a little bit more debt and to speed up new stores and to say, We're going to actually increase revenue, but traffic will take a bit of time to come back to the stores. We know people of our brand, so we're going to throw a bunch more stores out in places where we don't have this dense concentration and cannibalization. We're going to map this great real estate strategy out. They could have easily said that, but I don't think the market would have liked it too much, so they're doing the sensible thing, which is like, we're not really worried about adding new stores right now, that's not the problem that we have to solve today. Mary Long: Our next quick hit metric, GAAP operating margin down about 7% compared to a year ago. How do you feel about that one? Asit Sharma: It's a little bit of peril situation going on there, Mary. Starbucks is doing something which I think should help the business, which is to say, we've got a couple of pain points for customers. One is the time that it takes for customers to get through their order, average wait times of four minutes. You pointed out going this algorithmic route, so very old school. If a drink is very complex to make, don't make that the first thing you do, or in some cases, maybe you should if it has x number of ingredients, so that way it's ready and the stuff isn't melting on top when the customer gets it. Don't just do first come first serve. I think that is a really insightful way to start from scratch if you're a new CEO. Starbucks has these problems which they're thinking can be solved by labor. Then bring more people in so that we can satisfy customers, we can keep that throughput moving, but that increases your operating expenses, and they've got leftover depreciation from all of the investments they've made in technology. Under the previous CEO, they were trying to solve their problems by having more components like the clover vertica which make things automatic, and they had a cool brew system, which was very expensive, so now we're seeing that work through the profit and loss statement. What we're seeing in the GAAP numbers is that net income is going to be pressured. Number 1, they still have a lot of depreciation that they have to account for, and Number 2, to keep customers happy, which should be the first order of business, they're going to have to hire more baristas, keep those shifts occupied. That is not a clear out type situation, it will take time to resolve. That's a peril. Mary Long: Last but not least, we got GAAP earnings per share. That's down about 50% compared to a year ago. I think I know where you might land on this one. What do you say? Asit Sharma: It's a peril. Something that was a little iffy in the earnings call is both Brian Niccol and his new CFO, who's actually a veteran of the retail business, Cathy Smith. They were like, don't worry about earnings per share too much. We really think you should focus on us taking care of the customer, us becoming that third place again, us becoming the brand that attracts people, us being the place where you can have these day parts like the afternoon where we're going to revive your desire to come into the store and maybe have a non alcoholic aperitif, mind you, I'm not sure that's what investors want to hear. Investors will give a long line to Brian Niccol because he has been successful in the past, and so has his new CFO. But I didn't like that, don't pay attention to this because we're investors, we want money. We give you money, you make money, you give us back money in terms of dividends and share price, so a little bit of peril there. Mary Long: Another data point that I do think is relevant to the Starbucks story and just like the consumer story more broadly is GDP data, which we got out this morning. That showed a contraction of 0.3% down from 2.4% growth a quarter ago. This is the first decline since the start of 2022. Starbucks can improve wait times all they want, they can implement this back to Starbucks strategy, but if we are headed toward a recession and the company is already still struggling, how does that macro picture affect this chain that sells seven dollars drip coffees and $10 lattes to people? Asit Sharma: Mary, the first thing I'm going to ask you is, I actually throw circumstance Kanata Starbucks once every two weeks, and I buy drip coffee and sometimes hot chocolate, and we'll buy a pastry here and there. Where are you getting these seven dollar drip coffees from? Is that some venti with adding some special milk? I don't get that. It is expensive, stop, but seven sounds excessive. Mary Long: Okay, Asit. I was at a Marriott Hotel earlier this month for a latte. Asit Sharma: Here we have the first qualification. Like, well, I was at the airport Starbucks. It's not the airport Starbucks, but everyone listen to Mary. It was at Marriott Hotel. Go ahead. Mary Long: There are some asterisks attached to this example, but it fired me up, so I'm going to use this platform to share it. I'm at Marriott in Collierville Tennessee for a wedding earlier this month. There is no free coffee in the lobby at this hotel, which was my first red flag. I go down searching for coffee, and all that there is is a Starbucks Bistro, so I say, Okay, I'll go to the Starbucks Bistro, buy my coffee. It was a large, but it was a drip coffee. No fills, so easy, they turn around, pour the cup, and it cost me $7.50. I was so enraged, I was ready to throw that coffee across the lobby. I did not. I held it in, but I'm using this moment to share that. That is a real number. Though, again, perhaps that's not the price at every Starbucks. Asit Sharma: Well, I want to extrapolate from that. Which is to say, if it's seven bucks at that Marriott, that tells us something about what's happened to the price over the last few years because in all honesty, that entry level drip coffee, a tall order with nothing on it has increased. I'm going to guess it's 30-40% more than it was just two years ago. Now, some may say that this is taking a little bit advantage of commodity inflation and inflation in general, that Starbucks took an opportunity to bump up those prices, even though it has tremendous purchasing power, and it should be one of the first places to say, Hey, we're going to hold your price steady because we're Starbucks, because we buy from I don't know how many coffee providers across the globe. It's interesting Brian Niccol is saying, We're not going to raise prices anymore this year. I think he's sensing the winds and maybe realizes that Starbucks took a little bit of advantage of its most loyal customers by bumping up these prices. This is yet another thing that makes this very hard. But all in all, I do want to give the new team credit for leaning toward, again, OpEx people versus machines because under the previous management, Starbucks was really thinking that it could solve so many things by having automation. They could improve the rate at which people are going through the drive through lines and the wait times that you have even if you ordered in advance on your mobile order app, and it became something where they lost connection with the customer, and management, of course, is well aware of that. But it reminds me of something that Ray Kroc said years ago, the man who bought McDonald's when it was all of two restaurants, I think, and turned it into what it is today, he said, Hell, if I listened to the computers and did what they proposed with McDonald's, I'd have a store with a row of vending machines in it. Under the previous leadership, I almost felt like that's where they thought they could go, it's just a really automated format without this customer connection. Bringing that back, even though it sounds a little iffy, Mary, whoever is going to go back to Starbucks as a real third place when so many great community coffee shops have sprung up and our consumption preferences have changed? I still applaud management for getting that, that you've got to do right by your customers, price wise, ambience wise, connection wise, brand wise. Maybe there's something in there. Of course, this is a harder problem to solve than Brian Niccol had at Chipotle. Mary Long: I want to close this out by getting another look at the fast casual business from a different company, one that really is leaning more into this digital landscape, and that's Wingstop. Not even a year ago, this chicken wing joint was flying very high, indeed. Shares have dropped significantly since then, down about 45% from their high in September 2024. We're going to get to their earnings that dropped this morning, which were more positive in just a moment, but before we get them, let's look at the past several months. Why that drop? What headwinds was this company up against? Asit Sharma: Wingstop created its own headwinds in a way, Mary, because it had been so successful improving same store sales. The company has a really light real estate footprint, stores are incredibly small compared to some of their wing competitors, and they're meant for just going in, maybe sitting down, but mostly picking up and taking away. They really started to get a deeper concentration, some good metropolitan markets, not huge ones, but decent markets. They saw such an increase in traffic that their comparable stores went through the roof on what's called a two year stack. You compare what you sold today versus not just one year, but two years ago. When you lap great results, it becomes really hard. You can't keep increasing those results exponentially. This year, it turns out what they're doing is holding the gains over the past two years, but it's not like they're having another year where you're seeing same store sales increase by 25%. The projections were, this year we're going to grow those same store sales by mid digits to single high digits, and with this latest report, they're saying, Well, they could be flat this year. The market like the report for different reasons. But that's what happened to the stock because investors were like, Wait a minute. You're spending more on marketing. Yeah, because we're getting to the NBA. We're the official wing of the NBA. But I want those profits. Well, you're not going to get them because we're scaling, and people are just lining up to develop new franchises, and we're going to build this business out globally. Investors were a little bit confused last quarter. We're not getting profits that we want or as much profit as we want. We're not getting the growth that we want to see. But in the grand scheme of things, those were very understandable pauses in the business model and the economic model, and I think over time, it's destined to pick up. But you had some questions about the earnings today. Mary Long: Help us make sense of this most recent quarter because, OK, we saw a teeny tiny improvement in same-store sales. That number only ticked up by 0.5%. But there are some other numbers that seemed pretty impressive. You've got systemwide sales increasing almost 16%, hitting $1.3 billion, total revenue up almost 17.5%, net income increasing, wait for it, 221%. That's all in spite of what's obviously a very tricky, very uncertain macro environment. We've already seen that impact trickle down to other fast-casual chains. Domino's, for instance, reported a decline in same-store sales earlier this week, which is pretty rare for them. What's working and what's not in the Wingstop model, as we've just seen it reported today? Asit Sharma: Wingstop has been a company that's invested a lot in its technology. They've moved digital orders to some, I think, 70% now of their sales. That helps them with a leaner cost structure. Also, Mary, the company has its tremendous cash on cash returns. If you're an investor, let's say, a franchisee in a Wingstop business, you can make 70% cash on cash returns, 50% if you use financing, and that's just a stellar type of return in the QSR, quick service restaurant industry. What they have is tremendous demand in their development pipeline. Their franchise groups are like, we love this, we want more, and that's propelling a really fast store growth count. With Starbucks, they're slowing down. Wingstop is trying to build out new units as fast as possible, and that's where the growth is coming from. What investors are seeing is, I can live with this equation. You have a lean operation. You don't really own your own supply chain. You work with partners, so you've got less exposure to that. You seem to be able to manage all-important bone-in chicken price really well and not pass those increases on to customers for the most part, so I want in and I want to develop more stores. I will note that the company, one of the things that investors did like earlier this year, is the company keeps increasing its total advertising spend based on systemwide sales. It used to be 3%. Then it was 4% of systemwide sales was advertising budget for local markets. Now it's something like 5.5%. But look, with these big brand partnerships, like I mentioned with the NBA, and a lot more advertising in local markets, that's only increasing the flywheel of returns for the franchisees. This is a company that just looks destined to grow, almost like Dunkin' Donuts did in the early days. That's. A powerful equation for investors who can withstand the volatility of angst over same-store sales in any given quarter. Think of this as like, I'm going to buy this business for 10 years, and I'm going to watch it expand into Europe, into the Middle East, here in the States, and I'm going to watch you take market share from some of the bigger competitors who have larger store footprints. Of course, there's a lot that can go wrong in that. They have to keep executing and they have to make sure that they do manage those all-important bone-in chicken cost over time. But I like their chances in this environment. Mary Long: Asit Sharma, always a pleasure to have you on the show. Thanks so much for giving us some insight into coffee and bone-in chicken wings today. Asit Sharma: Thanks a lot, Mary. I had a lot of fun. Mary Long: Two of the biggest movies of the year, a Minecraft movie and Sinners, both came out of Warner Brothers Studios. But there's a lot more to this company than its movie-baking business. Despite the success of those two films, the stock WBD has been far from a winner for its shareholders. Up next, I talk to Fool analyst Yasser El-Shimy about Warner Brothers Discovery. This is the first in a two-part series. Today, we talk about the business. Tomorrow, we shine the spotlight on David Zaslav; the character charged with leading this conglomerate into the future. Warner Brothers Discovery came to be as a result of a 2022 merger between Warner Media, which is the film and television studio that was spun off from AT&T, and Discovery, another television studio. Together, today, this is a massive entertainment conglomerate, and it owns the likes of HBO, Max, CNN, Discovery Plus, the Discovery Channel; a mix of streaming services and traditional cable networks. One of the reasons, Yasser, why I find this company so interesting is because you can't really talk too much about it without hearing all these different names, all these different services, a fascinating history of mergers and acquisitions and spin-offs, etc. I want to focus today mostly on the person who has been tasked with leading this massive conglomerate into the shaky future of media. But before we get to David Zaslav, let's talk first about the company. Again, WBD is a big conglomerate. What are the most important things about this business as it exists today that investors need to know? Yasser El-Shimy: Well, thanks, Mary. To tell the story of WBD is to almost tell the story of entertainment itself in the United States. We're talking about structural challenges that are afflicting almost all television and film studios across the board, as well as TVs on TV networks. On the one hand, you have a structural decline of linear TV viewership. That is your basic cable, basically people, paying a monthly fee for whatever provider there might be to get a whole host of channels that they flip through at home. We've heard of the phenomena of cord-cutting. It has almost become a cliche at this point. It has been going on for years, at least over a decade at this point, but recently, it seems to have accelerated even further as people migrate more and more toward streaming options, subscribing to such channels as Netflix and Disney+ and Max and others. This has created quite a dilemma for a lot of studios like Warner Brothers Discovery, where much of the profits and the free cash flow has traditionally come from those very lucrative linear TV deals that they have had with the likes of Charter Communications and others. They have had to effectively wage a war on two fronts. They are being disrupted by the likes of Netflix, they're losing subscribers on the linear TV site, but at the same time, they can't go all in on streaming, at least not just yet, because so much of their profit and so much of their sales actually come from that linear TV side that is declining. What do you do? You try and just be everything to all people, and that has become a challenge. Warner Brothers is no different here. We're talking about a company that started off in 2022, as a result of that merger. You talked about between Discovery and Warner Brothers. Since then, they have focused on two main objectives. The first one is to pay down as much of the debt on the balance sheet as possible, and we can get to that later, and the second goal has been to try and effectively promote and develop their streaming business. Initially, it was HBO Plus, now it's called Max, and try and actively compete with the likes of Netflix and Disney. They've actually done rather OK on that front, as well. Mary Long: Let's talk about the debt before we move on because this is a big gripe with the business as it exists today. Warner Brothers Discovery carries $34.6 billion in net debt. That's as of the end of fiscal 2024. You get to that number because there's $40 billion gross debt minus $5.5 billion of cash on hand. How did they end up with so much debt? $34.6 billion is a lot of debt. How did they end up with so much of that in the first place? Yasser El-Shimy: That is a lot of debt. Let's just say that David Zaslav who was the head of Discovery, he was very enthusiastic about putting his hands on those assets from Warner Brothers. As a result, he actually saw that merger with the Warner Brothers assets from AT&T. AT&T took a huge loss on the price it had originally paid to acquire Time Warner, a 40% loss. However, what they did do is that they effectively put all the debt that they had from that business, as well as some of their own debt, into this new entity that was to merge with Discovery. Warner Brothers Discovery just was born with a massive debt load of $55 billion or so. That was nearly five times net debt to EBITDA, or earnings before interest, taxes, depreciation, and amortization, which was very high leverage for this new company. From the very beginning, Warner Brothers Discovery had to deal with paying down that huge debt load. Luckily, a lot of that debt was in long-term debt effectively that most of it will mature around 2035. Can be easily rolled over. It has an average interest rate of about 4.7%. It's not the worst in the world. Considering how much cash flow per year that Warner Brothers Discovery is able to produce around, again, the $5 billion range or more, you can see that the company has been able to effectively navigate this and pay down that debt. David Zaslav has paid down over around $12 billion since that merger took place. That leaves them with the $40 billion you're talking about. Still more to go, but at least you can see that they are able to accomplish that feat. Mary Long: Let's also hit on the streaming service because that's an essential part WBD and where it wants to go in the future. Max, which is the streaming service that's basically HBO plus others allegedly has a clear path to hitting, this is per their most recent earnings, at least 150 million global subscribers by the end of 2026. At 150 million global subscribers, that would make it about half of Netflix's current size. What metrics and what numbers does Max have to post in order to be considered a success? Yasser El-Shimy: I would say that Max has to, again, focus on growing that subscriber base, and they have done an excellent job at that. They've almost doubled subscribers year over year, reaching around 117 million subscribers currently. They accomplished that through a strategy that had two wings to it. The first is that they effectively bundled a lot of content into the Max service. The previous HBO Plus service, it merely had some TV and film IP that the studios produced from the namesake HBO, but also from the Warner Brothers Studios. But then they decided to expand that to include also shows and other content from the reality TV side of the Discovery side of the business. Think of your home network, HGTV, or Food Network, and so on. They accommodate a lot of that content in there. They also introduced live sports and live news into the Max. That made it a lot more appealing to be a place where you can have almost all of your viewing needs met. That has been a successful strategy for them. They have also struck a partnership with Disney to bundle Disney+, Hulu, and Max together for a reduced price, but that has definitely also helped with the increase in their subscription numbers. But I would also be remiss to say that they have successfully and actively sought to expand their presence in international markets. They are still at less than half the markets where Netflix is, so the opportunity is still pretty vast on there. However, as you started your question with asking about the metrics that we need to be watching out for, obviously, we need to be watching out, as I said, for subscriber numbers, as well as the EBITDA operating margins that will come from the streaming side. They are targeting around 20%, which would actually very good if that turns out to be the case, long term. But also we need to look at things like average revenue per user or ARPU. How much are these subscribers contributing, both to the top and bottom line for Max? I think on this metric, there might be a little less confidence because especially when you expand internationally, you're going to get a lot of subscribers who are not paying as much as a US subscriber might, so you might be looking at a decline there. On the bright side, they've introduced advertising as part of the package, but the basic package that you get. That strategy we have seen it successfully play out with Netflix, and I think that they may be able to increase or ad revenue on Max, and that can be a big contributor for their profits as well. Mary Long: As always, people on the program may have interest 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. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. For the Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you tomorrow. Asit Sharma has positions in Marriott International, McDonald's, Walt Disney, and Wingstop. Mary Long has no position in any of the stocks mentioned. Yasser El-Shimy has positions in Warner Bros. Discovery and Wingstop. The Motley Fool has positions in and recommends Netflix, Starbucks, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Marriott International and Wingstop. The Motley Fool has a disclosure policy. Is Starbucks Serving Up Promise or Peril? was originally published by The Motley Fool
Yahoo
17-04-2025
- Business
- Yahoo
Tariffs Send Us to a Liminal Space
In this podcast, Motley Fool analysts Asit Sharma and Tim Beyers and host Mary Long discuss: How to make sense of "tariff buckets." What a French ethnographer can teach us about the current moment. Earnings from Goldman Sachs. Green flags you should love to see in a company. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » A full transcript is below. Before you buy stock in Goldman Sachs Group, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Goldman Sachs Group wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $518,599!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $640,429!* Now, it's worth noting Stock Advisor's total average return is 794% — a market-crushing outperformance compared to 153% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of April 14, 2025 This video was recorded on April 14, 2025 Mary Long: Welcome to the in-between. You're listening to Motley Fool Money. I'm Mary Long, joined on this fine Monday morning by Mr. Asit Sharma, Asit. Good to see you. How you doing? Asit Sharma: Well, Mary, happy Monday. Mary Long: Happy Monday to you, too. We'll kick things off today by trying to clarify some stuff because we got some alleged clarification yesterday on the state of tariffs. The keyword in that phrase is actually the word alleged rather than clarification because we once again find ourselves in a position where well, there's new information, but nobody actually knows what comes next or where we are. Howard Lutnick the commerce secretary, said Sunday that smartphones and other electronics will be included in future semiconductor sectoral tariffs. This came though two days after the same administration had said such products were exempt from the China tariffs. Trump said on Truth Social yesterday that there was no tariff exception announced on Friday, rather, that the products would be moving to a different tariff bucket. Still, certain tech products are no longer exposed to the 145% reciprocal Chinese tariffs. That's a lot of words, a lot of back and forth, Asit. With a caveat that all of this is subject to change in the weeks ahead, what is the bottom line of all this back and forth? What in all of this should long term foolish investors actually be focusing on right now? Asit Sharma: Mary, the bottom line here is that there is no bottom to these tariff buckets. I mean, this is so difficult to follow, and it's only getting more complex as it goes along. For what Lutnick said about these exceptions. Basically, I think the Commerce Secretary is just trying to take his smoke signals from President Trump at this point and just be flexible enough to allow that any type of tariff could have a different outcome on any day of the week. But what I think is behind this is that consumers were really in a position to squawk very soon once everyday electronics started spiking the cost of those to buy those. We have this exemption here as for the bottom line for investors, I'm going to go back to something that you and I talked about a few weeks ago, which is to accept that this is going to be a feature of the markets and accept that it's going to be a feature of companies that we invest in. I know as we talk today, we're going to touch on this again, so I will pause now to get either your reactions or we can move to another question. Mary Long: I'm curious about the reaction here because in pre-market trading this morning, stock futures for all three major indexes were up about 1-2%. Apple was up over 6%. That's pre-market trading. We're recording this close to 12:30 Eastern Time. I just checked before we hopped on air. All those indicators now seem to be moving in the opposite direction. We had markets seemingly interpreting the back and forth of yesterday with a little bit of optimism, and now that's moved. What changed Asit between 6:00 A.M. This morning and noon this morning? Asit Sharma: Mary, part of it is a little bit of a big tech effect, especially with Apple because Apple has so many of those consumer products that it manufactures overseas coming into the US. the thought of an iPhone going from an average selling price of maybe 800 bucks, take the low and high models, all the way up to 12, 1500 bucks, and more. I saw some calculations that it could be 3,000 bucks for the top of the line iPhones. You had a sense of relief from major players who wanted to plow back into Big Tech this morning. But then what happened later on is the market realized that, we're back to where we started after this initial excitement wears off and that we have a game of incomplete information. Markets usually play a game of near-complete information. It's widely disseminated, what companies are earning. It is widely disseminated, what trade policies are. They don't change that rapidly. It's widely disseminated that players know how to import and export their goods and that consumers have that stability as well. When you go from this to a game of very incomplete information. It just as tough to figure out on a daily basis for most market movers where they should be placing their bets. They're moving money out of US markets. They're moving money to the sidelines. Even in those brief periods where they want to put money to work, they keep coming back to the same level of unpredictability. Mary Long: I want to hone in on this phrase you just said back to where we started because for all the ups and downs that we've seen in the market, especially last week, but also zooming out over the past weeks and months, things are relatively in line with where they were eight months ago. We see all these big headlines about how the market's moving up, moving down, and all that's been lost or gained. But on Friday, the S&P closed only 0.4% higher than it was on August 9th. That comparison between, Friday and August 9th doesn't capture at all any of the volatility that we've been covering on this show over the past several weeks. Is that still something that's worth calling out, that means anything? When you see that, when we talk about how the market has remained relatively unchanged, even though there's been so much movement in the days between Friday and August, what do you make of that? What does that comparison tell you, if anything at all? Asit Sharma: It forecast for me additional volatility. Take a look at the VIX. This is a measure of Ford volatility. It's an index that's based on options prices as we look 30 days Ford. When times are very calm and easy, the VIX trades at a low level. It spikes when the expectation of volatility increases. That's peeled off a bit in the past few days, but it's still at really elevated levels. It also shows me that we are at a little bit of a sea change here because, Mary, the period that you talk about included a lot of time where the VIX was trading at just a stable level and markets were moving up in almost incremental step fashion. In fact, the last three years have been a lot like this. We've had very great returns in the stock market. The US economy has been an outlier in the global stage. We have led developed nations in growth. We have had a lot of technology, think GPUs that has spurred innovation and brought lots of dividends to investors. I don't mean actual dividends, but appreciating stock prices for those who are invested in the market. Even if you were in an S&P 500 index fund, you enjoyed this propulsive wave as the US reaped its value out of the strides it had made in artificial intelligence and also the high tech manufacturing we do do here. We don't do the old school hand piece manufacturing. I mean, that's all up in the air now that we can continue to do this because the tariffs don't seem to have either a real trade imbalance goal or a real goal about making tariffs reciprocal. Again, it seems to change day by day. Without this, you see so many of the capital outflows leaving the US. You see trouble in the bond markets. It all points to one thing that the nearest bit of volatility we've seen in these past few weeks and months is going to be the Ford bit going forward. We can expect to see some more of this. Now, if it stabilizes next week, don't come back and call me on that. I'm doing my best here. Mary Long: Axios had a piece out this morning in their Markets newsletter talking about what it means to exist in the liminal period. I knew I was talking to you this morning, and I thought that this might be a topic that you especially would have some interesting insights on. The whole idea behind this liminal period is that there was a French ethnographer who defined a rite of passage as having three parts. First, you get this right of disengagement, which is when the old order ends. Then you get this liminal period, which is the transition between that old order and the new, and that liminal period continues for an undetermined amount of time. It's that volatility that you were just talking about. Lastly, you get the right of reengagement. That's when this promised new order actually begins. This is especially interesting to me as we think about how to interpret and analyze announcements and news around these tariffs because April 2nd was very much touted by the Trump administration as a right of re engagement. They didn't use those specific words, but the language was very much, Hey, this April 2nd is the day when everything changes. But Felix Salmon and Emily Peck, who wrote this Axios article, argue that liberation Day, April 2nd, was actually more of the first step. It marked the end of something old rather than the beginning of something new, which means that right now, we're stuck in this in between period, this liminal period of unknowns. I think this is interesting, Asit, but I wanted your take on this. Do you think that linguistic difference, the point of, hey, no, we're actually at the end of the old thing, not quite at the beginning of a new thing? Do you think that that distinction is significant for investors? Asit Sharma: I think they got it right, Mary. In fact, the whole right of engagement or the rite of passage, I should say, is a term that was coined by Arnold Van Ginepp. It's interesting. It's just like a cliche now, but it stems from this ethnological study that Van Ginepp did. He really laid it out in a very clear fashion. If you're a young person in a tribe somewhere where tribes still exist, in some obscure corners of the world, that you know when your rite of passage is coming, you prepare for it, and then you have a bit of time where you're put away from the rest of the tribe, then you go through the rituals, then you welcome back into the tribe as someone who belongs, you've gone through the rite of passage. The Trump administration tried to argue that the very beginning of this process, which is, Hey, everyone, we're going to separate you out. We're going to prepare you for this transition. They tried to skip that stage or confuse the two. Really, this liberation day was the beginning of the process where it became clear to everyone in one fell swoop at 4:00 P.M. On liberation day I've already forgotten. Was it like 2nd April? It's all running together. That was the introduction of the ritual. I think we're in a period of transition. Even with this 90 day pause, you have somewhat 180, 190 countries on earth that have to come and try to negotiate their position relative to the tariffs. We are in a liminal period, and I think it will extend beyond the point where the Trump administration says, everything's settled now. We have new tariffs in place because the trading order has changed in the world. All the flows that we took for granted, that the US would be an exporter of technology, it would be an importer of cheap goods and services. That stuff takes years to reorient. It's going to be a while unless the administration decides in a few months that, let's go back to the way things work because everyone's tired now and this is really unpopular. That's one outcome that could still occur. Mary Long: We've talked a lot about volatility on today's show, but largely what that means on the macro level. We can zoom in and look at a company that actually plays at that specifically. For all the volatility that's out there, for all that we've talked about today, it is not slowing down Goldman Sachs. Equity trading revenue at that investment bank rose 27% this quarter compared to the year before, with a company raking in nearly $4.2 billion from that segment alone in the first quarter. JP Morgan and Morgan Stanley both reported last week, and they too boasted near record revenue in the stock trading departments. If you're somebody that thinks that market volatility is only going to continue, is it a smart bet to maybe load up on some banks that might profit from all of the buying and selling that you expect to see moving forward? Asit Sharma: It could be Mary, if you have no fear that what might follow is a period of lessened activity or inactivity. Sometimes, shocks like this signal a recession. when recessions hit, the investment banks trading revenue goes down because people don't want to trade as much. What we're seeing now in the markets is like when a storm is coming and people are very active around their houses. They're making sure that everything is tied down. The windows are shut. There's this flurry of activity. We're seeing institutions unwind some derivative bets. We're seeing short sellers close positions. We're seeing retail traders like yourself and myself, maybe buying some companies that we like that are on sale, maybe trimming some speculations that we shouldn't have been in the first place to raise some cash. Everybody's busy. But if the net effect of this is that we head into a recession, which is one possibility, you'll see those trading volumes slow, and in fact, in Goldman's earnings, that activity that they had on the trading side masked some other weakness they had on the M&A side, on the fixed income side. I'd be careful. It might be a smart bet, but you've got to make sure that you're pretty confident in your outlook for the US economy for the next few quarters before you take that bet. Mary Long: You mentioned weakness in other segments of the business. Investment banking revenue came in 8% lower than last year, as did top line numbers from the financial advisory and the equity underwriting parts of the business. That said, when I last checked before we recorded, Goldman's stock was up about 3% this morning. It seems that Wall Street is pretty unbothered by that underperformance. What say you? Asit Sharma: I think Wall Street is OK to be unbothered. Goldman is a company that lost its way for a little bit. I lost its Mojo. I got into all things which were collateral to their core business, just thinking of some of their extensions into private banking, which probably they didn't even need to invest in. Now they're back to being an investment banking firm at heart. I think with the trading activity, they look like a company that's more focused on its core mission, and they really can't help what goes on in the larger mergers world. We're seeing mergers and acquisitions dry up everywhere as the effects of the tariff policy roll on. That will come back for them as it will for the other trading houses. I get that Wall Street isn't penalizing something that's out of Goldman's control and hence why the stock would be up. But I bet, Mary, by the time we finish taping, like the rest of the market, it's going to be closer to the break even pointer negative. Mary Long: Who's to say? Asit Sharma always a pleasure having you on. Thank you so much for helping to make sense of the continued uncertainty for us. Asit Sharma: Thanks a lot, Mary. This was a lot of fun. Mary Long: Last week, fool analyst Tim Beyers and I talked about ManagementX, the things a company does that make shudder. Today, we take the opposite view and talk through Tim's analyst kicks. IKEA, the moves he loves to see a company make. Frequent listeners of the show, Tim, might have some guesses as to what you love to see management do. Number 1, on that list, solving a migraine level problem. But for those who are maybe not such frequent listeners or unfamiliar with that terminology, what's a migraine level problem, Mr. Byers? Tim Beyers: A migraine level problem. If you have a migraine, you'll pay just about any amount of money to get relief because a migraine is intense. It is not something that you can just lay down and get rid of it. It's just pounding. It's relentless. It requires extraordinary relief. You will take measures. You will pay what is required to get relief for that. A migraine level problem is one that causes genuine corporate pain. People who have money and big checkbooks they will write checks in order to get that pain solved. For example, a massive supply chain problem or a massive competitive problem. Things like that are significant. In the case of a company that I've talked about many times, still my favorite stock that solves this is Toast. Who has the pain here? If you are a restaurant operator and you have somewhere 5-20 restaurants, restaurant operations do require digital systems in order to run. You have an ordering system. You have inventory. You have reservations. You have so many things that you have to do, and all of those can be different systems. If they are different systems, Mary, then the point of integration for all those systems is either you spending a boatload of money on a systems integrator to go out and integrate all those systems. The point of integration is you. You either have to figure it out or you make somebody else figure it out. What Toast decided is that they could be that point of integration. They could do that. They could go into a restaurant group, make it cheap on the front end to get all of the systems installed and set up, and then over time, you would pay them a subscription fee, and you would pay them part of the fees that you generate doing business there in the restaurant. They could win right along when the restaurant won. That to a lot of restaurant operators, is like, that is sweet relief. I don't have to be the point of integration, and your business model allows me to only pay you more when I am earning more. That sounds pretty good. For that particular group, there's a real migraine problem there. I'm not a technologist. Don't make me integrate all of these systems, and Toast came in and said, We won't won't force you to do that. We'll help you out here. Mary Long: The thing about a migraine is that if you are not the one experienced the migraine, it can be hard to actually understand just how painful that migraine that someone else is experiencing actually is. What advice do you have for retail investors to spot migraine-level problems in industries that they don't play in. It's one thing if you're a consumer and you use the product as a consumer and can understand, this solves a massive gap in my life. This addresses a massive problem. But it's another thing to try to look into an enterprise relationship and distinguish a migraine from what might just be a headache. Any advice for how to spot that when you're on the outside. Tim Beyers: Well, listen for complaints. I mean, if there's anything that is a human trait, it's that we love to complain. Listen to where the complaints are, and that might not always, but it might lead you to, you know, migraine level problems. I'm struggling to think of one at the moment, other than Toast, but, anything that you complain about consistently, I mean, here's another that I think you could have thought about. How backbreaking did it used to be constantly picking if you have a dog food from the grocery store. No, thanks. I don't want to do that. It is something that you will complain about. Bad food choices for your dog, big bags that are just heavy and onerous and just dumb to bring in. Like, could you fix that problem? Chewy isn't the first one to fix that problem, but they fixed it in such a way by virtue of how they treat their customers that they've won some very loyal fans to their customer base. They combined. They did something that's pretty interesting. They leaned into a way to solve a migraine level problem, but they solved it in a better way than most did by creating a massive customer service operation that made people love Chewy by caring about your dog, your cat, your bunny, your chinchilla, and so forth in ways that another retailer just really doesn't. But, follow the complaints. Complaints are a great place to start. Mary Long: A company that we can use as an example to highlight another kick that you pointed out, but that interestingly sits at the intersection of migraine and Joy is Duolingo. The kick in question is solid unit economics. I vividly remember once upon a time, we were at the old Denver office, and Duolingo had just dropped earnings, and they totally blew things out of the water. you were just floored by the company's ability to convert free users into paying members by its ability to generate so much from those paying users that the company was paying so little, honestly, to acquire. You launched then into a lesson on unit economics and why that matters so much. Walk us through what the Duolingo playbook is. What do they understand about unit economics that investors can look at and try to apply to other companies and see if they hit the same mark. Tim Beyers: They have a way. They have created a go to market mechanism or a customer acquisition mechanism that spends very little to generate interest. They primarily do it through social media and engaging social media. I do not follow Duolingo on Instagram, but I am told that you make Duo the owl, sat at your peril. Mary Long: At your peril. Tim Beyers: Fair enough. It doesn't matter that I'm an old man and don't know anything about what this really means. What matters is that I know that there is a genuine following here that leads to some amount of conversion, and that conversion to using the app is essentially free. It's as close to a frictionless captive go to market app as I've ever seen. They use social media creatively to get interest in the brand. That brand interest leads to app usage, and in some rare cases, it's a very small minority. It's like 8%, I believe it is of the usage that the paying customer base is, but there are paying customers. What's interesting is those are the subscription customers. A larger portion of those will be members who use Duolingo. They have a big streak. It's a game of FINAP. It's a language learning tool, but it's really a game, and people pay to play the game. If you miss the streak and you want to pay to keep that streak alive, you can do it because it's a game. It's not really a language tool. It has this unique dynamic of being a fun, playful brand that people like to follow. Then that creates interest and interest leads to curiosity. Curiosity leads to usage, and then usage sometimes, but not always leads to commitment. The end result is that it tends to cost for every dollar of revenue that Duolingo will bring in in a given quarter, new revenue will bring in, it's sometimes like $0.10. Or something crazy, $0.20 to get that dollar of new revenue. That's amazing. I mean, that really is something. That is the benefit. Great unit economics is the cost to get an additional unit of revenue really high, bad unit economics. Really low? Good unit economics. In the case of Duolingo, very low, exceptional unit economics. Mary Long: We'll close out on another green flag that you flagged for me when we were building out this conversation, and that is that third parties commit to the platform in increasing numbers. An example of this might be NVIDIA, another example might be Apple's App Store. Is this effectively the network effect, or are you talking about something a little bit different? Tim Beyers: Yes, it is the network effect. The network effect is that as usage goes up, more value is created. As the number of users increase, the net value of the entire networking increases as a result, the value of the product to you and in general goes up, but it starts with to you. As more people are engaged in the network, the value of being part of that network goes up. My participation and the value I get goes up as the network grows. That is network effect, but then the net benefit of that is I'm that network, wow, that's really valuable because it's very big. What I'm talking about here with the ecosystem is, you know what? I want to work with you. Let's say you're a rising star, Mary, you're going to make me money if I hitch my wagon to you. I want to be working with you 'cause you're going to make me money. That's what an ecosystem is. I want to commit to the app store. I want to be part of the app store because if I want to make money, I want to get involved with these people 'cause that's where money is. A platform that has ecosystem benefits is a place where somebody who has an economic interest will go to and they'll get plugged into that ecosystem because they know that that ecosystem is going to make them money. This is why you see, for example, back in the 1980s, 1990s, why did so many developers commit to Windows? Because that's where the money was? That's what we're talking about here. You're getting into a platform where money is being made. Lots of money to be made in the app store, lots of money to be made as an app connecting into, Hubs Spots Platform, for example, here. You want to be connected to platforms where usage is high, economic value is present, and so by your participation in that platform, you the economic benefits of being there. Mary Long: We'll end it there. Tim Beyers, always a pleasure. Thanks so much for walking through and highlighting what these icks and kicks are for you. Tim Beyers: Thanks, Mary. Mary Long: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. For the Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see a tomorrow. JPMorgan Chase is an advertising partner of Motley Fool Money. Asit Sharma has positions in Nvidia. Mary Long has no position in any of the stocks mentioned. Tim Beyers has positions in Apple, Chewy, Duolingo, and Toast. The Motley Fool has positions in and recommends Apple, Chewy, Goldman Sachs Group, JPMorgan Chase, Nvidia, and Toast. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy. Tariffs Send Us to a Liminal Space was originally published by The Motley Fool
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10-04-2025
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Rule Breaker Investing: Essays From Yesterday, Vol. 7
It's time once again to dust off Motley Fool co-founder David Gardner's old writings and pull some lessons forward into the light of today. In this podcast we discuss buying stocks that you already own, annual predictions, risk ratings, and keeping a record of your investment decisions. We look back in order to be smarter about looking forward! To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $296,487!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $37,700!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $509,884!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of April 5, 2025 This video was recorded on April 02, 2025 David Gardner: I got a secret for you. Actually, it's a secret weapon for you as an investor today. One word for you and no. It's not plastics. History. History. It's secret because most people don't have much of it. They follow financial media outlets, which through TV and social media display and promote such a short memory, quoting stocks minute to minute, throwing the bells and whistles of our attention at whatever's just happened. Well, as a Fool, I love to look back. The lessons we really learn, learn and earn are a consequence of observing and living through history, measured in years, not hours or days. Well, for years, I wrote short essays to kick off our monthly Motley Fool issues. I'm a quoting, as I say that they used to be snail mail mailed out to members back in the day. Well, today, the Motley Fool is, of course, pretty much fully digital and wedon't do paper copies anymore, and we don't do opening essays. But I put a lot of time into those essays, and they occurred over a long narrative arc of market history 2002-2017, 15 years worth of investing lessons in Motley Fool Stock Advisor and Rule Breakers. In this world of now now now, I say, you and I open up April 2025 by getting smarter, happier, and richer today for the lessons learned from yesterday. Only on this week's Rule Breaker Investing. Mary Long: It's the Rule Breaker Investing podcast with Motley Fool co founder David Gardner. David Gardner: Welcome back to Rule Breaker Investing. March Market Cap Madness. Most of the madness, even the sports madness is just about over. We had a lovely mailbag last week. Really enjoyed that. Thank you all for your wonderful notes. I enjoyed sharing my 20 favorite words, especially. But that was then, this is now, and let's get into it, essays from yesterday. Volume 7. This is the seventh in the series. And we last brought you the previous episode 7 months ago. It was September 4th of last year. So a couple of ground rules about how this series works. First of all, I completely randomize which essays I'll be sharing with you. So I don't know ahead of time until we plan this podcast, what I'll be speaking about, and I randomize it. Now, I wish I could cherry pick my best and favorite essays written over the years. I guess I like all of them. It's just that some of them were more right than others. So you never know how right or wrong I'll be with any of these. It's completely randomized, and often I'll refer to some stocks. So we get to look them up now and see how they've done since and we're always going to have some doozies both ways. That's the first ground rule randomized. The second is they're in chronological order. So we go from earliest to latest. For example, this particular episode, I'll be sharing an essay from May 2003. That was one of our earliest Motley Fool Stock Advisor issues. Then we'll jump forward to 2013, 15 and 16. Now, what matters isn't so much what I was saying back then, though, it's fun. What matters is what we can learn from it now. The purpose of the Motley Fool is, of course, to make you smarter, happier, and richer. I'm looking to do all three every week on this podcast, but especially this week, focusing on that word smarter with this one. Before we get started, as I shared at the start of the year, my 2025 book, Rule Breaker Investing is available for pre order now after 30 years of stock picking. This is my magnum opus, a lifetime of lessons distilled into one definitive guide and each week until the book launches on September 16. I'm sharing a random excerpt. We break open the book to a random page, and I read a few sentences. So let's do it. Here's this week's page Breaker preview. It's one sentence from early on in the book quote by the way, I need to take a deep breath for this quote. Here's my longest sentence of the book. Apologies ahead of time, but it just feels right to deliver this in one mouthful. Even though we disagreed on one key point with Jack Bogle, the founder of both Vanguard and of the Index Fund revolution, that individual investors should not, he said, buy individual stocks, we say you should. We dearly love Jack as a person and what he stood for and did in this world, which was to help wipe it of bad advisors and the compensation systems that drove those people because of overpriced opaque schemes, Ponzi but others, too, that were enabled by a status quo where the average person wasn't educated about money and thus, as an adult, was walking into a red light district of financial choices where even some of the cops couldn't be trusted. That's this week's page Breaker preview to pre order my final word on stock picking shaped by three decades of market crushing success. Just type Rule Breaker investing into barnes and or wherever you shop for fine books. And thank you to everyone is pre ordered. That means a lot to me. All right, essays from yesterday, volume seven. Rick Engdll, if I could get please, a little bit of wayback music. In fact, as we fire up our Wayback music machine, we need to go way way back with this one, Rick. The month was May 2003, and this was the introduction to Motley Fool Stock Advisor. It was entitled Back then we didn't have really titles for these. Later, we eventually dreamed up the idea of titling these essays. So if you go back to it, you'll see the title of this is introduction to May 2003 issue. And here is that essay. Dear reader, if you've been checking our stock scorecard hourly and be honest, who hasn't you may be convinced that investing is a bit of a crapshoot. Certainly, as the war unfolds, emotion and sentiment always at work in our financial markets are working double time. Hence, the wild swings as reflected in our scorecard. But I assure you, there's nothing random or irrational about stock investing. Over the long term, if the US economy grows, so too will the stock market. And in all markets, good and bad, well managed companies, particularly those that consistently surprise investors with their businesses and cash earnings eventually see their stocks head higher. The secret is to find those companies and have the courage to buy them in good times and bad. Sometimes you don't have to look very far. Late last summer, a few months after we launched our Motley Fool Stock Advisor, my brother Tom had a curious thought. Why he proposed? Don't we each take time out in an upcoming issue? To review our past picks. We could assign letter grades to each one for the company's business prospects, another for valuation, and then re select whichever was our favorite at the time. Foremost, Tom thought you'd want our latest thinking on our prior picks, but he was also stressing that we're not too hell bent on finding a new stock each month. After all, if we're to give you our single best idea each month, why would we exclude past picks? Now, initially, I disagreed. He is my brother, after all, insisting, among other things that our readers expect new ideas, new stocks every month. But Tom is right. I agreed to update my pick in a later issue, which turned out to be December. But when the time came to re select, I couldn't settle on just one. So I covered the names with my hand, and I simply scanned the page to see which stock had graded out the best and as I lifted my hand from the page, I saw beneath it the word Marvel. Rest, as they say, is history. The stocks up 64% in the few months since. I'll be the first to point out that Tom's suggestion and methodical approach prompted this great re selection, one that perhaps ironically has outperformed all of his picks so far. I hope you re upped on Marvel, and you can thank Tom if you did. Each month we provide our very best stock ideas right then, right there, looking at our standard investment horizon of at least three years. Often, that means a new idea, but not always. But by all means, recognize that when we re select a stock, we're saying that stock is a best bet right then, right there at that price. If you've already invested some, we're saying up the anni, invest some more. And why not? When we make a boring re selection of a previously written up stock, the returns need not be boring at all. Geez, I only wish all my stocks were up 64% in four months. In fact, take a look at the stocks Tom and I have re selected so far. And there's a short table with returns I won't share right now, but I'll speak to it in a minute. And remember, these returns are since the stocks were re selected. Notice, too, that none of our re selections has lost money, and as a little group, our re selections have heartily outperformed the market. Sample size is a bit limited here. There were only five re selections at that point. So we draw grand conclusions at our own peril. Still, my sense is that we do better with these picks because we know the companies even better the second time round. The moral, a single best idea is a single best idea, regardless of whether you've seen it before. One could even argue that you should be more confident in a re selection than a new stock and thus far, our returns bear that out. Next month, Tom will review his selections to date and re op his favorite, and I'll do the same the following month. But now we have two new selections for you until then, Tom, over to you and that is the end of introduction to May 2003 issue. The first thing I'd like to note about that here in April of 2025 is that essay was published on April Fool's Day. It was the May 2003 issue, but like a lot of magazines and other publications in paper back then, our so called May issue actually got published on the first of the previous month. So here we are recording on Tuesday, April 1, April Fool's Day here in 2025. And this was literally published what I just shared with 22 years ago today. And my next note, it had been a very poor stock market. The dot bomb crash of 2001 was still settling out in early 2003. There was a war breaking out at the time in the Middle East. There was a lot of angst and doubt around stocks. People who held real estate at that time, 2003, looked like the smart ones. In fact, my brother's essay the following month was all about how people think too much of real estate these days and they've written off the stock market. People who owned stocks in May 2003 looked like rubes. Now, it is worth noting 22 years to the day later that the stock market is up 550%, the S&P 500 over these 22 years, and by the way, Motley Fool's Stock Advisor is up way more than that. Two more quick reflections for you. The first is, Tom innovated. It was such a simple innovation, but much credit to him. He said, Let's repick a stock because up until that moment, we've been publishing stock advisor from March of 2002, so it was now more than a year later. And we'd just been picking one stock after another new each time and Tom said it doesn't always have to be new. And the results that came forthwith tell their own great story. I'm not going to read to you the table that was published in that essay. An stock advisor member can go back and read it. But basically, yeah, we had Marvel up 64% with the S&P down 2%. That was from December of 2002 to when I wrote this on, of course, April Fool's Day. So it had only been a few months. We also had Whole Foods up. Amgen was about a market performer, as was Activision Blizzard. The group as a basket. This is almost like its own five stock sampler back the five stocks were up 18.3%. The market was down 0.1% on average. So they were well outperforming the market, making, of course, the key point that Tom was trying to make, which is that sometimes your best idea can be one that you've already had, and just re upping that is a wonderful way to win as an investor. So again, much credit to Tom and from that day forward, I would go on to pick Marvel again and again. And a year later, 2004, I would pick Netflix and then Netflix again, and again, over the years. And one year after that, NVDA. And a few years later, I repicked Nvidia again. And then, of course, again and again. And we eventually turned those sometime rerecs into a new feature. Longtime members will know Best Buys now was eventually born in Rule Breakers and Stock Advisor. And we turned that sense that we should relook at our existing favorite stocks in our portfolio and make that a mainstay of our services. And as the years went by, it became the most clicked feature when we released something for Stock Advisor or Rule Breakers, not our new PI. The most popular feature were the Best Buys Now, the five from past PIs that we would say, With that new issue with that new month, we like them today. Even more or just as much as we did back then. So this all makes a really good point. And the last thing I want to say is performance. I mean, I love that I included that little table in that little essay 22 years ago. I love that it was 22 years ago, that I can tell you today, 22 years later, how the market has done and how we have done since, and I love that our stock advisor site shows you all our good picks. Like Marvel and all our bad picks. We'll be mentioning a few more this, this week over time. I love, of course, that we've crushed the market. The performance of my Best Buys now in particular, tells an eloquent story, supporting Tom's vision in 2003, to start re picking stuff we'd always picked. Many lessons embedded in that essay, but maybe the biggest takeaway for you and me here, not just in 2025, but any year going forward, is when you have new money coming in, take a hard look at stocks you already have in your portfolio. If you're listening to be Rule Breaker Investor habit number two is to add up. Don't double down, tend to add new money. If you're going to add it to existing picks, add it to the ones that are going up to your winners, throw good money after good, as I've often said, is maybe a great takeaway as we close out Essay number one. Let's move on to essay from yesterday, number two, and now we're going forward through time. It's almost ten years after I wrote that first essay that February 2013 was the page we turned on our calendars, and I go to my Rule Breaker's opening essay in that February 2013 issue, which was entitled New Year's Resolution. Here it is. At the start of this new year, it's natural to look ahead and wonder, what kind of year will this be for our breakers? January triggers humanity to look 12 months ahead, and that's much longer term than most people usually think about their money, yet it's still just a fraction of the three to five year increments that have always guided us here at Rule Breakers. Of course, the media outlets want market calls, but I rarely make them. Now, last year, in this intro, I did write January 2012. "I'm not a predicting fool, but I have a pretty bullish feeling about the NASDAQ performance in 2012 based prominently on what's happened since July 2011." We had all watched our returns, and some of our favorite companies temporarily cave in at the end of 2011, so I was going with my gut. It was the right call for 2012, amid all the political grandstanding and "fiscal cliff" and some doomsday economic forecasts, yes, Virginia, the NASDAQ really did rise 14%. Again, I'm not a predicting fool, but I have a pretty bullish feeling about 2013. If I had to make a call, I'd say NASDAQ 2013 up. The percentages are with us. Historically, the market rises two years out of three. You just wouldn't know it based on how the media covers the markets. Also, not helping is the lack of financial education. Worldwide. People tend to fear what they don't know, and I suspect most Americans think the stock market's returns look parabolic, when the truth is they're hyperbolic, but enough hyperbole NASDAQ 2013 up. But I could be wrong, and rule Breaker Investing isn't about one year market calls anyway. Another thought for the year ahead. In 2013, we promised to make extra efforts to make the best use of your time. For instance, on the day that Zipcar got bought out by Ava's Budget, did you get direct to your inbox an email featuring our perspective? You did if you were a Rule Breaker member who'd put Ticker symbol ZIP on his or her my scorecard. Of course, the information could be found on the site as well, but that's one example of us sending relevant info to those most concerned well, spamming rule Breaker members who presumably don't care much. The key is that you help us help you by here using my scorecard. There's one idea we have for improving our service. Your ideas are always welcomed at our RB members suggestions Board for 2013 up or down Fool on. That was the end of New Year's resolution, my Rule Breakers February 2013 essay. My first note, looking back now, and this is true every year. People always want the annual prediction, don't they? It doesn't really matter to Rule Breaker investors, but near the start of every new year, the media can't help itself. I'm sure we do this at these days too. They want to think about the year ahead and have people make calls that, by the way, are usually unaccountable. Because rarely do I ever hear a year later someone go back and say, Here's what you predicted on this podcast or this television show a year ago about this or that market year. In fact, note number two, let's note that the calls never really extend more than a year. At the start of a year, they just want your call for that year. If you try to say, I'd like to make a two year prediction or a five year prediction, nobody's really interested. In fact, after you start that year with your market prediction, the rest of the year, the financial media tends just to settle down into a quarter by quarter mode. It's largely just about this next earnings report, and after this one, well, the one after that. Everyone's attention shrinks further from a year where we started the year looking a year ahead, which was, by the way, always short term anyway. But then we just get down to each quarter. Now, I know any regular listener of this podcast, my fellow Rule Breaker, I know you know this isn't the right way to view the stock market or your portfolio. Two more notes about that SA. The third was, you're probably wondering, how did the market do in 2013, and I'm happy to say, Hey, I was right. The NASDAQ was up 34% that year. It clearly came just maybe a year or two before I settled into what has become my habit on this podcast and when I'm on other people's podcasts, my habit each year to say, I think the stock market's going up this year. That's my single market prediction I make at the beginning of every year. The joke, and it's not really a joke totally, but the joke is the market goes up two years out of three, so I have an incredibly good record as a market timer. Most market timers are flipping coins right about half the time. I'm right two thirds of the time because at the start of each year, I say, I think the market's going up this year. I can see from that 2013 essay I hadn't yet settled into that rhythm. I was still trying to call it one year at a time. Finally, I'd like to note that whether it was 2013 or when we launched the Motley Fool on AOL, August 4th of 1994, or right here today, April Fool's Day, as we record, in 2025, we're always looking to improve our services. That was the final paragraph of that essay, New Year's resolution. I was pointing out that people who were using our My Scorecard tool on the site at the time, if they had Zipcar, ticker symbol ZIP listed there, they got a special email from us with our write up about Zipcar being bought out by Avis Budget, which in fact, it was years ago. People who didn't get that email, that's because they didn't list ZIP as a stock that was of interest to them on their My Scorecard tool. I will just say, I hope we're better today in 2025, it's saving you time and being relevant to you than we were 12 years ago when I wrote that. I'll always say the Motley Fool is at its best when we combine empathy. We're all fellow armchair investors. We combine empathy with you, with intelligence, with our best ideas to serve you up something that's helpful and that respects your time. That's always been the aim. You can see I was speaking to that in February 2013 when, by the way, Zipcar got bought up by Ava's Budget, Zipcar wasn't really much of a winning stock for us at Motley Fool Rule Breakers despite that buyout. Speaking of Molly Full Stock Advisor, if you're enjoying this week's podcast, and you're ready to take your investing chops to the next level. Head over to to join Motley Fool Stock Advisor, our flagship Investing Service. As a Stock Advisor member, you get at least two new stock picks each month. That includes some rerec as well, rankings of a whole scorecard of companies and access to all episodes of our premium podcast, and that's Stock Advisor Round table. That shows only available to premium Motley Fool members. It focuses on Foolish recommendations and takes a deeper dive into the businesses we cover, featuring Fool analysts you already know and love from listening to Motley Fool Money. My brother Tom Gardner appears regularly on bonus episodes of Stock Advisor Round Table to discuss what's new in the Stock Advisor universe and answer questions sent in from Motley Fool members. Again, just show up, point your browser, See you online. On to essay from yesterday. Number three, let's go forward two more years in time. Essay number two is February 2013. This one is February 2015, and it's from Motley Fool Stock Advisor. The title is risk ratings for new members. Now here's that essay. I, David, this month, have never been satisfied by traditional risk measures applied to stocks. Most common is probably the proverbial high, medium low, subjective blase labels that leave me cold. Or typically in academia, risk equates to the Beta of a stock, Beta measures how exaggerated are a stock's moves relative to the averages. While a stock's past volatility may be a risk factor, by no means, is it a real indicator of the true risk of holding a stock for the long term. I think rating a stock's risk should be more forward looking, more fun, more educational, and indeed, more numerical. For true investors, the long term minded, like you and me, we should be more focused on the business than the stock itself. That's why for a few years now, our team has been putting numbers on the riskiness of our stocks. With so many new members of stock advisor joining in the past year, I want to make sure you know of this resource. I define risk as the likelihood of permanently losing a large amount of your investment. Our risk ratings range from zero, no risk at all to 25. Insanely risky. The higher the number, the higher the risk. To obtain our ratings, we ask 25 yes or no questions of a business and its stock, and each no adds plus one to our risk rating. Our set of questions is open to all, meaning that any member can embrace and employ our methodology. How might you use this new tool? Lots of ways. Here are a few. One, look at the risk ratings we published for your stocks in order to gain greater intelligence, assessing how safe or dangerous each is to hold, invest accordingly. For instance, both and Gilead Sciences are worth about $140 billion, but one has a safe risk rating of six, while the other is significantly riskier. Ten. To see which is which, visit our site's recommendations tab, looking at the active stocks in order to see the ratings for every stock we cover. Two, familiarize yourself with the methodology and begin to use it to rate other stocks you're considering or hold outside of stock advisor. Three, come onto our discussion boards and share your findings. Every act of sharing speeds up someone else's investment research and knowledge. You will be helped and can help others with this. It's worth noting that every starter stock on our list has a risk rating of eight or lower. We really believe every new stock advisor member should load up on a dozen or more stocks from our service, starting with the safer ones. Happy Fool year. Well, a few reflections back on risk ratings for new members, again, written ten years ago, February 2015, I continue to believe that risk ratings are a needed and great resource for investors. We still use them in some places on our site, I think, but I've made a real point of using that methodology for a podcast or two over the years, just to refresh it and make sure you, especially if you're a new listener, know of the methodology and the resource. In fact, we last did a calculating risk Foolishly episode. That's the name of the series on January 24th of last year. 1.24.24, check it. In fact, I had two Foolish friends come on, and we ran Chewy Ticker symbol CHWY and Kinsale Capital Group KNSL through those full 25 questions, two completely different companies with different risk ratings, but all united by the same system, which yielded a number for each. It's also a fun note coming out of March Market Cap Matis. It's a fun note to note that you can go back and listen to that podcast January 24, 2024 and learn the whole system Chewy and Kinsale, and you're led through it by the two Fools who joined me that week, Emily Flippen and Andy Cross, the very two who closed out our world championship a couple of weeks ago on the Market Cap Game Show. It was obviously not something I would have expected back in January 2024, that that would be true. But it's really fun to note that Emily and Andy talk you through my risk ratings methodology in that podcast. By the way, I'm reminded we should do another one of those this year. In fact, if anybody would like to write into this month's mailbag, rbi at is our email address. Of course, I love getting your mail about any of our episodes, but reacting to this one, if there's a particular company or request you have about maybe doing our next in the calculating risk Foolishly series, maybe this summer, make me a suggestion. So that's one thought back reading that essay from 10 years ago. Before I go to my second and final reflection on this essay, I do just want to mention I love the risk rating system because the higher the number, the higher the risk. So to me, it's very intuitive. And in fact, we've never given any stock a risk of zero. I've designed the system, so no stock would have a risk of zero because no risk at all will never be true of any equity you're thinking about putting into your portfolio. Anyway, there's a lot more I could say about that, but, A, you could listen to the podcast from last year or B. I'm sure we'll do one this year coming up this summer. My final reflection is just to note since I called it out in that essay, how and Gilead Sciences have done since February of 2015, because, as I mentioned, they had the same market cap. That month, as I wrote that essay, they did have different risk ratings. As you might guess, Amazon had the lower risk rating of six, and Gilead Sciences had a higher risk rating at 10, not a crazy high risk rating, but markedly riskier. Here's how they've done since that month. Since that month, the S&P 500 is up 200%. So over the last 10 years, the stock market has tripled. is up 1,200%. That would be a 13 bagger using Peter Lynch's multibagger parlance that I lean on a lot. So Amazon is a 13 bagger. In the meantime, Gilead Sciences is where its stock was 10 years ago. It's up 0%. Now, I'm not trying to make a point that our risk rating system is predictive and helps you pick out which stocks will beat, which others. I would also like to note, I picked Gilead Sciences along with Amazon. One has way outperformed the other, but those both have been Motley Fool picks, but it's fun to revisit that 10 years later and see how those stocks have done. All right, let's move on to our last one this week. Essay from yesterday number four, we'll jump it for just one more year. The year 2016, the month was June, and the Rule Breakers essay introducing the June 2016 issue was entitled What is infront of One's Nose. And here it is. I did my Rule Breaker investing podcast today, and on this one dated May 25, 2016, you can listen to it via iTunes, Spotify, etc. I pull a quote from an at RBI podcast follower on Twitter named At Wellington Randi. Randy's profile quote comes from George Orwell. To see what is in front of one's nose is a constant struggle. Love it. So true. You can hear more about my reflections on it in the podcast, but I want to add a couple of thoughts here. That line comes from Orwell's essay entitled In Front of Your Nose. As is often the case when you find a great quotation, you're rewarded for going to the source, checking context, reading a bit more. And so I quote a little bit more from that essay. To see what is in front of one's nose needs a constant struggle. One thing that helps toward it is to keep a diary or at any rate, to keep some kind of record of one's opinions about important events. Otherwise, when some particularly absurd belief is exploded by events, one may simply forget that one ever held it. And now continuing with the second half of my Rule Breakers essay, What is in front of one's nose, I wrote two Rule Breaking thoughts for you. One. This is one reason I love Motley Fool CAPS, @ I can put my thumb up or down for any stock, be accountable, and be scored from that date forward for my opinion. Further, I can spend a little time typing in a few sentences as to why I put forth that opinion. I have now done it 392 times since the debut of CAPS in 2006, ten years of learning, ten years of keeping Orwell's words some kind of record of one's opinions about important events, has been an invaluable part of my learning and development as a stock picker and future thinker. Are you serious about learning to pick stocks? If you're not already using CAPS? Take Orwell and me up on our recommendation, keep some kind of record. And two, beyond CAPS, I have the benefit and sometimes detriment of having a live updated scorecard for every stock I've ever picked, here in Rule Breakers, and in Stock Advisor. That includes a full write up for each, elucidating the reasons for my and my team's recommendations. That is also incredibly valuable, not just for me, but for you, you can go back and learn why we recommended Bydu in 2006, up 21 times in value. Or first solar in 2009, it lost 91% and everything in between. To close, what is in front of my nose these days, I think yours, too, is that we are at an unprecedented time of technological innovation. It will yield huge value for all of us, both as consumers and rule Breaker investors get invested with us and Fool on. And that was What is in front of One's nose, the Rule Breakers intro from June 2016. If you're really interested in hearing more thoughts on the Orwell quote, as I started that essay, I did it right here on this podcast, which is a reminder that while I no longer do opening essays for Rule Breakers and stock advisor, those were only ever once a month or so. I'm here with you every week, and when we reach July of this year, it will have ten years of a new fresh podcast every week from Rule Breaker Investing, thanks most of all, to my longtime producer Rick Engdol and, of course, many others. So while essays from yesterday no longer exist, I actually try to give you far more insights and add value to your life, trying to make you smarter, happier, and richer every week. And that has been true for years and years and something that I love doing this podcast. Well, a few more thoughts about what is in front of one's nose. The first is just that mention of Motley Fool CAPS, and I just want to say I'm sad about Motley Fool CAPS. As a resource, it's a pale shadow of what it once was. We really haven't invested that much or kept it up very well on our site. I do think that it is such a valuable resource, and I'm kind of sad about its present state. I do hope the company will make an effort to reinvigorate. I think there is such value to it. You know, I was reading Kevin Kelly's wonderful book, The inevitable, his book about technological predictions. He wrote it back around 2016. Motley Fool CAPS, he highlighted at one point in that book, which I took a lot of pride in 10 years ago or so. But now CAPS is hard to find at all on our site, and I would love to see that change. I can't move on to other reflections without making sure I reflect that. For those of you who've used CAPS and enjoyed it over the years, thank you. It's a way to add value to each other as investors, a community stock picking tool. And then one more thought, this one, much more about the stocks. And in fact, the ones I mentioned in that essay, I mentioned Baidu, which I think at that time, 2016 had been our number one performer in Motley Fool Rule Breakers up 21 times in value. It's actually down 50% since I wrote that essay. The S&P 500 is up 160% since I wrote that essay in June 2016, the S&P 500 up 160%, Baidu, down 50% First Solar. Also mentioned, up 160% right in line with the market. Why am I talking about these? Well, it's interesting just to know what's happened since. The rule Breakers team right near Christmas 2022 decided to jettison Baidu from our service, and they made a good call. The stocks actually down 20% since. The market has done well since. Baidu has really ended up being an underperformer, even though it still has some cobwebs in my own personal portfolio. So congratulations to the rule Breaker team letting go a market underperformer these last several years. I also want to note First Solar and its journey through Motley Fool Rule Breakers. I'm referencing it in that essay as a stock that was down 91% for us, and we had sold it at that point. So that was a permanent record. It was. It was first picked in 2009, not a good stock market environment, and it lost a huge amount of value. 91% over the subsequent three years we sold disconsolately in 2012. And so there I was mentioning it a few years later, and that essay is our worst performer in Rule Breakers at the time. But I want to shout out again the Motley Fool Rule Breakers service because we repicked it First Solar a year after the essay that I just shared with you in July of 2017. It's my colleague Carl Teal, longtime Rule Breakers present day Rule Breakers team member. And as he wrote up, that recommendation of First Solar in July of 2017 he reflected on how we'd already picked it once and lost 91% of its value for our members. And I actually think it takes some gall, maybe even some courage to repick a stock for paying members that had already lost you 90% plus some years before, but Carl wrote and I quote from his By report onFirst Solar, he said, What's changed? Two key weaknesses have turned into strength by focusing on commercial installations rather than residential with those solar panels, of course, which is First Solar's business. And also, he wrote by greatly lessening its reliance on government incentives, First Solar has shown both resilience and adaptability, two traits we prize in this industry, resilience and adaptability. Well, that was from his write up in July of 2017, and I'm really happy to say that now years later, here's we embark upon April 2025 First Solar is up 178% beating the market by 20 percentage points. So my takeaway at the end of this essay and really at the end of this week's podcast is too often we convince ourselves we missed it. We missed a stock. Either we didn't buy a winning stock in the first place or we did poorly with something, and we sold it and we write it off forever. So I want to congratulate the Rule Breakers team for being willing to go back in and re pick a stock that had already been such a loser. It reminds me in some ways of when I first picked Nvidia for Motley Fool Stock Advisor, because I'd been cheering against it. I recommended the rival of Nvidia, three DfX in the early DFX didn't end up panning out well at all. In fact, Nvidia bought The DFX for a song, but I decided with some humility with my tail between my legs to eventually just recommend Nvidia, and I'm darn glad I did in 2005, and the rest is history. So often we convince ourselves that we missed a stock. People could have bought Nvidia or Amazon in 2005, 2010, 2015, 20. Some people still haven't bought them today and should here in 2025, convincing ourselves we missed it. And also sometimes we have a bad experience with the stock, and keeping an open mind, it's worth sometimes revisiting, not always, but reconsidering. And so shout out again to the Rule Breakers team for that. All right. Well, from introduction to May 2003 issue, which led off the podcast to what is in front of One's nose, which closes us out this week. There it was essays from yesterday, volume seven, for essays. As always, we acknowledge some horrendous mistakes, for example,First Solar 2009-12. Ouch but also some heartwarming and inspiring facts because all of these things happened, and I wrote about them at the time, and so by actually using history, as our secret weapon, harnessing the power of our wayback machine, we're having that opportunity together this week to reflect and take away some lessons that we can use this month, this year are investing lives going forward, all powered by essays from yesterday. Fool on. Mary Long: As always, people on this program may have interest in the stocks they talk about, and the Molly Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing @ John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Gardner has positions in Amazon, Baidu, and Netflix. Mary Long has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Amgen, Baidu, Best Buy, Chewy, First Solar, Gilead Sciences, Kinsale Capital Group, Netflix, and Nvidia. The Motley Fool has a disclosure policy. Rule Breaker Investing: Essays From Yesterday, Vol. 7 was originally published by The Motley Fool
Yahoo
09-04-2025
- Business
- Yahoo
Tesla Underdelivers
In this podcast recorded April 2 before President Donald Trump's big tariff announcement, Motley Fool analyst David Meier and host Mary Long discuss: How different companies were bracing for the tariff impact. Tesla's sales slump. Motley Fool contributor Jason Hall joins host Ricky Mulvey for a look at Texas Instruments and Taiwan Semiconductor. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $249,730!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $32,689!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $469,399!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of April 5, 2025 This video was recorded on April 02, 2025 Mary Long: Welcome to Liberation Day. You're Listening to Motley Fool Money. I'm Mary Long. Join on this Wednesday morning, the Liberation Day of all Liberation Days by Mr. David Meier. David, great to see. Happy to have. How you doing? David Meier: I'm doing well. It's great to see you, too. Mary Long: Today is April 2, the day after April Fool's Day. As I've mentioned a few times already in this show, it's also Liberation Day. What the heck does that even mean? It's a great question. It's a fair question. We don't actually fully know. David Meier: No, we don't. Mary Long: But we are set, allegedly, to find out later today at 4:00 PM Eastern Time when President Donald Trump is scheduled to make an announcement from the White House Rose Garden. This event is being dubbed Make America Wealthy Again. We're recording this at 11:30 AM Eastern. The show won't come out until right during right after the Make America Wealthy Again event. We're not going to talk too much or make too many predictions about what exactly is going to unfold during that event. David, I will ask you to kick us off. Anything you're keeping an ear out for that you're especially going to be paying attention to or any bets you're making on what exactly might unfold? David Meier: We literally have no idea. It could be anything. We can't make any bets right now, and that's actually that's actually an issue that's facing the business community at large. It's actually an important event where we're going to get some information. One, what's the magnitude. We keep hearing 20% across the board, but it could just be reciprocal when other countries don't have big tariffs on us. There could be carve outs. There could be exemptions. There could be anything. We can tariff certain parts of the world and not tariff certain other parts of the world. We really don't know. It's going to be the thing that we have to do is just listen and digest the information that we get this afternoon from 4:00-5:00. Mary Long: You hit on this point. Many other people have hit on this point. It's worth hitting on this point again that so much of the anxiety wrapped up in this event is that there is so much we don't know. We have no idea what's going to happen. That uncertainty is what's largely been tied to the freak-out that's been happening in the markets. We know markets love certainty. It sounds like we're going to get some details from 4:00-5:00 Eastern Time today. The result of those details might not be something that everyone is rooting for, but still, we'll have a bit more certainty then than we do now. Do you think that that certainty, however great or small it might be, will be enough to calm investors? David Meier: I don't know. [LAUGHTER] I know that's a horrible answer, but here's the thing. This is the way markets tend to work. There's a set of expectations. What we have seen for a few weeks now, some days the markets are getting a little bit worried and the trend has been down. Investors are definitely thinking that there's perhaps some bad things coming forward when they look out into the future. There's a little bit of worry about recession. There's a little bit of worry about inflation coming up. If we get information where tariffs are higher than the market expects, that means that, oh, no, I need to change my expectations as investors. Something like that could put pressure on the market and cause it to go down. We've been hearing 20% across the board as the one thing that's been coming out pretty steadily. If it's 5% across the board, if that's not priced in, that could actually cause markets to jump. As far as calming investors, we don't know, but there's a little bit of level set right now where there's an expectation of something around 20% across a wide swath of the globe. Markets haven't really liked it for the most part, if you look at the general trend. It's also interesting that the White House moved this from 3:00-4:00 to wait until markets closed. Mary Long: The Trump administration argues that tariffs are just one part of Trump's large economic agenda. The point behind them is that they will work to boost US manufacturing and American jobs. Short-term pain is expected to be a part of that process. Perhaps, why? We've seen this event move from 3:00-4:00. It explains the downward moves that the market's been making recently in the past quarter. Let's zoom out, and let's run a little bit with this longer term trajectory. When will we know if those intended long-term effects, more American manufacturing, more American jobs is actually starting to come true, even in spite of some continued short-term pain? David Meier: It's a great question. It's actually a very Foolish question because ultimately, we don't want to necessarily be responding to the ultra short term. We want to figure out, longer term, what is this going to mean? I love what you've asked here. Unfortunately, increasing manufacturing, both from a plant standpoint as well as a job standpoint, that just takes a while. You can't just build a plant overnight. That's not how that works. When will we start seeing results? First of all, we got to figure out what's being said. Business leaders need to start figuring out, what does that mean? Some people have made some commitments already about, "Hey, we want to be a part of this. We want to bring manufacturing back." But others like the CEO of Ford in an investor conference the other day, basically said, "Right now, it's all chaos and costs." Once you get enough information to remove the chaos and then actually figure out what the costs are, then we'll start to see businesses making plans. Then we'll start to hear, "This is what we're going to do in response to the tariff. We're going to go after this market. We're going to start making this many widgets. We're going to make them in this state by opening up a plant." Unfortunately, it's not going to be probably 3-6 months before we start seeing those business plans and serious business plans. Not just, "Hey we want to be a part of this," but here's actually what we're going to do. Here's how many dollars we're going to spend. Here's where we're going to build those plants. That's just unfortunately going to take a while, so we're going to have to be patient. Mary Long: As you allude to, we're already starting to see some companies respond to these tariffs, and they're doing so in a number of different ways. You've got some like Johnson & Johnson, which just announced it's making commitments to boost its own US production. It's going to commit $55 billion in US investments over the next four years. That includes the development of three new manufacturing sites. You've got other companies like Walmart that are turning to their suppliers in Walmart's case, many Chinese manufacturers and are asking those suppliers to cut prices and essentially shoulder Trump's tariffs for the company. You've got other companies, Target and Best Buy, being two in particular that have warned customers about higher prices as they strive to preserve their own profit margins. The opposite of that is Nike, which adjusted its margin guidance, suggesting, "Hey, it'll attempt to absorb the tariffs for the time being." There's still a lot of uncertainty, but we're already starting to see these different defensive moves come into play. If you are the CEO of David Meier Enterprises, and I intentionally kept that unspecific because it doesn't matter what industry these companies are in, but if you're a CEO of David Meier Enterprises, how would you be bracing your company for whatever tariffs might be coming down the pike later today? David Meier: I'm going to work on the assumption that I make something that I'm a manufacturer because I think this will help illustrate some stuff. First of all, we knew this was coming. This was something that the new administration campaigned on. They've talked about ever since. We've seen companies do this, too. Hopefully, I've already made some advanced purchases of things that I think I'm going to need from other countries before the import tax, which is what a tariff is, gets put on the stuff I'm trying to buy. That's the first thing. The second thing is, I need to run some different scenarios. Again, if it's 5%, if it's 10%, if it's something ridiculous, like 50%, what does that mean for demand for my products? Hopefully, I've also done some scenario analysis. Then I'm going to actually talk about something real quick as it relates to Walmart and then assume that my company has this as well. Walmart can be considered what is known as a monopsony, and that is essentially where one company is powerful enough to really control prices by their buying power. Think about Walmart. Huge company. Lots of stuff goes through there. Of course, they can go to their suppliers and say, "Look you don't have that many other options. We buy most of your stuff. We can go and find other suppliers and work with them. We have plenty of people who want to work with us. You're going to have to take the pain here because we're not willing to bring that on the American consumer as Walmart." If I was fortunate enough to be in that position, as CEO of an enterprise that could do that, I would be telegraphing that to my suppliers as well, because what we want to do is try to make as many plans as possible before it comes. Then once we get the information, more information, better information to figure out this is the direction we want to go from this point forward. That's how, hopefully, I would have been preparing for, digest, and then say, "We now have the information to say, 'This is the direction our business needs to go' and then go." Mary Long: We'll move on to related, but also unrelated story. Tesla dropped their first quarter delivery and production numbers this morning. Vehicle sales fell to an almost three-year low. Analysts had expected the company to sell more than 390,000 vehicles in the first quarter. The real number was shy of 340,000. Is this sales slump attributable to Musk backlash, or is there more to the story? How do you parse this out when you look at these numbers? David Meier: A good question. There's actually a little more to this story. For a little additional context, I will also say that prediction markets were expecting about 356. Not only do you have experts say they were expecting 390, but you have wisdom of crowds saying 356, so this number is really was lower than a lot of people expected. Recently, Tesla has been having some struggles. It's not just for Musk backlash around the world based on what he has decided to do injecting himself into the global political scene. There was already a little bit of waning demand. Unfortunately, I think that people have said, "Hey this is not something that we agree with," and they were able to vote with their wallets and say, "Hey, we're not going to buy your car under these set of circumstances." It doesn't mean it won't change in the future, but right now. I think some of it is that this is a continuing trend that Tesla's experienced, but I believe that there's been a little bit of catalyst in terms of the backlash for how Musk has interjected himself into the global political scene. Mary Long: This Tesla piece does tie to the tariff conversation that we were having earlier. Many Tesla vehicles are produced in the United States. The Model Y scores as number 1 on American-Made Index. Still, though, they do import an estimated 20-25 percent of goods from international sources. We don't have an exact number on that. That estimate comes from the National Highway Traffic Safety Administration, doesn't specify which countries Tesla imports from, but we know that it does get a number of its goods from international sources. A 25% tariff on all imported cars and car parts starts tomorrow, April 3. Tesla is one of the car makers that stands to be less affected by those tariffs because so much of its products are produced in the United States, but that tariff change that's rolling out to all automakers, might Tesla expect to see an uptick in vehicle sales in the nearest future because of that and changing dynamics in car prices? David Meier: I certainly think it's possible, and you are right. One of the advantages of having less content produced outside the United States is that they have better visibility into the cost structure in a world where there are more tariffs. The other thing is Tesla's in an advantaged position. Who's to say they can't get an exemption on all those parts that they bring in from other countries? It's a very real possibility given the relationship that Musk has with the current administration. It is absolutely very possible. One of the things that Tesla has been doing is bringing down the prices for their cars in order to make them more affordable. In a situation where other substitutes, the competitors have to figure out what to do with the tariff and the amount that's been levied on them. How much are they going to pass along in terms of prices? How much are they going to deal with in terms of their margins? This very well could give Tesla an advantage in the short term. What's interesting is the initial market reaction today on April 2 was the stock fell on the production and deliveries news, but last I checked at almost approaching noon, the stock was up, so investors taking a longer term view may be seeing that very same thing that you're talking about. Mary Long: David Meier, always a pleasure to talk with you. Thanks so much for coming on the show this morning and helping us sort through and make sense of all of the uncertainty that we're seeing unfold today. David Meier: Thanks, Mary. I really appreciate it. Mary Long: How do you know if a company is walking the walk or just whispering some sweet nothings to shareholders? Up next, full contributor Jason Hall joins Ricky Mulvey for a look at two semiconductor companies, Texas Instruments and Taiwan Semi. Ricky Mulvey: Jason, we are recording this approximately 48 hours before Tariff Liberation Day as we talk about two semiconductor manufacturers, we shall see what happens on that day. But we're taking some time to check in on Texas Instruments and Taiwan Semiconductor, primarily because I was watching Scoreboard on Fool Live and saw your take that you think that Texas Instruments will outperform Taiwan Semi over the next five years. I own both companies, so what an excuse to talk about them? Jason Hall: Absolutely. Ricky Mulvey: It's a little bit of an intro for people less familiar with this space, what is different about the chips that these companies make from each other? Jason Hall: Basically everything, I think, is a summary of it. But Taiwan semiconductor, it's called TSMC in the industry parlance. TSMC is the manufacturer of basically 100% of the leading edge logic chips out there. You think about the chip in your smartphone that powers your smartphone. Obviously, NVIDIA's GPUs, anybody that follows that industry closely knows that TSMC is the company that makes the chips for their GPUs. The CPUs and GPUs, that's logic chips. Then you have memory chips that companies like Micron and others manufacture. Semiconductors, the leading edge stuff, that's TSMC. They also make the bulk of all of the used to be leading edge stuff because they've built out the capacity, and they're such an incredible operator. They do the contract manufacturing for the big fabulous semiconductor design companies. Basically, everybody that designs their own chips but doesn't make them. If it's Apple, we mentioned NVIDIA, AMD is a big TSMC customer. Those companies go to TSMC to actually do the manufacturing. Texas Instruments is a fully vertically integrated semiconductor manufacturing. They do their own design. They work with some clients to design special needs chips, but a lot of it is just stuff that they've designed over the past 50 years. Some of the chips that they designed back in the 80s are still being sold to go in industrial machinery and that kind of stuff. They have a big direct sales channel on their website. Over 100,000 customers, and a lot of them just go on their website and find a part off the shelf and order directly from Texas Instruments. Now, here's the biggest separator is its chips are analog chips and integrated chips. The best way to think about what they make is the logic chips that TSMC makes and the memory and all that kind of stuff, all that stuff operates in the virtual world in the electrical electronic world. Those chips have to interface with the real world. They need to get power in. They need to send signal out. That's what Texas Instruments chips do. Is there how electronic devices actually interact and interface with the real world? Ricky Mulvey: Both of these businesses, semiconductor stocks have historically been cyclical businesses, Taiwan Semi, definitely at a high point right now or highish point, I should say. Do you still see semiconductor stocks as cyclical businesses, and does that affect the way that you invest in them? Jason Hall: Yeah, absolutely. Businesses are cyclical when their customers and end markets are cyclical. The end market for chips are still cyclical because of that reality. What has changed, Ricky, is the size of some of those end markets. We think about logic, that's TSMC and memory. Those industries have benefited from this explosion in demand for accelerated computing infrastructure. It's bigger than just AI. It goes before AI, is the Cloud, this accelerated computing infrastructure. Now more recently, of course, AI has been like the nuclear explosion in demand, and that's led to this super cycle for TSMC and some other companies that are reaping those gains, and the demand is so big. This new market is so big for those companies that they're more than making up for loss volume and revenue from other sectors that have been weaker, like PCs, consumer electronics, industrial and automotive. Ricky Mulvey: Now let's separate these companies a little bit, both cyclicals, but both have different stories right now. Texas Instruments has come off a bit of a weak period, 2024, a bit of a down year from a revenue and operating profit perspective, and that has a lot to do with their embedded processing business. Can you explain what's going on there? Jason Hall: Yeah, so there's definitely some kind of asynchronous cyclicality between its analog business and its integrated business. But the big thing that we're seeing broadly is that it's in the late stages of a transformation in its manufacturing. It's shifting to a larger form factor for its chip making that's going to give it some structural benefits. But there's a protracted downturn in demand across multiple end markets. We actually just saw the last quarter that it reported was the first quarter in about two years where its analog business actually showed just a little tiny bit of demand growth. We can go back to 2023 when demand was really down for its analog business. This is the larger business too. There were some periods where demand was actually up for the integrated business. It's a little bit of a difference in how different parts of the cycle can affect those key businesses. But again, the big key right now for Texas Instruments, is that not only is the business weak, but it's kind of exacerbating its bottom line because it's about three quarters of the way through this big capital project to spend to make some structural changes to its cost structure and its manufacturing that are going to eventually help the business do better, but the timing is just really tough. Ricky Mulvey: In the past few years, extraordinarily strong for Taiwan semiconductor, its shareholders have been rewarded quite a bit. Why are you seeing an opposite story for that chip manufacturer? Jason Hall: The easy answer here is AI, and it's largely the correct one. We've also seen some recovering demand in other areas like smartphones. But being essentially the only contract manufacturer that has both the capability and the capacity to make the most advanced chips, it's been a massive boon for TSMC. In one sentence, if you're NVIDIA's foundry, you're doing really well right now. Ricky Mulvey: With TSMC, there's a different political component because it is sort of this national security infrastructure for Taiwan. China has had its eyes on Taiwan. It's an extraordinarily complicated story between the Taiwan and Greater China relationship. All of that is to say, if you are sitting in the United States, this is a company that carries some political risk that you probably don't fully understand. I don't fully understand it. How do you think about this if you're owning shares of TSMC, which I own a few shares of. Jason Hall: I do, too. I think it's definitely kind of in the too hard pile for most people, and even the people that are true experts in this area of geopolitics and military threat and risk, would say the same thing. It's a bit of an unknowable but it is a legitimate threat. There's significant national security implications across every Western country if those chips were made unavailable. TSMC, of course, is taking steps to address this expansion in the US. We know that's been ongoing for a while. There's also expansion in Europe, multiple facilities are looking to bring online by around 2027. Now, here's the thing. Those moves might be great for getting diversification of chips to the market if there were a military event actually on Taiwan. But that's not really going to protect shareholders very much. I think it's important to decouple those kind of things down from one another. But what it really comes down to me for is thinking about individual risk tolerance. How much do you have? If you have some tolerance to be able to be exposed to that too hard pile sort of answer, then position sizing comes into play. I'm sure there are a lot of investors, Ricky, that have done incredibly well with TSMC over the past five, 10 years, that might find it prudent to reduce their exposure, take some of those profits now off the risk table, despite there still being a lot of growth potential still for TSMC. Ricky Mulvey: I own Texas Instruments as well. When I bought the stock a few years ago, I found this was a leadership team that was saying all the right things. We measure our performance on free cash flow per share. This is something that activist investors Elliott Management has more recently sort of held management's feet to the fire. They point out on their investor relations page. Look at us. We've reduced share count by almost 50% over the past 20 years. But during this time, I'll say, over the past five years, this total return has underperformed the S&P 500, and for me, more importantly, it's underperformed the Schwab US Dividend Equity ETF SCHD, which is probably the more appropriate comparison, big strong companies that pay dividends. Management's saying the right things, but there's a little bit of a long term underperformance problem here. Jason, what's going on? Jason Hall: We look at Rich Templeton, who the company has basically built in his image over the past quarter century. Over the past five years, we've gone from a transition to his second retirement to Haviv Ilan, who's a long term insider, who's now running the company, and some people might say, well, what's going on? What's the shift here? I want to push back a little bit here, Ricky. Yeah, it's underperform those indices, but over the past five years, it's earned an average of 14.7% annualized total returns. It's not like it's been a bad investment. It's just a period that the market's CAGR has been over 18%. Let's contextualize that a little bit. Also, again, think about the cycle. Shares are down some 20% from the high back in late 2024. All this is happening during a period where its end markets are weaker. Now, one more thing. If we've had this conversation just about any other time over the past few years, Texas Instruments total return would be a little bit better than the benchmark, even again, during that persistent downturn in demand. It's not like it's been a bad investment. It's just not doing as well as some of its peers, and again, it's trailed an incredibly good market. Ricky Mulvey: Hey, I own the stock. Don't blame me. I'm just looking at the numbers here, Jason. Jason Hall: [LAUGHTER] As a shareholder, I'm right along with you on this. Ricky Mulvey: Let's get back to the original premise of this conversation. TXN greater than TSM over the next five years. So investors have been more excited about Taiwan Semiconductor. Texas instruments, it's doing boring stuff. It's checking the temperature on things. It's doing analog processes. This isn't the big explosive, exciting AI chip making stuff. why are you more bullish for the long term future of Texas Instruments than Taiwan Semiconductor right now? Jason Hall: It gets back to the story of the cycle, and I think it's so important with these chip makers to remember that. High fixed costs. You leverage those fixed costs when demand is strong to make more money, take that money and reinvest in your business when the opportunity is there. Texas Instruments has been steadily spending money through the downturn, and I think that's made its stock maybe look a little more expensive on both earnings and cash flows. On the other side of the coin, TSMC's CapEx spending is actually down from the peak in 2023, and it's monetizing much of that spend already. Now, its CapEx is about to start ramping back up. We talk about all of the capital commitments it's made in the US and Europe. As it deploys that capital, it's going to be going for a couple of years before it really starts to get a return on that capital. So its shares might look a little cheaper than maybe they really are. I also think that we need to acknowledge that we always overinvest in these big buildouts. History has shown us that that is the reality. All of these businesses are in a land grab mode, and we're going to get to a point where there's going to be too much supply, and that will lead to the cycle turning for TSMC. Now, there's going to be a shift from the buildout to the upgrade cycle, and I think we might be maybe closer to that shift from buildout to upgrade cycle than others do. The flip side of the coin here is that TSMC is going to continue to spend capital. TXN, on the other hand, is about three quarters of the way through its current CapEx cycle, which means that its CapEx is actually about to fall just as it starts to leverage the 300 millimeter wafer size for its chip manufacturing. This is going to give it some real structural cost advantages versus its competitors. In other words, its cash flows could really begin to soar in the years ahead making today's stock price that might look a little bit more expensive, really compelling for long term outperformance. Ricky Mulvey: Jason Hall, I'm going to end it there. Appreciate your time and insight. Thanks for joining us for Motley Fool Money. Jason Hall: Cheers, this was fun, Ricky. Mary Long: As always, people on the program may have interest in the stocks they talk about, and Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. With Motley Fool Money team, I'm Mary Long. We'll see you tomorrow. David Meier has no position in any of the stocks mentioned. Jason Hall has positions in Nvidia, Taiwan Semiconductor Manufacturing, and Texas Instruments. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Texas Instruments. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Best Buy, Nike, Nvidia, Taiwan Semiconductor Manufacturing, Target, Tesla, Texas Instruments, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy. Tesla Underdelivers was originally published by The Motley Fool
