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6 days ago
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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
27-05-2025
- Business
- Yahoo
Nike's Turnaround Story
In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey discuss: Nike's return to Amazon. The fundamentals and risks of investing in turnaround stories. A fitness company with a potentially brighter future. Then, Motley Fool Chief Investment Officer Andy Cross and senior analyst Asit Sharma interview PubMatic CEO Rajeev Goel about trends in digital advertising and his company's future. 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 $340,468!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $37,070!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $639,271!* 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 May 19, 2025 This podcast was recorded on May 22, 2025. Ricky Mulvey: Are you buying the Nike turnaround story? You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Jim Gillies. Jim, good to see you. Jim Gillies: Good to be seen, Ricky. Ricky Mulvey: Today is a good day to zoom out. There's some little news going on, but to be honest, it's a little bit of a slow news day. I think it's a good time to talk to you, especially because you like looking at valuation stories. I think today is a good day to talk about turnaround stories, especially with Nike, where Nike's CEO Elliott Hill is now trying to appeal to retailers again after the previous administration focused on a direct sales route. Here's the newsy hook. Nike is back to selling its products on Amazon. This is five years after pulling its products from the e-commerce giant. We'll get into the turnaround story, but what do you think of this Nike's move to reverse course on direct sales and say, "Hey, actually, outside retailers are good at selling our shoes and apparel?" Jim Gillies: I'm going to put it what Winston Churchill said way back in the day. It's nice that Nike does the right thing after trying all the other alternatives. It was dumb to pull it off. It's only the biggest online marketplace in the world. Why would you want to sell your products through there? Who knows? In other news, why would anyone want to sell in Costco, for example, or through Walmart? Why would you want that kind of relationship? I have fond memories of looking at Foot Locker after Nike pulled, the same thing. We're going to emphasize direct to consumer sales, so we're going to sell less through Foot Locker. In the process of being taken over by Dick's Sporting Goods, Foot Locker had some long dark tea times of the soul there before basically striking things with deals with Adidas or Adidas, depending on how pretentious you want to sound and got on with their business. With Nike deciding they could do it themselves and trying to disintermediate people and trying to take the profit for themselves, now they're coming back, scrunching back to people. Thank goodness it hasn't been a complete and utter failure. I know we're going to really drive toward turnaround stories, but this is an iconic brand. It's an iconic company with products and athletes that people identify with. Obviously, Michael Jordan, Tiger Woods, and various lesser beings as well. This is a company that maxed out. It's been, I think, three and a half years since it topped out. I know we're going to go down the turnaround thing. One thing I'm going to say about when you are playing in turnaround stocks, realize most of the time, turnarounds take a long time to turn around. That's not a unique insight. Peter Lynch said that, and I think one up on Wall Street, which was published in '87 or something like that. Turnarounds take a while. Nike's shed almost two thirds of its value over the past four years. Have we made the turn yet? I'm not entirely sure. Ricky Mulvey: Nike is also in a tough environment to turn around, announcing that it's going to hike prices on June 1. The company did not mention tariffs, but CNN reports that they just said, "We are regularly evaluating our business and making pricing adjustments as a part of our seasonal planning." Jim, I think we're going to see a lot more of that, especially from retailers. Just we're not going to put blame on anyone, but we are going to raise prices coming into the summer. Jim Gillies: That's the lesson of Walmart and President Trump jawboning them down last weekend. The second they say, "Our costs are higher, so we're going to have to pass a law on the costs caused by tariffs," and they got spanked. The signal that sent was, "Everyone else who is also going to raise prices, everyone's going to do it." Come up with literally any other explanation. It's going to happen and people are going to have to pay for this. Just don't point blame the general DC area is all. Look, they've also, of course, if they're going to do price hikes, part of that you got to pay the Amazon [inaudible] now, too. That's part of it. It's going to be interesting times for Nike in this new higher cost environment. I'll leave it at that. Ricky Mulvey: It's also incredibly difficult for a brand to come back from being a discount brand back to we're going to sell things at full price again because you've trained your customer base to wait for the discounts to come, and then good luck to you if you can stop that game. It's incredibly difficult. I don't want to discount Nike's ability, but there's also a pricing game that's going to be tough for them. Jim Gillies: One hundred percent. Ricky Mulvey: Let's talk about the turnaround story itself. It is difficult for companies to turn around. Nike has the Win Now plan, which is focusing on retail partners as we mentioned. There's some focus on brand. There's a shakeup in the technology division. You've seen a lot of turnaround plans, and it's easy for investors to get excited about them to want to hop on board and see an undervalued stock and get on that train. What do you specifically think of Nike's Win Now plan? Jim Gillies: I don't know what to think about the Win Now plan. I will say I've seen various other win now. I guess no one could see the air quotes, so it was wasted motion. I've seen other turnaround plans, and we remember the ones that work, and the ones that don't work tend to disappear into the ether along with the executives that trundled them out. I have very fond memories. This is a technology space. This is a few years ago. Someone had come from a very high profile technology company. We'll just put it that. I saw a presentation from them, which their version. The technology space, it's not important who it was, but they stood up and spoke very confidently about their version of the Win Now program, how they're going to win back customers for the technology products that they were offering. I remember watching this and really noting the enthusiasm of the executive who had come over from a much larger company and how much deference he was being given in the room because this guy a very important executive from a much larger company than us now. I think the plan and the person lasted less than 18 months. No, I'm not talking about Pat Gelsinger and Intel. We have seen this story before, and the principles that I have when looking at any turnaround, first of all, turnarounds are difficult, and a lot of time turnaround doesn't happen, and it's not that the company turns around. It's the company turns around on the person who's trying to drive the turnaround. We go get the latest savior. The second thing is, it's probably going to take you a long time and longer than you expect, so you have time to go into a turnaround story. You have time to maybe gauge a few quarters. Don't even throw any money at it or throw 0.1% tiny starter position just to make sure you keep paying attention. I'll give you a couple other turnaround scenarios. Right now, there's a lot of people getting very excited about United Health Group which has fallen like 50% in a month or whatever it is. There's a bunch of executives who have committed capital in the open market, and everyone's yay. You know what? Let's just see how this plays out. I'm going to point you in the direction of Boeing, as well, which the two airliner crashes of the 737 MAX, which kicked off a lot of the problems with Boeing. Those were in late 2018, early 2019, and people were rushing in in 2019 and 2020. It's like, "This is one of the great American success story companies." It's intrinsically required company in the defense industry as well as the airline. It's part of an airline duopoly. If you rushed in in the first year of that, boy, you've been waiting a long time for your money. Even like I mentioned earlier with Nike, Nike's probably three years into their turnaround. I'm not sure they're going to turn yet. Certainly, if you look at expectations, this is a company that as recently as 2021 had revenue growth over 20%. It's going to decline this year, and if you believe consensus estimates going to decline next year and going to decline the year after. One of the turnarounds that actually turned that I can appreciate is Chipotle. Chipotle in 2015, a very bad, terrible, awful year. Ricky Mulvey: It kept giving people food poisoning. Jim Gillies: In various locales and different types of food poisoning, too. It's nice that they went for diversification. You don't like E. coli? No problem. We've got norovirus. By the time you come along in 2016, the stock had already been knocked down by about 40 or 50%. You come along in mid-2016, it's like, "Evaluation is much better. They're still got good growth plans. They've at least paid lip service to improving the quality." We understand why they had a lot of the food-borne illness issues that they had. Ironically, a lot of it was tied to their whole food with integrity thing where you can't get one type of potato to make your potato chips or make your French fries, like McDonald's does, where they have a very specific French fry specification and they go everywhere. A lot of it was because local farms has had tainted lettuce, and they tried to do local. You come in about mid-2016, you've well cleared the 50% drop, and they've paid lip service. They've closed the stores to do a proper clean-up, everyone. They introduced more training, and they come out and say all the right things. Was still dead money for another two and a half, almost three years. It was only after Founder Steve Ells is gone, and they bring in Brian Niccol from Taco Bell, which is still hilarious to me. Only then did Chipotle have its renaissance, and it's done very, very well, but the people who ran in in the first couple of months probably paid more than they needed to, and they were very early. I look at a Nike and go, "We're about three years into this. Is any of the moves they're doing gaining traction?" I don't know. I'm still like, You know what? I'm still taking my time because I'm not sure there's a lot going on." Ricky Mulvey: Elliott Hill came in as CEO in 2024. It was John Donahue, who is there from 2020-2024. The new leadership has not had three years to really implement a new plan. It's been less than that, Jim. Doesn't sound like you're interested in Nike. I'm not getting you to bite on Nike. It's at historical multiple. It's like 20 times earnings for an iconic brand. I would bet that in 10 years from now, 20 years from now, people are still buying Nike shoes, not that I agree that is. I have no prediction, but you're not biting on Nike. These things are difficult. Are there any current turnaround stories that you're more interested in? I know you like looking in the dark corners of the market where not a lot of other people like paying attention, but when you grab your flashlight and search around the attic, are there any better situations for retail investors than Nike right now? Jim Gillies: I'm going to give you one that's going to get me some grief, but that's OK because I live on grief and tears, so that's good. In the spirit of Charlie Munger's try to destroy a cherished belief at least once a year, a company that I very publicly mocked on Fool24, Fool Live at the time, called out their now former CFO as being, I'll say suboptimal, I said nastier things, but that's OK. If you had told me that I would be an owner of Peloton today, I'm not sure I would have believed you, but the whole concept of Peloton is fine post COVID, because Peloton spent the COVID bubble completely overbuilding and pushing as far away as possible, any suggestion that they were nothing more than a COVID growth story. No, no, we're fine. Of course, they overbuilt all of their fitness gear, which is very low margin, as opposed to their subscription business, which is very high margin. They plowed all their capital into their treadmill and bike business and then had to sell it at just brutal discounts. The CFO, again, had no idea what the F in her name meant. She very publicly said, "We have no need to raise capital 12 days before the company raised a billion dollars in capital." When the CFO doesn't know what's coming, you don't exactly engender optimism in that they know what the hell is going on, but flash forward to today, the froth has been largely cut. The people who were intent on empire building are gone. They have hired a guy who on paper looks great. It comes from Apple-connected Fitness, was one of the pioneers there. That's the new CEO. He's been a Peloton member since 2016, himself, some subscriber, so he uses the product. It basically boils down to the new management finding and nurturing the real business hidden underneath this COVID era empire excess. Of course, Peloton was down 99% at one point. This has been bombed out. Why would anyone go here. If you look at the last three quarters, they have beaten and raised their guidance each time. You look at the full-year quarter, they have a June fiscal year, so they're three quarters into fiscal 2025. They came into fiscal 2025 with a prognostication of various things. The main things I'll say is adjusted EBITDA 200-250 million and free cash flow, which is not something this company was familiar with for the last couple of years, generating at least 75 million in free cash flow. That's what they came into. After one quarter, they bumped their guidance up, and the free cash flow guidance became at least 125 million. After two quarters, again, bumped guidance up, and cash flow became at least 200 million for the year. By the way, after three quarters, they've actually done 211 million in free cash flow, which is not what people were expecting from the corps of Peloton. This most recent thing is they're going to do free cash flow in the vicinity of $250 million. They've already got 211, like I said. They are now trading for about 13 times at least as of a couple of days ago, I haven't looked at today. Trading at about 13 times free cash flow. Have 1.5 billion in debt, and some of it's very expensive debt, but I think they're going to pay it off fairly quickly. They got $1.5 billion in debt with about $910 million cash against it. They're going to take out about $200 million in convertible debt, which matures next year. That'll be gone. Probably going to take out a couple hundred million dollars on the credit line, which is a very high interest rate. When they do that, it'll automatically drop their interest rate down, so now you've got another engine contributing to the cash generation story. They're really focused on keeping the subscriptions that they have now. They've deemphasized the hardware model. I just look at this and go, "I think Peloton not only can be a multi-bagger from here or here being six dollars when I was looking at it fairly recently. I think you could see a world in less than five years where Peloton goes from six 25 to 30." It's bought out during that interim. I'm more interested in that kind of a turnaround, where the bombing happened, and it's just rubble everywhere, rather than the fits and starts at at a Boeing, at a Nike, at an Intel. I mentioned Pat Gelsinger earlier. I'm more interested in I want to see blood in the streets or my turnaround target then I get interested. I don't see that with Nike. Ricky Mulvey: Importantly, you used a free cash flow metric for Peloton. That means that company is generating a profit for listeners making sense of that word salad. That's a great place to end it. How about that? Jim Gillies, thank you for your time and insight. Appreciate you joining us on Motley Fool Money. Jim Gillies: Thank you. Ricky Mulvey: What does a more open Internet mean for ad sellers? Motley Fool Chief Investment Officer Andy Cross and senior analyst Asit Sharma interviewed the CEO of PubMatic Rajeev Goel, on our Fool24 livestream. We're just going to play a portion of the conversation, where they talk about ad buyers shift to streaming and what investors need to know about this ad seller's future revenue growth. Andy Cross: Rajeev, one thing we love to dig in through is really the competitive advantages of the companies we invest and we follow and PubMatic is a recommendation across many of our services. I want to talk a little bit about Activate, Convert, and Connect. Just some of the new initiatives you've brought to the platform, especially tied to AI, but really, as you're looking to serve different parts of this market that is just all blending together with all the different players that are connected into serving advertisers to consumers as the advertising market is not just growing, but as you mentioned, really evolving toward more programmatic spend. Rajeev Goel: I think the great thing about our platform is how we connect all of these different segments of the market together so we can enable their businesses and enable them to transact. Convert is our commerce media platform. I gave a couple of examples earlier of Instacart data, for instance, is available on our platform. If a marketer wants to target people that are shopping for specific products, or maybe it's a conquest where you say, "If they bought Campbell's soup, then we want to show them an ad for the alternative." Instacart doesn't have a huge amount of digital ad inventory, in that people go on Instacart and they purchase their basket of groceries, but then that data can actually be applied outside of Instacart itself. We can extend the value of that data. Now, streaming inventory is a great place to extend the value of that data. If we can play on Instacart data onto, let's say, Roku inventory, that's a huge win for everybody involved in that process, including the consumer, by the way, who's going to get a much more relevant ad as they're watching content on Roku. The beauty of our platform, Convert for commerce media, Activate for buyers. We have our core SSP for publishers, and then we have a product called Connect, which I'm sure we'll get into, Andy, which has to do with curation and sell-side targeting. More and more, this targeting is moving to the sale side of the ecosystem rather than the buy side. We can bring all of these pieces together to enable a customer to vary efficiently and with a high degree of performance, drive the transactions and the outcomes that they want to drive. Asit Sharma: Rajeev, I wanted to ask you a question about where advertising is going in the current sort of macroenvironment, maybe some longer term trends. I think you've peripherally touched on this as you've been talking. In your last earnings call, you mentioned a shift in marketing funnels from sort of top of the funnel activities to lower level activities. I was curious, if advertisers are shifting from brand-building activities to more performance marketing, how does this benefit PubMatic and how are you all positioned to help advertisers go a little bit lower down the funnel? Rajeev Goel: There's no doubt that there's a degree of uncertainty out there, US trade policy, tariffs, all that kind of stuff that is causing some unease. The good news from my perspective is having been doing this as long as I have, we've managed through multiple economic cycles, and so we've seen this playbook of when the cycle shift happens, how does that play out into advertising? The good news is that advertising always comes back bigger and better, and in particular, digital advertising. Advertising has been around for hundreds of years, and it's not going away. What typically happens is the underlying shifts that were happening maybe slowly in the ecosystem, those get accelerated. A couple of things that I'm anticipating. Number 1 is, I think we're going to see a more pronounced shift of dollars from linear TV into streaming. No secret that obviously the eyeballs have shifted into streaming. The COVID pandemic was a big accelerant for that, but new households that form if you're in your 20s or your 30s, nobody's subscribing to Comcast or something like that, they're all going for streaming. The eyeballs have shifted, but the dollars have lagged. Right in the middle of the upfronts, this is when the big TV companies, the broadcasters, and the streamers, they go and they present what's their content slate and try to get advertisers to commit big budgets. When I talk to advertisers and agencies, I'm hearing who's willing to step up their commitment given the uncertainty, particularly because if you don't buy in the upfront, there's what's called the spot market. That's the real-time market where you can buy without having made a commitment. The spot market is available to you. I think we're going to see a lot of dollars move into the spot market in particular around streaming. Spot tends to be much more heavily programmatic dominated, and so we think that's a big upside potential for us. The second, Asit, is what you mentioned around performance. The other thing that happens is usually a CFO is now getting into the CMOs here and saying, "Hey, we got to make sure every dollar of ad spend is super accountable. We need to know granularly what's the ROI. Otherwise, it's potentially on the block for being cut." That means that I would expect to see a shift of ad dollars from brand orientation toward performance. What does that mean in terms of performance channels? CTV is a performance channel. Commerce media is a performance channel. You have closed-loop reporting, the ability to measure what kind of sales happened. We have a lot of advanced data and targeting. I'm sure we'll talk about cookies, but it's been a big transition, and we've been a leader in that transition away from cookies. A lot more advanced data like people logged in. I think we're going, in a good position, to be able to manage through that shift for publishers to drive more performance ad spend. Actually, I'll give you two more things. The third is more supply path optimization. If your CFO comes to you and says, "Hey, we're going to have to ratchet back the ad spend by 5, 7, 10%," then the first place you're going to lean to is to say, "Well, how can I protect actually the media spend, but how can I get more efficient? How can I take cost out of my supply chain, out of my buying process and supply path optimization?" Our Activate solution with its AI capabilities is a great way to do that. Then, lastly, I think we're right at the cusp of this AI revolution. Usually, what happens in a macrocycle is people are much more willing to try new solutions. When you're making 100, 110% of your plan, your motivation to try something new is very low. It's like, "Hey, why rock the boat?" But if you're coming in at 80 or 90% to plan, if you're a publisher or an advertiser trying to drive your sales, then all of a sudden you're willing to try new things. I think there's a lot of AI solutions out there in general, but we've been doing a lot of AI or new buyer platform that we announced last week with AI-driven workflows. I think we're going to see an acceleration of interest and trial, a lot of these new AI solutions. Asit Sharma: Rajeev, we've talked about a lot of technological advancements and potential tailwinds up until now. We're about halfway through. Before we jump into questions about AI, I want to draw everything together. Can you give us, from a financial perspective, a sense of the revenue CAGR we should be expecting, shareholders should expect, let's say over the next three and then maybe five years. Rajeev Goel: Sure. I'm happy to share what I can in terms of forward-looking projections. Let me give a little bit of context on the business just from the last couple of quarters. In May of 2024, so almost exactly a year ago, one of our large DSP buyers, they made a technical change to how they bid. I won't go into too many details on it, but they went from first and second price actions to really managing first price only. That was a significant headwind for us. The same time, we saw a nice tailwind in political ad spend. Obviously, last year, presidential cycle, big cycle, so there was a lot of political ad spend, particularly in the second half of the year. There's a lot of noise in the numbers right now, and so what we started to do middle of last year is just to break out, if you look at our business excluding that DSP and excluding political, so the putting the take what is the growth in the business look like so that investors could get a clear picture of what is the underlying business. How is it performing? That underlying business, by the way, is about 70% of our revenue, so I'll see a very significant chunk of it. In the second half of last year, that underlying business grew 17% on a year-over-year basis, pretty good. That growth accelerated in Q1 to 21%, so we're seeing a really nice trajectory in the business. Our reported revenues the entire business, they've been uneven. Uneven because we took that hit in Q2 of last year, and that persisted into Q3. Then we had uptick from political, so Q3 looked pretty good, and Q4 came back down. When you look at the total reported numbers, there's some unevenness. We are really targeting to grow at over 15% per year on a sustained basis. When we look at our underlying business again and the trends there with that 21% growth in Q1, and we think about even in the near term with the macro-uncertainty, we think we can continue to grow at that 15% plus rate. I think there will be quarters where we're above that. But I think that 15 ish percent is a good number. Asit, our market is growing in the 8-10 percent range. Digital advertising programmatic digital advertising. That 15% also implies sustained market share growth. Ricky Mulvey: I'll put a link to the whole interview in today's show notes, which members of any Motley Fool service can access. As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. 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. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross has positions in Amazon, Apple, Chipotle Mexican Grill, and PubMatic. Asit Sharma has positions in Amazon, Costco Wholesale, McDonald's, and PubMatic. Jim Gillies has positions in Amazon, Apple, Chipotle Mexican Grill, Costco Wholesale, and Peloton Interactive and has the following options: short July 2025 $6 puts on Peloton Interactive. Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Chipotle Mexican Grill, Costco Wholesale, Nike, Peloton Interactive, PubMatic, and Walmart. The Motley Fool recommends Campbell's, Instacart, and UnitedHealth Group and recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy. Nike's Turnaround Story 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
27-05-2025
- Business
- Yahoo
There Is No (Convenient) Alternative
In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss: Moody's downgrading U.S. debt, and why it's somewhere between a symbolic and a substantial update for investors. Whether the downgrade and "sell America" thinking mean international investors are rethinking whether there is no alternative (TINA) to the U.S. Coinbase joining the S&P 500, and crypto's continued march toward legitimacy. David Henkes, a restaurant industry expert and senior principal at Technomic, joins Motley Fool host Ricky Mulvey to talk about why more people are brown-bagging it for lunch, and what successful restaurants are getting right. 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 Coinbase Global, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Coinbase Global 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 $639,271!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $804,688!* Now, it's worth noting Stock Advisor's total average return is 957% — a market-crushing outperformance compared to 167% 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 19, 2025. Dylan Lewis: Moody's joins the crowd on US debt. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me today. Asit Sharma: Hey, Dylan, thanks for having me. Dylan Lewis: As we catch up on the news this Monday morning, the macro picture stays very much in the headline. Market starting up to week down a little bit after ratings agency Moody's downgraded US debt on Friday. Asit, SMP Fitch head downgraded US debt several years ago. Moody's finally joining them. Is this a symbolic change or is this a substantial change? Asit Sharma: I think it's in between, Dylan, so they changed the debt rating from A to as or AAA to Aa1. That's a slight difference, but it is a notch down, and it does join its peers, which had already taken VS out of their top-tier rating bucket. What does it mean? Well, Moody's pointed to higher interest rates and, of course, the burden of our increasing debt as a country. These are long-term things. Interest rates have been elevated now for a few years, and the debt has been around it feels like it's been around since I was born, only gotten more out of control. This shouldn't be a surprise to investors. In fact, after some initial I think Sellof in the futures this morning being stabilized a market realized, well, everyone knows the situation the US is in. It is still by far, the preeminent currency. In the world, the reserve currency, and there's still a lot of advantages to the US. It's not like it's a terminal problem, but one more sign that really from a policy basis, and this is going across multiple administrations from both parties, we've got to address our debt, and there are some other things you can read into it as well. A little bit of the volatility in the rollout of the tariffs that the Trump administration has passed through is playing into this as well. Dylan Lewis: I like that you talked a little bit about the long arc there. Moody's in a statement said, Hey, this is successive US administrations and Congress failing to agree on measures to reverse the trend of larger annual fiscal deficits and growing interest costs. This is a problem that has been building for quite some time. It seems like both the rating agencies and the market are looking for some sign that deficit will get under control, and that would rebuild some of the confidence in US debt and make a little bit easier for the US to operate. Asit Sharma: I think that's exactly what the market is looking for. When you go back to the last time the US got its ratings cut from basically just flawless credit where it is today, which is still pretty good credit. It's just not thought of as being risk-free anymore. It was more about the inability of policymakers to even pass resolutions so that we can fund our own government. That was really what shook the markets last time around. Now this is acknowledging that we can't run these deficits forever. As a country, we've got to find a way to bring our debt relative to our GDP output back in line. It's a little high just now, and it's not something that we can't solve. We could do this, but what it's going to take is some pain. One thing that politicians don't like to pass downstream is sacrifice, pain, burden because they feel like they might not make it back into office when they're up for reelection. This is the key problem in the US economy. It's not really about the deficit. What it is, it's about politicians who are scared to come clean with the American public and say, Hey, we've got to make some sacrifices somewhere because this isn't sustainable. Dylan Lewis: When creditworthiness comes into question, we typically see yields on debt go up. We are seeing that the 30-year treasury spiked above 5% in the wake of this news. We talk about the federal government being the foundation for borrowing and for debt in the United States. What does it mean when something like this happens for companies and for borrowing in the grand scheme of corporate finance? Asit Sharma: It's tough because corporations utilize debt in two ways. We're all familiar with companies issuing bonds to finance expansion or maybe just to reshape a balance sheet. Everyone understands that only the best companies can access the bond markets at will when interest rates get elevated. But corporations use a lot of commercial paper, too. These short-term interest rates rising has made commercial paper more expensive. Even the everyday functionality that lots of corporations use as a form of liquidity becomes more expensive, which means then downstream, they've got to keep more of their own capital in their treasury accounts, which means the CFO somewhere is saying, I don't know if we can spend all this on capital investment this year, I need more money in the bank because I'm not paying X percent more interest on our overnight paper. It has all these weird follow-on effects that we rarely think about as investors, but it's just a slow drip drab of problems just as in the real world, for us, you see that 5% threshold being crossed for the 30-year, and then you're trying to buy a house, and you look and you're like, Whoa, what happened to long term mortgage rates? It looked like it was getting better. This is way too much. I'm going to hold back now, and maybe I'll keep renting for a while. We all feel it. Corporations feel it and citizens feel it. Dylan Lewis: It's the financial Rube Goldberg machine. It starts off in one spot and just works its way through everything else. Asit Sharma: Totally, you can't understand how it works looking at it. Dylan Lewis: After the tariff escalations in early April, there was this sell America concept, the Sell America trade that got a lot of noise in the market. This seems to have stoked that a little bit. For the longest time, for certainly most of my investing life, the acronym has been TINA. There is no alternative to investing in the US, and that the US market in particular is risk-free debt. Even with all these concerns, Asit, is there really an alternative? As people are seeing these headlines, is there somewhere else that investors are going to be looking to park their cash other than US treasuries, other than the US stock market? Asit Sharma: Dylan, there is no convenient alternative. Let's put it this way. If governments want to take the trouble, if corporations want to take the trouble. If the US public, which is a big buyer of US debt wants to take the trouble we don't need to buy these bonds. You can go buy German bonds, which are perfectly safe and almost seem attractive because while the German government has its share of political problems, it doesn't seem near as chaotic as we have been over the past six months or so. It's just something that as technology increases, corporations find it easier to look elsewhere. The markets are pretty liquid in Europe, and even some investors are looking to Asia to place money. I think in the future, what we're going to see is countries like China, which has for a long time, said they wouldn't mind breaking the dollar's dominance, cooperate with other brick nations. There's a whole chain of countries that want to be in on bricks, by the way. I think you'll see that, especially on the sovereign level, governments will take the trouble to utilize other currencies, A, for trade and B for what you're talking about, which is to park assets, to park sovereign assets instead of in the United States, do a little work and spread them out among a host of other countries that in the past just didn't seem viable, but a global trade, which is not going backwards, even albeit temporarily from US tariffs, the long term mark of that it's a very globalized society that we're going to live in from here on out. It is something that governments can consider. Now, to our advantage, you can't do this overnight. We got time to fix the problem, but come on, people. Come on, policymakers, we need to solve this and soon. Dylan Lewis: It's been a busy week for Secretary of Treasury Scott Bessent. He has been taking questions on the country's debt, but also talking to leadership over at Walmart after the company made it clear in their earnings release, tariffs mean higher prices for consumers coming soon. As we were talking before we got on air, about how the tariff story and Walmart ties very directly into the deficit story and what we are seeing with US debt. Walk me through that. Asit Sharma: Walmart is a company that does about $680 billion worth of business in a year. That's the top line number, the revenue number. It also enjoys a really favorable tax rate as all US corporations do. Corporations got a tax break in the previous Trump administration, and that was set to roll back. What's happening now is, of course, we have this year's legislation, and it looks like those tax cuts will actually stay in place. There are some theories out there that point to how tariffs are related to the deficit, and that the imposition of tariffs is one way to bring money back into the country. I would say that Secretary Bessent would argue that it's not really about taxing the consumer, but it's having corporations pay their fair share once tariffs are imposed, which actually brings up something that many of us miss. When you read the headlines, it's all about China should eat the tariffs or the US citizens are going to eat the tariffs. Actually, there's that party, there's the intermediary between this foreign country that exports the goods and us who buy them, and that's a place like Walmart. By the Trump administration's eyes, Walmart should absorb this. I think President Trump used the word eat that they should eat the tariffs, and he points out that they have billions of dollars in profits. Now, before I get to those profits, we'll just take a step back here and say that this is one part of the puzzle to potentially reduce a deficit, which is to raise money by the imposition of tariffs. Now, it's not going to solve the problem because there are so many trillions involved, but it's one more way to bring in some revenue to the federal government. The two are related in that way, getting back to Walmart, though. This is a disciplined company that didn't get to be the biggest company buy sales on the planet by being undisciplined or not being focused or bending to anyone. It just asked Walmart suppliers. They know how to play hardball. I'm thinking about this. I don't know what the future is going to bring, Dylan, but I will say that Walmart has a very good argument to hold the line here, maybe, and push back against the Trump administration. It's about just basic economics. Walmart may sell so much each year, but their operating margin is only 4.3%. What that means is the Trump administration is very correct to say they're making billions of dollars, but they got this absolute scale where the revenue is so high, just a little bit of profit brings in billions of dollars to the bottom line. What happens if you break that equation and suddenly Walmart has to absorb 30% increases from the biggest flow where it gets its goods that we buy? They don't have a lot of wiggle room and very quickly, you could see if they just yielded wholesale to this proposition, all of that would evaporate, and they would be negative. They'd be losing billions of dollars. I think this sets up a very interesting dialogue. I don't know how much of it is going to be public. I think Walmart would prefer as you and I were chatting, before the show, for this not to be in the public eye, they would have these conversations behind the scenes with the US government, but it does set up an interesting push-and-pull to see where that line is where I think Walmart may concede a little bit and telegraph to the administration. Okay, we'll try to absorb some of this, but they have to stop at some point because ultimately they understand who really calls the shots, and that's the shareholders there. They're not going to like that share price going down. They're not going to like seeing profits evaporate. Dylan Lewis: Closing us out today on the news roundup. The S&P 500 is welcoming a new name today, crypto exchange, Coinbase joining the index. This feels like a little bit of a milestone moment for crypto, another step in legitimacy, and it's fitting in a way. Coinbase is joining the S&P 500 because Discover is leaving it. An Old Guard financial services company being acquired by Capital One, I love the symbolism of that, Asit, and just in terms of narrative arc, it is as Chef's Kiss Perfect as I could possibly structure it. Asit Sharma: It's like the thing that was the technology back in the day is being urged out the door. Come on, Grandpa. It's time for you to go you got the new thing here. Coinbase, you have to hand it to them. Whether you're a believer in crypto, this market over the long term, they have been very key in driving the industry forward, and they talk a lot on their calls about just this driving not just their top line, but utility across the whole ecosystem. The fact that when they discuss their earnings now, they talk not just about a global spot market for crypto, but also a derivatives market for crypto and the growth of stablecoins. All of the language of their earnings call, Dylan is just showing how far they have come as a business and how there's become a financial asset in the crypto world. We always thought that and we, being myself, maybe, and a few other people that I talk to because I'm not super knowledgeable about crypto. The folks that I have conferred with this on. I've always thought that utility was going to be the greatest driver in that all the crypto assets, derivative assets, digital assets that would make it would be very useful in some ways. But I think that the fact that coin base has joined the S&P 500 is a testament to just having a financial asset, something that people can turn to instead of, say, gold, had its own existence out there, and not everyone saw that. The trading volumes prove that out. Now, let me just argue against myself for 1 second. Even though you can say they've made it. Let's congrats to them. They've joined the club. I still think so much of this is driven by the success of Bitcoin and the trading volumes associated with that one asset. That's a risk with this business. It always has been. It may be that way for a long time. If you see another crypto winter could this be one of those companies that joined the S&P 500 and very quickly, just it felt like it was plateauing or even sagging a bit? That could happen, too. Dylan Lewis: I think the reality is, if you are a crypto lover, if you are a crypto hater if you own the index fund, you now own crypto exposure. It's as simple as that. Asit Sharma: Totally. Whether you like it or not, you're also a crypto investor, so there. Dylan Lewis: You and I, fellow crypto investors, Asit Sharma, thanks so much for joining me today. Asit Sharma: Thanks a lot for having me, Dylan. Dylan Lewis: Coming up on the show, times are tough for restaurants. Industry expert and principal at Technomic David Henkes joins my colleague Ricky Mulvey to talk through why more consumers are brown bagging it and what successful restaurants are doing right. Ricky Mulvey: David Henkes, senior principal at Technomic, and a global food and beverage industry trend watcher. Thanks for joining us again on Motley Fool Money. David Henkes: Sure, thanks for having me, Ricky. Appreciate it. Ricky Mulvey: So it's a tough time for restaurants. And I wanted to get you as soon as I saw this story last month in the Wall Street Journal, especially, I think it's continuing to play out in earnings for a lot of the large restaurant chains, which is that people aren't going out to lunch. Nationwide, the number of lunches bought from restaurants and other establishments fell 3% in 2024 from the year before to 19.5 billion. But that is important in context because that is fewer than were purchased even in 2020 in the middle of the pandemic. Now, people are going back to work, but fewer are going out to eat. David, any reflections on what's happening here? David Henkes: Well, I think there's a couple of things that you have to take into consideration, and the context for this is that the restaurant industry is struggling right now. There's been a lot of traffic issues. And so when you talk about the decline of lunch and the absolute number of meals consumed for lunch, you've got to look at it in the context of the broader industry. Where last year, if you look at the numbers that we publish or I think most other industry trend watchers, last year finished very weak for restaurants in particular. Big players like McDonald's had significant issues with traffic. Their sales numbers were much lower than they were in the last couple of years. And so, I think focusing on just lunch muddies the broader context, which is that consumers have really pulled back from restaurants over probably the last 12-18 months. When you look at the inflationary environment and menu price increases, menu prices are probably about 30-35% higher than they were pre-pandemic. What that's caused consumers to do even before the current situation that we've been in with the tariffs and all of the economic uncertainty that we're sitting in here today, is that over the last 12-18 months, consumers have really noticed higher prices and have pulled back. When you talk about lunch, lunch is one of those, I guess, easy day parts where you can replace it with a meal brought in, if you're brown bagging, if you're going into work. Certainly, when you look at office occupancy, we're getting back to pre-pandemic levels, but we're still not back there. There's a lot of bigger dynamics that are going on, and I think I've said a number of times that it's harder than ever to profitably run a restaurant in today's environment than in the 29 years that I've been doing this at Technomic. The lunch part is concerning, but I think the broader concern is just the consumer pullback that we've seen across the entirety of the restaurant industry. Ricky Mulvey: I have a theory on the consumer pullback, and it hit me when I was at, like, a fast-casual Mexican chain that is not Chipotle. I went up to order, and there was a screen that I was ordering at. There was one cashier on the other side, but I was ordering at a screen, and then I do my order, and it says, do you want to tip 18, 20, or 22%? This is being asked to me by the screen, and now I'm doing an algorithm in my head, algebra would be a better way of putting it, where I'm ordering at a screen, not with a human, but I know there's people making my food, and I know someone has to bring my food, but I also have to bus my own table. I think the food away from home cost may not account for the wider spread tipping culture, especially for fast-casual dining, which increases it I think even more. I don't know if tips are considered in the 30% from five years ago. David Henkes: No, actually, those are just menu prices. You're absolutely right. I think the US has a tip fatigue problem among a lot of consumers right now, and I think that happened during the pandemic when every restaurant that was open and we wanted to support restaurants and service workers, and so people were willing to tip extra, and so we developed this tipping culture during COVID, which really has stayed with us. When you talk about menu price increases, and listen, labor costs are one of the Top 2 costs that restaurants have, and they've continued to rise, and minimum wage pressures and all of that that are going up, and so there's no question that restaurants, if they can, they'd love to push a little bit more of that back onto the consumer. Historically, though, fast food or limited-service restaurants haven't been a tipping establishment. Tend to find it in full-service sit-down restaurants. I think where people 3, 4, 5 years ago were happy to tip, they've gotten very fatigued by that, and I think that's an additional pullback that we're seeing, where in addition to all of these higher prices that you're seeing just on the menu, and maybe some additional fees or things that are now on the menu, you are also being asked to tip everywhere for a coffee, for a muffin. Obviously, you're tipping the machine basically when you're ordering at the kiosk. I think a lot of people certainly look at the economics of running a restaurant and say, why can't you pay a living wage to your workers so that it's not being pushed back to me? It's challenging because the economics of running a restaurant are really hard. To the extent that you can offer those tips and, hopefully, drive some of your employee satisfaction to a greater extent, then that's a win for the restaurants. But it really has turned off a lot of consumers, for sure. Ricky Mulvey: The winners and losers are not even here. Is this still a big problem for the major chains that you follow a Technomic is the pain more acute for the smaller restaurants that don't have that ability to negotiate with suppliers quite like a Chipotle can? David Henkes: Listen, I think the pain is being most acutely felt by the smaller mom-and-pop independent restaurants. Just because you're right. They don't have the financial wherewithal, the negotiating power, they don't have the ability to invest in technology, and some of the things that help alleviate some of these cost concerns. But listen, we just released our chain data. In 2024, we tracked over 1,500 chains. We published the Top 500 of them in what's called our Top 500 Report. Chains had probably one of the worst years that we've seen in the last, I don't know, decade. Chains were only up about 3% last year. It's a substantial slowdown from what we've seen. I think this consumer pullback is real and it's impacting certainly the independence, and I think from a margin in profitability, we're seeing that from independence, but it's certainly hitting the chains. Last year, you had over 30 restaurant company bankruptcies. That's continued here into the first quarter of 2025. The big chains aren't immune from it. Really, then I think the exception proves the rule when you see great performers like a Texas Roadhouse or a Chili's who are just killing it. Those are really the standouts, but the rank and file of a lot of chains, up to and including McDonald's and some of the other ones are really struggling in this environment, and the consumer pullback is real. Ricky Mulvey: Even Chipotle was surprising to me. I want to get to Texas Roadhouse and Chili's in a sec. I probably at Chipotle once a week, so I'm definitely biased there, but I can get a good bowl of food for 12 bucks, I know what I'm getting, and yet fewer people are going there because of the price increases. Now, I know they've increased prices, but that one, even where there's a really strong perceived value there, at least for me, and I think for a lot of people, is experiencing that decline. Are you seeing any traffic numbers or same-store sales data that is surprising to you as a trend watcher here? David Henkes: Well, I think we're increasingly seeing winners and losers. Some of the things that have been most surprising to me, again, Chili's, the last two quarters have posted basically right around 31% same-store sales. That is unheard of for high-flying chains, much less a legacy casual dining chain. Chili's is one that we just continue to look at as executing on all cylinders. They are doing phenomenally well. I think Taco Bell is one that they posted 9% same-store sales this most recent quarter, first quarter after being up 5%, 4%, but they've been doing really well. McDonald's was down about 3.5% last quarter, Starbucks continues to struggle, they were down 2%. A lot of what are the biggest chains in the industry are having value issues, they're having traffic issues. Some of the smaller chains, and some of them don't publicly report, but we've been very high on a lot of these beverage players, Dutch Bros, some of these non-Starbucks coffee or beverage chains that are doing really well. Last year, we saw, a bunch of these chains that just did really well, 7 Brew and Swig, which does the dirty sodas, things like that. I think it's a tough time for legacy brands, and I think consumers are voting with their wallets, and they're trying to say, I have fewer dining occasions today than I did a year ago, and so I want to pick those establishments that are my favorites or that I know I'm going to get a great value. Value, by the way, is not necessarily lowest price, but they want a great value. We're not in a situation where rising tide is lifting everybody anymore, we're in a situation where the industry is flat to maybe slightly down, and you really start to see those winners that are standing above and beyond everybody else because of what they offer to the consumer. I think, same-store sales are certainly part of it, and you can look down the list and see who's performing. But, again, Chili's, Taco Bell are the ones just as I'm looking at. You can look at maybe a handful of chains that are outperforming in this market. But for the most part, it's flat to down when you look at most of the big public company chain reports and what their same-store sales are. Ricky Mulvey: Dutch Bros is the one that continues to surprise me. I went there one time, I think I got a chocolate-covered strawberry mocha. Saw on the menu, they have a 911 drink, where you can get six shots of espresso in one drink. But people like it. I see lines outside the door at eight o'clock. Anyway, Chili's. Chili's is the incredible one to me, 31% from a year ago. I think they were growing since then, too. Three for me deal. Can't go wrong with that. I think you get chips and salsa, burger, fries for 10 bucks. I was pretty happy with it. You look at Chili's versus Applebee's. Applebee's is not enjoying a similar level of growth, even though on the surface, you would think they're having a pretty similar offering. What has Chili's been able to figure out in this environment that many other chains have not? David Henkes: We've done a fairly deep dive into Chili's, and actually, some of our sister publications have awarded the CEO with Restaurant Tour of the Year. Obviously, they're doing a really great job. They are relevant to, I think, the younger consumers. I've got a couple kids in their 20s who Chili's is now on their radar again. Ten years ago, if you asked a younger person to go to a chain, they would have been like, no way, there's no chance. They've become relevant again. A lot of that is through their social media marketing. Certainly, the value promotions, the margarita promotions they run are really successful. But they do a great job of having a barbell strategy. They do have a lot of low-priced or value-oriented type things, but you can also have a premium experience if you want. I think there's a lot of chains doing that, and I don't want to over-commit to that's why they're doing well, but I think they've just remained relevant. I think the big part of what they do is, I've talked a lot about the general manager and how important the general manager is in setting the tone for the service, the overall experience that patrons have when they come in because a lot of your experience is not just how much you paid or what the food was because a lot of these casual dining chains are in that ballpark, but it's also the experience you have through servers. Chili's has done a great job of really giving their general managers the ability to fix things within their own restaurant. They've invested heavily in their GMs and the labor situation, and training, I think, in different ways than some of their competitors have because you're right, Friday's, Applebee's, some of these other casual dining chains that you would say, they all play in the same sandbox, if nothing else. They are not doing nearly as well. Chili's last year was up 15%. If I look at Applebee's, they were down 6%, Friday's was even lower. Chili's has done a great job through relevance, through marketing, social media, menu development, menu relevance, and service and ambiance to really set the tone for what a casual dining restaurant should be in 2025. Ricky Mulvey: Then as we close out, I saw on your X account that key lime pie is in your Top 3 desserts. Citrus with dairy, a little controversial. I was surprised to see that. Key lime pie, happy to see it show up, but it's not something you really crave. I guess, you got a wild mind here, David. What's your Top 3 desserts? David Henkes: I love a good cheesecake. In my mind, that key lime pie is an elevated, I know they're not the same, but it's the same type of experience with a little bit of a sour. I was down in Key West about a year and a half ago, two years ago, and I had some of the fresh key lime. Birthplace of key lime pie, and it was just delicious. I think if I had to look at my Top 3, that's a great question. I'm not a big sweet guy. I'm more of a savory guy. My wife really loves the sweets, and I'm more of a salty, savory-type things. Brownies ice cream, I like, I'll eat it. But I think key lime pie, it's definitely up there for me. Obviously, it's controversial, you don't appreciate it. What's your top dessert or there are tight up there . Ricky Mulvey: I appreciate it. I'm a sweets guy, so I appreciate the key lime pie. No disrespect to the key lime pie. You know what? I don't think Dulce de leche gets enough, love. I love Dulce de leche. Great. I'm going to take Jenny's Take 5 great ice cream. Very specific. Then the classic s'more. When you're building up to that outside time and you got a campfire going, s'mores are coming, that's when the hype cycle is coming. I'll go with those Top 3. David Henkes: I'll tell you, one other thing that I will throw in, and I was just in Europe on vacation a couple of weeks ago. The gelato in Europe is phenomenal. I might put that. It's got to be a very specific gelato because the stuff you get here in the States is not as great. But if you're over, and I was in Portugal and Spain, and some of the gelato that I had there was just second to none. It was phenomenal. Ricky Mulvey: I really got to travel to get the desserts to you like. I got to go to Key West and I got to go to Europe. [laughs] You're making it tough on the listener. David Henkes, Senior Principal at Technomic. Thank you for your time and your insight. Appreciate you joining us on Motley Fool Money. Ricky Mulvey: Thanks for having me, Ricky. Dylan Lewis: Listeners, a quick programming note as we wrap up today's show. This is my last Monday episode here in the host seat. I'll be wrapping up my time here at Fool later this week and I have one more radio show ahead of me with the team this Friday. I've been lucky enough to be here over a decade and been honored to be one of the many voices here at TMF that you turn to for a Foolish take on what's going on in the market, whether it was here on Motley Fool Money or way back in the day on Industry Focus. I'm going to miss chatting with our analysts and hearing from you all in our mailbag and on our voice mail, but I'm excited to flip over from host to listener. We talk about it often here, time is the most valuable thing you have. The biggest tool in your investing life, and it's the most valuable resource in your personal life. Thank you for all the time you spent with me over the years. 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 something based on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content provided for information purposes only. See our full advertising disclosure. Please check out the show notes. For the Motley Fool Money team, I'm Dylan Lewis. We'll be back tomorrow. Asit Sharma has positions in McDonald's. Dylan Lewis has no position in any of the stocks mentioned. Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Coinbase Global, Moody's, Starbucks, and Texas Roadhouse. The Motley Fool recommends Dutch Bros and recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy. There Is No (Convenient) Alternative was originally published by The Motley Fool Sign in to access your portfolio
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14-05-2025
- Business
- Yahoo
2 Palantir Tales: The Business and the Stock
In this podcast, Motley Fool analyst Sanmeet Deo and host Ricky Mulvey discuss: Palantir's impressive business results and astonishing valuation. Celsius' "meh" quarter. Why DoorDash kept growing after the peak of COVID. Then Cynthia Stewart, executive director of DART Collective, joins Motley Fool personal finance expert Robert Brokamp to discuss how AI is changing scams and how to protect yourself. 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 $302,503!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $37,640!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $614,911!* 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 May 12, 2025 This video was recorded on May 05, 2025 Ricky Mulvey: When you trade at 600 times trailing earnings, well, you got a high bar. You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Sanmeet Deo. Sanmeet, thanks for being here. Good to see you. Sanmeet Deo: Hey, good seeing you, Rick. Ricky Mulvey: We've got some earnings to breakdown. The biggest story today is Palantir and there are two stories with this company anytime you talk about it. One is the actual business the second is the stock because expectations for this company are absolutely incredible. Palantir, this is the company offering artificial intelligence platforms to the US federal government and private enterprises, some of its relationships with the federal government getting it into some controversial waters lately, not that CEO Alex Karp really minds that. The other is the results. Let's talk about the results. Total revenue up almost 40% year on year, majority of that growth coming from the United States, net income up 24%. That net income number, not sounding like a number of a company trading, it's 600 times trailing earnings, but all right. Here is where some investors and traders have noticed a little bit of pessimism, and that is international commercial revenue, which declined 5%. Sanmeet when you were breaking down the earnings here, what did you see in the actual business results? Sanmeet Deo: I actually liked it. I thought there was a ton of great growth here. One of the things I liked the most was that they just generated a bunch of cash flow. The cash flow operations were 310 million, representing a 35% margin, adjusted free cash flow was 370 million representing a 42% free cash flow margin, 42% free cash flow margin, let that sink in a bit. Ricky Mulvey: Alex Karp's commentary, noting, as you said, Palantir is on fire right now, the rapid expansion of artificial intelligence. But when we looked at international that's where Europe is going through, ''A very structural change and doesn't quite get AI. Maybe in the near future, we'll get AI.'' Let's talk about that European story. That's what investors are really responding to here. Do you think this is a hiccup, or is it a real problem for Palantir's growth story? Sanmeet Deo: Just for some context here, 72% of Palantir's business is in the United States with about 10% in the UK and the rest of it being in the rest of the world. Europe is not a huge portion of their business now. It could be a big opportunity for them for sure. While it's concerning, I'm not too concerned about it right now. I've also heard those rumblings of Europe not getting AI. I may offend some people here, but Europe doesn't strike me as always being on the innovative side of technology. They've been a little bit behind and so it could improve. They might jump on quickly, but when you think of AI, you think of the United States and China. Ricky Mulvey: As an ASML shareholder, count me offended Sanmeet. Let's talk about valuation to the extent we can. Before earnings, this was a company trading at 600 times trailing earnings ish. Tough to tell when there's so much movement in the stock. But at the time I wrote this Palantir valuation was about 560 times trailing earnings. Even though it's getting knocked down by the market, there is still a lot of growth priced into this company. Sanmeet, this is a software company that trades at more than 90 times sales. On that basis, it's the most expensive company in the NASDAQ with one exception, and that is now it's just called Strategy Inc. It's the artist formerly known as MicroStrategy, and now that's more of a Bitcoin holding company. Tough to make the comp there. Basically, the market is saying that Palantir does not have a lot of competition. It has a really strong moot for its artificial intelligence platform, and maybe just maybe this is the next coming of NVIDIA. This is the software version of NVIDIA, and it is going to places that are just unfathomable to any value investor. This is one I've struggled with. it's been on my watch list, but those numbers that's a nosebleed valuation. Are you buying the story that the market is selling here? Sanmeet Deo: This is by no means a value investor, darling that's for sure. Over the next years, the market is expecting revenue growth of 31% plus and EPS growth north of 70%. That's very, very lofty indeed, very high expectations. One of the reasons the stock is down today is actually down much more than even when they opened, but how do you meet those expectations? What is enough when they report? Their numbers, if you look at them, forget the stock price, forget the valuation, just the fundamentals are strong, 71% US commercial revenue growth. That's huge and they're gaining more commercial customers they're gaining more prominence in that area. There's a lot of people that believe Palantir's just a government contractor type software company, but they're expanding and they're expanding fast, as you can see. Difficult to purchase these valuations for anyone that does not have the stomach to bear, what will eventually be a correction in its price. We were talking about Cloudflare once and they had hit, I think it was 100 times sales or something and they flamed out. The thing I see with Palantir versus some other very, very lofty valuations that this has the potential to be a company that will be a standard when it comes to AI, almost like an AI operating system of sorts for companies. Anecdotal evidence I've seen tells me that when people get into this software, they're keeping it and they're keeping it for a long time and they're using and they're gaining a lot of value from it. While it's tough with the valuation, that's really the only thing that holds me back from buying more of this thing. Ricky Mulvey: If you look at the call, there's customer examples. I think it was Walgreens citing basically hundreds of billions of human decisions that are now going to Palantir's artificial intelligence platform that there's going to be a large scale commercialization of this but man, there's got to be a lot of it for this valuation to make sense. Let's move on to Celsius. This is one we enjoy talking about. I'm a shareholder, I know you're a shareholder. But this is one that I'm starting to put on a shorter leash, Sanmeet. International sales up more than 40% but this former growth darling is posting overall sales declines, sales declines in North America. That's its biggest market, earnings per share, almost cut in half from the prior year. I remember what was it six months a year ago, we were talking about inventory issues with PepsiCo coming in as a distributor. It's been a while, man. They've been in that relationship for a while. I don't know if we can keep blaming that. What is happening here with Celsius? Sanmeet Deo: A lot of discounting. They're having to use promos to sell. The Pepsi issue is still an issue. Why it hasn't been resolved, why it's not Pepsi overstocking, what's going on with that? Didn't really say too much even more on the quarter. In terms of earnings, they had SG&A costs so were up about 21% while their revenues were down 7% for the quarter. That's not the kind of math that you want for strong earnings growth. I was pretty disappointed by this quarter as well. I'm a huge fan of the company and the drink too, actually. But they did point some tailwinds coming up when it comes to resets and their stocking shelf resets, some new products, Alani Nu coming on the summer season and this is starting to be more easy comps going forward. They've cited that tailwinds are coming, and let's see in the next couple of quarters if they're true to their word. Ricky Mulvey: Maybe this goes against the health promise that it offers, but it needs a mixed drink. You've got the Red Bull Vodka. I think you need a Celsius cocktail for the summer to get these sales going. But when you were digging through the business results, there's a lot of reasons to be pessimistic. You can tell me all you want that you're driving category share growth, but if you're losing money, that doesn't make me happy as an investor in your company. Any green shoots or anything stand out here that you think is worth talking about. Sanmeet Deo: Look, if you think about Alani Nu acquisition was a good acquisition in terms of owning now another brand in the portfolio, whether it's masking the weakness in Celsius core brand is another thing. But combined, they have a 16.2% dollar share in the energy drink market. They're still the number three company in that market. While some of the revenue growth has been weak, some of the sales and earnings have been weak, they're not going anywhere anytime soon. That gives me some comfort. I think over time, they are looking to build out and broaden out a portfolio of brands. I'd be interested to see how they do that as well. International is growing fast and growing well and I think that could continue to form. Ricky Mulvey: The optimistic side of the Alani Nu acquisition, which Alani Nu is a female focused energy drink that they purchased last quarter. The positive spin is that this makes sense for their category. It's a healthy ish energy drink that fits well within their portfolio of brands. The more pessimistic take is that here is a company struggling to find growth within its core product, and now it is maybe overpaying for growth by acquiring another brand in order to become a growth story again. They've had a few months to settle out this Alani Nu acquisition. What needs to happen for this to be a good idea, a good buy for Celsius? Sanmeet Deo: Alani Nu they report retail sales growing about 88% so I'd like to see them continue to grow. Maybe it's because of this acquisition, I've been noticing Alani Nu a lot more in my social feeds and ads and whatnot, but it is a very, very popular brand, and I think the buying the company really stemmed the serious threat that they posed to Celsius so I'd like to see more like synergies where it comes to will Alani Nu's growth be able to help bring that Celsius core brand growth up. Because while there is overlap with the demographics, there is still some differences, and it could broaden out the distribution and the channel synergies. I'd like to see some of that happening and the share growth to continue. Ricky Mulvey: As we wrap up on this Celsius topic, if you have an open line of communication to CEO John Fieldly, he's still telling investors a growth story, but the results are showing, maybe this is more of a mature company. Do you think it's time for Celsius maybe to settle down into a more mature place. Start telling investors a cash cow story, start paying a dividend. We're going to focus on buybacks if we think our stock is undervalued. Should it really be settling into life as a mature company or is it still got a growth story left in it? Sanmeet Deo: I think it's a little early to call itself a cash cow story at this point. They definitely probably don't want to do that right after buying a very high growth brand in Alani Nu. They're working really hard to turn around their Celsius core brand and get that going again. While it could help in the short term, I think they still have a lot more growth ahead of it in terms of that platform that they're developing and continue to pursue that. Ricky Mulvey: We'll wrap up with DoorDash, which also reported swinging to a net income profit, but investors are responding to two acquisitions. We'll look at those in a sec. Right now, the business of DoorDash looking pretty strong orders and revenues up about 20% each. When I look at this company, Sanmeet, something that's interesting is this could very easily have become a fallen angel from COVID yet it's still continuing to see orders, revenue and profit rise. What's happening at DoorDash? Sanmeet Deo: It's a great point because DoorDash was heavily used during COVID, but the habit is stuck. there's many of those fallen angels where the habit didn't stick, and I think of Peloton as the primary culprit there. But the convenience and reliability of DoorDash has stuck, and more and more people are using it. teenagers are using. I have to stop my kids from getting on my phone and ordering cookies from DoorDash it's become a staple of our lives now. Ricky Mulvey: The things that investors are responding to are these acquisitions. There's been two of them, totaling about $5 billion. You have Deliveroo, which is a delivery service in Europe and the Middle East. They purchased or looking to purchase that for about $4 billion. Then a restaurant tech restaurant reservation service called SevenRooms for 1.2 billion. That one makes a little bit less sense. But what do you think of these acquisitions? The investment community seems to think you've posted good results, you're swinging to a profit, you're building sales, but maybe you're bringing in some diversification with these companies. Sanmeet Deo: With Deliveroo, they're expanding into their geographic reach, getting nine new markets in UK, Europe, Middle East, Singapore. I think they're really trying to take on Uber Eats and Just Takeaway. Look, there were more before, but there's so many delivery apps, and I think it's going to fall out to having a few and those few are going to be the ones that have scale. Those are the ones that have that customer stickiness that habit that's formed by using them. Just from my own personal experience, I now tend to go to DoorDash more than I go to other apps or Uber Eats. I don't go to some of the older ones or the other ones, one because they're gone and two because just don't see them as a place to go. I think they're really taking an aggressive push to scale and compete hard with the likes of Uber Eats and others and gaining that local expertise and becoming a multi category with delivering not just food, but groceries and other things. The SevenRooms acquisition, though, yeah, that makes a little less sense to me. Some of the reason behind that is, well, now we can help restaurants with not just delivery, but managing on premise and enhancing their commerce platform, supporting their restaurant operations. Sounds a little bit more like what Toast is doing. I don't know if they want to get into that. I can see how there's some client or segments that they can get into with SevenRooms, but do they really need to make a 1.2 billion dollar acquisition to do that? I think that one is a little less reasonable and I don't think that was necessary, per se, but we'll see how it goes. Ricky Mulvey: We'll leave it there. Sanmeet Deo, appreciate your time and insight. Thanks for joining us on Motley Fool Money. Sanmeet Deo: Thanks, Ricky. Ricky Mulvey: Up next, we're taking a look at scams. Cynthia Stewart is the executive director and founder of DART, a nonprofit that uses gamification to help people recognize online scammers. She joined Robert Brokamp to discuss which scams are on the rise and how to protect yourself and loved ones from losing money. Robert Brokamp: What people think of victims of scams, I think they often think of an older person who falls for something like a fake email or a text. Is it generally the case that senior citizens are more likely to fall prey to scams? Cynthia Stewart: Actually, no. The latest research shows that younger generations, taken as a group are more vulnerable to scams. Millennials and Gen Z are the highest rates of victimization. Older adults lose more money to scams than any other generation because they are more targeted and they have more to lose. Scammers are disproportionately targeting them because they have greater potential to get larger amounts of money from them, but they are not, in fact, more vulnerable than anyone else. That's a myth I like to debunk. Robert Brokamp: Let's talk about some of the biggest scams. What would you say are maybe three or so of the most common that you see? Cynthia Stewart: Well, the FBI just put out this year's Internet crime report. If you go by number of dollars lost, investment scams and a lot of that is fake cryptocurrency investments, tech support scams and romance scams would be your top three. If you go by number of victims, fishing is always number one and then tech support and then extortion. Those investment scams, I find particularly alarming because crypto ATMs are going in all over the world. I went and looked and there are 12 within walking distance of my house, which just makes it easier for people to fall for those scams. I think crypto is the new gift cards. People have learned not to buy gift cards, but now they can just send them to the crypto ATM and their money is just as gone and just as hard to recover. Robert Brokamp: I think one aspect of these scams is there's often a certain amount of emotion involved and a certain amount of urgency. It either makes you feel very good because someone's reaching out to you and saying, Oh, you're so handsome, we should be friends, or someone saying, I'm your granddaughter and if I don't get some money soon, I'm going to lose my house. You either feel very good or very bad or very scared and there's urgency to it. You need to act very quickly to prevent or get something. Cynthia Stewart: Yes, those are two of the hallmarks, especially the emotion part. That is really the scammers trick. They get you not to think, people will all the time tell me, I'm too smart to be scammed, I know what to do, and they're not wrong. They probably do know what to do but then I've heard hundreds of stories that end with, and then I hung up the phone and then I thought. They get you into feelings so that you don't think. Yes, it's either anytime anybody is trying to make you feel a strong emotion, that's the time to step back take some time and think about it. If it's a real problem and money can fix it, you have time to check it out. Don't let anybody rush you by making you feel some sort of way. Robert Brokamp: I think a lot of people think, well, I would never fall prey to something from a stranger. But these days, people can impersonate people who are not strangers very quickly, often using AI to impersonate voices or just gathering information about you from social media, Facebook, TikTok, provide some information and they're like OK this really is my granddaughter or this really is my bank because they know so much about me. Cynthia Stewart: It only takes 3 seconds of audio to produce a pretty good copy of a person's voice and make them say anything you want. It can sound exactly like your favorite grandchild it only takes small video clips now and completely publicly available software you can make really realistic looking video calls now. It is getting to the point where not only is hearing not believing, seeing you just have to check everything out. One thing I am constantly advising people to do, and I will advise your listeners if you take one thing from this, talk to your friends and family, use this podcast as your reason why. We need a plan. The next time there's some a disaster or one of us is in trouble and we need help, how are we going to confirm that we are talking to the person we think we're talking to? If you have a plan, a code word or some way you're going to acknowledge each other. That stops scammers from being able to rip you off, it means if you know if somebody's putting pressure on you, that it's not the person you think it is because you already have the plan in place. If it really was your grandchild, they'd know what to say. Robert Brokamp: In our family, our kids knew to use terms related to Star Wars as the code words. That's one very concrete step. What are some other concrete things people can do to protect themselves? Cynthia Stewart: I think talking about it is a huge thing, especially talk about it with the older adults in your life. They are particularly targeted. They're also particularly prone to being embarrassed if they fall victim to a scam or to feel like somehow they've done something wrong, if they're even targeted. They're not. Scammers target everybody technology allows them to target thousands of people at a time. But the embarrassment keeps them from talking about it. Fear that if they admit that they fell for something, they're going to lose their independence will keep them from talking about it, and isolation makes them more vulnerable. Let them know, Hey, I almost fell for this scam the other day. Hey, have you seen that tollbooth thing that's going around? Talk about it secrecy helps the scammers. Robert Brokamp: When you're talking about older folks, many of us have grandparents parents getting up there in years. They may be struggling with some cognitive decline or something like that. How do we help them stay on top of this? I say this because we all have stories of things that have happened to people we know. My father in law was basically participating in a fake lottery until my wife figured it out, cut off the source of funds and they actually sent a taxi to his house to try to get more money. It's pretty scary. Cynthia Stewart: Those are the ones that frighten me when people like they know where you live. The level of maliciousness is just out of this world. There are tools that can help flag potential scam calls that can filter those out. Older adults may need help installing those sorts of things on their devices. Maybe offering to put those in, it's a delicate balance because you don't want to be condescending or take away their independence. On the other hand, you're trying to keep them safe. Open communication, I think is really the biggest tool. Making use of those tools, but letting them know what you're doing and why you're doing it so they know what that means if it comes, suspected spam pops up or just talking about the techniques. What spoofing is, the fact that the caller ID is a number you recognize doesn't mean that it's the person it says. Then there's also a delicate balance of not scaring people so much that they then won't answer their phone at all. We run into that as well. People need to know what they can do safely, it is always safe to look at your email. It is always safe to look at your text messages that doesn't mean opening attachments. Where is the level where it becomes dangerous? Lots of important conversations to have with folks. Robert Brokamp: What are some of the things you should do once you realize you or someone you know has actually already fallen for a scam? Cynthia Stewart: Change your passwords right away. I recommend just change your passwords even if you think you didn't give that up because you're never sure how much they got that you don't realize you've given up and report it. Report it to the FBI or the FTC. That's the Federal Trade Commission. They may not be able to get your money back. In fact, it's very probable they can't but what they are looking at scammers are very organized now. It is international organized crime, and if they can see the patterns, if they got you to pay in crypto and you have the number of the crypto wallet you sent it to, if they can see, oh, hey, this is showing up again and again and again, then they can build the case to put federal resources toward closing a ring down or working with international partners. Even if you don't think it will benefit you, it's still worth reporting. Ricky Mulvey: As always, people on the program may have interest in the stocks they talk about in the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. Our personal finance content follows Motley Fool editorial standards and we not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our Fool advertising disclosure, please check out our show notes. Motley Fool only picks products that we personally recommend to friends like you. I'm Ricky Mulvey, thanks listening. We'll be back tomorrow. Ricky Mulvey has positions in Celsius. Robert Brokamp has no position in any of the stocks mentioned. Sanmeet Deo has positions in Celsius and Palantir Technologies. The Motley Fool has positions in and recommends Bitcoin, Celsius, Cloudflare, DoorDash, Nvidia, Palantir Technologies, and Peloton Interactive. The Motley Fool has a disclosure policy. 2 Palantir Tales: The Business and the Stock 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
