Can Starbucks convince people in China to drink more than a dozen cups of coffee annually to keep fueling growth?
In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:
- Starbucks' slowing growth in the U.S. and torrid growth in China.
- Why investors need to be patient with Pinterest.
- How AI and lagging PC sales trends are affecting AMD.
Motley Fool host Deidre Woollard caught up with Motley Fool analyst Yasser El-Shimy for a look at Saab -- a company that should be on your radar.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on August 02, 2023.
Dylan Lewis: Starbucks stores in China and AI isn't showing up for AMD quite yet. 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.
Asit Sharma: Dylan, thank you for having me. Great to be here.
Dylan Lewis: The beat is on for earnings season, at least for some companies, and so we are going to be spending most of our time diving through company results. We've got updates on Starbucks, Pinterest, and AMD. Asit, let's kick off with Starbucks. The company's same-store sales grew 10%. Double-digit growth seems impressive for a company this size, but it was below expectations. It seemed like, looking at the results for this company, North America was starting to weigh a little bit on the results.
Asit Sharma: Yes and no, Dylan. Weighing on results in terms of expectations that the market has, but I read this report with a lot of good takeaways that impressed me. First, they were able to generate 7% comparable sales growth. Now I know that's under what analysts were expecting. But when you think about how big and how penetrated Starbucks is in North America, that's a still pretty decent result. We're seeing some growth in levels that are match with pre-pandemic sales. So if you look at unit volume, management was talking about how that's really starting to take off again. They're having high attach rates, so attaching food to beverages in Dayparts that are outside of breakfast. I think all that is passive for them. But you had a question when we were prepping for this. I'll let you get to this question again.
Dylan Lewis: I'm looking at the results here, and we see customer traffic of 1% growth in North America, store count up 3%. Those are adjustments down, I think, from where this company has been growing for a while. Is North America officially a mature market for Starbucks?
Asit Sharma: It's at that point where you can see that arthritis might start to kick in in a few years, but I still think it's just shy of being a mature market. Management talked about some interesting trends. For example, if you look outside the major metropolitan areas, Starbucks is still relatively underpenetrated. The smaller format stores that they are now very good at popping up can be salted in across the US map. I think also the delivery business that Starbucks has in North America is getting stronger. Management talked about nearing a billion dollar's worth of incremental business out of that. I also think that just this move toward the technology that serves the customer and makes throughput easier in a post-pandemic world is working out nicely. It still has room to grow in North America. We seem to have been trained to want our beverages faster, so the changes that Starbucks has made in store design, in ordering via app, and upping its loyalty program, although I know some people are going to cringe hearing that because it did change a little bit of the stars equation, but at least broadening that out to more customers. All those are playing into some momentum that still is there to take in North America. I don't think it's quite a mature market, yet, it is getting there.
Dylan Lewis: One market that has been incredibly impressive for Starbucks is China. It's the company's second largest market. Same-store sales in China skyrocketed 46% during the quarter, Asit. Is the international story, and in particular, the China story, increasingly a part of how we need to be looking at this business?
Asit Sharma: I think so, Dylan. That's both from an opportunity side and a risk side. Opportunity side, very clear to see, China is a massive market. Starbucks has a special place in China because they very slowly and gradually and smartly built that brand. Unlike other outside brands, outside of China, it's been able to maintain a lot of cache. Couple that with the consumer spend dynamic in which there's a faltering recovery from China's COVID shutdowns. Factor activity is lower, export activity is decreasing. The consumer doesn't want to travel abroad as much. Those occasions at Starbucks become more important to a Chinese consumer. It's something that can still be afforded its a little pleasure. We saw that trajectory here in the US years ago. There is a lot of opportunity. There's White Space in China. Management talked about the fact that the average consumer in China consumes only 12 cups of coffee a year versus 380 cups a year we're chugging it here at the United States. That itself can point to how comparable sales could keep growing there. But there's China risk. This is obviously a market that is rising in its risk profile with the geopolitical tensions in the United States, so that Alka-Seltzer, I keep wanting to drop into my coffee when I think about the China opportunity, something we're going to have to grapple with for a long time, those of us who own shares of Starbucks as I happen to.
Dylan Lewis: Safe to say, you're probably having more than 12 cups of coffee a year, Asit. [laughs] I was going to say those are bad numbers for a week for me, and I'm sure a lot of our listeners as well. Let's switch gears and talk about a company that's near and dear to my heart because it's in my portfolio, and that's Pinterest. Company reported top line beat and an adjusted earnings beat. Numbers came in pretty good, over 700 million in revenue, 6% growth. We saw some monthly active user growth to this platform. Asit, I'm curious, where is this company right now, and what is the story for this company, because I have owned it, and I know a lot of people that follow the Fool have owned it as well, expecting this monetization story to materialize, and it seems like there are hints of it, but it hasn't fully happened.
Asit Sharma: Dylan, I think this is a business model that we're just going to have to be patient with. What makes you want to be patient with a company like Pinterest? It's got a 465 million users on a monthly basis around the globe. This is a company that's been able to establish this huge base, their very loyal base. They're also, I think, a base that is sticky enough that the monetization efforts will happen over time. This company talks about its most active cohort of users and they're not Millennials. It's actually Gen Z. The youngest cohort of consumers out in the market today is actually the most active on Pinterest. That means some of the experiments that Pinterest is working on can play out over a long period of time. Now I know that average revenue per user doesn't look that great. It's not growing that much. It's heavily tilted toward the US and Canada. Just reading these last statistics out of an ARPU of $1.53, $5.92 of that comes out of the US and Canada. Why is the aggregate number lower? Because the rest of the world monetize. It's such a small rate. But they've got some interesting monetization opportunities ahead. I'll pause here. Maybe we can talk about these a bit. But your thoughts as a shareholder on the monetization opportunities?
Dylan Lewis: I always felt like this was a business that didn't need to meaningfully grow its user count to provide some compelling top line growth just because, when I first bought it and when I think a lot of people first started paying attention to this company, that ARPU number was even lower than what you just threw out there, Asit. If they were to reach parity or even a fraction of what we see from the likes of Meta and some of the other social advertisers out there, there seem like a pretty good opportunity there. One of the things I wanted to talk about, I know there's a long-term growth story there, is short-term. As we look out for the rest of 2023, Asit, we've seen some mixed signals in the digital advertising business. We've seen some weaker advertiser demand on one side, but we've also seen some companies say we expect things to start getting a little rosier as we get to the back half of the year, especially that holiday quarter. How are you looking at some of those forces for a business like Pinterest?
Asit Sharma: I think Pinterest will benefit as digital advertising rebounds. I don't know how much benefit we'll get in the next two quarters, but there are certainly stuff underway where you can see as the market rebounds, you'll get some more monetization from Pinterest. They have this technology called MDL or mobile deep linking, which is pretty nifty if you're an advertiser. Basically, Pinterest can send a user straight to your app where they have to sign up. It's an argument from Pinterest's side. They can do something that other platforms can't. They can get you new users. Someone on Pinterest, who's a loyal user, can follow a mobile deep link and have to sign up on an advertiser's app. I think that's pretty powerful. As for what's going to happen beyond the next two quarters, so let's say that digital advertising rebounds toward year-end, we get a little bit of holiday bump, but Pinterest doesn't see it, just beyond that window though, I see some interesting things. This partnership with Amazon that's currently in test mode, where Amazon products now will be able to be advertised over the Pinterest platform, I think that's going to be very powerful. Certainly, as you look into 2024, it could be one of those gears that starts to finally turn. We see something tangible, some development there, and I don't think it will take much. Once investors get the idea that this long-held belief that the company should be able to monetize is starting to show some tangible results, I think that could perk the stock up a little bit, so maybe a latent period, but we should see something out of this company, I would think in the next several quarters that gets investors a little more excited. Again, it won't take much. It'll be a small lever. But Pinterest hasn't been able to show any tangible progress so far. I just feel patience is key here.
Dylan Lewis: Well, the listeners out there that have a basis on this one, close to my mind is in the high '20s, are probably pretty happy to hear something like that, Asit. Our final story on earnings today is going to be AMD. This is an interesting business because it seems to me like a little bit of a company at the crossroads, Asit. We see this business coming up a lot in AI conversations. But looking at the results they're reporting right now, revenue drop of 18% in the fiscal second-quarter, a big part of the reason seem to be weak PC sales pushing that revenue decline.
Asit Sharma: Totally. I think that AMD is a proxy for the larger semiconductor market, and that is currently a story of decreased demand and, in some parts of the semiconductor market, just oversupply. Everyone was conversant with these dynamics toward the end of last year, but with the explosion of generative AI and the opportunity that some companies like AMD had, it's really become a back burner conversation. But these earnings tell that story, Dylan, decreased demand for GPUs, decreased demand for gaming, decreased demand for PCs. You have a client segment revenue for AMD that was down 54%, as you point out to just under a billion dollar. That really pulls down some other success that the company has been having. Its data center segment revenue, while that was down 11% year-over-year, it's starting to build for, I think, an uptick next year. Also I think these smaller markets that AMD plays in competition with NVIDIA, I think it's starting to gain some ground. You wouldn't know it by the numbers, but automotive and test emulation, that market, could be promising for them in the future. But again I think investors are really focused on the AI opportunity, which is latent right now. We're going to wait probably another two quarters to see some real opportunity coming out as MI300 GPU series.
Dylan Lewis: That is the product to watch for this segment beyond specifically that product line, Asit. Is there anything else you're paying attention to, whether it's AMD or any of the providers in this space, with who is really gaining traction with AI applications?
Asit Sharma: For me, it's not just the opportunities to offer compelling GPU alternative to, say, NVIDIA. For AMD, it's going to be about speed. This is where NVIDIA excels because it also offers acceleration libraries for its GPUs, and this is what I think AMD is going to have to prove out in its thesis. When you extrapolate this idea that speed is important because it helps the customers' ROI, you can see how any tangible competitor to, say, NVIDIA in this space is going to have to show some kind of return on the investment that both small companies and large companies are going to make if they buy this software directly. I think AMD has some early interest from hyperscalers. While the jury is still out on how much of an edge it can gain, how much share it could start to take from NVIDIA, it's going to take some time. Ultimately, big players, small players, and medium-sized enterprises are going to get beyond the excitement phase, and they're going to start asking very compelling questions. If I'm using your shifts, if I'm using your silicon, does this help me train my models more cheaply, or is this something that doesn't give me any edge in the marketplace? We're going to very quickly move from excitement to a realistic appraisal of what kind of benefit the semiconductor industry is offering to its end users, its consumers, who want to train their models.
Dylan Lewis: This is the where the rubber meets the road portion of the hype cycle, Asit?
Asit Sharma: You said it much more succinctly and better. [laughs] I should've said that, Dylan.
Dylan Lewis: Well, you'll be along with us to report back as we see the cycle continue, Asit. Thank you so much for joining me to talk through these earnings.
Asit Sharma: Thanks a lot for having me, Dylan.
Dylan Lewis: Coming up we've got a case of a company that you think does one thing but really should be on your radar for something else. Deidre Woollard caught up with Yasser El-Shimy for a look at Saab. You know them as a car company, but there's more to the story.
Deidre Woollard: Hello. I'm Deidre Woollard here today with Motley Fool analyst, Yasser El-Shimy. How are you doing today, Yasser?
Yasser El-Shimy: I'm doing very well. Thank you.
Deidre Woollard: I'm excited to talk to you today about a company that I have not thought about. I don't think at all. I love being in this position of being the total newbie. You've been doing some work lately on international companies. This one is intriguing, Saab. Now when I hear Saab, I'm thinking about the convertibles my rich friends drove in the '90s. This isn't that, right?
Yasser El-Shimy: No, it isn't. You're absolutely right. Saab, when I was first introduced to that company, I think I was in college, and I remembered it being Jerry Seinfeld's favorite car, so that was its claim to fame for me. I just didn't think about it that much since, until recently when I started digging in into the defense sector globally. I've been following obviously with interest and concern the events in Ukraine and how the world has been responding to that and the various strategic developments, and one company that did catch my attention was Saab, that Swedish defense company that actually has a history that goes back into the late 1930s. It started from the beginnings of World War II when the Swedish air force could not source its fighter jets that it wanted from the United States. We had our hands busy at the time,and so they decided to invest in building domestic production. Saab was born and has been going on since. They expanded into automobiles after World War II. In 1990, they sold the automobile division to General Motors to just focus on being the defense company that they are now selling weapon systems including jet fighters, missiles, radar systems, electronic warfare equipment, ocean minesweepers, torpedoes, I could go on, but they are diversified Sweden-based defense company.
Deidre Woollard: Interesting. We don't think of Sweden as really being a very militaristic or military country?
Yasser El-Shimy: Not at all. That's perhaps one reason why we have not been thinking about Saab very much. Because Sweden's, let's say geopolitical role on the world stage is fairly limited compared to bigger countries with bigger militaries, with more operations overseas and so on. That has had its effect over time also on Saab's development as a defense company, limiting the number of, let's call it theaters of operation where it's weapons have been put to use that may have favored other rivals. When you think of the customer world, all the government's out there that are looking to buy very expensive weapon systems, there are usually political considerations associated with that. Some of that may be wanting to carry favor with as you strategically important country, maybe with a veto power and the united nations security council, or with military presence around the world, and Sweden is not that.
Deidre Woollard: No. It's a military contractor. Like you just said, one of the concerns maybe is a limited amount of customers. But what are some of the benefits of Saab's contract base?
Yasser El-Shimy: Sure. It's definitely a highly competitive industry. I would say that perhaps some of the competitive advantages they're being Scandinavian company. As we are witnessing the strategic shifts that are taking place right now in Europe's security posture vis-a-vis Russia, the end of the Cold War was supposed to bring about the end of history, as Francis Fukuyama once put it. But instead, we are witnessing the repetition of history and the thread that many Western European countries and Eastern European countries are now facing with perhaps some more expansionist Russian government. As we're looking at that and the invasion of Ukraine, many countries across Europe, including Germany, for example, which has not had a military posture, let's put it that way, an active military posture since the Second World War is now revising its national security strategy and deciding to invest much more heavily in building up its defense capabilities. The idea of just for Western Europe and Eastern Europe to sit back and hope that the United States is going to come to their defense and that Russia is no longer a threat to them, well, those days are gone. The Scandinavian region shares a lot of border with Russia, and now that both Finland and Sweden are joining NATO, NATO security posture is evolving as well as those countries and many other countries in Europe. The customer base in Europe, looking to buttress their defenses to become more self-reliant, they are likely to invest much more heavily in building those arsenals from European defense contractors, and we're likely to see the huge gap that has traditionally existed between US space defense contractors like Lockheed Martin, or General Dynamics, or Raytheon Technologies, that gap is likely, I'm not saying it's going to disappear, those are likely to remain much bigger in scale, but at least it's going to shrink over the coming years and decades. For a company like Saab-based in Sweden, most of its sales are in the Scandinavian region and Europe. That's definitely unfortunately a positive development.
Deidre Woollard: It is unfortunate the geopolitical turmoil that is leading to the tailwinds here. Does it sell in the US market or not really because we have our own defense contractors?
Yasser El-Shimy: Saab does sell in the US market, although the United States does not constitute a major part of their sales, roughly around a fifth or so, of Saab sales. But Saab has been very intent on expanding its international sales, including in the United States, and they have decided just a couple of years ago to start building a factory in the State of Indiana, part of what they call a multi-domestic strategy, trying to establish a domestic presence in many countries, including the United States, Germany, Brazil, and others, in order to have more appeal to governments and those countries when they try to effectively source new weapons for their militaries. These governments tend to think about national security concerns when they source weapons as well as job creation. It's definitely, I would say, an interesting approach Saab is taking and is already starting to bear fruit as we have been seeing from some of the most recent results.
Deidre Woollard: It's becoming increasingly a multi-national company it sounds like?
Yasser El-Shimy: That is correct. If you take, for example, their jet fighters, the Gripen, they are some of the most capable fourth-generation jet fighters in the world and yet they have traditionally not been able to sell them where they would have wanted for political, nationalistic reasons, for the most part. But the fact that they were shortlisted for consideration for the Indian Air Force, for the Canadian Air Force most recently, those were very high profile going head-to-head with either the Rafale jet fighters from Dassault Aviation from France or the F-35 here made by Lockheed Martin. It's a very capable fighter jet and they have been able to sell them to countries and across virtually all continents, including Brazil, and Colombia, and Latin America, South Africa in Africa, the Philippines in Asia, and obviously the Swedish Air Force.
Deidre Woollard: Let's talk about a part of Saab that is not military equipment. They've got this thing, it's called the Sabertooth AUV. It's an underwater robot. It's been used by energy companies like Equinor to help find the wreck of Ernest Shackleton's ship. This is a really cool underwater robot, but it's not a big part of the business, right?
Yasser El-Shimy: It is not. It's actually a pretty tiny part of the business, the whole Cocoms division in which the Sabertooth is nestled, and I just have to say, what a cool name [laughs]. The whole division, which includes making naval ships as well as submarines and torpedoes, constitutes less than a fifth of Saab sales, which are much more heavily geared toward either aeronautics or dynamics and surveillance, including radar systems, electronic warfare, and anti-tank missiles, and so on. But the Sabertooth is a very exciting product. It's an autonomous underwater vehicle that can be remotely operated, can go to depths of up to 3,000 miles underwater. Very highly capable sensors that allow it to have a very high level of autonomy when it's performing these missions. As both governments and the private sector invest more and more in deep underwater assets and infrastructure, we're likely to see Sabertooth take a bigger role to play here and definitely showcases the innovation that is there within Saab.
Deidre Woollard: Definitely one of the things I was thinking about was repairing the underwater cables and things like that. Seems like a perfect job for the Sabertooth.
Yasser El-Shimy: Absolutely. Underwater cables. You think of the Internet, for example. You think of gas pipelines under water. Now we have been seeing companies that are interested in deep sea mining. Also potentially could be used for military reasons. Reconnaissance or other missions that allows you to go autonomously in very deep levels under the sea. So it's an exciting new product.
Deidre Woollard: We've recently got earnings from Saab. They look pretty strong. Sales up 23%, operating income up by 44%. Like you said, it's those military tailwinds right now, but they did say between 2022 and 2027, they're going to grow about 10% compound annual growth rate. Is that in line with what you're seeing and what you're forecasting?
Yasser El-Shimy: Yes, I'm actually forecasting that they will be able to beat that guidance. I came into the year expecting that they will beat their guidance for 2023, and so far so good. They have had two successive quarters of over 20% organic sales growth and they have, as a result, updated their outlook for the year from 10-15% sales growth to 16-20% sales growth. I think where they have really shown a lot of resilience and strength as well has been on the operating income front where they've been able to grow operating income at higher rates and sales, showing that they have leverage there. I think this is also one of the companies, if you stretch your modeling and forecasting a few years out, you can see that they will benefit from scaling as many manufacturers might. As sales increase and they have been pretty healthy with their order intakes and order pipeline showing very strong numbers four years plus into the future, they have billions of sales lined up, I think that as they scale their production, they are definitely going to make some margin improvements on those. All of that adds to my conviction in this company as one important defense actor that's probably going to continue to grow sales and margins at a higher than industry average rates and should therefore command a premium from a valuation perspective as well. I would be remiss also not to mention that they have a healthier balance sheet than many of their peers. That adds to the strength of my conviction on there.
Deidre Woollard: [laughs]. We always like to hear that. But if people want to buy it, it's not traded on US brokerages. Speaking broadly, what does that mean for an investor if you want to invest in Saab?
Yasser El-Shimy: That's a challenge. Many investors might be tempted to just go for the over-the-counter shares or the pink sheets as some might call them, so under ticker symbol, Saab F or Saab Y. The problem with those is they have very thin volumes of trading. You may get stuck either overpaying or as you're trying to sell, you may not be able to fill your order and may have to settle down for a lower price than actual value of the shares. It was our recommendation to stay away from those shares given how thinly traded they are. I would be much more interested in trading Saab on the Swedish or the Stockholm Exchange for that matter. One of the platforms that enables international trading for a relatively low fee might be something like Fidelity, but also Charles Schwab and others are possible options.
Deidre Woollard: Awesome. Well, thank you for bringing this one down for us, Yasser.
Yasser El-Shimy: Happy to.
Dylan Lewis: As always, people on the program may own stocks mentioned and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks-based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
