Motley Fool Hidden Gems Investing - “Here’s Your Unicorn Drink. Now Get Out.”

Episode Date: July 31, 2024

Is efficiency everything? Starbucks certainly seems to think so. (00:21) Bill Mann and Mary Long discuss Microsoft’s AI timeline and what “experience” means at the world’s largest coffee chain. Then, (15:10) Bloomberg media reporter Hannah Miller joins for a conversation on what the Paris Olympics mean for Peacock. Companies mentioned: MSFT, SBUX, LCKNY, CMCSA, NLFX, AMZN, DIS, WBD Host: Mary Long Guests: Bill Mann, Hannah Miller Producer: Ricky Mulvey Engineers: Dan Boyd, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

We've got two types of spending stories. You're listening to Motley Fool Money. I'm Mary Long, joined today by Bill Mann. Bill, good to see you. Hey, Mary. How are you? Doing pretty good, pretty good. A lot of earnings going on this week, and today we're focusing on Microsoft and Starbucks. First up, got to hit Microsoft because all that anybody really cares about these days seems to be AI. On the one hand, for Microsoft, sales growth up, profit growth, and they posted some big numbers considering that they're a mega cap company. Revenue was up 17%, net income up almost 20%. But as I mentioned, because everyone only ever seems to care about AI,

What really caught a lot of investors' attention was revenue for Azure, Microsoft's cloud business. Revenue there only rose 29%. Shucks. And Wall Street was expecting north of 30%. So, the stock's down a wee bit this morning as a result. What do you make of all that, Bill? What are your takeaways from these numbers? Their quarter was fine. I mean, you have to keep in mind that Microsoft is huge. So, this isn't to bet the farm on AI, because it's a pretty big farm, but they've thrown a bunch of cows in the full upper 40 into the mix, a $19 billion allocation to capital spending. Just to compare, it was $3.1 billion in the fourth quarter of 2016. That's not that long ago. So, they are making a massive, massive bet.

But when you make a bet into AI, you're doing things like build data centers, which take 18 months to 24 months to build. They have all sorts of infrastructure that has to go to them. And so I've seen a bunch of stories about investors getting impatient with AI. I think that's actually crazy. This is exactly like in the 2000s in which companies, including Microsoft, built a huge infrastructure without any real idea of how they were going to make money from them. This is not that different. Yeah, let's talk about that timeline a bit, because like you said, a lot of Wall Street is impatient. They want to see that big spending start to pay off. We got a little bit of color on what that timeline for that payoff might look like

on the call. CFO Amy Hood said the timeline is the next 15 years and beyond. We're long-term investors at The Fool. How do you feel about waiting 15 years to see all this spend? I might be dead by then. So not happy. So, no. Look, I understand exactly what she's saying, and I understand also why people would react to this. But once again, she's taking basically the same exact model as the internet was. The massive expenditures from 1997 to 2002 really didn't pay out. And you could see this in Microsoft's stock chart until the mid-teens. It takes a long time, particularly with businesses

that are meant to be as transformational as AI is. So, all they know is that this is an area where they're heading. They don't know how they're going to get there, and they don't know how the market is going to develop. So, I almost wish she hadn't said a number, right? Like, hey, we don't know what's going to happen but it's going to take 15 years is kind of weird don't you think yeah but i think maybe the point is less the specific number and more just saying hey when we say wait a long time it's not wait a couple quarters and see what happens it's no wait a long time yeah no i love the fact that she i love the fact that she did that and i love the fact that she was like look if you think that ai is going to pay off in the fourth quarter of 2024 i have

some news for you. The only way that it's going to be paying off in the fourth quarter of 2024 is that we're going to be investing even more money into it. So, I mean, it's all fine. It's a good quarter, but we are moving into something that Microsoft is perfectly clear on. This is an uncertain time. They're investing a huge amount of money, and they don't know what's going to happen. They just know they want to be there when it does. Microsoft's a big company. We've already mentioned that. That's pretty obvious. They do things other than AI. So I also want to take a second to check in on the gaming segment because they had a pretty big acquisition not too long ago. So maybe smart to see what's going on in that world. Hardware sales of Xbox are down

42% compared to this time last year. That's not necessarily cause for concern. And Microsoft seems just fine with that because they want to move gaming more to the streaming side. And they even saw revenue from Xbox content services climb more than 60% this past quarter. How significant is this segment to this over $3 trillion company? It's significant in that it's part of the ecology of Microsoft, which they've done a very good job at building. Maybe the only company that's been better at building one has been Apple. The platform sales themselves, you have to remember that platform sales are a very cyclical component of their business. So, they will build a new platform, there'll be a huge launch, and you'll see a spike, and then things will trail down.

And we are at a product lull. It doesn't necessarily mean that the lull is throughout the gaming sector. I mean, they have committed billions in capital in gaming, not just the acquisition of Activision. So, this will remain a very big part of their business. And certainly, they are interested in seeing where this content intersects with AI. Another thing I want to check in on that caught my eye while catching up on Microsoft this morning is that they announced just before earnings yesterday that they are planning to hand out cash awards to non-executive level employees, basically as a thank you for a good fiscal year. So what that means, we didn't get specific numbers, but junior level folks can get up to 25%

of their annual bonus as a one-time cash bonus, which I can make a guess at what some of the salaries are over at Microsoft. I'm thinking that's a pretty nice surprise check. But it probably is worth mentioning that microsoft has issued a number of layoffs throughout the year already am i being cynical for thinking okay reading between the lines what this means is if you work in ai you're safe in fact you're rewarded and we want to keep you we'll do anything to keep you but if you work anywhere else dot dot dot dot dot you are so cynical i'm so disappointed in you no i like i i love the i love the cynicism no i love the thread that you just pulled so now Remember that although Microsoft is no longer run by Bill Gates, Bill Gates' DNA is very much

throughout the ecosystem. Bill Gates' best buddy is Warren Buffett, who enjoyed paying cash bonuses. It was the form of compensation that he finds to be most valuable to people. They are welcome to buy stock with it. All you're giving them is an unencumbered bonus as opposed to one that is in the form of stock. Now, it is definitely true in a company as wildly complex as Microsoft, there's going to be layoffs all the time. Again, they are talking about and they are making bets on areas of the market that don't yet exist. Some of these things aren't going to work out. and then the specialists within those segments, they're going to have to go and work elsewhere. And I never want to be too flippant about layoffs. They are a reality for businesses

that are enterprising. They are less of a reality of businesses that are not. And so, yes, the AI business is going to be very big for them, and the employees probably can name their number. that will change at some point as the AI industry itself begins to develop. There are people who will have skills in that segment that are not going to pay off, and that's reality. There's not really a neat segue from computers to coffee, so let's just hop on over to Starbucks. They also reported that yesterday. Yeah, just do it. The quarter before this most recent one, Starbucks had announced that long wait times were causing customers to leave coffee orders in their carts. And then they kind of blamed that for declining same-store

sales. This quarter, we see declining same-store sales again. Number of orders placed also down about 6% this quarter, and profit down about 7.5% as a result. Starbucks has around 17,000 stores. So any turnaround might not take the 15 years that Microsoft is talking about with their ai ai spend but a turnaround is going to take time right that said doesn't seem like that's starting to happen quite yet what grade are you giving to the triple shot two pumps reinvention efficiency plan that ceo locksman narasimhan has um has touted before i can't give it anything other than a d based on the name the name by itself yeah like that's so i mean i'm gonna say committee came up with that name and the committee felt very good about their cleverness by the time

they were done but there's a reason they're not on the creative sector perhaps exactly yeah exactly so i mean if we go to the tape uh here's what the market is saying starbucks added 1600 locations and their overall revenues declined by about seven percent like that is incredible to me they set a very low bar and still failed to beat it uh in terms of in terms of their system i find it really incredible that a company that started as an American take on Italian coffee shop experience is talking all about efficiency. Efficiency, efficiency, efficiency. And yes, getting drinks and orders out to customers more quickly is important. Maybe that has more to do with the fact that the stores are generally less well-staffed than they have been in the past.

We have seen this with other companies. When Bob Nardelli took over at Home Depot in the mid-naughties, one of the things he did was remove a bunch of the staff for efficiency's sake and for profitability's sake. guess what like the the the baristas have a skill and they you know they they need to have enough of them for a premium experience and i don't see any of that recognition when we're just talking about efficiency and systems at starbucks i couldn't help but think this morning about like when i was growing up the start my neighborhood starbucks was a place where all the high schoolers would go to sit for hours and do work and it was a lovely place to sit i haven't seen a starbucks like that and i can't remember how long the experience has completely changed yeah yeah here's your unicorn drink get out with boba bubbles isn't that enough for you

you know my order bingo and it was like one other thing that was striking to me is like after last quarter's not so great results howard schultz got on the line on linkedin and he like basically wrote this open letter saying you know sharing his thoughts he didn't give it uh explicitly give starbucks a d grade but he did talk about what he wanted to see moving forward and what that was was quote he wanted to see them reinvent the mobile ordering and payment platform which starbucks pioneered to once again make it the uplifting experience it was designed to be that's it here's what struck me about that uplifting experience to me like yes an app experience is is great and should be

smooth but is is this really should this really be all about the app or is this more about bringing back the experience of starbucks i mean i think that that's actually their goal and and and i think that you would be a little bit naive for for a company that large to say well hey what we need to do is have high schoolers hang out at the you know in in uh in their stores more but there is a coolness factor that has been that has been lost and while i am not sure i don't want to i i don't want to cast dispersions on efficiency because it's obviously something that they need to do. It is annoying when you order your coffee and you get it later, much later, if you are paying a premium price, which is still very much in Starbucks' DNA. It is something that they need

to do. They did have a decline in the users of their rewards app, which is the only other time that that's happened was during COVID. So, whatever that they have been doing has not yet translated anywhere within the system, it seems. Another growth area that Starbucks has been trying to capitalize on is China, but same-store sales there dropped 14%. Maybe before we get to the Starbucks question, is there something going on in China that's creating this drop? Is this a macro issue? You see a huge amount of competition here in the U.S. Oddly enough, for a company that in 2020 was found to be a complete fraud luck and coffee in china has been eating starbucks's lunch they're at a lower price point they have smaller stores uh they're competing very aggressively i

mean china has china overall has a pretty significant uh growth curve in coffee consumption uh and starbucks is just there they are being out competed there with larger companies in a way that it hasn't happened here in the united states you know in the united states it's starbucks versus i mean there are other coffee companies of course but it's usually you know your your cafe amore down the street your you know your your specialty coffee place that's what they're competing against So they don't notice each of those, but in China, they do. Bill, always a pleasure talking to you. I hope you go treat yourself this afternoon with a large venti boba tea order from Starbucks.

Unicorn, I'm getting it. Athletes aren't the only ones with a stake in the Olympic Games. Up next, Bloomberg media reporter Hannah Miller joins me for a conversation on what Paris means for Peacock. So you recently published a story with your colleague, Lucas Shaw, about what the Olympics mean for Peacock, NBC's streaming service. Notably, this is not Peacock's first rodeo at the Olympics. In fact, the streamer first launched in July 2020, which is when the Tokyo Olympics were originally scheduled to air. That did not happen as planned. Those 2020 games, though, were supposed to be, you write, a big coming out party for Peacock. What were they

instead? It was a bit of a disaster from many different perspectives. There were a lot of complaints about the user experience with Peacock. People were having trouble finding the events they wanted to see. It wasn't the easiest to use. It didn't retain a lot of the subscribers after the Olympics ended. A lot of people walked away. They were like, hey, this was a one-time thing, wanted to try out, didn't see a benefit to keeping it. So this is sort of a second chance with the Paris Olympics. So Peacock has another opportunity to shine. And what is Peacock doing to increase viewership this time? Yeah, I'm actually using the service. I got it. I love the Olympics. So I find that it's

actually easier than last time I also used it for the Tokyo Games. So I think it's easier now to find the sports that you want to see. They've also really gone in and tried to make these games as fun as possible from a reporting perspective, from a viewing perspective. We have seen a lot of celebrities in Paris. They're really leaning on people like Snoop Dogg to provide fun and interesting coverage. And they're also, you know, using it as an opportunity to advertise new shows coming out on Peacock. So we have, you know, shows coming out like Fight Night. And it's like that that's going to be a big thing that they're hoping people keep the Peacock app so that they continue to watch Peacock shows and NBC shows. Yeah. So I'm curious about this retention plan,

because you got to talk to Kelly Campbell, who's the president of Peacock. Peacock has 33 million subscribers. So that's up 38% compared to a year ago, but quarter to quarter, it did lose some subscribers, 33 million in its most recent quarter, but 33.5 million in March. I'm one of the people that signed up for Peacock this past weekend to watch the Olympics. So what is their plan to keep me around for the next billing cycle and the one after? Yeah, they're hoping that you're going to want to tune into their fall shows. And, you know, they want to build this up as a premier streaming service. You know, they want to compete with Netflix. They want to compete with Hulu. They want to compete with Disney Plus and Max.

And they're trying to advertise the content that's going to entice you to stick with this service. So I'm sure you've noticed when you're watching Peacock, you're getting ads for all different kinds of stuff, including new NBC shows and content. So they're hoping that you're going to stick around. They want to be a big name in streaming, especially when it comes to sports. And it's a huge opportunity for them with the Olympics. And we just have had all these negotiations around NBA media rights, which Comcast got a piece of. So we're looking forward to seeing how Peacock is going to play into this. We know a certain amount of NBA games have been slotted for Peacock. So there are a number of reasons to stick around. And they're just hoping

that one of them will get you to keep subscribing and keep paying. Yeah. I want to hit more on the live sports, the larger live sports angle here in a minute, but you mentioned competing with bigger names like Netflix and Amazon. Okay. Again, Peacock, whether they have 33 million or 33 and a half million subscribers, that is far behind the numbers that Netflix and Amazon and Disney boast. Netflix and Amazon each have over 200 million subscribers, Disney plus over 150 million. So help us really understand the stakes for Peacock here. Olympics or otherwise, what has to happen for this streaming service to be viewed as a success? Yeah. So we're going to be closely watching the subscriber numbers, the retention rates that they

have here post-Olympics when we see their earnings down the line. We're also going to look at what content is being put on there. They've been able to strike different deals. They're obviously with Universal Pictures, you know, being part of, you know, the Comcast world, that they've been able to get, you know, exclusive first rights to movies like Oppenheimer. You know, they're trying to build themselves up as something that you would go to not only for sports, but for movies and television as well. And I think they're hoping, you know, looking forward that they are going to be this powerhouse sports streamer. You know, the other thing we're looking at, too, is whether there are going to be technical issues here. We've seen some things happen with streaming

services, for example, with Max. The presidential debate between Trump and Biden, that was airing on Max, and it actually crashed out for users, including myself, and I switched to a different service. So if there are no technical issues like that for Peacock subscribers, that could be also another reason for them to stick with, with this platform. Yeah. This might have to do more with my TV than with Peacock itself. But when I was signing up for the service on Friday morning, I kept getting a note on my TV, like your Peacock app needs to be updated, go to the app store. And I kept, despite updating it wound up in this doom loop of you need to update this. You need to update this. And I just thought, okay, I'll do this tomorrow. Yeah. And the other thing too,

is like, yeah, okay. You want to have ads to, for your content and your new shows and to get people to stick with you, but you want to find the right number of ads. You can't have too many because people are going to be like, well, why am I, I want to watch this for sports. And I've watched, I've sat through two minutes of ads. So it's finding that, that sweet spot there in terms of, you know, having, not having any technical issues, but also, you know, having the right balance between ads and content. Yeah. User experience is, is a really important piece of this. Um, so Comcast earnings came out last week and over the quarter Comcast brought in nearly $30 billion in revenue. Peacock contributed $1 billion to that revenue. It is losing money,

Peacock, but it's narrowed those losses over the past year. Still, in a quarter, $1 billion to $30 billion of revenue seems inconsequential. In the best-case scenario, how meaningfully could Peacock impact Comcast's top and bottom lines? Yeah. If you hear it from the executives, this is going to be a very consequential thing for them. They've talked about how this is going to be this premier streaming platform. They know people are still cord-cutting, that they're still walking away from cable television. The fact that we've seen a lot of sports transition over to streaming, sports was a major draw for cable linear television. The fact that we're seeing new sports streaming services come out. Venue is another one that we're keeping an eye on that's

coming out in the fall. It's a joint venture with Disney and Fox and Warner Brothers. I think Comcast, from their perspective, they feel like they do have to further develop this streaming platform and make sure that they have a horse in the race. They don't want to fall behind other platforms. They want to make sure that they're still continuing to build up their subscriber count and that they're making, you know, Comcast, NBC, Peacock, you know, a major player within the streaming world. NBC has rights to more than just the Olympics. They hosted the NFL wildcard game in January. They just won a piece of these $76 billion NBA rights. How do live sports fit into the Peacock playbook? Yeah, they also just, it's been interesting to see like the live sports

conversation play out, you know, and they've walked away from some sports too. Like Warner Brothers discovery just got the French open, um, from them. So it's, it's been interesting to see how they're, how they're approaching this. They're really focusing on, in on mainstream sports and yeah, the NBA deal is, I can't emphasize enough, like huge for them. They specifically called out in their earnings call, these games that were going to be allocated to Peacock and, you know, not everyone, you know, especially older viewers, that's maybe not the greatest thing in the world. They just want to be able to turn on their TV and watch a game versus, you know, jumping to an app. So it'll be interesting to see how this plays out.

But live sports, you know, is huge for Comcast, for NBC, and ultimately for Peacock as well. And for other players, right? Like, sports rights have been in the news a lot lately. And so I'm curious to get your take on this, because even I'm trying to suss it out. Like, Netflix got the WWE for $5 billion for 10 years. The NFL's deal is $110 billion over 11 years. We just talked about this NBA contract and how that got parsed out. So for the Olympics, NBC signed in 2014, a $7.65 billion contract extension that would allow it to maintain its rights for the Olympics through 2032.

Is that nearly $7.7 billion price tag for the Olympics? Is that a good deal for an event that only airs for two weeks every two years? I think it's a huge prestige thing for them. I mean, the Olympics are probably the most iconic sporting event, even though the summer games only happen every four years. But it's interesting to see how they emphasize that all year round. There's always that rings logo. This is just such a big deal for them. I think the viewership numbers from this games, that's going to be key to determining whether or not this is a good deal. If they can get, you know, viewers boosted and get them to the Rio numbers from 2016, that would be a good signal that this is a good deal. So, I think it's hard to say at the

moment, you know, considering the uneven performance of the Olympics in terms of viewership over these past few years, you know, the Beijing Games as well for the Winter Olympics, you know, those had a very weak viewership stats as well. But, you know, as I mentioned before, there are advantages here. People love Paris. People want to see some of the biggest stars jump back in. You have huge figures like Simone Biles really set to dominate here as well. I think people are going to be drawn to this. We'll see how it plays out in the viewer numbers. We've talked about the business side of these games. Are there any non-business, non-streaming stories that you're watching over the course of these Olympics,

athletes you're rooting for? Oh my gosh, I'm so excited for the women's gymnastics. You know, the qualifying rounds were so great. It just shows how dominant Simone Biles is. You know, there are some great stories just watching, even some of the sports that are new. I want to watch break dancing. Like, I think that sounds awesome.

You know, I was seeing like kayak slalom the other day. Like, there's just really cool stuff. And I do like that Peacock allows you to sort of, like, jump between different sports. They have a really cool, like, these little sports icons so you can see what you're watching and actually find something new that you may not watch normally when you're tuning into sports. 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 yourself stocks

based solely. on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.