Motley Fool Hidden Gems Investing - The Treasure Hunt Economy

Episode Date: April 18, 2024

Are little luxuries are still scoring with consumers? (00:21) Sanmeet Deo and Deidre Woollard discuss: - How smartphone and EV demand are impacting Taiwan Semiconductor. - Japan’s place in the tech race. - More uses for weightloss drugs. (13:39) Mary Long and Deidre Woollard explore the allure of the treasure hunt economy. Companies discussed: FIVE, DLTR, DG, TJX, TSM, ASML, LLY, NVO Host: Deidre Woollard Guests: Sanmeet Deo, Mary Long Producers: Ricky Mulvey, Mary Long Engineers: Dan Boyd, Tim Sparks Public.com disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at public.com/disclosures/high-yield-account Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news! The Federal EV Rebate is back! Eligible customers get up to $5,000 with the Federal EVAP Rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Taiwan Semi would like you to refresh your smartphone. Spotly full money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Sanmeet Deo on this Thursday. How are you doing today? I'm good, Deidre. How are you?

Good. You know, yesterday, Tim and Dylan on the podcast, they broke down ASML. That's the big European company that makes the chip machines. Today, we're talking about the chips themselves because we've got earnings from Taiwan Semiconductor, which if you haven't heard of it, you should have heard of it. It makes the most chips in the world. You know, it's interesting because ASML's earnings and guidance, not so rosy, but of course they make those massive machines. Taiwan Semi, the results initially lifted the chip makers in the market because they beat on expectations and profits. The market's still digesting that. But how do we square those different inputs because asml pretty cautious taiwan semi felt very full speed ahead to me

yeah so you know asml yesterday reported much weaker than expected euv order book euvs are electric ultraviolet machines which was 656 million euros in the first quarter down from 5.6 billion euros in the previous quarter so a huge decline in their order book who is a big purchaser of these EUV machines? A big client, of course, is Taiwan Semiconductor. It was expected that Taiwan Semiconductor would have booked more orders, but it seems like they didn't. Hence, ASML's big drop in orders. When I went through the results for Taiwan Semi this morning, while we heard them discuss huge demand in AI, they also indicated more gradual recovery than previously expected in the overall semiconductor market with weakness in smartphones, traditional

server demand, Internet of Things, and particularly autos, which had the sharpest pullback. The company actually ended up lowering their fiscal 24 forecast for the overall semiconductor market to increase only by 10% year-over-year versus 10% plus, which they had indicated in prior comments. While AI is strong, other areas of the market are not making up for shortfall. This probably caused them to hesitate on spending money on buying expensive ASML machines and tools. Now, both ASML and Taiwan Semi are bullish long-term on semiconductors, especially when it comes to AI. Taiwan Semi expects AI to grow to 50% CAGR, and ASML sees a big pickup in 2025 as industry works through inventory. This pickup could coincide with numerous

fabs also being built by taiwan semi and one of the statements they made was the taiwanese chipmaker said it will begin mass production of next generation two nanometer chips in the last quarter of 2025 executives um so narrowing his time frame from next year in general so remember asm asmo machines are huge they have long lead times so as we see these fabs being built those fabs will need you know equipment and tools in advance of being fully operational so while taiwan Semi had a good report in the quarter. They're still seeing a lot of weakness and softness. Their guidance was a little less than exciting. Interesting. I think it's important with Taiwan Semi, one of the things I think about, which is always hard to understand,

is the nanometers. Smaller you go, more advanced. They call their 7 nanometer and below, pretty much, they call that the advanced tech, which is about 65% of the business. I'm assuming, As AI increases, the two and three nanometer things that they're building now are going to become a larger part of the business. Yeah, and they did say in the call that they're expecting business in the second quarter to be supported by strong demand for three nanometer and five nanometer tech. I want to talk a little bit about something you said, because smartphones, it's interesting. Smartphones still around 38% of the business, the HPC, the high performance computing, the

AI, that's around 46%. autos you mentioned, smaller. I'm guessing that's due to slower EV sales, but I want to zero in on smartphone demand because I feel like something has happened with this cycle. How often do you buy a new smartphone now? I might be one of those odd people out where it will be like four something years, five years sometimes before I buy a new smartphone. That's the thing. I don't think you're the odd person out anymore because I mean, it used to be, I used to be a fairly rapid, had to get the new phone, new phone every year type of person. I've had my current phones since 2019, which is the longest I've ever had a phone. And I'm wondering if that is part of

what's happening with, with Taiwan Semi is there's this larger thing where we're not getting a massive, you know, a massive improvement that's making everybody rush to, to the Apple store, to Samsung, you know, even the new innovation Samsung had, like the flip phones and things like that it didn't create that rush so is that part of when we look at tsmc we look at that smartphone thing is that part of what's happening here it has to be i mean you know apple even reported that their their smartphones uh shipments were were struggling i i don't get that excited about smartphones coming out anymore myself you know like it's very incremental when you get the next version of you can't even tell sometimes what what the uh what improvements are made in

smartly, can we really tell with our eyes how better the camera is? Maybe some of us can, some of us could care less. Well, the other thing is, I think the phones don't look different anymore. So you no longer get that little shame that you had when you had the clearly a few generations back phone. Now they all look relatively similar. I can barely tell the difference. So I think it's a different world now. I wanted to go on and talk a little bit about where Taiwan Semi is building, because I think that's really interesting too, because last week and we had the, they announced their third fab in Arizona. We talked about that on the show and we're seeing a lot of announcements. Samsung and Micron also are doing announcements this week

with U.S. factories. But TSM, they're also doing good, they're also doing factories elsewhere. They're doing them in Dresden. They're doing them in Japan. They're making good progress with the factories in Japan. They had their opening earlier this year. They're set to start production this year. There's been a rush of articles I've seen lately about Japan taking back its technology crown. And this is something I'm starting to follow. Oracle, they announced an $8 billion investment in cloud and AI infrastructure this week. What's going on with Japan? This is starting to become a really interesting story. Maybe they see the opportunity and the demand for AI chips in the semiconductor market and want to go after it, revive some of their technology and chip-making

businesses and revive that area of their economy, which maybe has not been as strong as it used to be. And they see this opportunity, especially with Taiwan Semiconductor, kind of expanding out outside of their home markets into places like the U.S., Japan. I mean, it's almost like an arms race where countries don't want to be left behind. Yeah, it really is an arms race. And it's sort of flashing me back to like the 80s and 90s when we had this race with with cars and there was that anxiety of Japan was going to outpace us and really did outpace us for a time. So I don't think we're we're nervous about that at this point because we seem to be more focused on being nervous about China. But is it it is an interesting thing for anybody who sort of studied

history. Yeah, absolutely. And, um, you know, rather be in the market as much as you can than be fully left behind. So even if you're not a market leader, if you're at least taking a slice of that pie, it will be good for you. Yeah, no doubt. Well, now we've mentioned a pie and I'm hungry. Good segue there. Good segue. The other, the other craze, of course, weight loss drugs. And we've got some news on this front. Zepbound, which is Eli Lilly's weight loss drug, they have trials promising results for sleep apnea, which is interesting. This only adds to the hype here.

Zepbound is really interesting. So that's the weight loss specific version of the, I'm not going to pronounce it right, but Terzapatide, which is also in Monjaro, approved by the FDA in November for weight loss. It's been in widespread shortage. They really cannot stock enough of either Monjaro or ZepBound, planning to open another factory by the end of the year in North Carolina. I'm thinking about this AI chip demand story, and I'm thinking about this weight loss drug demand story, and they're both the hype cycle. They're both short supply is a concern here.

At some point, doesn't the weight loss drug cycle have to even out? oh yeah i mean it's funny because when i think of the the hottest trends in in the market and economies right now i think of ai and i do think of weight loss actually um this is the hot hot hottest topics uh in the investment world but i mean when you think back on on your economy economics classes if uh if you if you had them i'm sure all of us have had to add some basic economics you know supply and demand can go go in out of balance and at some point they find an equilibrium where they meet, I definitely imagine that stabilization will occur whenever you hear about these demands going crazy. That's what's been happening in the semiconductor

market too. People are worried, is this huge AI demand going to last? It will be cyclical because semiconductors are cyclical, but will it last? Same with the weight loss drug sector. this demand uh for these drugs last now when you have things like studies showing oh it's great for sleep apnea it's great for um other ailments outside of just weight loss it almost seems like it's a miracle drug um so demand is going to keep going and it'll feed on itself if if people see results so but i do think at some point it will stabilize and um it will hit that equilibrium Everything always does, but it's fascinating because ASML was the biggest company in Europe. Now, Novo Nordisk, which of course makes Gove, now they're the biggest company in Europe. So,

two trends running neck and neck at this point. I want to wrap up on something fun. You and I, we did a podcast a few weeks ago about flying cars. We're also both a little bit obsessed with the humanoid robots. And, you know, I think maybe we'll hear something from Tesla about that next week. Maybe not. But Boston Dynamics, not publicly traded, but majority owned, I believe, by Hyundai. Also, SoftBank is in that mix, too. They went through this whole thing. They said farewell to their Atlas robot, which if you've ever seen the videos, check those out. They're fascinating. But they've now got this new version of Atlas, which is their humanoid robot. So instead of being hydraulic and a little bit slow, now it's electric. It's supposed to have all these

applications for workplaces, for factories, for things like that. Now, it's sort of humanoid, but you have to watch the videos. It does not move like a human. People have called it nightmare fuel, creepy, terrifying. I don't know. Should we be fearing our robot overlords here? i actually am embracing uh the robot overlords because the one thing that keeps sticking my mind with humanoids is wow so i'm gonna have somebody to do all the housework every time i do the dishes now i'm just thinking man if i had a humanoid for this be so much so much better if i had a humanoid to do do maintenance and and get those like uh light bulbs that are way up there that would be awesome so i'm i'm i mean i'm still i'm still a little bit creeped out and right now

they're in their early stages. They look weird the way they walk, but I don't know. I feel like it's not going to be long before they're, they're moving around and doing stuff just like us. Yeah. It'll take a while for it to shake out to our, our, our house assistants. Cause right now we've got this sort of like, we've got the ones that are mostly for, for factories and things like that, but you know, maybe, maybe someday we get robots. Well, you know, I always, I always do the Jetsons test. When you watch the Jetsons now, how many of those technologies do we actually have already and how many are actually in progress? And you'll be surprised. There's many that we already have and some are coming. So what you're telling me is Rosie is coming our way.

I feel like Rosie is coming our way. Indeed. Thanks for your time today. Thank you. you just found out that your sales team is at risk of missing quota don't panic just ask rippling ai since it's built on your real-time people and business data rippling ai can pull metrics from rippling and salesforce into a meeting ready dashboard showing quota attainment headcount plan and monthly revenue to quota by region in seconds you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted. When you have critical business questions that need answers, don't just file a ticket and wait weeks for an outdated report. Describe what you need and have Rippling AI build it instantly from your live

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your brain a little bit on a specific segment of the retail space, like the discount value retail space. News recently seems to be painting a not-so-pretty picture for this segment. There was word earlier this month that Family Dollar, which is owned by Dollar Tree, would be closing about 1,000 stores. The $0.99-only store is set to go out of business. Seems to me, when I hear that, that consumers might be down on dollar stores. What do you say? You kind of see the same thing, or something else? Yes and no. It's interesting, because we've got inflation, hasn't been tamed yet, still high, and we've got people who still want to spend. Our most recent retail numbers showed us that. You'd think that that would

be prime for dollar stores, but I think it's the type of dollar store. One of the things is, the $0.99-only store, which isn't a dollar store, there's a chain on the West Coast, about 370 stores, they filed for bankruptcy recently. That made me think about the type of store that was. It had some groceries, it had some consumer staples, not so much the discretionary stuff. And I think Family Dollar and Dollar General are more of the stores that you go because you have to go, whereas Dollar Tree is more discretionary. So I think that the types of dollar stores are having different results. You mentioned the retail numbers. And you and Bill Barker talked about this on the show on Monday.

But those numbers actually seem pretty good. They were better than economists had expected when they came out earlier this week. If we rewind to earlier in the month, Dollar Tree CEO Rick Dreiling, when he was talking about these closures, he said that Family Dollar is the victim of the macro environment out there. Just like you said, I'm kind of of the belief that in an uncertain macro environment where consumers do still seem to be spending, you might see more consumer attention on these discount and value stores. Do you buy Dreiling's take that Family dollar is a victim of the macro story, or do you think that the blame lies elsewhere? Yes and no. I think partly, it's also the experience, too. I lump family dollar and

dollar general together because they're both catering to that audience that needs them, 80% consumables, and Dollar Tree more discretionary. I think with all of these, though, there's been a lot of news stories about the experience. People talk about going to the they can't find anything, merchandise is expired, things like that, can't find help, or you hear stories about the consumer or the employee having a really bad experience, it's not safe. There's a limit to how much of a bad experience someone is willing to tolerate, even if a store is cheap. I think that's part of this. But the other thing I'm looking at is the competition, which doesn't say it's a dollar store, like a Walmart or an Aldi. The growth

Both of Aldi is something I'm really following, especially since they bought Winn-Dixie. That got them about 300 stores in the South, directly in competition with a lot of dollar stores, too. Experience matters, no matter what the price point is. Another discount retailer that does seem to be honing in on that experience piece is Five Below. Whereas these other discount single-dollar stores are cutting back on number of stores, Five Below is actually expanding its store count. Have you been to a Five Below? Oh, yeah, of course.

So what is that discount store doing that $1 brands or even like an Aldi, something that doesn't limit itself to a dollar amount that other discount stores aren't? Well, it's fun and it's aimed at kids and tweens. And so, you know, you've got like the section that's called like Sugar Rush. You know, I love sweets. That appeals to me. But it's great for anyone who buys for kids or who wants to just throw their kids in there for a little while. I think that's part of the draw. And it's the treasure hunt thing. I watch this with other retailers at other price points. The treasure hunt thing is really important to people because it goes back to those retail numbers. People still want to spend. They

want the cheap thrill. They want the experience. And that's what Five Below provides. Yeah, exactly. And it's so, Five Below strikes me as like an allowance store, right? You have, you know, even if there are some exceptions, you generally know what the ceiling is that you're going to pay. And so if you're a kid, you can just go in and have fun. I think back to when I was growing up and if I would be let loose in Target with my $5 allowance or whatever I had collected, I had to really consternate and worry about like, oh, I can't afford this toy or I have to save up X months of allowance for this toy. And in Five Below, that seems like less of a problem. Our colleague, Ricky Mulvey, had sent me a 13-minute video of someone walking through

the aisles of a Five Below and just kind of recounting their experience and the different products that were involved. It's probably been about 10 years since I've been in a Five Below, but what struck me about that video is the intentionality of the store layout and the branding, the color, those segmented Candy Rush sections of the store that you mentioned. I know you've got opinions on physical retail space. What do you like about what they're doing and how they're thinking about that physical layout? Yeah. I think the candy section is interesting. I think that they're definitely trying to get you to discover different sections. I'm really fascinated by their five beyond concept, which is the store within a store thing,

because I think that maybe opens it up to an older audience and it certainly seems to be performing better. So I think it's really about that flow and how you make a store feel feel like you need to visit all of the parts. That's what Five Below is really good at. That's part of the treasure hunt idea, too, is that you don't want to miss anything. You see that with Aldi. They have a special aisle for things like that. You feel like, okay, I don't want to miss anything. I better go down every aisle. I better look at everything, because I want the full value of my experience. We've talked so much about that experiential piece of Five Below, but they do also have an online shopping element. Do you think that

there's meaningful growth in that segment, or is that just a necessity that stores these days need to have? I am so skeptical about this. I have reasons. I saw TJX, TJ Maxx, try to do this with home goods for so long. I think it's so hard with the treasure hunt. Even the outlet stores, Simon Property Group has tried to figure out online shopping, too. I'm asking myself, what's the treasure hunt online? What is it? Is it Amazon? Is it random brands I'm buying on Instagram? Is it Shein or Timu? What is that? Because I think there's a way to make this work online, but I'm not sure any physical retailer that does treasure hunt has really fully pulled it off yet. You mentioned Amazon and maybe some, I think I've structured this conversation to maybe

set up Five Below's competitors as single dollar discount stores, but maybe it's also Target, Walmart, Amazon, et cetera. And some of those retailers have entered into this private label game. But Five Below, in contrast, they work mostly with licenses. So Hello Kitty, Disney products, Harry Potter, Squishmallows, those are all really big brands that you can pick up at Five Below. Is there a world in which Five Below enters the private label game or do you think it makes more sense for them to kind of stick in the license world? I think anything's possible. I'm not sure they have the critical mass yet because, I mean, this is still a relatively small retailer, right? I mean, they're aiming for, I think, 3,000 stores by 2030 or something like that. So they

don't quite have the mass to do that at scale. And then they don't have the setup yet. Does it make sense for them in the future? Yeah, it may. But right now, I think they've got kind of a sweet spot. So, Fibolo's last earnings call was in late March. In that call, the word shrink was mentioned 62 times. CEO Joel Anderson said the company would be limiting self-checkout to combat that shrink, to combat theft. How seriously do you take worries about shrink? And how much do you think that, if that's a legitimate worry, that self-checkout is to blame for that worry? I've been thinking about this so much. In the beginning, I was like, no, this is ridiculous. This is just retailers trying to hide poor performance under this bucket. But I don't know.

I think I might have been wrong. Judging on what I've seen from so many changes about self-checkout, shrink is real. We're seeing so many stores put everything behind lock and key, which is so annoying. So many stores are wrestling with this. The question I'm asking myself is, is this permanent? Are we moving away from self-checkout? Or are we going to see this maybe scaled back and then come back with a different version? Amazon had that checkout where you don't even have to do anything, and they stopped doing that, but now Aldi might be testing that out. The thing I'm really thinking about is friction Friction versus non-friction. With paying, with everything, we've aimed for that frictionless

experience where you buy and you don't even know you're buying. But maybe a little friction, even a little conversation with the checkout is a good thing. I wonder how much friction and frictionlessness comes into play when you think about physical versus e-commerce. If I'm buying something online, of course I want that frictionless experience, right? Of course. If I'm going into a store for a treasure hunt, like we've said, then, okay, maybe I want to interact with crew members. I don't mind having to talk to someone at the checkout counter if that's an additional and lovely part of the experience. And that could also kind of help

combat this shrink issue as well. I've seen a bear case for Five Below that really focuses on the store's name. The thinking is that with inflation, eventually they're not going to be able to keep selling things for $5 or less. I kind of think that this is a little silly. I think that branding is really the point here. And if Five Below has built a name for itself or a brand for itself, that, hey, we're a discount retailer where you can get things around a certain price point, that that general sense of the price consumers can expect will be enough to carry the brand on. Do you see the store's name as a barrier for future growth? Well, I was thinking about this. When you were talking about your budget as a kid,

there used to be penny candy stores and and there are there's no such thing as a penny candy store anymore there's no such thing as a five and dime anymore five and dime stores used to be a thing it's a it's a 20th century thing now inflation is real this is a real thing that happens so i don't know if we're gonna see a change in in the dollar stores and in in five below i think maybe a little bit i mean there there is the value of the brand of course but i look at dollar general they've experimented with like the DG market, which is their sort of like cheaper grocery store thing. And they've also got pop shelf, which is sort of their version of five below. So will it, maybe they'll try another name or try something else for a different concept. I could

absolutely see that evolving. And you never know if sometimes a concept ends up becoming the larger part of the brand. Deidre, so fun to talk to you about this. Thanks so much for the time and the insight. Thank you. 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. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.