Motley Fool Money - Margin Game

Episode Date: January 24, 2024

We’ve got some different takes on the state of semiconductors, and continued signs that Netflix is the king of streaming. (00:21) Tim Beyers and Dylan Lewis discuss: - ASML’’s surging revenue, and why the key semiconductor company has a different outlook for 2024 than its main customer Taiwan Semi. - Huge subscriber gains for Netflix, and the metric that shows the company’s streaming supremacy. - Chipotle’s preparations for “peak burrito.” (15:00) The trend of stay-at-home is hitting some “eatertainment” companies. Motley Fool Money’s Ricky Mulvey caught up with Fool contributor Rick Munnariz to talk about one arcade company that’s trying to reverse a sales decline.  Companies discussed: ASML, NFLX, CMG, PLAY, BOWL, MODG Host: Dylan Lewis Guests: Tim Beyers, Ricky Mulvey, RIck Munarriz Engineers:Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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We're talking burritos and chips, but you might not want them both on your dish together. Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Tim Byers. Tim, thanks for joining me. Thanks, Dylan. Fully caffeinated, ready to go. Love it. We've got a look at the eatertainment world and big results and big reactions from company earnings,

and that's where we're going to kick things off with ASML. Tim, the linchpin of the chip industry and Europe's largest tech company, posted 9% bottom line growth and 30% top line growth for the quarter. Sent shares up 10% this week after earnings. Seems like it's a pretty good time to be in the semiconductor business. Well, let's not say that. I wouldn't go that far, but I would say it's a better time. It does look like things are turning, turning for the better.

So let's just point out that ASML did have some really good results in the business that really drive results for the longest period of time, which is the EUV business. This is the more advanced chip-making business. So when we're talking about lithography, which is what ASML does, and they are the provider of EUV, which is the most advanced form of lithography for making the smallest and most advanced chips. So this is where we're talking about doing really advanced chip manufacturing here. So in that part of the business, the EUV lithography was up 30% to $9.1 billion euro. Sold, or I guess I should say recognize revenue on 53 systems. So a big deal, but they also shipped, and this is interesting, they shipped the first modules of what they call a high

NA EUV system, and they're shipping it to Intel. So watch out for the Intel results tomorrow. this is going to be really interesting to see where we are at here. Because one of the rules of chipmaking, Dylan, is that we are always looking for the next generation. We're always looking for how to make a more functional, smaller chip set. This looks like the next step. It's the step change that takes us into the next era of chipmaking here. So what does this mean for Intel's Foundry plans? Hopefully, we find out more tomorrow.

But the fact that this is happening, that at the highest levels, ASML is selling with a high degree of growth, its most advanced lithography machines, is a very good sign. Now, on top of that, they had, they're more, I would say, somewhat lower tier, but sort of the kind of the workman-like chips that are made with DUV systems. Those are greater than 7 nanometers. so they're a little bit bigger. But it's the kind of chip sets that you're going to find in industrial equipment. So this is like, these are the workman-like chips. They are everywhere. We have more of them in industrial equipment every single year.

So it's a better time to be in the chip-making business up and down the supply chain, which is nice to see. That wasn't really the case about 18 months ago. You mentioned Intel's reporting later this week. We'll have a fuller picture of the chip business and industry when they get results in. But we have results from Taiwan Semiconductor in addition to ASML. And I want to kind of put those two together and look at some of the different spots in the supply chain. Because we saw what looked like some strong outlook and expectations from Taiwan Semi when they reported.

Taiwan Semi is ASML's biggest customer. We're seeing more moderate growth expectations in the commentary from ASML's management. Yeah, and I, to me, I just think that is prudence, and I'm okay with that. I don't think it's a bad. What I think they're saying is we're seeing a recovery here, but we're going to be, we're going to be cautiously optimistic, and that's ultimately a good thing here because there's, we don't know what the long-tailed demand of, you know, let's say, really advanced hardware for AI workloads. We don't know how long that tail is.

So, do you want to be cautious? Especially when you make a product that takes a long time to build and a long time to sell? Yes, I would like you to be cautious. That's a smart thing to be. In the case of Taiwan Semiconductor, so you have kind of the way the supply chain works here, Dylan. You have the most advanced equipment. And ASML does not sell very many of these because they're are super, super expensive, these EUV machines. And so in order for Taiwan Semiconductor or any foundry provider, and a foundry is a chipmaking factory, for them to order one of these machines, they need to have a really big backlog of orders that they need to have in place, or the expectation of a really big backlog of orders,

that they need to be able to rely on in order to say, like, okay, we need these machines in order to satisfy that demand. So there's a little bit of chicken and egg going on here. But in this particular case, before ASML is going to invest a huge amount of R&D and a huge amount of manufacturing capacity to build a machine that costs just huge amounts of money, they need to be relatively assured that the demand is there and that the demand is not just the next six months. The demand is multi-year. So I don't blame them for being All right, Tim, we're going to stick with the earnings beat and look at some updated results from Netflix. On yesterday's show, our colleague, Ricky Mulvey, and Bill Mann, they discussed Netflix,

and they got into the $5 billion deal with WWE. The Week of Good News continues for the streamer. Shares up 10% following earnings. We saw some strong top-line growth. We saw even stronger bottom-line growth. But the headlines and everything I saw covering this earnings, Tim, was the subscriber. account. That seemed to be what everyone was zooming in on here. It's understandable. I mean, it's, what, tripled year over a year? So if I look at this here, Dylan, if we take a look at the overall number

from Q4 of 2022, the number of global streaming paid editions, I'm sorry, it didn't, it didn't quite double. So paid net additions, Q4 of 2022, 7.6 million. For Q4 of 23, 13.12 million. And so that's a huge number. That's not quite a double, but it is a massive, massive increase, up 12.8% year over a year. So you can understand why that's an area of focus. I would caution that some of that is likely to be some maybe password cheaters coming into the fold and paying a little bit. And you know what?

So there may be a little bit of an artificial bump there, but I don't mind that. I mean, they've tried to create a scenario whereby those who want Netflix and they want to get it and they have to pay a little bit, but not a lot, because previously they were sharing passwords. I think that gives them, you know, I'm not going to say goodwill. It gives them a little incremental income, and it satisfies somebody who's like, yeah, okay, He got me. I still want it, but I'm not going to pay the full freight, give me something that I can live with. They've got that. And so now the net additions are rising as a result. I don't think that should be the headline number, though, Dylan. Not at all. What should people be paying attention to? It should be 26.2. 26.2 should be your number because that is the Q1, 2024 forecast for operating margin. Let me just say that again. 26.2% is your forecasted operating margin for the next quarter. That is bonkers when so many of the streamers are having trouble even making one cent of profit that Netflix can tell you that pre-tax, we think we can make 26 cents on every dollar of streaming revenue in the first quarter. That is astounding. They are so far.

of everybody else. Also, for their full-year guidance for 2024, they raised their operating margin guidance for the full year to 24%. So they're going to get off to a great start in the first quarter. They're going to see, presumably, some dips here and there during the year, but end on 24%. That's astounding, Dylan. And they also ended the year with close to $7 billion in free cash flow. So I can understand why this stock is soaring at present. This is by far the most efficient business in the streaming industry. Let's be clear, it ain't close. There is no one even remotely in the same ballpark.

I will make that statement. No one is close. No one. So Tim, the story with this company has been for a while, growth, growth, growth. And then over the last couple years, we've had to moderate a little bit more and focus more on things like our margins and free cash flow, which also came in incredibly strong this quarter. It seems like this is something where the company is kind of having its cake and eating it too with these results. We're seeing strong enough subscriber growth, and we're

seeing a lot of the efficiency elements that we want to be seeing with this business. I think that's right. I also think it's a good study in effective capital allocation in entertainment. The two things... Netflix's core advantage, which I think I think I think I've said to you before, Dylan, and something that they have that others do not have, is they have a direct relationship with hundreds of millions of subscribers around the world. They are essentially a streaming TV service that has direct access to and control over subscriber accounts across the world in 190 countries. Nobody else can do that. Nobody else can claim that. The reason these streaming services came to be in the first place is to try to get

that. The way the entertainment business has historically worked is you have the country that you're in, and then you rely on distribution in other countries for local distributors. And it's been really disaggregated. That's the way the entertainment business has always worked. Netflix really disrupted that. And as a consequence of that, they get the ability to experiment with a lot of different types of content in each of those localities directly with their subscribers, make a lot of small bets with small amounts of capital, and then allow a hit that may be something in like South Korea, Squid Game, and it becomes a global phenomenon. And so they get huge returns on a small amount of capital. I don't think we're seeing that in the other

streaming businesses. And it's one of the ways I can explain. how good Netflix is at squeezing margin out of the same business, the streaming entertainment business. They spend a lot, but on a lot of projects. And so when one hits, it can have a really outsized impact on the business, and they get huge economies of scale from that. All right, Tim. That's going to wrap our earnings beat. And while it might be earnings season right now? Chipotle, not so focused on earning season, more focused on burrito season. It's burrito season. Come on. News out that Chipotle is looking to hire 19,000 workers to meet the demands of peak burrito, which I didn't know, is between March and May. And when it comes

to the job market, most of the stories that we've been seeing have been about layoffs. Do you take this as a sign that Chipotle is expecting the good times to continue to roll? I have no idea, but I know they're expecting to roll a lot of burritos, and I know I want to see Peak burrito t-shirts being sold at Chipotle, that's for sure. I think this is bonkers. It's really interesting that they are hiring as many people as they are, and I think they do have an opportunity in particular to serve customers as it gets warm. People get out.

They like to, you know, just experience, you know, dining out again because when you are, you know, in the house, you know, during the winter, and let's be clear, I mean, this has been, we've had some Snowmageddon around the country. People have been hold up a bit. We've had some Arctic frost blowing across the country. I know we've had it here in Denver. So I think we are looking forward to things warming up a little bit, maybe getting out and enjoying a burrito as well. Well, who knows if this is the good times continue to roll here, but Chipotle has been executing quite well. So if they're looking to hire 19,000 employees here, it makes me, at worst, Dylan, it makes me really curious to see what the results are going to be in the next quarter here. Because clearly, they have found something that they can hang their hat on. So let's see it. I mean, roll me some burritos.

I love it. I will happily share a Chipotle burrito with you out in Colorado if we ever get the chance to make that happen, Tim. In the meantime, I appreciate you jumping on today's show and walking through this with me. Thanks, Dylan. If you're early in your career and looking for insight, inspiration, and honest advice, listen to the Capital Ideas podcast. Hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last, what it means to lead with purpose. The Capital Ideas podcast from Capital Group,

available wherever you listen, published by Capital Client Group, Inc. Coming up, when's the last time you went out on a weeknight? A new stay-at-home trend is hitting some of the entertainment companies and Motley Fool Money's Ricky Mulvey caught up with fool contributor, Rick Minarez, to talk about one arcade company that's trying to reverse a sales decline. So, Rick, I saw this article in the Wall Street Journal, and I thought of you, the title is,

Americans are ditching weeknight fun. Can they be tempted back? So, first question, do you think this is concern trolling, or is this a legit problem for the, we'll call them, eat entertainment companies like Dave and Buster's Top Golf and Bolero? Yeah, I think in the near term, yes, it is a legit concern. I mean, the numbers are there. We're seeing some companies that sort of saying, hey, our business is as good as it was a year ago. and it's a lot pointing to what's happening in the middle of the week. And the longer answer is about, can they be tempted back? Yes, I think that can happen, but I don't think it's going to happen immediately.

But I think you sort of see what's happening here. It makes sense when it all comes down together that in the pandemic. The pandemic was scary. It was awful. It was brutal. But it also was a time when a lot of us were stuck at home and we needed to get out. I don't know that situation because I've been basically contributing remotely to the full since 1995. So I've been sheltering in place for almost 30 years.

So to me, this was something that when the pandemic came, it was awful, obviously. But the fact that my wife and my kids were like, oh, what's we need something to do? I'm like, well, this is a Tuesday for me. This is typical. Don't worry. In the old days when I was the only one working at home and everyone else in the planet was working in an office or going to school, I was like a little puppy. When my wife would come back from work, when my kids would come back as well, you know,

where do we go? Where do we go? and in a sense they were like, no, we're tired. And you're sort of seeing the numbers you play out. You're seeing Roku, just to bring out a name, people are still streaming almost four hours in content, even though now they have the ability to go out. They still want to go home and relax, and we're seeing this happen. And it's coming at the expense of all these fun places to go, especially in the middle of a week when people are coming back home from work, they're tired. They may be pressed for cash, whether it's because they had student loans that now started resume payments,

or just that they're just trying to save money for whatever the case may be in this climate of rising rates until recently. I do think that it is valid. It is a concern, but I think it is a near-term concern. Yeah, so the article focuses on what you said where people were working from home. Now you're hybrid a couple of times a week, so you're a little more tired. Maybe your kids are going to have more after-school activities. And so the companies are busting out the weeknight promotions. So Dave and Busters brought back All You Can Eat Wings on Mondays and Thursdays, Top Golf,

is experimenting with some additional midweek discounts. They already do half-off golf on Tuesdays. In Bolero, the fancy bowling chain offers unlimited late-night bowling during the middle of the week, half-priced arcade games on Wednesdays. I've been a big fan of going out during the week lightly, because that's when you get some of the deals. And while we're talking about sort of these maybe anecdotal examples, it seems like these companies would constantly be monkeying with different promotions. you know, happy hour doesn't necessarily mean that people are spending less money.

So do you think these promotions are signaling anything significant about these companies? They get the data faster than we do as consumers. And I think you get to the case where with Top Golf, once they started doing half off golf on Tuesdays, who is going to go to a Top Golf on a Monday or a Wednesday? And sure enough, they said Monday, Wednesday, Thursdays are now their worst days. They need something, they need to do something about that to get people back in there. Of course, it makes sense. And we are at a time, thankfully, for them that is very easy to reach your customers.

You have loyalty programs like Dave and Busters have. You have the internet. You have Instagram. You have all these outlets to reach to them. It's no longer having, oh, we need to cut a commercial spot. We need to have a radio ad. We need to talk the group on about getting a deal out there. These tools are there for them to change things on the fly.

And I think they have to. They have to think creatively at a time when people are now no longer, it's no longer cabin fever. Now it's like cabin, you know, desire, I'm glad to be back at home at the end of the day. I want to rest and relax. And I think you're seeing that happen. Even toast to bring in another company, they are the leader of payments on restaurants in their latest quarter. And they said that transactions for revenue are trending lower in the holiday quarter. And this is a company with 99,000 restaurants. So it's a great sample size of what's happening out there that people are spending less, especially

in the middle of the week. It's also, I think, a consumer debt story where you're seeing credit card balances go up higher. And I'll focus on Dave and Busters for a second because, you know, it's fighting off that post-pandemic hangover. People are tired of going out. If you have a higher credit card balance, that's a pretty easy trip to cut if the kids are bored at home. Maybe, you know, maybe we're not going to go to Dave and Busters this week, even if they have a great discount. But it's also, you know, you could make the lipstick effect argument, which is that, hey, maybe we're not going to go to a professional sporting event. That's too expensive. But we're going to meet you in the middle and go to something like Dave and Busters, which might be a little bit cheaper

for a weeknight activity. So we'll start with the macro. I mean, what do you think of David Busters is a consumer spending indicator? Does it say anything? I think it's fair. And again, I don't think this is the same as red lipstick during the war time. I think this is more of an issue, Ricky, where if the economy's contracting, if you have more bills to pay, you're not going to trade down to a Dave and Buster's experience. I think it is the kind of thing where you will have a case, they will suffer. this happened at the restaurant level. You've seen this happen at Top Golf when they're not discounting at half price on Tuesdays in the middle of the week. People will cut back. I think it's understandable. I can't open up my Groupon app without a Bolero ad deal showing. So I do think

that that is the kind of situation where it's legit. I don't think people are, you know, it's not a matter of finding the middle ground. I do think that it's real. And I think you're seeing with David Busters, I think it's important as an investor, their latest quarter, their comps were down 6%. And you see that and you think, oh, the business is declining. But it's still 8% above where it was in 2019, the last pre-pandemic year. So business has improved. It was just a bananas 2021 and 2022. And to a certain extent, the beginning of 2023 for Dave Busters. And now that part is stabilizing. But as long as it's normalizing, their operating margins are 390% above a basis points higher than it was in 2019. I think Dave Buster is definitely in a better place now.

than it was in 2019. I think it's just a matter just building from this point now, which is a better baseline than it was last year. Yeah, I think one of the issues for these companies, especially when you're doing those promotions, like you mentioned with Groupon and Bolero, is the longer you do that, the longer you set the expectation where someone's going to come in and get a deal. You've seen that happen to retailers in the past where if your customers come in and nobody's expecting to pay full price, that becomes a problem three, five, 10 years down the road. We'll focus on Dave and Busters, in part because I think if you want to teach anybody about Peter Lynch-style investing. This isn't the worst place to get them interested in doing

so. Chris Morris came in as CEO in 2022. We got to turn around plan because every time a CEO comes in, you've got to have a turnaround plan. And in this case, there's basically, there's three options. We've got to go with three, Rick. One is remodeling the arcades. Number two is changing up the food and drink menu. So you got more snackable options. Number three is growing the special events business. The market seems to be buying the store. You mentioned the pre-pendendom I'm at Comps. And I know you follow this company. What do you think of his story for the Dave and Buster's turnaround? Yeah, real quickly. Chris Morris, I know he's new to Dave and Busters, but he's not new to this market. So the reason he became CEO was in 2022, Dave Busters bought a company called

Main Event. And Dave Busters have 160 locations. Main Event is much smaller, about 50 locations, but sort of the same concept where it's quality sit-down dining and all these fun arcade games and other things you can entertain yourself with. So he was a natural incumbent and say, hey, we want you to be the new CEO. It's an almost an aqua hire, and they're also gaining new locations. And again, in Chris Morris's case, he was also, he was a CEO, who's a president of California Pizza Kitchen before that. He was even the CFO of CEC entertainment, which is Chucky Cheese. And if you always consider Dave & Busters as a Chucky Cheese for adults, he was run the Dave and Busters for kids already as a CFO. So he has that experience. I think it's the right approach,

especially when you're dealing with entertainment and something you have to be vibrant, you can't stand still. I think you're seeing this, and just in fact, remodding that whole million-dollar midway, which is such a big part of the experience. And the fact that, again, I haven't been to Dave Busters in about two years, not for lack of love of the place. It's that the nearest one near me is no longer near me as I moved away. But I do, it has always been a place where you can go and get a quality meal. But again, it is kind of like the sit-down experience, the fact that they've trimmed down the menu so you can get more stuff all over the place. is definitely something to look forward to. But yeah, and special events business, that was really hard

for them to come around in. In 2020, 2021, people were dying to come back in, but businesses weren't ready to have functions. You weren't ready to have birthday parties and other kind of like anniversaries and all these other bachelor parties happening there anytime soon. That's a big part of the market. They tend to have these big rooms reserved for these special events too. And I think that's going to be harder to come by if the economy goes south. But I think it's really a fact that the fact that he's tweaking things, and business is better than it was in 2019, better than it was before he got there. I do think that he's on the right path. So one, I got a couple knocks on the business in the story.

And this continues the Peter Lynch theme. So you've taken your kids to the arcade. They've played the life-size rock'em-sockom robots. They've done the racing games. Now it's time to talk about sale leasebacks and share buybacks. So Morris has aggressively been buying back shares, I think taking out about 18% of the existing share. account in fiscal 2023. The business is profitable, and yet he's doing some sale leasebacks, which is where you sell your real estate to basically a real estate investment trust or a

bank, and then you're just leasing the building forever. So you get some immediate cash. You get that little sugar, but then you've got a long-term debt problem, which I would give those as knocks against the business. Right. So I'm going to approach it a little differently. First of all, I look at a buyback as a great thing. Even when your stock is hitting recent highs and doing really well, as Dave and Buster's stock did in 2023. I do think that this is the company signaling, hey, we know our stock is high, but we think it's going to be even higher. That's where we're buying back now. And obviously, from a company that's profitable as they are, the fact that your buying back shares increases earnings per share rather than the money that they'd be

earning off it. So I do think this is a smart move on their part. Sale leaseback, I'm torn. I know a lot of quality companies do this. It's a way to generate cash flow and use that money to expand, and they are expanding. They are growing. They're all. these things that you were talking about, remodeling the arcades, changing up their menus, building up the special events business. These things cost money, and I think it's important for them to create the flexibility to be asset light, so to speak, even if it means that they're paying more in rent to maintain the place. I'm not necessarily against a sale leaseback environment, especially if we are at this point where it looks like interest rates will start heading lower

where I think it would be a more convenient terms for them. As always, people on the program may own stock. mention. And The Motley Fool may have formal recommendations for or against, so don't buy or something based solely on what you're here. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.