Motley Fool Money - Starbucks Targets 12 Cups of Coffee

Episode Date: August 2, 2023

China was the star of Starbucks’ earnings report. Can the company convince consumers to drink more than a dozen cups of coffee annually to keep fueling growth? (00:21) Asit Sharma and 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.  (15:14) Deidre Woollard caught up with Yasser El-Shimy for a look at Saab – a company that you think does one thing, but really should be on your radar for something else..  Companies discussed: SBUX, PINS, AMD, SAABY Host: Dylan Lewis Guests: Asit Sharma, Deidre Woollard, Yasser El-Shimy Engineers: Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Coligard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. Starbucks soars 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.

Dylan, thank you for having me. Great to be here. Yeah, the beat is on for earning 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 the size, but it was below expectations.

And it seemed like looking at the results for this company, North America was starting to weigh a little bit on the results. 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 impress 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 still pretty decent result. I mean, we're seeing some growth in levels that are matched 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 day parts that are outside of breakfast. I think all that is positive for them. But you had a question when we were prepping for this about, I'll let you get to this question. Yeah.

I mean, 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's been growing for a while. Is North America officially a mature market for Starbucks? You know, it's at that point where you can see the 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. So the smaller format stores that they are now very good at popping up can be sort of salted in across the U.S. map. I think also the delivery business that Starbucks has in North America is getting stronger. Management talked about nearing a billion dollars worth of incremental business out of that. And I also think that just this move towards the technology that serves the customer and makes throughput easier in a post-pandemic world is working out nicely and 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 clear that because it did change a little bit of the the Stars equation, but at least broadening that out to more customers. All of 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. One market that has been incredibly impressive for Starbucks is China. It is the company's second largest market.

Same store sales in China skyrocketed 46% during the quarter asset. Is the international story, and in particular, the China story increasingly a part of how we need to be looking at this business? I think so, Dylan. And that's both from an opportunity side and a risk side. I mean, 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. So unlike other outside brands outside of China, it's been able to maintain a lot of cachet.

Couple that with a consumer spend dynamic in which there's a faltering recovery from China's COVID shutdowns, factory activity is lower. export activity is decreasing. The consumer doesn't want to travel abroad as much. Those occasions at a Starbucks become more important to a Chinese consumer. It's something that can still be afforded. It's a little pleasure. We saw that trajectory here in the U.S. years ago. So 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 where we're chugging it. here in the United States. That itself can point to how comparable sales could keep growing there. But there's China risk. I mean, this is obviously a market that is rising in its risk profile

with the geopolitical tensions in the United States. So, you know, 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 us who owns shares of Starbucks as I happen to. Safe to say you're probably having more than 12 cups of coffee a year. 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.

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. for 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. Don. 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? Well, it's got 465 million users on a monthly basis around the globe. So this is a company that's been able to establish this huge base. They're a very loyal base. And 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. So the youngest cohort of consumers out in the market today is actually the most active on Pinterest. I mean, 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 towards the US and Canada. Just reading these last statistics, out of an ARP of $1.53, $5.92 of that comes out of the U.S. and Canada. Why is the aggregate get a number lower because the rest of the world monetize it 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. Yeah, I always felt like this was a business that didn't need to meaningfully grow its user count to provide some compelling topline growth, just because when I first bought it, and when I think a lot of people first started paying attention to this company, that The Harpoon number was even lower than what you just threw out there, Osset.

So, you know, 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 seemed like a pretty good opportunity there. One of the things I wanted to talk about, I know, like, there's a long-term growth story there is short-term, and as we look out for the rest of 2023, Osset, 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, you know, 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? I think Pinterest will benefit as digital advertising rebounds. I don't know how much benefit will get in the next two quarters, but there's certainly stuff underway where you can see, as that 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. So it's an argument from Pinterest side. They can do something that other platforms can. They can get you new users. Someone on Pinterest, whose loyal user, can follow a mobile deep link and have to sign up. on an advertisers app. And I think that's pretty powerful. As for, you know, what's going to happen beyond the next two quarters. So let's say that digital advertising rebounds towards 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, you know, Amazon products now will be able to be advertised over the Pinterest platform. I think that's going to be very powerful. And that's certainly, as you look at 12, 24 could be one of those gears that starts to finally turn. We see something tangible, some development there. And I don't think it'll 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 this 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. And it won't take much. It'll be a small lever, but Pinterest hasn't been able to show any kind of tangible progress so far. I just feel patience is key here. Well, the listeners out there that have a basis on this one close to my or mine is in the high 20s, probably pretty happy to hear something like that, Asset. Our final story on earnings today is going to be AMD. And this is an interesting business, because it seems to me like a little bit of a company at a crossroads asset. 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 seemed to be weak PC sales pushing that revenue decline.

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 towards the end of last year, but with the explosion of generative AI and the opportunity that some companies like AMD have, it's really become a backburner conversation. But these earnings, you know, 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 dollars. That really pulls down some other success that the company has been having. So it's data center segment revenue. While that was down 11% year over year, it's starting to build for, I think, an uptick next year. And 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 of this

MI300 GPU series. So that is the product to watch for this segment. Beyond specifically that product line, Osset, 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? 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 NVIDA 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 customer's 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. And I think AMD has some early interest from hyperscalers. So 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, medium-sized enterprises are going to get beyond the excitement phase. And they're going to start asking very compelling

questions. Okay, if I'm using your chips, 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 kind of edge in the marketplace? So 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. So this is the Where the Rubber meets the road portion of the hype cycle asset? Yeah, you said it much more succinctly and better. I should have just said that, Dylan. 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.

Thanks a lot for having me, Dylan. 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 Wollard caught up with Yasser El Shimi for a look at Saab. You know them as a car company, but there's more to the store. Hello, I'm Deidra Wollard here today with Motley Fool analyst Yasser. Elshimi, how are you doing today, Asser? I'm doing very well. Thank you. I'm excited to talk to you today about a company that I have not thought about, I don't think, at all.

And so I love being in this position of being the total newbie. You've been doing some work lately on international companies, and 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? No, it isn't. And you're absolutely right. I mean, 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 kind of its claim to fame for me. And I just didn't think about it that much since. Until recently, when I started kind of digging in into the defense sector, globally, I've been following kind of 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, a Swedish defense company that actually has a history that goes back into the late 1930s.

It started kind of with the beginnings of World War II when the Swedish Air Force could not source its fighter jets that it wanted from the United States. You know, we had our hands busy at the time. So they decided to invest in building domestic production. And Saab was born and has been going on since they kind of 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 mine sweepers, torpedoes. I could go on, but yeah, so they are a diversified Sweden-based defense company.

Interesting. Yeah, we don't think of Sweden as really being a very militaristic or military country. Not at all. And that's perhaps one reason why we have not been thinking about Saab very much because Sweden's, let's say, geopolitical role in the world on the world stage is fairly limited compared to bigger countries with bigger militaries, with more operations overseas and so on. And that has had its kind of effect over time also on Saab's development as a defense company, limiting kind of the number of, let's call it, theaters of operation where its weapons have been put to use that may have favored other rivals. When you think of the customer world, all the governments out there that are looking at to buy expensive, very expensive weapons systems, there are usually political considerations

associated with that, and some of that may be wanting to carry favor with a geo-strategically important country, maybe with a veto power in the United Nations Security Council, or with military prisons around the world, and Sweden is not that. No, so it's a military contractor, and 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? Sure. So, yeah, it's definitely a highly competitive industry. I would say that, you know, perhaps some of the competitive advantages there being a Scandinavian kind of company, as we are witnessing the strategic shifts that are taking place right now in Europe's

security posture vis-à-vis Russia. I mean, the end of the... the Cold War was supposed to bring about the end of history, as Francis Fukuyama once put it. But instead, we're kind of witnessing the repetition of history and the threat that many Western European countries and Eastern European countries are now facing with perhaps a 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 strategy, its national security

strategy, and deciding to invest much more heavily in building up its defense capabilities. The idea of kind of just for Europe, for Western Europe and Eastern Europe, to sit back and kind of 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. And the Scandinavian region shares a lot of border with Russia. And now that Finland, both Finland and Sweden are joining NATO, NATO security posture is evolving, and as well as those countries and many other countries in Europe.

So the customer base in Europe looking to buttress their defenses to become. become more self-reliant. They are likely to invest much more heavily in kind of building those arsenals from European defense contractors, and we're likely to see kind of the huge gap that has traditionally existed between U.S.-based 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 Scandinavian region and Europe. That's definitely, unfortunately, a positive development. It is unfortunate, the sort of geopolitical turmoil that is leading to the tailwinds here. So does it sell in the U.S. market, or not really because we have our own defense contractors? Saab does sell in the U.S. 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 domestic presence in many countries, including the United States, Germany, Brazil, and others, in order to kind of become more appealing, to have more appeal to governments in 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. So, it's definitely, I would say, an interesting approach to sobs taking and is already starting to bear fruit as we have been seeing from some of the most recent results. So it's becoming increasingly a multinational company, it sounds like? That is correct.

I mean, if you take, for example, their jet fighters, the Grypen, they are some of the most capable fourth generation jet fighters in the world. And yet, you know, 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 Rafael jet fighters from Descent Aviation from France. or the F-35 here made by Lockheed Martin. So it's a very capable fighter jet, and they have been able to sell them to countries across virtually all continents, including Brazil and Colombia and Latin America, South Africa, and Africa, the Philippines in Asia, and obviously the Swedish Air Force.

Let's talk about a part of Saab that is not military equipment. They've got this thing. It's called the Sabretooth 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? It is not. It's actually a pretty tiny part of the business. The whole Cougham's division in which the Sabretooth is nestled. And I just have to say, what a cool name. Right? Right. You know, the whole division, which includes making naval ships as well as submarines and torpedoes, constitutes less than a fifth of SOP's sails, which are much more heavily geared towards either aeronautics or dynamics and surveillance, including, you know, radar systems,

electronic warfare, and anti-tank missiles and so on. But the Sabretooth is a very exciting product. an autonomous underwater vehicle that can be remotely operated, can go to depth 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. And as both governments and the private sector invest more and more in deep underwater assets and infrastructure, we are like. to see Sabretooth take a bigger role to play here and definitely showcases the innovation

that is there within SOP. Yeah, definitely. One of the things I was thinking about was repairing the underwater cables and things like that. It seems like a perfect job for the Sabretooth. Absolutely. Underwater cables. You think of the Internet, for example.

You think of pipelines, gas pipelines underwater. Now we have been seeing companies that are. interest in deep sea mining. Also, you know, potentially could be used for military reasons. You know, reconnaissance or other kind of missions that allows you to go kind of autonomously in very deep levels under the sea. So it's an exciting new product. 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 sort of in line with what you're seeing and what you're forecasting? So, 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 to 15% sales growth to 16 to 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 have been able to grow operating income at higher rates in sales, showing that they have leverage there. And I think this is also one of the companies.

If you kind of stretch your modeling and forecasting a few years out, you can see that they will benefit from scaling, as many manufacturers might. So as sales increase, and they have been pretty healthy when their order intakes and order pipeline showing very, 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. So 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. So that adds to the strength and the conviction there.

We always like to hear that. But if people want to buy it, it's not traded on U.S. brokerages. So, speaking broadly, what does that mean for an investor if you want to invest in Saab? Right. So that's a challenge. Many investors might be tempted to just go for the over-the-counter shares or the pink sheets, as you can, some might call them. So under ticker symbols, Saub F or Saub Y.

The problem with those is they have very, very thin volumes of trading. So, you know, you may get stuck either overpaying, or when you're trying to sell, you may not be able to fill your order, and may have to settle down for a lower price and actual value of the shares. So, you know, it was our recommendation to stay away from those shares, given how thinly traded they are. I would be much more interested in trading SOP on the Swedish. or the Stockholm Exchange for that matter.

So, you know, and one of the platforms that sort of enables international trading for a relatively low fee might be something like Fidelity, but also Charles Schwab and others are possible options. Awesome. Well, thank you for breaking this one down for us, yeah. As always, people on the program may own stocks mentioned, and the Motley Fool may have four more 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.