The Canadian Investor - PayPal Gets a Buyout Offer, Aritzia Crushes Earnings, and ASML Rides the AI Memory Boom

Episode Date: July 16, 2026

In this episode of The Canadian Investor Podcast, we start with a quick look at the Bank of Canada’s latest rate decision and why the central bank is keeping policy steady while balancing economic weakness with inflation risks. We then dive into the reported buyout offer for PayPal from Stripe and Advent International, why the market appears skeptical the deal will go through, and whether the offer undervalues PayPal given its free cash flow. We also look at Lucid’s financial struggles, its cash burn, and why EV startups remain such difficult businesses to scale. From there, we break down another strong quarter from Aritzia, including impressive growth in the U.S., strong comparable sales, expanding gross margins, and why the company continues to stand out in retail. We also discuss MTY Food Group’s difficult quarter, its strategic review, and what slowing consumer traffic means for restaurant franchises. Finally, we cover Pepsi’s struggles with pricing and private-label competition, IBM’s surprise preliminary results and why the stock sold off sharply, and ASML’s strong quarter as AI-related demand drives spending on memory, lithography systems, and semiconductor capacity. Tickers discussed: PYPL, SQ, LCID, ATZ.TO, MTY.TO, PEP, KO, IBM, ASML, MU, TSM, NVDA Subscribe to Our New Youtube Channel! Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Welcome to the Canadian Investor podcast. I'm Simone Ben-Ager and I'm back with Dan Kent. We have a fun episode for you today, a lot of news and earnings. It was a bit more dead over the last few weeks, but now things are picking back up. So we'll go over the Bank of Canada rate announcement, just a quick overview, because Dan Foch and I will be talking more in-depth about that decision during our Friday live that you can hear on the podcast on Saturday if you just won the podcast feed. We'll be talking about PayPal, a buyout offer coming in from Stripe and Advent International. We'll also talk about lucid she seeing it. shares dropped by close to 50% yesterday, but rebounding a bit more today. Now, we'll also move on and talk about Eritzia earnings that had another phenomenal quarter.

We'll also talk about Pepsi, MTI Food Group, the Canadian franchise company, IBM with some early preliminary earnings release, which is never a good thing in the stock actually tanking quite a it on the news and then we'll finish off with ASML. So a fun episode up ahead and we'll get started right away. So and actually just a little bit of housekeeping items. So keep an eye on your podcast speed. We are doing some rebranding with a podcast cover. I know I've mentioned this a few times already, but you'll probably see it in the next few weeks show up on your podcast player. We're changing it tomorrow. So it does take some time, sometimes to actually show up on the feed. So just keep that in mind. So Dan, fun episode ahead. Are you excited now that news are coming back up?

Yeah, it seemed like there was nothing last week. And now we're going to have to get right into it because we have a ton to talk about. But some very interesting topics. Let's get into it. I guess you'll go over Bank of Canada. Yeah, exactly. So the Bank of Canada had his policy announcement and monetary policy updates. So essentially the Bank of Canada decided to keep rates unchanged. Based on the summary of the decision, because I did not have time to look at the video just yet, it was released just, I think, or done about an hour ago or so. But essentially based on the summary is that they believe the current rate is appropriate to strike a balance between economic recovery and bringing back inflation to 2%. They did mention there's a high degree of

uncertainty and they are prepared to adjust the policy rate as needed, as they always say. And like I mentioned prior, Dan Fosci and I will be digging into this a lot more on our Friday Macro live. So make sure you tune in for that or go on the podcast. So any comments on that, Dan? Did you have the time to watch a video or not at all? No, I've been, I spent the morning looking at this PayPal buyout. So I don't have anything to say on the rates. Okay. No, that's good. So you won, speaking of the PayPal buyout. Do you want to go over what exactly happened? So it looks like Stripe and obviously everybody knows Stripe, but the other one is Advent International, which is a private equity firm.

I don't know too much about them, but they're looking to acquire PayPal. So the price is for $60.50, which was, I think it was around a 28% premium to, it probably would have been the closing price yesterday before this deal was announced. And, the market is clearly hesitant as to whether this deal will go through. I think the stock is currently around $50. Yeah, $55. So it's improved a bit today, but it's not really trading near that buy price.

And I think I'll get into it a bit, but I think that's mostly regulatory concerns. But what will happen is Stripe and Advent will own 50% each. The company is being kept intact, so nothing is going to change there. But there is one weird thing here. And I didn't have a lot. of time to dig into why this is, but apparently Block is reportedly on the equity offering. And I mean, it's kind of weird because isn't this a direct competitor?

Yeah, I mean, I would square. They're like, I know they've rebranded or the name of the company is Block now, but those little square kind of POS if you go to like a, yeah, terminals if you go to a farmer's market and they have they have a pretty good, pretty large business. They also have the cash app. So yeah, I would think that's definitely pretty close. The same thing, though, for, you know, Stripe. I mean, they're all kind of in that same space.

Yeah, I guess. I'm just kind of, yeah, I was kind of wondering why they would be involved on the equity side of things. But again, I didn't have a lot of time to look into it as to why they were doing it. But the offer today is still 80% lower than the peaks we see in PayPal in 2021. Around 80% lower. So you're talking about it was $53 billion today, and I think PayPal's market cap at peaks was over $350 billion.

I think on this one, I mean, at least in my eyes, I think regulators, you would have to be thinking pretty hard on this one in terms of approval. Like Stripe and PayPal are pretty much the two largest payment processors, and now you're kind of combining them. I mean, on my website, like stock trades, there's two ways you can pay. You can pay Stripe or PayPal. So I think there is the potential possibility that if this goes through, maybe some assets need to be sold off. I'm not exactly sure.

We've seen this quite a bit in the waste collection space here in Canada. So, you know, they would let these acquisitions go through. They'd say, okay, the deal can go through. But you've got to sell XX business segment to make it happen. So I would imagine why it's trading at the discount today is the regulatory issues. Like this would be, you know, the combination of these two businesses would be, would be quite large and take up a pretty big chunk of the,

of the online payment space. In terms of the deal, I mean, it just seems like an awful deal for, for PayPal holders overall. I mean, last trail, uh,

trailing 12 month free cash flow is around 6.7 billion. So you're pretty much getting potentially purchased for like 8x free cash flow. So, even though PayPal is really not growing at, the pace it used to. I mean, that just seems like a very cheap offer. But yeah, it just generates like gobs of free cash. It may not be growing all that much, but I mean, it's still a very profitable business. Yeah. It seems very cheap to me. If I, again, if I was a shareholder, I would, I would kind of be upset with this. Obviously, you're, we're probably never going back to

that $350 billion market gap, but I think PayPal is definitely probably, probably, it's worth. It depends when you bought this shares, let's be, let's be fair. Yes. Yeah. Yeah. I mean, if you bought them a few weeks ago, you're probably doing, you're, you're probably quite happy. If you bought them at, you know, 20, 21, you're probably quite upset or even over the last

year or so because the other thing, I guess I want to go over is just the buybacks. So the company, pretty much over the last three years, I think since 2020, it's effectively spent every single dollar of its free cash flow generation on buybacks. I think it was, I quick calculated at $24 billion or something since. 2023. So pretty much all of these buybacks are underwater, pretty much below the offering price. So unless maybe the ones they've just recently bought, and if you look over the last three years, the S&P 500 is pretty much doubled.

So I think this is a situation where you would prefer a dividend more than buybacks. And I know hindsight is 2020, but growth was slowing, you know, the valuation multiples across the entire industry were compressing. The company kept pouring pretty much every dollar it made into buying back shares. And as a shareholder, you're now kind of in the hole on those buybacks. If they instead just continued potentially aggressive dividend growth and potentially even special dividends, that money would have been routed elsewhere and probably earned you more. So I think it's a good, you know, kind of an example of how buybacks are solid, but they're not

always solid, like they need to be done at the right time. And I think a company trading 80% below, you know, peak prices, maybe a lot of people thought that it was the right time to do buybacks, but it was definitely not money well spent. And on PayPal side, I think maybe aggressive dividend growth and maybe even special dividends would have kind of been, you know, an indicator to the market that they were kind of giving up, I guess, you know, potentially turning into that slower, growing, mature company that they are anyway, but they probably just didn't want to admit it.

So yeah, I can see why they were getting so bullish on share buybacks. I'm not saying they're wrong, but I'm just kind of going over a situation where shareholders would have been much, much better off getting paid out dividends rather than them going through these buybacks. But I don't know what will happen with this deal if regulators will reject it. Or like I said, if they'll let it go through, but there'll be assets sold off or if they just let it go through period, the market seems to be kind of on the fence about it. Yeah.

No, it's always interesting when you see this discrepancy. And did I miss it? Like, how much is it supposed to be all cash? Like, how is it supposed to, what's the offering here? That I'm not sure. No, okay. Because sometimes it'll be dependent if it's kind of a stock deal. But I would assume it's probably cash because there's two, you know,

they're splitting that 50-50, but that could be part of it. But again, I think they're all cash. Yeah, okay. Joint all-cash offer, yeah. It's definitely something where the market's, not sure in terms of the regulatory approval. But no, that's some really interesting news came out. I think this morning, right?

Right. Yeah, right the morning. July 15th. It was, I think the article was put out like very early in the morning. Because I got news. It came on my, I got pinged on my phone at like 1 a.m. My time. So.

Okay. Yeah, that's fair. Like 3 a.m. Eastern. Yeah. Okay. Well, let's move on to another piece of hot news. So you have the Lucid, the automaker. So take care.

LCID that's been struggling for quite a while. Definitely not looking all that great and I have some information here. So I'm just looking at, I'm sharing here for our joint TCI subscribers. So a statement from the head of communication saying that the reports that the company may head into bankruptcy or is working with advisors for a strategic review is false. while he did say that they're looking at strategic review, but going or filing for Chapter 11, Bakercy was false.

And this was a statement that was sent yesterday by Nick Torg, who's the head of communication. And that's following a report from electricvehicles.com saying that the company was really struggling financially and was looking at all its options right now. And at the end of Q1, the company had 700 million in cash. So it was definitely not looking great. And again, you can see here, $700 million in cash. And then if you look back at just a quarter prior, it was $1.7 billion.

A quarter before that, $2.3 billion. So clearly you can see that it was not doing well. And it's just been burning through a whole lot of cash. So if you're looking at the amount of free cash oil was burning every single quarter, it's been north of a billion or close to it for the last four quarters. So you can see that there really. They're really not doing well. And he disputed that because I'm just saying that they were fine.

And to be fair, they did recently raise another billion in April. So that wouldn't have shown up in the most recent quarter. It will show up in their Q2 when it does come out. And it's also backed by the Saudi government, which could continue acting as a bit of a backstop for them. But definitely interesting. I know it was definitely a very popular stock a few years ago for people to, invest in, but again, with the EV hype, I guess going down a little bit and definitely not

profitable and probably nowhere inside in terms of profitability. The company is clearly having some, some big issues here. Yeah, it's down 99.4% from November 19th peaks in 2021. So it's, yeah, it's taken a beating. I know Uber has given this company a ton of money. I think it's like 500 million some dollars over the last few years here. I think they have a lot of partners that they're dealing with. But I mean, obviously they're running out of money and they're running out of money quick. Exactly. Yeah. It's not easy like an automaker, right? There's a reason why these companies are really large. And there's a reason also why Elon started the model. The business model for Tesla really started with like the supercar at first and then a kind of expensive sedan because

he started with what had the highest profitability and did not require massive amounts of sales and then went down and trickled down the chain for, you know, more mass production and on vehicles that are not as profitable. So if you're not using that business model and you're also not called Elon Musk, it might just, it's just a very difficult type of business to make it work. But I just wanted to go over that. It was all over social media yesterday. So it was kind of just in time for our news and earnings. There is an old saying in investing. It's not about timing the market, but time in the market. The most successful investors aren't usually the ones trying to catch every top and bottom.

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And while we're away enjoying that time together, the timing also made me think about our own home back in Ottawa. Early July is such a busy time in this city, with Canada Day and Blues Fest bringing so many people in. That got me thinking about how our home could be put to good use while we're out of town as it's just sitting empty. Listing our home on Airbnb could create some extra income to help cover part of the trip, while also letting another family enjoy our neighborhood during one of the best time to visit Ottawa. They could walk over to a local coffee shop, spend the afternoon at a nearby beach, and use our place as a comfortable home base after taking in everything happening downtown. Your home might be worth more than you think.

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Now let's move on to a company that you follow very closely. I know a lot of our listeners have a stake in this company. So a company that keeps proving that fashion can be very profitable. Yes. Eritzia, I mean, it was a huge quarter from the company. It's like it almost seems when you look at companies like Nike and Lulu Lemon, like Eritzia is making it look too easy at this point. Revenue, 43.4% increase from last year, which was well ahead of considering. census. Ernie's came in 96% higher, well above consensus as well, and comparable sales grew by 35%.

So the interesting thing here is you're also working off 19% comparable sales the previous year. So they're growing at a near 20% pace last year and they topped us up with 35% this year. So I have followed the retail space for quite a while. I've dabbled in quite a few of them, my own Lulu Lemon way back in the day, I own Canada Goose. I'm not sure I've seen this type of momentum in terms of same store sales in the fashion space. Like it's just, it's absolutely wild. The company's gone from, you know, coming out of the pandemic, growing comparable sales, as you can see the chart here by like 1.6% and now they're just launching.

Well, those are total revenues, but still, I mean, to give context here, total revenues have been 30, have been increasing at a clip of 30% or higher since. since March of last year. So now like what like six quarters in a row that it's been, which is absolutely crazy. Yeah. It's I've never seen it before. I'm sure a lot of people have been doing this a lot longer than me have,

but it's, it's been pretty wild. So gross margins came in at 50.3%. So this is a 3.1% increase. And this does include 2% tariff impacts. So obviously you can't, you know, you have to factor these in.

But if you just take the situation where we didn't have the tariff environment, they would have came in around 5.1% higher, which is, which is pretty impressive. I think Nike is struggling to even maintain gross margins of 40%. So for Eritzia to peak to, you know, eclipse 50% is pretty good. A US grew 54.5% year over year, Canada grew by 25%. When Canada has been seen as the laggard for this business for quite a while,

but it's posting some pretty nice growth. But if you own this one or are considering owning it, I mean, the story is all in the United States. States. So it makes up over 67% of revenue now. And when I first bought this company in 2019 and kind of started covering it, it was under 40%. It might have even been under 35%. So if it continues to grow at the pace it is south of the border, I would say, I mean, I don't want to say Canada will become an afterthought, but growth wise, I think it'll just become similar to a situation where like Lulu Lemon where it's just growing so fast in the States that Canada just falls behind primarily

because we have 10% of the population. They're doing this off 76 stores. That's all they have in the United States. And if you look at the other major clothing retailers, they have hundreds. And to boot, they only expect to open around 11 boutiques a year. So they're kind of leveraging the Omni Channel approach. Like e-commerce revenue is growing by 55% a year. Makes up 30% of total revenue. And it's outpacing, you know, boutique growth by about 20% annually. So if that continues for longer, you could realistically see e-commerce make up half of sales, which kind of shows you the strength of the brand. I mean, they're not cheap items of clothing. They're not overly expensive, but they're not cheap either. And people are just ordering it on their phone or their

computers. So they trust the company, trust the quality. And for new boutiques, they had an initial target of 12 to 18 months payback time. So when they open the new store, it takes them 12 to 18 months to recoup all the cost of doing so. They've blown past these targets. They're now seeing paybacks of less than 12 months. And this is primarily due to the fact they have zero debt, over 500 million in cash, I believe. So you have no interest expenses dragging on the buildouts.

They can be paid back much quicker. And they had mentioned they're in the middle innings of gross margin expansion. So they believe there's kind of more to come. So that's definitely a good thing. And in terms of guidance, 35 to 39% revenue growth next quarter estimates were for around 25. Gross margins should expand another 250 to 300 basis points. And on the year, like, that was just next quarter's guidance.

On the total year, 23 to 28% revenue growth, high teens to low 20s, same store sales growth, and 2% increase to gross margins. So the stock has kind of taken a dip after the quarter. I would imagine it's this guidance, but the thing is I think this guidance was in place before they even reported this quarter. So nothing was overly surprising. but with the way it had ran up, I'm guessing what they had expected is this annual guidance

to maybe be ticked upwards and instead it was just kind of maintained. So that's probably why it's, I mean, it's not down a ton. It got up to 160 and I think now it's down to 148. But yeah, they've been on a massive run over the last while. Yeah, I think it's probably just a matter of expectations, right? I think you get at some point where, and we've talked about this countless times where expectations are so high that even a quarter,

it looks phenomenal if it's slightly below those expectations and the stock doesn't really move or he could even decline sometimes. So not overly surprising on that point. If people were just too excited about this, that would make sense. But let's move on to another name here, MTY food group. Are you familiar with this company? Like, I do look at it from time to time. Yeah. I mean, I have, I do know of it. I kind of labeled it as like the food court company for a long time. But then I was kind of proven wrong on that because they do have some other stores. They do. It's your typical like massive fast food chain kind of royalty company, is it not?

Yeah, exactly. So they essentially own a bunch of different brands. And then they, for most of it, they do have some corporately owned stores, but for the most part, it's franchises. And like you just said, yeah, it's all food franchises. It is a small company with 750 million in market cap and an EV of 1.8 billion. So a lot of debt on the balance sheet compared to the size of the company. And their business model, like you said, is that of franchisees, but it also does own some corporate stores. They manage over 80 brands across Canada, the U.S., and a bit internationally as well, but mostly those two markets, including brands like Baton Rouge, Mike's.

I think that's most in Quebec, La Cremier, which is also, I guess, most in Quebec, a bit in Ontario, too, Mr. Subs, Scores, Thai Express. These are just some that are a bit more well known and they have some different brands, Canada versus U.S. And it really was not a good quarter for them. Their overall business is facing some significant headwinds with slower traffic and consumers just spending less overall. Same store sales improved versus the previous quarter, but still decline near 2% both in Canada and the U.S. on a year-over-year basis. So not exactly what you want to see. And you can see this. Just the revenues are down.

So they saw during the quarter on a year-over-year basis, revenues declined 6%. So that is a pretty significant. And during the earnings release and the stock did take a pretty big head because clearly it was not a good quarter for them. They said that they are in the process of closing 68 underperforming corporate-owned stores following a review or strategic review process that is still ongoing. Papa Murphy is a brand I was not familiar with, but it's a pizza banner or pizza brand in the U.S. It's been really underperforming.

It represents, I think, 45, 50 of the 68 stores that will be closing in the U.S. And they mentioned there's just a whole lot of competition around pizza in the U.S. And it's not surprising. I don't know about you then, but there's a lot of competition here as well when it comes to pizza. I mean, it's just... Oh, yeah. There are some local ones and I find those are the ones that do the best like these kind of either small chains or one-off shops that offer something a little bit more unique.

I find those are the ones that tend to do better versus the well-established brands that I think now. Everything is so expensive. So I get the sense that if people want to spend on pizza, they'd rather pay an extra 10 or 15% and get something that kind of stands out and is a bit more. local compared to the big chains. That may be just my perception, but are you seeing something similar? No, I think that's, yeah. I think that's reality. I mean, pizza is, I think pizza right now, especially on the fast food chains is like a race to the bottom in terms of like you look to dominoes and stuff offering. I don't even know how they make money at the prices they offered. Personally, we go local versus chains, but I mean, a lot of these restaurants, I think,

are struggling because of just how expensive they are overall. Like if you go to, I mean, I they don't own subway, but if you go to subway, it's like 20 plus dollars for one person, whereas, you know, pre-COVID, these places were more affordable and now people just don't have money to spend. So you're just seeing them get hit across the board. I don't think it's exclusive to M-T-Y. I think it's just most of these chains overall. Yeah, exactly. It really, I think, depends on the type of chain, but there is more, you know, people are more conscious about their, their dollar. And Dan Foch and I talked about that Walmart actually did some, like, thousands of price drops in the U.S.

It just announced that I think it was last week or the week before on thousands of items because essentially, you know, they're not doing this in the goodness of their heart. They're doing it because they want to keep people coming in. They're going to be taking a hit to the margins. They can probably afford it, yes. But, you know, if they could increase the prices, they definitely would do it. But they're trying to get more people in, probably seeing some bifurcation when it comes to the wealthier customer versus the more middle to lower income.

And that middle to lower income is probably cutting back on eating out, including to, you know, food courts and some of the chains that MTI food group owns. And then if you look at their actual results, so they have revenues per quarter around like 200 and between 270 and 300, depending on the quarter. And they had net income of 36 million in the latest quarter. And what's really interesting is they said on the call that the locations they are closing have lost over $10 million over the last year. That is a lot for a company as small as this. And the estimated cost of closing them will be between $10 to $12 million.

But when they say it lost over $10 million, I mean, clearly it makes sense to close them even if you're going to get a one-time hit of $10 to $12 million. So they're not sure if the slowdown is due to their brands or simply, the consumer spending less or combination of both. I was kind of wishy-washy a little bit on the call. That's what I found. They're also undergoing, like I mentioned, a strategic review of the company's operation. They didn't want to comment on the status of the process as a whole, but it could result in them selling parts of the company or selling the whole company. They're still generating a ton of cash flow. And I think it's, it is smart from them to look at their business from that lens and saying, okay, these franchises are struggling. And they did say

that the ones that they think they could turn around, they're not closing those, but the ones that they just figured that, look, this is not happening. We're just ripping off the band. That's essentially what they're doing. Yeah, I can't imagine. I mean, there'd probably be some people that would buy this, some, you know, take private, but I can't imagine the lineup is very long just because of the current situation. I do know they have a lot of exposure to the retail space. And obviously, retail is not doing very well right now, shopping, malls, whatever it may be. But yeah, I don't know. I was trying to, as you were talking, I was trying to look up because they bought Papa

Murphy's in 2019. I think they paid $200 million for it. I was trying to see if they isolated out the individual revenue. I doubt it because they own so many chains. I doubt they go that deep into it, but I'd be curious to see what they're turning out now from that business. But these are, they own so much. It's hard to even, like, he's, Simone scrolling down here for joint DCI. Like, it's got to be 50, 60 brands they own. I've heard of next to none of them. I would imagine because most of them are down in the States. But yeah, it's been a struggle for this one for quite some time now.

I think especially once, you know, food just started getting unaffordable. Yeah, I mean, for me, the Canadian ones I've heard like, oh, Taco Time. Yeah, yeah. And MMM muffins or like stuff like that. I've definitely heard of some of them, but they're still, even on. the Canadian side, like, I would say like three quarters of them I've never heard of. So maybe they're not the best franchises to own. There is an old saying in investing.

It's not about timing the market, but time in the market. The most successful investors aren't usually the ones trying to catch every top and bottom. They're the ones who spend the most time in the market. I've been a quest trade user for over five years, and the reason I stick with them is that they remove the friction of regular investing. With no commissions on stock and ETF trades, you don't have to wait until you have thousands of dollars saved up to make a move. You can contribute small amounts regularly and keep your portfolio growing consistently, removing the stress of trying to time the market. And they keep making it easier to build a well-rounded portfolio. Soon, you'll be able to trade

precious metals through Questrade, giving you even more ways to diversify. Questrade makes the whole process seamless, allow you to focus on what really matters your investment strategy, not trying to avoid fees. Ready to invest, head over to questray.com, open and fund your account with code TCI and receive $50. Conditions apply. We've booked a cottage for early July, and I'm already picturing the kind of trip where the days are pretty simple. Mornings outside with coffee, my daughter running around with our new puppy, afternoons by the lake, and those quiet evenings with my wife watching the sunset with a glass of wine after everyone else has gone to bed. And while we're away enjoying that time together, the timing also made me think about our own home back in Ottawa.

Early July is such a busy time in this city, with Canada Day and Blues Fest bringing so many people in. That got me thinking about how our home could be put to good use while we're out of town as it's just sitting empty. listing our home on Airbnb could create some extra income to help cover part of the trip while also letting another family enjoy our neighborhood during one of the best time to visit Ottawa. They could walk over to a local coffee shop, spend the afternoon at a nearby beach, and use our place as a comfortable home base after taking in everything happening downtown. Your home might be worth more than you think. Find out how much at Airbnb.ca.com slash hosts. If you're a DIY investor ready to take control of your portfolio, BMO all-in-one ETFs simplify the process.

Whether you're new to investing or looking to streamline your existing holdings, these all-in-one solutions are designed to help you invest smarter. With management fees on popular portfolios now reduced to 0.15%. You get professional diversification at a lower cost. Check out the asset allocation ETS at BMOETFs.com Let's move on here to the next on the slate. Another company that continues to struggle, I think consumers being pinched in Pepsi, right?

It's kind of the same, obviously, completely different businesses, but kind of the same struggles, I would say, as something like MTY. But this is one that I used to cover because I kind of thought when you looked at Pepsi and Coca-Cola, Pepsi had more diversity.

They weren't solely beverages. I kind of changed my tune on this over the last few years. I don't follow the company all that much. But it's funny because the diversity of the business is actually what has been hitting it so hard. Coca-Cola is doing very well. Hepi's beverage segment is doing very well. But it's the food. Like it's the Frito-Lay the Quaker, et cetera, that are just kind of killing it right now.

Which used to be like, that's why I was doing better than that. then Coca-Cola, especially during the pandemic, I think, right? Yeah, it just kind of shows you, I mean, if you have a thesis about a company, which has worked very well in the past, like things can change because, yes, Pepsi's success was largely due to all of the things that are just causing it to get hit pretty hard right now. And there was, I would argue there was some poor decisions made, which I'll get to in a bit, but revenue increased 6.4%, earnings were flat, operating margins declined by 0.4%.

percent. And organic revenue came in at only 2.4%. So pretty much this business is struggling to grow out of anything acquisition based. Organic growth in its food segment declined by 1%. Beverage is increased by 1%. Internationally organic growth is pretty strong, but in North America, its main market, it is definitely hurting. The company has been aggressively discounting products, and it's just not working. This is kind of why we get the food segment stalling out. So volumes are flat, but sales are down. So they're, they're marking down these discounts. Like you, or sorry, marking down these products, kind of like you said, like a Walmart type situation. They're marking these down in order to try to boost volumes, but it's just not working. So, I'm showing here

for joint TCI. So just for North America, but foods, organic growth and then beverages, beverages are doing slightly better, but it's still like one to two percent pretty much over the last three years where food is just, it's declining. So it's not looking great. But it had been doing well until recently. Well, I think even if you go back to 2021 and 2022, if you look at this chart and they were growing organically by 12 or 13 percent, a large amount of that was just price increases, which I think is what has been the main downfall of them.

So the company raised prices aggressively. And I think they do have a chart for price increases. I think if you go to the KPI's they actually have, they'll have a KPI for net pricing growth. It's right at the bottom there. But they were, they were raising prices very aggressively during COVID, and I think they're now kind of paying for it. So if you look to a chart of their net pricing growth, they historically raise prices from anywhere from 2 to 4%. Yeah, like this chart just tells you. It's pretty phenomenal.

Just looking at that. And if you're going to yearly, so for those just listening, Essentially prior to 2021, you were looking at, you know, price increases, probably in the range of inflation, slightly higher. Slightly above. Yeah, slightly above 2 to 4%, then 5% 2021, 14, 13, and then back down to 4% in 2024. So you have 14 and 13% 22, 2023. And then it's been essentially at 4%, probably even lower if you're looking at a quarterly basis. Yeah.

So close now, closer to 2%. So clearly there's not much room for price increases right now. No, and I think like inflation was eight, what did it peak at? Like 8% back then. So they did need to raise prices. But I think they kind of went in a situation where they said, okay, we're going to raise prices with inflation and then some. So, you know, 13, inflation was never 13, 14%. I think this was a situation where, again, it's a hindsight.

situation, but I think they had to look back and say, let's raise prices less and maybe take a little bit of a hit to the margins. So we don't get in a situation that we are right now where our products are so expensive that just nobody is buying them anymore. So I think these pricing increases ended up being a big, just impact to the company. So they're now back at, you know, normal pricing levels of around 4%. But they, you know, with grocery prices as high as they are, people just aren't not. willing to pay $8 for a 12 pack of pop or $6 or $7 for a bag of chips. And I really don't know how they navigate this situation because there is a bit of research that kind of shows that sugary drinks, junk foods, chips, etc.

are more often consumed by lower income consumers. So you got this K-shaped economy or recovery, sorry, where, you know, people with money you're spending, but your largest audience. And I don't think it's, or sorry, largest consumer. I don't think it's like overwhelming evidence at the lower income, but they have shown that they're more likely to buy these types of products. So. Yeah, and I'm just showing here.

So I went on the real Canadian super store just because there's one that's not too far from my place. So I'm pretty familiar with it for their online ordering. And I'm looking here. So they have lays like classic. So just the regular lays. So that's $1.91 per 100 gram because sometimes they don't have the same exact amount. So I always like to look at that. And then you have the no name from the Loblaws or whatever.

And then that one is 0.75 per 100 grand. So you're looking at two, at least like twice and I guess one and a half time the price of the no name brand. At the end of the day, I notice that I don't know about if I go to grocery store. Like usually the brand name chips and that's the one I kind of I just notice more will be, you know, fully stocked. the no name or whatever the store brand, whatever you want to call it, is usually like has half of the shell depleted because people are going towards that one. I think private label is, yeah, it's a massive, massive situation, well, headwind for these companies. So I think there's two of them. You get to the situation where once these consumers

pull back on all these type of purchases, if the environment improves, maybe they have a bit more disposable income. Do they, do they realize that they really don't need them? So do they ever go back to buy them? And then even that, I mean, you have a situation where probably when these brand labels were cheap enough, people never shifted to the private label, the no names are like the president's choice or anything, but I mean, now they are. They're definitely shifting. And I don't know, you kind of buy them and they're like, this is definitely a good cost tradeoff because they're really not that much worse. I mean, at least in my situation, I don't buy them often, but when I do, like, it's kind of a no-brainer.

They're there, can you tell they're a little bit different? Yeah, but would I pay double the price? I can't tell the difference. Maybe if I had them next to one another, but I don't eat chips very often. And I know we're focusing on chips because obviously Frito Lays has a whole lot of that. But I think, yeah, I think you're absolutely right. When you see a difference of a bag and I know the bags will vary in size, but one bags for the other one's $1.50 or two, that's a pretty significant different.

Whereas I think before the pandemic, it may have been like the store brand was maybe like, you know, a dollar 50 versus delays $2 or $250 where that different than costs maybe wasn't as noticeable and people weren't, you know, pinching as much and, you know, struggling as much to make ends meet that, you know, they didn't mind or they didn't really think about it. They just took whichever brand they, they were the most familiar with. Yeah. Yeah. And whether or not it turns around is difficult to say. I think there's probably been a permanent shift. Management mentioned, same thing with MTI. They mentioned that like higher gas prices is kind of impacting the situation.

I'm not really sure I believe this. Like Pepsi's been struggling for years. I think the high gas prices right now is kind of a convenient excuse to mention why the consumer is slowing. But again, hindsight is 2020. I'm not like overly criticizing them for the pricing increases. but in hindsight, I think they just had the lower prices less, maybe take a little bit of a hit on margins, and then you're not in a situation right now

where your products are way too expensive. Instead, they kind of tried to get really aggressive on those pricing boosts, and now a lot of people just can't afford the product. Yeah, exactly. And even looking at food basics, so this would have been that's Metro brand. So looking at one of the other big grocers, same kind of thing. You're looking at the option of the store brand,

significantly cheaper than delays. And even that, delays is discounted. So it's actually discounted pretty heavily on food basics. And it's still about 50% more expensive than the store brand. Yeah. Yeah. It's a tough quarter. I can't see any massive turnaround.

Maybe I'm wrong. But I think you're going to need a big shift in consumer kind of mentality over the next while. Yeah. No, exactly. So let's move on to, I guess, another company that's struggling. but for different reasons here.

So you had IBM that surprised investors. So the CEO, Arvin Krishna, sent letters to IBM investors out of the blue. So about what, like they're about to report in a week or so or 10 days. And it basically said, we're coming out with preliminary earnings release. And usually when companies do that, it's not good. Let's just remember like an example we talked about on the podcast, go easy. So they did that a couple of weeks early. Usually it's when it's really bad. They actually want to give a heads up that it will actually be coming. I'm not sure why they feel the need to

do that if I'm being perfectly honest. Because at the end of the day, it's going to be released in a week. Like, you're going to, your stock is going to take a hit no matter what. But anyways, IBM wasn't different here. The release wasn't because they had good news. It was to tell investors that things are looking materially worse than they thought as recently. as the last quarter. So revenue for Q2 is expected to be up around 1% compared to 9% in Q1. Every segment fared worse than Q1, but infrastructure revenue was what really stood out here in terms of performance. What they were saying is that in Q1, just for comparison, in Q1 infrastructure revenue was up 15%. And in Q2 it was down a whopping 7%. So software revenue also came in lower than

expectation. Mainframe sales were weaker than expected. So demand for IBM's Z-Mainframe system slowed more sharply following the strong Z17 launch. And these mainframes are just massive computers that will be used by a large institution that have to be running 24-7 and extremely reliable. And the sales also, it's important because they will also sell software along along with those mainframes. So if you have less sales from that, then you're also hurting your software sales. And what they said is customers, you guessed it, AI is the culprit. Customers are redirecting their budgets to supply-constrained hardware. So clients are prioritizing buying supply-constrained servers, storage, memory before expected price increases,

leaving less money for IBM's other products. So they're essentially spending on AI infrastructure or buying not necessarily AI infrastructure, but products that will be impacted by price increases. So maybe clients are looking to upgrade the computers for their staff. And instead of waiting because they know price increases are going on in memory and other components, they're just doing it now before those anticipated price increases. There's large deals that were delayed. Several major software infrastructure contract didn't close before the quarter end.

IBM says this caused most of the shortfall. and they said also that management openly admitted in the release that they just failed to adjust its sales efforts quickly enough to address the customer shifting priorities. Yeah, it's never really, there's a lot of companies that kind of pre-report earnings, but those are kind of planned. Like there's some that come out with prelim results. Like Costco, for example, comes up with monthly. Yeah. But when you do it out of the blue, that's when people tend to get spent. boot? What did it, it felt like 25% yesterday, I think potentially even more. Yeah, something like that.

I don't know what it's at today, but yesterday was one of the, yeah, the worst performing stock. So yeah, it's down slightly today as well. So about down 1% today. Yeah, I think it was a worst performing day for IBM in like decades. I might be wrong on that, but I'm pretty sure I read something about that. But I'm not really sure what the angle is. Like he said, they're reporting pretty soon. So why come out a week earlier? Not sure. Yeah. I have no idea.

Maybe the stock falls a bit more if you report this on earnings day, but I kind of doubt it. I don't really get the logic behind it. Maybe there is. Let us know if you think there's a logic behind reporting early, even like the go easy stuff. You know, just report before the year end as you plan at that point. I just, I don't understand why they do it. Go it was a bit odd though because they kept pushing the earnings out and out and out until the like end. Maybe though, like.

Now that I'm saying that it's a way, like usually they won't have a conference call with that, right? So it could be a way to prepare analysts for what's coming and not be shocking when they go on that conference call and get the question. So the analysts are actually prepared in advance that, okay, like you had like a week or two weeks to digest that information. So actually that now that we talk about it could be the reason. Yeah. I would imagine that's actually why. Yeah, I grilled too much and they probably also large companies like that, they for sure are talking to analysts as well. So they're probably exchanging information and making sure potentially to just ease the blow during the earnings call.

So that would be logically, I guess, as we talk about it, the reason that they probably do it. Yeah. Sometimes I have a good idea. Sometimes I have good ideas. But let's move on to another tech company. This one that is really benefiting from AI. So ASMR actually reported earlier this morning, really early. because they're based in the Netherlands.

So I think it was already posted when I was up. But essentially, really impressive quarter from ASML. They saw net sales up 6%. Install bates management was 11%. So essentially what's installed. So the maintenance that they do on that, they sold 86 new lithography system, which was up 28%.

And the numbers I'm giving, they're all versus Q1. I think they tend to go, yeah, quarter over quarter when they do those comps. So it just, I figure that was easier to do. They're benefiting massively from spend on AI. They are seeing customers make significant investment to in memory. So DRAM, for example, or HBM, so high bandwidth memory that's actually used for those data centers.

They're making significant investment to address those supply constraint. And then if you look at the presentation that they give, you can definitely start seeing that because of a lot of that memory is actually in South Korea. So a lot of, we saw SK Hynix actually do their ADR, so the American depository receipt in the U.S. last week. We didn't talk about it, but it was pretty big. I can't remember the amount of money they raised, but it was quite significant.

So you can see that, yes, the locations being shipped, South Korea is now 45% for the last two quarter, roughly 43, 45%. And what's also interesting is EUV was, flat in terms of systems. So 16 system versus 16 in Q1, but they still saw 28% increase versus Q1 for systems as a whole, which the rest, the balance being V system, and EUV is the extreme ultraviolet system. They're the most advanced one. And year to date, the sales are actually split between DRAM, HBM, so between memory systems and logic. So logic would be like CPU, GPU. So think about processors and GPUs like an Nvidia, which is a big shift compared to previous

years where logic sales were much greater than memory cells. And now it's essentially like a one for one, which is pretty interesting to see that. I'm trying to, yeah, there you go. So you can see here, you have for joint TCI listeners. So you have the install base management in yellow. And then the green and blue is logic and memory. And this is one of essentially the first year where it split half and a half where previously years the system being sold were about on a, depending on which year, there was about like twice as sold for the logic versus the memory. Yeah, it's been a wild situation for ASML. They didn't really react all that well to this quarter. I think they were down actually. Again, it's probably expectations. Yeah. Yeah. But I mean,

what else, I don't know what else they could have done, really. I mean, they bump guidance. Sales are up 6% sequentially. Their servicing segment is, is kind of crushing it too. I think all time highs in terms of revenue, all time growth. It was pretty expensive. I think it was trading at like 50x expected earnings or something like that. But yeah, they're going to eclipse memory sales probably more so by the third quarter than what they did all last year. So yeah, who knows whether memory actually surpasses. At this rate, I wouldn't be surprised if memory actually surpasses just because there's so much demand and ball on that ground memory right now. So I wouldn't, I wouldn't be surprised. And that's what they're saying. They're just saying that their client, their customers are just now investing

more in memory to just try to address those backlog. And like I mentioned, just to continue on this here, another point that's really interesting is that they are, the demand is just so strong that they are planning a 30% increase in capacity for EUV system in 2027 and possibly another 30% increase in 28. I guess the possible increase will depend if they see demand being that strong because when you increase capacity, of course, you have additional cause that comes to that and you have to make sure that demand actually follows that. Really, the high demand, they even said it provides them with increased flexibility for future

pricing adjustment. So they'll probably be able to increase prices. That's what they're saying. Yes, that's a nice way of saying it. It's a nice way of saying they'll be increasing prices and they have the flexibility to do it. It kind of happens when you have a monopoly with EUV system and only a few companies that do the UV system. They also, like you mentioned, they raise guidance significantly compared to what was provided in Q4, 20, 25 when that was released to now. They were looking at net sales between $34 and $39 billion.

Now it's between $43 and $45 billion for $2026. So that's a significant increase. And gross margins have also the guidance have been bumped up 300 basis points. So it's also another significant increase. When you think about these massive machines, it's not like it's an asset light business model. It's asset heavy. So really impressive for ASML. I think the subdued reaction from the stock is probably just a byproduct of all the hype around AI.

And the Pixen shovel plays. And yeah, it's probably just a result of that where people are expectations are just sky eye for ASML. Yeah. And I think you have a situation like Taiwan Semiconductor mentioned it as well. Like you have to be very, very careful on your capacity expansion, not to overdo it. Yeah. Because you don't want to spend all that money and then, you know, demand slows and you spent all this money for, you know, a situation where you're, there's no demand for it. So like you had mentioned, they're going to grow this year.

probably see how it is and then see what they do in 2028. But you definitely don't just want to put the pedal to the floor because then in a couple of years, I mean, it could be money poorly spent if demand slows. I just kind of took that from this quarter because TSM said the exact same thing. They could expand as much as they need to right now to satisfy the demand right now, but you don't want all that money spent and they're not being as much demand down the line because it's, it wouldn't be a good spend. So it's pretty good that they're being cautious in that.

regard, but I haven't had a chance to dig. Go ahead. Yeah, and memory producers have historically been very reluctant to increase demand, like increased production too much. So they are probably, they were probably waiting a little bit to see how things were panning out if this increased demand for AI and the ripple effects if it was really sustainable. So I'm assuming now they're just starting to put in some new orders to get the capacity up because they're probably realizing, okay, we have these commitments from, I can't remember what they're called, but they're like essentially, like contracts that they have locked in with some of the hyperscalers or for the buildout of AI data center, so high bandwidth memory. So I think they're like take, can't remember

the exact term, but essentially they're like guaranteed contracts almost where the company's, take or pay, there you go, take or pay contracts. So they're actually starting to do that. Micron was saying that. So now they're starting to see demand. now several years down the line. So it's an added incentive for these memory companies to start putting some orders to ASML and build up more capacity if they can see more into the future that demand is not going away anytime soon. Yeah, the one thing I'll talk about on the capacity situation is you can look to a company we talked about earlier with Eritzia. When they, you know, coming out of the pandemic, they saw a bunch of demand and they ended up ordering all that

inventory at once. Yeah. And then inflation hit, interest rates hit, the demand fell, and then they were left with all that product that they had to mark down and kind of sell off, hit margins, all that type of stuff. It's obviously a much different business. You're talking about clothing versus these machines, but kind of a similar situation as to why spending is being taken pretty cautiously right now.

Yeah, exactly. And I mean, it's understandable, but the companies are getting more capacity, so it's pretty clear now that they are. So, no, really interesting week. I think we, we didn't even talk about SK I Nix and their ADR, but it was definitely pretty packed in terms of news and earnings items. It was definitely a fun episode. Hopefully you enjoyed it. We will be back on Monday with a regular episode. We have a fun episode. So you'll be looking at some of the Canadian inquiries. So for roll-ups, yeah. Roll-ups type of companies. Compounders that have been struggling a little bit. in recent months or years.

And then I'll be looking at different type of, so which kind of account, so TFSA, RSP, taxable account, FHSA, are suitable for different type of investment. But looking really at stocks and stock ETF. So I'll be breaking down in some of, sometimes the tax consequences, which can be a bit complicated that people can face,

especially with ETFs. So I'll be breaking those down, trying to make it as simple as possible for you listening, but something we haven't, we've touched on it a bit now and then, but I figure it would be a good topic to talk about and really useful for people. So make sure you tune in Monday for that. And like I mentioned, Dan Foch and I do our Friday lives. We had some technical difficulties, but we're switching to a new streaming platform. So it shouldn't have any issues this week. We got fed up and just switched over to a new one, which actually works quite better. So make sure

you tune in on Friday if you want the live version. If not, it will be available as a recording, on YouTube and X and a few other platform or you can wait for our Saturday release for the audio podcast version. So thank you for listening and we will be back Monday with a new episode Dan and I. The Canadian Investor

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