Palantir's Premium Valuation, Yum Considers Offloading Pizza Hut, Spotify Rules Audio Streaming

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. Let's get back to some of these tech earnings coming in here. Palantir, Uber. Yes, I arbitrage between Uber and Lyft. And people who don't do that, I don't understand those people because I get huge discounts, 20, 30%. Wait, so you, whenever you need to go somewhere, you're going to check both apps and then figure out which one to take.

1:42It takes an incremental like eight seconds and it saves me real money. And Matt Miller and I had this fight on the air. He doesn't do it. He's brand loyal to you. I'm like, you're leaving money on the table. No, no, there's no loyalty to this. This is all about how much it costs. Yeah, I don't know. It's a commodity. It's all about the money. Exactly right. Mandeep Singh, somehow he's built a career on doing this stuff. Mandeep Singh, he's our senior tech analyst at Bloomberg Intelligence. Mandeep, let's start with Pat Palantir. What's your call on that and what do you make of the stock action today?

2:08I'd love to just get your thought on the company, the stock, and what do you think of the action today, the sell-off? I mean, Palantir still is the most expensive enterprise software business. So at a$500 billion valuation, you have to ask yourself, you know, is this the best software company that I can own? Or is there something else out there in the world of AI, which to my mind, OpenAI and Enthropic are also recurring revenue software businesses. Yes, OpenAI is much bigger in their ambitions with regards to a consumer business and an enterprise API business. But these companies, OpenAI and Enthropic, are growing triple digits.

2:49And OpenAI, for example, is at a 13 billion plus revenue run rate. So when I compare an OpenAI and Tropic to Palantir, Palantir at$4 billion run rate, growing at a very healthy 50%, trading at 100 times EV to sales, that is where I think the valuation is what gives me a stop here. Okay, I was raised by gentlemen where you did PE ratio. And then I got converted to EV to EBITDA. And then you people in technology got me focusing on multiples of revenue. When it comes to software companies, not other businesses. Yes, exactly. And then I said, all right, I can kind of get used to five, six, seven, eight times revenue.

3:30Now you're telling me what? A hundred times. Oh, my goodness. Yeah, it's like peg ratio and eyeballs back in the day. So, Mandeep, when it comes to Palantir and what it does, though, there's no other company like it, right? That's the issue. It counts big governments as its customers and then now increasingly big companies. And as much as you can compare Palantir as a stock to other AI plays, what the actual responsibilities it has, the business that it conducts is irreplaceable. No, irreplicable. They clearly have a very strong mode in terms of, you know, creating an ontology. That's what they call basically making sense of data that an enterprise may have.

4:14And think about, you know, any enterprise, they'll have 10, 20 systems, a lot of data replication. And Palantir can give you like a master data where they can help you get rid of all the redundancies and give you data that really matters for your AI. And so think about an organization that has a billion dollar IT budget, spending billions of dollars on AI. why would you not spend$50 million on Palantir, especially if you are a government or bank or a manufacturing company and not a tech company? That's why Palantir's customer base is not your sophisticated tech companies like Google or Meta or any of the tech players because they do their own thing.

4:58But it's your banks and government, and not that they're not sophisticated, but they need more help with organizing their data. And Palantir gives you an out-of-the-box solution And in this age of AI, when things are really kind of getting bigger and bigger in terms of spend, the last thing you want to save on is, you know, spending on data. Because if your overall project fails, since you didn't have good data, then it's bad ROI. And that's where Palantir is really benefiting and making a case. Guys, you're spending so much on infrastructure. Why are you not spending on data? And I think that's a good pitch.

5:34Don't cheap out on the data. Yeah. Stay with us. More from Bloomberg Intelligence coming up after this. This is Special Agent Regal, Special Agent Bradley Hall. The time is approximately 11.15 a.m. About to start consensual telephone call with Dr. Daiwa Zhang. China's Ministry of State Security is one of the most mysterious and powerful spy agencies in the world. But in 2017, the FBI got inside.

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7:01You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Looking at Yum! Brands today, that's a stock in the news. Stock's up 5.6 % today. It's up about 10 % year to date. Launching a strategic review focusing on their Pizza Hut brand there. Let's break it down a little bit with Michael Halen. He's a senior restaurant analyst for Bloomberg Intelligence. Michael, when I was in college in Richmond, Virginia, Pizza Hut was the bomb.

7:37That's all we had down there for pizza. What's going on with Pizza Hut and what's Yum's thinking about? Yeah, you know, I miss Pizza Hut from back in the day. You know, I feel like the quality has slipped since then. I miss those breadsticks especially. You know, international has been OK, but U.S. has been a big time drag on UFC on on on Yum Brands results. So, yeah. So I think this was kind of a long time coming. It's really been a drag on the top and bottom line growth. you know, Taco Bell is an absolute monster, is putting up strong unit growth as well as same-store sales growth quarter after quarter after quarter.

8:24KFC has had some well-documented same-store sales issues in the U.S., but that seems to be turning. They had a solid little quarter here with flat same-store sales versus six straight quarters of decline. So that business seems to be accelerating a little bit. And KFC unit growth overseas is phenomenal. Absolutely phenomenal. They crush it overseas. Yeah. So Pizza Hut has been this drag on this business for quite some time. I think the street is really excited about a potential divestiture here. Any potential buyers out there that you can identify? No, we don't have, we don't think any of the companies in the public market are going to be an acquirer of Pizza Hut.

9:11Yeah, this thing, like I said, has struggled mightily. I mean, we can see private equity. I think private equity would be a good fit, right? Because it's going to take, management said on the call, it might take some of their markets two, three years to get them back to their rightful position as market leader in those countries, which they see as their rightful. you know, position. I think Domino's would have something to say about that. But, you know, it's going to take a few years to turn around some of these markets and private equity, obviously, looking at a five to seven year time horizon would be a good fit.

9:50All right, Mike, let's step back. The restaurant space in general, getting through, you know, earning season here. What are you learning about kind of the consumer out there from the restaurant perspective? Yeah, today we heard from Wingstop and another fast casual chain that's struggling, also partly been a victim of its own success, right? It's absolutely crushed it over the last six years and is lapping very, very strong results from last year. But they talked some more about low-income consumers and Hispanic consumer weakness and it broadening here in the third quarter. The stock is up pretty significantly, though.

10:30We think there's a couple of things going on. Number one, the stock sold off big time off that Chipotle's poor third quarter print. And secondly, there's some optimism here, I think, around the smart kitchen. So what's a smart kitchen? So they're rolling out some kitchen technology that's boosting operations. It's speeding up service times. They're putting out consistent 10-minute service times, which is 50 % better than they were doing prior. accuracy is better, food's getting to customers hotter and fresher, and people are going to have a better experience. And so stores that have had this technology, right now it's in about two-thirds of the U.S.

11:14stores. It's going to be in all 3 ,000 by the end of the year. But stores that have this equipment and have had it the longest are outperforming on same-store sales by 500 basis points. So we think that's why the stock is up so much. People are now a little bit more confident in a positive 2026, despite the decelerating trends here in the third quarter. Boy, big pop today. Stock's up 13 % today, down 14 % year to date, but a good move today. I don't think there's wing stops in Jersey. Are there, Mike? I haven't seen one. Yeah, there's some, but there's There's not a whole bunch. It's strong in Texas.

11:57They're talking about the Southwest being strong. But no, man, we need some more New Jersey Wingstop franchisees. The product's pretty good. Absolutely. So what's going on on the labor front for restaurants? I'm thinking quick service restaurants with the southern border shut off. That was one of the industries that said we may have some labor problems associated with that. Have you heard from your companies about that? Yeah, you know, our companies just talk about the fact that they use E-Verify and they do everything by the book, which I think is predominantly the case. The impact that you're seeing, A, is with more of the independent restaurants.

12:39But then B, also kind of causes labor costs to go higher here for the public chains, right? They're seeing another 4 % to 5 % wage rate inflation this year. That's been pretty common year in and year out since the pandemic. Stay with us. More from Bloomberg Intelligence coming up after this. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Businessweek Daily Podcast. Now, every day we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies, and trends that are shaping today's complex economy.

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14:09You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Geetha Ranganathan, she covers all the media names, including Spotify. And she explained it to me very clearly early on in the coverage of this company. Think of Spotify as kind of the Netflix for music. And I was like, OK, now I get it. Geetha, thanks so much for joining us here. What did you make of the Spotify numbers? I actually like the Spotify numbers, Paul.

14:44I mean, you know, the big numbers that we always look for are, of course, the user metrics. We want to see them kind of do well on both monthly active users, which are basically the free listeners, as well as the premium subscribers, which is basically, you know, everyone paying about$12 a month for a Spotify subscription. And both those numbers came in well ahead of guidance. The other number that we look for in Spotify results is gross margin. This has been a constant point of debate, but Spotify has done really well in terms of expanding their gross margin. They again delivered numbers ahead of guidance, both for third quarter as well as ahead of forecast for the fourth quarter in terms of guidance.

15:22So fundamentals seem to be really strong. I think the one concern, Paul, that has really kind of emerged with Spotify over the past few months is pricing power. You know, are they going to keep, you know, being able to increase prices? And this is something that has dominated the conversation for not just Spotify, but of course, for any streaming company. We've seen Netflix, as you just pointed out, demonstrate really good pricing power. I think Spotify has very good pricing power as well. But people are really waiting for the next big U.S. price hike to really gain more confidence in the story.

15:55Keith, what's the competitive landscape for Spotify out there? Because as we think about the video business, it's Netflix. and then kind of a big drop down to Disney and then a bigger drop to kind of everybody else fighting it out. What's the landscape for in the audio business? It's actually very similar, Paul. In fact, Spotify just leads by a wide, wide margin. So if you just look at both the global audio streaming market in terms of subscribers, they have about a 33 % share globally. They have close to almost a 40 % share in the US market. So way ahead of their competitors. So obviously gives them a lot of, I think, you know, again, we come back to pricing power, gives them definitely a lot of pricing power in the market.

16:38So what's on the cost structure for them? What are the real levers for them? It seems like, you know, the I know at Netflix and they got to write big, big checks to, you know, either license content or, you know, create their own content. What's it like on the Spotify side? Yeah, you bring up an excellent point, Paul. And this has kind of, again, been one of the pain points for Spotify, because, again, this is a music streaming service. They don't own any of the music itself. That's all kind of controlled by the labels. And as you well know, content is king. So this is really where Spotify has a lot of trouble, because for every dollar that they earn, about 70 cents goes back to the music label.

17:19So they have very little leverage. which they've been trying to kind of change that whole dynamic, that whole equation, come up with more of their content. So a big investment area for them has been, you know, podcasts, has been audiobooks where they kind of get better, you know, profit dynamics. It has worked well. But actually, one of the things that we're kind of looking for next year is we're going to see a step up in all of the royalty costs. And that's, again, something that the street and investors are a little bit nervous about because we need to see how Spotify kind of manages their whole margin expansion story as those royalty costs go up.

17:57So the amount that they're paying all of the music labels, the Warners and the Universals of the world is going to go up slightly. But we still think that they're in good shape. They've been adding a ton of new features to all of their tiers. They're probably going to debut some new tiers. Again, all of that builds to that whole pricing power and monetization story. And how is Apple as a competitor here? Because anytime I see a company that's even remotely in competition to Apple, I get nervous. So Apple, you know, if you're just kind of looking at it in terms of share, they are way below Spotify, both globally as well as in the U.S.

18:31market. So not much of a competitor from a share standpoint. In fact, they've even priced their product slightly lower. Some of the noise around Spotify and Apple has been in terms of the iOS and whether Spotify can kind of get better terms. And they've managed to do that as well. So some of the changes on the iOS system have actually helped Spotify in terms of getting a better market share and getting better economics, actually. So Apple Music, not too much of a worry for Spotify. All right, let's switch gears to some of the big cap media names you cover. I need to get an update, Geetha, on Paramount, Warner Brothers Discovery, Comcast, any movement for there?

19:16Or I have to wait to the Allen & Company conference next summer to get something done. Yeah, we really don't know. We haven't heard anything. So just a few days back, Paul, I think it was just before last week, and we heard that Netflix was kind of poking around. So Warner Brothers Discovery at this point has opened up their books to any of the interested parties. There were news reports that Netflix is looking at some of the financials of Warner Brothers Discovery. Again, this doesn't necessarily mean that a bid is coming, but of course, anybody who has a chance, I'm sure, wants to take a look at the Warner Brothers Discovery, especially the studio and the streaming assets.

19:50So right now we know Comcast is interested. We know Netflix is definitely interested. And of course, Paramount Skydance is interested, but again, Paramount Skydance is interested for the whole company. So streaming studio plus the TV networks. So this is, again, I don't know how it's going to play out, but hopefully we should get to hear from somebody pretty soon. Warner Brothers Discovery is reporting a little later this week. Boy, you think about it, Gita, I mean, you've got a company whose board and whose CEO seems to be open to a deal. You would think that something could happen quickly, but it's not happening, is it?

20:26price has been a sticking point paul so we know that yeah so we know that um you know a paramount has come in with about 24 a share um it looks like david's also i was looking for something north of 30 so again it's you know it's it's all going to come down to those negotiations this is the bloomberg intelligence podcast available on apple spotify and anywhere else you get your podcasts listen live each weekday 10 a.m to noon eastern on bloomberg.com the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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