Snap Breaks Earnings Curse & US Soft Landing in Trouble?

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0:27Good Morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, big tech companies have gone all in on AI, but are they seeing any benefits to their actual business? Then we found the one item where customers seem immune to price hikes, Chipotle burritos. It's Friday, April 26th. Let's ride.

0:51So based on the pictures you guys tag us in on social media or send our way in our inbox, a lot of you listen to this show while sipping on your morning brew. Maybe you're a tea person. Maybe coffee is your thing. But one thing is for certain, you're probably drinking it out of a mug. And we fully encourage pairing Morning Brew Daily with your daily morning brew. But there is a way to make the experience 10 times better. What if you could also drink out of a Morning Brew Daily mug? That's right. Next week, we are releasing an MBD branded mug. Neil and I got to work with our design team to bring this your way.

1:25How would you describe the final product, Neil? I'm no art critic, but it's maybe minimalist with a pop of color. It really captures the essence of this show. I love it. It's got one of my favorite phrases on it as well. We're pumped to get this mug in your guys' hands. Hit them with the details, Neil. Well, the mug drops in the Morning Brew shop this upcoming Wednesday, and you can find it at shop.morningbrew.com. We'll remind you again next week, but get excited, people, because I'm excited. Now let's hear a word from our friends over at Robin Hood. We've talked so much about tools and strategies when it comes to Robinhood, but let's get back to why you invest in the first place.

2:02You might invest because you want your money to do some of the work for you. How do you get there? That's up to you. Maybe you like picking individual companies you believe in or brands you like. Or maybe you're an ETF person who likes a broader investment in a certain sector. Or maybe you've just got retirement on the mind and you want to try to optimize your tax benefits with accounts like IRAs. Whatever your strategy is, letting your cash do the work for you should always be the goal. Even uninvested cash just sitting around in your brokerage account, Robinhood Gold offers 5 % APY on that. Just make sure you come in with an attitude of patience because even though cash is king, patience is a virtue.

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3:25dot com slash campaign. Terms and conditions apply. Tech companies have talked a big game about infusing their products with AI, but have the most famous two letters in the world had a tangible impact on their business? Have any of those little AI seedlings actually borne fruit? We found out this week when Meta, Alphabet, and Microsoft reported their earnings, and it was a mixed bag of apples. For Meta, at least, any significant benefits from AI seemed to be years out. Zuck asked for patience on his earnings call, telling investors that while AI is the future, he's got to spend money to make money.

4:00And they did not appreciate when Meta said it would need to spend an additional$5 billion on capital expenditures more than predicted. So they sent the stock down 11 % yesterday in a major wipeout. Other than that, though, Meta's business seems to be on solid footing, posting its highest first quarter revenue ever. Yeah, this was all the stock drop was all about the future because you're right. Their actual quarterly performance, they crushed it. They had one of their best quarters ever. But looking ahead, people are just a little beaten down from Zuck's head on plunge into the metaverse. And now here they are saying that they're going to plunge even more money into developing AI.

4:38So it was a little confusing to me to see this much of a reaction because we knew this was coming. We know Meta is investing heavily in these future technologies. I think the timeline and the sheer amount just got people a little nervy. Right. And if AI is anything like the metaverse, then meta is going to lose a lot of money on it now while there aren't any tangible benefits because the metaverse unit, the Reality Labs, which houses its headsets and all of its AR and VR stuff, I mean, it lost$16 billion last year, and there's really no road to major revenue growth there or any tangible significant revenue impacts for the business.

5:17So if AI is anything like the metaverse, then the investors are not going to see Meta make actual money from this until years out, if any time. Some analysts covering the stock boiled it down to this. They said, without sounding overly religious, you either believe in Zuck or you don't. And we do. So that is really what it comes down to. Do you think that Zuck can pull off and orchestrate yet another big platform ship when it comes to tech, which is what he's been doing for the last however many years he's been at the helm? So without sounding overly religious, it's either Zuck or not. That's their perspective on Meta.

5:51Let's move on to Google's parent company, Alphabet, which reported yesterday, a day after Meta's Whopper, and really changed the vibes in a positive direction. Shares soared after the company posted strong growth and announced its first ever dividend to butter up investors. Google seems to be chugging along as it always has, even as AI threatens its dominant search engine. Overall, revenue was up 15%, its fastest rate of growth in two years. and YouTube sales growth, top 20 % for the first time since 2021, a sight for sore eyes. Like Meta, Alphabet is also spending gobs of money on building data centers to power AI.

6:27It recorded$12 billion in capital expenditures in Q1, a 91 % increase from the same period last year. Yeah, it almost had a mirrored quarter from Meta because it was more about the immediate future, like issuing a dividend for the first time. That is something that returns money to shareholders in the immediate future. That$70 billion share buyback plan is also something that hopefully increases the value of the shares that current shareholders are holding. But it is ironic, too, because the narrative just a few months ago and even today was that Google was kind of boofing it when it comes to AI.

7:01Remember the Gemini mess up when it was generating those historically inaccurate images, then even stuff leaking about its Mountain View campus having poor Wi-Fi. It did look like Google was dropping the ball here, but clearly they've got their act together. And there's just a very clear path towards monetizing AI in a way that Meta does not have. Right. But right now, I mean, Google did say that there's no real impact of AI on its business, but it does have this cash cow with YouTube and search that it can always fall back on. That also Meta can as well with all of its social media platforms.

7:36Microsoft is the one company whose AI seeds have actually yielded a bounty. Sales from its huge cloud computing unit, Azure, grew 31%, with a fifth of that coming from generative AI services. Remember, Microsoft has a tight relationship with OpenAI and has begun selling its productivity suite with AI tools. So for$30 a month, you can do things like transcribe virtual meetings in Teams or summarize documents in Word or create emails by snapping your fingers in Outlook. Companies seem to be scooping that up for their employees with AI subscriptions growing 15%. Microsoft, maybe the only big tech firm that can actually look investors in the eye and say, yes, our AI investments are boosting our business right here, right now.

8:19They've invested extremely heavily. They obviously shelled out a big chunk of change to get that stake in OpenAI. So it does make sense that they're further along in this evolution. I'm also pumped for their launch of what they're calling AI PCs, which are powered by these latest Qualcomm chips. They think that this could be the biggest CPU shakeup since Apple released its own chip. So there are things that they are doing right now, but also in the near future that makes investors think that. Microsoft's the most mature AI company at this point, and nothing in this quarter did anything to dissuade that opinion.

8:52If we have to sum up Meta, Alphabet, and Microsoft in two words, it wouldn't be AI. to me, it would be capital expenditures. These companies are spending tens of billions of dollars a single quarter to invest in the infrastructure that is needed for AI. So that is where all this money is going. They're spending so much more money. Alphabet, CapEx up 91%. Microsoft, CapEx will increase materially. Meta is spending$5 billion more than expected. So these companies are writing huge checks to build AI infrastructure. Finally, while we're on the topic of tech, Let's give a round of applause to Snapchat, which posted awesome results last quarter.

9:31Sales jumped 21%, and crucially, its TikTok competitor Spotlight grew 125 % year over year. And that'll be the focus now that the U.S. is trying to boot TikTok if it isn't sold. Snap could be a main beneficiary if TikTok users are looking for somewhere else to spend some time. Yeah, Snap is in its own little world. But listen, you do have to give it a round of applause because it's coming off six straight previous quarters where it had single digit growth or sales declines. So whenever you post a surprising sales increase or something, the market does go nuts for you. And you're right. Snap is playing at just a much smaller level than everything that we mentioned in the big tech world.

10:14But these little inklings of potentially it could benefit from that TikTok ban. It's got this nice subscription business that grew 194 % Snapchat Plus year over year. So there are signs. It's just kind of turning the ship around at a much smaller scale. Yes. I mean, Snap never really had an issue with having a lot of users. It has 422 million daily active users in Q1, and that is a huge social media platform. The problem for Snap has always been making money and monetizing its users, getting that ad platform to really sing and work well. If it can do that, it could make itself into a nice little social media business.

10:50Let's zoom out to the macro picture now. The soft landing that Jerome Powell and the Fed have been trying to orchestrate for the economy just hit some unexpected turbulence. Here's why the captain might be recommending we put on our seatbelts shortly. Remember, a soft landing is a term for when you reduce inflation without causing a recession. It's a tightrope walk with not a lot of margin for error, and recent economic data has shown some cause for concern. The headline number that has everyone a little nervous is that the U.S. economy grew at just a 1.6 % annual rate in the first quarter of the year, a sharp slowdown compared to last quarter's growth rate of 3.4%.

11:26But wait, Toby, don't we want the economy to cool a little bit? Yeah, but not quite that much. Projections were hoping for 2.4 % growth. And when you combine slower GDP growth with multiple hotter-than-expected inflation readings in a row, capped off by another higher-than-expected 3.7 % rise in consumer prices this past quarter, you start to see why Federal Reserve policymakers are getting nervy. So what does this mean for you? Well, it might mean higher interest rates for longer because inflation is that stubborn back pimple on the economy that won't get any smaller, which is exactly what we needed to do in order for the Fed to cut rates.

12:03Yeah, I mean, slower growth by itself is not bad. We want to see moderating growth. So prices come down. The problem is prices aren't coming down. That is it was the worst of both worlds because you have slower growth, a GDP coming in a little lower than expected, while not alarming in and of itself. That's fine. We're still chugging along. The economy is doing fine. But the problem is that consumer prices rose 3.4 percent annually in the first quarter. So combined with higher inflation and slower growth, it's kind of the opposite of what the Fed wants to see. So what did everyone do yesterday?

12:36They dialed back their interest rate cut expectations yet again. We were going into this year expecting six or seven interest rate cuts. Now the smart money is that there won't be an interest rate cut at all until at least the fall, November. And maybe we won't even see one for the entire year. So there's been a huge sea change that's going to affect everything. 10-year yields, which track interest rates, jumped. That means borrowing costs for everything from credit card loans to buying a house to just everything that you need to borrow money for is going to remain super high for the remainder of this year.

13:10Right. And Jerome Powell has said previously that he does think that growth can run at a faster rate. It's all right if the economy is running a little hot. Thanks actually to we've had a very strong labor market. We've had a very strong labor supply. These have been things that Jerome Powell has been beating this drum of like, yes, it's okay if we're running a little hot as long as those prices come down, but you cannot have both happening at the same time. You do not want to slow down in the economy and still high inflation. Jamie Dimon, JP Morgan CEO, has been beating kind of this warning drum for really the past month.

13:42In his letter to shareholders, he cautioned against too much optimism. And then in a recent video, he said, the market is pricing the odds of soft landing at around 70 % right now, but he thinks it's closer to half of that. And his reasons are he doesn't like staring down this massive fiscal deficit that we've had. He also just looks at the geopolitical scene and says this is more cause for concern than the market is pricing in. So he basically just said, don't get lulled into a false sense of security here. We're not through that final mile of getting inflation down. I'll end on a positive note, because why not?

14:11But the U.S. economy has now grown after this past quarter. It's grown for 48 straight months, which is divide by 12. That's four years. So the U.S. economy is still doing really well, and now it accounts for 26.3 % of all global gross domestic product, which is the highest in almost two decades. So the U.S. economy is still growing at a much faster clip than its peers, which you could say is maybe not a good thing because our allies and our peers around the world buy stuff from us. And, you know, one plus one equals three in the entire global economy. But the U.S. economy is growing at a much faster rate than anywhere else in the world, and it has been growing for four years now.

14:50Up next, we turn our attention towards the markets for your weekly dose of Stock of the Week, Dog of the Week. Eczema isn't always obvious, but it's real. And so is the relief from EBCLIS. After an initial dosing phase, about 4 in 10 people taking EBCLIS achieved its relief and clear or almost clear skin at 16 weeks. And most of those people maintain skin that's still more clear at one year with monthly dosing.

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16:27It's Stock of the Week, Dog of the Week time where Neil and I comb through the stock market and pluck out one stock that has a nice aura to it and one stock where the vibes are just way, way off. Neil, brutal loss for you today in the pre-show slam poetry contest. So I'm up first, and my stock of the week is Chipotle. I may not be able to pronounce it very well, but it's doing just fine without me. Chipotle keeps raising prices, and you all keep buying. It's increased prices six times since 2021, but it hasn't hurt sales. Store traffic increased 5.4 % from a year ago, which combined with an average check size that was up 1.6%, means same-store sales rose a healthy 7%.

17:08It's currently on a Scotty Scheffler, Nelly Korda-esque hot streak, reporting better-than-expected earnings for four straight quarters now. Neil, the stock is up 6 % in the last week and 59 % in the last 12 months compared to an S &P 500 index of U.S. restaurants that has been flat over the same time. What's behind this inexorable March hire? Call me crazy, but it might be time to start talking about Chipotle in the same breath as McDonald's and Starbucks. I mean, what do you think? It's really, it's one of the fastest growing restaurant chains now. It's opening up 300 new locations this year.

17:43It has 3 ,500 locations currently in North America, and it's planning to double that to 7 ,000. So it's on an absolute heater. Yes, very Nelly Korda, Scotty Scheffler-like. And it's just people, it has this brand loyalty that keeps people coming back. It has high income consumers. It can appeal to a wide variety of customers, whether you're trying to go on a particular diet that's very customizable so you can go in and get exactly what you want to eat. It is just an amazing growth story. Right. And we've been seeing these headlines that it's millennials and gym bros kind of pushing this stock ever higher because Chipotle's customers are this very unique blend.

18:22They're usually affluent. They're usually health conscious. Their customers are 20 % more likely than the average U.S. consumer to earn more than$125 ,000 a year. So they are less affected by these price hikes that we've seen eat into the profits of every other restaurant like the McDonald's of the world. So it is just kind of occupies this very interesting niche within the restaurant industry that makes it weather these price hikes better than other companies. Yeah, and it had some marketing tactics that also helped it the previous quarter. It introduced this limited edition chicken al pastor, which was selling so well that the company instructed its employees to not use chicken in their meals that they make for themselves because they had to save it for the customers.

19:05And there wasn't enough chicken al pastor to go around. That actually drew a huge outcry over the past week. So after that, Chipotle came and said, OK, OK, you can have chicken because we don't really want this controversy. But that just speaks to the high demand for these particular menu items that they're rolling out and are hugely popular. And their other kind of marketing hack that they figured out is that they added barbacoa to their menu. And a lot of people didn't know what barbacoa was. So they added the words braised beef in front of it. So now it's braised beef barbacoa. And now it's one of its best selling meat.

19:34So it is interesting the leverage that you can pull to really increase sales. My dog of the week is Southwest because it's really not a great time to be an airline that exclusively flies Boeing 737 planes. The company's stock fell 7 % yesterday after announcing it was cutting costs and pulling out of some airports as it grapples with higher expenses and delayed deliveries from a struggling Boeing. Southwest expected to get 79 new planes from Boeing this year. But now, after Boeing's Alaska Airlines door panel fiasco and the ensuing fallout, it's expected to receive just 20. That and other headwinds are sending its growth plans into reverse.

20:11Southwest rarely pulls out of markets. Hasn't done that since 2019. but it's getting out of four cities, including Syracuse and Cozumel, Mexico, to adjust to its new reality. And finally, Southwest teased what would be its biggest change in years, scrapping its single-class open seating cabins to drive more revenue. First class on Southwest, it just doesn't sound right. Doesn't sound right. If the toxic relationship between Boeing and Southwest makes me lose the amazing Southwest seating arrangement, I am going to be very, very mad. But you're right. This relationship with Boeing has a lot of second order effects.

20:46Less planes means less fights, less revenue. But it's also left Southwest very overstaffed on the hook for a higher cost. So even though these Boeing delivery setbacks, they're trying to paint the picture that like, no, we're not at the mercy of Boeing. We still control our own fate. They kind of are at the mercy of Boeing to a certain extent. And it's a little crazy that Southwest has maintained that particular single class seating arrangement for this time because all you have to do is flick a switch and you make a lot more money. I mean, it's pretty clear you can upsell people. Every single other airline does it.

21:17When you book a flight, you get hit with the screen that says, do you want to upgrade your flight to$20? Do you want various seating classes? And, you know, eight airlines made$4.2 billion on seating fees in 2022. So it seems to me like it's just a matter of time before Southwest looks at its balance sheet and says, OK, where can we move things around to make this look a little bit better? Well, we can start charging for seats. The one thing that they said is off the table is charging for bags. Bags will still fly free at Southwest. Like a Bachelorette group chat, Oracle is planning a trip to Nashville.

21:50It's currently headquartered in Austin, Texas, which is in line with what a lot of trendy tech companies who absconded for their Silicon Valley roots decided to do. But now it's heading even further east towards better country music and better vibes and a move that has shocked many. Oracle is making the leap to get closer to the healthcare industry, but also to offer its employees a better lifestyle, according to its founder, Larry Ellison. Ellison said Oracle surveyed employees and they said they wanted to live in places that were good for raising a family and had a vibrant culture. Nashville checks those boxes.

22:22But let's not get it twisted. There's a significant business reason as well. Healthcare is a big deal in Nashville. The industry employs more than 300 ,000 people and adds$68 billion to the region's economy. And given Oracle's$30 billion deal to buy the electronic medical records company Cerner back in 2021, It clearly sees healthcare as a driver for cloud computing growth in the future. So much so, it's willing to shift its HQ to a healthcare hotbed. What's Austin's loss is Nashville's gain. Big loss for Austin, big gain for Nashville. Oracle is a huge company, but you said it. I mean, if you wanna be in the healthcare industry, wanna be a leader in the healthcare industry, you have to have a presence in Nashville.

23:04It has HCA Healthcare, which was one of the first for-profit hospital companies in the US. It's one of the largest owners of hospitals. It has created this ecosystem that is absolutely booming. When you think of Nashville, maybe you think of country music, maybe you think of Vanderbilt. But if you actually go and look at the logos on all the office buildings and talk to the people and say, hey, what industry are you working in? I mean, health care is huge, but it is a big loss for Austin. And they were blindsided from this. They said, hey, City Hall wasn't aware of this. And for a city that had seen so much growth and so much corporate relocations since COVID over the past few years, it's come to a shock that their, you know, their glow has maybe worn off a little bit.