Coffee, Chips, and Credit Cards

0:05Travis Hoium:Is earnings season selling us a bill of goods? Motley Fool Money starts now.

0:20Travis Hoium:I'm Travis Hoium joined by longtime fools, Lou the legend Whiteman and from a vacation that never ends, Rachel Warren. Today we're going to get to earnings from Spotify and get a pulse on the consumer. Let's start with Tesla. We learned this week that Samsung's new fab in Texas is going to be making Tesla's AI6 chip. This follows AI5, which is being fabbed by TSMC. AI6 is going to be used for humanoid robots, cars, and even AI data centers. Tesla could spend over$16.5 billion on these chips. And Elon Musk is going to get to, quote, walk the line, making sure it's efficient, something Samsung apparently can't do itself.

1:00Travis Hoium:Rachel, what does this say about Tesla and Samsung's chip ambitions? Well, what's interesting about this is that Samsung didn't name the counterparty in its filing. They cited a request from that second party to, quote, protect trade secrets. But they said the effective start date of the contract was July of this year. Its end date is in 2033. And then Elon Musk later confirmed in a reply to a post on X that Tesla was, in fact, the counterparty. But I think this deal is great news for both companies for different reasons. So Samsung definitely needs this deal, in my view. The partnership provides a much-needed anchor client for Samsung's new semiconductor fabrication facility in Taylor, Texas.

1:41And that could also validate their investment in U.S.-based chip manufacturing and potentially attract other clients. You know, Samsung has been facing serious challenges due to increased competition, particularly in the memory chip market. And they've really been struggling to keep up with the demand for advanced AI chips. Their logic chip business has also faced challenges. And in foundry services, which is manufacturing chips for other companies, they are behind TSMC. Now, for Tesla's part, it's gaining greater control over a crucial element of its AI infrastructure, its diversifying its supply chain, and its reducing reliance on a single manufacturer.

2:19That could mitigate a range of potential future risks and ensure a more stable supply of critical components. And finally, it positions Tesla to maintain a competitive advantage in a rapidly evolving AI and automotive landscape. It suggests that they're planning for future generations of AI chips that could ensure a pipeline of advanced technology for years to come.

2:37Travis Hoium:Lou, I have lots of questions about how many chips Tesla is going to need going forward for vehicles, robots, and those AI data centers, because a lot of those products just frankly don't exist yet. But U.S. chip manufacturing does seem to be booming. The TSMC plant in Arizona, going through another edition, their costs actually seem to be sort of under control there. It's not as expensive as they feared. Has the U.S. chip tide shifted over the past couple of years?

3:03Lou Whiteman:So, you know, fun fact, kind of lost in a narrative, but the U.S. has more semiconductor plants than Taiwan. The U.S. is second only to China. I mean, I'm sorry, Japan in terms of semi-production. And that's been true for a while. So, you know, context matters though, right? And Taiwan, thanks to its national champion, Taiwan Semi, and all their deals with NVIDIA, all of these AI players, they have a strong share of the cutting edge chips used in AI. Obviously, that's the focus. So, that's what we're looking at. I don't think we can say the tide has shifted. It's way too early to raise the mission accomplished banner.

3:35Lou Whiteman:The US is making steady progress, and this deal is definitely part of that progress. But look, we are still very reliant on Taiwan for those high-powered AI chips, and that hasn't shifted. That's still true.

3:47Travis Hoium:Well, if these chips do their job, hopefully one of these humanoid robots can do my laundry or mow the lawn for me sometime in the near future. Let's move on to earnings. You may be listening to this podcast on Spotify, so we should probably check in on their earnings. Revenue for the second quarter of 2025 was up 10 % to 4.2 billion euros. Free cash flow was 700 million euros. That's a huge improvement from a few years ago, but the stock was down as much as 12 % on Tuesday. Lou, was this really a disappointing quarter?

4:19Lou Whiteman:Relative to expectations, yes, but I think it is important to look at the big picture here. So, yes, revenue missed estimates, and yes, the company posted an unexpected loss. But if you look at it, the revenue miss was mostly due to about 100 million euros worth of currency fluctuation losses. Back that out, back out just the currency conversion kind of noise, and revenue was basically in line, which is much better. On the earnings side, there were some higher personnel costs. There is some cost creep, but much of the loss was tied to what they call social charges, which is basically stock-based compensation.

4:53Lou Whiteman:Back all this out, it's worth noting that the underlying numbers, how the business is doing, looked a lot better. Free cash flow was up 43 % to 700 million euros. The all-important number of premium subscribers continues to grow up 12 % to 276 million. There are no signs of distress here. There are no signs of worry. This is still a very, very good operating business. They just got caught up in some accounting things. Yeah. Did these results warrant the stock dropping and having its worst trading day in two years? I think that might be a bit of a market overreaction, but it does also fit in with the types of market movements we've seen in recent earning seasons when a company misses on maybe a couple of key metrics, even if the overall picture remains positive as it does in my view for Spotify.

5:40CEO Daniel Ecke acknowledged that the company's ad supported revenue growth. It's been slower than anticipated. And he attributed that to execution challenges rather than actual strategic issues. It's worth noting that their ad-supported revenue declined by about 1 % year-over-year in the quarter, but revenue from premium subscribers actually rose 12 % from one year ago. It's also worth noting monthly active users grew 11 % year-over-year to 696 million. That means that Spotify added 18 million monthly active users in Q2 versus the guidance they had previously given for 11 million. And they also achieved premium subscriber net additions of$8 million, which far exceeded their guidance of$3 million.

6:20You also saw gross margin rise to 31.5%. And a lot of that was attributable to premium revenue growth, outpacing music costs, as well as improved contributions from areas like podcasts and music. And Spotify is expecting continued strong user and subscriber growth going into Q3. They're looking to achieve as many as 710 million monthly active users and 281 million premium subscribers. They had about 8.4 billion euros of liquidity on hand as well at the end of the quarter. I still think this is a solid business.

6:50Travis Hoium:Yeah, they talked a lot about improving that ad business on the conference call. So we'll see if they can do that in the future. For some context, Spotify stock is up 385 % in the past three years, even after yesterday's drop. But the price to sales multiple is up 240%. So a lot of multiple expansion there. When stocks go up, expectations rise. And sometimes even a good report isn't enough to impress investors. I think that's kind of the big story. Next up, we're going to talk coffee and credit cards, get a glimpse of how the consumer is doing. You're listening to Motley Fool Money.

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8:13Travis Hoium:The biggest question this time of year is, what is the consumer feeling? How healthy are they? Last week, banks said that consumers were doing fine. And late on Tuesday, we heard from Visa, Starbucks, and Booking.com. Lou, let's start with Visa because they have kind of the widest view of the economy overall. What did we learn?

8:32Lou Whiteman:So Visa topped expectations, grew adjusted earnings by 23%. But as you say, the big news, CEO Ryan McNerney's comments about the consumer, that's what really stood out. He called the consumer spending resilient, even non-discretionary, which I found interesting. He also said it has remained so past the end of the quarter into July. So, kind of all is well. Great news. But it is worth noting, Travis, that even with this perceived strength, Visa held guidance steady for the rest of the year. No beat and raise here. And so it appears they're at least hedging their bets a bit or at least a little worried.

9:07Lou Whiteman:Definitely not sounding the alarm, but I'm still curious about what's going on and what will go on in the months to come.

9:13Travis Hoium:Rachel, this one shocked me. Starbucks stock is down over the past six years. This is really a turnaround story right now. Brian Nickel has been brought in to change the direction of the business. So are we seeing progress from their recent results? So this is definitely a period of transition for the business for Starbucks. And the turnaround is taking time. And this is really evidenced by the fact that Starbucks reported that same store sales fell for a sixth straight quarter in their recent report. Gap earnings per share of 49 cents actually declined 47 % year over year. So that's a couple of those facts.

9:49But we are seeing progress. For example, their net revenue of$9.5 billion in their fiscal third quarter, that exceeded analyst expectations of$9.3 billion in the recent quarter. It was also up 4 % year over year. Notably, Starbucks saw its first sales gain in China since 2023 with a 2 % increase in comparable store sales, and that was driven by a 6 % increase in transactions. Now, we've heard reports that Starbucks is weighing a sale of its China business. That remains to be seen. But this was also the third consecutive quarter of improvements in U.S. transaction comp, although we're still seeing negative growth there.

10:26Now, barista turnover is at its lowest since the pandemic. Starbucks is investing an additional$500 million in labor hours for U.S. stores over the next year as it's looking to really improve its customer service and store operations. And finally, Starbucks just announced that they're going to be introducing a new standalone store prototype in 2026 with a drive-through and more seeding. So that could be interesting to watch as well.

10:49Travis Hoium:Yeah, these numbers coming out from restaurants and fast food chains or coffee chains are kind of all over the place. I'm really having a hard time. Chipotle's quarter was a little bit weak. Their same store sales comps were down. So it just kind of seems very company specific right now. Let's go to our final one of the day. That's Booking.com. Fun fact, over the last 20 years, Booking stock is up 22 ,407%. Just a phenomenal run. They reported last night after the market closed, results were solid, but outlook was weak. What's going on, Lou?

11:24Lou Whiteman:Yeah, just an amazing company and a big winner over the years for Motley Fool members. So, really, really fun to watch. As you say, a really solid quarter came in ahead of estimates, but they did set profit guidance slightly below expectations. And I'm going to emphasize slightly here, because at the midpoint, they see revenue of$8.63 billion in the current quarter, which is maybe$60 million short of consensus, which is kind of funny that that could cause a sell-off. But Travis, you mentioned it before with Spotify, I think the same is true of Booking. Great company, great quarter, holding up very well in what we thought maybe could be a tricky environment, but there were so much expectations baked into the stock.

12:06Lou Whiteman:And it just had to let off a little steam post-earnings. As a long-term holder, I don't see much reason to worry about this quarter, even if the stock did sell off. Yeah. The company exceeded analyst estimates for Q2 revenue and earnings per share, but its Q3 guidance for revenue as well as room night growth was lower than anticipated. The market probably also didn't love that double-digit decline in earnings, but a lot of this goes back to near-term investments the company is making in its platform that are putting pressure on the bottom line. This deceleration of growth, even from strong absolute levels, seems to be scaring some investors.

12:40Some might believe the travel boom following the pandemic could be reaching a plateau or perhaps are concerned about a weakening macro environment. This is still a fundamentally well-financially bolstered business. Room nights in this recent quarter grew 8 % compared to one year ago. Gross bookings were up 13 % year-over-year. Revenue rose 16%. They also reached a major milestone with their connected trip transactions on the flagship booking.com platform. This is where customers choose to book more than one travel vertical. And that represented that connected trip transactions cohort represented a low double digit share of booking.com's total transactions.

13:17That was up 30 % year over year. And they also saw growth across other verticals, including flight tickets up 44%. So, you know, travel is a cyclical space, but booking does have a very solid and well-run business. And I think they have the financial fortitude to withstand any near-term shakiness in the overall sector.

13:34Travis Hoium:Yeah, it doesn't seem like any of these companies are reporting bad results. It's just a matter of what those expectations are. So now that we're far enough into earnings seasons to get a feel for what the economy looks like, or at least what we think it's going to look like over the next three months or so, and what the market is looking for, that's maybe even more important.

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14:50Travis Hoium:I want to give you both a chance to put yourselves on a scale, 100 % bull, 100 % bear. Where are you on the economy and the market? I'd say I probably fall somewhere in the middle. I mean, I want to say that roughly 80 % of S &P 500 companies that have reported Q2 earnings so far have exceeded earnings per share estimates. That's outperforming both the five-year and the 10-year averages of about 78 % and 75 % respectively. In the near term, you've got the impact of policy shifts like tariffs. You've got macro pressures that could stem from them that could pose realistic challenges, both for the economy and the market.

15:25And I think it's important to recognize that. Could we see another bear market? Absolutely. As a long-term investor, though, I do remain incredibly bullish about prospects for great businesses to generate excellent returns for faithful shareholders and for the market's ability to rise with the passage of time. That's what I'm focusing on.

15:42Lou Whiteman:So for the market, I'm probably 55-45 in favor of bullishness. stocks, generally speaking, yeah, they're on the pricey side if you look at the indexes. And I think that might limit upside for the second half of the year. But I don't see the elements of a crash building. So, I think the market can grind at these levels, maybe slowly raise. I just don't think it's going to be a dramatic up or a dramatic down. The economy, Travis, that side worries me a bit more. I still think that the tariffs are just beginning to hit Main Street, and they're going to hit it a lot worse in the months to come. I don't think that deflights the markets, though, because I think, A, investors are aware of it, and B, if you look back to Sam Adams last week, I think in some cases, we have now estimated such an effect that the tariffs, if they net out at 15 % or whatever, I think we might have actually overstated some of the impact in the quarters to come in our estimates.

16:38Lou Whiteman:So, I do think the market can grind higher from here, even if it gets worse on Main Street. But it does feel like it's just going to be a bit of a trudge from here. It's not going to be a rocket ship market or a crisis on the street market. It's just going to be onward.

16:58Travis Hoium:Lou, you brought up tariffs. And I want to get an idea for, as we're ending the Q2 earnings season and going into Q3, are you expecting more impact from tariffs, whether that's costs that impact companies' margins or consumers just behaving differently? If something is more expensive, maybe you don't reduce the amount of money that you're spending overall, but the volume goes down because that average sale price is going up for the items that you're buying. So what sort of trends are you looking for there as we go to the second half of the year?

17:30Lou Whiteman:Here's my best guess. I do think that on both of those, it's a headwind, both for the companies and just the consumer habits. I think it might be manageable enough that we're talking about maybe estimates are in trouble or estimates have to come down a bit, but it's not going to derail a growth story. So I think it's going to just be more than noise. It's going to be a headache, but it's not going to be to the extent that it really drives down the economy or drives down the market.

18:00Travis Hoium:A lot to watch in the second half of the year, and we'll be covering it all on Motley Fool Money. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check our show notes. For Lou Whiteman, Rachel Warren, and our production magician, Bart Shannon, and the entire Motley team.

18:33Travis Hoium:I'm Travis Hoyam. We'll see you tomorrow.