Starbucks' China Challenge and Decoding Meta's AI Push

0:05Jason Moser, Starbucks pivots in China and Meta make some big investments. You're listening to Motley Fool Money.

0:20Welcome to Motley Fool Money. I'm Jason Moser. Joining me today, it's Motley Fool analyst Lou Whiteman. Lou, thanks for being here. Great to be seen. On today's show, Hershey has a new CEO. Meta's making some big investments in AI. And earnings season is, believe it or not, right around the corner. But today, we begin with the king of coffee. Reports are that Starbucks has garnered quite a bit of interest in its China business, as it looks at possibly selling a majority stake in that business. And the company said, I quote, we remain committed to China and want to retain a meaningful stake in the business.

0:53Any deal must make sense for Starbucks business and partners." Lou, China has been a bit of a challenge for Starbucks as of late. Do you think this is the right move to try to sell the majority stake in this business?

1:09Lou Whiteman:I do. I like this a lot. New CEO, Brian Nickel, he's got a lot on his plate, right? He's articulated a plan, the back to Starbucks. He's going to revitalize the domestic business. But look, it's going to take time. It's going to take resources. finding a partner to work with China, it would allow Starbucks to retain some of the upside. But yeah, it is a massive market. I get it. But it would provide a cash infusion and take one thing off of that plate, off of that daily agenda. It feels like a win-win. Yeah. And it seems like there was a lot of interest. I mean, something close to 30 equity firms and whatnot actually submitted.

1:46Big money. Yeah. Big money, valuing it anywhere from like$5 to$10 million I saw. You talk about the growth opportunity in China. And that's been part of the story, I think, with Starbucks for many of us for many years. It's not to say they haven't grown there. They have almost 8 ,000 stores in China to date. But I mean, they're talking about really going so far beyond that. I mean, it's 10 % of overall revenue right now. So, I mean, it's meaningful, but it seems like it could be more meaningful. How big do you think they can grow this part of the business?

2:16Lou Whiteman:So, they talk about 20 ,000 locations, right? Yeah. which is more than double. Honestly, I don't know about that. That's part of why I think I'm okay with them at least finding a partner or keeping some upside, but not all of it. I think the Chinese consumer, like the American consumer and most other consumers, I think they're going to lean into domestic brands over international ones as that market matures. I think, to some extent, it's happening. Maybe refocusing the operations, finding a partner, growing that way, and doing it, not just rubber stamping what Starbucks is here. I think there's probably room for growth, but I don't think maybe it's what we were talking about a few years ago, and I don't think it's priority one right now for them either.

3:04Yeah. This seems a little bit like history repeating itself. You remember in the early days when they were growing internationally, and in most places, they were taking that company-owned approach to the stores. And then, you know, it turns out not every country is the same. The cultural clashes, the differences, I mean, it was all very different in so many different ways in so many different locations. And so they kind of pivoted to partnering up with local partners in those respective markets. So I'm with you. I think this is a good move. I actually like it. I think it gives them the opportunity to participate in the upside without having to devote so many resources to it.

3:45So, I like the decision. I feel like this is something that Nickel has been mulling around for a while. I'd be curious to know, he's closing in on a year in September with the company. What grade, what kind of grade would you give Brian Nickel today?

4:01Lou Whiteman:So, forget what I think. Howard Schultz seems brought in. And I think we can all agree, I mean, Howard's very smart and also, you know, can be a meddler. So, I think Howard Schultz giving them an A is very important. But I don't think Howard's wrong. I think Nickel's plan to refocus Starbucks, give us back the experience we fell in love with, and also adjust the menu so we're not waiting in line for 40 minutes in the drive-thru. It all makes sense. It's a strong grade. It's an incomplete grade because it's one thing to say it, we have to execute and do it. But I like where they're going with it.

4:35So, the stock is basically flat since nickel took over, I think it's just up a couple of percentage points, but it still boasts a premium multiple at 34 times earnings. Do you think this stock from today, do you think this is an outperformer in the coming five years? I think so.

4:51Lou Whiteman:I'll be honest, the valuation gives me pause and I don't think it's going to be. I think maybe the hyper growth days are over, but look, the brand resonates. I think you'll see operational improvements under nickel, which will boost results. You have, what, a 2.5 % dividend yield to boost your total return. So yeah, maybe it isn't what the growth was before, but yeah, it still, I think, has the bones of a market beater of just a top operator. Yeah, I'm with you. I'm hanging on to my shares too. Well, next up, Hershey has a new CEO. Get a concise daily market preview from Charles Schwab, including stock updates, U.S.

5:30Lou Whiteman:and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less. Listen today at schwab.com slash market update podcast or wherever you get your podcasts. That's schwab.com slash market update podcast. The Hershey Company has a new CEO, Wendy's CEO, Kirk Tanner will replace Michelle Buck, who's retiring after almost eight years as CEO of the company. Tanner will take over on August 18th and previously served over 30 years at Pepsi.

6:11Lou, I was talking with our colleague, Ant Chavone, who follows Hershey closely. He said that while Tanner definitely has the resume to be CEO with those three decades at PepsiCo, he had a short stint at Wendy's. It started in February 2024. It was a bit shaky. He even shares down around 40 % during his tenure. They had to cut the dividend earlier this year. The aunt noted that was likely to happen regardless who was CEO. What do you think his biggest challenge right off the bat is going to be taking over for such a, I mean, this is just a legendary, iconic American brand. I mean, they're going through some tough times.

6:47What do you think the biggest challenge he's facing is?

6:50Lou Whiteman:And a brand that has always, or mostly promoted from within too, which I think is interesting too. Yeah, right? Yeah, I think you said it well. It's hard to judge the time at Wendy's, both because it was so short and he did step in at a difficult time. But it feels like Hershey's is more similar to what he did at Pepsi. Yes. And he was successful there. You know, Wendy's is more retail focused, right? So I think that that's a positive. I suspect his biggest challenge is kind of to continue the pivot away from chocolate, from cocoa prices. Yeah. Hershey's has quietly built up this roster, what, pirate booty, that's pretzels, skinny pop.

7:31Lou Whiteman:It feels like there's further opportunities to go in that direction. And bringing someone in from Pepsi suggests to me, at least, that that's where the board is focused. And so that's his challenges to execute there and make that happen. Yeah. I think you're right. You got to broaden that portfolio up because we've seen this over the last several quarters, I mean, years, the cocoa prices have really been hammering Hershey. And it's always fun to kind of pay attention during Halloween to see what kind of candy is selling. And last year, we definitely saw a trend towards like the fruity, sugary candies, chocolate a little bit less so because it was getting more expensive.

8:07And then the dreaded shrinkflation came into play. They're making the candy bar smaller, Lou. Not cool, but I guess I I get it. Hey, my doctor likes it, even if I don't. Exactly. We talked about Brian Nichol. Now we're talking about Hershey here with Kirk Tanner. When you see new leadership in play here, how long do you typically give new leadership to start delivering?

8:33Lou Whiteman:It's so hard because obviously every situation is different. You have to factor in macro. What situation does a new leader drop into? But look, generally, I think at least a year, we talk about this a lot. We're long-term focused investors. We understand that quarter-to-quarter fluctuations happen, and they're part of the business, and we don't panic. We don't freak out with one quarter. We don't get too excited. I think we have to give leadership the same understanding, the same philosophy. In a case like this, the challenges, the consumer cocoa prices, perhaps maybe you need more time. But I'll tell you what I do want, JMO.

9:13Lou Whiteman:And what I'd like to see is within a year, what Nicole gave us, I want to hear our leadership articulate a plan. Yes. And I want something I can evaluate from here. You may not be able to solve the problem in a year, but I want to hear how you're planning on doing it within a year. Yeah, I like that. One of Tanner's go-to moves at Wendy's was offbeat collaborations. They did a Girl Scout Thin Mint Frosty. Tried that one. It was good. Spicy Taki Chip Chicken Sandwiches. I love Takis and I love chicken sandwiches. SpongeBob branded burgers. Let's play armchair CEO for a second here. What brand collaboration would you recommend for Hershey's?

9:52Lou Whiteman:The company that brought us peanut butter and chocolate. They have to get collaborations, right? This is a no-brainer, but I love Dots Pretzels. Looking at the website, they have cinnamon season. They have barbecue. They have honey mustard. They don't have chocolate-covered pretzels. You know, that crossed my mind. That crossed my mind. I'm a little bit seems so obvious. I have more of a more of a salt tooth than a sweet tooth. I was thinking like I love dots pretzels. I have them here in the pantry at home. I also like skinny pop. That's pretty good stuff. Yeah, I was thinking, hey, you get skinny pop and you partner up with McCormick for some old day skinny pop.

10:26And I mean, you can cheat and put the stuff on at home, but I guarantee you the stuff in the bag is going to be way better. I mean, you're bringing to two worlds together right there. I'd be all in my Baltimore roots are speaking to me right now. Yeah, I'm in for that. Mr. Tanner, get on that.

10:41Lou Whiteman:Last question on Hershey. Do you think Tanner is still there in five years? I do. I do think fit matters. And I think the resume implies a better fit, like we said. To use the Willy Wonka, I think maybe this is a golden ticket. And I think it can work out well for Tanner and for Hershey shareholders. Well, Lube Meta continues to make big, big investments in AI. Founder and CEO Mark Zuckerberg is spending big to recruit AI talent. I mean, we're talking tens, hundreds of millions of dollars from reports. And now, we also saw that the company's taken a minority stake in Ray-Ban maker Esselor Luxottica.

11:20And that really plays into these Ray-Ban AI glasses that they're starting to get out there. I'd be interested to see how this holiday season, how those are received. Now, as we saw with the metaverse, Zuckerberg's playbook is to go big or go home, right? $3.5 billion investment in Ray-Ban, reportedly hundreds of millions of dollars in recruiting bonuses. That's a lot. What should

11:43Lou Whiteman:investors make of all this spending? Here's what I find interesting. Back in January, Meta committed to spending$70 billion in CapEx, mostly to build out AI. Our focus was on chips at the time. Certainly, you can know chips is still getting, NVIDIA is getting a lot of love here. But it feels like we're hitting that next step, where what do we do with all that capacity, making the magic happen. And look, if you think chips are hard to come by, and they are, just how hard is it going to be to get the right talent and the right partners and all of that? So, I think the be aggressive makes sense. Zuckerberg likes to be aggressive, but focus on the big picture, try and be a first mover here.

12:27Lou Whiteman:I get what they're doing, and I think it makes sense. Because at some point, we've got to use all these chips for something, and it better be neat, right? Yeah. I mean, this is an arms race, like we haven't seen in some time. I mean, all these companies is just foot on the gas and they're spending a lot. But clearly, that's telling us something. I mean, I think we're in the middle of something big here. Now, the metaverse spending, right? That led to the year of efficiency, if you remember that. Investors became worried about return on investment. Do you see this playing out the same way? Or like how long of a leash does Meta have here to ultimately build out their AO chops and demonstrate real return?

13:06Lou Whiteman:I'm curious what you think. I think here, the difference is, last time they were out on their own. They literally changed their name to Meta. They were the metaverse island. For better or for worse, it ended up worse. They own that space. There's a lot more there there with AI, I think. If there's not, we have a lot of people going along for the ride. I think as long as everyone else is spending, I think it's a much longer leash. Yeah, I think so, too. I mean, I think you said it perfectly. There's a there there, right? AI, it just seems so much bigger. And when we're looking at augmented virtual reality in the metaverse, I mean, it's fascinating technology, but it certainly is more niche and it's really not quite developed the obvious use cases that we're seeing play out with AI.

13:54The stock, let's talk about the stock. It's had a good year to date. It's up almost 25%, outperforming the market nicely. At around 28 times earnings today, is this something you're interested in? Do you think this is an outperformer over the next five years at today's levels?

14:09Lou Whiteman:So, 28 times earnings, what? That's second most affordable among the Mag7, for what it is. But look, for all the talk about AI, you bury the lead when you don't talk about that core advertising business and its ability to just generate. I'm excited about AI, but that core business, I don't see a disruption on the horizon here. And with that business, I think the stock beats the market. I mean, that is the engine. Yeah. And I think AI is really ultimately making that core business even better. And that really is kind of the point. I mean, they're going to do ancillary stuff with it, but it is making that core business better.

14:51And man, they really own a big slice of that ad market, like you said. Next up, earning season is right around the corner.

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16:14What you got?

16:16Lou Whiteman:We just talked about Meta's year of efficiency. We want to talk about so far this year, and we're still early into this year, it has been the year of uncertainty for public companies. Investors largely gave management teams a pass last quarter when they said, I don't know when it comes to guidance. And I think that's understandable. I was one of those investors who, yeah, I don't know what's going on either, so that's fine. Two related big picture questions I have as I'm watching now is, A, is there more clarity now than there was three months ago? Is there more management teams that are willing to stick their neck out?

16:55Lou Whiteman:And since I'm guessing the answer is maybe not, will investors continue to be patient? And will the I don't know answer, will that be acceptable now the way it was last quarter? I think probably, but I'm curious to see how things play out. We're always forward-looking. And as investors, it's scary when there's clouds forward. So, it's a weird time. Yeah, it is. Well, yeah, I think in regard to your points there too, We're seeing a lot of headlines coming out here again regarding tariffs. It's leading right into earnings season. I mean, it would be understandable if you hear that sort of uncertainty language.

17:35But I don't know. Do you feel like maybe folks are just kind of getting tariff exhaustion? Like, I mean, it's just day after day after day. So, you kind of know that it's happening. And at some point, you just got to kind of let it go and keep running your business, you know?

17:51Lou Whiteman:Yeah, it feels like it's going to net out as a drag on earnings, kind of indefinitely, that we're just going to have to grin and bear it with. Which is kind of a terrible medium, because it's just going to be a slog, unfortunately. Yeah, you asked what I was looking at. And for me, it's in regard to enterprise spending trends. Over the last several quarters, there's a phrase that we've seen on a lot of these earnings calls, whether it's Twilio or Cloudflare or CrowdStrike, Palo Alto, I mean, you name it, these big enterprise servers. The phrase elongated sales cycles, kind of to your point about uncertainty, right?

18:33Their enterprise customers are just simply not quite certain what the future holds. So, they're spending with some trepidation and maybe not fully committing. So we saw just elongated sales cycles on so many earnings calls over the last several quarters. I wonder if that's kind of starting to come to a close. I wonder if we're going to start seeing some more bold spending from a lot of these big enterprises. And so I'm going to be following a lot of those companies, like I just mentioned, those earnings calls. And that will be one key term that I'll be searching through all of those calls, elongated sales cycles.

19:11That's just telling you they're just not spending as much as quickly. And we want to see that. We want to see that turnaround.

19:19Lou Whiteman:It's a great point because kind of putting it both together, it's like there is so much uncertainty. It's understandable not to want to make bold moves, but at some point business has to go on. So where are we in balancing that? That's going to be fascinating to see. Well, we'll leave it there. Lou Whiteman, thanks again for being here. Always a pleasure. As always, people on the program may have interest in the socks 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. While personal finance content follows Motley Fool editorial standards and are not approved by advertisers, advertisements or sponsored content are provided for informational purposes only.

19:54To see our full advertising disclosure, please check out our show notes. I'm Jason Moser. Thanks for listening. We'll see you.