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We are still knee deep in earning season.
And even though I keep saying that most of big tech has reported, not all of tech has reported.
Cisco was the latest to report. It's a hardware company.
They make the gear for Internet networking, and they're benefiting from AI. They're getting more business from AI like many hardware companies, but they're also seeing a downside to that, and that is higher costs. Woujin Hoo is our senior hardware networking analyst here now to give us some insight into Cisco. So Ujin, it sounds like the increasing cost of memory chips is kind of dogging Cisco like we've seen with other hardware companies. How do you think about
the increase in cost of memory chips? Is this kind of a one time problem, one time adjustment, or is this creating a new normal for hardware companies?
Yeah?
Hey, Scarlett, So now when we think about it. It is going to create a new normal. Quite quite frankly, the magnitude of the DRAM price increases was a bit higher that we had anticipated, and it's going to be a drag on margins. At least it already hit the current reported quarter, and then it is going to be another two hundred basis points gross margin rosion next quarter.
The one thing that we can be assured of is that there's going to be a price increases across the board for a lot of Cisco's products and more importantly a lot of big tech products such as Dell and Hpe going forward.
So is this more today an industry problem or a Cisco problem here?
No, it's an everybody problem, Plum quite frankly. I mean, look, there's a couple of things here right. The DRAM pricing isn't going to hurt only Cisco. But I'm scrambling to get new laptops from my kids before the DEVAM prices hit the PC market as well. And you know what we are going to see is that anything that's DRAM heavy, in particular servers, that's going to be bogged down on
the gross of margin side. But what I'm trying to balance out is how much of that is going to how much are the companies going to eat that gross margin? And how much is that going to be passed through?
Okay, so I guess the other part of it was that Cisco shares were kind of priced to perfection as a lot of people were putting it.
So it didn't take a whole lot.
For investors to react negatively to Cisco and the latest results. But ten and a half percent, you know, that's that's a pretty big adjustment. Are people re rating this company completely?
Yeah?
And you actually make a good point. Right, as I was looking into the print, the PE was at roughly twenty one twenty two times, and the last time we saw the pees like that was back in twenty twenty three when people were pre buying a lot of networking gear and during the COVID cycle, right, And what you know, historically ps are roughly around seventeen to eighteen times for Cisco, and what we are seeing is that the multiples coming
back to the seventeen to eighteen times. And I do think that's kind of a bit wrong, Scarlett, primarily because this AI story is actually has a lot of sales behind a lot of wind behind its sales. And I think a lot of investors are overlooking the AI opportunity, which is going to be multi year for Cisco.
How long will the industry have to deal with I guess chip shortage going forward? Is this something that chip makers can just go up a switch and start making more chips?
You know, I wish I had a bottle with the magic gen that will pop up and create new DRAMs. But the fact of the matter is is that every time you have if you want to create capacity for new memory chips, it takes about two to three years. And the memory manufacturers were struggling very bad during the during the COVID period when there was over capacity, and
they've been hasn't to build up the capacity. But this AI boom and the memory demand related to the AI boom is a lot stronger than we had anticipated in you know, I think my colleague Jake Silverman has a good piece out on how long it'll last. It might take another two three years before it gets resolved.
So is there and I realized that this is more Jake's remit But is there still any kind of excess inventory of those memory chips or have we drawn down on all of that.
Well.
I also covered the hard discrip space Scarlett. So my guy, my hard dest right guys are sold out until twenty twenty six and possibly the twenty twenty seven. All the read throughs from s K high Neck, Samsung, Micron, and sand Disk, they're all sold out through twenty six and into twenty seven, already taking orders for twenty seven and twenty eight.
So this is a global problem. This isn't a trade spat supply chain screwing everything up, trade war tariff type thing. This is just global supply issue.
Yeah, this is this is That's exactly it, right. You know, the b I team has been writing about this for a couple of couple of months now, and they started to exasperate into higher levels. To give you some context, we picked up on the higher chip memory prices back in November when they were rising. We're fully around fifty sixty percent on a year or year basis. Over the past quarter dround prices have doubled to almost tripled, So everyone's scrambling to get chips before they rise even further.
All right, So inevitably that means laptop prices are going to be higher a long with everything else.
What about smart appliances.
Do they use memory chips or do they use the analytic chips that Texas Instrument makes well.
I mean, get to get your smart TV, get your smart refrigerator, laundry matt stove as quickly as possible. I think the bigger issue here Scarlett is probably going to be the smartphone market. You know, IDC has cut their smartphone forecast to be in decline, primarily because there aren't enough memory memory DRAM chips and as well as storage to help supply all the smartphones. Apples should be okay, but at the end of the day that there is going to be a supply constraint there.
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And again, all the hotels reporting, a lot of the leisure companies reporting here high it just report it and some decent numbers of street likes it stocks up five point six percent today, that's a fifty two week high and a stocks up eleven percent year to date. Let's check in with Jody Lourie. She's a senior credit analyst for Bloomberg Intelligence. Jody talk to us about Hyat. We heard from Hilton. What are the folks at Hyatt saying about their business?
So everything is seeming to be pretty upbeat. I mean, we're seeing a lot of the same narrative that we heard from Marriott that we heard from Hilton, and it's that we're seeing the strength in the luxury market at the moment. And it's not so surprising for us because we've been talking about this. I mean, we did our travel survey, we ran it in November, and we talked
about the k shaped economy. We anticipated that coming into this year, people who have the ability to spend on travel are going to continue and those who aren't might pull back a little bit, and so we've started to see that. I think what's probably more interesting maybe is that both Brian Egger, my equity counterpart, and I have been talking about this topic and we've been comparing notes and we're pretty in lined, which usually don't really see
equity and credit analysts line. But it's kind of hard not.
To be in this situation, right, the fundamentals are the fundamentals, and these companies are able to monetize on that ca shaped economy, certainly by focusing their efforts on the upper end. What about the lower end? Marriet runs Courtyard by Marriott, and that's it's branding right there. Does it mean that it just you know, focuses less on that or devotes less resources to it. Is that a brand that you know, kind of has a ceiling.
So I don't think it necessarily has a ceiling per se, But I think that, you know, and what I think the companies are taking a longer term outlook of Okay, right now, at this moment, those businesses might be a little bit weaker. They also actually cost a little bit less to run, because when you think about luxury businesses, you have a lot more additional costs that you have to contribute to give the quality of service that the customer expects. So I don't think they're necessarily going to
stop creating those brands and building out that platform. In fact, they think they're going to continue doing that because eventually will run its course. What I do think is an interesting point that we've talked about a few times is if you look at a company like Choice, which is much more heavily embedded in that lower income consumer, embedded in that extended stay market that was likely more so affected by, for instance, the government shutdown which Marriott, which
Hilton talked about on most recent quarters. And so I think that's where you're going to really see. The differentiation is not so much in these companies that have these global, massive brands that they can sort of like shift around resources and also anticipate that some of their brands might be stronger than others at different times of the cycle. I think it's more in the ones that are a little bit more concentrated that might have some issues.
Okay, that makes a lot of sense.
And I want to pick up on what you said about how luxury running those luxury brands costs more. How much of those costs does high at the company which has an asset light business model bear versus whoever's paying the licensing fee to Hiatt Sure?
And I think that's a key question too, because us start. When you think about it, you know, the Hyatt is doing the management of it, right, so they have the brand, they have the management, but you do have the company
that owns the property. And more so, what you know, what they sort of reference on the call, and we've heard this a few times from the company, is more the anticipation that some of the owners of the hotels, if they have issues with financing, that these companies have to sort of think about ways that they can leverage their higher quality ratings to help them with financing, to grow up the business and to make these sort of
modifications on the properties themselves. Hyatt is an interesting company in and of itself because you know, it generates great cashloads and anticipates to generate strong cashloads this year. But it's twice now done the same thing where it made these relatively large scale acquisitions to expand its footprint and to build out into all inclusives, into other parts of the market and extend their sort of you know, vertical integration.
And in both instances they levered up to do so, but they've been pretty quick to de lever and to your point, Scarlett, they use their pivot into asset light, meaning selling their properties and entering into management agreements to do so, so they benefit from that fee structure instead.
So is there debt for you to look at for these hotel companies are there all this asset like stuff.
There is debt because the companies are still borrowing. You know, they're borrowing to sort of build out their platforms, they're borrowing to do tech upgrades, They're borrowing for all sorts of reasons. Marriott has sort of this I don't want
to say it's a flywheel, because it's not. But they're at the point now where they you know, they have triple V ratings, they access the commercial payment market and they can access it because of their short term ratings at the moment, and they use it as cash gaps, right, and they'll fill those cash gaps and then they refinance the debt that's coming due. So I don't think we're in a situation where these higher grade companies like Marriott
is going to necessarily increase their jet load. They're just going to sort of lean on the ebdout growth. They're going to lean on the fact that they have these cash flows to support that. You know, they are going to give back to shareholders. They're continuing to do so. We're seeing Hyatt talk about that as well, and I expect that that's going to be the case now in Hyatt's situation. They are still talking a little bit more about deleveraging just to get back to the category that
they need to be in. But I think that over time, and it's the type of thing that we see these companies issue debt, foreign acquisition, and then they do lever and then they do it again.
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Again, a busy day in the earnings from particularly for some of the restaurant companies. McDonald's reported numbers that beat estimates. Restaurant brand think Burger King, I think is kind of it raised its dividend. So let's talk to Michael Halen. He is the analyst of Bloomberg Intelligence. Well, I was all the restaurant companies out there. Mike, thanks so much for joining us here. Let's talk about McDonald's. Their value menu was a kind of a hit with consumers.
Yeah, they've re established themselves as the value leader in QSR which makes sense.
Right.
They have fourteen thousand stores in the US, more scale than anybody, you know, and they've done a phenomenal job with the marketing. I mean, I think they sold fifty five million pairs of Grinch socks, right, the Grinch Happy Meal, they got one of their most successful promotions ever. Right,
So yeah, they're firing on all cylinders. They also benefited from lapping E Coli a year ago, and that's that's how they ended up with such a strong comp in which was a pretty tough quarter for most of the industry because of the cold weather and the flu that we saw in decent right.
And we also are hearing that McDonald's is not going to rest on his laurels. It's looking to innovate. It's going to introduce some new beverages under the McCafe mcafe, mcafe, mcafe mcafe that's hard to say cafe French anyway, indulging coffees that sounds kind of fancy? Is that to appeal to the consumer who might be trading down to McDonald's.
Now, you know what it's it's beverages are hot, I mean cosmics, you know, although that that chain isn't isn't you know, has been kind of dissolved that they they've learned a lot about the beverage beverage industry through that through that test, right dirty sodas. You know, there's a chain out west called Swig that that absolutely crushes it with dirty sodas. Think you know, popa polo with added syrups and whipped cream on top and things of that nature. Right,
It's a lot of energy drinks. These these are like really a really hot segment of the QSR industry. It has been for years, right as some of these bigger, slower moving chains like McDonald's are starting to kind of jump on this bandwagon a little bit later. But you know, we think this is this could be meaningful for them in the second half, you know, and it's no longer public, but you know, this could take a chunk out of Sonic's business, you know, because they've they've long been a
beneficiary of the beverage market, you know. And what's nice about that business is a lot of those drinks are sold and during that snack period, you know, when these restaurants have a low around you know, two, three, four o'clock in the afternoon.
Restaurant brands. They also reported some numbership remind us who restaurant brands is and what they're doing these days? How are their results?
Yeah, so you know it was kind of mixed results versus what the street was looking for. You know, I look at the underlying trends and I think they're still strong. So the reason why it's down right now is, you know, Burger King showed an acceleration in the US, which is is pretty promising. You know, they showed strong results at IT international and International is a pretty well oiled machine
for this company. But there was some deceleration in the Tim Horton's numbers, which makes up sixty percent of adjusted EBITDA. And you know Popeyes remains kind of weak, right, So I'd say the biggest concern in this report is really about the slowdown in tim Horns. But it's lapping tougher comps.
And when we look at you know, same store sales trends going back you know a handfull of years, the trends are actually accelerating even though it decelled the on the one year and a two year basis, And so you know, tim Horns is a monster in Canada. I wouldn't be too concerned about it. Like I said, a big part of this story is the internetational unit growth that they're putting up, and we think they can get back up to mid single digits here in another year
or so. You know, Popeyes and Burger King are absolutely crushing it around the globe, and you know, we expect pretty solid growth here and we think they can outperform a lot of their quick service peers here in twenty twenty six.
Michael, how are the McDonald's and the restaurant brands of the world using AI. We've seen them embraced automation with you know, you have to go order yourself at the kiosk and then someone calls your number, so they've removed they've made things more automated in that regard.
But how will AI change the whole experience?
Yeah, well, you know AI is going to change the experience, the restaurant experience in different ways, Like different chains are going to look to different solutions. Something that works for one type of chain like a Chipotle, isn't going to work for McDonald's and vice versus. So you know, I think when you're looking at AI first and foremost, it's going to be a continued progress on that one to one marketing, getting people into your loyalty program and eventually
getting those very directed offers to them at the right times. Right, this has been kind of a long time coming. AI should really kind of help with that piece, and I think for these quick service chains, the thing that's going to be probably most useful is like an AI assistant.
You know, Taco Bella is rolling this out, testing it and then eventually going to roll out to all its stores where they have basically an AI assistant for their GM tells them how much food they need to prep, if they need more labor on the line, helps them have more accurate sales projections, so they know how much labor they're going to need on any given day, how much food prep they need to do, whatever it might be.
Right.
So, I think those are going to be the two most ubiquitous use cases and probably the ones that we'll see most of the progress on in the near term.
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One of the stocks on the move to the downside is tech company app Lovin. I'm just looking at the stock here, really taking it on the chin here. Today they had some earnings and some guidance, a little bit of a challenge that stocks down nineteen percent today and forty five percent year to date. This is a big company that a lot of people, including myself, don't know a lot about. We're going to change that right now. It's got to mark a cap of one hundred and
twenty five billion dollars. Nathan nade Joints is Bloomberg Intelligence technology research analysts. Nathan, do me a solid here and just tell me what app love and does. Number one and number two why should it start getting hammered today?
So thanks for the questions. First question, app Lovin essentially controls and auction, which is a marketplace where ad space inside of mobile apps are bought and soul.
It has a.
Commanding influence on this sort of real time auctions for in app ad space and that is helping. You know. The reason it runs an auction houses because it essentially connects advertisers which one to advertise inside of mobile gaming apps, and also mobile gaming app publishers that want to sell ad space to make dollars. You know, because a lot of these states these days, a lot of mobile apps,
games or otherwise I actually offer for free. So how else are they going to make money if not selling the ad space inside of the apps and Applevin is essentially the mediator connecting brands which one to advertise and apps which want to sell the ad space. And on the share price reaction we saw today, I think, you know, I think to some extent that's used to this sort of AI disruption risk or so called AI fears. And obviously Eplevin is not alone in facing disruption for any
sort of AI companies. And there's been a lot of headlines where the Google genie in the last week that can create an interactive video with simple text prompts. It means people like you and I can create games you know, any and you know sometime soon. And also more closer to home for Ablevin, there's a startup called cloud Acts,
which is in the space that Eplevin is in. It's Ablevin's brand by the business, which is mobile ad monetization, and there's still uncertainty around how much disruption the extent of disruption to Eplevin because Eblevin's mode, which is a word that gets thrown around a lot, but it's essentially its competitive advantages are relatively stronger than other rivals in the space. Yeah, I think I'll leave it then to see if there's any follow up.
Okay, thank you for that introduction. So it sounds like to a large extent, because it's tied to the advertising industry, that it is cyclical, that it's going to move in line with how people feel about the economy. So where does that leave this company when it comes to disruption or resilience to.
The AI narrative.
I mean, even if it doesn't happen right away, there's that idea that it could down the road.
Yeah, you certainly right, like that it could happen down the road. But I guess going back to the extent of disruption and this so called mode which is competitive advantage, and I think av Levin has some tricks of it leadst For example, it has these AI or machine learning models that took more than five years to build, and it's trained with data from in app transactions back when it was still publishing games. And obviously how sharp a model is at targeting ads depends on the quality of
the data and the and the amount of data. And I believe because Ablevin's model, at least in helping advertisers target ads instead of mobile giving apps, that model is mature in the sense it would take some time before any sort of upstarts can catch up to that level of sophistication in the modeling. So I believe Evelurbin steps in one way and like for context, right, and when an ad it's shown to a mobile gamer, seven or eight out of ten times that ads is med data
by Ablevin. That is how much of a commanding influence Ablevin has in the in the auction of digital ad space. So I believe that dominance. It's you know, it would take a lot to displace that, but uh, you know, obviously for smaller rivals in the space, whether it's unity is vector or you know, uh leveler. You know, for smaller rivals, I think, you know, the concerns for AI fears might be even more pronounced.
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