In this podcast, Motley Fool analyst Bill Mann and host Mary Long discuss Microsoft‘s AI timeline and what “experience” means at the world’s largest coffee chain.
Then, Bloomberg media reporter Hannah Miller joins in for a conversation on what the Paris Olympics mean for Peacock, NBC’s streaming service.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 31, 2024.
Mary Long: We’ve got two types of spending stories. You’re listening to Motley Fool Money. I Mary Long, joined today by Bill Mann. Bill, good to see.
Bill Mann: Hey, Mary, how are you?
Mary Long: Doing pretty good. A lot of earnings going on this week, and today we’re focusing on Microsoft and Starbucks. First up, got to hit Microsoft because all that anybody really cares about these days seems to be AI. On the one hand, for Microsoft sales growth up, profit growth, and they posted some big numbers, considering that they’re a mega-cap company. Revenue was up 17%, net income up almost 20%. But as I mentioned, because everyone only ever seems to care about AI. What really caught a lot of investors attention was revenue for Azure Microsoft Cloud business. Revenue there only rose 29% shocks, and Wall Street was expecting north of 30%. The stocks down a bit this morning as a result. What do you make of all that Bill? What are your takeaways from these numbers?
Bill Mann: Their quarter was fine. You have to keep in mind that Microsoft is huge. This isn’t a bet the farm on AI because it’s a pretty big farm, but they’ve thrown a bunch of cows in the full upper 40 into the mix. A $19 billion allocation to capital spending, just to compare it was $3.1 billion in the fourth quarter of 2016. That’s not that long ago. They are making a massive bet. But when you make a bet into AI, you’re doing things like build data centers, which take 18 months to 24 months to build. They have all sorts of infrastructure that has to go to them. I’ve seen a bunch of stories about investors getting impatient with AI, I think that’s actually crazy. This is exactly like in the 2000 in which companies, including Microsoft, built a huge infrastructure without any real idea of how they were going to make money from them. This is not that different.
Mary Long: Let’s talk about that timeline a bit because like you said, a lot of Wall Street is impatient. They want to see that big spending start to pay off. We got a little bit of color on what that timeline for that payoff might look like on the call. CFO Amy Hood said the timeline is the next 15 years and beyond. We’re long term investors at the Fool. How do you feel about waiting 15 years to see all this spending?
Bill Mann: I might be dead by then.
Mary Long: Not happy.
Bill Mann: No. Look, I understand exactly what she’s saying, and I understand also why people would react to this. But once again, she’s taking the basically the same exact model as the internet was. The massive expenditures from 1997-2002 really didn’t pay out. You could see this in Microsoft’s stock chart until the mid-teens. It takes a long time, particularly with businesses that are meant to be as transformation as AI is. All they know is that this is an area where they’re heading. They don’t know how they’re going to get there, and they don’t know how the market is going to develop. I almost wish she hadn’t set a number, like, hey, we don’t know what’s going to happen, but it’s going to take 15 years, is weird, don’t you think?
Mary Long: Yeah, but I think maybe the point is less the specific number and more just saying, hey, when we say wait a long time, it’s not wait a couple quarters and see what happens. It’s no, wait a long time.
Bill Mann: I love the fact that she did that, and I love the fact that she was like, if you think that AI is going to pay off in the fourth quarter of 2024, I have some news for you. The only way that it’s going to be paying off in the fourth quarter of 2024 is that we’re going to be investing even more money into it. I mean, it’s all fine. It’s a good quarter, but we are moving into something that Microsoft is perfectly clear on, this is an uncertain time. They’re investing a huge amount of money, and they don’t know what’s going to happen. They just know they want to be there when it does.
Mary Long: Microsoft’s a big company. You’ve already mentioned that. That’s pretty obvious. They do things other than AI. I also want to take a second to check in on the gaming segment because they had a pretty big acquisition not too long ago, so maybe smart to see what’s going on in that world. Hardware sales of Xbox are down 42% compared to this time last year. That’s not necessarily cause for concern, and Microsoft seems just fine with that because, they want to move gaming more to the streaming side, and they even saw revenue from Xbox content services climb more than 60% this past quarter. How significant is this segment to this over $3 trillion company?
Bill Mann: It’s significant in that it’s part of the ecology of Microsoft, which they’ve done a very good job at building. Maybe the only company that’s been better at building one has been Apple. The platform sales themselves, you have to remember that platform sales are a very cyclical component of their business. They will build a new platform, there’ll be a huge launch, and you’ll see a spike, and then things will trail down, and we are at a product lull. It doesn’t necessarily mean that the Lull is throughout the gaming sector. They have committed billions in capital in gaming, not just the acquisition of activation. This will remain a very big part of their business and certainly, they are interested in seeing where this content intersects with AI.
Mary Long: Another thing I want to check in on that caught my eye while catching up on Microsoft this morning, is that they announced just before earnings yesterday that they are planning to hand out cash awards to non-executive level employees, basically as a thank you for a good fiscal year. What that means, we didn’t get specific numbers, but junior-level folks can get up to 25% of their annual bonus as a one-time cash bonus, which I can make a guess at what some of the salaries are over at Microsoft. I’m thinking that’s a pretty nice surprise check. But it’s probably is worth mentioning that Microsoft has issued a number of layoffs throughout the year already. Am I being cynical for thinking, reading between the lines, what this means is, if you work in AI, you’re safe, in fact, you’re rewarded, and we want to keep you, we’ll do anything to keep you. But if you work anywhere else.
Bill Mann: You are so cynical. I’m so disappointed in you.
Mary Long: I love the cynicism.
Bill Mann: No, I love the thread that you just pulled. Now, remember that although Microsoft is no longer run by Bill Gates. Bill Gates’ DNA is very much throughout the ecosystem, and Bill Gates’ best buddy is Warren Buffett who enjoyed paying cash bonuses. It was the form of compensation that he finds to be most valuable to people, and they are welcome to buy stock with it. All you’re giving them is an unencumbered bonus as opposed to one that is in the form of stock. Now, it is definitely true in a company as wildly complex as Microsoft, there’s going to be layoffs all the time. Again, they are talking about, and they are making bets on areas of the market that don’t yet exist. Some of these things aren’t going to work out, and then the specialists within those segments. They’re going to have to go and work elsewhere, and I never want to be too flippant about layoffs. They are a reality for businesses that are enterprising. They are less of a reality of businesses that are not. Yes, the AI business is going to be very big for them, and the employees probably can name their number. That will change at some point as the AI industry itself begins to develop. There are people who will have skills in that segment that are not going to pay off, and that’s reality.
Mary Long: There’s not really a neat segue from computers to coffee, so let’s just hop on over to Starbucks. They also reported after the film yesterday. Just do it. The quarter before this most recent one, Starbucks had announced that long wait times were causing customers to leave coffee orders in their carts, and then they blamed that for declining same-store sales. This quarter, we see declining same store sales again. Number of orders placed also down, about 6% this quarter, and profit down about 7.5% as a result. Starbucks has around 17,000 stores. Any turnaround might not take the 15 years that Microsoft is talking about with their AI spend, but a turnaround is going to take time. That said, doesn’t seem like that’s starting to happen quite yet. What grade are you giving to the triple-shot, two pumps, reinvention efficiency plan that CEO Laxman Narasimhan has touted before?
Bill Mann: I can’t give it anything other than a D, based on the the name by itself. I’m going to say a committee came up with that name. The committee felt very good about their cleverness by the time they were done.
Mary Long: But there’s a reason they’re not on the creative sector, perhaps.
Bill Mann: Exactly. If we go to the tape, here’s what the market is saying. Starbucks added 1600 locations, and their overall revenues declined by about 7%. That is incredible to me. They set a very low bar and still failed to beat it. In terms of their system, I find it really incredible that a company that started as an American take on Italian coffee shop experience is talking all about efficiency and yes, getting drinks and orders out to customers more quickly is important. Maybe that has more to do with the fact that the stores are generally less well staffed than they have been in the past. We have seen this with other companies when Bob Nardelli took over at Home Depot in the mid 90s, one of the things he did was remove a bunch of the staff for efficiency’s sake and for profitability’s sake. Guess what? The Baristas have a skill, and they need to have enough of them for a premium experience, and I don’t see any of that recognition when we’re just talking about efficiency and systems at Starbucks.
Mary Long: I couldn’t help but think this morning about, when I was growing up, my neighborhood Starbucks was a place where all the high schoolers would go to sit for hours and do work, and it was a lovely place to sit. I haven’t seen a Starbucks like that, and I can’t remember how long, the experience has completely changed.
Bill Mann: Here’s your unicorn drink. Get out.
Mary Long: With boba bubbles. Isn’t that enough for you?
Bill Mann: You know my order.
Mary Long: Bingo. Another thing that was striking to me is, after last quarters, not so great results, Howard Schultz got on the line, on LinkedIn and he basically wrote this open letter saying, sharing his thoughts. He didn’t give it explicitly give Starbucks a D grade. But he did talk about what he wanted to see moving forward. What that was ”He wanted to see them reinvent the mobile ordering and payment platform, which Starbucks pioneered, to once again make it the uplifting experience it was designed to be.” That’s it. Here’s what struck me about that. Uplifting experience to me, yes, an app experience is great and should be smooth. But should this really be all about the app, or is this more about bringing back the experience of Starbucks?
Bill Mann: I think that that’s actually their goal, and I think that you would be a little bit naive for a company that large to say, well, hey, what we need to do is have high schoolers hang out, in their stores more. But there is a coolness factor that that has been lost. While I am not sure, I don’t want to cast dispersions on efficiency, because it’s obviously something that they need to do. It is annoying when you order your coffee, and you get it much later, if you are paying a premium price, which is still very much in Starbucks DNA. It is something that they need to do. They did have a decline in the users of the rewards app, which is the only other time that’s happened was during COVID. Whatever that they have been doing has not yet translated anywhere within the system, it seems.
Mary Long: Another growth area that Starbucks has been trying to capitalize on is China, but same-store sales there dropped 14%. Maybe before we get to the Starbucks question. Is there something going on in China that’s creating this drop? Is this a macro issue?
Bill Mann: You see a huge amount of competition here in the US. Oddly enough, for a company that in 2020 was found to be a complete fraud. Luckin Coffee in China has been eating Starbucks’s lunch there at a lower price point. They have smaller stores. They’re competing very aggressively. China overall has a pretty significant growth curve in coffee consumption, and Starbuck, they’re being out-competed there with larger companies in a way that it hasn’t happened here in the United States. Here in the United States, it’s Starbucks versus. There are other Coffee companies, of course, but it’s usually your Caffe Amouri down the street, your specialty coffee place. That’s what they’re competing against. They don’t notice each of those, but in China, they do.
Mary Long: Bill, always a pleasure talking to you. I hope you go treat yourself this afternoon with a large venti bubble tea order from Starbucks.
Bill Mann: Unicorn, I’m getting it.
Mary Long: Athletes aren’t the only ones with a stake in the Olympic games. Up next, Bloomberg media reporter Hannah Miller joins me for a conversation on what Paris means for Peacock. You recently published a story with your colleague Lucas Shaw about what the Olympics mean for Peacock, NBC’s streaming service. Notably, this is not Peacock’s first rodeo at the Olympics. In fact, the streamer first launched in July 2020, which is when the Tokyo Olympics were originally scheduled to air, that did not happen as planned. The 2020 games, though, were supposed to be, you write a big coming out party for Peacock. What were they instead?
Hannah Miller: It was a bit of a disaster for many different perspectives. There were a lot of complaints about the user experience with Peacock. People were having trouble finding the events they wanted to see. It wasn’t the easiest to use, and it didn’t retain a lot of the subscribers, after the Olympics ended. A lot of people walked away. They were like, hey, this is a one time thing, wanted to try out, didn’t see a benefit to keeping it. This is sort of a second chance with the Paris Olympics. Peacock has another opportunity to shine.
Mary Long: What is Peacock doing to increase viewership this time?
Hannah Miller: I’m actually using the service. I got it. I love the Olympics, so I find that it’s actually easier than last time I also used it for the Tokyo games. I think it’s easier now to find the sports that you want to see. They’ve also really gone in and tried to make this games as fun as possible from a reporting perspective, from a viewing perspective, we have seen a lot of celebrities in Paris. They’re really leaning on people like Snoop Dogg to provide fun and interesting coverage. They’re also using it as an opportunity to advertise new shows coming out on Peacock. We have shows coming out like Fight Night, and it’s like that’s going to be a big thing that they’re hoping people keep the Peacock app so that they continue to watch Peacock shows and NBC shows.
Mary Long: I’m curious about this retention plan because you got to talk to Kelly Campbell, who’s the president of Peacock. Peacock has 33 million subscribers, so that’s up 38% compared to a year ago. But quarter to quarter, it did lose some subscribers, 33 million in its most recent quarter, but 33.5 million in March. I’m one of the people that signed up for Peacock this past weekend to watch the Olympics. What is their plan to keep me around for the next billing cycle and the one after?
Hannah Miller: They’re hoping that you’re going to want to tune into their fall shows, and they want to build this up as a premiere streaming service. They want to compete with Netflix. They want to compete with Hulu. They want to compete with Disney Plus and Max. They’re trying to advertise the content that’s going to entice you to stick with this service. I’m sure you’ve noticed when you’re watching Peacock, you’re getting ads for all different stuff, including new NBC shows and content. They’re hoping that you’re going to stick around. They want to be a big name in streaming, especially when it comes to sports, and it’s a huge opportunity for them with the Olympics. We just have had all these negotiations around NBA media rights, which Comcast got a piece of, so we’re looking forward to seeing, how Peacock is going to play into this. We know a certain amount of NBA games have been slotted for Peacock. There are a number of reasons to stick around, and they’re just hoping that one of them will get you to keep subscribing and keep paying.
Mary Long: I want to hit more on the larger live sports angle here in a minute. But you mentioned competing with bigger names like Netflix and Amazon. Again, Peacock, whether they have 33 million or 33.5 million subscribers, that is far behind the numbers that Netflix and Amazon and Disney boast. Netflix and Amazon each have over 200 million subscribers, Disney plus, over 150 million. Help us really understand the stakes for Peacock here. Olympics or otherwise, what has to happen for this streaming service to be viewed as a success?
Hannah Miller: We’re going to be closely watching the subscriber numbers, the retention rates that they have here post Olympics, and we see their earnings down the line. We’re also going to look at what content is being put on there. They’ve been able to strike different deals. They obviously with universal pictures, being part of the Comcast world that they’ve been able to get exclusive first rights to movies like Oppenheimer. They’re trying to build themselves up as something that you would go to not only for sports, but for movies and television as well. I think they’re hoping, looking forward that they are going to be this powerhouse sports streamer. The other thing we’re looking at too, is whether they’re going to be technical issues here. We’ve seen some things happen with streaming services, for example, with Max. The presidential debate between Trump and Biden, that was airing on Max, and it actually crashed out for users, including myself, and I switched to a different service. If there are no technical issues like that for Peacock subscribers, that could be also another reason for them to stick with this platform.
Mary Long: This might have to do more with my TV than with Peacock itself. But when I was signing up for the service on Friday morning, I kept getting a note on my TV like, your Peacock app needs to be updated, go to the app store, and I kept, despite updating it, wound up in this doom loop of, you need to update this, you need to update this, and I just thought, OK, I’ll do this tomorrow.
Hannah Miller: The other thing too is, you want to have ads for your content and your new shows to get people to stick with you. But you want to find the right number of ads. You can’t have too many because people are going to be like, who am I. I want to watch this or sports and I’ve sat through two minutes of ads. It’s finding that sweet spot there in terms of not having any technical issues, but also having the right balance between ads and content.
Mary Long: User experience is a really important piece of this. Comcast earnings came out last week and over the quarter Comcast brought in nearly $30 billion in revenue. Peacock contributed $1 billion to that revenue. It is losing money, Peacock, but it’s narrowed those losses over the past year. Still in a quarter, a billion dollars to $30 billion of revenue seems inconsequential. In the best case scenario, how meaningfully could Peacock impact Comcast’s top and bottom lines?
Hannah Miller: If you hear from the executives, this is going to be a very consequential thing for them. They’ve talked about how, this is going to be this premier streaming platform. They know people are still cord cutting, that they’re still walking away from cable television. The fact that we’ve seen a lot of sports transition over to streaming, Sports was a major draw for cable linear television. The fact that we’re seeing new sports streaming services come out venue is another one that we’re keeping an eye on that’s coming out in the fall. It’s a joint venture with Disney, Fox and Warner Brothers. I think Comcast from their perspective, they feel like they do have to further develop this streaming platform and make sure that they have a horse in the race. They don’t want to fall behind other platforms. They want to make sure that they’re still continuing to build up their subscriber count and that they’re making, Comcast NBC Peacock, a major player within the streaming world.
Mary Long: NBC has rights to more than just the Olympics. They hosted the NFL wildcard game in January, they just won a piece of the $76 billion NBA rights. How do live sports fit into the Peacock playbook?
Hannah Miller: It’s been interesting to see the live sports conversation play out. They’ve walked away from some sports, too, like Warner Brothers discovery just got the French open from them. It’s been interesting to see how they’re approaching this. They’re really focusing in on mainstream sports. The NBA deal is, I can’t emphasize enough, like, huge for them. They specifically called out in their earnings call, these games that were going to be allocated to Peacock. Not everyone, especially older viewers, that’s maybe not the greatest thing in the world. They just want to be able to turn on their TV and watch a game versus, you know, jumping to an app. It’ll be interesting to see how this plays out, but live sports is huge for Comcast, for NBC and ultimately for Peacock, as well.
Mary Long: For other players, sports rights have been in the news a lot lately. I’m curious to get your take on this because even I’m trying to suss it out, like, Netflix got the WWE for $5 billion for 10 years. The NFL’s deal is $110 billion over 11 years. We just talked about this NBA contract and how that got parsed out. For the Olympics, NBC signed in 2014, a $7.65 billion contract extension, that would allow it to maintain its rights for the Olympics through 2032? That is nearly $7.7 billion price tag for the Olympics. Is that a good deal for an event that only airs for two weeks every two years?
Hannah Miller: I think it’s a huge prestige thing for them. The Olympics are probably the most iconic sporting event, even though the summer games only happen every four years. But it’s interesting to see how they emphasize that all year round, there’s always that rings logo, this is just such a big deal for them. I think the viewership numbers from this games, that’s going to be key to determining whether or not this is a good deal. If they can get viewers boosted and get them to the real numbers from 2016, that would be a good signal that this is a good deal. I think it’s hard to say at the moment, considering the uneven performance of the Olympics in terms of viewership over these past few years. The Beijing games as well for the Winter Olympics. Those had very weak viewership status as well. But as I mentioned before, there are advantages here. People love Paris. People want to see some of the biggest stars jump back in. You have huge figures like Simone Biles, really set to dominate here as well. I think people are going to be drawn to this, and we’ll see how it plays out in the viewer numbers.
Mary Long: We’ve talked about the business side of these games. Are there any non-business non-streaming stories that you’re watching over the course of these Olympics athletes you’re rooting for?
Hannah Miller: My gosh. I’m so excited for the women’s gymnastics. The qualifying rounds are so great, it just shows how dominant Simone Biles is. There are some great stories just watching. Even some of the sports that are new. I want to watch break dancing, I think that sounds awesome. I was seeing Kayak Slalom the other day. There’s just really cool stuff, and I do like that Peacock allows you to jump between different sports. They have a really cool like these little sports icons, you can see what you’re watching and actually find something new that you may not watch normally when you’re tuning into sports.
Mary Long: 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 pseudo-buyers on stocks based solely on what you hear. I’m Mary Long. Thanks for listening. We’ll see you tomorrow.