Welcome back, everyone. Today on the Joseph Carlson
Show. I've had a bad case of
laryngitis over the weekend. My voice has been completely
gone. I've been getting it back a
little bit more every day, but I have so many things that I want
to share. So I apologize if I sound a bit
off. Bear with me.
However, we have a lot of news to get to on this episode.
First of all, the Big Short investor Steve Eisman believes
that Apple is the hidden AI play.
We'll be looking at the case he makes for Apple being an AI
play. Now, we also have one of my core
holdings into it trading down today and yesterday into it.
Reported earnings here and it traded down 8% after earnings.
It's down 10% on the week. We'll be looking at what went
wrong and what I plan to do with my Intuit shares because I still
currently own $56,000 worth of Intuit.
And then finally, we have the casual restaurant chain Red
Lobster filing for bankruptcy. We'll be looking at whether or
not the endless shrimp deal really caused the bankruptcy of
Red Lobster and what Red Lobsters bankruptcy means for
other restaurants like one I happened to own called Texas
Roadhouse. We have all of this to go
through plus much more on this episode, so we have a lot to
cover. Let's 1st jump into Apple.
Apple's been one of my longest core holdings in this portfolio.
Currently a $42,000 position, and I'm $25,000 in the green.
But Apple is struggling now with the number of pressures.
First of all, the valuation is higher.
It now trades near a 34 PE ratio, which is a bit higher
than its historical average. The revenue has only grown
around 2% over the past three years, and Apple now faces a lot
of regulatory challenges as well.
So I've been a bit more cautious on Apple.
I've trimmed my position a little bit, but I still hold a
relatively large position. Now despite those concerns, one
of my most respected investors, which is Steve Eisman, he's one
of the big short investors and I believe he gives very level
headed advice. He was asked about AI and which
companies he thinks will benefit the most from artificial
intelligence. You think that there's a huge I?
Think Apple's actually the hidden AI play.
Not exactly today, but will be because, you know, everybody's
focused on the chips and everybody's focused on the
cloud. But at the end of the day, when
there will be apps, and I have no idea when that's going to be,
but when there will be apps that the consumer can use, they're
going to want to use it on their phone.
And I have a new iPhone and I know for sure that when all
those apps come on, my phone is going to I'll need a new phone
and I'll need a new iPad and I'll need a new laptop.
And so when the apps show up, the biggest probably beneficiary
is going to be Apple because they're going to have a refresh
of every literally everything that they.
Sell His first major thesis on Apple being an AI play is that
AI will eventually go through the phone.
When it goes through the phone, it'll have to pass through the
Apple tollbooth. And the Apple tollbooth is the
service line of revenue, the only consistently growing
revenue from Apple. Now, of course, that could be
the case for consumers using AI applications.
Anytime you run a digital transaction, Apple take a cut
from that digital transaction. He's also asked about the
concerns of Microsoft taking market share from Apple by
offering AI hardware. You know, trade happened with
Microsoft, which just unveiled its new sort of hardware lineup
that is AI I equipped. Partially, I mean, that's going
to happen. But yeah, I don't know how much
Apple. I mean, you're going to need to
see people start to buy their laptops and it's going to be
more than you probably need more than just Microsoft doing what
it's doing. The apps have not come yet when
they will, and I have no idea when that's when this whole
refresh cycle is really going to take off.
Satya Nadella has been talking about these new Microsoft
laptops and that's great. But it is true he needs to
actually see them sell. I don't think they'll take any
market share from Apple. And laptops are not the most
important category with applications.
Phones are now moving on. With this interview, he's asked
about NVIDIA, which is the go to AI play today.
NVIDIA trades up in price every day as investors become
increasingly bullish on its future prospects.
But Steve Eisman double S down again on why he believes Apple
is actually a less obvious AI winner.
Right now, the easiest way to play AIR is NVIDIA, AMD, few
other chip players, and then anybody who is in the cloud with
a massive database. Beyond that, either there's
Apple, which I just mentioned. And after that it's not clear
because so much of what's going to happen is unknown.
I you know, there's no, there's no way to know at this point.
So Steve focuses on the fact that Apple owns the App Store,
and having new AI apps in the App Store will cause a big
refresh. Now, there's another way that
Apple wins that Steve Eisman didn't even mention here.
We're seeing a lot of devices enter the market that are
different factors of AI devices, like the humane PIN.
It does projections, it talks back and forth to you.
It does a lot of different neat things.
And this has received a ton of funding.
This is a really well funded device.
They're going after the iPhone market, but the reviews for this
PIN have been not so good, with top reviewers saying it's one of
the worst devices they've reviewed.
Ultimately, what this humane pin boils down to is a nice pin
attached to ChatGPT. That's all it is, a ChatGPT pin.
Another new device that came out recently is this Rabbit R1
device. It looks a little old school as
a screen here that you can scroll through.
And basically when you summarize this device, it's another
plastic device attached to ChatGPT.
The biggest criticism that people had for this device was
the form factor. If you made some changes like
they're illustrating here, you could improve it.
You could widen the screen, make it touch screen, make it so it
has little buttons on the side, lengthen the screen so it's a
little bit taller and you have more room, and then you
basically have a phone. All these third party devices
are trying to go around Apple by simply integrating ChatGPT into
their plastic box, and that strategy is not working because
the phone is already so powerful.
Now Apple knows that they can make all of these other devices
completely irrelevant by integrating right into the
source. Having the iPhone integrate with
ChatGPT directly, that would take all of advantages away from
the humane PIN or the Rabbit R1 or any other third party device
that's trying to use AI as an advantage.
Apple's entire ecosystem would become an AI ecosystem.
So when we look back to Steve's comments, I think there's two
ways that Apple become a hidden AI play.
One of them is with the apps like he mentioned, that will be
in the App Store. That could cause a new refresh
cycle with Apple devices better suited to run AI.
And the next one is Apple directly integrating AI into
their phones with a ChatGPT partnership.
If they do that and they have the type of personal assistance
that ChatGPT showed off, that could be a game changer.
So we'll have to see ultimately what Apple decides to do, but
there are some growth paths there.
Now, moving on from Apple, we had another company in My
Portfolio recently report earnings.
The company was into it. This is a large $56,000
position. I'm currently $15,000 in the
green, and that is after the company has traded down 10% over
the past week. It dropped down 8% after
reporting earnings in their earnings report.
As investors scan over the different highlights, there's
one line that caused investors some concerns.
Customers paying nothing to be over 10 million, down from
11,000,000 last year. That is the headline there.
The Intuit is losing market share from its free TurboTax
customer. Now, to add context to this, the
CEO is not worried about this at all.
It's actually part of their plan.
They're not focusing on TurboTax free customers, they're focusing
on converting those customers into paid customers, which they
did successfully. TurboTax Live Revenue, which is
a paid version of TurboTax, grew 17% to 1.4 billion, representing
approximately 30% of the total consumer group revenue.
They want to get this from 30% up to 70%.
Their long term goal is not to have as many free customers as
possible. Their long term goal is to
expand in the TurboTax live market.
The live market are the people that need assistance in more
complex tax returns and the total addressable market in that
category of live returns is much larger.
But overall that is the one reason the stock is down.
Everything else on their earnings report looks good.
They beat on their revenue, they beat on their earnings, they
raise their full year guidance. The company's growing in every
business segment. If we use Qualtrum Hair, we can
look at the KPI's of the different segments of revenue
and every single part of them is growing.
Small business is growing, Consumer Pro Tax and Credit
Karma, all of the revenue in every part of their company's
growing. They have a lot of optionality
to continue growing all these various segments and a greater
portion of their sales is now coming from services than
products as they continue to get people on subscription services
away from one time sales. Intuit's stock price may be
selling down, but from everything I could gather on
this earnings report, it was a very solid earnings report
across the board. Not only is the total revenue
and the revenue by every segment growing incrementally year over
year over year, but the profits of the company are growing.
Intuit's free cash flow is also a record high last quarter of
$3.89 billion higher than the year prior and higher than the
year prior than that and the year prior than that.
They're growing their free cash flow above 10% per year.
This also translates well into net income for the company.
It translates into earnings per share growth for the company.
Their balance sheet now has more cash and less debt than quarters
prior. And of course, they return cash
through dividends, which they grow around 15% per year.
Overall, financially, this was a very solid quarter from Intuit
and the CEO highlighted that in an interview.
We are raising our guidance for the year.
We're shifting from 11 to 12% revenue guidance to 13%.
And we're raising every metric, operating income and EPS, and
it's really several fold. One, our revenue's growing
faster and we're continuing to get just incredible leverage
because we're a platform company and all of our investments that
we've particularly made in data and AI is allowing us to deliver
more innovation for our customers and be far more
effective internally. And so that's the leverage that
you're seeing and why we're able to, you know, increase our
guidance across all of those metrics.
Intuit's another company that I think is a hidden AI play.
They're wrapping all of their products with artificial
intelligence. They're not going to be a main
driver of AI, but they're leveraging it for everything
they do. With Intuit trading down 10%
after this earnings, it is causing some concerns for other
companies reporting earnings like Salesforce.
Ever since Intuit reported earnings, Salesforce has had
continuous red days as investors have looked at both Intuit and
ServiceNow, another company that's similar it's reported
earnings and both of them have done poorly after earnings.
Intuit was down 10%. ServiceNow was down 20% after
earnings. So is Salesforce reporting their
earnings the end of this month? A lot of investors are concerned
about this company selling off after earnings as well.
As for me, I am holding my entire Intuit position.
I'm not selling a share. And I'll also happily buy
Salesforce if this company sells off after earnings.
Both Intuit and Salesforce are highly profitable tech
companies. They're both incredibly strong,
and I didn't see any fundamental weaknesses in this report from
Intuit. Now, finally, we get to the
story of Red Lobsters Chapter 11 bankruptcy.
And ultimately, this is a story of a restaurant being managed by
a group of investors that don't know how to manage a restaurant.
Let's first go to the mistake #1 the Red Lobster endless shrimp
loss leader. It's normal for companies to
have loss leaders. There are things that get you in
the store that you get a great deal on so that you spend a
greater amount of money on something else.
For example, Costco has the hot dog and drink combo.
Costco doesn't lose a lot of money with the hot dog and drink
combo. But Costco also doesn't make any
money with the hot dog and drink combo.
The only reason they offer it is to get you to go to Costco.
They know once you get in the store, you might be tempted to
buy one of those big screen TV's or one of the new BBQ grills
that they put out for the summer.
They know they'll probably get you to buy something more
expensive by getting you in the warehouse.
So this is an example of a well executed loss leader.
They have a small ticket item that they don't lose a lot of
money on to get you to buy bigger ticket items that they
make a lot of money on. The managers at Red Lobster
wanted the same thing, but rather than having a loss leader
that was inexpensive, they went with a loss leader that was
incredibly expensive. They launched a $20 all you can
eat shrimp deal. This allowed dining customers to
scarf down unlimited garlic shrimp scampi or shrimp linguine
Alfredo. The new investor that owns Red
Lobster that came up with this ridiculous promotion says they
told investors in November that the shrimp deal contributed to
an $11 million loss for Red Lobster for an entire quarter.
In one quarter, they're losing $11 million on this one loss
leader promotion. There's actually videos of
people going into Red Lobster, not ordering anything else and
just scarfing down as much shrimp as they could, some of
them eating 60 or 70 individual pieces of shrimp.
Red Lobster lost money on every single patron that did this.
That was a poorly thought out promotion by the management, but
that wasn't the biggest mistake they made.
The chain's real estate portfolio is a huge problem
created in part by Red Lobster's former owner, Golden Gate
Capital. When Darden Restaurants, which
was the previous owner of Red Lobster.
When they sold Red Lobster to a private equity firm in 2014, it
funded the $2.1 billion acquisition partially through a
$1.5 billion sale leaseback agreement.
Under the terms of the agreement, the majority if not
all of the Red Lobster locations were sold off and the chain had
to start paying rent on properties it once owned.
While Golden Gate reaped the profit.
At the same time sales started to drop, they could no longer
afford the leases. So we have two major issues so
far. First of all, their promotional
loss later deal was a big problem for the company, losing
10s of millions of dollars per quarter.
The second issue is that they no longer own the locations they're
running out of. They're now paying rent on them,
with rents rising every single year.
If they own the properties outright, they wouldn't have to
deal with rising rents. These two issues combined with
lower sales contributed to their bankruptcy, but there is still
one major issue. Another issue contributing to
Red Lobster's demise was one of their biggest investors, Thai
Union Group. They're also one of the world's
largest suppliers of seafood. Once they bought Red Lobster,
they made it so that they had to exclusively get seafood from
company. So Thai Union Group, the largest
investor, was the exclusive supplier of seafood.
And they also controlled the prices of the seafood, which
some believe forced Red Lobster to pay above market rates for
their seafood. So Thai Union Group extracted as
much money as they could out of this investment through
supplying overpriced seafood. Ultimately, Red Lobster could
not afford to deal with all of these issues.
They're paying too much in rent, they're paying too much in food
product. Their sales are dropping.
So the company is now a Chapter 11 bankruptcy looking for a
buyer, and they're closing hundreds of locations.
The biggest take away from the story is it's important to
control all these external factors.
Texas Roadhouse, for instance, owns their locations.
They have much better control over their rent.
They have no exclusive provider of all of their beef.
They can get the best market price available.
The management team is incredibly experienced in
promotions. They're not going to do $20 all
you can eat premium steak deals. They'll never do a promotion
that loses an enormous amount of money for the company.
They're far too experienced in the restaurant industry to run
such a poor promotion. So while it's unfortunate that
Red Lobsters closing and the company is going bankrupt, that
is a story of a complex set of factors and a lot of
mismanagement. And I don't have any concerns
that crossing over to Texas Roadhouse or Chipotle.
Now, that's going to be it for this episode.
So I apologize again for the poor voice in this video.
Hopefully I'll be back to 100% soon.
That's all for now. See you in the next one.