Semiconductors, Burritos, and a Streaming Behemoth

In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:

• ASML's surging revenue, and why the key semiconductor company has a different outlook for 2024 than its main customer, Taiwan Semiconductor.
• Huge subscriber gains for Netflix, and the metric that shows the company's streaming supremacy.
• Chipotle's preparations for "peak burrito."

The trend of staying at home is hitting some "eatertainment" companies. Motley Fool host Ricky Mulvey caught up with Fool contributor Rick Munnariz to talk about one arcade company that's trying to reverse a sales decline.

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 January 24, 2024.

Dylan Lewis: We're talking burritos and chips, but you might not want them both on your dish together. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst Tim Beyers. Tim, thanks for joining me.

Tim Beyers: Thanks, Dylan. Fully caffeinated. Ready to go.

Dylan Lewis: Love it. We've got to look at the entertainment world and big results and big reactions from company earnings and that's where we're going to kick things off with ASML. Tim, the linchpin of the chip industry in Europe's largest tech company, posted 9% bottom line growth and 30% top line growth for the quarter, sent shares up 10% this week after earnings seems like it's a pretty good time to be in the semiconductor business.

Tim Beyers: Well, let's not say that I wouldn't go that far, but I would say it's a better time and it does look like things are turning for the better. Let's just point out that ASML did have some really good results in the business that really will drive results for the longest period of time, which is the EUV business. This is the more advanced chip-making business. When we're talking about lithography, which is what ASML does, and they are the provider of EUV, which is the most advanced form of lithography for making the smallest and most advanced chips, we're talking about doing really advanced chip manufacturing here. In that part of the business, the EUV lithography was up 30% to 9.1 billion euro sold or I guess I should say recognized revenue on 53 systems, so a big deal. But they also shipped, and this is interesting, they shipped the first modules of what they call a high NA EUV system and they're shipping it to Intel. Watch out for the Intel results tomorrow.

This is going to be really interesting to see where we are at here because one of the rules of chip-making, Dylan, is that we are always looking for the next generation. We're always looking for how to make a more functional, smaller chip set. This looks like the next step. It's the step change that takes us into the next era of chip-making here. What does this mean for Intel's foundry plans? Hopefully, we find out more tomorrow. But the fact that this is happening, that at the highest levels, ASML is selling with a high degree of growth, its most advanced lithography machines is a very good sign. Now, on top of that, I would say somewhat lower tier, but the workman like chips that are made with DUV systems, those are greater than seven nanometers, so they're a little bit bigger. But it's the chipsets that you're going to find in industrial equipment. These are the workman like chips. They are everywhere. We have more of them in industrial equipment every single year. It's a better time to be in the chip-making business up and down the supply chain, which is nice to see. That wasn't really the case about 18 months ago.

Dylan Lewis: You mentioned Intel's reporting, later this week. We'll have a fuller picture of the chip business and industry when they get results in. But we have results from Taiwan Semiconductor in addition to ASML and I want to put those two together and look at some of the different spots in the supply chain because we saw what looked like some strong outlook and expectations from Taiwan Semi when they reported, Taiwan Semi is ASML's biggest customer. We're seeing more moderate growth expectations in the commentary from ASML's management.

Tim Beyers: To me I just think that is prudence and I'm OK with that. I don't think it's a bad. What I think they're saying is we're seeing a recovery here, but we're going to be cautiously optimistic and that's ultimately a good thing here because we don't know what the long tailed demand of, let's say, really advanced hardware for AI workloads. We don't know how long that tail is. Do you want to be cautious, especially when you make a product that takes a long time to build and a long time to sell? Yes, I would like you to be cautious. That's a smart thing to be. In the case of Taiwan Semiconductor, so you have the way the supply chain works here, Dylan, you have the most advanced equipment and ASML does not sell very many of these because they are super expensive, these EUV machines. In order for Taiwan Semiconductor or any foundry provider, and a foundry is a chip-making factory, for them to order one of these machines, they need to have a really big backlog of orders that they need to have in place or the expectation of a really big backlog of orders that they need to be able to rely on in order to say like, we need these machines in order to satisfy that demand. There's a little bit of chicken and egg going on here but in this particular case before, ASML is going to invest a huge amount of R&D and a huge amount of manufacturing capacity to build a machine that costs just huge amounts of money, they need to be relatively assured that the demand is there and that the demand is not just, the next six months, the demand is multi year. I don't blame them for being prudent.

Dylan Lewis: Tim, we're going to stick with the earnings beat and look at some updated results from Netflix. On yesterday's show, our colleague Ricky Mulvey and Bill Mann, they discussed Netflix and they got into the $5 billion deal with WWE. The week of good news continues for the streamer shares up 10% following earnings, we saw some strong top line growth. We saw even stronger bottom line growth. But the headlines and everything I saw covering this earnings Tim, was the subscriber account. That seemed to be what everyone was zooming in on here.

Tim Beyers: It's understandable. It tripled year-over-year. Dylan, if we take a look at the overall number from Q4 of 2022, the number of global streaming paid editions, it didn't quite double. Paid net editions Q4 of 2022, 7.66 million, for Q4 of '23, 13.12 million. That's a huge number. That's not quite a double, but it is a massive increase, up 12.8% year-over-year. You can understand why that's an area of focus. I would caution that some of that is likely to be some maybe password cheaters coming into the fold and paying a little bit and you know what? There may be a little bit of an artificial bump there, but I don't mind that. They've tried to create a scenario whereby those who want Netflix and they want to get it and they have to pay a little bit, but not a lot, because previously they were sharing passwords. I think that gives them, I'm not going to say goodwill, it gives them a little incremental income and it satisfies somebody who's like, yeah, OK, you got me, I still want it but I'm not going to pay the full freight give me something that I can live with, they've got that and so now the net editions are rising as a result. I don't think that should be the headline number though, Dylan.

Dylan Lewis: What should it be?

Tim Beyers: Not at all.

Dylan Lewis: What should people be paying attention to?

Tim Beyers: It should be 26.2, 26.2 should be your number. Because that is the Q1 2024 forecast for operating margin. Let me just say that again, 26.2% is your forecast at operating margin for the next quarter. That is bonkers when so many of the streamers are having trouble even making $0.01 of profit, that Netflix can tell you that pre tax, we think we can make $0.26 on every dollar of streaming revenue in the first quarter. That is astounding. They are so far ahead of everybody else. Also, for their full year guidance for 2024, they raised their operating margin guidance for the full year to 24%, so they're going to get off to a great start in the first quarter, they're going to see presumably some dips here and there during the year but end on 24% that's astounding, Dylan, and they also ended the year with close to $7 billion in free cash flow. I can understand why this stock is soaring at present. This is by far the most efficient business in the streaming industry. Let's be clear, it ain't close. There is no one even remotely in the same ballpark as net. I will make that statement, no one is close, no one.

Dylan Lewis: Tim, the story with this company has been for a while, growth and then over the last couple of years we've had to moderate a little bit more and focus more on things like our margins and free cash flow, which also came in incredibly strong this quarter. It seems like this is something where the company is having its cake and eating it too with these results. We're seeing strong enough subscriber growth and we're seeing a lot of the efficiency elements that we want to be seeing with this business.

Tim Beyers: I think that's right. I also think it's a good study in effective capital allocation in entertainment. The two things, so Netflix is core advantage, which I think I've said to you before, Dylan, and something that they have that others do not have. Is they have a direct relationship with hundreds of millions of subscribers around the world. They are essentially a streaming TV service that has direct access to and control over subscriber accounts across the world in 190 countries, nobody else can do that, nobody else can claim that. The reason these streaming services came to be in the first place is to try to get that. The way the entertainment business has historically worked is you have the country that you're in and then you rely on distribution in other countries for local distributors and it's been really disaggregated that's the way the entertainment business has always worked. Netflix really disrupted that. As a consequence of that they get the ability to experiment with a lot of different types of content in each of those localities directly with their subscribers, make a lot of small bets with small amounts of capital and then allow a hit that may be something in like South Korea, Squid Game and it becomes a global phenomenon and so they get huge returns on a small amount of capital, I don't think we're seeing that in the other streaming businesses and it's one of the ways I can explain how good Netflix is at squeezing margin out of the same business, they entered the streaming entertainment business. They spend a lot, but on a lot of projects. When one hits it can have a really outsized impact on the business and they get huge economies of scale from that.

Dylan Lewis: Tim, that's going to wrap our earnings beat. While it might be earning season right now, Chipotle, not so focused on earnings season, more focused on burrito season.

Tim Beyers: It's burrito season, come on.

Dylan Lewis: News out that Chipotle is looking to hire 19,000 workers to meet the demands of peak burrito, which I didn't know is between March and May. When it comes to the job market most of the stories that we've been seeing have been about layoffs. Do you take this as a sign that Chipotle is expecting the good times to continue to roll?

Tim Beyers: I have no idea but I know they're expecting to roll a lot of burritos and I know I want to see peak burrito T-shirts being sold at Chipotle, that's for sure. I think this is bonkers. It's really interesting that they are hiring as many people as they are and I think they do have an opportunity in particular to serve customers. As it gets warm, people get out, they like to just experience dining out again. Because when you are in the house during the winter and let's be clear. This has been, we've had some snowmageddon around the country, people have been hold up a bit and we've had some Arctic frost blowing across the country, I know we've had it here in Denver. I think we are looking forward to things warming up a little bit, maybe getting out and enjoying a burrito as well. Who knows if this is the good times continue to roll here. But Chipotle has been executing quite well. If they're looking to hire 19,000 employees here, it makes me, at worst, Dylan, it makes me really curious to see what the results are going to be in the next quarter here because clearly they have found something that they can hang their hat on so let's see it. Roll me some burritos, I love it.

Dylan Lewis: I will happily share a chipotle burrito with you out in Colorado if we ever get the chance to make that happen, Tim. In the meantime, I appreciate you jumping on today's show and walking through this with me.

Tim Beyers: Thanks, Dylan.

Dylan Lewis: Coming up, when's the last time you went out on a weeknight? A new stay at home trend is hitting some of the eatertainment companies and Motley Fool Money's, Ricky Mulvey caught up with Fool contributor Rick Munarriz to talk about one arcade company that's trying to reverse a sales decline. 

Ricky Mulvey: Rick, I saw this article in the Wall Street Journal and I thought of you. The title is, Americans are Ditching Week Night Fun. Can hey be tempted back? First question, do you think this is concern trolling, or is this a legit problem for the we'll call them eatertainment companies like Dave & Buster's, Topgolf and Bowlero.

Rick Munarriz: I think in the near term, yes, it is a legit concern. The numbers are there. We're seeing some companies are sort of saying, hey, our business isn't as good as it was a year ago and it's a lot pointing to what's happening in the middle of the week. The longer answer is about can there be tempted back? Yes, I think that can happen, but I don't think it's going to happen immediately. But I think you see what's happening here. It makes sense when it all comes down together that in the pandemic, the pandemic was scary, it was awful, it was brutal. But it also was a time when a lot of us were stuck at home and we needed to get out. I don't know that situation because I've been basically contributing remotely to The Fool since 1995. I've been sheltering in place for almost 30 years. To me, this was something that when the pandemic came, it was awful, obviously.

But the fact that my wife and my kids were like, oh, we need something to do? I'm like, well, this is a Tuesday for me, this is typical, don't worry. In the old days when I was the only one working at home and everyone else on the planet was working in an office or going to school, I was like a little puppy when my wife would come back from work, when my kids would come back to school, where do we go? In a sense they were like, no, we're tired and you're sort of seeing the numbers you play out. You're seeing Roku, just to bring out a name. People are still streaming almost four hours of content. Even though now they have the ability to go out, they still want to go home and relax. We're seeing this happen. It's coming at the expense of all these fun places to go. Especially in the middle of the week when people are coming back home from work, they're tired, they may be pressed for cash, whether it's because they had student loans that now start to resume payments, or just that they're just trying to save money for whatever the case may be. In this climate of rising rates until recently, I do think that it is valid, it is a concern, but I think it is a near term concern.

Ricky Mulvey: The article focuses on what you said where people were working from home, now you're hybrid a couple of times a week so you're a little more tired, maybe your kids are going have more after school activities. The companies are busting out the weeknight promotions. David and Busters brought back all you can eat wings on Mondays and Thursdays. Topgolf is experimenting with some additional midweek discounts. They already do half off golf on Tuesdays. In Bowlero, the fancy bowling chain, offers unlimited late night bowling during the middle of the week, half priced arcade games on Wednesdays. I've been a big fan of going out during the week lightly because that's when you get some of the deals. While we're talking about these maybe anecdotal examples, it seems like these companies would constantly be monkeying with different promotions. Happy hour doesn't necessarily mean that people are spending less money. Do you think these promotions are signaling anything significant about these companies?

Rick Munarriz: They get the data faster than we do as consumers. I think you get to the case where with Topgolf, once they started doing half off golf on Tuesdays, who is going to go to a Topgolf on a Monday or a Wednesday? Sure enough, they said Monday, Wednesday, Thursdays are now their worst days. They need to do something about that to get people back in there. Of course, it makes sense and we are at a time, thankfully for them, that it is very easy to reach your customers. You have loyalty programs like David and Busters have. You have the Internet, you have Instagram. You have all these outlets to reach to them. It's no longer having, oh, we need to cut a commercial spot. We need to have a radio ad. We need to talk the Groupon about getting a deal out there. These tools are there for them to change things on the fly. I think they have to think creatively at a time when it's no longer a cabin fever. Now it's like cabin desire, appreciation. I'm glad to be back at home. At the end of the day, I want to rest and relax and I think you're seeing that happen. Even Toast to bring in another company. They are the leader of payments on restaurants in the latest quarter and they said that transactions for revenue are trending lower in the holiday quarter. This is a company with 99,000 restaurants so it's a great sample size of what's happening out there that people are spending less, especially in the middle of the week.

Ricky Mulvey: It's also, I think, a consumer debt story where you're seeing credit card balances go up higher. I'll focus on Dave and Buster's for a second because it's fighting off that post pandemic hangover. People are tired of going out. If you have a higher credit card balance, that's a pretty easy trip to cut if the kids are bored at home. Maybe we're not going to go to Dave and Buster's this week even if they have a great discount. But it's also, you could make the lipstick effect argument, which is that, hey, maybe we're not going to go to a professional sporting event that's too expensive, but we're going to meet you in the middle and go to something like David and Buster's, which might be a little bit cheaper for a week night activity. We'll start with the macro. What do you think of Dave and Buster's as a consumer spending indicator? Does it say anything?

Rick Munarriz: I think it's fair. Again, I don't think this is the same as red lipsticks during the war time. This is more of an issue, Ricky, where if the economy is contracting, if you have more bills to pay, you're not going to trade down to a Dave and Buster's experience. I think it is the kind of thing where you will have a case, they will suffer. You've seen this happen at the restaurant level. You've seen this happen at Topgolf when they're not discounting at half price on Tuesdays in the middle of the week. People will cut back. I think it's understandable. I can't open up my Groupon app without a Bowlero ad deal showing. I do think that that is the kind of situation where it's legit. I don't think people are, it's not a matter of finding the middle ground. I do think that it's real and I think you're seeing. With David and Buster's, I think it's important as an investor, their latest quarter, their comps were down 6% and you see that and you think, oh, the business is declining. But it's still 8% above where it was in 2019, the last pre pandemic year so business has improved. It was just a bananas 2021 and 2022 and to a certain extent, the beginning of 2023 for Dave and Buster's and now that part is stabilizing. But as long as it's normalizing, their operating margins are 390% above, a basis points higher than it was in 2019. I think Dave and Buster's is definitely in a better place now than it was in 2019. I think it's just a matter of just building from this point now, which is a better baseline than it was last year.

Ricky Mulvey: I think one of the issues for these companies, especially when you're doing those promotions, like you mentioned with Groupon and Bowlero is the longer you do that, the longer you set the expectation where someone's going to come in and get a deal. You've seen that happen to retailers in the past, where if your customers come in and nobody's expecting to pay full price, that becomes a problem 3, 5, 10 years down the road. We'll focus on David and Buster's, in part because I think if you want to teach anybody about Peter Lynch style investing, this isn't the worst place to get them interested in doing so. Chris Morris came in as CEO in 2022. We got a turnaround plan because every time a CEO comes in, you got to have a turnaround plan. In this case, there's basically three options. We got to go with three, Rick. One is remodeling the arcades. Number 2 is changing up the food and drink menu so you got more snackable options. Number 3 is growing the special events business. The market seems to be buying this story. You mentioned the pre pandemic comps and I know you follow this company. What do you think of his story for the Dave and Buster's turnaround?

Rick Munarriz: Real quickly, Chris Morris, I know he's new to David and Buster's, but he's not new to this market. The reason he became CEO was in 2022, Dave and Buster'sbought a company called Main Event and Dave and Buster's have 160 locations. Main Event is much smaller, about 50 locations, but the same concept where it's quality, sit down dining and all these fun at arcade games and other, things you can entertain yourself with. He was a natural to come in and say, hey, we want you to be the new CEO. It's almost an Aqua Hire. They're also gaining new locations. Again, in Chris Morris's case, as he was the president of California Pizza Kitchen before that. He was even the CFO of CEC Entertainment, which is Chuck E. Cheese. If you always consider Dave and Buster's as a Chuck E. Cheese for adults, he was running the Dave and Buster's for kids already as a CFO, so he has that experience. I think it's the right approach, especially when you're dealing with entertainment and something you have to be vibrant. You can't stand still.

I think you're seeing this and just, in fact, remodeling that whole million dollar midway, which is such a big part of the experience. The fact that, again, I haven't been to Dave and Buster's in about two years, not for lack of love of the place, it's that the nearest one near me is no longer near me as I moved away. But it has always been a place where you can go and get a quality meal. But again, it is like the sit-down experience. The fact that they've trimmed down the menu so you can get more stuff all over the place is definitely something to look forward to. Special events, that was really hard for them to come around in 2020, 2021. People were dying to come back in, but businesses weren't ready to have functions, you weren't ready to have birthday parties and like anniversaries and all these other bachelor parties happening there anytime soon. That's a big part of the market and they tend to have these big rooms reserved for these special events too. I think that's going to be harder to come by if the economy goes south. But I think it's really the fact that he is tweaking things and business is better than it was in 2019, better than it was before he got there, I do think that he's on the right path.

Ricky Mulvey: I got a couple knocks on the business story. This continues the Peter Lynch theme. You've taken your kids to the arcade, they've played the life size Rock 'Em Sock 'Em robots. They've done the racing games. Now it's time to talk about sale lease backs and share buybacks. Morris has aggressively been buying back shares. I think taking out about 18% of the existing share account in fiscal 2023. The business is profitable and yet he's doing some sale lease backs, which is where you sell your real estate to basically a real estate investment trust or a bank and then you're just leasing the building for forever. You get some immediate cash. You get that little sugar. But then you've got a long term debt problem, which I would give those as knocks against the business.

Rick Munarriz: I'm going to approach it a little differently. First of all, I look at the at a buyback as a great thing, even when your stock is hitting recent highs and doing really well as Dave and Buster's stock did in 2023. I do think that this is the company signaling, hey, we know our stock is high, but we think it's going to be even higher, that's why we're buying back now. Obviously from a company that's profitable as they are, the fact that you're buying back shares increases earnings per share rather than the money that they'd be earning off it. I do think this is a smart move on their part. Sell these back, I'm torn. I know a lot of quality companies do this. It's a way to generate cash flow and use that money to expand, and they are expanding, they are growing. All these things that you were talking about, remodeling the arcades, changing up their menus, building up the special events business, these things cost money and I think it's important for them to create the flexibility to be asset light, so to speak, even if it means that they're paying more in rent to maintain the place. I'm not necessarily against a sale lease back environment, especially if we are at this point where it looks like interest rates will start heading lower where I think it'll be a more convenient terms for them.

Dylan Lewis: As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.