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00:00:01
DeepSeek rocks the Magnificent 7, and a tonic for Fever Tree shareholders?
1.3k Plays2 months ago
In this week’s episode, Lawrence is joined by Graham Neary and Megan Boxall. They discuss:
02:20 - Fevertree #FEVR - can its recent strategic partnership with Molson Coors put the fizz back in its investment case?
11:54 - WH Smith #SMWH - we discuss the sale of its high street business, and whether there’s a potential opportunity for it to re-rate as a lower-debt travel business.
18:33 - PayPoint #PAY - this week’s trading update from one of the UK’s “best fintech stocks”, and what value are shareholders really getting from its buyback scheme?
28:12 - AJ Bell #AJB - why its seemingly positive update this week may have disappointed the market.
35:09 - Why Graham is so downbeat on #SAGA’s prospects, despite the refinancing of its corporate debt this week.
37:55 - Whether the Magnificent 7 can continue to justify their sky-high valuations after quarterly earnings from this week, and the AI giants’ tussle with DeepSeek. Where could you find potentially better opportunities?
If you enjoyed this, you can read daily analysis on noteworthy and hard-to-research shares with Stockopedia’s Daily Stock Market Report. You’ll also unlock award-winning investing insights, tools, and education to speed up your research process and help you make more informed decisions.
Try Stockopedia free for 14 days at stk.pe/pod.
Extra Stockopedia content we mention:
Ahead of Expectations: How trading updates drive share price momentum: https://www.stockopedia.com/academy/reports/ahead-of-expectations-how-trading-updates-drive-share-price-momentum/
Host: Lawrence Judd
Analysts: Megan Boxall, Graham Neary
Help us improve the podcast by leaving your feedback here: https://www.surveymonkey.com/r/XLRXBP5
Disclaimer: We do not provide personalised financial advice. None of our content constitutes or should be understood as constituting a recommendation to enter in any securities transactions or to engage in any investment strategies discussed in our content. We do not provide personalised recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual. It is very important to do your own analysis before making any investment based on your own personal circumstances.
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Transcript
Introduction and Format Update
00:00:04
Speaker
Hello and welcome to this week's episode of Companies and Markets Weekly from Stockopedia. I'm Lawrence. I'm joined in this week's episode by Graham Neary and Megan Boxall. We've got a bit of a bumper episode this week. There's been a lot happening in the UK and US stock markets this week. ah One piece of feedback that we've implemented from from you, from listeners, is that ah you'd like to know when in each episode different things are discussed so that if things are more relevant or interesting to you, you can skip ahead ah to those points. ah To that end, I have put timestamps in the show notes that you should be able to see when we discuss.
00:00:42
Speaker
at different things.
Fevertree-Molson Coors Partnership: A Game Changer?
00:00:44
Speaker
On that topic, we're going to start this week's episode in part one with the UK news. ah We're going to look at Fevertree and discuss whether its recent strategic partnership can put the Fizz back in its investment case.
WHSmith's Strategic Shift
00:00:56
Speaker
ah We're also going to look at WHSmith that announced this week that it was going to be selling or exploring the sale of its high street stores and whether ah we think there's a potential opportunity for the business to re-rate as a lower debt travel business.
Paypoint's Market Position and Strategies
00:01:11
Speaker
We're going to look at Paypoint, a trading update from what Graham is calling one of the UK's best fintech stocks. and We're going to discuss what value a shareholder is really getting from its buyback scheme.
AJ Bell's Trading Update: Market Reactions
00:01:24
Speaker
and Finally, in the UK, we're going to look at AJ Bell, who announced a relatively positive trading update this week, but slightly disappointed the market. so We're going to discuss why that might be.
00:01:36
Speaker
um We're also going to touch on why Graham is so downbeat on Saga's prospects, despite its refinancing of its corporate debt
US Markets Focus: The Magnificent Seven and AI
00:01:44
Speaker
this week. Then in part two, we're going to shift over to the US and we're going to discuss whether the Magnificent Seven can continue to justify those sky-high valuations after quarterly earnings announcements from this week.
00:01:57
Speaker
and the AI giant's tussle with DeepSeek, potentially where you might be able to find better opportunities that are exposed to those same
Investor Tips and Final Thoughts
00:02:06
Speaker
themes. And finally, Megan and Graham each offer one thing they think investors should be paying attention to this week, that you might have missed. I hope you enjoy this episode. Let's get into part one.
00:02:20
Speaker
Graham, it's been a been a busy week on the Daily Stock Market Report for UK News this week. ah what's What stood out to you? Well, ah yes, Lawrence, it's been ah there's been plenty to discuss. and and I think the the most interesting bit of news we've had ah came towards the end of the week with ah Fever Tree,
00:02:43
Speaker
which has announced an investment and a strategic agreement with Molson Coors, which is a ah drinks giant in the United States. Obviously, Coors makes Coors.
00:02:59
Speaker
and um it ah It trades under the ticker TAP, or T-A-P, which is quite nice. and yeah so This this sort of Canadian-American company is putting £71 million pounds into Fever Tree buying shares.
00:03:19
Speaker
ah Fever Tree is returning that money to shareholders in the form of a buyback, although I know judging by the comments that not everybody appreciates a buyback, but that's what the company is doing. They're they're taking $71 million in, and they're sending it back out in the form of the buyback. But what's really exciting about it is that Fever Tree has a growth opportunity in the United States. That's the fastest growing ah country and in terms of it's getting the most grow more growth there than anywhere else. And now it will be able to rely on cores for a lot of help ah in terms of distribution.
00:04:08
Speaker
and They mentioned supply chain, procurement, all these practical things. ah so It basically means that Fever Tree will be able to you know have a but a stronger attempt in the United States. And and they're talking about ah getting a more predictable ah sort of cash generation from the United States. They're talking about maybe doing another buyback.
00:04:39
Speaker
and You know in due course because they're expecting the united states to generate a lot more cash for them so ah i'm i'm pretty positive on ah on fever tree and i i acknowledge that it is.
00:04:55
Speaker
More on the expensive end of the spectrum, if you look at you know earnings multiples, it's definitely you know up there. ah and like you know A lot of drinks companies ah have been derated ah in recent years, ah but with Fever Tree,
00:05:14
Speaker
What I really like about it is that it's got this niche in mixers where people will often have a lot of different drinks, but use the same mixer for each one of them. So in that sense, you can you can get an enormous market share in mixers, which I don't think you can get with other drinks categories. So yeah, Fever Tree Market Cap ah you know has gone up today. it was It was about $800 million before before the announcement came out. It's up ah up strongly now, twenty up over 20%. It's definitely expensive if you if you just look at you know earnings multiples, dividend yield isn't huge, but you know if you put it in the buyback opportunity,
00:06:06
Speaker
ah in terms of shareholder rewards and you think about where it could be in a few years in the United States, I wouldn't be surprised if Coors ended up buying the whole thing at some point. So ah yeah, I have a pretty positive ah stance on this um the stock right now. I was going to ask you that about an all-out acquisition because obviously, Fevertreat was a real stellar stock when it first came to the market and great brand, great Yeah, great product, ah still has both those things. But it's been a terrible investment for the last, how long? ah Three years? Three, yeah, three three three, four years. It's just been, it's been awful. um And from the statistics that I'm looking at, obviously it's still expensive, even though the share price just hasn't really gone anywhere for ages.
00:07:04
Speaker
and Yeah. like Is this best option as an investment of takeover? Yeah. I so i certainly think a takeover would make sense in due course, and it it wouldn't have to be Coors, but now that Coors is involved, ah that could be an option. Coors itself, ah it's not the biggest drinks company in the world. I think it's $10 dollars ten billion dollars or so. and But in terms of Fever Tree and how it got here, the Fever Tree share price today is actually lower than it was in ah mid-2016, according to the Stockapedia chart. So there's been a really, really long period
00:07:53
Speaker
nearly 10 years, I guess, where the share price has gone up a lot, come down a lot, gone up a lot, come down a lot. and But I always said, you know go I'm sure everyone here probably had their own views on fever tree during that time. I always did feel that the valuation was a little bit pricey, but ah now at, say, 20 times earnings or so, or so and I guess I think the US opportunity could be a really interesting leg of growth for the next five years. and Where will it end? I would say probably it will end in a takeover at some point. so and I'm not outright bullish if you look at what I wrote in today's stock market report. I didn't go all out bullish on this, but I did take a ah moderately positive view because i I do think this could be the next ah leg of growth.
00:08:53
Speaker
Does it have revenue from the US at the moment? Yes, it does. And it's um it's been active in the US for years. It's been taking market share. But I think it's still got ah a space to grow into there, which it doesn't in the UK. So in the UK, revenue is actually on the decline because the market is saturated. But in the United States, it's still it's still growing double double digits.
00:09:24
Speaker
Is this potentially a way of getting around future tariffs, like striking up a deal with a US-based company to import? I suppose that's another angle on it, which I hadn't considered, Lawrence. Perhaps. Are there any barriers that companies run into, like UK companies, if they're trying to penetrate the US market? Have we got any sort of historical precedent there? I would suggest that probably the most difficult thing is understanding the local the local sort of situation on the ground in terms of distribution. But now that Fever Tree is working with Coors, they've got somebody to help them with with that every step of the way. so i think I think it's a perfect solution to that problem. Mason I sense you're you're a little sceptical about the investment case here. What would you need to see in order to to be more positive on this?
00:10:19
Speaker
I mean, I haven't looked at Fever2 for a a very long time. i It was a a great growth stock when it first came to the market. um It hasn't been, as Graham said, the UK market got saturated and and the opportunities for growth dried up, but the valuation was still and remains very, very high. And I think we've talked a lot before in the past about the profile of stocks changing. um And I think this future is certainly an example of a company which was a high high growth, compounding quality company, yeah and it's not anymore. and the The growth figures just aren't particular. It's a very high quality company. um and ah But yeah, it's the the growth just isn't there. So ah honestly, um I struggled to get excited about it as an investment anymore. And I look at the major shareholders
00:11:13
Speaker
and registry. And I feel like I'm not the only one. It's a sea of red of major shareholders selling, including big managers like Linzel Train and Fun Smith. And yeah, and actually even one of the founders, Charles Rawls has been selling recently. So it's a great company. It's a great brand. It's a great product. But It's unfortunately not a very good investment anymore. Well, here's hoping that this week's news provides a tonic for weary shareholders. I promise that's the end of my puns today. Graham, do you want to, shall we move on to WH Smith? That had some pretty big news this week. ah Yeah, absolutely. So WH Smith also in the news this week. and So it is considering the sale of its high street business,
00:12:11
Speaker
And I wrote on Stockopedia on the report this week that I thought it was positive news. I think the market broadly agrees with me. The share price has moved up kind ah you know materially this week. And um essentially,
00:12:31
Speaker
The way I see it is that the travel business is is the growth side. side it's the you know It's the biggest contributor. ah And I just think there's when you get ah when you get these stores in airports, especially, you are in a place where you can charge Disneyland prices, I guess. And when you have a shop on the high street, by kind by contrast,
00:13:00
Speaker
you're competing with anybody and everybody who sets up on the high street. So, you know, you're not charging Disneyland prices there. And everybody and everybody who sets up online as well, um, which right is a different, different in the airport. Amazon doesn't do shipping that quickly just yet. So, uh, if you're buying your last minute purchase in the airport, it's a slightly different, yeah, as you say, charge what they like rather than, um, rather than, yeah, eroded by competition.
00:13:30
Speaker
Yeah, absolutely. And so no it's not clear if if they're going to be able to sell it and who will buy it and at what price. and But they've acknowledged that that they're thinking about it. W.H. Smith also announced a trading statement this week, which had a positive start to the year. But it again showed that the high street division was not doing as well as the travel division basically. So there was 8% growth in revenues and the in the travel division and a 6% reduction in revenues in the high street division. So a clear divergence there. And I don't think they need to explain in great detail why they're
00:14:19
Speaker
thinking about selling the high street of course. That trend that's existed for some time hasn't it, that divergence that I mean even the amount of investment I'd say in it like you go into a divergence on the high street and it's pretty grim like horrid carpets like they don't they're not investing money into yeah into their stores on the high street and yeah there's not been an awful lot of interest in the fact that that that division has been drinking for a little while I was in one of the weekend because I was shopping for a birthday card from my mum, and it's very different to the WH Smiths that I grew up with, certainly. um In terms of its it's valuation, you're you're saying for a while that this shift has been happening for a while, i.e. it's been reporting less and less growth in its its high street business, more and more growth in its its travel retail business.
00:15:11
Speaker
um I think in in this week's report, you basically said it's finally becoming a travel business. ah Is it valued as such yet? Is it valued as a growing travel business yet, or is it still valued as a faltering high street retailer? so it It is a good question. and I think what's holding back the valuation may be that the balance sheet is a little bit ah weak in terms of ah the debt outstanding.
00:15:40
Speaker
and When I checked the most recent results, I found debt excluding leases was £370 million. pounds ah so bear and Bearing in mind, the company generated after-tax net income of £67 million pounds last year. Now, that is expected to rise you know very significantly you know over the next two years, but the point sort of stands that I think debt may be holding back the balance sheet excuse me debt may be holding back the valuation a little bit, but if they manage to sell the high street division for a half decent price, that will presumably be used to deleverage, at least to some extent, which
00:16:33
Speaker
which may enable the violation to to pick up again. And I do think it deserves to trade at ah you know the and a reasonable earnings multiple. and I think you know as with Fever Tree, I haven't been all out bullish on this, but I have been moderately positive on it because I think it's i think this is a fine company in terms of its cash generation, the track record. And I think now the competitive position in the airports is so strong that I think it has, you know, hopefully many more years of success ahead of it. Yeah, I think that point about the debt is a really good one because it's not great. I think I guess a negative side of the growth
00:17:19
Speaker
in the airport business has been that it's been very much debt fueled. And it's not great when a company is having to rely on um borrowing money to grow um at all. So being able to hopefully, if if there is a decent sale of the high street business, hopefully be able to pay down some of that debt might put it into a bit of a better, a stronger position financially so it can ah start reinvesting his profits for growth rather than just relying on on borrowing, um which then puts it back among the quality high quality companies rather than ah rather than a highly leveraged company. um And I guess that's where I'm more positive about it than I am about Fever Tree because there seems to be a bit more of a plan, um a plan that it's under its own control than a plan that relies on external partners, external,
00:18:16
Speaker
markets to which it is not particularly familiar with, um and currently doesn't have a track record in. um so yeah yeah I think the WHSmith story is quite interesting. I want to be interesting to see how that plays out. Interesting to see what kind of valuation they can get for the high street as well. Should we move on to one of the companies on your watch list? and You said one of your favourite companies in terms of its quality and ability to spit out cash. At Paypoint, we had a trading update on Wednesday, didn't we?
00:18:47
Speaker
Yeah, so Paypoint is is one of the UK's best fintech stocks. Of course, and you know that's obviously ah you know said slightly in jest because it's an old-fashioned business in terms of it has an old-fashioned energy payment ah activity that it does, an energy payment service that it does, bill pay service.
00:19:13
Speaker
ah but it is ah it has ah actually a multifaceted set of services that it provides to ah convenience ah stores to just ordinary customers and.
00:19:31
Speaker
It's got some of the best ah quality metrics and cash generation statistics you'll find um in in the mid caps. It's about 500 million market cap. and so This week, ah it came out with a trading update where where it was on track to deliver expectations. If you look at the top line, net revenue,
00:19:57
Speaker
OK, I acknowledge that it's not growing terribly fast. Net revenue was only up 1.9%. But I think if you look sort of at the different segments, there are parts of it that I think are very interesting. So for example, in e-commerce,
00:20:19
Speaker
They have this ah Collect Plus business for for parcels, where volumes rose 37%. Now, revenue there is still very low, but it is growing very fast from that low base. The Love to Shop um shopping voucher business had another solid performance.
00:20:45
Speaker
And and you know aside from that, they've got the shopping division, which is the terminals in convenience stores, and they've got a payment and banking division as well.
00:20:57
Speaker
and but so On the whole, I acknowledge that the growth isn't super exciting, but it's just such a reliable performer and the quality of the performance is so decent that i don't know I've always felt like this was a quality company and it always trades quite cheaply.
00:21:24
Speaker
PE multiple about nine times, paying a yield of over 5%. Yeah, for I think for a solid mid cap, it's just one of my one of my favorite sort of buy and hold kind of candidates. um I've held it before in portfolios I've managed. It's always done reasonably well, and and they buy back their shares as well. so and I think that that earnings per share can improve you know with the help of those buybacks, as well as hopefully some decent underlying growth. and not the it's not ah It's not going to be the next Nvidia, but it's ah it's ah it's just a really solid mid-cap. We will, of course, come on to Nvidia in a later part of this conversation. You said they've got a
00:22:16
Speaker
a target of £100 million pounds of EBITDA by the end of financial year 2026. What could stop them achieving that? like What's going to get in their way? Honestly, I think it's in their own hands because they are they are buying back their own shares. They are paying high dividends. It's really up to them. So, being a bit of a chatter this week in the forums about that share buyback policy and go to pay devil's advocate because i actually quite i like i don't I personally don't mind a ah buyback policy, especially when especially when companies, ah share shares are looking decent value and they're generating a lot of cash. But some of the questions that people have been asking is, is it really the best use of cash, especially if they're operating in a growing market? And I guess that is slightly true of Paypoint. What
00:23:13
Speaker
Why does management and what value really a shareholder is getting and if they're using the surplus cash just to keep buyback shares? Okay, so they've got a 20 million pound ah buyback program currently. There is a chance that they could pay out significantly more than that next year and the year after, depending on how things are going. So if, for example,
00:23:43
Speaker
over three years, they spent 20 plus, say 25 plus 30. If they spent 75 million pounds buying back their shares, that would reduce the share count by something like 15% at the current share price. so you You would get and an increase in earnings per share of more than 10% purely from that action, which would mean that divide the dividend per share could be increased as well as a consequence. So really if if they don't think that they are they have the growth opportunities to earn a lot more than that kind of return,
00:24:39
Speaker
and And if their existing opportunities are already fully funded, which I believe they are, then yeah I don't see the harm because the ah the alternative is is to pay down their their debt, which they don't really need to do in my view. So and obviously there's a balance to be had, and this is every company has to make these decisions. ah There's never a you know a perfect right answer, and it's never only one thing. and you know you You always have to allocate funds out to a broad range of you know opportunities. but
00:25:18
Speaker
To me, this is this is pretty this is quite proportional. and You made a point, I think, in the comments, um which one of our subscribers congratulated you as a huge point well-made about, I think he was referring specifically to the point about ah the fact that P-E ratios are based on shares outstanding, not shares an issue. and Could you explain that a little bit more? Yeah, so when a company buys back its shares,
00:25:44
Speaker
And there's a question about where do the shares go? Do they disappear? What happened do they go to, you know, wherever shares go in the afterlife? Actually, the company has an option about whether they keep them in, it's called keeping them in treasury, or if they actually just delete them, which is called canceling them.
00:26:07
Speaker
I personally, I don't care care whether the shares are kept in treasury or whether they are cancelled because you know even if the company cancels them, well, some people will say that's good news because it means that they can't be sold again. They can't be reissued. So that means I'm not going to be diluted in the future. I don't really see it that way. If a company cancels its shares,
00:26:37
Speaker
There's nothing stopping it from making new shares in the future. so I don't take sort of confidence if a company cancels its shares. Honestly, i I don't care whether they're cancelled or kept in Treasury. It's all the same to me.
00:26:51
Speaker
With the kept-in treasury, is that effectively saying that the company has an ownership of itself, of the shares that still exist? So let's say it's a 100 million pound company and you own 1% of it. If the shares are kept in treasury, would you still be owning 1% of it? And if they were cancelled, you'd own a high percentage.
00:27:18
Speaker
No, because those percentages about ownership are based on shares outstanding. So shares outstanding is the key number that's used to decide ah things like earnings per share or dividend per share. If ah if a company has ah shares in treasury,
00:27:43
Speaker
for all from From an economic point of view, they don't exist because they're not they're not used for anything. They're just a thing on a just a a record on a piece of paper. But in terms of all the metrics that we calculate, that's all based on shares outstanding, which means shares that the company doesn't own, shares that are out there in the world with third parties.
00:28:10
Speaker
Shall we move on to AJ Bell? On the face of things, a relatively positive trading update this week. Assets under administration up 3% customer numbers, up 4% in the quarter, but the market was a little disappointed by this.
00:28:29
Speaker
Yeah, so AJ Bell shares ah shares fell 2% on this, which is not a very meaningful fall. But I suppose the main thing I want to point out with AJ Bell is just that when people look at a stock like this,
00:28:45
Speaker
or at Hargreaves Landstand, people are expecting a lot more from these companies than they do from the actual fund managers. So, you know, when when people are are saving into their Ices and their Sips,
00:29:05
Speaker
and their other accounts, it's actually the the platform is considered a far more attractive investment with far higher prospects than a lot of the fund managers that people might be using on these platforms. So, AJ Bell, for example, it tends to have a pretty strong valuation. It's currently at about 20 times earnings.
00:29:33
Speaker
um but I'm positive on this one because i think it has you know I'm not a customer myself, but from all the you know the reviews I've read, ah it seems to people seem to prefer it over a lot of the competition. You look at its trends.
00:29:55
Speaker
And it is making very consistent growth over the years. I think it's got to be taking market share. And so, for example, customer numbers up 16% year on year.
00:30:10
Speaker
according to the trading update that came out this week, and with the direct-to-consumer customers, so people signing up as individuals, those that sort of set of customers up 20% year-on-year. We've got decent inflows. i just i mean It was a good trading update. The shares were down. People were wondering, why is it down? Maybe there there's a slight reduction in the growth rate.
00:30:39
Speaker
and I did some comparisons and I saw, well, net flows maybe are a little lower now as a percentage of starting assets compared to last year. So maybe things are slowing down a little bit, but I actually think this is worth the the price that the market is charging at the moment um on balance. and Of course, and nothing's guaranteed, but i do I do think this is worth an above average multiple.
00:31:13
Speaker
So, AJ Bell I think is is interesting. I think it's interesting from a consumer perspective. I downloaded the app, had a little play around with it. It is a very good app. and I was wondering,
00:31:24
Speaker
and Graham, do you know um how many of the customers, how many of the assets under management, how much of the revenue is generated from the two divisions of the business, the direct to consumer portion and the the advised part? Well, according to last year's ah results, they had 371,000 direct to consumer customers.
00:31:47
Speaker
versus 171,000 customers on their advised platform. and And in terms of assets under administration, that was actually much bigger in on the on the advised platform with 56 billion pounds underman under administration.
00:32:08
Speaker
versus only 30 billion assets at the direct-to-consumer platform. so Direct-to-consumer is has higher customer numbers but smaller assets under administration. ah In terms of revenue, i'm I'm not sure exactly how that splits out, but that just gives you a sense of their respective size.
00:32:29
Speaker
yeah it and it's interesting because obviously I mean, I assume that the advised section of the business is, ah there are higher margins in in that part of the business. I assume that once they have there and their clients who are using the advised part that that they're stickier as well. I mean, it's not that difficult as it as an individual investor to switch platform. um But I wonder what the growth prospects are like for those two those two divisions of the business and how which which of the which of the two elements is going to provide sort of the the future growth potential at AJL. Yeah. And there is a risk, I suppose, that that they run out of growth um before too long. But
00:33:15
Speaker
It seems to me that at the moment, they're just taking market share. and Maybe that market share is coming from Hargreaves Lansdowne. Yeah, i want see it I see less and less of Hargreaves Lansdowne, like just among chatter about what kind of platforms people are using. um I mean, it's i don't use I've never used Hargreaves Lansdowne because I've always been aware of the fees, but I wonder maybe if the fee situation is now becoming more high profile. And the competitors like AJ Bell have caught up in terms of usability and number of funds and stuff available. um And I'm sure Hargreaves Lansdowne, their new they new owners will we'll have will have some thoughts on what to do as well. So it will be interesting. yeah I know. I signed up with Hargreaves Lansdowne before I was aware of just how expensive that it it could be. um
00:34:07
Speaker
To wrap this part up, Graham, obviously you've been paying a lot of attention to the UK news flow this week. What's one thing that you think investors should be paying attention to this week from the UK that they might have missed? If I had to pick one thing, I'd probably note that we had a takeover. We had good energy with a cash offer a twenty at a 24% premium that was covered by Roland.
00:34:38
Speaker
So um I would say the takeover story is not finished yet. um quick We will hopefully get attractive takeover offers until the market rerates. Obviously, it's not it's not nice to see the number of stocks continue to fall. but you know if share prices remain you know at these levels, at you know for offering pretty decent value in small caps and mid caps, then it is an antidote. Did we ever get to the bottom of why SAGA was up so much this week? I know I had a trading update today, Thursday, but the share price was up quite a lot during the week as well. I saw some comments on the discussion forum that it had managed to refinance its corporate debt, which was quite large.
00:35:25
Speaker
Yeah, I think the the refinancing may have leaked out a little bit early, perhaps. But, Graham, you're still red. Why are you so negative about Saga still, even though it's refinanced instead? Well, look, i'm I'm a little bit biased against Saga, and I think it's the concept that just annoys me.
00:35:45
Speaker
you know the idea that once you turn 50, you need to you know go somewhere else to buy your holidays and your insurance. and But speaking seriously, i just it just strikes me as an accident waiting to happen. and I acknowledge the refinancing is great news. ah The trading update was not was not terrible.
00:36:11
Speaker
We look at the historic numbers here. ah COVID was a big problem, of course. But you know even since COVID, even when other travel companies have been doing quite well, this one hasn't. I just i don't really get it. I don't understand why they have to leverage themselves up so much. um I do think the disposal they announced, ah you know the they are trying to deleverage. It makes sense.
00:36:40
Speaker
and Hopefully, they succeed, but I just don't see the attraction. you know for For most companies, I'm looking for a competitive advantage, something interesting, something new. ah With this one, it's just, are they going to survive? Maybe, hopefully, and I don't i don't see the attraction. Yeah, it's not particularly inspiring, is it? Are they going to survive being the the way to look at the investment case?
00:37:10
Speaker
Hello, Editor Lawrence here. Just before we head into part two, I know a number of you listening are already subscribers to Stockopedia's stock market research platform. If you are, thank you very much.
Exploring AI Investment in Europe
00:37:22
Speaker
If you are not and you enjoy the analysis of UK shares like you just heard in part one,
00:37:28
Speaker
I think you'll really enjoy our daily stock market report on Stockopedia, published every weekday by Graham and a number of the other writers from around Stockopedia who've also appeared on episodes of this podcast. ah You can access it for free for 14 days using the link in the show notes. You'll also unlock the rest of Stockopedia's insights, tools and education to help you speed up your research process and make more informed decisions. Let's get back to the conversation.
00:37:57
Speaker
In this part, we're going to chat about Chinese deep-seek. We're knocking $600 billion dollars off Nvidia's market cap. We've also had quarterly updates from a lot of the rest of the Magnificent Seven. Megan, you've been taking a look at these, haven't you? Yeah, so i'm starting, I guess, with that ah deep-seek point. Graham, I know you also had a look at Nvidia in the fall. I i mean, the movements in this stock when it moves, it's just mind blowing. It was the entire market capitalization of Mastercard, ah which is a big company. um I mean, a move that was larger than all companies in the UK. um
00:38:35
Speaker
So yeah I think quite ah quite an extraordinary thing. I think there's been obviously a bit of back and forth about whether or not this was inevitable because Nvidia got overheated and Graham I feel like that is potentially the side of the fence that you come down on. But the AI market is still growing at a phenomenal pace and because there is another player in that market, it doesn't necessarily take away from the incredible demand that is going to be heading the way of Nvidia. And I think one of the reasons that this is true is because DeepSeek is claiming it can, the kind of things that Nvidia makes. So the
00:39:21
Speaker
requirement, they're suggesting that potentially the requirement from companies like um well any company that's exploring artificial intelligence, they might have less ah demand for the kind of chips that Nvidia makes.
00:39:36
Speaker
Which would be true if the market had if the growth in the market had slowed down. But I think a view that is shared among quite a lot of people who are so who remain positive about Nvidia is the fact that if companies are finding that there's more capacity for their chips, they will simply do more in there in the AI space. I heard that there was a massive spike in Google searches for something I hadn't heard of called Jevons Paradox this week.
00:40:05
Speaker
and which is basically what you're describing, Megan, is that increases in efficiency will lead to increased consumption rather than decreased consumption. so that's yeah I thought that was interesting. My my concern is more about the hangers-on, the companies that put AI in their name and they say that they're machine learning experts and they're AI experts. um you know There's this little sort of cottage industry of small caps ah calling themselves AI companies. um NVIDIA itself, I don't have a ah big problem with it. I do think that ah you know the it's part of that MAG7, which, broadly speaking, looks rather overheated to me. And I do think that there are risks when people assume that
00:40:59
Speaker
you know that AI is going to be the place where they're going to get rich. It might be, but you know every few years, something else comes along that is the the next big thing. I suppose i'm maybe i'm I'm too old now, even though I'm not really old, but maybe I'm i'm i'm so old now. When I see all these companies worth $2 or $3 trillion, dollars I start to get nervous, but maybe it all makes sense.
00:41:24
Speaker
I don't think it's an age thing that is ah makes it fair to be wary about so many companies worth so much money. and i think the I was listening to Stephen Yew, who's a fund manager at Blue Whale, um but he was talking about how the way that they run their fund is very much if they if they believe in one of these big companies, they take a bigger bet on it than its position in the market. um And if they don't believe in these companies, then they look for a different one. um And that's the way that they that's the approach that they take to beating the passive indices. And it's actually an interesting way of looking at it as a private investor as well, taking a taking a big position on a company that you have a huge highlight high conviction
00:42:11
Speaker
about is is quite interesting, but if there are ones that you're slightly on the fence about, not really sure, um then look for something better. And I think that's something that's amazing about the US is the depth in that market, the quality of the stocks, not like beyond the Magnificent Seven and the growth and the opportunities that are available for investing in the US.
00:42:36
Speaker
and Yeah, is is really exciting. And you look at the results from the three companies, well, the three magnificent seven companies that announced their results on Wednesday evening. And none of them were particularly inspiring. Microsoft is another $3 trillion dollar company, and incredible company. But with evaluation like it does, you're wanting it to beat on every level. And the area that the company actually disappointed on was the was the was the cloud AI um division, which obviously triggered a bit of a wobble in the share price. um I mean, when you're on an evaluation like that, any little disappointment is going to trigger trigger a wobble. For meta, incredible results, earnings expectation like massively beaten um and beaten on the revenue level as well.
00:43:33
Speaker
But the company was only willing to give guidance for Q1 on the revenue level, which sent a little bit of question of question mark. Why are they not willing to guide further out in 2025? And then the question maybe for private investors is where else could we be looking in the US? And I think there are a lot of a lot of other opportunities.
00:43:55
Speaker
Yeah, and highlighting the um the opportunity in the United States, I just point out that the company that we were talking about in the last segment, Beaver Tree, actually generates more revenue in the United States than it does in the UK. So just to highlight that that opportunity in that in that enormous economy they have. such a It's just such a different scale. um It is interesting. interesting with fever i think that's I didn't actually know that they generated more more revenue in the US s than they did in the UK, but yeah, I suppose it makes sense. If you if you're in the US, you probably should be generating more revenue there than than you are in the UK. It's such a bit so much bigger as a market. and Often called the graveyard for UK companies though, the US. I want to talk, if we may, about the level of investment in AI, especially by some of these magnificent seven companies.
00:44:51
Speaker
that Microsoft and Meta announcing massive and defending as well their massive investments in and AI. Have they given any guidance or indication of what the timeline is for seeing a return on those and and how that's going to impact impact their revenue and bottom line? Well, I think Meta sort of hinted at it by saying the revenue guidance for the rest of 2025 is going is good, although they didn't actually give a number, um because we've been investing um quite a lot. But yeah, the the scale of the investment in AI is ticking up enormously for both Meta and Microsoft in 2025. Meta's announced capital expenditure of between 60 and 65 billion dollars, and and Microsoft as well, capitala capital expenditure,
00:45:42
Speaker
um they're planning on spending 80 billion and in in this fiscal year to build the data center infrastructure for for training AI. um The chief executive of Microsoft, who comes across as quite a mild-mannered man, um he got into a bit of a spat on Twitter with with Elon Musk he about about the level of investment. he He said, all I know is I'm good for my 80 billion.
00:46:06
Speaker
um And all this money is not about hyping AI, it's about building useful things for the real world. So quite defensive almost about about the the amount of money that the company is planning on spending and on on building AI models. But yeah, I suppose investors will want to see a relatively quick return on on that on that capital investment. It's it's capital expenditure, they're not they're not putting it through the income statement. it It would be unusual for a company of that size to be expensing their um investment. But it's something that if the benefits of this expense if this expenditure are going to be coming within this year, maybe it should be being expensed rather than capitalised and put through the balance sheet. From a purely accounting perspective, it's probably investment that's going to pay dividends in the coming years rather than immediately. Does that level of investment, it's 65, 80 billion for Microsoft and Meta,
00:47:06
Speaker
Is that like a material step up in terms of their annual capital expenditure, or are they just diverting funds that would normally be invested elsewhere? It's massively higher. it's It's double what Meta spent this year, and I think it's maybe more than double for for Microsoft. I mean, they've got a huge amount of cash, so it's not it's not something that is at all troubling. and ah yeah These businesses are enormously cash generative, sit on vast quantities of cash and have loads and loads of short-term investments. i mean um Microsoft obviously has a $14 billion dollars stake in OpenAI. and is going to well If OpenAI start making money, we'll start generating profits from that investment as well. so They've got the money, they can afford this kind of this level of expenditure. um
00:47:53
Speaker
It's good, I think, to see that they're willing to commit. And this is another thing that Stephen Yu was talking about in this podcast. they've been The fund's been selling down Microsoft because his argument is that the free cash flow yield for both Nvidia and Microsoft is roughly the same. But if you look at how they've been spending their money, the volume of expenditure in video is significantly higher. And if you're valuing a business, you're obviously valuing it based on the potential future earnings.
00:48:20
Speaker
and cash flow. and His argument is that Nvidia has done more to invest for the future than than Microsoft and and others have done, which is why he's he's hanging on to that one. Their fund, extraordinarily, has they've got a 10% cap on how much of the fund can be exposed to just one company.
00:48:43
Speaker
And Nvidia was always 10% of their fund. They've sold more shares than they currently own because they just keep on having to sell and because they're they're right up against their limit. It's just an extraordinary growth story. It is incredible. On Nvidia specifically, I was having a look at its stock report. It's currently got a quality rank of 94. Margins are huge operating margin, nearly 63%, returns on capital of 90%, return on equity of over 130%. How sustainable is all of this if new entrants can come into the market really quickly using, as we as we apparently saw with DeepSeek, Nvidia's cheaper chips? Yeah, I think that's ah it's ah it's an interesting point, and I think that's something that is is the main worry for investors who ah who think that the stock might have become overheated.
00:49:41
Speaker
is the company going to have to so let's sell its chips for cheaper? And how might that impact operating margins? I mean, it yes, that that that is a thing. um If cut companies with a a very strong defensible position, if that attracts competition, it can lead to margin erosion. I mean, here's what happened at Fever Tree.
00:50:02
Speaker
Yeah, my my view is still that there's still a little bit more time to come. People who are nervous, by the way, there are some really interesting opportunities in Europe, which are exposed to the same sort of themes. We had results this week from ah ASML, which is a Dutch company, and SAP, which is a German company. um Both big AI infrastructure plays rather than an application. So the application side is more like what Microsoft and Apple and Meta are doing, but the actual infrastructure, which is where Nvidia sits, there are some yeah interesting opportunities in Europe there. So they're good ones to look at for for investors who might be a little bit more nervous about the situation, the the overheating in in the US.
00:50:42
Speaker
I want to come on to a question we had from a ah subscriber um about end users of the the chips. A question from Mark Carter. He says, I don't really know what these large companies are doing with AI anyway. I suspect it's mostly a bandwagon. Obviously, Nvidia is a clear beneficiary.
00:51:02
Speaker
Apple says, built into your iPhone, iPad and Mac to help you write, express and get things done effortlessly. I expect it's the same for Microsoft, he says. and If that's the case, isn't the recent news this week a good thing? If Apple can now provide its tech more cheaply, for example, is this a benefit for Apple? So the end user, the customer,
00:51:24
Speaker
So those that are building AI applications. So that is like and like this reader saying sort of what what your iPhone can do. um And I mean, Apple's got a really, really good advert. I'm pretty sure it's Apple. The one where the one where he writes someone writes a really angry email to their coworker and then they get AI to make it make it more polite. I think that's so funny. um But yeah, so for that end application,
00:51:49
Speaker
having ah more efficient chips is ah is is is a positive thing. And it does mean that they'll be able to run more applications on a smaller number of chips. So yes, companies like Nvidia, which provide the infrastructure, are the ones that are going to be more eroded by that. But with these massive companies, um like Apple, Meta, Alphabet, um yeah, Alphabet, even Amazon, there has been a drive, and this is where all this capital expenditure comes in, there's been a drive for them to start doing their own infrastructure, so reducing the need to spend on Nvidia chips and the like.
00:52:28
Speaker
So that's where there is a positive and a negative for these larger companies in um in the arrival of a cheaper Chinese counterpart. I mean, there were still questions, to be honest, around the around the cheapness and the legality of this Chinese counterpart. and OpenAI has actually said now that they're pretty confident that there's been some intellectual property theft that's happened in um by deep-seeking training their a AI models. See, that could end up in a in ah in some legal wrangling. it's also like There's always questions, I think, over announcements that come out of Chinese companies. I think there is a ah general distrust there. so
00:53:11
Speaker
I wouldn't say that anything that's happened this week would create a cause for concern above what we knew before this week. I don't think the story is any different. I think the fundamentals of these companies remain. And until they don't, I'll i'll remain positive.
00:53:32
Speaker
I'm going to ask you the same question that I asked Graham in part one about the US markets. Obviously, you've been paying a lot of attention to them this week. What's one thing that you think investors should be paying attention to this week but might have missed?
00:53:45
Speaker
Obviously, all the hype is often around the the by the magn magnificent seven. There have been other companies this week that's how in the US that have had financial results. One of them was MasterCard. and and MasterCard remains a fantastically high quality company. i mean It pretty much shares a duopoly. A duopoly that doesn't seem to, it goes sort of flies under the radar of the regulators. and with Visa, also a very, very high quality company. And so each of the last four quarters, it's just consistently doing better than what an analysts are expecting, and which ties in very nicely with the research that Ed has been doing this week. um That wasn't wasn't i didn't tee myself up for that. it just It just is the kind of thing that you should be looking for with these high quality companies, those that can continue to
00:54:32
Speaker
to exceed expectations. So yeah, MasterCard is a is great business. um So while everyone's being distracted by what's happening in um in the world of AI, there's other great companies that are exist in the US.
MasterCard's Exceptional Performance
00:54:49
Speaker
ah Ed's research was on post earnings announcement drift. um We had him on last week's episode of Companies and Markets Weekly to talk about some of the preliminary findings from that. and I will link to that episode and a PDF of the research in the show notes of this episode. ah Finally, to to wrap today up with the both of you, I want to ask the Nvidia lost $600 billion dollars off its market cap in one day this week. What would you buy with $600 billion? dollars I mean, I quite like the look of my MasterCard. $524 billion there, so I'd have some change. Yeah, I would also pay off my credit card.
00:55:36
Speaker
you I contentiously would maybe have a look at Greenland because I hear that's so that's something that the people who wanted to buy at the moment, see if I could ah flip that.
00:55:49
Speaker
And that brings us to the end of today's episode. Thank you so much for listening and thank you as well so much for people who have taken the time to fill out our most recent feedback survey. We're always looking to understand how we can make this show more relevant and valuable to you and your investing. um So if you've not done so yet, you can find the link to that in the show notes too. If you know somebody who you think might enjoy or benefit from this conversation, we'd love it as well if you could share ah the episode or the podcast with them and spread the word.
00:56:19
Speaker
And of course, we always really appreciate it when people leave us ratings and reviews on Apple podcasts or Spotify if you are listening there. It really does help other people discover and benefit from the work we're doing here. So that's that's it. Thank you very much for listening. We'll see you same time next week for the next episode. Bye for now.