A look at Starbucks' and Boeing's earnings; David Einhorn's annual investor letter; Tech spending on AI infrastructure and the latest on DeepSeek

January 29, 2025

1) It's earnings season, so let's take a look at two companies I've written about recently...

First up, after the close yesterday, coffee giant Starbucks (SBUX) reported fiscal first-quarter earnings, the first under new CEO Brian Niccol.

Sales declined 1% year over year to $9.1 billion due to a 4% drop in same-store sales, partially offset by opening 3% more units (18,537 as of December 29). Margins contracted, leading to a 23% decline in earnings per share ("EPS").

Here's the Wall Street Journal's take on the earnings report: Starbucks Earnings and Store Sales Fall, but CEO Upbeat on Turnaround. Excerpt:

Starbucks said business continued to slide at cafes and its profit fell in the most recent quarter, though executives said they saw progress in their efforts to make cafes more welcoming and less hectic...

Profit and revenue both came in ahead of analysts' expectations, according to FactSet. The decline in U.S. same-store sales and transactions during the quarter were slightly improved from the prior quarter, and overall revenue held roughly steady compared with last year.

"While we're only one quarter into our turnaround, we're moving quickly to act on the 'Back to Starbucks' efforts and we've seen a positive response," Chief Executive Brian Niccol said Tuesday.

In my August 14 e-mail, I wrote about how Starbucks poached Niccol from Chipotle Mexican Grill (CMG) and quoted my friend Lloyd Khaner of hedge fund Khaner Capital, who pitched Starbucks at my Value Investing Congress on October 19, 2009. He rode the stock, then at $10.47 per share, to more than $100 per share before he exited a few years ago.

I asked him for his take on the company today, and he replied:

New CEO Brian Niccol is doing everything right!

They are streamlining the menu offerings to make things more efficient and eliminating upcharges on non-dairy milk. They will focus on improving store operations and bringing back a friendly customer experience. Increasing labor hours and training will go a long way and bringing back the old Starbucks magic.

They are also smartly addressing the mobile ordering backup that's been slowing down service by introducing a mobile sequencing order system to better manage orders and pickups by customers.

They are wisely taking restructuring charges now, while at the same time incrementally increasing their marketing spend.

The turnaround has just begun, but they're making all the right moves and laying a strong foundation for future success.

We are watching a restaurant turnaround master class in real time.

I asked whether he has bought the stock yet, and he replied:

For me, it's really not a matter of price, but rather how far along they get into a successful turnaround. It's still too early from my turnaround investing discipline to buy the stock.

Patience, grasshoppers, patience!

I think Lloyd is right. Niccol is doing all the right things, but unfortunately that's no secret, and hence the stock is richly valued by any metric: 3.8 times trailing revenues and 32.4 times EPS.

So, like Lloyd, I recommend being patient and waiting for a pullback.

2) Yesterday morning, aircraft maker Boeing (BA) reported another awful quarter (here are links to the earnings release and slide presentation).

Revenues crashed 31% and EPS declined from negative $0.04 to negative $5.46, nearly double the expected losses of $3, while free cash flow reversed from $3 billion to negative $4.1 billion year over year.

However, the company's perilous net debt position improved from $47.2 billion at the end of the third quarter to $27.6 billion, thanks to a $24 billion capital raise during the fourth quarter.

Remarkably, Boeing shares surged as much as 7.6% yesterday, touching a nearly six-month high, before fading and ending up only 1.5%. This Reuters article captures why: Boeing stock rallies on plane progress despite $11.8-billion annual loss. Excerpt:

CFO Brian West told analysts the planemaker had delivered 33 of its strongest-selling 737 jets so far in January. West added the company expects to be in position later this year to exceed a cap of 38 per month imposed by U.S. regulators, but would need approval of the Federal Aviation Administration...

[CEO Kelly] Ortberg, who took the planemaker's helm in August, said the company is restoring production stability, after a harrowing mid-air accident a year ago raised concerns about the safety of its jets...

Boeing, which has returned to a production rate of five per month for its widebody 787 jets, will move to a rate of seven a month, hopefully in the next quarter or so, Ortberg said. The company is working through supply chain difficulties of parts such as seats...

Ortberg reiterated the company's four-part plan to turn the business around, including a multi-year effort to fix Boeing's culture.

Ortberg appears to be making the right calls to turn things around at Boeing, but I'm still wary of the many major problems the company faces, as well as its high debt load. I continue to recommend avoiding this stock.

3) My old friend David Einhorn of hedge fund Greenlight Capital is one of the smartest value investors out there, so I always enjoy reading his investor letters. You can read his latest annual letter here, in which he expressed uncertainty about the macro outlook...

Donald Trump was inaugurated yesterday. While 2024 was dominated by election uncertainty, with the election now behind us, it feels like we are faced with more uncertainty than ever. We know who the President is, but it's anyone's guess as to what he will do. We carefully followed the campaign, but don't seem to remember any discussion about territorial expansion. President Trump now aspires to take over Greenland, Canada and the Panama Canal. This could be Manifest Destiny Part 2: the New American Colonialism, a Trump negotiating position, an attempt to distract from other issues or simply more meme fuel. We're not sure.

Economic policy is similarly uncertain. Will we have a labor shortage caused by mass deportations and potentially voluntary emigration due to the removal of benefits and the fear of arrest? Will we have large tariffs? Will the Department of Government Efficiency eliminate $1 trillion from government spending? Will any savings generated be allowed to reduce the deficit, or will they be directed to offset additional tax cuts and/or new spending initiatives favored by the new administration? How will financial markets react to all this?

... heaped scorn on MicroStrategy (MSTR), which I wrote about yesterday...

One of the biggest owners of Bitcoin is MicroStrategy. While MSTR owns a small software business, its principal pursuit is buying Bitcoin. In practice, MSTR is an investment company that buys and holds Bitcoin. MSTR trades at a large premium to the value of the underlying Bitcoin it holds. The idea is to raise money from new investors at a premium and use the proceeds to buy more Bitcoin. Since the Bitcoin that MSTR buys costs less than the Bitcoin-implied value of MSTR's stock, the new investment is dilutive to new investors but accretive to existing investors. MSTR's promoters have labeled the return to existing investors created by this scheme the "Bitcoin yield." As Bitcoin itself yields nothing, the Bitcoin yield is simply a measure of the Ponzi finance's effectiveness. Lately, it has been pretty effective.

... questioned Apple's (AAPL) valuation...

A look at a prior favorite company of ours, Apple, shows that the stock at times sported a single digit P/E ratio and achieved 19.2% compounded revenue growth during the eight years we owned it. The last couple of years AAPL has had no revenue growth, but the P/E multiple has expanded from 22x to 37x. In this environment, we can't say the multiple won't expand to 45x a year from now. It might. But we don't see why it should or what the investment appeal is at this valuation.

... and discussed three of his current positions: exercise-bike maker Peloton Interactive (PTON), tractor manufacturer CNH Industrial (CNH), and Medicaid manager Centene (CNC).

4) As a brief follow-up to my discussion on Monday about the Chinese AI model, DeepSeek, this chart with data from Bloomberg shows the explosion in capital spending on AI by five of the largest tech companies:

Whether or not DeepSeek itself takes market share from the other AI players, the fact that it developed an AI model for a fraction of the cost of others raises legitimate questions about whether such high spending is necessary going forward – which, as I wrote on Monday, "is bad news for the companies selling the chips and other technology underlying AI, but is great news for the buyers and end consumers."

Here are three articles in today's WSJ about the latest developments in this area:

Best regards,

Whitney

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