In this podcast, Motley Fool analyst Sanmeet Deo and host Deidre Woollard discuss:
- How smartphone and EV demand are impacting Taiwan Semiconductor.
- Japan's place in the tech race.
- Additional uses for weight loss drugs.
Motley Fool hosts Mary Long and Deidre Woollard explore the allure of the treasure hunt economy.
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.
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This video was recorded on April 18, 2024.
Deidre Woollard: Taiwan Semi would like you to refresh your smartphone. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst, Sanmeet Deo on this Thursday. How are you doing today?
Sanmeet Deo: I'm good, Deidre. How are you?
Deidre Woollard: Good. Yesterday, Tim and Dylan on the podcast, they broke down ASML. That's the big European company that makes the chip machines. Today we're talking about the chips themselves because we've got earnings from Taiwan Semiconductor, which you haven't heard of it, you should have heard of it. It makes the most chips in the world. It's interesting because ASML's earnings and guidance not so rosy, but of course they make those massive machines. Taiwan Semi results initially lifted the chip makers in the market because they beat on expectations and profits. The markets are still digesting that. But how do we square those different inputs? Because ASML, pretty cautious, Taiwan Semi felt very full speed ahead to me.
Sanmeet Deo: ASML yesterday reported much weaker than expected EUV order book. EUV is electric ultraviolet machines, which was €656 million in the first quarter down from €5.6 billion in the previous quarter. Huge decline in their order book. Who is a big purchaser of these EUV machines? A big client, of course, is Taiwan Semiconductor. It's expected that Taiwan Semiconductor would have booked more orders, but seems they didn't. Hence, ASML's big drop-in orders. When I went through the results for Taiwan Semi this morning, while we heard them discuss huge domain AI, they also indicated more gradual recovery than previously expected in the overall semiconductor market with weakness in smartphones, traditional server domain, Internet of Things and particularly autos, which had the sharpest pullback. The company actually ended up lowering their fiscal '24 forecasts for the overall semiconductor market to increase only by 10% year-over-year versus 10% plus which they had indicated in prior comments. While AI is strong in other areas, the market are not making up for the shortfall. This probably caused them to hesitate on spending money on buying expensive ASML machines and tools.
Now, both ASML and Taiwan Semi are bullish long-term on semiconductors, especially when it comes to AI. Taiwan Semi expects AI to grow to 50% CAGR and ASML sees a big pickup in 2025 as industry works through inventory. This pickup could coincide with numerous fabs also being built by Taiwan Semi. One of the statements they made was the Taiwanese chip maker said it will begin mass production of next-generation 2 nanometer chips in the last quarter of 2025 narrowing its time frame from next year in general. Remember, ASML machines are huge. They have long lead times. As we see these fabs being built, those fabs will need equipment and tools and advance of being fully operational. While Taiwan Semi had a good report in the quarter, they're still seeing a lot of weakness and softness and their guidance was a little less than exciting.
Deidre Woollard: Interesting. I think it's important with Taiwan Semi; one of the things that I think about, which is always hard to understand, is the nanometers. Smaller you go, more advanced. But they call their 7 nanometer and below, pretty much they call that the advanced tech, which is about 65% of the business. I'm assuming as AI increases, the 2 and 3 nanometer things that they're building now are going to become a larger part of the business.
Sanmeet Deo: They did say in the call that they're expecting business in the second quarter to be supported by strong demand for 3 nanometer and 5 nanometer tech.
Deidre Woollard: I wanted to talk a little bit about something you said, because smartphones, it's interesting, smartphones still around 38% of the business. The HPC, the high-performance computing, the AI, that's around 46%. Autos, you mentioned smaller, I am guessing that's due to slower EV sales, but I want to zero in on smartphone demand because I feel something has happened with this cycle. How often do you buy a new smartphone now?
Sanmeet Deo: I might be one of those odd people out where it will be like four something years, five years sometimes before I buy new smartphone.
Deidre Woollard: That's the thing. I don't think you're the odd person out anymore because I used to be a fairly rapid, I had to get the new phone every year type of person. I've had my current phones since 2019, which is the longest I've ever had a phone. I'm wondering if that is part of what's happening with Taiwan Semi is there's this larger thing where we're not getting a massive improvement that's making everybody rush to the Apple Store, to Samsung, even the new innovation Samsung had, like the flip phones and things like that, it didn't create that rush. When we look at TSMC, we look at that smartphone thing; is that part of what's happening here?
Sanmeet Deo: It has to be. Apple even reported that their smartphones shipments were struggling. I don't get that excited about smartphones coming out anymore myself. It's very incremental when you get the next version, you can't even tell sometimes what improvements are made in the smart. Can we really tell with our eyes how better the camera is? Maybe some of us can, someone of us could care less.
Deidre Woollard: Well, the other thing is I think the phones don't look different anymore, so you no longer get that little shame that you had when you had clearly a few generations back phone. Now they all look relatively similar. I can barely tell the difference. I think it's a different world now. I wanted to go on and talk a little bit about where Taiwan Semi is building because I think that's really interesting too. Because last week they announced their third fab in Arizona. We talked about that on the show and we're seeing a lot of announcements. Samsung and Micron also are doing announcements this week with U.S Factories. But TSM, they're also doing factories elsewhere. They're doing them in Dresden, they're doing them in Japan. They're making good progress with the factories in Japan. They had their opening earlier this year. They're set to start production this year. They've been a rush of articles I've seen lately about Japan taking back its technology crown. This is something I'm starting to follow. Oracle, they announced an eight billion dollar investment in cloud and AI infrastructure this week. What's going on with Japan? This is starting to become a really interesting story.
Sanmeet Deo: Maybe they see the opportunity and the demand for AI chips and the semiconductor market and want to go after it. Revive some of their technology and chip-making businesses and revive that area of their economy which maybe has not been as strong as it used to be. They see this opportunity, especially with Taiwan Semiconductor expanding out outside of their home markets into places like the U.S, Japan. It's almost an arms race where countries don't want to be left behind.
Deidre Woollard: It really is arms race and it's flashing me back to the '80s and '90s when we had this race with cars and there was that anxiety of Japan was going to outpace us and really did outpace us for a time. I don't think we're nervous about that at this point because we seem to be more focused on being nervous about China. But it is an interesting thing for anybody who studied history.
Sanmeet Deo: Absolutely. Rather be in the market as much as you can than be fully left behind. Even if you're not a market leader, if you're at least taking a slice of that pie, it will be good for you.
Deidre Woollard: Yeah, no doubt. Well, now we've mentioned pie and I'm hungry [laughs].
Sanmeet Deo: Good segue there.
Deidre Woollard: Good segue. The other craze, of course, weight-loss drugs. We've got some news on this front. Zepbound, which is Eli Lilly's weight-loss drug. They have trials promising results for sleep apnea, which is interesting. This only adds to the hype here. Zepbound is really interesting, so that's the weight-loss specific version of the, I'm not going to pronounce right, but tirzepatide, which is also in Mounjaro. Approved by the FDA in November for weight loss. It's been in widespread shortage. They really cannot stock enough of either Mounjaro or Zepbound. Planning to open another factory by the end of the year in North Carolina. I'm thinking about this AI chip demand story, I'm thinking about this weight-loss drug demand story and they're both the hype cycle, they're both short supply as a concern here. At some point, doesn't the weight-loss drug cycle have to even out?
Sanmeet Deo: It's funny because when I think of the hottest trends in the market and the economy is right now, I think of AI and I do think of weight-loss actually. This is the hottest topics in the investment world. But when you think back on your economics classes, if you had them, I'm sure all of us have had to add some basic economics. Supply and demand can go out of balance and at some point they find an equilibrium where they meet. I definitely imagined that stabilization will occur whenever you hear about these demands going crazy. That's what's been happening actually in the semiconductor market too, is people are worried, is this huge AI demand going to last? It will be cyclical because semiconductors are cyclical, but will it last. Same with weight-loss drug sector, will this demand for these drugs last? Now when you have things like studies showing, it's great for sleep apnea, it's great for other ailments outside of just weight loss, it almost seems like it's a miracle drug. Demand is going to keep going and they'll feed on itself if people see results. But I do think at some point it will stabilize and it will hit that equilibrium
Deidre Woollard: Everything always does, but it's fascinating because ASML was the biggest company in Europe. Now Novo Nordisk makes a [inaudible]. Now they're the biggest company in Europe. Two trends running neck and neck at this point. I want to wrap up on something fun. You and I, we did a podcast a few weeks ago about flying cars. We're also both a little bit obsessed with the humanoid robots. I think maybe we'll hear something from Tesla about that next week, maybe not. But Boston Dynamics, not publicly traded, but majority owned, I believe, by Hyundai also, SoftBank is in that mix too. They went through this whole thing. They said farewell to their Atlas robot, which if you've ever seen the videos, check those out they're fascinating, but they've now got this new version of Atlas, which is their humanoid robot. Instead of being hydraulic and a little bit slow, now it's electric. It's supposed to have all these applications for workplace, for factories, for things like that. Now it's humanoid but, you have to watch the videos. It does not move like a human. People have called it nightmare fuel, creepy, terrifying, I don't know. Should we be fearing our robot overlords here?
Sanmeet Deo: I [inaudible] embracing the robot overlords because the one thing that keeps sticking in my mind with humanoids is, I'm going to have somebody to do all the housework. Every time I do the dishes now I'm just thinking, if I had a humanoid for this, it'd be so much better. If I had a humanoid to do maintenance and get those light bulbs way up there, that would be awesome. I'm still a little bit creeped out and right now they're in their early stages, they look weird the way they walk, I feel like it's not going to be long before they're moving around and doing stuff just like us.
Deidre Woollard: It'll take a while for it to shake out to our house assistance because right now we've got the ones that are mostly for factories and things like that. But, maybe someday we get robots.
Sanmeet Deo: I always do The Jetson's test. When you watch The Jetsons now, how many of those technologies do we actually have already and how many are actually in progress? You'd be surprised there's many that we already have and some are coming.
Deidre Woollard: What you're telling me is Rosie is coming our way.
Sanmeet Deo: I feel like Rosie is coming our way.
Deidre Woollard: Indeed. Thanks for your time today.
Sanmeet Deo: Thank you.
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Deidre Woollard: You go to a Dollar store for the essentials or the cheap thrills. Mary Long and I sat down for a spirited discussion on the pleasures and perils of low-cost retail. Deidre, you are an expert on many topics that I know that you have two particular passions that you love to talk about real estate and retail. I today wanted to pick your brain a little bit on a specific segment of the retail space, like the discount value retail space. News recently seems to be painting and a not so pretty picture for the segment. There is word earlier this month that Family Dollar, which is owned by Dollar Tree, would be closing about 1,000 stores. The 99 cents only store is set to go out of business. Seems to me when I hear that consumers might be down on Dollar stores, what do you say, you see the same thing or something else?
Deidre Woollard: Yes and no. It's interesting because we've got inflation hasn't been tamed yet, still high, and we've got people who still want to spend our most recent retail numbers showed us that. You'd think that would be prime for Dollar stores, but I think it's the type of Dollar stores. One of the things is the 99 cents only store, which isn't a Dollar store on the west coast about 370 stores. They filed for bankruptcy recently and that made me think about the type of store that was because they had like some groceries, it had some consumer-staples, not so much the discretionary stuff. I think Family Dollar and Dollar General are more of the stores that you go because you have to go for as Dollar Tree is more discretionary. I think that the types of Dollar stores are having different results.
Deidre Woollard: You mentioned the retail numbers and you and Bill Barker talked about this on the show on Monday. But those numbers actually seem pretty good. They were better than economists had expected when they came out earlier this week. If we rewind to earlier in the month, Dollar Tree CEO Rick Dreiling, when he was talking about these closures, he said that Family Dollar is the victim of the macro-environment out there. Just like you said, I'm of the belief that in an uncertain macro environment where consumers do still seem to be spending, you might see more consumer attention on these discounted value stores. Do you buy Dreiling's take that Family Dollar is a victim of the macro story or do you think that the blame lies elsewhere?
Deidre Woollard: Yes and no. It's also the experience too. I lumped Family Dollar and Dollar General together because they're both catering to that audience that needs them. 80% consumables and Dollar Tree, more discretionary. I think with all of these though, there's been a lot of news stories about the experience. People talk about going to the stores, they can't find anything. Merchandise that is expired. Things like that. Can't find help. Or you hear stories about the consumer or the employee having really bad experience, it's not safe. There's a limit to how much of a bad experience someone is willing to tolerate even if a store is cheap. I think that's part of this. But the other thing I'm looking at is the competition which doesn't say it's a dollar store, like a Walmart or an ALDI. The growth of ALDI is something I'm really following, especially since they bought Winn-Dixie, that got them about 300 stores, I think, in the south, directly in competition, I think with a lot of dollar stores too. Experience matters no matter what the price point is. Another discount retailer that does seem to really be honing in on that experience piece is Five Below. Whereas these other discount single dollar stores are cutting back on number of stores, Five Below is actually expanding its store count. Have you been to a Five Below?
Mary Long: Yeah, of course.
Deidre Woollard: What is that discount store doing that one dollar brands or even like an ALDI, something that doesn't limit itself to a dollar amount, that other discount stores aren't?
Mary Long: Well, it's fun and it's aimed at kids in tweens. You've got the section that's called like sugar rush. I love sweets, that appeals to me. But it's great for anyone who buys for kids or who wants to just throw their kids in there for a little while. I think that's part of the draw and it's the treasure hunt thing. I watched this with other retailers at other price points. The treasure hunt thing is really important to people because it goes back to those retail numbers. People still want to spend. They want the cheap thrill, they want the experience. That's what Five Below provides.
Deidre Woollard: Exactly. Five Below strikes me as an allowance store.
Mary Long: Yeah.
Deidre Woollard: Even if there are some exceptions, you generally know what the ceiling is that you're going to pay. If you're a kid, you can just go in and have fun. I think back to what I was growing up and if i would be let loose in Target with my $5 allowance or whatever I had collected, I had to really consternate and worry about like, I can't afford this toy or I have to save up X months of allowance for this toy. In Five Below that seems like less of a problem.
Mary Long: Our colleague Ricky Mulvey had sent me a 13 minute video of someone walking through the aisles of a Five Below and just recounting their experience and the different products that were involved. It's probably been about 10 years since I've been in a Five Below. But what struck me about that video is like the intentionality of the store layout and the branding, the color, those segmented candy rush sections of the store that you mentioned. I know you've got opinions on physical retail space. What do you like about what they're doing and how they're thinking about that physical layout?
Deidre Woollard: I think the candy section is interesting. I think they're definitely trying to get you to discover different sections. I'm really fascinated by their Five Beyond concept, which is a store within a store thing. Because I think that may be opens it up to an older audience and it's certainly it seems to be performing better. I think it's really about that flow and how you make a store feel like you need to visit all of the parts. That's what Five Below is really good at. That's part of the treasure hunt idea too, is that you don't want to miss anything. You see that with ALDI, they have a special isle for things like that, you feel like, OK, I don't want to miss anything. I better go down every aisle, I better look at everything. Because I want the full value of my experience.
Mary Long: We've talked so much about that experiential piece of Five Below, but they do also have an online shopping element. Do you think that there's meaningful growth in that segment or is that just a necessity that stores these days need to have?
Deidre Woollard: I am so skeptical about this and I have reasons. But I saw at TJX, TJ Maxx tried to do this with HomeGoods for so long. I think it's so hard with the treasure hunt, even the outlet stores, Simon Property Group tried to figure out online shopping too. I'm asking myself, what's the treasure hunt online? What is it? Is it Amazon? Is it random brands I'm buying on Instagram? Is it Shein or Temu? What is that? Because I think there's a way to make this work online, but I'm not sure any physical retailer that does treasure hunt has really fully pulled it off yet.
Mary Long: You mentioned Amazon and I think I've structured this conversation to maybe set up Five Below's competitors as single dollar discount stores, but maybe it's also Target, Walmart, Amazon, etc. Some of those retailers have entered into this private-label game, but Five Below in contrast, they work mostly with licenses. Hello Kitty, Disney products, Harry Potter, Squishmellows, those are all really big brands that you can pick up at Five Below. Is there a world in which Five Below enters the private-label game, or do you think it makes more sense for them to stick in the license world?
Deidre Woollard: I think anything's possible. I'm not sure they have the critical mass yet because this is still a relatively small retailer. They're aiming for, I think 3,000 stores by 2030 or something like that. They don't quite have the mass to do that at scale. Then they don't have the setup yet. Does it make sense for them in the future? Yeah, it may, but right now I think they've got a sweet spot.
Mary Long: Five Below's last earnings call was in late March. In that call, the word shrink was mentioned 62 times. CEO Joel Anderson said the company would be limiting self-checkout to combat that shrink, to combat theft. How seriously do you take worries about shrink and how much do you think, if that's a legitimate worry, that self-checkout is to blame for that worry?
Deidre Woollard: I have been thinking about this so much because in the beginning I was like, no, this is ridiculous. This is just retailers trying to hide poor performance under this bucket. But I think I might've been wrong. I think that judging on what I've seen from so many changes about self-checkout, shrink is real. We're seeing so many stores put everything behind lock and key, which is so annoying. But so many stores are wrestling with this. The question I'm asking myself is, is this permanent? Are we moving away from self-checkout? Or are we going to see this maybe scaled back and then come back with a different version? Amazon had that checkout where you don't even have to do anything. Then they stopped doing that. But now ALDI might be just testing that out. The thing I'm really thinking about is friction versus non friction. Paying with everything we've aimed for that frictionless experience where you just buy and you don't even know you're buying. But maybe a little friction, even a little conversation with the checkout is a good thing.
Mary Long: I wonder how much friction and frictionlessness comes into play when you think about physical versus e-commerce. If I'm buying something online, of course, I want that frictionless experience.
Deidre Woollard: Of course.
Mary Long: If I'm going into a store for treasure hunt, like we've said, then maybe I want to interact with crew members. I don't mind having to talk to someone at the checkout counter if that's an additional and lovely part of the experience. That could also help combat this shrink issue as well. I've seen a bear case for Five Below that really focuses on the stores name. The thinking is that with inflation, eventually, they're not going to be able to keep selling things for $5 or less. I think that this is a little silly. I think that branding is really the point here. If Five Below has built a name for itself or a brand for itself, that hey, we're a discount retailer where you can get things around a certain price point, that that general sense of the price consumers can expect will be enough to carry the brand on. Do you see the stores name as a barrier for future growth?
Deidre Woollard: Well, I was thinking about this, when you were talking about your budget as a kid. There used to be penny candy stores, and there's no such thing as a penny candy store anymore. There's no such thing as a Five and Dime anymore. Five and Dime stores used to be a thing, it's a 20th century thing now. Inflation is real, this is a real thing that happens. I don't know if we're going to see a change in the dollar stores and in Five Below. I think, maybe a little bit. There is the value of the brand of course, but I look at Dollar General, they've experimented with like the DG market, which is their cheaper grocery store thing. They've also got pop shelf, which is their version of Five Below. May be they'll try another name or try something else for different concepts, I could absolutely see that evolving. You never know if sometimes a concept ends up becoming a larger part of the brand.
Mary Long: Deidre, so fun to talk to you about this. Thanks so much for the time and for the insight.
Deidre Woollard: Thank you. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
Ally is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Deidre Woollard has positions in Amazon.com, Apple, Dollar General, Simon Property Group, Walmart, and Walt Disney. Mary Long has no position in any of the stocks mentioned. Sanmeet Deo has positions in Amazon, Eli Lilly, Tesla, Walmart, and Walt Disney. The Motley Fool has positions in and recommends ASML, Amazon, Apple, Taiwan Semiconductor Manufacturing, Target, Tesla, Walmart, and Walt Disney. The Motley Fool recommends Five Below, Novo Nordisk, Simon Property Group, and Tjx Companies. The Motley Fool has a disclosure policy.
