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- [00:00]
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Anne Berry
Nike the sneaker OG just changed course in China, but is it repeating a past mistake? We have the Latest on its turnaround 3M, the century old industrial mainstay just achieved record margins from post its to fiber optics. We dig into the conglomerates turnaround strategy and Reddit preparing maybe for showdown with Google. We explore why their multimillion dollar deal could be coming to an end. Wednesday, July 22, it's Brew Markets Daily and I'm Ann Ber
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Aflac Advertiser
Foreign.
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Anne Berry
Market details to come. But first, one of the most intriguing and slightly uncomfortable relationships in artificial intelligence may be heading for a showdown. According to a report from the Wall Street Journal, Reddit may not renew its AI licensing agreement with Google when the current deal expires. Now, that agreement, signed in 2024, is reportedly worth about $16 million a year, providing Reddit's vast AR of conversations to Google to help train and power its AI products. So why would Reddit walk away from that kind of money, especially after getting its mitts on the cash meant upsetting some portion of its users, frustrated that Redditors provide their content for free while Reddit turns around and monetizes it. Now, although only a small portion of Reddit's more than $2 billion of annual revenue, that $60 million in licensing income mostly drops straight to the bottom line. So it decent chunk of Reddit's $520 million plus of net income last year. So the issue here is traffic. Publishers increasingly argue that Google's AI generated summaries answer users questions without redirecting them back to the original websites. In other words, Google is using the content of Reddit and others like them to keep people on Google itself. That means fewer clicks, fewer ad impressions, and as a result, less revenue for the sites creating the information in the first place. Which is why the Wall Street Journal reports Reddit is among a growing list of publishers actually rethinking whether these AI licensing deals are really worth it. Well, this report caught my eye because it gave me an eerie sense of deja vu. I was on the Wikipedia site recently, as I often am and one of its requests for donations popped up, citing a drop in traffic for a reduction in its income. Now the online encyclopedia is the number one that's the most cited source on ChatGPT as one example, which does link back to sources in its answers and summaries. But the problem is just limited click through users can't be bothered to go and see the source. Now no final decision has been announced by Reddit and the public airing of its concerns frankly feels like a negotiating tactic aimed at securing a richer deal from Google. Even way back in September, Reddit was reported to be in early talks to strike its next agreement with Google and aiming to extract more value from its treasure trove of fresh, authentic human conversations generated by its roughly 1.5 billion monthly average users. Nevertheless, investors not taking any chances on this one. Reddit stock dropping by 20 bucks. That's about 11% on the news. We're going to keep on watching. Well, coming up in a moment, we delve into 3M's 120 year evolution from a failed mining company to the maker of Scotch Tape. And now you can guess the and AI play. But first, a few headlines from the day's trading session. Kicking things off with Super Microcomputer, which is the company that builds the physical servers that house AI chips so those chips can actually run. That's right.
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John
Shares in the super micro company ticker SMCI surged over 20% today after the company said it landed more than $60 billion in new orders last quarter, pushing its backlog to record revenue levels. And those go go AI build results have lifted. Shares in server making rivals dell stock up 9%, Hewlett Packard Enterprise trading nearly 4% higher.
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Anne Berry
Well, it's been a volatile year for Super Microcomputer. It's not been alone from that perspective. But its shares at this point are trading nearly flat this year after tumbling in June. At that time, the company announced an equity raise to purchase components to fulfill those tens of billions of dollars in AI server orders. That was a big purchase and it was expensive. And that type of shift in Capex spend toward AI is once again hitting software. So let's take a look at shares in Pega Systems which fell over 17. The company missed top and bottom line earnings estimates and issued a pretty dire AI warning.
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John
The company said, quote, unprecedented changes in the AI market are causing clients to delay purchasing decisions and that's slowing subscription revenue growth for its cloud platform. Feels like deja vu. IBM issued a similar warning last week saying clients are reprioritizing IT budgets toward AI infrastructure. Since that announcement, shares in IBM are down nearly a third.
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Anne Berry
Well, speaking of IBM, it does report earnings after the bell today. And we'll be looking then for more insight into customer spending trends. Meanwhile, over in the consumer world, we've got to talk about Nike looking to reboot its China business by overhauling its digital presence.
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John
That's right, the retailer plans to cut off thousands of online distributors and concentrate online sales on its own platforms. Plus a few official storefronts like Douyin, China's version of TikTok. And while that vast network of resellers gave Nike's products wide reach, it also created inconsistent branding and pricing.
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Anne Berry
But not everyone's convinced that this is actually the right move. There's one analyst who compared the change to Nike's retreat under previous leadership from wholesalers in North America, a shift that ultimately cost the company real market share. Well, stock price of the athletic retailer, that's ticker NKE trading 2% lower today, down 75% over the past five years.
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John
And moving over to a slightly different kind of consumer product, eggs. Shares in Cal Maine Foods, the largest US Egg company, Ticker Calm, dropped over three and a half percent today after the company posted a surprise loss for the quarter. Cal Maine also missed on revenue estimates as sales plunged 50% year over year.
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Anne Berry
CEO Sherman Miller said an oversupply of eggs drove prices down to historically low levels. The average price for a dozen conventional eggs fell more than 70% over the quarter. I love the use of the word conventional.
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Sponsor/Other Speaker
Exactly.
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John
I don't know if I'm buying conventional eggs or maybe I'm buying expensive eggs.
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Anne Berry
I. Oh, yes, very cool. Yeah, it's very cool because I haven't
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John
seen that price drop yet in stores that 70%. So, you know, I'm keeping an eye on this one. After last month's DOJ settlement where three major egg producers, including Cal Main over allegations of price fixing. And finally, a major headline out of Europe, France has become the first EU nation to ban social media for kids under 15, intending to keep them off platforms like TikTok and Snapchat.
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Anne Berry
Well, the law, which goes into effect in September, will also ban students from having phones in high school and will require social platform to introduce age verification checks.
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John
And Anne, that is the kicker. It's enforcement. Those verification checks aren't too difficult for young folks to circumnavigate. We'll have to see how those moves have a meaningful impact on engagement with the social media giants. By the way, shares in Snapchat are down 2% today.
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Anne Berry
Well, coming up, 3M, the manufacturing company, two years into a turnaround attempt. But is it working? We're going to break down the numbers.
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John
Did you know Sam's Club isn't a store. It's actually a club with cool finds and like a whole community, it's a club.
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Anne Berry
Of course, Jason.
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John
It's in the name.
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Anne Berry
Sam's Club. Oh, yeah. Come join us.
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John
Sam's Club.
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Anne Berry
Well, we are now in the thick of earnings season. Hundreds of companies reporting this week alone and some of the glamorous tech names like Alphabet and Tesla reporting after the bell today. So before they do, and before we end up going down the tech rabbit hole, John wanted to focus on a more traditional American manufacturing company that did report earnings this week. That is 3M. Well, the company is over 120 years old, makes tens of thousands of products. That's right, tens of thousands. And is two years into a significant turnaround. Yet it's bucking the trend we've seen from other industrial conglomerates, choosing to remain as one big operating company instead of splitting itself up. Plus, no surprise, guess what? It is making its way into data centers. More on that in just a moment. But first, John, give us some background on this historic American company. This is 250 years of America and this one is about half of America's age.
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John
Exactly. Perfect for the second half.
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Anne Berry
Exactly.
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John
We're talking about. Mmm. On the New York Stock Exchange. That's three.
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Anne Berry
Right. Ticker. Very clever ticker.
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John
Market cap of $90 billion. And it was founded in 1902 as the Minnesota Mining and Manufacturing Company.
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Anne Berry
That's the three M's.
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John
Those are the three M's. Exactly. The Minnesota part has stuck. Mining wasn't as successful and of course in 1920 they became manufacturing adhesives. So the manufacturing part of the M. So two out of three M's are still going strong. We were saying in the office that all the News coverage of 3M's earnings this week showed clip art of post it notes and scotch tape, because that's the sort of tangible consumer facing business that we're all familiar with. And they do. They do manufacture all these things in your home. Command strips, Scotch Brite sponges, Filtreat air filters. But that's only 20% of their business. The other 80% is science based heavy duty materials adhesives for cars, industrial coatings, precision abrasives. It's a long, long list. Like you said, tens of thousands of products.
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Anne Berry
I do love a good post it note though too.
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John
Oh sure.
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Anne Berry
I just. In all those different colors and all the different sizes. They're sort of. I think it's very.
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John
They're helpful at work, they're helpful for art. I've seen people do beautiful things with them.
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Anne Berry
It's very Damien Hursty. You know it's like we've actually got so outside our studio. John, you can attest to this. There is actually a blank wall. You and I wanted to expropriate and we wanted to put a pin board up so that we could do our week show planning on it.
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John
Yeah, we can see where the guests are coming.
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Anne Berry
Exactly. Because we thought that we needed this organizational tool and we were told that it was niche. Niche. We were not permitted to do that. That's right. The wall was communal space. Not to be taken over by us. But I do notice that there is a little mosaic of post it notes that have made their way up there from some of our neighbors in the office. Yes.
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John
And our neighbors were doing one video one time back in November. All those posted notes remain on the wall.
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Anne Berry
I know it than the big blank space or frankly our calendar for the recent quarter just reported revenue of six and a half billion dollars up 2.4% year over year. Adjusted earnings per share 2.4 dollars 2 bucks 40. Beat by 15 cents. The company's fifth consecutive beat. Now margins, this is the interesting story hit 25% an all time high. We're going to come back to that in a moment. But here was the. Here is the sort of cherry on top. Raised its earnings forecast for 2026. That's what everyone's looking for quite frankly in these sort of days of outperform. Popped 9%. So now 3M stock is trading near all time highs.
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John
Absolutely. And we've been teasing this turnaround so far in this story. So let's go back to 2023. There were in the middle of two massive lawsuits. 3M. The company paid $6 billion to settle with hundreds of thousands of US veterans who claimed the 3M's military issued earplugs cost hearing loss during service in Iraq and Afghanistan. And the company paid another $10 billion to settle with US public systems that these water systems that claimed decades of PFAS contamination, those are known as forever chemicals. And so 3M stock had hit a 10 year low. In 2023, the company spun off its health care business and saying it wanted to focus the company into the three parts it has now.
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Anne Berry
Yeah.
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John
And then at that time, 3M brought in new leadership and they made Bill Brown the new CEO, trying to put all those lawsuits in their past.
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Anne Berry
So Bill Brown comes in as CEO. He's now been there for two years and he's been at the helm of this turnaround. And he signaled from the absolute get go he got into the seat that his focus was on operational excellence and margins, looking to streamline operations. None of that is sort of a novel idea, but the execution, the doing, it's very difficult. But he did put out there a specific target which was to hit 25% operating margin by 2027. So just to sort of go back to what we were saying, the fact that that margin got there this most recent quarter, ahead of timeline, ahead of schedule, is part of the reason we saw that stockpile. People were saying, okay, this is proof that this team's got it and they're going to execute in the. They said they were going to do well. Bill Brown said on this week's earnings call. I'm going to read this. The actions taken across commercial execution, innovation and operations are part of a broader transition at 3m from a holding company into a more integrated operating company model. That may sound like not two very distinct titles or descriptions, but they are in fact very different ways of operating the business.
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John
And we've been talking about similar conglomerates spinning off into several pieces. That seems to have been the trend over the past several years. Honeywell, for example, spun ALF into four companies. Chemicals, industrials, aerospace, quantum computing even. And then GE over the last several years has had a very successful breakup. There are now three companies. Healthcare, energy and aerospace. Stock price up for all of those. And the idea is that spinning off reduces the conglomerate discount that we've talked about on the show. Investors might look at one of these conglomerates and trade on the worst performing segment. So if you split, split out the company into different parts, investors can have a clear investment thesis into each one of those parts. But 3M has taken the opposite approach. Instead of breaking apart, they're integrating from a holding company to an operating company. So Ann, do you have any thoughts like why are they still a conglomerate?
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Anne Berry
So they're still a conglomerate because I mean Conglomerate is a fancy way of saying diversified. Right? Right. And it's a fancy way of saying that you've got different segments of this business, you know, each of which represents a chunk of diversification in and of itself, but it's still the conglomeration. Right. Of lots of different lines of business. But I think the key point which you just hit on there, John, is a holding company is what at least I think of as you've got a big parent company sitting up top holding literally lots of individual subsidiaries that may or may not have anything to do with each other.
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John
Right.
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Anne Berry
The point of it now being an operating company is even though there are different reporting segments, in this case safety and industrial segment number one, transportation and electronics segment number two, consumer segment number three, that there is either some common thread which could be a shared back office, shared IT system, shared financial resources, whatever it may be, and. Or some level of these segments doing business together in a way that's synergistic. For example, is there a distribution synergy because some of these products from the different segments end up being sold in the same place. That that's how I think of it, very different from the autonomy that you see under a holding company.
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John
And Bill Brown referenced that in the earnings call, saying the next step in the journey is around transformation, simplifying and standardizing core products, processes. And so they also mentioned on the earnings call that they're using AI across all of these to automate the back office that they're doing. So things are going to get simpler there. And you know, talking about a holding company, we were talking about Lowe's, that company that has hotels that they operate, but they have other things. But it's not run as one big
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Anne Berry
business and you can see that. And that's Lowe's. Ello. Ews. Yes, but you can that sort of intuitive in that particular instance, you know, what does a hotel company have to do with an insurance business? It's not an obvious synergy. The point he's making here is where it is possible to achieve them, we will go get them. Different, for example, from Berkshire Hathaway, do you remember you and I have talked, for example, about some of their holdings in railway businesses in the past. Berkshire is taking stakes in in different companies and even if they look as though they should be close cousins, very much not getting in there and telling them how to operate, just saying we're going to own stakes and you're going to be completely separate and independent. Holding, holding, holding, Exactly. Well, let's take a look at some Parallels here. When it comes to one piece of build playbook. Bill, the CEO, we're sounding very familiar now, just like Corning. This is a 100/plus, year old company that has made its way into data centers, intentionally or not. Now, 3M just announced that Microsoft will deploy its expanded beam optics technology into Microsoft's Azure data centers. So this 3M product, these are fiber optic connectors that are quote, durable, dust resistant and vibration resistant and cuts installation time apparently by 85%. So at the moment, looking small relative to the size of 3M. Again, it's a $90 billion market cap company. This small part of the business generates about $50 million of revenue that's anticipated for this year. But it is expected to grow 4 to 5x over coming years.
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John
Yes, exactly. They're looking at this in the future. They are dipping their toes in the water. And I was interested. 3M's expanded beam optics, that's what we're talking about. 3M has 100 patents in that area. And there was a great quote I read in Bloomberg that said, quote, the success of 3M has never been about great acquisitions. It comes down to the scientists who pump out those incremental product improvements or who every now and then hit upon a product that shakes up the market. And so you're looking at these 100 patents that they have holding, who knows, down the line with more AI build out if some of these patents are going to come into play. They've got a lot of lottery tickets out there with this research that they do. And then finally, if you're making a space play, 3M communication headsets were used by crew members on NASA's Artemis 2 mission.
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Anne Berry
There you go, John, you're really sort of leaning into this idea of diversification even more. Well, we're going to keep an eye on this turnaround because there are a lot of them happening with public companies at the moment, Nike, as we said at the top, being one of them. And it's a real mixed bag when it comes to the success or this or the pace of change that's being achieved by some of them. Some leaning into it like 3am, others not getting that quite on the timeline that the market expects. Well, the company structure one will keep watching. High margins can generate a lot of cash. So the question is, will the investors be looking for that to be reinvested in growth? Are they going to be looking at changes in the dividend structure or buybacks? And will there be a point where instead there is going to be pressure for more assets to be sold for more removal of that complexity while share price up 90% over the last two years. We're going to keep on watching this one. Well, it's 4:00pm on the east Coast. The markets have closed. There it is, the closing bell. We don't have a ticker tape so let's throw it over as always to our human ticker, our producer, John.
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John
That's right. The markets pared earlier gains and The S&P 500 finished down 1. 10 of a percent. The Dow finished flat and the NASDAQ was down half a percent for the day.
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Anne Berry
Well, we have got the Kessel going because we're going to need some caffeine. The big name earnings reports are now starting to roll on in. We had the financials, the titans of financials. We covered that last week. Now it's go time. We've mentioned earlier in the show, IBM earnings out now, Alphabet and Tesla literally right as that Bell range starting to hit the wire. So we're going to be covering it all in detail over the course of this week. That's it for today's Brew Markets Daily.
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John
Brew Markets Daily is hosted by Anne Berry and produced by Jean Croteau, Tarka Delatif, Abena La Roya and Emily Millarn. Our technical director is Felicia Edwards. Jim Orzo is our audio engineer. And the president of Morning Brew Inc. Is Devin Emery.
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Anne Berry
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow, same time, same place.
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Sponsor/Other Speaker
It.