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- [00:00]
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- [00:27]
Ann Berry
Alphabet, Google's parent company reported blowout earnings, but the stock is sinking we explore investor concern over AI spend steel Dynamics we answer one listener's question about the company that's forging metal and throwing off cash and Tesla Might mixed earnings report move the company even closer to a merger with Space X? We have the latest for Thursday, July 23. It's blue markets Daily and I'm Ann Berry. More market details to come. But first, Tesla if there's one message from last night's earnings long awaited, it's that investors really do need to decide once and for all if they want to own this stock. As a true AI bet, that's as the OG electric vehicle maker reported headline car sales that were pretty encouraging. Tesla delivered just over 480,000 vehicles during the quarter, comfortably beating Wall Street X parents expectations and marking its strongest delivery quarter since late last year, the sign that demand has stabilized, bringing a sigh of relief. Yet the share price has headed south as non auto business drivers, pun intended, firmly take over the narrative. Research and development spend surged nearly 50% from a year ago to around $2.4 billion, reflecting heavy investment in autonomous driving software, which does help that core auto business, but also really in AI computing infrastructure and of course the Optimus humanoid robot program. Then of course there's the capex, which more than doubled from the previous quarter to hit around $5.8 billion, all in all generating negative free cash flow of about $1.1 billion. This is a significant reversal from the positive free cash flow we saw in the prior quarter and the first negative cash flow print in around two years. Well, these non car developments explain why Tesla stock price fell around 4% in after hours trading. And we saw early reactions from Wall street reflecting calm but still some trepidation. Ratings largely held steady in terms of buy or sell or hold, but the price targets of Wall street analysts did get nudged on down. Now in amongst all of these reports, there was one nugget that caught my eye and it was a throwaway comment toward the end of a Goldman Sachs analyst report released two just before midnight last night. Yes. I'm such a nerd. I was up late trying to see these reports come in. Well, in this particular analyst research report, you had the usual list of upsides to target price and there included two in the list of risks laid out by this analyst was, quote, a risk being key person risk and the internal control environment. So this is just my view, this is one person's opinion, a merger with Musk's other public company, that's of course SpaceX is now seeming ever more likely there would still be key person risk to the combined company. In the CEO, there's only one Elon Musk. But at least getting his executive bench under one roof gets top talent that's been trained in what I call the Elon way, working together across complementary priorities all in one place. Now this work's really happening already in several ways. Back in March, Musk launched Terrafab, that's a $25 billion chip fabric facility in Austin. That's a partnership between, you guessed it, Tesla and SpaceX AI. So Tesla and SpaceX, look, just make it official, unite, get real synergies, cut out duplicate back offices and duplicate public company expenses, streamline your combined R and D, get scale benefits from the totality of your capex, remove conflict of interest issues, get the market relaxed, that everyone's going to focus and march in one direction for forwards as a single company. Well, looking too at what's going on at SpaceX's share price, that company may actually also welcome a near term price catalyst given that it now trades below its IPO price. And Tesla, just given what's been going on in its reaction to that earnings report, the shares there clearly could do with the pop. Now it is such a glaringly obvious combination that on yesterday's earnings call, Musk, after highlighting Terrafab, said, quote, we can't talk about combining companies on an earnings call. It's got to be done with the appropriate process. So, appropriate process, we're watching out for you. Meanwhile, shares in Tesla down over 14% in this afternoon's trading. We're going to move on to other headlines from the day's trading session. Kicking things off with earnings from tech giant Alphabet.
- [05:04]
John Croteau
That's right, shares in Google parent Alphabet ticker Goog fell more than 6% despite reporting blowout earnings. The company posted an almost 300% jump in earnings. Google Cloud revenue surged more than 80% year over year. That's as demand for AI services continued to accelerate.
- [05:20]
Ann Berry
So what was the sticking point here? You guessed it, it was capital expenditure. Alphabet spending nearly $45 billion during the last quarter, representing about 100% increase from the same period last year. Now the quote, vast majority of that expenditure went towards AI investments and all that spending, pushing the company into negative free cash flow for the quarter is becoming a bit of a recurring theme.
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John Croteau
Absolutely. And that outflow is not slowing down. Management raised its capital expenditure forecast yet again. But despite today's sell off, Alphabet shares are still up more than 67% over the past year.
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Ann Berry
Heading on over now to media, shares in comcast are trading 4% lower, even after the company reported earnings that beat expectations. And that's because it did reveal a higher than expected loss of broadband customers. Just weeks ago, Comcast announced plans to spin off its NBCUniversal media business and to retain that core broadband and wireless operations. So the bleed of broadband subscribers doesn't bode well for its future core business. The timing for this kind of report frankly couldn't have been worse.
- [06:23]
John Croteau
And my two cents, maybe Netflix should look at that NBCU spinoff. Netflix's share price is trading at 52 week lows and with one acquisition, that company Netflix, which has mastered global distribution, could add sports news and a movie studio, Universal, to its portfolio. Universal is, by the way, the studio behind the buzzy blockbuster the Odyssey between Comcast, Netflix, Paramount, Warner Brothers. There are so many developments in the media M and A to keep an eye on.
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Ann Berry
Well, whether Netflix is going to go into news has actually been a point of controversy for quite a long time. Netflix going into live, period. It's had a sort of mixed record when it comes to execution. So be very curious to see if Netflix does make that kind of move in reaction to the fact that its stock has stagnated. Well, a couple of highlights now from a busy week of earnings. Specifically, let's start with shares in Harley Davidson tick at one of our favorites, hog. That's hog down over 6% after the company reported mixed results. While the number of Harley Davidson bikes sold rose 9% year over year, but did miss expectations revenue as a result. Missing also. That's right.
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John Croteau
Global demand for Harley motorcycles has been flat for years. Company leadership has cut prices and plans to introduce a lower price model, the Sprint. But the plan has divided analysts. Some expect the cheaper bikes to attract younger riders. Some just see those lower prices putting pressure on profitability. Either way, one little nugget from the print, Harley Davidson still has those core fans, of course. Apparel and licensing revenue rose 2% to $62 million in the quarter.
- [07:52]
Ann Berry
Got to get me some Harley Davidson Merch to bring that kind of statistic to life. Well, finally an update from Taco Bell which we talked about earlier this week, which has been taking a hit after letters served at the chain was linked to a foodborne illness.
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John Croteau
And daily foot traffic is down as much as 30% and shares at parent company Yum Brands have fallen 10% just in the last week.
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Ann Berry
Well, the chain is in Prof. Problem solving, damage control mode, looking to shore up its customer base with $1 enchiritos and $1 regular nacho fries, hoping that single dollar price tag is going to get people back through its door.
- [08:27]
John Croteau
Here's the problem. I don't know how much those items typically cost, probably more than a dollar. But the move is reminiscent of when Chipotle offered free burritos to win back customers after that restaurant battled E. Coli in its supply chain over a decade ago.
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Ann Berry
There it is. Inflation from free handouts to a dollar cost price. To try and remediate these young brands were still down a half a percent today. So investors not quite buying that dollar strategy yet. Well, let's take a quick break and when we come back a listener asks us to tell the quote cool story of Steel Dynamics.
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John Croteau
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- [09:27]
John Croteau
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- [09:37]
Ann Berry
John I'm very excited because we got a note from a listener that's our favorite. We love hearing from you all. Yes, that's right.
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John Croteau
Buster wrote. Hey guys, could you give us your thoughts on Steel dy? I'm curious to hear your perspective on the quarter and future expectations. I think the company is an interesting situation with cash flow rapidly expanding. Also, they have a cool story that more people should know about.
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Ann Berry
Well, thank you for the note Buster and I love it when people find these corporate stories cool because I'm a nerd and I do and I like to have everyone else share in that enthusiasm. We're going to get it into that cool story in a bit and the bet that the company is making with its cash. But first, John, give us some background on the business and how it gets to make all of that cash in the first place. Right.
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John Croteau
Steel Dynamics STL LD on the NASDAQ market cap of $35 billion. The company was founded in the 1990s, and that's relatively new, considering most of the large traditional American steel companies trace their roots back 100 years or more. Think Andrew Carnegie. So this comes down to newer technology that sets Steel Dynamics apart. When we think of steel production, we think of the old blast furnaces fed by iron core and coke. But Steel Dynamics solely uses electric arc furnaces, eaf, which allow the company to melt recycled scrap metal into new steel. So this is not ore from the ground. And last year, the steel they produced contained 88% of that recycled feed. And guess what? The company also owns omnisource, one of the largest metal recyclers in North America. So they collect the scrap and turn it into new steel, which they call circular manufacturing.
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Ann Berry
Interesting. Well, it's one of these things because when you and I were talking about this earlier on, the headline is that the electric arc furnaces have fewer emissions than the blast furnace. So at the surface, you think, oh, this is a more environmentally friendly of going about things. Now, the fact that it does recycle existing metal certainly falls in that bucket. But there have been some questions around what is the true environmental impact here, which is just worth bringing up, because as these older manufacturing businesses evolve, there is always this question around, how do the new technologies achieve two things. Greater innovation. That's number one. Number two, actually three things. Number two is greater efficiency. But number three, there's always some sort of question around, are these sort of more green technologies? Well, an analyst on the earnings call did ask whether these emissions reduction is actually a favorable trend. And the company talked about just how energy intensive. As you can imagine, these electric arc furnaces, or EAFs, are just the amount of electricity that they consume being enormous. The company did say that the power grid and the restraints on it are a concern. And you can just imagine how rising utility belts we. I complain about it, you complain about it. We see it going up in our households. Big corporations like this one, dependent on electricity consumption, really seeing just the impact of utility bills going up. So Steel Dynamics, trying to take matters into its own hands. The company has partnered with wind farms, has a goal of using 30 renewable electricity by 2030. I'm having sort of deja vu to data centers trying to figure out getting their own localized sources.
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John Croteau
And this is absolutely the case. And management on the call did call out data centers and talked about the grid and having to shore that up and then working directly with energy suppliers.
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Ann Berry
So let's talk about those earnings. They did report that Steel Dynamics this week, revenue hitting $6.1 billion. That's up 33% year over year. Earnings per share up 84% year over year, hitting adjusted EBITDA measure of profit of 921 million. So decent margins on this business. But you know, this is a capital intensive company, so all eyes on this one are on cash flow.
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John Croteau
That's right. And co founder and CEO Mark Millett called out three tailwinds for the steel business. Tariffs on imported steel is keeping domestic pricing firm. He's also seeing manufacturing reshoring in the United States with more factories being built domestically and the federal government is spending on infrastructure. So all of these are a tailwind for steel, for the company. Their steel fabrication order backlog is up 45% year over year with strong demand coming from the construction of data centers.
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Ann Berry
Well, before we go into data centers, because we're always talking about data center,
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John Croteau
it always comes back.
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Ann Berry
We haven't really talked about tariff impact on US Manufacturing for a minute. So do you mind if we just sort of dig in there a little bit? You said that three things were called out as tailwinds, and arguably two of those are tariff related. Number one, you said that tariffs on imported steel is keeping domestic pricing firm. So really that was the point of these tariffs, which if you slap them onto imports, the idea is you're protecting your domestic production and helping with domestic pricing. So the intent of that tariff actually taking place. And then number two, and this is what was really interesting to me, he is seeing manufacturing reshoring, which is bringing it back, bringing back what's gone overseas back into the United States with more factories being built domestically. So it's interesting. I feel as though the tariff conversation has sort of died down a little bit since AI has really dominated the headlines and since many companies have sort of reached the point where they either they've passed on the costs or the consumers unfortunately gotten used to the impact on our in our wallets. This is interesting to me because now these are industrial businesses saying we're seeing these tariffs come through a cycle and we're actually seeing it change behavior.
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John Croteau
And we're talking about the impact of steel. And in One moment. We're going to talk about the impact of tariffs on aluminum.
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Ann Berry
Yes, aluminum or otherwise known as aluminum aluminium for those across the pond. Well, how does this all take effect when it comes to looking at cash? Now, Buster, when you wrote in, you mentioned cash flow generated from operations this quarter, just over $425 million. So here is some of the math that built up to that. The company shipped a record 3.7 million tons of steel in the second quarter. The average steel selling price increased by $105 a ton from the previous quarter, which is pretty meaningful. But the scrap input cost only cost 16 bucks a tonne. So really here, what's at the core of this story is this recycling capability.
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John Croteau
Yes.
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Ann Berry
The fact that this company is able to take existing metal reuse. It really is fascinating when you take a look at how it's creating a competitive advantage for Steel Dynamics.
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John Croteau
And this is what they're doing with the cash is also what Buster was bringing up. First of all, in the last quarter, they spent $200 million to buy back shares, but they're expanding from steel into aluminum. Aluminium. The company is building its third and final production line in its new aluminum flat rolled product mill in Columbus, Mississippi. And so production there is ramping up. It's still running at a loss. In the latest quarter, they doubled the amount of aluminum shipped, but they lost $33 million in the process. The company expects that by the end of the year they're going to turn those earnings positive. And they project an annual EBITDA of $650 million alone from aluminum in the coming years.
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Ann Berry
Aluminium. There it. So why aluminum? You know, what is it that's going on here? And it's interesting, John, because there are two consumer categories that I've tracked for a long time. Aluminum cans have been very popular, obviously in beverages and particularly different kinds of aluminum cans that have come out. You think that a can as a can is a can, but those little skinny ones, you know, became very popular. You saw some of these iced coffee brands lean into them, and there was actually a shortage. I remember looking at this couple of years ago, there was a shortage of these aluminum cans, the skinny ones, they were being produced in New Europe in a much smaller way. Another place I've seen it, I'm very involved in a couple of beauty businesses. Aluminum tubes have been very popular. Almost like these little squeezies where you. It's like an aluminum version of your toothpaste tube or more actually what it is. It's, you know, artists using paint that's inside those aluminum tubes. So the idea is sort of replicating that creative process. But you have seen the sort of move into interesting uses of aluminum. Then of course, automotive parts that sort of a more cookie cutter use of aluminum industrial applications. Well, the price and demand for steel can go through pretty extreme cycles because it's used primarily in heavy construction. So this is something that is pretty closely tied historically to things like GDP growth. If the economy weakens, there's less building, there's less demand for steel. The other thing I'd point to is the global markets. I travel a lot internationally. And if you go to places like the Middle east or Asia, there are countries where there's so much construction that they joke that the national bird is the crane. Right, that's. And I've heard that joke in so many different countries around the world. And it's like the local town taxi driver always tells me that joke as though it's like unique to that particular country. But I, whenever I'm traveling and I hear that joke, I can't help but think of demand for aluminum. Aluminum and demand for steel because it just so closely united. Well, aluminum is actually relatively less volatile than for steel. There's a more consistent need for these sort of consumer and consumable products. I've talked about things like the beverage cans and packaging. Unfortunately, you know, these are sort of disposable, quote unquote, when it comes to consumer use for them. So this diversification is something that's made real sense for Steel Dynamics.
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John Croteau
That's right. And the CEO called it out on the earnings call saying a cost effective and high return growth opportunity providing Steel Dynamics with additional countercyclical diversification while further stabilizing and growing our cash generation capabilities. So they're looking forward to that. Now, you talked about the tariffs. We're going to bring it back to that because just this week tariffs on aluminum were adjusted. Things are getting changed through the White House. They're looking at different percentages of 100% aluminum or some that have other sort of mixtures. And so currently Steel Dynamics uses about 60 to 80% scrap in its aluminum process, and that's way less than the amount of scrap it does for its steel. It's having a hard time sourcing enough aluminum scrap to generate the new aluminum that it's making.
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Ann Berry
Yeah.
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John Croteau
And so where the steel was considered sort of, the tariffs on steel were considered a tailwind. It's a mixed situation for aluminum because they're having to source aluminum to mix with their scrap. And so the tariffs on aluminum are currently as high as 50%. And so that is in the short term causing higher prices to generate this aluminum for the company.
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Ann Berry
Well, looks like Steel Dynamics sort of trying to lean in when it comes to the policymaking here. They're quote in discussion with the White House about tariff designations on aluminum products. So something that we're going to be keep watching because as that evolves, that will of course impact the cost structure of this business. Well, look, given everything we've described, given that cash flow generation, given that push for diversification, no surprise here. The share price is up. The magnitude's interesting. It's up 40% year to date. That share price up 84% year over year, up 305% over the past five years. One thing I would just note there, lots of good news that we've just covered, but there is some caution at this valuation level. When you take a look at the coverage, You've got about 12 analysts covering the business and it's not a universal buy on this one. About 8 of the 12 are saying it's a buy or strong buy. You do have a couple of holds and underperform or sells in there. So. So something to watch out for as you're passing through this if you found this interesting.
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John Croteau
Yes. And I just want to have one final foot for Buster because as he mentioned, he thinks it's a cool story.
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Ann Berry
Yes.
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John Croteau
And so let me quickly get into story time. I'm not sure how much of this is apocryphal, but I saw it cited in many places. So there's another company, Nucor, that's North America's largest steel manufacturer and they pioneered that EAF process. They also still use blast furnaces. So well, in the 1990s. Picture it, there's three former Nucor executives having a beer at a Holiday Inn and they thought, why don't we launch our own steel mill? That's all eaf. Keep in mind, nobody had successfully launched a brand new independently financed U.S. steel company in nearly a century. But they got the backing and they started production in 1996. They went on to acquire that recycler and three decades later, one of those guys, Mark Millett, is still running the company.
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Cash App Advertiser
There it is.
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Ann Berry
I mean, that's a great entrepreneurial story. And you're right because we play so much emphasis on tech, we talk about the glamour of technology. Also lots of consumer entrepreneurs, I think of biotech is pretty glamorous as well. Heavy industrials isn't the kind of entrepreneurial story that gets quite as much coverage. So I do think this is a pretty cool nugget to unearth. So thank you very much, Buster, for writing in. And by the way, we love this. If that's not clear from the energy and the enthusiasm, if there's a stock you want to unpack, if there's a cool executive you want to know more about, if there's a sector that you're intrigued by, write to us, send us a note. You know, comment on our YouTube and on our Spotify and on our Apple. We look at all the comments. We like email, we like handwritten notes. And John likes carrier pigeons.
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Cash App Advertiser
I do.
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Ann Berry
You do. That's it. It's 4pm on the east Coast. There it is, the bell. The market's wrapping up for the day. We don't have a ticker tape, so instead let's throw it over to our human ticker. As always, our producer John and stocks
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John Croteau
were crushed today amid a sell off of the Mag 7, including Google and Tesla, which we discussed earlier along with the dramatic rise in oil prices due to reports of oil tankers being attacked in the Red Sea. About that, oil futures for Brent crude, the international benchmark surged over 7%, crossing back over that $100 per barrel mark for the first time in two months. Along with it, the S&P 500 was down 1 and 2, 10 of a percent. The Dow finished down 1% and the Nasdaq finished the day down over 2%.
- [22:48]
Ann Berry
So the big question here is what do those inflation numbers mean for the outlook for rates? We have a Fed meeting next week. Now a couple of weeks ago if you said that a Fed rate hike was on the docket, people would have said no way. Though there has been some question mark around September. If you take a look at what the market was saying today, the probability of a rate hike hit about 40% at one point over the course of today. Which just goes to show that oil breaching that hundred dollar mark is doing something to market sentiment. Aside from that, though, and a more positive note, I want to tease something up because Ariel Cohen, the co founder and CEO of Navon, which is frankly the travel sector stock I had not paid attention to and many of you won't have heard of, CEO and founder Ariel Cohen is joining the show tomorrow. We actually filmed this a couple of days ago. He was in New York, but we're going to air the episode tomorrow. This was an incredibly fun conversation. I really enjoyed it. It was super annoying to prepare for it because what you want when you have these interviews, you want to have good energy, but you want something a little spicy and controversial to dig into, to really poke around and unearth some nuggets. This one, there's so much glowing news out there, it was hard to try and poke the bear. But I did my very best to come back tomorrow to see how I did. That's it for today's Brew Markets Daily.
- [24:01]
John Croteau
Brew Markets Daily is hosted by Anne Berry and produced by John Croteau, Tarkov, Delatif Avenue, La Royal and Emily Millern. Our technical director is Uchenawa Ogu, Jim Orzo is our audio engineer and the president of Morning Brew Inc. Is Devin Emery.
- [24:12]
Ann 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.