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- [00:04]
WhatsApp Narrator
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Ann Barry
Royal Caribbean Cruise Lines UPS and Wayfair earnings are out. So which stock sank and which delivered caring Dr. Pepper will buy JD Pete's we answer your question on a creative twist to the deal and OpenAI pulls off a critical split. $500 billion, a powerhouse board and the mission to, quote, benefit humanity. We break it all down for Tuesday, October 28th. It's Brew Markets Daily and I'm Ann.
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Sponsor Voice
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Ann Barry
More market details to come. But first, it's finally happened. Non profit AI giant OpenAI is now officially split into two. The company completed its reorganization this morning, splitting itself into one piece, a non profit called the Open AI foundation that controls another piece, a for profit enterprise called OpenAI Group that for profit is valued at $500 billion and structured as something called a public benefit corporation. That's a special kind of commercial outfit whose directors are legally required to consider not only profits but also the pursuit of stated public benefit, which in this case is the somewhat vague mission to, quote, ensure that artificial general intelligence benefits all of humanity. So here's why the split matters. Back in April, which is why this has been long awaited, SoftBank invested $40 billion in Open AI. Half of that amount was conditional on OpenAI lifting a profit cap that was in place owing to its muddled status. It's worth noting though that the cap on returns to investors that profit cap represented was still at a pretty massive level of a 100 times return. Now the other condition of Softback's investment was allowing share to hold conventional equity. So cookie cutter stuff by early 2026. Well, the split today enables OpenAI Group to get that chunky $20 billion second half from SoftBank and to go raise capital more freely in the future. It also opens the door to an ipo, which is a game changer for investors wondering how to find a path to one day actually get their money back out of Open AI. Now the foundation holds a 26% equity stake in OpenAI Group valued at around 130 billion dol, almost the same size as the 27% of OpenAI owned by Microsoft. In addition, the OpenAI foundation has a warrant that allows it to receive additional shares in OpenAI Group in the for profit part if its share price increases more than tenfold after 15 years. The foundation stake is a controlling one, meaning it remains extremely powerful. But it does free up the for profit enterprise to go and find the money for what Sam Altman has said could be a trillion dollars of spend on capex. So here's what we're watching. We're really closely watching who it is on that controlling foundation's board because again, it's very powerful and right now it's a pretty impressive cast of characters. There's OpenAI CEO Sam Altman, plus Brett Taylor who's chair of the board. He's a co creator of Google Maps, a former Chief technology officer of Facebook and a previous co CEO of Salesforce. Then on the board there's co founder and CEO of Quora, who's also another former CTO of Facebook. That's Adam D'. Angelo. There's also Dr. Sue Desmond Hellman, an oncologist and former CEO of the Bill and Melinda Gates Foundation. Dr. Zico Coulter, professor at Carnegie Mellon University, retired U.S. army General Paul Nakasone. There's Adebayo Ogunlesi, chair and Managing partner of private equity firm Global Infrastructure Partners, Nicole Seligman, former General Counsel at Sony Corporation and Larry Summers, former U.S. secretary of the Treasury. I'm out of breath because that's number one. A lot of people. It's also a heck of a lot of collective credibility betting big on OpenAI's reputation. This is something I call trying to cocoon a company with very credible people to make sure that even if things are complicated, there's at least the halo of trying to do things the right way. We're going to keep on watching. Coming up, it's earnings season. Investors like what they see at UPS and Wayfair. But just why are shares in Royal Caribbean stock sinking? Plus I answer your question about the convertible preferred stock that Keurig Dr. Pepper is using to buy JDE Pete's. But first, a word from our sponsor, Surf Air Mobility. The transportation industry is evolving and our producer John has more on why air travel is no exception.
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John Curto
That's right. Surf Air Mobility is working to redefine the way we fly by combining AI driven software with future electrified aircraft. They're developing a platform called Surface OS that acts as the intelligent operating system for the air mobility industry. It's designed to streamline operations and make air travel more efficient and reliable.
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Ann Barry
With this technology, Surf Air Mobility believes they're positioning themselves to be a leader in the air mobility market, which is estimated to grow to about $100 billion by 2035.
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John Curto
Learn more about their mission and technology@surfair.com MorningBrew this is a paid advertisement for Surfair Mobility Inc. Full disclosures and Podcast.
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Ann Barry
Description well, we are off to the races with earnings season and we thought to dig into a couple of the big reports that caught our eye today. So John, why don't you kick it off with one that is typically called a bellwether stock, meaning as so goes this company, so tends to go the global economy and that is United Parcel Service. Ups.
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John Curto
That's right. UPS came out with their earnings today and I'm going to ask you at the end of this conversation if you think it's a bellwether currently.
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Ann Barry
Yeah.
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John Curto
Okay. So the market cap $81 billion shares popped 11% on their earnings today. It's sudden settled in up about 8% for the day. And the reported consolidated revenues of $21.4 billion, operating profit of 1.8 billion. And the story here is that UPS is in the middle of a post pandemic turnaround back when everyone is at home ordering things. So the shares are down nearly 25% year to date and the company announced that it's been trying to wean itself off of its partnership with Amazon. Last year Amazon accounted for about 12% of UPS total revenue. That's about a billion dollars. And in January, UPS's Carol Torme said, quote, Amazon is our largest customer, but it's not our most profitable customer. And so UPS is now focusing on lowering volumes and increasing margins, getting higher leverage shipping and they're specifically cutting its Amazon shipping volume by more than 50% by next year. That's the goal.
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Ann Barry
So I remember when this was announced and I remember thinking at the time, this is a really, really bold, bold move, right, to actually say we are going to cut ties with the absolute monster, the giant, there's Amazon, and have the confidence that is going to enable you to free up your capacity to find higher margin customers instead. That is a pretty high conviction vote of confidence in yourself. So everyone's been watching really closely to see if they could pull this off. Now the current quarter, John, just with listening to the numbers that you laid out, it looks like they're doing it and that's why the share price I think got such a healthy response to this news. Volumes were down in the United States, but UPS did see those go up internationally. Something by the way. And just thinking back to FedEx's most recent earnings. FedEx actually said something very similar. Also a bellwether stock, by the way, which is why they were seeing some weakness in the United States, in certain parts of the United States, not all of it. They were really seeing some compensating strength in the rest, in the rest of the world of the globe's economy. Now, adjusted operating profit margins here at UPS were up. They're at 10%, up 120 basis points from where they were before. So it looks like they're delivering, pun intended. That's yours. I borrowed it from you. And the Amazon volume down 21% year over year. So it looks like they're doing what they said they would do. Couple of other things, though, because this is not the whole part of the story.
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John Curto
Sure.
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Ann Barry
UPS has been incredibly aggressive about trying to remove costs from other parts of its business. It's closed 19 buildings in this last quarter, just under 100 buildings so far this year. So meaningfully trying to shrink its real estate footprint, cut 48,000 management and operations positions as well. That's a very, very large number of positions eliminated. All in all, these restructuring efforts resulting in cost savings. $2.2 billion for this year. So these are really excruciating decisions for a leadership team to make, but they've made some tough ones and they're delivering.
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John Curto
Right. It seems like the idea to get leaner and not deal with Amazon is working out. Shares were up today.
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Ann Barry
Well, you're going to ask me if it was going to be about where the stock. I thought about it and actually I do think to sort of the. So the question inside your question is, when a company's got so much of its own stuff it's working through, can you really rely on it to be an indicator of what's going on in the economy more broadly? And I just wanted to touch on that because one of things that we like to do on this show is go past the headlines. We don't just read the press release. We actually go to the place that I think is the treasure trove for the kind of information that answers the question you asked, and that is the earnings call transcript. Because that's where the best companies with the best management teams take that opportunities to bring to life the stories about what's going on and to actually unpack and draw very clear distinctions between what's our own esoteric issue that we're dealing with, like closing our buildings versus what's actually going on in the global economy, or more broadly, like what is going on with international trade trends. So I actually think ups part of the reason again that they're having this very positive share price performance today is, is the market saying, you're also telling your story convincingly.
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John Curto
Yeah, it made sense to me.
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Ann Barry
It's fun. I love these earnings transcripts. I could spend all morning going through. I do in fact spend all morning going through this.
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John Curto
That's right. All right. Why don't you take us to Royal Caribbean? Because I know how much you like cruises.
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Ann Barry
Yes. And I also really struggle. I, every part of me wants to say Royal Caribbean. I just want to say on the other side of the Atlantic, this, this company is pronounced Royal Caribbean. But here we are. Royal Caribbean ticker RCL market cap just under $80 billion, up 25% year to date. So just to touch on why cruises are the kind of vacation that the market looks at very favorably when consumers are feeling pressure. Because if you look at the cost of a cruise vacation all in, it provides to the customer a really compelling value proposition. You get all your food, you get travel, you don't need to worry about changing currencies if you're going sightseeing. And so when, if, when customers are feeling the pressure as they have done with inflation, it tends to be a pretty sort of compelling way for them to go and take those precious vacations.
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John Curto
And if we're talking about what we learn on the earnings calls, yeah, that, that story was told today by CEO Jason Liberty Cruises, besides making for an incredible vacation experience, are an incredible value for the money. If you understand what a cruise is like. That's not only difficult to replicate on land, but impossible to replicate for the money spent.
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Ann Barry
That's a great storytelling. That's a quote. So despite the fact that they're telling that story, the share price is actually down 10% today. And also despite the fact that Royal Caribbean beat earnings expectations, it hiked its full year guidance, citing strong cruise demand and also pulling out costs in the third quarter. It sort of begs the question, like what more could the market have wanted? But there it is, the share price down. The company did say that it had adverse weather that did contribute to. Despite earnings beating expectations, the top line revenue did actually fall slightly short by 30 million bucks. Its private island destination of Labadee was also temporarily closed. So that was actually a fairly new initiative which threw a wrinkle into Royal Caribbean story. But I think this is one again, great news all around. In terms of its overall performance, its cash was up over 75% year over year. The dividends gone up by 33%. It sent cash back to shareholders by repurchasing 1.3 million of its outstanding shares. But I think this is one person's view, the shares are down because expectations for this business were even stronger than was actually delivered upon. Particularly because if you look back earlier in the year, the bookings outlook had been so such a massive improvement on prior periods. So this to me was the curse of did really well, but didn't do absolutely outsized brilliantly.
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John Curto
And one more footnote on this. They announced today that Royal Caribbean will open the Royal Beach Club, Santorini.
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Ann Barry
Oh, wow.
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John Curto
And I'm fascinated that these cruise lines own private islands or private beaches and spaces. And so by 2028, the company aims to have eight of these types of locations around the world.
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Ann Barry
People seem to want both, they say, they sort of want to say, and all the convenience of being on sort of floating hotel. But I also want to be able to get off the ship and go put my toes in the sand. So Santorini, Greece, here they come.
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John Curto
All right, let's wrap it up with Wayfair, the home furnishing company whose stock was way up. Shares are up 140% year to date, market cap of a little under $14 billion. They reported total net revenue today of $3.1 billion. That's up 8.1% year over year. Orders are up 5% year over year. And EBITDA adjusted EBITDA was 6.7, which marks the highest level achieved in Wayfair's history outside of the pandemic period. So doing quite well today.
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Ann Barry
Doing quite well and just taking a step back. So first of all, I love talking about these stocks and this is coming from someone I've spent my weekend diying, right? So I'm in like full on pok around the welfare site trying to look for things like bookshelves. You know, if you look back to a couple of weeks ago and we think about the announcement from the White House that they were going to think about slapping tariffs on furniture imports. Everyone sort of panicked and said, oh my gosh, what does this mean for the home furnishings industry? Well, Wayfair has seemed to manage to find a way to sort of wiggle its way through this. The Chief Financial Officer said again on the call today, the company has seen, quote, limited impacts of price increases. And one of the things that Wayfair has been credited with is having this enormous supply supply chain with lots and lots of different suppliers all over the world. Which means even with those kinds of tariffs and also with the continued acrimony with China that Wayfair has been able to try and go out to lots of different sources and find ways to average cost down its its imports, which has been sort of one superpower of this business.
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John Curto
And I didn't realize this before, this is not tariff related, but that one of their strengths pointed out by the CEO is that they have brick and mortar stores. Yes. I had no idea. They're under brands like all modern, Birch Lane, Joss and Main Perigold. And there is one Wayfair in Illinois. And the CEO pointed out that that's part of the strength is that the brick and mortars are doing well.
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Ann Barry
Well, that's actually something that reminds me of a conversation we had about William Sonoma, which owns Pottery Barn Rejuvenation. Thank you, West Elm. And so the idea is that each of those brands had really figure out who is their customer. They're providing really good store services. They were combining that with digital services like digital design and AI to do that. When these brands have figured this out for something as intimate as the home, they are getting it right. And to your point, it does feel like all modern. And Paragould owned by Wayfair is also figuring out how to play in this space. The other thing that was sort of hidden in plain sight at Wayfair, and I always love this when it comes to consumer businesses, the CFO Kate Gulliver did cite the loyalty program that Wayfair has. And this is kind of extraordinary. Something like 80% of total orders at this business are being driven by repeat customers. Which sort of begs the question, how much, how much repeat purchasing do you need to do to spend on your home? It just feels like a very heavily concentrated set of spend.
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John Curto
And, and they also pointed out that their marketing expenses were down. So maybe they're finding they have to. They're not acquiring as many customers because the customers are coming back.
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Ann Barry
You know, when you get this right, you really get right. Ulta for the longest time had its loyalty program as a superpower. And then we've also talked about airlines, airline loyalty programs. You know, it really does keep you sort of shackled to going back on the same brands anyway. Shares of Wayfair up 140% year to date and continuing to do pretty well today as well. Well, let's take a quick break. When we come back, I jargon bust the creative financing at play in Keurig Dr. Pepper's acquisition of JD Pete's Coffee. Stick with us for that one. It's technical, but it's actually pretty interesting. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive, murky and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard makes institutional quality the standard for their products across the board. They've got over 80 bond funds managed by a team of 200 experts, from analysts to traders to sector specialists. The bond market is complicated, but Vanguard can help make it make sense with scale, consistency and zero drama. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio that's vanguard.com audio all investing is subject to risk. Vanguard Marketing Corporation Distributed this episode is.
- [17:28]
Sponsor Voice
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Ann Barry
John we have a question today from the audience.
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John Curto
That's right, Josh in Durham, North Carolina wrote, and I was reading this week, that Kerry Dr. Pepper is using, quote, convertible preferred stock to buy JDE Pete's. Please explain what that is.
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Ann Barry
Well, thank you for the question and it's a pretty technical one. But there is also a big picture takeaway from this too, which is a commentary on the moment in time we find ourselves in. It's the fact that companies are now getting really creative to fund big, big deals now that mergers and acquisitions are back in full swing. So for some context, Keurig Dr. Pepper is buying coffee giant JDE Pete's with a plan to then split itself into two separate companies, one focused on coffee and the other on different beverages like sodas. It's an 18 billion dollar acquisition. It is a massive deal. And while it makes strategic sense, one question on the market's mind has been how on earth is caring Dr. Pepper going to pay for it? The two companies already $22 billion of debt between them, so taking on more just isn't very appealing for investors. And issuing more shares to raise cash isn't a straightforward process either. That's why Keurig has turned to private equity firms KKR and Apollo to find a way to bridge the gap and the answer is convertible preferred stock, which sits halfway between regular shares and debt. Now this $3 billion will, after the companies have united and then split, ultimately sit with just the beverage business. And that's going to include brands like 7up. So think of it as a hybrid. Like a bond, it pays investors a steady returned return. In this case a 4.75 annual dividend. They don't call it interest, but it's a steady stream. That's the same year over year. But this instrument also has the potential to turn into regular shares. Later on. Investors can convert their preferred stock into common shares at a set price of 37.25, which is about a 40% premium to where Dr. Pepper's shares have been trading recently. Now this feature means that if upside comes around, if everything goes really well, KKR and Apollo participate in it as a reward for taking on an instrument that's riskier than debt. Again, this stuff sits between share above shares but below debt. By the way, there's even more creative financing sitting around this deal. KKR, Apollo and also Goldman Sachs have promised $4 billion to support the new independent coffee company's pod manufacturing operations. Once again, after the split happen happens. Well, for Keurig, Dr. Pepper, this structure checks a lot of boxes. It brings in billions of dollars without adding as much traditional debt. And it also avoids the heavy dilution that comes from selling regular shares outright. Now the final thing that doesn't get talked about as much, but is really important, this signals confidence both from management and from heavyweight investors like KKR and Apollo. They're basically saying, using this structure, we truly believe that the long term plan is going to pay off and we're all going to put our money where our mouth is. There's a going on with public company acquisitions these days. There's going to be more creative financing. I've no doubt about that. We're going to keep watching.
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John Curto
And if you have a question for Ann, send an email or voice memo to brewmarketshow morning brew.com well, it's 4:00pm.
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Ann Barry
On the east Coast. There it is, the closing bell. We don't have a ticker tape, but let's throw it over to our human ticker, our producer John, and how the market's wrapped up.
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John Curto
While the record highs continue to pour in on Wall street today, the s and P500 was up a quarter of a percent, the Dow finished up a third of a percent, and the NASDAQ finished up 8/10 of a percent. Now, many reports of high profile layoffs came in today, the newly merged Paramount Skydance is looking to cut approximately 1,000 jobs this week. Meta is planning to lay off more than 100 employees from its Puget Sound offices. And Amazon announced today it is going to cut about 14,000 corporate jobs, or roughly 4% of its workforce. Also coming in today was a report from private payroll processor ADP, which indicated that on the whole, the US labor market market showed signs of bouncing back in October with an average weekly increase of more than 14,000 jobs. So all eyes now turn to the Federal Reserve, which announces its policy vote tomorrow on interest rates.
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Ann Barry
Well, just as a final thought, we would be remiss if we didn't touch on one company that has been even busier than OpenAI today, I think, and that is Nvidia. There's a quick run through a list of a couple of things that Nvidia announced literally over the course of today. A partnership with the US Department of Energy, seven new supercomputers for the US Government, a billion dollar investment in Nokia, which I have nostalgic memories of because Nokia was the first ever cell phone I had. It was like a little mini piece of Lego before I switched over to the iPhone. Nvidia also announced a new AI partnership with Samsung, a new AI partnership with Hyundai, and a 500 billion dollar announcement of expected business over the next six quarters. Jensen Huang in Washington, D.C. today having a big Nvidia conference. That was a lot of news coming out of just one company. We're going to keep watching that and we're going to get tonight we've got a strong cup of coffee brewing because we're going to be keeping an eye on all of the earnings coming out after the bell. That's it, folks for today's Brew Markets Daily.
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John Curto
And Brew Markets Daily is hosted by Anne Barry and produced by John Curto, Tucker, Bella Teef and Emily Milian. Our technical directors, Uchena Walgu, Jesse derozier handles audio and the president of Morning Brew Inc. Is Devin Emery.
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Ann Barry
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, same time, same place.