A (3:16)

Meta's plans were certainly the largest of the three, or at least they didn't give numbers, but certainly sound the most aggressive of the three magnificent seven companies. And we're going to get to Microsoft and Alphabet right after the break.

C (3:30)

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A (3:58)

Matt the results from Microsoft were better than Meta's, I guess you could say, or at least the commentary was it. But the stock's still down about 2.7% as we're taping, which if I'm counting right, for Microsoft, that's about $100 billion in market cap or, you know, maybe a few data centers here or there. So for the slightly down revision or slightly bearish sentiment, I guess, if you will, for the earnings quarter, was it the results not meeting expectation, what was the outlook? Which one was it?

D (4:28)

Yeah, well, it wasn't the earnings results. So Microsoft, they beat expectations on both the top and bottom line and pretty handily. Cloud revenue from the Azure business soared by 40%. All the other business segments delivered revenue that was well ahead of expectations. But there were a few negative points. And just like with Meta, it was spending, it was the big one, essentially the data center and infrastructure that's needed to keep up with AI demand. It needs money. And at the time of the second quarter earnings report, Microsoft told investors they were going to spend about $30 billion. During the third quarter, they spent just under 35 billion. The company specifically said that CapEx in 2026 is going to be significantly higher than it is in 2025. That seems to be what's dragging the stock down. But a really interesting note, and I don't want to spoil too much about your Alphabet discussion, is that all three of these companies increase their spending or their spending guidance, but investors are reacting to each one of them in a different way. To John's discussion on Meta, they have a history of what I would call questionable spending, especially on Mark Zuckerberg's metaverse ambitions. But investors seem a little bit less concerned about the ROI that they're going to get from Microsoft spending. It also didn't help that there was a massive Azure outage that was affecting a lot of websites while the earnings report was being released. This is like if Amazon had released its earnings during that big AWS outage a week ago and as we saw then that should be completely forgotten by investors within a few days. But it certainly came at an inopportune moment. But Microsoft quarter looks good. It's just whether or not the hundreds of billions or over 100 billion in annualized spending is going to turn into actual money in investors pockets.

A (6:13)

Yeah, returns on money spent seems to be a little bit more in the forefront because when Microsoft's conference call I did remember mentions of hey we're going to have some of the best roi, which I think might be the first time I've heard that when it comes to AI spending. So and also at the same time we saved the best for last. And I covered Alphabet here, which is actually up 4% at the time we're the taping. The numbers all looked great pretty much across the board. I mean 45% year over year growth for a 3 trillion market cap company is like kind of absurd, right? It's not just me, like how does a company that large grow this fast? It's kind of mind boggling. And just about every part of the business performed well. Which I think can come as a surprise since you know, we've been talking about OpenAI, ChatGPT and all these other AI query tools that were, you know, supposed to be the death of Google search. But you know, Google Ads are still chugging along just fine. YouTube is strong and it's getting adoption with Gemini as well. So all the things seem to be working in some way. They discussed Waymo, but Waymo isn't really a revenue or returns thing yet. So I think it's kind of funny to read the headlines about Google being an AI winner over the like the past 24 hours when it Seems like, I think we all read so many thought pieces on why it was going to be an AI loser like what, six months ago? You know, we in the market, we tend to change our mind pretty quickly here. Also, Alphabet's increase in CapEx spending was, I would say, the most measured of the three, going from about 85 billion for the whole year to somewhere in the range of 91 to 93 billion. So, you know, of the three, it's still a lot, but not certainly the jump that we're seeing with the other ones. Maybe the market's becoming a fan of discipline and staying true to initial forecasts. And I think there was to kind of sum up all three of them and I'd love to see if you guys agree or thoughts on this as well. These are my two big thoughts about Alphabet's quarter and kind of the Mag seven in general. And number one was optionality. And I think this applies to Microsoft a little bit as well. But. But there's going to be some value in a company's optionality when it comes to AI. Some of the biggest winners from the Internet age came years after the Internet frenzy because the business models didn't materialize. I think AI will follow a similar path and having those options to pivot the business, whether it be the AI tools themselves or just providing the compute and storage and inference for everyone else to build their models on, I think that's going to be valuable for somebody like Google and Microsoft. I. And the last thing we'll consider here is the expectations games. It said like six months ago they were the loser of, you know, AI, but now they're looking really well. And for well over a year, Alphabet has traded at the lowest multiple of the Mag 7 companies. You know, we were talking like 16 times earnings back in April for them. And so outperforming expectations at 16 times earnings is much easier than 40 to 40 times earnings.

B (9:12)

In fairness, Tyler, the meta expectations are quite down and so it is now the cheapest of these three that we just talked about. So just for what it's worth, beating.

A (9:22)

Low expectations is one of the best things you can do. We're going to go for a quick break and then we're going to talk about earnings. On the restaurant side of things, AI may be getting much of the attention today. Deservedly so. I mean, we just talked about hundreds of billions of dollars in Capex spending, but loads of companies reported today and we elected to go with restaurant stocks because this quarter represents a full year for Brian Niccol at Starbucks and because Chipotle. Well, let's just say they might be missing Brian, Nicole. Right now, shares of Chipotle Mexican Grill are down about 16% as we record. And John, you took a look over the report and the commentary. So should Chipotle's board kind of be standing outside of Nicole's office with a boombox like Lloyd Dobbler and say anything? Just being like, come back to us, please.

B (10:11)

That would be entertaining. Look, Chipotle is essentially a victim now of Nickel's success when he was at the company. I think this is a complicated story to unpack. You look at it, Chipotle's revenue, its sales are still up, both on a absolute basis because it opened new restaurants, but also on a same store basis, barely. But 0.3%. But they're still up. But the profit margins are what are coming down. In particular, the restaurant level operating margin. This is a metric metric that Chipotle breaks out down to 24.5%. That's a decent decrease year over year. But you look, it kind of peaked back in the second quarter of 2024. So just over a year ago, right before Nickel left the company, it was almost at 30%, up at 29%. So if you look at the discrepancy from where the restaurant level margin is now versus where it was just from five quarters ago, I mean, you're talking about a difference of over 100 million per quarter in profit just based on that, that margin difference. And, you know, it's. It's interesting. The pricing still came up barely for the quarter. Transactions were down a little bit. And I think this is a noteworthy trend because back in mid-2024, consumers and analysts started pushing back on Chipotle's pricing. And whether it's real or just imagined, that value perception seemed to have shifted in the market. People don't feel like it's a good value. And it seems like that's coming out here. Maybe those margins are coming back down, Transactions are stalling. And look, management mentioned value 14 times in this conference call in the prepared remarks. They mentioned it about 25 times in all when they were answering the questions from the analysts. So clearly, pricing is still kind of this issue that is creating a little bit of headwind resistance. Those portions may be coming up relative to the pricing, but margins are getting hit. And I. I think they soared so much under Nickel. That was good, but they kind of hit a ceiling, and now they're coming back down. And I think that's the difference in Chipotle stock right now.

D (12:21)

Yeah, I, I, I would agree with that. And it, it's not a, a brand that you would think, you know, Starbucks. Everyone expects to pay five times for a Starbucks coffee that you would at like a gas station. But that's not necessarily true of Chipotle's products. So it does seem like they're getting a lot of pushback on their, on their, on their food prices.

A (12:38)

John, kind of tying to our AI conversation ever so slightly. And the idea of expectations, you know, obviously there's based on management's commentary on value, really trying to, you know, say hey, we're worth it. Let's, let's pivot that to the stock like it is based on where it's trading today with a 16% decline and where management thinks it's going to go. Are we at a good point of expectations for the stock for better performance?

B (13:10)

It's one of the better moments that it's ever had. It's the second cheapest price to earnings valuation that it's had in an entire decade. Cheaper even than the COVID 19 pandemic stock crash. It's only cheap. The only time it was cheaper in the last decade was when it had that E Coli scare and the stock price came way down then. It's under 30 times earnings right now. I wouldn't necessarily call it cheap on an absolute basis still like 29 times earnings. But you know, that's for Chipotle. That's quite cheap comparatively. And look, if it can find ways to say hey, this is who we are, we do offer good value. Assuming that management commentary there is accurate, that hey, this is a good value, if they can communicate that, get those transaction trends start going in the right direction again, get those profit margin numbers coming back up again. Yeah then this is a good place that it can outperform from. But I think that these margins personally, I think that they're a little bit more what we should expect with Chipotle.

A (14:10)

Now onto Brian Nichols current job as the CEO of Starbucks. And the numbers were fine. Matt, you looked into a little bit more and you mentioned in our pre show that there were some really interesting points in this quarter. So tell us what those interesting points were.

D (14:27)

First of all, fine is good. When the last two years have been bad. That's the first thing I would mention right off the bat. But you're right that an interesting quarter. For one thing, it does feel odd to celebrate a quarter where same store sales grew by 1% year over year. That's roughly what Chipotle did. And John saying how bad it was. The company had 107 net store closures during the quarter. For a company that's been growing like a weed since the 90s. But there's more to the story. For one thing, we're now a year into nickels. Back to Starbucks plan after, let's call it some missteps by previous leadership. This is Starbucks. The first same store sales increase that they've reported in seven quarters. Revenue is up by 5% overall. And really the kind of between the lines is that the company's just doing a better job of introducing products that customers actually want rather than telling them what they want, which is what the former leadership was doing. For example, in the third quarter they rolled out their protein cold film, which has been a big success so far because that's something Americans actually want in their diets. They were needing more protein. The line of olive oil infused coffees they were telling us we should drink, which was I think the last straw under previous leadership, not so much. I don't know, no offense if you guys like the olive oil coffees. But Starbucks has largely also fixed its issues of the mobile order bottlenecks we were seeing and the long wait times on that issue of store closures. It is important to note that Starbucks still aims to gradually increase its footprint over time. But the closures impacted stores that either weren't performing well or that didn't really fit into Niccol's vision, which is essentially the warm cozy coffee shops that Starbucks operated 20 years ago. For example, a drive thru only store doesn't really fit that vision. So those are an example of what closed. Starbucks isn't really giving an annual forecast, but they've scheduled an investor day in January and we should get some answers. Before we go, I want to know what both your Starbucks orders are. Mine is now the protein cold foam. I have to tell you, it doesn't.

A (16:24)

Matter what coffee shop it is. Starbucks, whatever. It's just a straight double espresso black.

B (16:30)

I'm actually heading there pretty soon. I'll probably get a Pike's Place black.

A (16:36)

There we go. Black coffee. I like the sounds of it. All this olive oil and proteins. Oh man, I sound like a grumpy old man complaining about this stuff. But hey, you know what? I'm in my 40s now. I get to do that. We liked to give some stocks on our radar as part of our Thursday show, but you know, we've actually got another 870 companies to look at this week, so we're gonna have to boogie on out of here. As always, people on the program may have interests in the stock they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd from Matt, John and myself. Thanks for listening and we'll chat again soon.