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Everything Is a Circle
00:22:49
A stablecoin stock isn’t so stable; an accessible watch brand looks to lean into luxury.
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- [00:05]
Mary Long
Crew stocks catch a wave. You're listening to Motley Fool Money. I'm Mary Long, joined today by Mr. Asit Sharma. Assit, great to see you. It is truly a pleasure to have you here today.
- [00:28]
Asit Sharma
Say Mary, I am truly honored to be with you today.
- [00:30]
Mary Long
There we go. Pleased, honored. All good vibes today. Before we dive into some deeper stories later on in the show, we're going to highlight some of today's headlines up top. So asa, we're going to start with some macro stories and then dive a bit deeper into some company specific news. First big thing that keeping an eye on is that the S and P and Nasdaq both closed at their highest points since February, leaving both indexes hovering around record highs. Largely on the news of a ceasefire between Israel and Iran. There are reports that fighting continues, but investors seem to be betting on peace. You got oil futures falling on the ceasefire announcement. Gold moved in a similar direction, dropping to a two week low. You also have another part of the economy that's moving in a different direction. The housing market is falling from its pandemic highs. Data from the latest S and P case index reports that home prices rose just 2.7% in April. That's down from their 3.4% gain in March. Redfin says sellers outnumber buyers 3 to 1 in this market and predicts that prices could slip 1% by late 2025. Asad, I think you want to double click on the housing market story. Anything you want to add there? Give us a little bit of color, Mary.
- [01:45]
Asit Sharma
This is an industry at the end of the day that is a supply and demand story. I think what we saw in the great financial Crisis back in 2008, 2009, really put a stick in the story that house prices will always rise inexorably and be a great investment. That's been challenged during the pandemic. We saw the reverse occur. And now here we are where the economy is slowing down. There's a lot of uncertainty. Tariffs are a big story. Interest rates are still stubbornly high. People aren't earning as much. We see this outnumbering of sellers to buyers. What does this mean to me? Well, one thing it means is that lots of people have lots of equity tied up in their homes. On the other side of the coin, there aren't as many people now in this economy who are able and willing to buy those houses. So it becomes a little bit of a buyer's market when the sellers aggregate. And I don't doubt that we could start to see prices slip by late this year. Historically when you look at all the data we have that goes back an enormously long period. It is unusual for house prices to fall. But we may be in that situation again. So keep an eye on that.
- [02:59]
Mary Long
Earnings are kind of slowing down but we did get news from Carnival Cruise Lines yesterday and as as a result of its results the stock was up 7% yesterday after market close. The company tripled its net income and raised its guidance. It expects adjusted net income to be 40% higher than last year at the end of the fiscal year. Asit, what stuck out to you in these results?
- [03:24]
Asit Sharma
I think for me the thing that sticks out for Carnival in general over the last several quarters is the way that they have managed and boosted their yields. So all of their ships, they've decreased the ship supply in the past few years. They do a really good job of marketing so they're getting more yield per marketing dollar. And I think this whole strategy that Carnival has had of acquiring these small islands and making them destination place so the experience isn't all about the cruising has really resonated with cruisers out in the larger world. So so many things they have done right. The other thing that really popped out at me this quarter is the amount that they're now spending on the interest that service their debt is less than it was just a few years ago. I think their long term debt peaked at around $32 billion I think in 2023 and it's roughly $25 billion today. When you look at the commensurate effect of the interest expense on that debt, that's like half a billion dollars to the bottom line that they can add and those over a trillion 12 month period. And those numbers really start to make the net income look a lot juicier if you're a long term shareholder. So paying down the debt, cutting the number of ships they have, having these destinations to drive interest and drive the yields, all these things together just make a picture of a well run Carnival Cruise line. So I think last point, CEO Josh Weinstein has done a tremendous job putting this company back on track.
- [04:56]
Mary Long
It's not news for me to say that the word of the year certainly seems to be uncertainty. That's in regard to the economy, to geopolitics, kind of any, any field, you name it. Because of that a person could be forgiven for thinking hey, in an uncertain environment people aren't going to be going on vacation as much, they're going to be tightening their wallets. Carnival doesn't seem to be facing that issue in fact, Josh Weinstein seemed very enthusiastic and excited that people are getting great value out of their cruises. Why do cruise stocks tend to rise even when consumers start tightening their wallets?
- [05:29]
Asit Sharma
Consumers tend to fool themselves in one sense, which is if you're looking at a vacation, which is all in, all inclusive, many of us trick ourselves into thinking that's all that we're going to spend on that vacation. And cruise lines historically have enjoyed some periods where we've seen uncertainty in the economy, even like a slight recessionary trend where consumers will drop down from multi component vacations. So you're renting a car, you are staying in hotels, you're booking air flights to this one thing that if you book in the right time during booking season, you can get at a massive discount. Now Carnival is very savvy, so once you get there, they're really good at extracting your dollars anyway. But this is a lure for the general person out there in the economy who's starting to struggle a bit as a way to maybe make sure that they can stay within budget. Doesn't always happen, but this is, you know, part of the up and down momentum of this industry. Surprisingly, bad times can be good for the cruise line.
- [06:28]
Mary Long
Bad times can be good for the cruise line. Does that mean that you, Usit Sharma, plan to catch a ride with any cruise ship stocks? Why fall on that, that side of the coin?
- [06:37]
Asit Sharma
I am still trying to get some racks put on the top of my car for some kayaks we have that are sitting there very appealing. I want to get out on those kayaks at a local lake in Raleigh, North Carolina this summer.
- [06:50]
Mary Long
Well, that's very different than a cruise. So yes to kayaks, but it sounds like no, you're not a cruise ship.
- [06:56]
Asit Sharma
In the calm waters of Lake Johnson.
- [06:59]
Mary Long
So it sounds like no. Austin is not a fan of adding cruise ship stocks to his portfolio already. With that we're going to take a quick break. Later on in the show we'll be talking stablecoins and the luxury watch market.
- [07:11]
Asit Sharma
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- [07:40]
Mary Long
Circle Internet Group has been on a tear since going public earlier this month. Circle is the company behind usdc. That's the second largest stablecoin by market share. So A stablecoin is a token that's backed by an equivalent dollar denominated asset. Before we get to Circle's rise and in more recent days, its slight fall, we what is behind all of this interest recently in stablecoins?
- [08:05]
Asit Sharma
One of the things that stablecoins bring to the market is an avoidance of the fees that we pay to networks such as Visa and MasterCard when transactions are made. And most of the time the merchant bears the brunt of those fees. But what do they usually do, Mary? They pass them on to you and me. And as time goes on, sometimes you even see that as broken out as a surcharge in certain service areas. So the lure of the blockchain didn't really pull a lot of retail interest in where transactions were concerned because of so many digital assets that sort of came and went. There was fraud associated with some crypto assets over the last several years. But the idea of a stablecoin, which is backed in many cases by reserves of currency pegged to a currency like the US dollar and perhaps regulated, as we see with the genius act, which has been the news lately, that's starting to pull in more interest. And also I think the technology of stablecoins has improved over the last few years. We saw Circle announce a partnership with fiserv, which is a really large payment processing company. So you see many strands of the story starting to come together that we could have a viable alternative to some of the established payment systems that have been around for decades. Hence this explosion in retail stock interest. For those of you who follow Circle, the stock market, a recent ipo, I'm sure you have seen how this stock has exponentially enjoyed some interest. I'll put it politely there. Whether it stays up in that stratospheric level is another question.
- [09:43]
Mary Long
Yeah. To put some numbers behind those adjectives, circle stock soared 168% on its first day of trading alone. It continued to rise in the weeks following. I think at its highest point it was like 700. It had grown 750%. It's dipped a bit back down over the past few days. But asit, we're long term investors here, so let's zoom out and think not about what might happen over the next month, but maybe over the next five years. Where do you think Circle stock will be about five years from now?
- [10:11]
Asit Sharma
It's hard to say. Of course I'm going to hedge outright, Mary. I always do that. But I will take a bit of a stand here. I think this company has some potential because the market is so vast when you think about transaction volumes for like Visa and MasterCard, those are in the trillions every year, trillions of dollars crossing those platforms. So even getting a slice of that would be a substantial win for a business like this. What do they have to do to get there? They've got to have full transparency. So to be this very easily defined and easily followed entity, they've got to comply with regulatory bodies around the world. They have to scale and be liquid at the same time. So they need a lot of capital to do this and they've got to seal a lot of deals with companies like fiserv. So in addition to like sovereign body licenses, they have to wheel and deal out in the marketplace. But if you can do that, the market is there for an alternative to current payment systems. And you know, I should say this is also an alternative to slower moving systems like ACH Payments and some peer to peer payments. So we've got, you know, a story which could emerge, but we're going to have to follow the execution on so many fronts that I just mentioned for that story to pan out where this becomes a really, really, really valuable company. But I'm saying all this just for some investors who might dismiss this company out of hand. Just seeing it's almost meme stock like movement since the ipo, that doesn't mean that this can't be a good business. Of the different networks. You know, when you look around this landscape, this company in particular stands out for the effort it's put in to sort of show it is compliance minded, it is reserve fund minded, it wants to be known as the most legit of these networks. So it's got some potential over the long term.
- [12:05]
Mary Long
Thinking of the broader landscape of this space, A name that a lot of investors are probably pretty familiar with is Coinbase. How is what Circle is doing different than what Coinbase is? And maybe where do these, do these crypto, crypto adjacent companies overlap?
- [12:19]
Asit Sharma
I think Coinbase is a company that's just benefiting from the general rise in digital assets. You know, it's a trading platform, Mary. It is a company that rises when volumes of different coins rise. So that's a really good place to be in this whole ecosystem. A company like Circle may make it, it may not. It may be usurped by an even better competitor, or regulations may change or the demand for this may decrease. And I'll give you one, you know, great example of how this could happen. Although it is blockchain based, we still don't have really great mechanisms for fraud prevention the way that like MasterCard does or Visa or American Express. These companies that have been around for a long time and have made huge investments in their payment services. So the rigidity and structure and backbone of these networks are yet to be proven. Whereas Coinbase is over here just being a middleman, a broker. And I always like those businesses because as long as there's trading, they'll find a way to make money whether they're selling order flow, whether they're making it on the transaction, whether they are making it on the spread of holding assets and making interest off those assets. There's so many ways for a middleman like Coinbase to make money. So if you asked me okay, right now, which is going to be around in five or 10 years with a higher probability, I would say Coinbase. So both can succeed in this environment, but they are different. They don't at this point have a lot where they have confluence in the things they do.
- [13:58]
Mary Long
This episode is brought to you by Amazon Business. How can you free up your team from time consuming office tasks? Amazon Business empowers leaders to not only streamline purchasing, but better support their teams so they can focus on strategy and growth. Free up your teams and focus on your future. Learn more about the technology insights and Support available@AmazonBusiness.com We'll close out with a story that I really wanted to be sure to hit on with you asit, because you and I have talked about the luxury goods market before and I came across a fascinating story in the Wall Street Journal the other week that I thought you'd have some really interesting takes on. So this one is about an American fund manager named Steven Wood who's taken a 0.5% stake in the Swiss watch company Swatch, and he was gunning ultimately unsuccessfully, but he was gunning earlier this year for a board seat at the company. And Wood's hope is for Swatch to capitalize on its highest end brands, to lean into its luxury offerings. I'm going to link to this article in the show notes because I think the listeners would be really fascinated at this. Just like this wild look at business strategy and family dynamics. There's a lot to unpack there, but we'll focus on Swatch, the company for now. So swatch currently owns 16 brands across various price points, so you can get a breguet for almost $44,000, whereas a Swatch watch could run as low as $40. What do you think of this play asit? Do you like it or do you see it more as an example of diversification.
- [15:25]
Asit Sharma
It might be diversification, Mary. It might be too little, too late. I like that 0.5% stake. If he can get up to 1%, he might have some more say and maybe get a seat on the board. But Swatch is a business which was in currency years and years ago. Decades ago actually was when I think it was at its brand peak. And that would have been a great time to capitalize on that brand and to offer some super luxury items, attract the massively affluent who also loved the watches that were going for whatever it was at that time. Probably $30, inflation adjusted. But I'm not so sure that's a great strategy today because the brand doesn't have the cachet, simply put. And this is a business which has, you know, sort of stalled in its revenue growth. I do think that Swatch is making a little bit of a comeback. I notice some of the younger generation now are starting to wear Swatches. You see them more in circulation than in the past. So that's good for the brand. But trying to do this sort of like barbell strategy with this type of brand which is been around the block, I think that's difficult. So I'm going to say it's a do worse idea than maybe others would have. So we'll, we'll, we'll see. I never want to count an enterprising entrepreneur out, but I'm skeptical.
- [16:48]
Mary Long
You're not the only person that's skeptical. 27% of Swatch shares are short interest. Net profit fell 78% last year. I asked you the five year question on our last story. I'll ask you for this one as well. Where do you see swatch going in 5 years time?
- [17:04]
Asit Sharma
This is a business that can plod along, maybe sort of meet the market or hang out with the market. The one thing to remember about Swatch is that it's got a really strong balance sheet. It doesn't have much in the way of long term liabilities and it's got a really great haul of current assets. It's something like 10 billion Swiss francs in current assets. Now about 7.6 billion of that is Swatch inventory. But the company turns its inventory over pretty regularly. So this isn't a company that is just about to collapse. So I think with a little bit of brand revival, they will plod along. Do I see them out gunning the market and maybe suddenly catching fire? I don't know. I will say this though, before we head out. I did actually buy a Swatch in an airport for my wife last year simply because at one point in our illustrious career as a couple, we were too poor to afford what was then married, probably that $30 swatch price point. And we happened to see this really beautiful store in the Istanbul airport. And I was very surprised at the number of swatches they have now. It's an explosion of color and lots of different styles. So maybe they'll, they'll catch fire with something. But I don't see this being an alternative to some other of the really higher end luxury companies you and I have talked about that make for better long term investments.
- [18:38]
Mary Long
Yeah, I was going to say you keep an eye on the luxury goods market. Is there a company that comes to mind that has already caught fire or that you think could continue to do so in the future that plays in, in the luxury space?
- [18:48]
Asit Sharma
Well, I've been talking up Ferrari for the last couple of weeks. I've been looking at symbol R, A, C, E. The thing that is really dawning on me over time is how well they sell into demand and how disciplined they are in restricting their output. And I noticed just for fun internally here at the Motley fool we have something called the Fool's Errand where we awards randomly through a game that we play every month, some time off to valued fool members. And this month's theme was Ferrari. And our team did a great job of explaining that business model much better than I did on Motley Fool Money last week. But I will say that is catching my eye as a company that's going to benefit from the tailwinds of the F1 interest that's growing and also just the amount that they spend in R and D research and development. They really love engineering. It's an engineering first company. And sometimes what propels a brand isn't really about status, but it's about the product itself. And they've always kept their eye close to that.
- [19:52]
Mary Long
That's about all the time that we've got for today. Asit, thanks so much for spending the morning with me here on Motleyful Money. Always appreciate having you on.
- [19:59]
Asit Sharma
Always a pleasure, Mary. Thanks so much.
- [20:01]
Mary Long
Before we go, a quick programming note that this will be one of my last shows hosting Motley Fool Money. Working on this show each day for the past few years has truly been a highlight of my career. My favorite part of this job is that I get to read articles and books and go down rabbit holes every day and then have conversations that help me to better understand the world. I have learned so, so much and it's my hope that by virtue of listening, you feel that you have too. I don't know exactly what comes next, but I do know that I plan to continue podcasting. So if you want to see what I'm up to, LinkedIn is the best spot to find me. Until then, thank you to each of you who have listened to Motley Fool Money for the gift of your time and your attention. I hope you feel that it was well spent and that you're a little smarter, happier, and richer because of it. I also can't go without giving a very special thank you to the Motley Fool Money team. That's Chris Hill, Dylan Lewis, Ricky Mulvey, Rick Engdahl, Dan Boyd, Tim Sparks, and all the wonderfully smart and kind and funny analysts that are regulars on the show. You all are the epitome of of foolishness. What a gift it's been to work with each and every one of you. So, until next time, full on. As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are 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 for Motley Fool Money, I'm Mary Long. Thanks for listening. We'll be back tomorrow.