Expectations Over Results

Summary

Motley Fool Money: "Expectations Over Results" Episode Summary

Release Date: November 22, 2024

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Introduction

In the "Expectations Over Results" episode of Motley Fool Money, hosts Dylan Lewis, Ricky Mulvey, and Mary Long delve into the latest developments in the stock market, focusing on key earnings reports and their implications for investors. The episode navigates through the performances of major retailers, prominent tech companies, and highlights the significance of upcoming holiday sales.

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Retail Sector Analysis

Target's Struggles and Market Position

The episode opens with a discussion on Target's challenging third-quarter results, where shares plummeted by 20%. Senior analyst Jason Moser provides insight into the factors contributing to this decline:

"[00:40] Jason Moser: ... consumers just continue to spend very cautiously, most notably in discretionary categories. That's a problem for Target because ... they don't benefit from the grocery side like Walmart."

Moser elaborates on Target's strategic missteps, such as overstocking inventory in anticipation of a prolonged dock workers strike, which ultimately led to operational inefficiencies.

Walmart's Resilience

Contrasting Target's downturn, Emily Flippen highlights Walmart's robust performance:

"[03:27] Emily Flippen: ... Walmart's same store sales growth in the quarter was above 5%, compared to Target's under half a percent."

Despite similar traffic growth rates, Walmart leverages its diverse business segments, including grocery and third-party e-commerce, to sustain growth even in a cautious consumer environment. Flippen emphasizes that Walmart's ability to attract higher-earning, cost-conscious consumers gives it an edge over Target, especially as the holiday season approaches.

Holiday Sales Outlook

As the holiday season looms, the conversation shifts to expectations for Q4. Moser underscores the importance of scale, particularly Walmart's substantial market capitalization and sales volume:

"[05:31] Jason Moser: ... scale really does matter ... the consumer just continues to spend very cautiously."

Both analysts agree that the holiday sales period will be crucial for retailers like Target and Walmart, with Walmart poised to potentially outperform due to its strategic advantages.

Williams Sonoma's Mixed Performance

Emily Flippen discusses Williams Sonoma's surprising 20% share price increase despite a 10% revenue contraction over the past year. She attributes the stock surge to:

"[07:09] Emily Flippen: ... expectations for Williams Sonoma have been low, persistently low for a while now and this quarter saw comps only decline 3%."

However, Flippen warns of future challenges, particularly in adapting to e-commerce:

"[09:13] Emily Flippen: ... concerned about their investments into E Commerce. These aren't brands that have naturally transitioned to an E commerce model."

Moser concurs, highlighting the importance of sustainable growth and prudent capital expenditure for Williams Sonoma's future.

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Technology Sector Insights

Nvidia's Earnings and Market Normalization

The discussion transitions to Nvidia's earnings, reflecting on the company's consistent performance amidst its monumental growth:

"[11:42] Jason Moser: ... Nvidia is just remains a company that's in a terrific position ... Revenue of $35.1 billion. It was up 17% sequentially, up 94% from a year ago."

Moser notes that while Nvidia continues to excel, the market's expectations are now intensely scrutinized, posing new challenges for future earnings beats.

Snowflake's Impressive Growth Amidst Concerns

Emily Flippen covers Snowflake's outstanding quarterly performance, with a 30% sales growth and a 55% increase in remaining performance obligations:

"[15:22] Emily Flippen: ... nearly 30% sales, sales growth and then remaining performance obligation growth of like 55%, that's effectively their backlog."

Despite the positive outlook, Flippen raises concerns about Snowflake's escalating stock-based compensation, drawing parallels to Cloudflare's similar issues. Moser advises vigilance regarding the sustainability of such compensation structures.

Palo Alto Networks' Transformation Efforts

Palo Alto Networks' shift from a traditional firewall provider to a comprehensive cybersecurity platform is analyzed:

"[18:44] Emily Flippen: ... management was disappointed with the market's response ... platformization is the standard."

Flippen acknowledges the company's strategic growth in annualized recurring revenue and customer acquisition but remains skeptical about its market reception.

Adobe's Strategic Moves in AI

A significant portion of the episode features Adobe CFO Dan Dern discussing the company's integration of artificial intelligence:

"[23:19] Dan Dern: ... Generative AI is this incredible opportunity ... We're going to unleash creativity for all, ... AI isn't going to replace human ingenuity... it's going to augment it."

Dern emphasizes Adobe’s responsible approach to AI development, focusing on ethical considerations and customer-centric innovations. He highlights Adobe's commitment to data integrity and the enhancement of creative processes through AI.

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Holiday Season and Consumer Trends

As Thanksgiving approaches, the hosts touch upon personal anecdotes related to holiday preparations, seamlessly transitioning back to stock market insights. The emphasis remains on how consumer behavior during the holiday season will influence stock performances, particularly for retailers and companies leveraging AI technologies.

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Stock Radar and Market Picks

In the concluding segments, analysts Jason Moser and Emily Flippen share their stock radar picks:

• Jason Moser: Highlights C3AI (Ticker: AI) for its expanded partnership with Microsoft, enhancing enterprise AI adoption.

  "[37:54] Jason Moser: ... C3AI, an enterprise AI software company ... expanding their partnership with Microsoft ... speaks to the value proposition that C3 holds."

• Emily Flippen: Focuses on Tesla amid potential regulatory changes under the new administration, expressing concerns over the removal of consumer tax credits which significantly impact Tesla's operating profit.

  "[39:15] Emily Flippen: ... over a quarter of Tesla's operating profit is generated from the sale of tax credits ... removing consumer tax credit may incentivize the government and states to remove their other tax credits."

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Conclusion

The "Expectations Over Results" episode of Motley Fool Money offers a comprehensive analysis of recent earnings reports, spotlighting the delicate balance between market expectations and actual performance. With a keen focus on the retail and technology sectors, the hosts provide valuable insights into how companies are navigating a cautious consumer landscape and the burgeoning influence of artificial intelligence. The episode serves as a crucial guide for investors aiming to understand the nuanced shifts in market dynamics as the holiday season approaches.

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Notable Quotes:

• Jason Moser on Target's Challenges:

  "[01:03] ... consumers just continue to spend very cautiously, most notably in discretionary categories."

• Emily Flippen on Walmart's Performance:

  "[03:27] ... Walmart's same store sales growth in the quarter was above 5%, compared to Target's under half a percent."

• Dan Dern on Adobe's AI Strategy:

  "[23:19] ... Generative AI is this incredible opportunity ... AI isn't going to replace human ingenuity... it's going to augment it."

• Dan Dern on Responsible AI Development:

  "[27:22] ... We're going to do it in a responsible, commercially safe way ... our approach is very differentiated in the market."

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Timestamped Highlights:

• [00:40] Introduction of analysts Jason Moser and Emily Flippen.
• [01:03] Jason Moser discusses Target's 20% share decline.
• [03:27] Emily Flippen contrasts Walmart's performance with Target.
• [05:31] Holiday sales expectations by Jason Moser.
• [07:09] Williams Sonoma's 20% stock increase explained by Emily Flippen.
• [11:42] Nvidia's earnings and market position discussed by Jason Moser.
• [15:22] Snowflake's growth and stock compensation concerns raised by Emily Flippen.
• [23:19] Adobe CFO Dan Dern discusses AI integration and strategy.
• [37:54] Jason Moser presents C3AI as a stock radar pick.
• [39:15] Emily Flippen analyzes Tesla's regulatory risks.

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This summary encapsulates the episode's key discussions, providing listeners with a clear understanding of the stock performances and strategic insights shared by the Motley Fool Money team. Whether you're an existing investor or new to the market, the episode offers valuable perspectives to inform your investment decisions.

Transcript

[Dylan Lewis]

It's the most wonderful time of the year, unless you're Target. This week's Motley Fool Money radio show starts now.

[Jason Moser]

Everybody needs money. That's why they call it money.

[Dylan Lewis]

The best things in life are free but you can give them to the birds and be like. From Poole Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley fool senior analysts Jason Moser and Emily Flippen.

[Jason Moser]

Fools.

[Dylan Lewis]

Great to have you both here.

[Emily Flippen]

Hey.

[Dylan Lewis]

This week we've got the rundown on how one of the leaders in AI is prioritizing projects. All eyes on Nvidia's earnings and a look at retail. And that is where we are going to pick things up. Red in the chart this week for Big Red. Jason, shares of target down 20% after the company reported third quarter results. What did you see?

[Jason Moser]

Well, that was a big move for sure, particularly for a company like Target, obviously a large retailer in the space. But it's challenging. It's a challenging time for consumers and clearly a challenging time for some retailers. We've certainly seen in regard to targeting, we saw what, a 2% decline in average ticket there. People are going to the store, but they are spending less. For me, that really goes back to something Brian Cornell was talking about in the call there, where consumers just continue to spend very cautiously, most notably in discretionary categories. That's a problem for Target because if you think about Target, we compare something like a Target to a Walmart, they're very similar, but they are a little bit different. Right. I think Target doesn't necessarily benefit from the grocery side of things like a Walmart would. And so when we hear about headwinds in the discretionary categories, that's going to be a really big problem for Target. And the other thing that they really suffered from, you remember we've been talking about the dock workers strike over the last several months. That was short lived.

[Dylan Lewis]

Right.

[Jason Moser]

But it was something that actually could have gone on longer than it really did. The thing is, Target prepared for that by bringing a lot of inventory in. Right. They really kind of stocked their shelves in order to make sure they didn't witness shortages. Ultimately, what that ended up in was just a little bit of bloat there. Right. In Brian Cornell, again, he referred to this sort of idea that they were a little bit fuller than usual and they just don't operate so well when they're as full as they are or when they have as much inventory as they do. And I think that ultimately played out in the numbers. But it also, I mean, listen, I mean, Target is. They're dealing with some serious competition here in this big retail space. You're talking about companies like Walmart, Costco and whatnot. And certainly Target's feeling the pressure.

[Dylan Lewis]

Let's talk about that competitive landscape a little bit. Because if you were to focus just on Target, you would have a very specific view of the consumer and what's going on here. Emily, over at Walmart, we don't necessarily see it playing out the same way.

[Emily Flippen]

No. In fact, you'd wonder if these two companies were operating in the same environment where Target stumbled. Walmart is just running straight ahead. You'll notice that traffic growth is only marginally better for Walmart. They had around 3% traffic growth versus 2% traffic growth for Target in the quarter. But same store sales growth is really where Walmart is starting to shine. Their same store sales growth in the quarter was above 5%. If you compare that to Target, Target was under half a percent. So incredible business there for Walmart. But I do think that just these numbers alone don't really paint the right story. Now obviously Walmart is attracting higher earners who are a little bit more cost conscious. Inflation is obviously on everybody's minds. People are still feeling the pain. And Walmart noted that households making six figures or above were responsible for three quarters of their customer gains over the course of the past quarter. So you can see how that would theoretically steal from customers that would otherwise go to Target. But I'm still not convinced that Target has some sort of systematic issue here. This is what we always see between these two businesses. When people feel cash strapped, they trade down to Walmart. And Walmart gets the benefit of having a third party E commerce site, of having healthcare. Right. The sales of jail LP1 drugs for instance, were beneficial to Walmart in a way they weren't for Targets. All of these other businesses that make them look good when the environment and the economy is a bit tighter versus Target has a lot of discretionary items. That's typically their spend in merchandising for Target has historically been strong. So the fact that Target tends to do better in expansionary environments I think should not be lost on our listeners. Because this quarter in my opinion is not writing off Target for debt. They do have their job cut out for them. But I do think the holiday sales could be surprisingly where they shine.

[Dylan Lewis]

You're right, it is. It is officially Mariah Carey season. We are talking holiday sales. It is holiday season. And that's top of mind for a lot of people when you look at the results together. Jason, what do you think they're saying about the expectations we should have for retail as we head into that all important Q4?

[Jason Moser]

Well, I mean certainly the holiday season is a big time of year for everyone. I mean I think when you look at something like a Walmart versus a Target, I mean one of the things that comes and comes to mind here is just the advantage of scale. And when you think about Walmart, I mean Walmart's basically 10 times the market cap of Target and it's basically 7 times the sales of Target. And so I mean scale really does matter when it comes to this line of work. And obviously we see Walmart benefit from grocery. But again, I mean I think the common theme, the thread, right, regardless of the companies, they're all talking about this cautious consumer, right? The consumer just continues to spend very cautiously. And even more so consumers are looking across platforms to find deals. So they'll go to a Walmart and then they'll shop around to a Walmart or to a Target or to an Amazon or wherever else it may be in order to see if they can find a good deal. I do think we will see that cautious consumer theme continue to play out here over the course of the holiday season.

[Dylan Lewis]

This is something that's not only coming for the big box companies, we are seeing it show up retailers across the industry moving us up market just a little bit. We have fresh earnings from Williams Sonoma this week. Emily, if you showed me the results and then asked me how I thought the market would react to these results, I would not have guessed that shares would be up 20% after the report.

[Emily Flippen]

Yeah, absolutely incredible reaction to William Sonoma's quarter. Good luck trying to reconcile the narrative we just painted with Walmart and Target with the share price results for a business like Williams Sonoma. But I will just quickly mention while Williams Sonoma, for anybody who's unaware, owns a host of brands that tend to be a bit more high end. So it doesn't really make sense Then why are shares up 20 plus percent if we're all not purchasing things and going to Walmart instead, it's all in the expectations. I mean expectations for Williams Sonoma have been low, persistently low for a while now and this quarter saw comps only decline 3%. Now I know what you're thinking, 3% decline in comps. That sounds awful. There's been a 10% contraction in revenue, total revenue over the course of the past year. But all of this represents a slowdown in the negative growth, which I guess is a good thing for investors and to give credit where credit's due. Obviously I'm taking some shots here at William Sonoma. They are still positive in terms of their cash flow and they're using that cash flow to buy back shares. Their bottom line tends to grow faster than their top. So actually earnings per share did grow in the quarter. So it's not like this business is completely going into nothing. They also pay a pretty nice, pretty well covered dividend. But you still have to ask yourself, man, what is the future for West Elm? What is the future for Williams Sonoma? Where is the place in this world? Because if the, I guess concerning purchasing patterns of Americans continue, I think William Sonoma might have a target in front of them literally in terms of their.

[Dylan Lewis]

Next quarter for the shareholder perspective, a little bit less the consumer perspective. There was a period where Williams Sonoma, I think based on those expectations was down below 10 times earnings. It was very cheap. On a historic basis, we are now looking at a company that is well above 20 times, earning much more in the zone that it tends to trade in. And yet we are not seeing top line. We are seeing that negative growth rate slowing. Emily, is it a bit of a watch out below type moment for Williams Sonoma?

[Emily Flippen]

I should really knock on wood when I say this. I'm inclined to say yes. Interestingly enough, it's not because I actually think the business is doomed. I actually think they have a fair amount of opportunity in front of them. They play it correctly. But I'm concerned about their investments into E Commerce. These aren't brands that have naturally transitioned to an E commerce model. And the fact that we're sitting here, it's almost 2025, talking about their need to move to an omnichannel approach is absolutely mind boggling to me because this business, in my opinion, is behind on the infrastructure and digital investments they needed to have made to this point. And I think if they're going to keep these brands competitive, that's going to require a fair amount of capex in front of them that it's possible the market's not pricey in and interestingly enough, that's my main concern to them. How are they going to meet the consumers where they are today? Because I don't know, they have so far.

[Dylan Lewis]

All right, coming up after the break, we've got tech earnings, including the one we've all been waiting for. Nvidia. Stay right here. You're listening to Motley Fool Money.

[Rick Engdahl]

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[Dylan Lewis]

Welcome back to Motley Fool Money. I'm Dylan Lewis, here on air with Emily Flippen and Jason Moser. We are right back on the earnings beat and we've gotten used to some huge moves, some huge market reactions from Nvidia's results over the last year. Guys, I'm amazed to say it, but this wasn't even the lead story for us this week. Jason, are we now in Nvidia Normal when it comes to some of these earnings reports?

[Jason Moser]

I like that perspective there. Nvidia Normal, right. It does seem like we've kind of at least caught up. I mean this is, this, listen, this is a $3.5 trillion company at this point. I mean, these things just don't keep growing forever. Now with that said, I mean, Nvidia just remains a company that's in a terrific position, right? Tech is in high demand, Nvidia products are in high demand and supply just isn't able to keep up. Right. So when, when those are the case, I mean, hey, listen, economics work out very well for you. But I mean the numbers, the numbers were very encouraging, right? Revenue of $35.1 billion. It was up 17% sequentially, up 94% from a year ago. And when we think of Nvidia, clearly we're thinking of AI first and foremost. And I think in regard to AI, the primary focus there is on data center. In data center revenue of $30.8 billion. That was up 17% from a quarter ago, but up 112% from a year ago. And cloud service providers remain such a Massive, massive part of that performance, they said. I think the cloud service providers were approximately half of data center sales with that revenue up more than two times from a year ago. Now, I mean, it's not just data center. I mean, obviously Nvidia does other things very well. Gaming revenue was up 15% from a year ago. We saw professional visualization that was up 17% from a year ago. And then even automotive revenue performed very well. It was up 72% from a year ago. I think it's sort of status quo for this business.

[Emily Flippen]

Right.

[Jason Moser]

They just keep doing what we all expect them to do. The Blackwell technology continues to do very well. Demand, they said in the call that demand is staggering. The hopper demand, I think is going to be what drives this business over the course of the next year, at least over the next several quarters. But ultimately they're guiding forth $37.5 billion in revenue for this coming quarter. That would represent growth of about 70% from a year ago. Again, just a company that continues to since just amazing growth numbers.

[Emily Flippen]

You know, I always can't help but think about the amount of pressure that Jensen Huang must be under when running Nvidia. And it's actually almost becoming a concern for me as an investor when I see quarter after quarter after quarter of consistent marginal earnings beats from a business especially of this size. Because the pressure to beat earnings now moving forward for Nvidia and all of the world's eyes on them as what has now become the operating system of the world, that is a risk factor that I actually think we're starting to need to incorporate into our expectations moving forward.

[Dylan Lewis]

These are the problems that you have when you're growing only 70%, only 94% year over year.

[Jason Moser]

Well, I feel like, Dylan, if somebody's going to say, like, hey, Jason, what would you advise the CEO of Nvidia to do? I mean, listen, I can't give them much advice, but you know what? I think I would start getting in the business of sandbagging, set expectations even lower because, man, I tell you, the world is expecting the world from this company.

[Dylan Lewis]

That's a free tip there, Jensen. Courtesy of Jason Moser. Staying in the lane of tech. We have some fresh results from Snowflake this week. Emily shares up 30% after the report. Seemed like the market was pretty happy with what the company had granted.

[Emily Flippen]

I do think similar to Williams Sonoma, although entirely dissimilar to Williams Sonoma in a building a million other ways, the expectations for Snowflake were a bit lower heading into this earnings report. When they came out with nearly 30% sales, sales growth and then remaining performance obligation growth of like 55%, that's effectively their backlog. So business is accelerating. There was just so much to like in this quarter, especially because for so many different tech businesses, as companies are spending on Nvidia and AI and such, the question is how does Snowflake continue to grow its customer base? And they're doing a great job proving that they can continue. And I do think that Snowflake's platform is going to increasingly become table stakes for enterprises across the globe. They're proving that out, but I can't help. I'm sorry, I have to say it, not to be the pessimist in the room, but the stock based compensation here is out of control and it has not slowed down. This is a maturing company and they're still spending more than a third of their total revenue on stock based compensation. It's padding their cash flow. If I see one more adjusted number out of this management team, my head just might explode.

[Dylan Lewis]

Jason, are you going to pile on or are you going to take the other side of that one?

[Jason Moser]

I'm not going to take the other side. I think she makes a great point. I think it's something worth keeping an eye on for all investors. Another company that stands out to me, I thought about this because I was putting together some notes recently on Cloudflare. Cloudflare, the performance has been tremendous here over the last several years, business wise. But when you look at the stock based compensation that has represented the lion's share of operating cash flow. If you even look over the last 12 months, it really has been most of operating cash flow. Now it's worth noting that is starting to pivot.

[Dan Dern]

Right?

[Jason Moser]

We're starting to see that change and I think for investors that's just something to keep an eye on. It's one thing for early startups, for businesses that are just getting involved or getting established, we expect that. But. But as they mature, you definitely want to see those numbers pivot. And that sbc, you want to see the number come down.

[Dylan Lewis]

If you're going to stick with the optimistic tone a little bit, there is an AI horn to toot for Snowflake. In addition to earnings, they announced a partnership with Anthropic, who's the owner of the Claude large language model. They'll be bringing those models to Snowflake on aws. Emily, this is LLMs in the cloud, very in the weeds. Give me a hand. What does the average investor need to go need to know with a development like this.

[Emily Flippen]

Oh, I love this. This question is a huge question. I think we're kind of at a precipice right now, which is are we going to go with one single giant LLM that does everything or lots of tailored LLMs that do lots of little things? And I think Snowflake is very much in the second group of that. And I love seeing this partnership because it shouldn't be, at least for the time being, too capital intensive for this company. So it's a low upfront cost with a high opportunity to deepen engagement with their customers and generate revenue from the partnership alone. So I think it's smart. I think we're headed to the ladder. But I mean, we're. We're not writing off the former. It's still possible. And if that were to happen, Snowflake.

[Dylan Lewis]

Would need to iterate wrapping us up on the earnings beat. We also had results from cybersecurity firm Palo Alto Networks this week. A bit of a head fake. As the market reacted to the results, we saw what looked like a pretty downbeat reaction, only to recover and wind up up for the week. Is that an encouragement from the company's guidance, Some processing on the earnings side? What were you seeing, Emily?

[Emily Flippen]

You could tell that management was disappointed with the market's response because they've been in the process of transforming their business, trying to get away from being just a firewall provider to truly being this platform. And they believed this quarter with 14% sales growth was even faster. Services growth, lots of software, annualized recurring revenue growth here. That is great. From their core customers. They feel like this was a testament to the success of an initiative they launched earlier this year that resulted in a lack of fanfare from the market. I still think it's maybe too early to be taking the victory lap. Platformization is the standard. They're not the first ones to the game, despite management's insistence that everybody is copying them and they were the first. Pretty sure a few companies beat you to the punch there, but I do think this is great to see that they are growing ARR per customer and acquiring larger customers at an increasingly expedited pace. All of those directions pointing in the right way, plus a rising tide lifts all boats in the cybersecurity industry.

[Dylan Lewis]

Is platformization a new buzzword we need to be watching out for in company earnings calls? Is this one we need to have on our hands?

[Emily Flippen]

It's one that Palo Alto certainly watching out for. They said it was used, what, 50 times more frequently this year? Versus last. I'm like, why are you collecting that data? What are you doing?

[Dylan Lewis]

You got to have it handy just in case. All right, Emily, Jason, we're going to see you guys a little bit later in the show. Up next, Nvidia not the only company grabbing AI headlines. Adobe is at the forefront of how a lot of end users interact with technology. We hear from their CFO Dan Dern about the company's approach to developing and monetizing AI. Stay right here. You're listening to Multiple Money.

[Dan Dern]

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[Dylan Lewis]

Welcome back to Motley Fool Money. I'm Dylan Lewis with AI front and center. In 2024, we wanted to hear from the leaders in the about how they're building tools and the frameworks they're using for allocating resources to the technology. This week Adobe CFO Dan Dern joined me to talk through the Digital Shift. The company continues to see Adobe's creator friendly approach to AI and how we want shareholders to grade the company's efforts. I'm excited to be talking with you because Adobe is probably one of the companies that is most at the forefront of so many major trends right now that the market is focused on heavy digital presence. You guys are in the AI conversation and really leading what's going on in that space as well. Before we get too deep in anything, I'm just curious what is the atmosphere like at the company right now?

[Dan Dern]

It's a great time to be at the company. I think the best place to start is maybe explain a little bit about who we are. We're the creative digital content company with our creative cloud business. We're the digital document and digital workflow business with our document cloud business. And we're the digital interface between between a company and its customers with their digital experience business. And against the backdrop of this pivot we see happening in the global economy. Global economy is moving from being global economic growth being driven by oil and gas for the better part of a century to increasingly being driven by digital content and data. I call it digitalization of the global economy against the backdrop of digital content and data fueling global economic Growth. Any one of those businesses that we have would be a great company. Having all three of those businesses under one roof, I think makes us a special company. And I think there's a strong sense of the moment inside of the company. There's a vibrancy, there's an energy. It's palpable. You can feel it. So it's a great time to be at the company at this moment.

[Dylan Lewis]

I think one of the main things that people are focused on with digitalization and tech right now is artificial intelligence. So why don't we talk a little bit about that? I think there are some folks who look at your company and say Adobe is probably one of the companies most poised to benefit from the proliferation of AI and gen AI. There are also some folks who think, oh, this is a little bit of a threat to a business that has had really clear ownership of a space for a long time. How are you guys approaching that market?

[Dan Dern]

Yeah, Generative AI is this incredible opportunity that we have in front of us. When I think about the mission of who we are as a company, we're going to change the world through digital experiences. And when I think about AI and generative AI, it only expands the three massive opportunities that the company is exposed to. We're going to unleash creativity for all, we're going to accelerate document productivity, and we're going to power digital businesses. AI only expands those three massive opportunities, and I can't think of a better company to be at that leverages this technology again to fundamentally change how people live their lives and also how companies compete in their markets. It's a great time to be at Adobe.

[Dylan Lewis]

You were talking about expanding there, and I've heard the thought that things like generative AI could take a lot of the creative tools that you guys make available and make them more accessible to people who have less technical skills. I mean, think about this conversation that we're having right now. Our engineer will be editing this in software that I'm not well versed in. But there are probably a lot of people who have creative ambition, but maybe don't have the technical skillset yet. Is that a pathway that you see for new customers or maybe meeting some markets that you're not currently meeting?

[Dan Dern]

Absolutely. That's going to be a byproduct of the technology we see being increasingly adopted out in the market. But I think it's even broader than that. But let's start with that democratization of access to the creativity process. I think we're in the golden era of creativity. Creativity is no longer just a process that's accessible to the creative pros in this world. These technologies that we're increasingly adopting adopting are lowering the barrier to entry for a broad cross section of people to now be successful in the creative process. So there's a democratization of creativity that is underway. When I think about the creative process up till now, the most important and valuable skill or the commodity that a creative professional has is their time. What is the surface area of ideation they can explore before they find that spark of magic that they take further in the creative process and really bring to life what is in their mind's eye into the digital world? These technologies are now going to just make that ideation, that exploration, far more expansive. And creativity is a uniquely human characteristic ingenuity. Uniquely human characteristic generative AI isn't going to replace human ingenuity and creativity. It's going to augment it, it's going to amplify it. It's going to make the creative people, the creative participants, even more productive than they've been in the past. And they're going to find that spark of imagination faster and in higher quality ways and then have more time to bring it to life in the. And so I get really excited about the pervasiveness of these technologies and the way they have to potentially amplify and augment that uniquely human characteristic called creativity.

[Dylan Lewis]

When we hit these inflection points, there tends to be a tension between being first in this market that has a lot of green space and wanting to make sure that you are being mindful of the legal ethical considerations. Particularly with something like AI generated content, how are you guys balancing that with what you develop and roll out to users as products or as features or tools within your software?

[Dan Dern]

Yeah, so this is where it's really great to be at a company like Adobe, we take our responsibility to the community very, very seriously. And we've got a differentiated approach to how we're bringing these technologies to life. We're going to do it in a responsible, commercially safe way. So what do I mean by that? If we take a look at the AI stack, there's three elements to the AI stack. There's data, there's models, and then there's the interfaces that our customers know and love that defines their day to day workflows. And we're a participant and a leader in each of those three elements. From a data standpoint, we don't train on our customers data, we only train on data that we have IP rights to. And we compensate the contributors of that data to our model training. That's a very differentiated approach versus what others are doing. When you think about the models, we've got decades of experience that give us real differentiation in the market. When you talk about things like imaging design, vector video, and so where we can differentiate ourselves based on those decades of experience, we're going to produce first class, world class models, but again, we're going to do it in a responsible way. We're co founder of initiative called Content Authenticity where we've created the baseline open source technology around content credentials. Our tools automatically embed these content credentials into the content that's produced. It's like a digital nutrition label so those that consume the content can see where it came from and can trust the veracity of the content. So being a leader in building models and bringing them to life in a commercially responsible way I think is really important. And so when we think about IP protection, when we think about content authenticity, when we think about digital nutrition labels and we think about native and deeply embedding these technologies again into the surfaces that our customers know and love and defines their day to day work product, they're more likely to adopt these technologies knowing that they're safe and respectful of the ecosystem. We don't scrape data, we don't train on our customers data, we don't infringe on other people's IP and we indemnify our customers for the safe use of the models. Our approach is very differentiated in the market and again, it's great to be at Adobe and know that you've got a very ethical, responsible market participant at a time of a major inflection like this.

[Dylan Lewis]

One of the things I really wanted to get your take on was there's this question right now out in the market, I think about a lot of AI spend where we know at some point we'll need to see return materialize both for end customers and for companies that are heavily investing in AI applications. How are you guys thinking about the amount of leash that you want to give projects internally, knowing that there will be a pay the Piper type moment for some of this stuff?

[Dan Dern]

Yeah, and I'll talk out of both sides of my mouth on this for a second because I sit in a unique seat inside of a company where I have to have that spark of imagination to work at a great company like Adobe that is capable of innovating and doing great things. But you gotta overlay discipline in the process and the natural tension and balance between those two concepts is really where the magic comes to life. Within technology companies, innovation is our lifeblood. We need innovation. The industry defining categories, the industry defining platforms, the products our customers know and love, and the feature sets, the rich feature sets that make them successful, is really why our customers keep coming back to the Adobe ecosystem. The way in which we do that, the discipline we apply, is really, really important. What I'll often say, in an environment like this, where there are so many interesting things to apply our attention and resources to a company like Adobe, there isn't anything we can't do. We've got the customer relationships, the product portfolio, the industry defining platforms and products, the geographic distribution and footprint, the financial performance. I don't say this arrogantly, but there isn't anything we can't do given who we are as a company, except one thing, and that's everything. So let's prioritize. Let's think very, very clearly about what is going to make our customers successful. Let's narrow the aperture around those must win initiatives and then let's sharpen the execution crispness around them. What happens in a moment like this is velocity of innovation will go up and execution crispness will go up. And this is what you see from Adobe right now. I think our innovation engine, it's second to none, but it's moving with a velocity that's probably faster than at any point in the company's history. I really love what I see in terms of the velocity, the innovation and the execution out of the company. Really proud of the hard work and what this team is doing. Companies that will get distracted by shiny objects in this environment try to do too much and then you see the execution crispness atrophy. And right at a moment when a company should be fast, they become slow. This is the real danger in an environment like this. So while the spark of imagination is lit and what the possibilities entail, it is an amazing time to be at Adobe. But we're going to be disciplined. We're going to have a very clear sense of prioritization and we're going to invest and execute against the most meaningful opportunities and make sure we have a velocity with the way in which we execute.

[Dylan Lewis]

Right now, I guess on that you're talking to an audience here at the fool who Follows the Company. And I know there are a lot of people who will listen to this that own the stock. What's the rubric that you'd like to be graded on when it comes to the development and the commercialization of AI? You may have touched on some of these things in some of your answers already. But I'm curious, are there any kind of specific things you think this is really our target here and this is the way we want shareholders to be looking at our plans in this space?

[Dan Dern]

Well, ultimately, I think it comes down to having a customer centric approach and making your customers successful. If you bring this innovation to life in a customer centric way and make them successful, you see the simultaneous benefits of revenue growth, bottom line profitability, and the cash flow that's derived from that equation. And so ultimately, I'd like to see that customer success manifest itself in the top line growth and bottom line profitability of the company. That's the ultimate proof point that we've gotten it right with our customers all at the same time, doing it in a commercially safe way and a responsible way that's respectful of the community of creators out there that we serve and the employees who have a very strong ethical underpinning. Being responsible while driving customer success is a really powerful combination.

[Dylan Lewis]

Listeners, if you've got someone we should interview for the show, let us know. Shoot us a [e-mail] Coming up next, Emily Flippen and Jason Moser are back with some stocks on their radar. Stay right here if you're listening to Motley fool money. As always, people on the program may have interests in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't probably sell anything based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards and is not approved by advertisers. TMF only picks products it'd personally recommend to friends like you. And we are back. I am Dylan Lewis, joined again by Emily Flippen and Jason Moser. As we tape, we are just a few short days before Thanksgiving. And so before we get over to our usual Radar stock segment, in observance of the holiday, I need to ask, what are your radar plates for Thanksgiving dinner? Jason, I know you are a foodie. You are, Mr. McCormick. What are you looking forward to eating?

[Jason Moser]

Well, listen, I'm going to spatchcock the turkey on the Traeger. We're going to have some good smoked turkey there. Listeners know that I love peanut butter stuffing, but the problem with spatchcock turkey is you can't really do that. Another tip, fried okra. I know that seems like a Southern summer dish, but it works very well for Thanksgiving.

[Dylan Lewis]

I'm excited. That sounds pretty good. I might have to stop by your house, Emily. What are you looking forward to?

[Emily Flippen]

Well, there's one dish that I love so much that I actually don't allow myself to make it any other point of the year. Cause I have no self control. And it is like this cranberry dip that you pour over cream cheese and use crackers to dip it. It's a side dish, but it is incredible. I'm sure there's a million recipes out there for it, but I can only have it this once. So that's the thing I'm looking forward to the most.

[Dylan Lewis]

Hey, you have to celebrate the holiday in traditional form, right? Whatever that is for you, you gotta find it and you gotta make space for it.

[Emily Flippen]

Exactly.

[Dylan Lewis]

All right, let's get over to stocks on our radar. Our man behind the glass, Rick Engdahl, is gonna hit you with a question. Jason, you're up first. What are you looking at this week?

[Jason Moser]

Well, It'd be just C3AI, a company we've talked about before on this show. Ticker is AI. It was a heck of a week for the stock. I mean, it's up around 30, 30% on news that they have expanded their partnership with Microsoft in order to accelerate enterprise AI adoption. As a reminder, C3AI, it's an enterprise AI software company. They ultimately provide a platform that enables their customers to design, develop and operate enterprise AI applications at scale. Now, while there are still some questions, I think in regard to how AI is ultimately going to impact us at the consumer level, it does feel like there are a lot of opportunities there on the enterprise side. That really does play right into C3's wheelhouse. It's worth noting this is not new news in the sense that these companies have been working together for a while, but it's encouraging to see that they've expanded their relationship. It does really speak to the value proposition that C3 holds in that value chain. So I think it could bode well for its future.

[Dylan Lewis]

Rick, a question or a comment about C3AI?

[Jason Moser]

C3AI ticker symbol AI. They make AI for companies who need AI. Is this a real company? This is a little on the nose for me. I was expecting a C3PO question. Rick, I'm going to defer to answer your question later.

[Dylan Lewis]

Seems legit. Rick. I don't know. That was a total non answer. Emily, what's on your radar this week?

[Emily Flippen]

Tesla is actually on my radar this week and I've been spending a lot of time spinning my wheels about the impact that President Elect Trump's policies may have on the company. On the good hand, they're talking about reducing regulations for the cyber capacity on the other side. I think removing the consumer tax credit may hurt EV adoption. But even more concerningly, over a quarter of Tesla's operating profit is generated from the sale of tax credits to other vehicle manufacturers. And I have this lingering fear that removing the consumer tax credit may incentivize the government and states to remove their other tax credits, which actually maybe could hurt Tesla. I'm probably throwing this out of proportion, but it's on my radar.

[Dylan Lewis]

Rick, a question or a comment about Tesla. Any concern that Elon's overcommitted? I mean he's got a lot going on, right?

[Emily Flippen]

I think the more over committed the better.

[Dylan Lewis]

He just runs a few companies and does a couple different things. Right. Rick, which one's going on your watchlist this week?

[Jason Moser]

What was the first one again? 3D something C3PO.

[Dylan Lewis]

Yeah, I'll go with the AI one. It's safe bet. I think it's where the market is these days. Emily Flippen, Jason Moser, thank you for coming and bringing your radar stocks. That's gonna do it for this week's Motley Fool Money radio show shows mixed by Rick Engahl. I'm Dylan Lewis. Thanks for listening.

[Jason Moser]

See you next time.