Starbucks' China Challenge and Decoding Meta's AI Push

In this podcast, Motley Fool analyst Jason Moser and contributor Lou Whiteman discuss:

• Starbucks' move to sell part of its China business.
• Hershey hires a new CEO.
• Meta moves for more talent and invests in eyewear.
• What should be on investors' radar this earnings season.

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A full transcript is below.

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Jason Moser: Starbucks pivots in China and Meta makes some big investments. You're listening to Motley Fool Money. Welcome to Motley Fool Money. I'm Jason Moser, joining me today. It's Motley Fool analysts Lou Whiteman. Lou, thanks for being here.

Lou Whiteman: Great to be seen.

Jason Moser: On today's show, Hershey has a new CEO. Meta is making some big investments in AI, and earning season is, believe it or not, right around the corner. But today, we begin with the king of coffee. Reports are that Starbucks has garnered quite a bit of interest in its China business, as it looks possibly selling a majority stake in that business. The company said, "We remain committed to China and want to retain a meaningful stake in the business. Any deal must make sense for Starbucks business and partners." Lou, China has been a bit of a challenge for Starbucks as of late. Do you think this is the right move to try to sell the majority stake in this business?

Lou Whiteman: I do. I like this a lot. New CEO Brian Niccol, he's got a lot on his plate. He's articulated a plan, the back to Starbucks. He's going to revitalize to domestic business. But look, it's going to take time, it's going to take resources. Finding a partner to work with China, it would allow Starbucks to retain some of the upside, but it is a massive market. I get it. But it would provide a cash infusion and take one thing off that plate off of that daily agenda. It feels like a win-win.

Jason Moser: It seems like there was a lot of interest. Something close to 30 equity firms and whatnot actually submit it.

Lou Whiteman: Big money?

Jason Moser: Yeah, big money, valuing it anywhere from, 5-$10 billion, I saw. You talk about the growth opportunity in China, and that's been part of the story. I think with Starbucks for many of us for many years, it's not to say they haven't grown there. They have almost 8,000 stores in China to date. But, they're talking about really going so far beyond that. It's 10% of overall revenue right now. It's meaningful, but it seems like it could be more meaningful. How big do you think they can grow as part of the business?

Lou Whiteman: They talk about 20,000 locations, which is more than double. That, honestly, I don't know about that. That's part of why I think I'm OK with them at least finding a partner or keeping some upside, but not all of it. I think the Chinese consumer, like the American consumer and most other consumers, I think they're going to lean into domestic brands over international ones as that market matures. I think to some extent, it's happening. Maybe refocusing the operations, finding a partner, growing that way and doing it, not just rubber stamping what Starbucks is here. I think there's probably room for growth, but I don't think maybe it's what we were talking about a few years ago, and I don't think it's priority one right now for them, either.

Jason Moser: This seems like a little bit like history repeating itself. You remember in the early days when they were growing internationally, and they had, in most places, they were taking that company owned approach to the stores. Then, it turns out not every country is the same, Lou, and the cultural clashes, the differences, it was all very different in so many different ways, in so many different locations. They pivoted to partnering up with local partners in those respective markets. I'm with you. I think this is a good move. I actually like it. I think it gives them the opportunity to participate in the upside without having to devote so many resources to it. I like the decision. I feel like this is something that Niccol has been mulling around for a while. I'd be curious to know. He's closing in on a year in September with the company. What grade would you give Brian Niccol today?

Lou Whiteman: Forget what I think. [LAUGHTER] Howard Schultz seems bought in. I think we can all agree. Howard's very smart and also can be a meddler. I think Howard Schultz giving him an A is very important. But I don't think Howard's wrong. I think Niccol's plan to refocus Starbucks give us back the experience we fell in love with and also adjust the menu, so we're not waiting in line for 40 minutes in the drive through. It all makes sense. It's a strong grade, it's an incomplete grade because it's one thing to say it. We have to execute and do it. But I like where they're going with.

Jason Moser: The stock is basically flat since Niccol took over, or you think it's just a couple of percentage points. But it still boasts a premium multiple at 34 times earnings, do you think this stock from to date, do you think this is an outperformer in the coming five years?

Lou Whiteman: I think so. I'll be honest. The valuation gives me pause. I don't think it's going to be, I think maybe the hypergrowth days are over. But look, the brand resonates. I think you'll see operational improvements under Niccol which will boost results. You have, what, 2.5% dividend yield to boost your total return. Yeah, maybe it isn't what the growth was before, but it still, I think, has the bones of a market beater of just a top operator.

Jason Moser: Yeah, I'm with you. I'm hanging on in my shares too. Well, next up, Hershey has a new CEO.

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Jason Moser: Hershey Company has a new CEO, Wendy's CEO Kirk Tanner will replace Michele Buck, who's retiring after almost eight years as CEO of the company. Tanner will take over on August 18th and previously served over 30 years at Pepsi. Lou, I was talking with our colleague, Ant Schiavone, who follows Hershey closely. He said that while Tanner definitely has the resume to be CEO with those three decades at PepsiCo., and he had a short stint at Wendy's, it started in February 2024. It was a bit shaky. Shares down around 40% during his tenure. They had to cut the dividend earlier this year. The Ant noted that was likely to happen regardless who was CEO. What do you think his biggest challenge right off the bat is going to be taking over for such a, I mean, this is just a legendary, iconic American brand. They're going through some tough times. What do you think the biggest challenge he's facing us?

Lou Whiteman: A brand that has always or mostly promoted from within, too, which I think is interesting, too. I think you said it well. It's hard to judge the time at Wendy's, both because it was so short and he did step in at a difficult time. But it feels like Hershey's is more similar to what he did at Pepsi and he was successful there. Wendy's is more retail focused. I think that's a positive. I suspect his biggest challenge is to continue the pivoted way from chocolate, from cocoa prices. Hershey's has quietly built up this roster.

Jason Moser: What?

Lou Whiteman: Pirate Booties, Dot's Pretzels, SkinnyPop. It feels like there's further opportunities to go in that direction, and bringing someone in from Pepsi suggests to me, at least that that's where the board is focused. That's his challenges to execute there and make that happen.

Jason Moser: I think you're right. You got to broaden that portfolio because we've seen this over the last several quarters, years, the cocoa prices have really been hammering Hershey, and it's always fun to pay attention during Halloween to see what candy he's selling. Last year, we definitely saw a trend toward, like, the fruity, sugary candies, chocolate, a little bit less so because it was getting more expensive. Then the dreaded shrinkflation came into play. They're making the candy bar smaller Lou. Not cool, but I guess I get it.

Lou Whiteman: Hey, my doctor likes it, even if I don't.

Jason Moser: Exactly. We talked about Brian Niccol. Now we're talking about Hershey here with Kirk Tanner. When you see new leadership in play here, how long do you typically give new leadership to start delivering?

Lou Whiteman: It's so hard, because obviously, every situation is different. You have to factor in macro, what situation does a new leader drop into. But look, generally, I think, at least a year, we talk about this a lot. We're long term focused investors. We understand that quarter to quarter fluctuations happen, and they're part of the business, and we don't panic. We don't freak out with one quarter. We don't get too excited. I think we have to give leadership the same understanding, the same philosophy. In a case like this the challenges, the consumer, cocoa prices, perhaps maybe you need more time, but I'll tell you what I do want Jamo and what I'd like to see is within a year, what Niccol gave us, I want to hear our leadership articulate a plan. I want something I can evaluate from here. You may not be able to solve the problem in a year, but I want to hear how you're planning on doing it within a year.

Jason Moser: I like that. One of Tanner's go to moves at Wendy's was offbeat collaborations. They did a Girl Scout thin mint frost Deep. Tried that one, it was good. Spicy Taki chip chicken sandwiches. Hey, man, I love Takis and I love chicken sandwiches.

Lou Whiteman: I don't love that.

Jason Moser: Sponge Bob brand and burgers. Let's play armchair CEO for a second. What brand collaboration would you recommend for Hershey's?

Lou Whiteman: The company that brought us peanut butter and chocolate, [LAUGHTER] they have to get collaborations. This is a no brainer, but I love Dot's Pretzels. Looking at the website, they have cinnamon season. They have barbecue. They have honey mustard. They don't have chocolate covered pretzels.

Jason Moser: That crossed my mind.

Lou Whiteman: It seems so obvious.

Jason Moser: I have more of a salt tooth than a sweet tooth. I was thinking, I love Dot's Pretzels. I have in the pantry at home. I also like SkinnyPop. That's pretty good stuff. I was thinking, Hey, you get SkinnyPop and you partner up with McCormick for some old bay SkinnyPop? You can cheat and put the stuff on at home, but I guarantee the stuff in the bag is going to be way better. You're bringing two worlds together right there. I'd be all in.

Lou Whiteman: My Baltimore roots are speaking to me right now. [LAUGHTER] I'm in for that. Mr. Tanner, get on that.

Jason Moser: Last question on Hershey, do you think Tanner is still here in five years?

Lou Whiteman: I do. I do think fit matters, and I think the resume implies a better fit, like we said. To use the Willy Wonka, I think maybe this is a golden ticket, and I think it can work out well for Tanner and for Hershey shareholders.

Jason Moser: Lou Meta continues to make big investments in AI. Founder and CEO Mark Zuckerberg is spending big to recruit AI talent. We're talking tens, hundreds of millions of dollars from reports. Now we also saw that the company's taking a minority stake in Ray-Ban maker Es Luxottica, and that really plays into these Ray-Ban AI glasses that they're starting to get out there. I'll be interested to see how this holiday season, how those are received. Now, as we saw with the Metaverse, Zuckerberg's playbook is to go big or go home, $3.5 billion investment in Ray-Ban, reportedly hundreds of millions of dollars in recruiting bonuses. that's a lot. What should investors make of all the spending?

Lou Whiteman: Usually I find interesting back in January, Meta committed to, what, spending $70 billion in CapEX, mostly to build out AI. Our focus was on chips at the time. Certainly Invidia is getting a lot of love here. But, it feels like we're kidding that next step, where, what do we do with all that capacity, making the magic happen? Look, if you think chips are hard to come by and they are, just how hard is it going to be to get the right talent and the right partners and all of that. I think be aggressive makes sense. Zuckerberg likes to be aggressive, but focus on the big picture of try and be a first mover here. I get what they're doing, and I think it makes sense, because at some point, we got to use all these chips or something, and it better be neat.

Jason Moser: Yeah, this is an arms race like we haven't seen in some time. All these companies is just foot on the gas, and they're spending a lot, but clearly, that's telling us something. I think we're in the middle of something big here. Now, the Metaverse spending, that led to the year of efficiency, if you remember that. Investors became worried about return on investment, do you see this playing out the same way or like, how long of a leash does Meta have here to ultimately build out their AO chops and demonstrate real return?

Lou Whiteman: I'm curious what you think. I think here the difference is last time they were out on their own. They literally changed their name to Meta. They were the Metaverse island. For better or for worse, it ended up worse. They owned that space, and there's a lot more there with AI, I think.

Jason Moser: I agree.

Lou Whiteman: If there's not, we have a lot of people going along for the ride. I think as long as everyone else is spending, I think it's a much longer leash.

Jason Moser: I think so, too. I think you said it perfectly. There's a there there. AI, it just seems so much bigger. When we're looking at augmented and virtual reality in the Metaverse, it's fascinating technology, but it certainly is more niche, and it's really not quite developed. The obvious use cases that we're seeing play out with AI. The stock, let's talk about the stock. It's had a good year to date. It's up almost 25%, outperforming the market nicely. At around 28 times earnings today, is this something you're interested in? Do you think this is an outperformer over the next five years at today's levels?

Lou Whiteman: So 28 times earnings. What? That's second most affordable among the Mac 7, which for what it is. But look, for all the talk about AI, we you bury the lead when you don't talk about that core advertising business and its ability to just generate. I'm excited about AI, but I just that core business, I don't see a disruption on the horizon here, and with that business, I think the stock beats to market. That is the engine.

Jason Moser: I think AI is really ultimately making that core business even better. That really is the point. they're going to do ancillary stuff with it. But it is making that core business better, and man, they really own a big slice of that ad market, like you said. Next up, earning season is right around the corner. Lou, believe it or not, earnings season is upon us again. JP Morgan unofficially kicks things off on Tuesday, July 15th. What's something that you'll be paying close attention to this earning season? A trend, policy, specific company, and industry? What you got.

Lou Whiteman: We just talked about Meta's year of efficiency. If we want to talk about so far this year, and we're still early into this year. It has been the year of uncertainty, for public companies. Investors largely gave management teams a pass last quarter when they said, I don't know when it comes to guidance. I think that's understandable. I was one of those investors who, I don't know what's going on either, so that's fine. Two related big picture questions I have as I'm watching now is, A, is there more clarity now than there was three months ago? Is there more management teams that are willing to stick their neck out? Since I'm guessing the answer is maybe not, will investors continue to be patient? Will the 'I don't know answer', will that be acceptable now the way it was last quarter? I think, probably, but I'm curious to see how things play out just kind of. We're always forward looking. As investors, it's scary when there's clouds forward. It's a weird time. How about you.

Jason Moser: Well, I think in regard to your points there, two. We're seeing a lot of headlines coming out here again, regarding tariffs. It's leading right in earnings season. It would be understandable if you hear that uncertainty language. But I don't know, do you feel like folks are just getting tariff exhaustion. Like, it's just day after day, so you know that it's happening, and at some point, you just got to let it go and keep running your business.

Lou Whiteman: Yeah, it feels like it's going to net out as a drag on earnings indefinitely that we're just going to have to grin and bear it with, which is a terrible medium because it's just going to be a slog, unfortunately.

Jason Moser: Well, you asked what I was looking at, and for me, it's in regard to enterprise spending trends, over the last several quarters, there's a phrase that we've seen on a lot of these earnings calls, whether it's Twilio or Cloudflare or CrowdStrike, Palo Alto. You name it. These big enterprise servers, the phrase elongated sales cycles, to your point about uncertainty. Their enterprise customers are just simply not quite certain what the future holds. They're spending with some trepidation and maybe not fully committing. We saw just elongated sales cycles on so many earnings calls over the last several quarters. I wonder if that's starting to come to a close. I wonder if we're going to start seeing some more bold spending from a lot of these big enterprises. I'm going to be following a lot of those companies like I just mentioned, those earnings calls, and that will be one key term that I'll be searching through all those calls, elongated sales cycles. That's just telling you, they're just not spending as much as quickly, and we want to see that turnaround.

Lou Whiteman: It's a great point because putting it both together, there is so much uncertainty. It's understandable not to want to make bold moves, but at some point, business has to go on. Where are we in balancing that? That's going to be fascinating to say.

Jason Moser: Well, we'll leave it there. Lou Whiteman, thanks again for being here.

Lou Whiteman: Always a pleasure.

Jason Moser: 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, so 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 or sponsored content are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Jason Moser. Thanks for listening. Will see you.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of Motley Fool Money. Jason Moser has positions in McCormick, Starbucks, and Twilio. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Hershey, JPMorgan Chase, Meta Platforms, Starbucks, and Twilio. The Motley Fool recommends McCormick and Palo Alto Networks. The Motley Fool has a disclosure policy.