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Insights on Semiconductor Giants and Streaming Successes: A Closer Look
In this podcast, Motley Fool analysts Jason Moser and Matt Argersinger join host Dylan Lewis to discuss:
- The contrasting futures for Taiwan Semiconductor Manufacturing Company and equipment maker ASML, shedding light on semiconductor market demand.
- Netflix‘s ad-supported service and how live sports could drive the company to new all-time highs.
- Uber‘s interest in Expedia and the air travel industry.
- Amazon reinforcing its desire for employees to return to the office.
- Two stocks to keep an eye on: SEMRush and JP Morgan.
What relationship exists between CEO tenure and shareholder returns? Bob Stark, who leads the succession practice at Spencer Stuart, has examined the performance of chief executives at S&P 500 companies over this century and uncovered notable trends in performance.
To access complete episodes of all The Motley Fool’s free podcasts, visit our podcast center. Those looking to begin investing can check out our beginner’s guide on stock investment. A full transcript follows the video.
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Dylan Lewis: The future is leaning towards ad-supported services, with Uber facilitating your door-to-door travel. Welcome to Motley Fool Money, your go-to radio show for finance.
From Fool Global headquarters, this is Motley Fool Money. I’m Dylan Lewis, and today I’m joined by Senior Analysts Jason Moser and Matt Argersinger. Together, we’ll explore CEO tenure impacts on stock performance, highlight notable stocks, and share the latest updates from two leading names in the chip supply chain. Let’s dive right into it.
This week was pivotal for the semiconductor industry, with earnings reports from Taiwan Semiconductor, a major player, and ASML, the key equipment manufacturer for chip production. Jason, these reports allow us to examine two essential components of the chip supply chain. What insights can you share?
Jason Moser: Let’s discuss ASML first. You hit the nail on the head; they are an integral part of a highly complex supply chain. ASML provides the equipment, specifically the extreme ultraviolet lithography systems, or EUV, essential for producing advanced semiconductor chips that power our devices and expanding data centers. This week saw a notable drop in the market response post-earnings, which revealed solid revenue and earnings growth compared to the previous quarter. They also reported a 3.6% increase in the number of systems sold. However, the bookings number was concerning—around 2.6 billion euros, falling short of the expected $5.5 billion. This discrepancy is substantial.
The crux of the matter lies with a cautious consumer base, which in ASML’s case, primarily includes large chip manufacturers. They noted that a lower order intake reflects a slow recovery in traditional markets, as customers remain hesitant in the current economic climate. This aligns with trends we’ve observed with many enterprise customers over the past quarters. Although current prospects seem dim, it’s possible that these orders will be fulfilled later, presenting potential opportunities for investors.
Dylan Lewis: It’s interesting to contrast ASML’s cautious outlook with what we’re hearing from Taiwan Semiconductor, which claims strong demand in the AI sector. How did their earnings reports differ, and what could that mean for investors?
Jason Moser: That’s a key point. Taiwan Semiconductor reported impressive results, particularly with their high-performance computing segment, which now accounts for 51% of their revenue, up from 42% the previous year. Smartphone chip demand also remains robust. The pressing question for Taiwan Semiconductor is how long AI investment momentum can sustain, and if it slows, what impact that will have on the business. Unfortunately, we lack clarity on the timing of any slowdown, but AI continues to dominate discussions.
Dylan Lewis: We also gained insight into the streaming landscape this week, with Netflix announcing positive earnings that sent shares rising 10% to new all-time highs post-report. Matt, what drove the strong market reaction?
Matthew Argersinger: Indeed, Netflix is thriving. The company gained five million new subscribers during the quarter, exceeding expectations by almost 500,000. They now boast close to 283 million subscribers globally. Notably, their ad-supported membership grew by 35% quarterly, making up more than half of the new sign-ups in ad-accessible regions. This shift indicates where Netflix is focusing its efforts.
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Netflix Thrives with Growth Amidst Evolving Entertainment Landscape
Netflix is making headlines with impressive financial results. Revenue surged 15%, while operating income soared by 52%. Notably, the operating margin increased, and earnings per share hit 45%. Members are also spending an average of around two hours daily on the platform, a statistic that surely underscores Netflix’s influence in contemporary media consumption.
Amid discussions about this view of society, Netflix’s expansion into live sports and events is noteworthy. With two NFL games scheduled for Christmas Day and a promising WWE agreement on the horizon, the company forecasts a revenue growth between 11 and 13% for the upcoming year. Analysts highlight this quarter as a strong one, emphasizing Netflix’s dominant position in the entertainment industry.
Dylan Lewis: It’s interesting to see that two-hour average, Matty. It seems like remote work has made entertainment a key part of daily life.
Jason Moser: Absolutely.
Dylan Lewis: We will revisit remote work thoughts later. Let’s examine Netflix’s current state. The company has regained its standing after a significant drop in 2022, which was linked to slowing subscriber growth. Today, Netflix presents a broader membership model, catering to diverse preferences as it responds to consumer demand.
Jason Moser: Indeed, Netflix has transformed. Initially, it operated on a straightforward model, but as the entertainment landscape evolved, the company realized it needed new avenues for growth. Presently, it enjoys a solid financial footing, evidenced by $2.9 billion in operating income this quarter alone. The investments in areas such as live sports—like the upcoming NFL games—signify this new direction. Their ad-supported model is another step worth noting.
Dylan Lewis: Matty, what are your thoughts on the valuation of Netflix in comparison to industry competitors?
Matthew Argersinger: Reflecting on industry changes over the past five years gives clarity. The entry of competitors like Hulu, Disney+, Paramount+, and Apple TV+ marked a significant shift. Fast forward to fall 2024, and Netflix—the original streaming pioneer—emerges as a clear leader. Observing its trajectory, I believe Netflix’s stock could reach $1,000 within a few years. However, it’s puzzling that its market cap is now double that of the iconic Walt Disney Company, a stalwart in entertainment history.
Dylan Lewis: I find that perplexing as well.
Jason Moser: There is some rationale behind it. Investing is future-focused, and the market seems to recognize Netflix’s groundbreaking role in establishing the streaming future. The company not only generates significant cash flow but does so consistently. This reliability positions Netflix favorably for continued growth and investment in live sports and other innovative offerings. The ad-supported model is simply an additional opportunity for expansion.
Dylan Lewis: For those tracking the ad-supported model’s impact on financials, data is still pending. The management is optimistic about this initiative. We will keep an eye on developments as we proceed.
Welcome back to Motley Fool Money. I’m Dylan Lewis, joined by Jason Moser and Matt Argersinger. While banks and chip makers often grab the spotlight during earnings season, another one of our favored indicators reported this week. Matt, share the latest insights from Prologis regarding the industrial real estate sector.
Matthew Argersinger: Prologis had a mixed quarter. Demand appears weak in some regions, notably Southern California, due to excess capacity created post-COVID. Many companies expanded inventory in response to pandemic-related supply chain issues. Consequently, some leased spaces are now underutilized. However, results show Prologis holds strong. Occupancy rates stand at nearly 96%, cash same-store net operating income increased by 7.1%, and core funds from operations per share climbed 10%. Furthermore, they’ve recorded a 68% increase in rents for new or renewed leases.
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What stands out is CFO Timothy Arndt’s commentary on attractive acquisition opportunities. With a solid balance sheet, Prologis is raising its guidance for annual acquisitions for the second consecutive quarter. Initially, they anticipated between $500 million and $1 billion in acquisitions; that forecast is now nearing $2 billion. While immediate effects may not be seen, these strategic moves may yield significant benefits by late next year or early 2026.
Jason Moser: Just a quick note, Matty—thanks to your recommendation, I now own shares in Prologis and plan to continue investing in it for my retirement portfolio.
Matthew Argersinger: That’s fantastic!
Jason Moser: I’m looking forward to discussing Prologis’ potential further.
Exploring Potential Acquisitions and Strategic Moves in Big Tech
The Underestimated Potential of Data Centers
Matthew Argersinger: Indeed, the company has a $40 billion land bank intended for development. Much of this growth appears to be focused on data centers, which presents a fascinating opportunity.
Dylan Lewis: Speaking of acquisitions, recent rumors have emerged regarding Uber. The company has already established itself in ride-hailing and food delivery, and now it seems they may be eyeing a travel booking giant: Expedia. Jason, in your view, what could motivate Uber to pursue longer trips?
Jason Moser: Dylan, as both a customer and an analyst, I appreciate Uber’s service. We previously recommended their stock in our next-gen Supercycle Service, which has proven to be a solid investment. Upon hearing the news about the potential acquisition, I had to pause for reflection. This wouldn’t be a simple transaction. Expedia currently has a market capitalization of around $20 billion, so for Uber to acquire it—possibly at around $6 billion—they would need to consider borrowing or issuing shares. It’s worth noting that CEO Dara Khosrowshahi, who previously led Expedia, is familiar with its operations and still serves on its board.
Combining ride-sharing with travel booking could enhance customer experience through data integration, expanding their user base. However, merging two corporate cultures and addressing operational redundancies would be complex. Historically, similar large-scale acquisitions have faced significant challenges. While Uber aims to evolve into an all-inclusive app, other companies, like PayPal, have reevaluated their broader ambitions, realizing success often comes from mastering a few core functions rather than spreading too thin.
Dylan Lewis: It’s uncommon for a CEO to consider acquiring a business with which they have such deep familiarity. Although it appears to be a challenging endeavor, this closeness suggests potential. It seems to me that Uber is aiming to expand its value, striving to grow from a $165 billion firm to potentially over $200 billion in valuation through diversified offerings.
Jason Moser: Absolutely, expanding into the travel sector makes sense given the industry’s vast monetary potential, which spans billions to possibly trillions globally. The positive aspect of Expedia is that it is a well-established and profitable company, generating strong cash flows. Still, the integration would be a considerable undertaking.
Dylan Lewis: Shifting focus, Amazon is pushing its return-to-work strategy forward. In September, they announced that employees must return to the office five days a week starting January 2025. This week, AWS head Matt Garman told employees those who resist this arrangement are free to seek employment elsewhere. Interestingly, alongside Amazon’s moves, Meta has also announced layoffs at platforms like Instagram and WhatsApp. It seems major tech firms are downsizing their workforce.
Matthew Argersinger: While some might see this as a drastic cost-cutting measure—especially after extensive hiring during the pandemic—there’s merit to Amazon’s belief in improved collaboration and productivity from in-office work. Garman’s announcement, made in Arlington, Virginia, suggests these changes are widespread across Amazon’s operations, not limited to Silicon Valley. It signals a return to the office trend among tech companies.
Dylan Lewis: Jason, as Matt indicated, many tech companies expanded their workforce during the pandemic, investing heavily in growth. With firms like Meta now focusing on efficiency, this marks a new era where companies are not only streamlining but also embracing AI technologies.
Jason Moser: It’s not unreasonable to view their return-to-office mandate as a way to naturally reduce workforce size. This shift serves dual purposes. Firstly, it might result in voluntary departures, which may be acceptable to the company. Secondly, since collaboration fuels innovation, Amazon recognizes that remote work environments may hinder this vital interaction.
The push for efficiency is a common goal across the industry. As shareholders, we always want our investments to be as efficient as possible.
Dylan Lewis: Thanks, Matt and Jason. We’ll come back to you shortly for stock ratings. Up next, we’ll dive into a comprehensive analysis of CEO performance across the S&P 500 over the past 24 years and how it impacts your investment returns. Stay tuned for more on Motley Fool Money. [MUSIC] Welcome back to Motley Fool Money. I’m Dylan Lewis. CEOs command significant salaries, but what does the data reveal about their impact on company performance? Bob Stark, who oversees succession practices at Spencer Stuart and authored the book “The Life Cycle of a CEO,” examined how S&P 500 executives have fared this century, uncovering some interesting trends. This week, Bob shared insights about misconceptions surrounding CEOs and their effect on shareholder returns. To start, what are some common misunderstandings about CEOs and their paths to success?
Bob Stark: The book covers several misconceptions. Let’s begin with the myth of linearity.
The Ups and Downs of CEO Tenures: A New Perspective on Leadership Performance
When CEOs step into their roles, expectations often run high regarding their performance over time. About six years ago, we surveyed directors to understand their views on how CEOs evolve. The results presented a familiar pattern—a curve resembling an inverted U. Initially, when a CEO joins, they learn quickly. Performance improves as they gain experience, peaking around years eight or nine. However, after this point, energy seems to fade, and performance typically declines, signaling it’s time for a transition. This perception has long been accepted in the business community, but recent findings challenge this conventional wisdom.
As we dug deeper, the data on Total Shareholder Return (TSR) by CEO tenure year revealed a more complex story, one that does not conform to the expected pattern. This illustrates a broader life lesson: while we often wish for a straightforward, linear path, the realities of leadership—and life—are frequently marked by unpredictability. Stories of celebrated CEOs, such as Hubert Joly who transformed Best Buy from a stock price of $3 to around $70, often overlook the trials and failures they faced along the way. Joly’s narrative is not a straight line but a series of bumps and setbacks, reminding us that success is rarely a smooth ascent.
Dylan Lewis: This brings to mind a popular illustration on the internet that contrasts typical views of success with reality. The common notion depicts success as a steady climb, while actual success often resembles a chaotic drawing by a child, filled with ups and downs before ultimately trending upward.
Bob Stark: Absolutely! It’s almost reminiscent of a seismic chart after an earthquake—showing jagged lines reflecting the tumult of the journey.
Dylan Lewis: I know you mentioned your research on CEO tenures and performance metrics. You and your co-author, Claudius Hildebrand, examined the tenure and performance of every CEO in the S&P 500 this century, alongside conducting interviews with various leaders. Can you share your process?
Bob Stark: Our research focused on CEO performance over the last 20 years, initially sparked by client inquiries regarding CEO succession. We wanted to determine if insiders performed better than outsiders by diving into the available data. When Claudius joined us about seven years ago from BCG, he invigorated our research efforts by adding new insights and team members. The breakthrough came when we organized the data by tenure year. For example, we could track CEOs like Dave Cody of Honeywell from their start date, normalizing performance against the S&P’s general market to remove external fluctuations.
Dylan Lewis: That makes sense. It’s interesting how organizing data differently can reveal new insights. Could you explain some of the findings regarding the different phases of a CEO’s life cycle that you identified?
Bob Stark: Certainly! One key chapter is titled “The Launch,” referring to the first year of a CEO’s tenure, which often sees a honeymoon effect. Excitement surrounds new leadership, as expectations run high. This surge typically reflects in enhanced stock prices due to the anticipation of positive changes, evident in the data from over 2,000 CEOs in our study. However, as these changes often take time to manifest, challenges usually arise in year two. We found that approximately 73% of CEOs see a decline in their TSR during this period.
Dylan Lewis: That’s a stark reminder for new leaders—how should current CEOs, like Brian Nikolet at Starbucks, approach their tenures?
Bob Stark: The experience offers valuable caution. After the honeymoon, CEOs enter a stage we call “Calibration,” which can lead to what some describe as a sophomore slump. From years three to five, we advocate for a phase of “Reinvention,” inviting CEOs to tap into the potential gains initiated during their first two years. Ideally, during this reinvention phase, the fruits of earlier efforts begin to bear results, though not all CEOs will capitalize on this opportunity.
Understanding CEO Longevity: The Challenges of Leadership Through the Years
Trends in CEO Performance across Tenure
In the corporate world, leadership roles can be complex and daunting. Currently, three distinct groups of CEOs emerge based on their journey over time with a clear fork in the road ahead. Some have struggled through initial stages and may face job losses in years 3-5. Others enjoy success but risk becoming complacent, while a third group actively seeks innovation and future growth. A few years ago, a CEO in the audience expressed to our team that, despite their extensive experience, they had never faced the need to reinvent themselves truly in place until now. The challenge lies in coordinating bold actions particularly without external pressures.
The Complacency Trap: A Common Pitfall for CEOs
Years 6-10 often pose a significant challenge for CEOs, as performance typically declines. This trend points to what we term the “complacency trap.” After an initial phase of reinvention, without proactive change, some leaders slide into complacency. Boards also contribute to this issue; they become less responsive to ongoing underperformance compared to the first five years. As both leaders and boards grow complacent, the need for transformation becomes harder to recognize.
Historical Insight: The Legacy Period of Successful CEOs
A striking trend shows that only about 20% of CEOs last beyond the ten-year mark, but those who do often achieve significant value in their remaining years. A pertinent example is Dave Cody at Honeywell, whose tenure reveals that, despite a rocky phase around years 9-10, his final years produced exceptional value and left a lasting legacy.
Dylan Lewis: You noted natural turnover among CEOs, with about 25% to 30% lasting less than three years. Is three years a fair timeline for evaluating CEO effectiveness?
Bob Stark: The timeline for CEO evaluation is indeed critical. Often, boards may act too quickly or remain too patient. It’s common for a new CEO to experience a performance decline in the second year, which may catch boards off guard. Therefore, aligning board expectations with realistic timelines for the CEO’s priorities is essential for effective oversight.
Dylan Lewis: Great insights. Our listeners can learn more about these CEO dynamics in your book, “The Life Cycle of a CEO.” Now let’s shift to a recent regulatory update from the FTC affecting subscription services. Stay tuned for our analysis.
FTC Ruling: A New Era for Subscription Services
This week, the Federal Trade Commission introduced a new rule that simplifies the cancellation process for subscriptions. This “click-to-cancel” requirement aims to ensure that consumers can cancel a service as easily as they sign up for it. Jason, this seems like a significant improvement for transparency in the consumer experience.
Jason Moser: Absolutely. It simply makes sense for businesses to adopt consumer-friendly practices. From my personal experience with a subscription service, I faced numerous obstacles when trying to cancel. Streamlining the cancellation process is beneficial for consumers and enhances long-term customer relationships.
Dylan Lewis: That is an important perspective, Matt. What are your thoughts on the implications of this ruling?
Matt Argersinger: I agree with Jason. Making cancellation easy may encourage past customers to return. A straightforward process signals confidence in the product, likely leading to a better customer experience overall.
Dylan Lewis: Excellent points from both of you. It appears that a transparent cancellation process could be indicative of a high-quality business model. Now, let’s delve into our stocks on the radar. Rick, please pose the question as we explore potential investment opportunities.
Matt Argersinger: As part of our Dividend Show, we’ve recently launched our Dividend 7 series, which highlights companies that excel in paying and growing dividends. One notable recommendation is JP Morgan, ticker JPM. This company stands out due to its strong competitive position in the finance sector.
JPMorgan Chase: A Dividend Powerhouse and Market Leader
Strong Financial Growth and Global Reach
JPMorgan Chase, the largest bank in the world by market capitalization, stands out as a globally recognized banking enterprise. Over the past decade, it has seen a remarkable 213% growth in dividends, including 14 increases since the 2008 financial crisis. The bank’s financial and brand strength is evident as it operates across various sectors, including consumer banking, business banking, IPOs, and wealth management. Jamie Dimon, the bank’s CEO, is a well-known figure in finance, and his leadership has contributed to JPMorgan’s reputation as a top-tier institution. For those interested in dividend growth, JPMorgan appears to be a strong option.
Dylan Lewis: Rick, Matt brought up a well-known brand. Any thoughts or comments on JPMorgan?
Rick Engdahl: I’m curious about how you found this stock. [LAUGHTER] It’s not something most people talk about, but it’s great that we highlighted it.
Dylan Lewis: Jason, are you focusing on something well-known, or have you discovered a different company this week?
Jason Moser: I appreciate dividends, and following JPMorgan is tough given their stature. This week, I’ve found a new company to discuss: Semrush Holdings (Ticker: SEMR), which operates in digital marketing. They help clients identify and connect with their target audiences through various tools and a subscription-based SaaS model. The two founders control around 90% of voting power through a dual-class system and own approximately 50% of shares. As of the end of 2023, Semrush boasted over one million free users and around 108,000 paying customers, a significant increase from 803,000 and 95,000 in the previous year. The company is profitable and maintains healthy cash flow, making it an intriguing stock to explore further.
Dylan Lewis: Any questions about Semrush, Ticker SEMR, Rick?
Rick Engdahl: Just a quick question about SEO. With the rise of AI, does SEO still hold importance?
Jason Moser: That’s a valid question and an ongoing discussion in the industry.
Dylan Lewis: It sounds like there might be some challenges ahead. Rick, which stock will you keep an eye on this week?
Rick Engdahl: I prefer smaller companies, but I’m going to go with JPMorgan.
Dylan Lewis: It will be a household name eventually. Jason, Matt, thank you for sharing your stock picks. Rick, we appreciate your insights. That wraps up this week’s Motley Fool Money Radio show. The show was mixed by Rick Engdahl. I’m Dylan Lewis, and I appreciate your listening. See you next time.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook, is a member of The Motley Fool’s board of directors. Dylan Lewis has positions in Semrush. Jason Moser has positions in Amazon, Apple, PayPal, Prologis, Starbucks, and Walt Disney. Matthew Argersinger has positions in Amazon, Netflix, PayPal, Prologis, Roku, Starbucks, Uber Technologies, and Walt Disney, and has short options on Prologis. Rick Engdahl has positions in ASML, Amazon, Apple, Meta Platforms, Netflix, PayPal, Roku, Starbucks, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool recommends ASML, Amazon, Apple, JPMorgan Chase, Meta Platforms, Netflix, PayPal, Prologis, Roku, Starbucks, Taiwan Semiconductor Manufacturing, Uber Technologies, and Walt Disney. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
