AI's Cash Flow Bomb and Earnings Analysis - Coca-Cola, McDonalds, Shopify, Cisco, Robinhood & More

Welcome everybody to our latest Earnings Watch. We got a big lineup today. We've also got some interesting things to share around AI as usual. We've completed some really interesting work this week, and what we're seeing is that the AI race might be over. In fact, some of the big spenders, we sort of prefaced this back in November in our first AI Winners and Losers report that, hey, it's going to be tough for some of these companies to stay in the race. And then what happened? The companies with the most money said, hey, you know what, we're going to spend even more. And then what happened? Some of the weak sisters, the weak players, the less cash flow companies, Started to see their stocks tank because the debt investors like, oh, I don't know if I can keep funding this. This doesn't look so good. We've seen that times 2 or times 5, times 10 based on the full fiscal year 2025 results. Free cash flow went big time negative. Meanwhile, CNBC saying it positive. You know what people are missing? Off-balance sheet debt. Early next week, we're going to be publishing an update on our AI winners and losers. We're going to talk about those companies that we think are about to fall out of the race. Or seriously dilute shareholders because they're out of money. And I'm not just talking about earnings, I'm talking about all the debt they can take on, and I'm talking about the cash on balance sheet. Now, there are some companies that can afford to stay in the race for a long time at their current spending rates. There are some that are about to fall out within the next year or less. And so I think that's a pretty big innovation. And I think the thing to point out here is that we're pretty well known across the industry. We've got live-traded indices, et cetera, based on core earnings. We also do another metric extremely well, free cash flow. And our free cash flow number is different from what you're going to see from other firms in the media because we are looking off balance sheet. And when we do, we're finding like over $450 billion of off-balance sheet debt that's making people's cash flow look a lot better. When you adjust for that off-balance sheet debt, cash flows are in real trouble. And that means some of these firms are going to be falling out of the race. Look for that early next week. Again, free cash flow is a precursor of Earnings. Before earnings hit the tank, free cash flow goes down. And what we're seeing is cash flow bad, like in the hundreds of billions of dollars bad. We're seeing debt levels up for some companies 1,000%. So that's not sustainable. It's the same situation with the US economy, right? We're overspending. We've borrowed to the max. Interest rates are going up. Our currency's going down. Gold is through the roof. People are clearly hedging away. It can't go on forever. And right now, I would also add that I don't see any salvation from a ton of cash flow going to AI. Where's all the spending? First of all, it's got to be enough spending. It's got to be a couple hundred billion dollars, assuming that you need at least a 10% return on the spending. You got $2 trillion in the last couple of years. So that's the amount of capital that's gone in. So to get a decent return on that 10%, you're talking $200 billion needs to be spent. These are rough numbers, folks, and it could be higher. So it's gonna be $650 billion this year alone. And we've been spending on AI for the last couple years. So I think we're probably up over $2 trillion in spending, at least for these big companies, right? Like for the world, could be even more. So in aggregate, we're looking at $200 billion of incremental spending that's gotta go to AI. To earn a decent return on that. That's a lot. And I think that right now there's no path to that. We've spent all this money on infrastructure and we're getting the same results, maybe a little faster. Don't get me wrong, AI's doing a great job of taking out lower-level jobs. It's like with us, we used AI to redesign our websites and our offerings for so much cheaper. Than buying a firm. So much cheaper. We created the new products. We created their names. We created the copy. I'll just ask ChatGPT and Gemini. Easy. Getting all kinds of answers to stuff. It's whoa. This is great. We don't have to go to some marketing firm who's gonna minimum charge us 10 or 20 grand to answer those kinds of questions, which is what we were trapped with in the past before. Yes, we can get it to do those things, but that just means I'm not spending the money. And by the way, that was all free. On Gemini and ChatGPT. Does it do enough to justify $200 billion minimum, I think, in incremental spend? I think until these big companies realize that it's not just about building a bigger, faster machine, it's about the fuel. What data are they putting into this? How are they going to endow these machines with enough subject matter expertise to do something besides what a mid-level marketing or analysts can do. Yeah, you get an infinite amount of them effectively with ChatGPT or with the, you know, AI tools, but they're not gonna do much above that, which means you're not going to get the kind of revenue or spend to justify all the CapEx. And I think that's the second stage of the AI race. The AI race might be over because there's only a couple companies left. There's nobody to run with them because Some companies have to fall out. But the finish line is a long way away. The data centers don't get us across the finish line. What really gets us across the finish line is the datasets that power the AI to give you really sophisticated answers. Show me an AI that you would trust with a sophisticated answer. And I'm not talking about, oh, tell me what I should name these new products on my website based on what kind of product I have. Or which restaurant I should go to based on these tastes, or create a summary of this document and put it into a slide deck. It's awesome at that. But real subject matter expertise, like which companies are going to miss earnings next quarter? How would you diagnose all these symptoms? When it's a complicated disease, right? Like better than— we've had WebMD for a long time. It does pretty decent. That stuff's okay. But AI is not doing anything better. You still need human experts. And there are precious few human experts around who can actually put the data together to endow the machine to do what they do. Don't expect these experts to be rushing to the exits to quit their jobs and give it all over to AI. That's why these datasets don't exist. It's part of why. They're complicated. They're difficult. All right, folks, let's get into the earnings watch. Got enough of the AI rant? Let me know if you guys like that or not. I can cut it out. We could just do earnings watches. All right, let's create a new portfolio. By the way, great feedback in the chat up to this point on start times. Give me some feedback on the AI rant too. You guys want to just get down and talk about stocks? We like a little AI rant every now and then. All right, let's go with earnings watch today. I believe I got these tickers. Boom. Let's create a portfolio. All right, let's start with the largest market cap stocks first. That's always fun. What happened with Coke this week? Decent earnings, decent stock price performance. How it's holding up? Sticking with this pricing plan. Disappointing outlook is Coke Zero water. Interesting market here, right? Here's when earnings come out and here's what still happens. So there's a lot to be figured out here. And we see this with our core earnings work. In fact, there's a 2-week gap between when the filings come out and when earnings come out and when people actually read the Ks and get the answers. Right. And so I think here you're seeing immediate reaction, and then this is what happens later, right? So that means with Coke— look, there's not a lot of sexy stories here on this list. We got one maybe, but this is a neutral-rated stock. Just blah. Not a lot of risk on the upside, not a lot of risk on the downside. The market's efficient. The majority of stocks will be neutral. That should be the case. We see the large majority is neutral and unattractive, and very few get very unattractive, and very few get very attractive. That's how it should be. Wall Street rates like 57% of stocks buy because Wall Street is tainted. They're trying to sell stock. We rate less than 4% of our stocks very attractive or strong buy. By the way, less than 4% of stocks are responsible for 100% of value creation in the market since 1927. I never really designed the rating system and honestly didn't even know that it was under 4% of stocks got a very attractive rating for— till a few months ago when we started putting that data together for one of our promotions. So works out well. All right, Cisco. I think the story here was that these guys Came out with some pretty good numbers, but wasn't good enough. Earnings failed to wow because the stock was already expensive. Yeah, look folks, let's see what it was. What's the five-day performance here? Overall down. So this is a good example. Good company, bad stock. Looked. I think this was on our focus list for a while, and the stock went up so much that we were like, all right, it's risky, and. That's what we're seeing here. You didn't wow the street enough to move the needle because guess what? You got a lot of really good performance priced in. Applied Materials, probably a similar situation. We got a strong miss here and we're going to get the next Q here soon. So what did Applied Materials— March 12th. I would imagine their Q would be coming a lot sooner if they reported this week. Maybe last year they reported early, earlier than usual, and so we'll probably get the Q. That's what we would have expected based on last year's reporting schedule. We'll probably still get it way sooner than that March 12th. Up 12%. What happened here? Jumps after earnings, trounces expectations with big quarterly beat. So good news on AMAT. Had a great week. Looks like they— we were wrong on the strong miss. Uh, and it's expensive, but I guess they beat by enough to please the market. That's a surprising one for us. This is an expensive, super expensive stock, as you can see here. Good company, the market seems to like it. I don't really understand how the market is working sometimes on some of these stocks. Obviously they've been super expensive for a while, but you know, is what it is. McDonald's, another focus list stock that got too expensive. Good company, expensive stock. How'd they do this week? Nothing much. Beat estimates, uh, chain's value push pays off. One of the reasons we put McDonald's on our focus list a long time ago is because these guys just execute. You take a look at their return on invested capital, just steady. And you go over a longer period of time, steady and upward, slightly upward, moving to the right. Steady Eddie. And with their competitors, it's like this. Typically goes down when they run a bunch of promotions and try to take market share from McDonald's. And then when they let go of the promotion, ROIC comes back up and they lose market share. They just keep coming at McDonald's, but they can't get across the moat. They can't climb the wall. They keep trying. And meanwhile, McDonald's just keeps grinding out higher and higher return on invested capital. Great business. We love it. I love seeing shares go down and they buy back stock. It's pretty good business, but it's expensive. It's expensive. And we don't expect to see a lot of return from that big run here recently too. I think the market, a lot of institutional talk around shifting out of the risky tech, which has had a great run into more consumer cyclical type businesses, great businesses. I think honestly this big AI shakeup we're seeing now is driving people back to what they know they can trust, which is cash flow. And I think that's why we're seeing a lot of these AI stocks or software stocks, some of which are profitable, but their valuations are way too much. You'd rather be in a stock like McDonald's where you're getting a much better free cash flow, right? You got a 3%, and that's after the run-up, right? A lot of these software stocks, your free cash flow numbers are negative or the free cash flow yield's super low. It's just more risk. And their businesses are under threat. As I made a post here early in the week, I don't think that a lot of these software businesses are going out of business. They're still going to be around, the good ones. But it's for sure true that some businesses, like the pure data providers, let's say Morningstar, FactSet, S&P, those guys have no moat right now. They've been selling commodity datasets. at exorbitant prices. And I know I talk to institutions all the time. You know what they tell me? Help me get out of this contract with LSEG. They're killing me. The price is going up and now they're charging me for multiple uses, whereas before it was a one-size-fits-all for all the different use cases at our firm. And now they're like, no, that's another one, that's another one at a higher price. Why are they price gouging? Because I think they know the end is near. It's time for a new global fundamental database based on better data that gives people the truth about earnings and not just the same old slop that everyone else is pushing around. Disruption time is close. All right, what do we got next here? Arista Networks. Good company, bad stock. See what I mean about like really expensive? Good week, 29% surge in revenue. Nice beat, good week. Look folks, nothing's going to stop a stock from going up if you get a good beat. I mean, people still love that. But you want to see a stock that has a beat that can really get you excited, it's one that's already cheap. That's what we like. This is a long idea stock, right? We want to look up— we had Crocs in here. Switch over to the rating system. Focus List long. Strong beat. There it goes. About to get a new 10-K. Yeah, that's what you want. All right, let's go. This is our professional membership. It's got a few extra buttons because I get the Cadillac version of the site. But this is just what you're going to get on a professional membership. This ability to track unlimited number of companies and as many portfolios as you want, up to 50. We've never seen people use more than, I don't know, 5 or 10, but you get 50. And you can screen on equity rating, gap earnings distortion score, credit rating. Super cool stuff here. And of course, track all these stocks and get alerts when things change. All right, we're into Shopify. Oh man, I want to do a reverse DCF on Shopify. We don't really have time. Good company, bad stock, super expensive. I'm— I think this is a pretty probably big improvement. Got a new 10-K. Brand new. So this is looking good. I think you're seeing economic earnings going up, return on capital making a real rise here. They're doing well. I just think this is a commoditized business. I just think the valuation is absurd. And I think when we've done the work in the reports here, I think you'll see some of the stuff if you're not professional. But if you're professional, you can check all these guys out and you'll see just how risky and absurd the expectations Required to justify the stock price are cash flow expectations, like absurd amounts of market share and GMV gross merchandise volume. It's got to be like I think it's three times what Amazon does or something to justify the price. It's okay, not happening. And then free cash flow. What's it been? Okay, really low. That's why we're seeing the yields of less than one percent over time. Yeah, this is a business that's just not as good as it looks. It's decent quality of earnings. That's what we're going to show. But when this is also a 0 or a negative, these greens need to be questioned. The sustainability of those green scores need to be questioned. So Shopify, how we do? Slumps on earnings. Miss software worries or why? Yeah, I don't know. Yeah, the Shopify service selling stuff on the web. Not seeing a big moat there. I would expect to see more downside on this one. Focusless short. Let's take a look. What's Shopify year to date? Yeah. Okay. Yeah. I expect more of this despite all that. We're still showing You can see here, and we think the next earnings is going to be a— going to be a beat. So you might see a little pop from that. Looks like they got some more unusual expenses. Earnings were a little understated this time. But again, when the free cash flow is not as good as the quality of earnings, I think that's a bad sign. It's a bad sign. And these earnings distortion scores are very short-term, like they're going to beat that consensus number or not. These are overstated. So it's not really speaking to the underlying value or long-term sustainability profits for the business. It's a short-term indicator for our shorter-term-oriented folks. Budweiser. Yeah, look, this guy is attractive, right? Decent company, pretty cheap stock. What happened for our buddy Budweiser today? Good old American Bud is not even American anymore. It's an ADR. So I don't know what that makes you think. All right, here we go. How did we do? Upbeat volumes decline. What, you know, is the weed and the psilocybin stuff going to take the place of alcohol? No, they're going to sell that stuff too. Weed infused, psilocybin infused. They'll get into that market. Look, these folks in the liquor and alcohol business, they're smart. They've made a lot of money. They can afford to buy their way into whatever the next big thing is with respect to what consumers are. And they are. So nice earnings beat, even though there's a revenue miss. Stock's looking great year to date. Yeah, that's where the money's going, folks. It's going to companies like this as opposed to companies like Shopify. Where would you put your money going to this market? All right. All this AI spend, the table I set for you for how AI is— I think the AI story is about to break. Maybe we don't call it anymore the AI race, the AI narrative. Because the spending, like Google, $180 billion. Can they afford that? Not for long. Can a lot of other companies afford a much lower spend? Not for long. Not at all, according to our analysis. When you take into account, if you assume that they can plow 100% of earnings into AI and 100% of their cash on hand can go to funding it, we're still looking at super short timeframes for how long they can keep that up. And by the way, we haven't even started to pay for the data. So stocks like Budweiser look good. Oh, S&P Global. This is one of those stocks, legacy data providers. They sell fundamental data. They sell corporate actions data. They sell kinds of data that's been out there for a long time. You get startup firms, a firm like a friend of mine runs via Nexus. They got all that same data for way cheaper. And you pay by the drink. These guys make you pay like for the all-you-can-eat. On all kinds of stuff. They'll put a lot of other products in there to make it feel like it's a lower price per product, but you don't use much of them. These businesses are in trouble. They're in trouble. And the stock, you know, you can see it. These guys are down year to date. Yeah, 22%. That's a lot, folks. This is a business that AI really does threaten. Everybody can get this CompuStat kind of data. Everybody can get Capital IQ level data pretty easily. You can scrape it and get close. And by the way, these guys aren't trying to be accurate. I know because I've been competing against them for years. They're not trying to be as accurate as we are. They're not trying to get the footnotes. They just got to get vaguely right. They tell me their goal is 80% accuracy. That's the goal. What do you think they hit? 50, 60? They hit 30. And guess what? Nobody knows because who checks? You want to type in a ticker and get an answer. You don't see me going, oh, I wonder if Google has the stock price right for us. No, no, we're just using it. That's what everybody wants. So they get away with low-level quality. And that just means that they've had such high margins, they haven't had to innovate for a long time. And this is a business that I think is neutral. That's a good rating for these guys because I think they've been able to price gouge. And so things have looked pretty good in the recent past. I don't think that's the case going forward. Traditionally great cash-flowing, profitable businesses, not going to last. What happened with BP? BP had a hard week cutting back some stock buybacks. Year to date, pretty flat. But this week, down a fair amount, up and down. Cost cutting as profits slide. What are we seeing? So it's a neutral rating. We've liked this stock for a while. It's an acquisition target, so it's suspended rating. Yeah, let's see. We should be getting the new K or a 20-F foreign filing any day now. Shares going down because they used to buy back a lot of shares. Return on capital on the slide. Margins look like they're a bit on the slide. Yeah, we're bullish on energy though. Demand is there. These guys have great distribution. Love to see this get a little bit better. Clearly, they've got some cost-cutting work to do. And let's see, suspends share buybacks, results, profit slide. We had it as a beat here. Spotify. Oof, gosh, this one's fun to talk about. Great company. You know what it means when you see a dot and a— or a star and a dash? Infinite return on capital. Super profitable. Is that sustainable? I doubt it. But you can see the valuation here. Super expensive. Like the market share they're going to have to own and the margins they're going to have to continue to see, we think it's impossible. And I've done the reverse DCF on this before. In fact, maybe we look that up here. Let's go reverse DCF and Spotify. I know for sure I can find the reverse DCF models here. That's just that you have to be a member of the community. Let's see. Here it is. Bam! Shocking truth about Spotify's valuation. I'll put that in the chat. It's in our community. It's free to join. But yeah, this one is really interesting and it shows it justifies $622 a share. Where's the stock now? $445. Okay, well, it's come back a little bit. Can't say I'm surprised. It's got to grow revenue by 27.5% compounded annually. While seeing its return on capital improve to 2,000%. And really what it would do is it would put their revenue versus where— this is back when we did this report. They'd be the 3rd largest revenue company 15 years from now. They'd have to be at $560 billion, which would be ranked number 3 in the S&P right now. That was what was back then. So that's, I think that's cool benchmarking. Cool benchmarking. All right. Robinhood. I love this stock and I love to hate it, right? Because I think they profit on, right, the free trading. They profit on trading your— selling off your trading intentions. And I'm not a huge fan of that. Look, good company, bad stock. They've done— they make a lot of money on Bitcoin. A lot of money on Bitcoin. How much longer is that going to last? I don't know. What do we see with crypto today? It's having a good day, but we're at $68,000, folks. It's a pretty big drawdown in 6 months. You can see there Bitcoin, 6 months, pretty bad. 1 year. Yeah, we're lower than we were. That's probably going to mean Robinhood is going to struggle a little bit. Maybe not. Down 10% for the week, year to date down 32%. I think the bloom is coming off the rose for a lot of these sort of popular stocks because their valuations are writing checks that their cash flows can't cash, or that their earnings can't cash, that the business can't cash. And you're seeing really expensive valuation here. And so it's just risky. Shares slide after earnings. Crypto winter hits Robinhood sales. Yeah, we actually, we predicted a miss here. We're going to get a K here probably any day now. Because we've already gotten the Q, but came off the zombie stock list, but still very dangerous because you just don't— economic earnings, what are barely— they're positive, but not by much. Return on capital just breaking above the cost of capital. I wonder if that sticks with the crypto stuff going down. Probably, because look at the trailing 12 months, it's done really well. Great business. They gotta be able to continue to attract clients. All right, folks, any questions I can answer before we end this thing? Any requests? Okay. Thanks very much. I believe we got one more of these next week and then we are close to being done with earnings. Either way, we'll be here through the duration. Thanks for being with me. Have a great weekend.