BoC Cuts Rates Amid Tariff Uncertainty and Big Tech Reacts to DeepSeek

[00:00:01] This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger Welcome back to The Canadian Investor Podcast. I am back with Dan Kent for news and earnings. You are listening to this on Monday. It's not our usual release date because we are recording this a bit in advance on Friday, January 31st.

[00:00:30] But I think our timing is quite good because there was a lot to talk about this week. A lot of stuff happened, whether it's DeepSeek, the fallout with Big Tech reporting, what they had to say about that. The Bank of Canada cutting rates by 25 basis points. The Fed also had its rate announcement this week as well. So a lot to talk about. There's also some Canadian companies reporting. We'll be talking about CP. And I think you'll also compare it a little bit to Canadian National Rail.

[00:00:59] So I think our timing is pretty good because it was a jam-packed week and a lot of stuff to talk about. It'll be a fun episode. We'll probably take a full hour. Oh yeah, for sure. Especially, it's all kind of hit us. You know, there wasn't much last week outside of the DeepSeek news, but now there's, they're pouring in.

[00:01:17] And Big Tech is particularly interesting just, you know, just on the comments of that. I mean, I don't know. Microsoft was kind of a little bit, they didn't really mention all that much, but I guess we'll get to that when we speak on them. But yeah, Meta did. Meta did talk about it. Not upfront. They had to answer some questions, but they definitely talk about it.

[00:01:40] So it'll be interesting to get your opinion on that too. I listened to the Zuck on the call to see what he had to say. But let's get started with some more Canadian content here with the Bank of Canada cutting rates. The cut of 25 basis point brings the overnight rate to 3%. It's clear that the BOC isn't sure what to do when it comes to potential tariff. And if you listen to a press conference, it's clear that they have no idea what they'll be doing.

[00:02:09] I'm not saying that they're incompetent or anything like that. It's just there's so much uncertainty. If you've listened to Trump during the campaign and since he was elected, he's changed his tune on the percentage of tariffs that could be applied to Canada and Mexico on the timing of it. It's changed quite a bit. It used to be that he was saying the first day of inauguration, they would be imposed and February 1st. And you were saying that now there's mentioned that could be March 1st

[00:02:38] and oil and gas could or could not be exempt. So we see that there's a lot of uncertainty around that and being in TIF's shoes or the Bank of Canada's, I mean, I can see how it would be difficult for them to try and figure out what to do. So they'll have to be more reactionary, lack of better words. I don't think there is any other way because the tariffs could have a big impact.

[00:03:04] But they also said that they have limited ability to soften the blow. And I'll talk a little bit more about that if there's anything you wanted to add before I continue. No, I mean, I guess the one thing I'll say is I've gotten a lot of, I've gotten a lot of questions, particularly people like asking, you know, what should I do? And it's just, it's impossible to tell. Like it's impossible to tell because it's impossible to know what he's going to do. I mean, there's a few. I'm not even sure he knows himself.

[00:03:29] Yeah. I mean, there seems to be one industry in particular that, I mean, I would guess is almost guaranteed to get hit and that would, that would be lumber. And the only reason I say this is because he's mentioned it a few times, like we don't need Canadian lumber, things like that. So, but I mean, who knows, who knows what the percent will be the day he imposes them. I mean, like, like I said, it's changed to March 1st now when at first it was, you know, day one, it's going to happen. And everybody was freaking out.

[00:03:56] Exactly. And for the Bank of Canada, what they've said is they stated that tariffs could indeed be inflationary, but I could also put some downward pressure on the Canadian economy, which would be deflationary. So they're kind of saying they're stuck between a rock and a hard place without saying that out loud. In other words, they said they have to strike a balance between not being too restrictive with rates in order to stimulate the economy,

[00:04:24] but restrictive enough that they also keep a lid on inflation. So again, it's not an easy thing to do when you have that big tariff threat from the U.S. looming over your head. You wouldn't rule out quantitative easing and quantitative easing for those not familiar with it. It's referred to QE. And for lack of better words, essentially where the Bank of Canada would print money to buy assets typically will be government bonds,

[00:04:53] but there are central banks that have bought other things than just government bonds. And what they'll do is they'll print money, they'll buy those bonds, which will push the price upwards of the bonds, but the yields down further down the curve. So when the Bank of Canada sets the overnight rate, that's just the short end of the rate. So it's typically things if you have a variable rate mortgage or variable debt will be impacted by that.

[00:05:18] But if you have fixed debt that's longer dated, it will usually be impacted by the bond market and the rates that are on the Canada five-year bond, for example. So if they start doing QE, they could potentially push down the interest rate on the longer end, which could be stimulative, especially if the federal government does some stimulus to support industries that could be affected by tariffs.

[00:05:43] Because if they start spending more and more money, which they are already spending quite a bit, at some point there's going to be a lack of buyer on the bond market for Canadian bonds. And if there's a lack of buyer, then the buyer of last resort becomes the central bank, the Bank of Canada. Yeah, I was wondering, like, I didn't actually get a chance to listen to this, but did they mention anything about, like, the relief package that was rumored?

[00:06:08] No, I think there were some questions, but they always try to stay away from anything political. And they didn't say that they would do QE. They just said that it is something that they could consider, but they had plenty of room to maneuver with the policy rate. But they also, when they were asked about QE, they also did not rule it out. So it's basically a non-answer, which if you understand political talk, it means it's not off the table.

[00:06:37] Like, that's essentially what it means. Pretty much. Yeah, exactly. And TIF was clear during the press conference that they can't offset the pain from tariffs, but they can help the economy adjust to that. So he was doing his usual gestures with, like, you know, going down for people watching on doing CCIs. They'll see, but he does talk with his hands quite a bit. So essentially, they're trying to soften the blow of potential tariffs if they do happen.

[00:07:06] And in the end, the main takeaway here, I think, is they'll focus on the data. If they see upwards pressure on inflation, they'll have to try and combat that. And if they see downward pressure on inflation and the economy is really slowing down, they'll try to stimulate the economy. At the end of the day, you have reporters still asking what they'll do with interest rates. I mean, they can't answer the question because they don't know themselves. So it's just interesting to see those type of questions still coming up.

[00:07:34] And the lack of understanding of some of these reporters that get credentialed, it just baffles me. Because why would you ask this question when it's clear that they don't know themselves? Like, they won't tell you what they'll do. They don't even know. Yeah, they kind of try to bait answers out of them. I mean, it's kind of the same with any interview. They kind of try and pick at you and try to get an answer out of you,

[00:07:59] I mean, I've seen some kind of, I don't know if they're good sources or not, but they kind of said that the policy rate in Canada could go down to 2%. You know, I believe it was like midway into 2026. I mean, that would be, that'd be pretty low, especially when you consider the fact and you'll talk about it now is the Fed isn't moving. Like the Fed is not, they're just not reducing rates. So yes, the Fed ended up standing path for interest rates.

[00:08:27] So they did not cut rates like we had mentioned at the beginning of the episode. I did not listen to the full press conference because of course it was a jam-packed week for us. But I read some of the summaries that would happen. And what was interesting afterwards was really what Trump said, because he was not happy that the Fed left the rates unchanged, since he had said the Fed should be cutting rates in the last couple of weeks. I don't remember exactly when.

[00:08:55] And Trump can be quite vocal. So a lot of people were surprised that the Fed didn't budge. But again, not that surprising because they're focusing on the data. And I think they're still unsure where exactly the data is going in terms of inflation, but also the economy over there. And they always have that dual mandate of getting inflation in check within their target around 2%, but also ensuring maximum employment.

[00:09:21] And what is really interesting is if you start looking at the CME Fed watch tool, really, really good tool for those interested in seeing what the market is pricing in. And what you're seeing right now is that the market is actually pricing in two cuts for this year for 2025. So the highest probable outcome is two rate cuts at 87%. And then the next one on the list would be one rate cut at around 13%.

[00:09:50] So you're looking at the US and I think there's a high probability that the gap, the interest rate differential between Canada and the US will stay quite high. Because even if the Bank of Canada stood path for the rest of the year at 3%, you'd still be looking at our overnight rate 75 basis point lower than the US. And a lot of people would say, like you mentioned a bit earlier, is that there's a good chance that the Bank of Canada will continue cutting.

[00:10:19] And of course, the Fed could cut aggressively as well and it could narrow down. But if we're looking at things that it is right now, I think it's fair to put a decent probability that the interest rate differential between the two countries will at least remain as wide as it currently is, but could potentially get even bigger. Yeah, I think the Bank of Canada is probably going to have to... Like the economy is kind of bad enough already.

[00:10:45] And then we haven't even factored in, you know, the potential impacts of tariffs either. So I would imagine the Bank of Canada is going to go lower. I don't know if you watched that, the Trump interview where they ask him about the interest rates and he's like... No, I did not see it. He's like, I'm going to get interest rates down. And the reporter was like, do you think they'll listen to you? He's like, I'm going to tell them to get interest rates down. And the reporter was like, you think they'll listen to you? And he just paused for two or three seconds. He's like, oh yeah.

[00:11:14] Yeah, it was hilarious because they're supposed to be independent. They're supposed to be independent. Like they're... Yeah, like the Bank of Canada, the Fed, they're not really supposed to... They're supposed to be an independent entity. I mean, I imagine there's a lot of pressure on them, but they're not supposed to, you know, kind of cut rates or raise rates based on... Yeah, it's... They're not independent. No. That's BS. I'll be straight up. They're supposed to be. But even in Canada, right?

[00:11:43] Like they will oftentimes say they don't want to comment on government spending. But every now and then they're like, yeah, it's not... They'll kind of mention things where they're taking jabs at the government for overspending, for creating looser regulations when it comes to mortgages. Like, yes, they say they're not political, but then off... Like they're not afraid at saying some things that can definitely be interpreted political in nature.

[00:12:13] And even sometimes with their action, I know there's a lot of people in the US that said the Fed was trying to get Biden reelected. That's why they were cutting rates pretty relatively aggressively, not as much as the Bank of Canada in the back half of last year. Whether that's true or not, we'll see. But the fact that it's independent... I mean, it's more independent than I think in some countries, but it's not fully independent. I think that's completely... That's fantasy land, in my opinion, at least.

[00:12:42] Well, especially you see a lot of Canadian politicians, when rates go down, they kind of comment on how they kind of got their rates lower, when in reality, yeah, they're supposed to be independent, but they're not. No, exactly. So, no, that's about it for the Fed. So I'll let you continue while I'm trying to arrange my desk that will not go down anymore. Yeah, so I initially did Canadian Pacific, but then CN Rail reported.

[00:13:11] So I kind of like bundled them in together and kind of like put numbers side by side, and I'll go over both of them. So CP Rail reported revenue of $3.87 billion and earnings of $1.29. So those earnings were over and above while the revenue was kind of right in line with what was expected. CN Rail, on the other hand, reported revenue of $4.35 billion and earnings of $1.82. So both of those actually came below analyst estimates.

[00:13:37] And with CP Rail, over the last year or so, there's been a lot of adjusted results and combined results because of that Kansas City Southern acquisition they made. But now it's kind of more, you know, that company's integrated now. So we can kind of look at year over year numbers on a stable basis, I would say. Revenue grew by 3% and earnings by 9%.

[00:14:02] So for CN Rail, on the other hand, revenue only grew by 1% and earnings actually declined by 2%. And the interesting thing here is CN Rail is, I guess it's kind of more shareholder friendly, I guess over the last while, like whether it be to their detriment or to their, you know, benefit. They're a big, big buyback. They do huge buybacks and they do a lot of dividend raises. Whereas CP hasn't really done that over the last while.

[00:14:31] I mean, they're not really that consistent dividend grower that CN Rail is. But the thing here is, is most of CN Rail's earnings growth over the last while, or actually in this case, the softer earnings decline is because of share buybacks. It's ultimately, you know, increasing that earnings per share number. Whereas CP Rail, they haven't really bought back any shares. They haven't really raised dividend. I mean, it's allocating a lot of capital back to debt.

[00:15:01] So you see that- Which is a good move. Yeah. It's definitely the more prudent move. And I mean, for me, the dividend growth is kind of irrelevant to the point, especially when the debt levels remain high. But they're allocating all that back. They're not buying back shares and they're still increasing earnings by 9%, which is, like, I think this quarter was a big separator as to the better performing railway. Just CP Rail.

[00:15:29] I mean, it's hard to defend CN in this quarter. Like, CP Rail just had, I mean, a much better quarter overall. I know you got a chart here of total revenue for what? Yeah. Yeah. That's for CP and I can put it on as well for CN Rail here. Yeah. Yeah. If we look to actual efficiency, so we look to CP. So the weight per car increased by 4%.

[00:15:58] The length per car increased by 4%. And their fuel efficiency actually increased by 1%. So the cars are heavier. The cars are longer, but they're getting more fuel efficiency. And for CN Rail, there was actually small declines across the board in all of these. So the weight per car went down, the length went down, and the fuel efficiency went down. It's nothing major. They were very, you know, very small single digit increases.

[00:16:22] When we looked at car loads, they dropped 4% at CP Rail versus around 4.6 at CN Rail. So for the most part, both of these companies were impacted in things like coal, potash, fertilizer, metals, intermodal. Intermodal, I think, would be more heavily dependent on like consumer activity. And this is just simply a result of a slower economy.

[00:16:48] Not really much either railway can do about any of this at this point. But the one thing is, despite lower volumes, CP offset these declines with a 7% increase in revenue per car load, while CN Rails was effectively flat. So in CP's case, this is definitely, you know, it's kind of helping to shore up revenue during this economic downturn. And the thing is, revenue per car load is unlikely to drop in the future.

[00:17:17] It could maybe flatline for a bit. But I mean, these railways, they're effectively, they have such dominant moats. I mean, they can effectively charge what they want to. So if you think about it, when the economy does pick back up again and those car loads go up, it's likely, you know, these, you know, increase in the revenue that they're charging per car load will be effectively realized in stronger growth when things return.

[00:17:40] So CP is actually forecasting 12 to 18% earnings per share growth next year. CN Rail, on the other hand, issued, I believe it was 10 to 15% this year, but they expect, I believe by the end of 2026, they want a high single digit compound annual growth rate on earnings. So, I mean, it's clear that CP Rail is a lot more bullish, I guess you could say, on the future. Maybe that is because of the Kansas City Southern acquisition.

[00:18:09] I mean, there, you know, there's a lot of integrations there that are probably going to help the company moving forward. CP, again, as I mentioned at the start, they continue to prioritize debt reduction. So its leverage ratio went from 3. This would be, I mean, I would imagine I didn't actually look at the leverage, but it would be some sort of debt to adjusted EBITDA more than likely. So that went from 3.4x to 3.1x. CN Rail expects their leverage ratio to be maintained around 2.5x.

[00:18:35] But I mean, these, you can think that, you know, CP is a little bit higher leverage and they are right now. But prior to the acquisition, they were relatively similar debt structures. And I mean, once the debt is at manageable levels, CP will likely resume share buybacks and raise dividends to kind of, you know, get more, you know, shareholder returns. CN Rail guided to a mid single digit dividend raise in 2025. And they actually raised the dividend by 5%,

[00:19:04] which is actually their lowest dividend growth rate in a very long time. They're typically a bigger grower than this. But overall, I mean, to me, at least CP Rail is the clear standout here from a performance standpoint. And I actually ended up, I've owned CN Rail for a very long time. I like a very long time. And I actually ended up selling it today. And I purchased CP just because I think they, a bit better performer right now.

[00:19:32] And kind of a bit more, you know, in my eyes, a bit more with the acquisition, wider network, more growth prospects for the future. And just like more, they're more prudent, I would guess, with that debt reduction. Whereas CN is, you know, they're dumping a lot of money into share buybacks. Yeah. Which I mean- Which I don't love. You know my opinion on that. And I own CN Rail too. Yeah. I'm not really sure.

[00:19:58] I mean, their leverage ratio is kind of, you know, it's relatively in line where it's historically been. So maybe they just think that's a comfortable debt level where, you know, they'd be able to continue to buy back shares. But yeah, I just think at this point in time, this kind of quarter, and it is, it's again, it's one quarter. This was the biggest differentiator. I think like this is the widest. These railways typically work kind of, you know, lockstep. They report relatively consistent results. But I think this quarter was, there's a big differentiator here.

[00:20:28] And whether it continues or not, it's tough to tell. As I mentioned, it's one quarter. But CP was the winner for sure, I think. Yeah. And I'm showing here the full year results for Canadian National Railway. And I'll explain it for people so they get a visual. So I have the free cash flow that was generated by CN Rail for the full year. So the last year, 2024, and then 10 years prior to that. They have the common dividend paid and the repurchase of common stocks, the total amount that's been repurchased in dollar value.

[00:20:57] And what you've seen essentially since the new CEO came aboard and the whole attempt to buy CP fell through before, not CP, but Kansas City Southern fell through before. CP actually got the offer approved and everything went through regulators in the US. And this is what I don't like to see is that over the last three years, CN Rail has paid dividends and bought back shares much, much more than its free cash flow. Yeah.

[00:21:26] That's what I don't like. I understand that the leverage ratio may not be that high. It's historical norms. But my issue with it is if something happens, a black swan event, they're removing some of their flexibility. I just don't understand this idea of buying back shares. If you want to keep the dividend, sure, go for it as it is. It's more than covered by free cash flow. The dividend last year, the total amount paid was over 2 billion, slightly over.

[00:21:55] And the amount of free cash flow was slightly over 3 billion. So it's probably a payout ratio around 66%, which is completely fine for a staple business. But the idea that you should also be buying back shares, buy back shares to the amount that is covered by your free cash flow, that excess. But don't take on debt to buy back share, which is what they are doing and something that I do not love as a shareholder. And we've talked about it for quite some time.

[00:22:23] I've been looking at CP, same for you, potentially selling my shares in CNR or Canadian National Rail to buy CP because I just don't think this is prudent capital allocation. I think it should be better to pay down debt and then you have more flexibility down the line. And then if down the line you want to return more capital to shareholders because you've paid down debt and you can afford to, then by all means have at it. But I don't think this is a great strategy right now.

[00:22:53] Yeah. I mean, they're effectively like ramping up the buybacks in a big way in 2022 and 2023 when the economy is getting weaker. Yeah. Share buybacks or like I seem to remember last year. I can't remember actually what they reported in terms of earnings per share growth. But like when you worked out the numbers, it was it was effectively all due to those buybacks. Like there was really no growth there from an actual operational standpoint. I mean, you see like what would that be? 4.8 and 4.6.

[00:23:23] So they're talking what, like nine, almost nine and a half billion dollars in buybacks over the last while. Yeah. In buyback. Yeah. Yeah. And it's for 22 and 23 alone. And then you add in another close to 3 billion last year. I just don't think it's good management here. Good capital allocation. I like I don't understand companies that haven't learned from the last five years. I just don't understand.

[00:23:48] Like there's so many examples of companies that did massive buybacks from 2015 to 2020, early 2020 before the pandemic. And then they essentially were hamstrung because they did too many buybacks when they should have been shoring up their balance sheet in case of an adverse event. They didn't. And then they were in a really tough spot. Airlines come to mind when it comes to that. Yeah. Suncor was like the prime example of that.

[00:24:17] I mean, they were buying back a ton of shares. And then I mean, that's a little bit different situation because I don't think you'd ever see these rails get hit by an environment like that. Like Suncor is obviously exposed to oil, which is ridiculously volatile. And they hit pretty much a global lockdown. But that was a prime case. They were buying back a ton of shares. The pandemic hit and they pretty much had to cut the dividend, which probably would have been sustainable if that, you know, if they hadn't have done that so aggressively.

[00:24:46] But yeah, I don't know. I think CN Rail is a well-operated company, but I've just kind of liked what I'm seeing out of CP a little bit more over the last while. So I've ended up kind of I've mulled over doing that for this for like a year. And I finally just after this quarter, I kind of pulled the trigger. Yeah. For me, the only thing preventing me is the valuation still pretty steep. Yeah.

[00:25:11] And that's where I'm having a bit of an issue because even though there's more growth there, there's also probably some short term uncertainty with the North American economy. So that's where I was. I think that's the block for me. So if the valuation could come down a little bit, I'd probably pull the trigger. It's not a huge position. Canadian National Rail. So we'll have to see. We'll move on because we have quite a few other companies to talk about. But we'll start off with Big Tech.

[00:25:41] I mean, let's just start with the Zuckerberg. And yes, I said the Zucker or Zuckerberg, as I call him sometimes because of my French accent. And I'm fully embracing it right now. So they released their Q4 and full year earnings. I'll mostly look at their Q4 earnings just because I think that's the most relevant. You can look year over year. Revenues were up 21% to $48 billion. Advertising is still the bulk of revenues.

[00:26:11] So for those that are not familiar here with meta, advertising is 97% of the revenues. It's, I mean, it's all advertising. I know they have reality labs, but it's not a big portion at all. And I'm showing here, you can tell like the highest bar of the graphic is total revenues. And then next to it is advertising. And it's almost at the same level.

[00:26:35] So the most last year, for example, for the full year, they had $161 billion in revenue from advertising. And their total revenues was $164.5. So it gives people an idea that it's very, very reliant on advertising. Having said that, within that segment, Zuckerberg said that meta Ray-Ban glasses are a hit. So within the reality lab segment. And have you looked at those glasses? I've never even heard of that before.

[00:27:04] So I imagine there's some sort of VR or something? Yeah, it's kind of AR, like augmented reality. So it's, you know, they look good. Oh, does it like display stuff on the glasses? I think so. Yeah, I think you have like certain things. I think they integrate some AI. You can like, you see the little holes here on the glasses. You can actually like record stuff in high definition, take pictures. Like there's different functionalities.

[00:27:33] I don't think they're as advanced as like an Apple Vision Pro, which I will be talking about when I talk about Apple. Much cheaper. Much cheaper. Not as stupid looking. Yeah. Is probably the other thing.

[00:27:46] I mean, they look very close to Ray-Ban like regular glasses and the polarized version is $409 and this is Canadian dollars versus regular Ray-Ban glasses that are probably $200 to $300 depending on the model and whether they're polarized or not. So the price definitely makes a whole lot of sense. So I can see why these are much more attractive because they don't look as stupid as the other AR and VR stuff that's on the market.

[00:28:15] Yeah, they already have, you know, a lot of data on your Facebook and now you're going to slap the glasses on and pretty much give them insights into your whole life. I mean, the one thing about Meta is they're, I mean, even as a company, we've advertised on multiple platforms and Facebook is the only one that we've ever really, you know, generated positive, you know, ad spend from. Like they're, it's crazy how tailored their algorithm is.

[00:28:43] And I mean, I believe it's just all the data collection and I mean, putting these glasses on, it's just going to give them more, I would say. Yeah. And no, exactly. So I was, I never looked at them. I knew they had launched them, but I have to say, I'm pretty impressed with the design and everything. And I think if they, and again, I don't know the full extent of the functionality here, but it's definitely something I would potentially consider down the line if I want to get into that.

[00:29:11] But again, it's, you know, we'll have to see. I'm just not familiar enough with the product, but apparently they're doing well according to what he said on the call. And what's impressive is their family daily active people. So that's the metric. That's one of their KPIs that they use. So that one is up 5% to 3.35 billion family or FDAP, I guess that or DAP as they call it.

[00:29:37] And it's been steadily increasing, which is impressive for a company that's as mature as a meta. Yeah. Yeah. I mean, they already have, I can't even remember how many like active users do they have. It's like. Oh, it's in, I mean, they have half the world. Yeah, half the world. Yeah. It's crazy. More than half if you exclude China, because I think either they're not available in China or Chinese big tech as most of the market share there. So it's pretty impressive.

[00:30:07] That's for sure. Ad impressions increased 6%. The average price per ad was up 14%. Headcount was up 10% year over year. That is interesting because there was a lot of talk about efficiency in the last couple of years with Meta specifically. But he did mention Zuckerberg on the call that most of that account growth is going towards AI initiatives. CapEx almost doubled in Q4 versus last year.

[00:30:33] It reached 14.4 billion during the quarter, which is pretty wild. Net income was up 49% to 21 billion. Earnings per share was up 50% to $8.02. I had put a little typo in my notes here. Regarding AI, here's what Zuckerberg said, because that was one of the things I really wanted to know. So he expects that this is a year that a highly intelligent AI agent reaches more than 1 billion people.

[00:31:02] He expects Meta AI to be the leader in this space. He also believes that people will look for AI tools that are customizable to their needs and view of the world. He thinks that open source AI, like a llama, for example. So their AI model will be the leaders in AI model over a closed source like a chat GPT. They anticipate bringing on one gigawatt worth of data center capacity this year with another two in the coming years.

[00:31:32] They continue to develop and increase the use of their own in-house silicon or computer chips, but are still using some third-party chips. And why they're using their own in-house is they're making them more efficient for the tasks they want them to do. Without going into too much detail for people that are not as familiar with chips. So Apple, for example, those M1 chips that you see in the MacBooks, for example, they're all designed by Apple.

[00:31:59] And I believe they're all manufactured by Taiwan Semiconductors. Don't quote me on that, but that's my understanding. And the reason why companies and big tech are doing that is they're really making these chips, designing them to really fit the purpose that they want them to have. Versus back in the day, for example, the MacBook Pros, you had Intel chips inside of them. While they were not as efficient, they were more power hungry. Now I have a MacBook Pro. I have the M1 chip.

[00:32:29] I've had it for a couple of years. I mean, it's fantastic. Never gets hot. There is no fan. It's always super quick. The only times it's slow, it's because I haven't rebooted the laptop in like two months. So I just have to reboot it and it's fine afterwards. But it's very like for any kind of multitasking, video, audio editing, it's really fantastic. Don't try to play games on it because it will suck. But aside from that, it's really good.

[00:32:54] And then finishing on the AI topic, he was asked some questions about DeepSeek. He said that there's a bunch of things that they've learned about DeepSeek since it's been out. So clearly they've been studying it. They've been looking at it and they will be looking to be implementing some of those learnings. But they're also saying that there's some stuff that they're still trying to figure out. He also said that it was too early to say that DeepSeek would impact and the technology

[00:33:23] or the efficiency that they're bringing would have what kind of impact it would have around AI infrastructure and capital expenditure spending. So that was one of the big fears, right, for NVIDIA is that last thing I'm talking about here is that what DeepSeek came out with would essentially with big tech that's been spending billions and billions of dollars in acquiring these GPUs from NVIDIA, it would make them scale

[00:33:53] back those spending plans. So according to what he's saying, it's too early to make any conclusion. So it's coming from him. He was asked that question. That's probably the right approach to say. I think I would say he's not mentioning specifically NVIDIA. And I think what we talked about last week was very accurate that the impact could be that the demand stays pretty high for GPUs, but more competition comes in.

[00:34:21] And AMD starts gaining a bit more market share because companies are looking at more affordable option. They could also be scaling back a little bit. This could impact margins from NVIDIA. So it doesn't mean that NVIDIA will crater. It just means that it may not be growing as quickly as it is. The margins might start contracting a little bit. All these things, because the valuation was so high, could definitely impact NVIDIA in terms of the share price.

[00:34:51] And that's what we were saying. We don't know where it's going, but there's a lot of potential ripple effect from just that announcement and just the efficiency that was shown by DeepSeek, at least what we've seen so far. Yeah. The one thing, too, about all these comments, like if we think about it, we're only what, like one week into it being released? Not even. So I mean, obviously... More than that. I think it was on the 20th. So it's 10 days. Yeah. 10 days into the release. We're 10 days in.

[00:35:19] I mean, they're really not going to have a lot of answers just because it's so early. I mean, I imagine the one thing I would say that they know is that, you know, a lot of the... Just judging by the comments from Meta and Microsoft is it kind of is the real deal. Like there was a lot of stuff that maybe, you know, initially we thought, you know, could be fabricated or anything. I don't think that's the case anymore, but it's... I think where there's still some uncertainty is the cost it took him to develop.

[00:35:48] But again, I think, like you said, the efficiency achieved, I think it's been validated now that yes, it's for real. Yeah. So yes, there might be some other things that are up for debate and it's hard to trust because it's a Chinese company. But again, I think it's safe to say that some of it can be validated with a lot of certainty

[00:36:12] so far, at least what we've seen said by Meta, by Zuckerberg, by Satyen with Microsoft. So it'll be interesting. I mean, I think we'll keep learning about this probably like every week, every month, we'll learn some new stuff and some new developments regarding this. Yeah. And as you mentioned, it's interesting on the NVIDIA front because I mean, if it is cheaper, if you can do it cheaper, I mean, that brings way more competition into the space because,

[00:36:40] you know, you don't have to have the top end chips in order to, you know, your capital expenditures on very expensive GPUs can go down. I mean, I really don't know this industry very well. So, I mean, I, but yeah, I mean, for right now, I mean, it's just so uncertain. Like even, I don't think they're going to scale back spending plans at all. I mean, I know at least I'll go over Microsoft. They pretty much said they're not going to scale back plans at all either.

[00:37:09] So, I mean, it's too early. Well, tell us what they said. Yeah. Yeah. All right. Let's dig into Microsoft. So, Microsoft reported revenue 69.6 billion in earnings per share, $3.23. They both came in ahead of estimates, but the stock took it. It took a pretty big hit. What did it fall? It felt like almost 7% after it reported. And I think one of the main contributors to the dip would have been its cloud revenue. So, reported revenue was 40 billion, but street estimates had it around 41.2.

[00:37:38] So, this was one of the slower cloud growth rates the company has posted in the last few years. So, back in 2023, it reported year-over-year growth of around 20.7. I believe this quarter was 20.8. But outside of that, it's typically grown at a 22%, 23% year-over-year pace. So, I mean, maybe that's kind of what caused it to dip. But I mean, overall, their business seems to be growing at a pretty reasonable pace, not including valuations.

[00:38:07] I mean, I've always thought for Microsoft to be very expensive, which is one of the reasons I've never really owned it. But their 365 commercial products grew at 15% year-over-year. Consumer products, 365 consumer grew at 8% year-over-year. And its cloud platform Azure grew by 21%. I'm not even sure if I'm saying that right. I've never known if I've been saying Azure, Azure. Azure. Yeah, I think it's Azure. Yeah, I think it's Azure.

[00:38:34] Yeah, so to the main points on the quarter and probably what, again, most everybody is interested in right now is the developments in AI. So the company still does plan to spend over $80 billion next year. They mentioned a few things that we mentioned last week on the podcast. They stated that DeepSeek is definitely innovative. But they kind of counteracted this with the point that as the tech gets cheaper, more people can consume it, more businesses will use it.

[00:39:02] And as a result, more applications will be created, more demand will be, overall demand will be increased. And on that front, they said that their data centers are fungible. They're very flexible. And what I think they probably mean by this is they're easily adaptable to a wide variety of situations. Maybe downplaying the fact that they spent an enormous amount of money developing them and will continue to spend an enormous amount of money on AI capex.

[00:39:30] Yeah, it's an interesting point when you think about it because I don't disagree, but it still doesn't mean that the investment was a good investment. I think that's where it is. We'll have to see. And I don't disagree that more businesses would be probably interested if the technology becomes better and cheaper. And I think you can easily compare that to the internet. I know you were probably too young at the time, but I grew up, we had the internet pretty early in my household.

[00:39:58] I think I was like 9 or 10 years old in the mid-1990s. And I can't remember what the cost was, but it was dial-up. And it was super slow. And I remember when cable and DSL started happening, it was, I'd have to ask my parents, but I think it was still like 50, 60 bucks a month back then, which as much more would probably be. Yeah, exactly. It'd probably be 150 today.

[00:40:24] And you also had a maximum amount of data that you could use in a given month for your home internet. And for younger listeners, they may be surprised, but it was, yes, you didn't have, at the beginning, you did not have unlimited plan, even with broadband, so cable or DSL. And then obviously back then, a lot less people had internet. And over time, as it became cheaper and cheaper, you can get some pretty affordable internet deals.

[00:40:52] Even it might not be the fastest, but it'll be decent. It'll be decently fast. You'll be able to do most things, probably video calls will be unlimited as well. More and more people started adopting the technology. So I think that's what he's saying a little bit. And you can see it with just general population internet adoption. Oh yeah, for sure. I mean, I remember it. I was, I had to be probably six, six, seven years old.

[00:41:15] I think our first internet speed, I mean, I'm pretty sure it was like 16 kilobytes a second. Which I mean, in today's, like you're talking, I don't know, I think we have 100 or 200 megabytes internet now. So you're talking like fiber. Yeah. You're probably not high. Yeah. Monumentally slower than it is today. Which I mean, again, like we're still in the infancy of, you know, this whole AI development. So things are going to change.

[00:41:45] I mean, this isn't the first shakeup in the industry. I would almost guarantee. I mean, the other thing they mentioned is they're still limited in terms of being able to satisfy the demand for services because of capacity constraints. So they're going to continue spending, you know, a ton of money to, to build out the infrastructure. And they said they should be able to meet demand by the end of 2025.

[00:42:09] So I looked at the conference call transcript and there actually wasn't as much questions asked, I guess, on DeepSeq as I expected. But the gist I got from the conference call is that, as I mentioned, that DeepSeq in terms of power capability is as good as it, as it is rumored to be. And they've kind of said they'll, they'll need to adapt. The one interesting thing that I found, and it was actually Brayden that quote tweeted this.

[00:42:35] So yesterday, Microsoft, like OpenAI was like investigating DeepSeq to see if they stole, they stole their data. And then this morning, like Microsoft announced that DeepSeq is available on their platform. So, I mean, I don't know what changed in the, in the 24 hour period, but that's a pretty big accusation. And then, you know, within 24 hours, you got the, it available. I don't know. Yeah. I mean, at the end of the day, like I think OpenAI, like who cares at this point, right?

[00:43:03] Like you have, like they have closed, you know, it's not an open source, it's closed source. But at the end of the day, I mean, this stuff is easily, I mean, I'm not an expert in the field, but from what I've read, like it can be copied quite easily. And when you're looking at companies outside the US, I mean, at the end of the day, like you have no control over that. So you have to like expect that it's going to be plagiarized.

[00:43:26] I mean, the internet is, has a history of, you know, copy and plagiarism, you know, it goes back ever since the internet started. So for them to be saying that, it's like, okay, like, what are you going to do about it? Like they probably did. So what? Like it is, if you didn't think this was going to be a commodity, you're probably realizing it now. I think that's just what I get from it.

[00:43:51] Well, and it's kind of funny too, because as you know, a writer, I mean, a lot of these open AIs have taken, you know, stuff from writers to train the model too. I mean, I've done plenty of stuff on, on GPT where it actually like sites. It's my website for the result. So I'm getting money for that or what? No, definitely not. So, I mean, I don't, I don't feel bad for them.

[00:44:15] I mean, it's kind of, yeah, even if you go on Google, you know, they have those little AI overviews and they'll pretty much take what you've written, plaster it on the front page of Google. And then, you know, you don't get any, any sort of click throughs or any sort of, I mean, they cite you at the bottom. If you click read more and scroll halfway down the page. But yeah, I mean, it's, I'm really not surprised. I'm kind of surprised by the accusation. And then, you know, the next day there.

[00:44:42] But yeah, it's, but it was like Microsoft has struggled quite a bit over the last while. I mean, if you, if you look at it over the last year, they're only up like two or 3%. They, yeah, it's been mostly sideways. Yeah. Yeah. I looked at it recently and I have here, like, because you were talking earlier about slowing cloud. I mean, it's still growing quickly. It's just a deceleration in the growth. And it's been like quite the performer since 2019.

[00:45:08] I mean, it's almost triple in terms of the revenue it generates, but you're, you're not wrong. I was looking at, um, and I'll show it here for the last year. So even if you factor in total returns, I mean, you're not looking at a great outcome. Exactly. 6.1%. If you include dividends, I hate to break it to people, but that is well below the S&P 500 at the peak. I mean, they were doing quite well.

[00:45:35] When you look at the peak of July, things were going well, but ever since it's been, let's just say sideways, but yeah, looking back a year, you're completely right. I was, I looked at it too. And I was surprised when I saw that. Yeah. And it's not really a company that I follow all that much. Like I said, I've never really wanted to own it just because of how expensive it is. I just, I've always kind of bought Alphabet just cause it's so much cheaper, but, uh, I don't know what happened, what's happened over the last year or so, but, um, it hasn't really had a good run.

[00:46:04] I mean, it, it's results were, were all right. But I mean, for a company that was like trading at like 50 times free cashflow, like I would kind of expect more, but again, I, like I said, I don't follow the company all that much. I think it's a good reminder. We saw it within video and it's probably the same thing with Microsoft. When you have stocks trading at very high multiples for valuation, I don't care how good the company is.

[00:46:30] If the stock is trading at very high valuation and they don't meet expectation or blow past expectation, they might still have a very good quarter. You'll likely see a decline in the share price because the market was expecting more. And I think that's where people, a lot of people with NVIDIA were missing the point who said it was overblown. NVIDIA might be fine longterm, but this changes things at least in terms of projection of what

[00:46:59] people will be doing for NVIDIA going forward. And this could be changing things for Microsoft too. So I think it's just important that to remember that, yes, these companies are still very good companies. But the reality is it was trading at a high multiple. It still is. And expectations are sky high for Microsoft. Doesn't take much for the stock to take a hit if they don't meet those lofty expectations. Yeah. I mean, you got to think about it.

[00:47:27] If you, if, I mean, most of the articles I read said that it took a dip because of the cloud miss. And if you think about it, they miss cloud revenue. That's what I read too. Yeah. They miss cloud revenue by two and a half percent. And the stock took a seven percent dive on that. So yeah, there's, they have to, you know, when, when companies get this expensive, they got to do pretty much everything right. They got to do over and above most of the time. Yeah. Unless you're called Apple, then you don't need to grow revenue. And the stock will still be up.

[00:47:54] So that's my transition into Apple Q1 2025. So this one, I was really excited to see, and they reported late yesterday in the evening. So I was really excited to see because you must remember that then just this fall when they came out with Apple intelligence. So if you know, at AI, Apple intelligence, that little play on words, it was, you had analysts left, right, and center saying this would spur demand for new iPhones.

[00:48:23] People would upgrade sooner because they, you need a 15 pro or an iPhone 16 to be able to use Apple intelligence and it would spur sales. And we started hearing reports that, that may not have been the case in the fall. And it definitely was not the case now that you're starting to see results because keep in mind this quarter ended, I think it was December 28. It was smack into the holiday period.

[00:48:49] One of the strongest period in terms of iPhone sales typically and sales overall. So including all the other segments, they were up 4% to 124 billion, which is good. But iPhone sales were down 1% to 69 billion. And that's where I think the issue is with Apple is because iPhone sales, people may say, oh, 4% sales overall is pretty good. I mean, yes, it's pretty good for a mature business like Apple.

[00:49:19] But when you look at their iPhone sales, I mean, it's still more than 50% of all their sales. And for joint TCI viewers here, you can see on the graphic, the big blue line, which was in the last year in terms of iPhone sale, that was 200 billion. If you're looking, the closest one compared to that is services. And it's half of the sales of iPhones. And then you have iPad revenue, Mac revenue and wearables that also make the rest.

[00:49:47] They've all they've all did quite well with the exception of wearables. They all did quite well. But the reality is when the behemoth of iPhones sales is not doing well, it's going to put some pressure on the business. Yeah. I mean, people, I think people just don't have the money to be buying new phones like they used to anymore. I mean, if you look at like a 16 Pro Max, I look up the price, it's $1,800.

[00:50:15] So it'll cost you $75 a month for 24 months. Like, I don't even, I don't even. Maybe GoEasy can give you some financing for that. Oh, yeah. Or you can buy it with buy now, pay later, you know. Oh, I'm sure. Hopefully you can pay later. You probably could. Yeah. I mean, it's just like, I don't know. I think like if you have, I think like maybe pre-pandemic or even during the pandemic.

[00:50:41] I mean, if somebody had an iPhone 15, they might, you know, once their deal runs out, come and grab a new phone. But I think like people just aren't doing that anymore. And like the phone costs you $75 a month. Like, I don't even think my phone bill in its entirety is $75 a month. No. So I just think. Yeah, I'm like that too. So I, when I, I got like a plan where they basically, they finance it over two years.

[00:51:06] And then once that finished, I renegotiated my plan to, I dropped it by from $65 to 50, increased the amount of data I had because now they no longer had me locked in. Yeah. And I could leave where, wherever I wanted to go. So my plan cost me 50 bucks a month. And I think I have like a hundred gigabytes in data because I said, if you guys don't give it to me, I'll switch to another carrier. Yeah. And I think more and more people are, are kind of finding that out and they're kind

[00:51:35] of finding like the technology just isn't really, I mean, if you spend, let's say you have an iPhone 15 and you spent $1,200 on that, are you really going to spend $1,700 to get a model newer? And maybe, you know, when rates weren't as high, there was a little more, you know, consumer spending. People might've done it, but I just, I don't think that's happening anymore. And, you know, coming out with a new phone every six months, I don't know if they still do every six months. I know it's a once a year pretty much now. Yeah.

[00:52:04] But I mean, I've, I've seen Apple intelligence in action with a friend of mine and it's not great. It's really not good. Like, I don't know if they improved it since it's been a few months since he had showed it to me, but he sent me one was hilarious. He sent me a screenshot after, after I got the shot for my back, for my disc, I texted my buddy cause we mountain bike quite a bit. And I said, Oh, like, you know, with this, like give me a few months, I'll have the back of a teenager.

[00:52:32] And then he showed me what it summarized. Yeah. And it was something that I could go to jail for. Oh my God. So I'll let people, yeah, yeah. So that's kind of the stuff it, so how the hell it actually summarized when I was just like saying like, Oh yeah, like my bag's going to be as good as a, you know, as a teenager. It just, I was like, okay, well now I really don't want that. Refinements. Yeah. Yeah. Yeah. I mean, exactly.

[00:52:58] It was funny on like the day when like Nvidia and all the, all the chip companies were falling and they said that Apple's AI was so bad. They were unfazed. I think they ended up green on the day, didn't they? Or something like that. It was, yeah. Yeah. They, and it was funny and not to go too much on a tangent here, but I was reading just for fun. Sometimes I'll go on CBC, the business just to see what they say. Cause it's usually sometimes it's good, but most of the time, like I find they don't do proper

[00:53:25] research and they were talking about deep seek and how now was creating uncertainty with like big tech because they're spending so much on AI infrastructure and they cited meta and Apple. I'm like, what? Why are you putting Apple there? Yeah. Yeah. Like what site meta and like Microsoft, if you're Google and Microsoft. So that, you know, take that with a grain of salt. I don't mean to dunk on CBC, but I've noticed that a lot of their business article that I've

[00:53:54] seen over the last few years. I think there's just a lack of research or understanding by some of the reports. Honestly, it's pretty disappointing, but that's just a little bit of a rant here. Now the wearables segment to get back at the good stuff for Apple, actually the wearable was not good. So that was down 2% at 11.7 billion. But again, it's a small segment. They talked about Apple vision pro being available in new markets on the call and are excited about that.

[00:54:21] But the problem is that they don't provide sales numbers specifically with the Apple vision pro. And I've seen countless articles of reports that sales are falling very short of what expectations were. It's very expensive. I'm not surprised. It looks ridiculous. I'm not surprised either. That's my opinion. Some other people might not think it's ridiculous, but I think it looks pretty stupid, but that's 10 to agree. And yeah, and it's just bulky.

[00:54:50] So it'll be interesting whether they come out with a cheaper version that would be more interested to more people or they go the kind of meta way where they team up with a company that has like a more of a luxury brand reputation, which I think Ray-Ban would have been the perfect brand to team up for an Apple. But I guess that that's no longer on the table. So now if you go to Mac revenues, so now the good stuff, Mac revenues were up 16% to 9 billion.

[00:55:18] iPad revenues were up 15% to 8 billion. Services revenue, that is probably the shining star of the result. It was up 14% to 26 billion. But like I said earlier, it is starting to be a much bigger portion of their business. So that is the one that is, I think, saving them a little bit because it's about half of the revenues that are generated by the iPhone. So it's making up a little bit for that slowdown in iPhone sales.

[00:55:47] What the other things that were interesting is that if you start looking at the different regions, they all increased in sale except for China, which saw a decline of 11% to 18.5 billion. Now on the call, they said it was because they didn't have like proper inventory in China. I have my doubts about that. We'll have to see whether that's actually true or as we've seen, I've seen a lot of reports

[00:56:13] saying that Chinese consumers are switching more and more to local options. So there's a lot of smartphones like Huawei would be one of them that are available in China. So we'll have to see if that's right if China kind of picks back up in the next couple of years. But it was a decline of 11% and it's their third largest region in terms of sales behind the Americas at 53% at 53 billion and Europe at 34 billion. So it's not a small market for them.

[00:56:43] They also repurchased 24 billion worth of shares during the quarter and they generated 27 billion worth of free cash flow. However, that was down from 37 billion last year. So for a company that's trading as expensive as it is, it's very meh in terms of results. If you ask me, I think it's okay. It's fine. But you're paying a premium. Yes, it's very profitable. It generates a whole lot of free cash flow. But again, the same question is there for Apple.

[00:57:12] Where does the growth come from? Services? Sure. Mac, iPad, all that stuff. Sure. But there's such small portion of the business that unless you see services really keep going strong and iPhone sales stabilizing or slightly increasing, I think they're in a tough spot of increasing revenues over the long term. They have to come out with a new product.

[00:57:38] And there hasn't been much ever since Steve Jobs passed away and left Apple. Yeah, there's been like, I mean, the Vision Pro was supposed to be a big thing. But I mean, I mean, I guess you could say like they kind of hit. Yeah, they kind of hit like a bad time, I guess. I mean, what do they cost? They cost like 5,000 bucks, don't they? Or something crazy? Oh, yeah. Something like that crazy. Yeah. Yeah.

[00:58:04] Like people, I can't even imagine the disposable cash I would need to have to spend $5,000 on a Vision Pro. I mean, it just, I mean, we've seen over the last while here, I mean, Buffett kind of dumped out of his position in Apple. I mean, it's still a pretty big position, but he's definitely cashed out a bit on that front. I mean, the one thing is, is the company kind of reports kind of meh earnings all the time,

[00:58:31] but it's share prices, it's just relatively stable. Like I think if you had a company like Microsoft, Alphabet, Amazon report quarters like this, I think it would just be, I think they would, it would sell off massively, but for some reason, Apple just never does. So they, yeah. So they start at, for the 250 gig version, it's five grand, half a terabyte, it's 5,300.

[00:58:59] And then a terabyte is 5,600. Yeah. It's kind of pale because you have to like log in and stuff, but yeah, it's not cheap. I'd rather get a top of the line MacBook Pro for less than that than buying that. That's for sure. Yeah. I think it's just kind of a huge, it's a huge miss. And I just, yeah, I don't know if it'll ever, ever sell well. You don't like paying five grand for ski goggles? It's mind boggling. I mean, Apple's always sold expensive products.

[00:59:27] Like they're, everything's more expensive. I mean, their laptops are more, I mean, they're much higher quality. I will say like their tablets, their laptops for the most part, the iPhones higher quality, but yeah, I don't know. I just don't see how they're going to be able to grow. I mean, I own, I own Berkshire, so I do own like a lot of exposure to Apple in a roundabout way. And I really, I don't know. They just seem so average, I guess I would call it. Yeah. No, I agree.

[00:59:55] I mean, they still have super strong brand power and I use Apple products, so I love their products. I'm not saying that. It's just, there's been a lack of innovation. They've made their products better. Yes. But they haven't come out with a new iPhone type of deal, like a new brand, a brand new concept, right? They haven't come out with that. The Apple Vision Pro was kind of just trying to get in that AR augmented reality, virtual reality space. So it was not necessarily a new concept either.

[01:00:23] It was just trying to make it the Apple way. We'll have to see. I mean, it's still a great business, but again, for the valuation, it's trading. I'm just happy to look on the sidelines and not owning it. Anything else we wanted to talk about? I know you had made some notes for Starbucks, but we're already over an hour. So I think... Go over it next week. I think we'll call it an episode. Yeah, yeah, exactly. So when you're back from that golf tournament, that the Wasted Open, is that what you call it? Well, it's a Wasted Management Open, but they call it the Wasted Management Open.

[01:00:53] But it's fun. It's a lot of fun. So trying to, you know, just... You're in your 30s, Dan, so you have to hydrate electrolytes. That's the key if you don't want to feel like you're dying the next day. Well, I'm not going to be drinking too much there because it's 17 US dollars for a beer. Oh, okay. So you'll pre-drink. Yeah. That's okay. I like that too. Hey, I used to do that back in the day. Okay, well, it was, I think, a fun episode.

[01:01:23] I hope everyone enjoyed it. And we do appreciate all the support we get. If you haven't had the chance, leave us a review on whichever platform that you listen to. It helps people find us. We were pretty present, both Dan and I, on Twitter, even though I haven't been posting as much just with the move and everything. But I do try to respond when people kind of tag me in a reply. But I'll probably be a bit more active as I have more time. So I'm at fiat underscore iceberg.

[01:01:52] Dan, you're at stocktrades underscore CA. That's right. Yes. I got it. Perfect. Well, thanks everyone for listening. We'll see you next week. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions. The host and guests posted anything. By the way. We'll see you next week. I'll see you next week. I'll see you next week. I'm going to go to the summit. And the last week's... It's a right. Thank you.