Nvidia Caught in the Crossfire of the US-China Trade War

[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'm back with Dan and we are doing some news and earnings today. We're recording this on April 16th. We have to timestamp everything now. I think we'll have to do that until Trump leaves office because

[00:00:31] you can tweet something and it just changes everything. And then we look pretty stupid if we don't mention when we actually recorded. Yeah, I mean, it seems like it depends on which way the wind blows. I mean, as I was saying, there wasn't much going on, but now there's a lot going on. Should be a pretty good episode. Yeah, exactly. So we'll talk quickly about the Bank of Canada announcement that just happened a couple hours ago.

[00:00:56] It'll be very quick because we have a lot on the slate. Then we'll be talking about Nvidia and some new restrictions regarding their chip for going to China. ASML reported earnings earlier this morning, and then we'll switch over to some Canadian content with WellHelp, a company that you talked about a couple weeks ago or last week. I don't quite remember. And then we'll finish off if we have time with GPMorgan and BlackRock that also reported.

[00:01:26] So hopefully we can get all that done in less than an hour. But we'll get started with a Bank of Canada announcement saying that they would be standing back a path for the overnight rate at 2.75%. I know you were thinking they were going to cut, although most economists were divided on it. It was close to 50-50 in terms of expectation.

[00:01:49] I said they probably would stand path, even though I've missed the mark in recent meetings. I'm not trying to take a victory lap here. Yeah, I've kind of called every cut. But obviously, they were much more obvious before. This was probably the first one that was in question as to whether or not they were going to do it. But I'm not surprised they held. Obviously, I wanted them to cut. I had mentioned I have my mortgage renewal coming up in January. So I was hoping rates would go down and bond yields would kind of come down as well.

[00:02:18] But I mean, they need some sort of lever to pull, I guess, if inflation starts to ramp back up. And this is maintaining it here. Yeah, exactly. It's probably a better decision. That's it. And there's an excerpt on their release because I'm not sure if listeners are aware, but every time they come out with announcement, they'll have a release on their website that goes over the reasoning behind it. And then they have the press conference. I think the press conference is probably happening as we are recording.

[00:02:45] I looked about an hour ago and it hasn't started yet. But nonetheless, I think there's a really good excerpt that really encompasses what they were thinking and what they're really struggling with. And I'll just quote here. The major shift in direction of U.S. trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth and raised inflation expectation.

[00:03:11] So I think that just encompasses where they're sitting right now. And they also said they're working on two big projection scenarios, although they do admit that there's a bunch of different other scenarios. But you usually when you're thinking about investing or on the macro macro side of things, you definitely want to have some, you know, one, two, three possibly possibly big scenarios that you're working off with.

[00:03:41] So it sounds like they have two, one being high uncertainty but limited tariffs, which would then slow the economy and keep inflation close to 2%. The other one being a trade war, fall on trade war that would lead Canada into a recession this year and inflation to rise above 3% next year. So these are the two main scenarios they're working off of. But at the end of the day, it's pretty clear that they're struggling between wanting to support a slowing economy,

[00:04:09] but also keeping inflation in check. So I think they're really waiting to just wait and see a bit more data. The recent employment data was not great. But again, the most recent reading for inflation, if you look at core inflation that came out earlier this week for March, has remained pretty sticky. So they're definitely concerned about these two things. And I think they are standing path to gather a bit more information and then decide what they'll do in the next meeting.

[00:04:37] Yeah, I mean, I would imagine if this whole tariff situation wasn't occurring, like they would probably cut rates because like you said, I think, didn't they lose, it was something like they lost 33,000 jobs or something when they put up. Yeah, I think it was like that. Yeah, it was not a good. I mean, the economy is not in very good shape overall. And I think, like I said, if this stuff wasn't around, like the trade wars, the overall uncertainty, I think they would cut because definitely justify some sort of cut.

[00:05:04] But I mean, I wouldn't want to be the ones making these scenarios either. Like how do you even... I'm surprised they don't have 10 different scenarios with how many things... Well, I'm sure they have multiple of them. I think they're probably working off those two big scenarios. And then they probably have, you know, 20, 30 different sub-scenarios that are closer to each of them. So that's probably the way they're working off them, if I had to guess. Yeah. Yeah, I mean, it's...

[00:05:33] I wouldn't want to be them right now. No, exactly. But that's why they're making the big bucks and we aren't. So we're just commenting on it. So we'll move on here to NVIDIA. Some more news that came out last night. So NVIDIA is down... I don't know if it's still down 5%, 6% for the day. I think it is, yeah. Yeah, it's still around there. It's pulling down pretty much every semiconductor stock that you can think of along with it. Not surprising because it's still a behemoth in terms of market cap here.

[00:06:03] They announced that it would incur a $5.5 billion charge due to new U.S. government restriction on exporting its H20 artificial intelligence chips to China. So the H20 are the most advanced chips that they're allowed to sell to China right now. Now, demand for the chip has been strong coming from China, but specifically Chinese big tech players that are also making a big push for AI.

[00:06:31] The U.S. government determined that the H20s were too powerful and it could enable its use in Chinese supercomputers. The U.S. now requires NVIDIA to obtain licenses for H20 exports to China, but it is unclear if these licenses will be granted or not. So we'll have to see. It could be deliberate from the U.S. administration to try and use that as leverage against China in negotiations with the tariffs.

[00:06:58] I would not be surprised at all if that's why they're making it unclear to basically say to China, look, we will grant some of these licenses if you start playing ball with us. Not quite sure, but I could see them do that. The $5.5 billion charge reflects inventory, purchase commitments, and related reserve for the H20. It's a big impact since its Chinese business was still like 14% of its revenues.

[00:07:25] If we're looking at the last quarter, it's still a pretty decent size. It's not as big of a proportion that it used to be. It really peaked around 2022 at 26.4% and has been going down ever since. Probably a reflection of more and more restrictions going against China from the U.S. government. So it's definitely something that will impact NVIDIA negatively.

[00:07:52] There's no question about that, but we'll have to see. But what it also says, and we'll talk about that when we discuss ASML, is it also serves notice to the whole semiconductor sector that the U.S. could very well start imposing more and more restrictions on any kind of exports to China that touches that sector. Yeah, I mean, if you think about it, this is one of the fastest growing sectors right now.

[00:08:19] So in the event of a trade war, I mean, this could be the first of many additional restrictions that they put on. And I mean, I'm curious like why they had to pretty much like they effectively wrote off all the inventory, like all these chips, like there's no demand for them anywhere else. Well, I think it's kind of interesting. I think the problem is that the other clients of NVIDIA purchase the more advanced chips, right?

[00:08:45] So this is the most advanced that's available for China, but they do have more advanced chips than that. So I think that's probably it. It's probably because the demand is just not as strong. Maybe they're able to sell them elsewhere, but they have to take a haircut on it because the price they would be able to get won't be as strong or you might even eat into their profits for their other more powerful chips. So that would probably be the reasoning behind it if I had to guess. Yeah, that makes sense.

[00:09:15] I noticed they like I didn't read much into this, but I noticed last night like they pretty much said that their China like their revenue to China won't be impacted. I would imagine they can. I don't know how that works, but I mean, they're good at they've been doing that for quite some times when it started for the Biden administration.

[00:09:32] Like I'm not an expert in semiconductors, but I know enough that they were always towing the line with just making something available that was barely meeting the requirement, but it met them. But just on the edge of what was allowed and not. So they were always getting the most powerful GPUs chips that they could sell to China.

[00:09:58] They were always going to that exact limit and flirting with that fence. That was my understanding. So we'll have to see. I'm sure they'll probably try to come up with a new chip that would meet the new requirements. I'm not sure. We'll have to see. But I think it's probably a dangerous game because the Trump administration is definitely focusing on China and I could see them.

[00:10:23] Making more and more restrictions if they see NVIDIA trying to kind of not circumvent, but really toe the fine line that. Yeah, exactly. That's allowed. Yeah. I mean, I guess the one good thing is China does make up. I mean, it's a double digit portion, but it's not like a huge chunk of sales, but obviously this is. It's gone down for sure. Yeah. It's gone down, but it's still, you know, a notable risk. And I mean, as you can see, I think NVIDIA is down. Yeah, they're down around 8% right now. And they.

[00:10:53] Oh, wow. It's accelerating. I would say they've effectively caused like they probably caused the, you know, 2.2% dip we're seeing in the market right now. Like I would imagine they're a big factor in the NASDAQ dipping this morning because news like this. I mean, it just it adds to the crazy amount of uncertainty right now. It's well. And I think it's also a reminder for investors that we're saying thinking like, oh, the 90 day pause is on.

[00:11:20] And they're going to make a deal with every country. Everything's going to be fine. Worst case, it's going to be 10% tariffs. And I think this is just a reminder that tariffs are not going away. And whether it's specific tariffs or it's targeting certain imports or export to specific countries, obviously, most likely there's going to be a lot more against China. But I think it's just a reminder for investors that there's still a whole lot of trade uncertainty.

[00:11:47] Like it's not going away anytime soon, even though we're in the middle of a 90 day pause. I think I think that would be my first thing is just serving as a reminder that, you know, this volatility is still going to continue going forward. Like don't be fooled by the last like three, four days of trading. Yeah. And I mean, they you see a lot of countries where at least they say a lot of countries are coming to the negotiation table. But clearly China is not it's been back and forth for for a few weeks now.

[00:12:17] And it's tough to say. I mean, they can definitely leverage a company like NVIDIA to kind of pressure China, because, again, this is, you know, one of the fastest growing industries out there right now. And they could definitely limit what's being shipped there. And I imagine this probably isn't going to be the last if I were to guess unless some sort of deal happens. But I mean, it doesn't seem like that's going to be anytime soon. Yeah. And these deals take time.

[00:12:44] And I think, you know, when just as a side note here, they said what 70, 75 countries, whatever the amount reached out to them, 90 countries to iron out some trade deals. Well, these are long documents like this is not a three page like trade deal that they have to do with every country like this will likely be hundreds of pages per country. They have to agree the other country like the fact that they think they can do all of that in 90 days.

[00:13:14] I think it's it's pretty ambitious, to say the least. So I think that's the other part that people just have to keep in mind. But going back to the semiconductor space here, ASML reported earlier this morning. And what's very interesting here is that obviously ASML for those. Well, actually, I should probably mention quickly for newer listeners what ASML is. So they manufacture these machines that are used to produce computer chips. So semiconductors.

[00:13:43] So the most advanced chips that are produced by a company like TSMC's Taiwan Semiconductor, which will produce the NVIDIA chips. NVIDIA actually designs the chips and then Taiwan Semiconductor will actually produce them. Well, the machines they use to produce them are from ASML. So they make the most advanced machines. They're called Extreme Ultraviolet EUV. They're the only ones in the world that make these machines. They also make Deep Ultraviolet that are a bit less advanced.

[00:14:13] They're not the only company that produces those, but they are only a couple that produce those in the world. So it's still a very limited amount of suppliers for that. So just to give people an idea. So this is a very important company when it comes to the semiconductor space. I was just going to mention they're what are they? $150, $200 million a machine? Oh, I think it's yeah. The EUV actually, I think are like $250 to $300. Yeah. Yeah. Yeah. So I, they're not cheap. They're very expensive.

[00:14:43] They're very expensive and they take some time to build as well. And they require very special, specialized parts. I mean, I kind of wrap my head around the ASML for people who want to understand a bit more. Their role here is it's a bit similar to like a Boeing or Bombardier where they actually like assemble the planes.

[00:15:05] So they get all these different parts, whether it's the engine from, from company A and then, you know, certain parts from the wings from company B and B and they assemble everything together. So ASML is a little bit like that, but they are the ones that know the technology, but they will have to get different parts from suppliers around the world. So just to keep that in mind, they don't produce all the parts for their machines themselves. I think that's really important for people to remember.

[00:15:33] Now, Q1 sales came in in line with guidance at 7.7 billion euro, although you were telling me and I didn't see that, that it was a bit lower than what the market had expected. Yeah. It was a miss on sales. I don't think by that much, but it was a miss. Yeah. Still in line with what they said, Q2 sales are expected to come in between 7.2 billion and 7.7 billion euros and they are headquartered in Europe. So that's why they use euros.

[00:16:01] They are keeping their 2025 sales guide in Intax, which was a range of 30 to 35 billion euros. They said the range is wider than usual because of all the uncertainty going on, which may cause some customers to be a bit more cautious with their orders while others will look to be adding more capacity.

[00:16:22] But despite that, they expect 2025 and 2026 to still be growth years for them, primarily driven by, you probably guessed it, strong AI demand. They said that they could be impacted by tariffs in different ways. They mentioned four different ways that they could potentially be impacted first. It could be tariffs imposed on their entire systems shipped to the US. So that could be a potential impact. It could be on certain components of the system.

[00:16:51] Like I mentioned earlier, it could be on the tools that they import to the US because they do have some operations in the US or it could be other countries imposing tariffs on the US. Again, some of the components that they would make in the US itself. So there's different ways that they could be impacted and they are aware of that. But so far, I mean, it seems to be limited in terms of the impact for them. But they are saying that it is creating some uncertainty there. Yeah.

[00:17:20] And I was asking you this morning, like I didn't really realize how this company would be hit by tariffs. But obviously, I mean, it hits so many things that you wouldn't even realize as well. I thought they would be relatively immune, but clearly not. I know they, on their guidance, they had mentioned, I mean, I haven't had a chance to look at the whole report yet because I do own this one. I bought it, I believe last year. They expect that the guidance will come in the low end.

[00:17:48] Like they kind of, I think they kind of prepared people for that guidance to come in or the revenue to come in closer to that 30 billion end versus the 35. And I mean, maybe if the situation gets sorted out, you'd probably see it, you know, maybe get to that 35 billion mark. But they were a bit cautious in that regard, which probably caused a bit of a sell-off too. Because I think it's taking a bit of a dip this morning too. I think it's down 5% or 6%. Yeah, probably. Yeah, on the NVIDIA news that is just pulling down the whole sector.

[00:18:17] I mean, I watch your video because when they release earnings, they always have this little video where they have, I think, the CFO and CEO just discussing the result. It's kind of funny, but they have like this 15-minute video. They didn't seem, they said it could still be anywhere within that range. They didn't seem like they were moving towards the bottom or top end.

[00:18:39] They just said there's still so many, so much uncertainty that it could go either way, depending whether people want to make AI investments right now or a bit later. So it'll be, I'm not sure, but that's the sense I got from the video. Well, and that's just the difficulty with guidance right now as well. Like I think there's going to be a lot of companies that just yank it outright. Obviously, they're maintaining it, but who knows moving forward?

[00:19:05] I mean, the quicker we can resolve this global trade war, the better. But yeah, it's very uncertain. Yeah, and when we get to JP Morgan, that's one thing that Jamie Dimon said. He's like he expects a lot of companies just outright pulling their guidance, which I'm not surprised because we've talked about that. I expect that as well. I expect a whole lot of companies pulling their guidance going forward or just providing these like super wide ranges. Yeah, I think you'll see both.

[00:19:35] You'll see either like super wide ranges or just pulling guidance altogether. But to get to get back to ASML, net income came in 14 percent higher than the previous quarter at 2.7 billion. Net bookings were a bit lower than expected at 3.9 billion for the quarter, which continues to show that, in my opinion, there are still some strong demands for their system, although it is it was lower than what analysts were predicting.

[00:20:00] They shipped about a quarter of their systems to China, which is down from about 50 percent where it peaked last year. But they still get quite a bit of their revenues from China. A lot of people still don't realize how dependent it is here. I'll just show a chart from our joint TCI. So this is their total revenues compared to their China revenues. So I could have done a ratio.

[00:20:28] I just didn't have time with the custom metrics here. But for those listening in the last 12 months, you see that China revenues is about 10 billion and then you have total revenues at 28 billion. So let's just say that China is about a third of total revenues here. And it has definitely grown pretty quickly in the last couple of years. So it has increased what they're selling to China. It's not their most advanced system.

[00:20:56] It's the deep ultraviolet system that I was talking about. So it'll be interesting whether the U.S. imposes more restrictions on the semiconductor space on China. Because I think that's one of the risks that you're facing with ASML. And same as you, I own ASML. So it's part of my portfolio. But it's definitely a risk to be aware here that they still have a pretty good chunk of their revenue coming from China.

[00:21:24] And if the U.S. is getting more and more aggressive with China on the trade front, I would not be surprised if there is additional restriction imposed on ASML shipping their deep ultraviolet system to China. Like that would not surprise me one bit. Yeah, because wasn't it they used to ship the EUVs, but I think it was when Biden was in power, they restricted those that they couldn't sell them? The EUVs. No, I... Yeah, well, yeah.

[00:21:51] They prevented them from selling EUVs, but that was a while back. That must have been two, three years ago. So... Yeah, that's what I was thinking. Yeah, I think... A couple years back. Yeah, I'm not even sure if they were ever allowed to ship EUVs to China. So I'm just going on memory. So I don't want to say that the incorrect thing for our listener here. But the Biden administration definitely imposed some more restrictions on ASML. And you had a good question for me.

[00:22:17] And the way they could do it is like I mentioned about the Boeing and Airbus example is yes, they assemble these machines, but they don't make all the parts for the machine. So they have suppliers. And some of the suppliers will be located in the US.

[00:22:32] So if the US wants to prevent some of these machines to go into China, they could basically try and cut off the parts being shipped over to ASML and create some restrictions on the US suppliers to make sure that they're not building these systems and sending them over to China. And they would have no choice but to comply at that point because it would cripple their whole business, right?

[00:22:57] If you're not getting all of the components required for all of your system, clearly you'll take the head and say, okay, send them over. We will agree not to send more systems to China. So that's how the US could leverage their position against them. Well, then you have from a maintenance perspective as well. Yeah. I mean, they supply a lot of the maintenance for these units, obviously, because they're ridiculously complex.

[00:23:23] But if they kind of restricted it from that perspective, parts, things like that to go over, I mean, you could have kind of a nightmare situation there as well. I mean, I don't know how much of their China revenue is actually related to maintenance. I know like, I think like 75% of their sales are actually unit sales, whereas the other 25 is maintenance. So I would imagine it would be similar to that in China, but that's actually an interesting angle as well. Yeah, exactly.

[00:23:51] So there's definitely some ways the US could pressure ASML, which is a Dutch company, to not be able to service China. So we'll have to see, but again, it would not surprise me whatsoever. And the last thing I'll mention is they are starting to roll out EUV systems. So their most advanced system that are able to produce two nanometer chips. And for those who are new to the space, that's fine.

[00:24:17] Essentially, the smaller the chips, the more powerful they can be typically. So the nanometer, it's the, I can't remember the term, but essentially it just enables you to put even more components on the actual chips. And I do apologize, I'm kind of missing the technical term here, but the transistors. So it actually allows you, the smaller it is, the more transistors you actually can put on a chip, which means you get more computing power.

[00:24:44] So that's the idea behind these types of systems. And like you said, the install base management keeps growing more and more, and it's becoming a bigger part of their revenue as things are going forward, because these things do have to get maintained and require maintenance over time. Yeah, and it's also the higher margin business, as is most, you know, when you're talking about like maintenance and like recurring maintenance on things. I mean, it's definitely going to be the more profitable end rather than the manufacturing.

[00:25:14] Yeah, and it's pretty sticky, right? So it's such a specialized business that it's not like, you know, you get an HVAC system installed at your place. And the company that you chose, they did a good job, but they're pretty expensive. So you start for maintenance, you start calling other companies to come and do the maintenance. It's not like that. It's very specialized. So it would be very unlikely that companies who've bought these systems would be able to find an alternative for the maintenance.

[00:25:42] So I feel like this will be a sticky part of their business. Yeah, you definitely can't shop around. It's not like hiring a plumber. It's a little more complex than that. It's more complex than that. But that's it for ASML. We'll keep an eye on it. So we'll switch over here for the Canadian part of our content today, aside from the Bank of Canada with Well Health Reporting, which is a company you own as well. Yeah, so I've owned this one for a while. It's gone through.

[00:26:10] I mean, it's growing quite fast, but there's been some issues. I think we talked about it two weeks ago. But effectively, what they had was a U.S. subsidiary that got kind of caught up in some weird billing practices. So Circle Medical was the company. I believe they bought it a few years ago. So it wasn't able to file its annual report and its quarterly earnings at the end of March because of these billing practices.

[00:26:37] And they were given a two-week extension to kind of get the situation organized. And they did come out on April 8th and said that they would be done by the two-week extension. They were going to report earnings after market close on April 14th. And this was pretty interesting because after market close, I waited a few hours and I didn't see anything. And typically, Well Health is a company that sometimes they report at like 6 Eastern. So I was like, okay, that's not a big deal.

[00:27:05] So I came back after supper, didn't see anything. And I'm like, okay, this is getting a bit weird. And it's like 10.30 p.m. I'm going to bed. And I'm like, okay, I'm going to check if they reported. And they didn't. So I'm like, okay, clearly they are taking this April 14th deadline to the absolute max. And yeah, they reported like right before midnight. And I kind of figured at first, like obviously the speculative me was thinking, okay, they're going to report a horrible quarter.

[00:27:32] And they're dropping this at midnight because they want to wait till everybody's in bed or something like that. But it actually wasn't that bad of a quarter from Well Health. I mean, they're growing at a pretty solid pace. But the only difficulty here is there's a lot of accounting moves here. What the main issue actually was with Circle Medical, and we didn't really get any of the information prior to that. And this is like my take on it.

[00:27:56] I don't exactly know what is going on, but by the looks of it, they were booking revenue in 2024 for services that were like gradually being completed. Probably treatments, things like that. They were booking that entire slot in 2024 when in reality they should be, they should have been booking it gradually. Yeah. Okay. So this is more so an accounting issue. So what ended up happening is Well Health had to- So they were pulling forward revenue basically. Yeah.

[00:28:26] They were pulling forward revenue for services or treatments or whatever it may be that started in 2024, but were not going to be completed. So what they ended up having to do is pull back revenue. So I believe they earned around a billion dollars in 2024. So what they had to do is scale that back to $920 million. And then they were going to gradually book that revenue in 2025.

[00:28:53] So effectively they're going to give, you know, the proper way they should have done it. 8% in the first quarter, 28% in Q2, 32% in Q3 and 26% in Q4. So the revenue is still going to be realized. Although there is a possibility that something could go wrong and they couldn't realize that revenue, which is why you don't book it all in 2024. But it's probably not going to be a huge deal. But it is, you know, it's a bit weird.

[00:29:22] I mean, this is something that you never really want to see. And, you know, what I found a bit odd, and I know you have a chart. I don't know if you can pull this chart up from the for the joint TCI, but they had their reporting. So I don't know why they've done this because it's not revenue that should be booked. But what they do is they have their IFRS revenue.

[00:29:44] So the revenue that they have to book and then to the right of it, they have their revenue excluding what they've been forced to scale back, which is, I mean, completely irrelevant. You know what I mean? Like they report, you know, this is our revenue, but this is our revenue. What it would have been if we didn't do these poor billing practices, it just seems kind of odd to me. And they have this throughout the whole report. And it's like, if you're actually not billing these things properly, like this is completely irrelevant. That isn't the revenue that you generated.

[00:30:13] So, I mean, you shouldn't even really be showing it. The actual accounting revenue is what you should be showing. But yeah, maybe they're trying to show that. I don't know. Yeah, it's weird. Like you're like, I am not quite sure. Yeah, this is a revenue. We would have generated if we were allowed to bill this way. But we got caught. We're not allowed to bill this way. So here's the revenue we did generate. But yeah, I mean, it was a bit of a weird quarter and they reported it weird.

[00:30:41] I mean, excluding the impacts, they grew 29% a year. But obviously, the impacts are the impacts. You didn't grow that fast, but they still kind of showed it, which was a bit odd to me. But I mean, overall, it was still a pretty solid year by the company, overshadowed by all this. The stock is down quite a bit, obviously, because revenue came in 8% lower than expected. But even after you exclude the whole circle situation, they grew revenue 19% year over year.

[00:31:10] Free cash flow came in just shy of $50 million. The Canadian arm of the business is doing very well. 30% total growth, 20% of it being organic. This company does acquire quite a few companies. They just acquired HealWell, which is like a, it's an artificial intelligence healthcare type company. And patient growth was up 35%. In Canada, US, 28%. Total patient visits up around 32%.

[00:31:36] And the company did issue guidance, which again, on the surface, looks really strong. And they didn't really exclude any of this. But they expect revenue to come in at $1.4 to $1.5 billion, which, you know, if you're thinking about the $920 billion they earned last year, that's actually, you know, some substantial growth. However, you know, there's some caveats here. Obviously, they have that $80 million that they just included in their next year's guidance. So they had to remove it from 2024. But then they just added it into 2025 guidance.

[00:32:06] And then they have their HealWell acquisition, which is, they're expected to generate around $120 million in revenue. So you're looking at $200 million with these two types of situations. So, I mean, guidance is, you know, apples to apples basis is probably $1.2 billion on the bottom end, which is still pretty solid. I mean, that's 30% plus growth. But if you're looking at that guidance and thinking, oh, they're going to grow from $900 million to $1.4 billion in one year.

[00:32:31] I mean, there's some acquisitions and there's obviously some revenue that they have misrepresented that they're just throwing in next year's guidance. But, I mean, overall, it was a pretty good year. I just, once companies start doing this, I mean, missing quarterly results, even if it's only, you know, a couple week delay. And then they're reporting their results in the quarterly report as if, you know, the billing practices weren't incorrect. It's just, it's a bit odd to me.

[00:32:59] And, I mean, I think they're going to have to have a pretty good year in 2025 to maybe get some trust back. But, yeah. Yeah. Is this a result? Like, I was just looking at the free cash flow per share. That's a result of the, like, they had to pull back quite a bit. Okay. It was growing, you know. Yes. It was kind of steady, growing a little bit, and then big drop. Yeah. Yeah.

[00:33:27] Well, that's what happens when you got a report, when you have to, like, restructure your financials. It's, yeah, it was, I don't exactly know, like, how much they knew what was going on. I mean, it is a majority-owned subsidiary, so I would imagine they knew that this was going on. I don't know. It's a weird situation. Not something I like. Yeah. Yeah. Then again, remember, Canopy didn't really know about the biosteel shenanigans until it came out.

[00:33:56] So, basically, yeah. Like, it's hard to say. You would hope that management was aware of it, but then that raises some questions that, why did you not disclose it before that? And if they weren't aware of it, then it also raises questions like, well, should you not have been aware of this? Well, yeah, the main issue here, they were aware of it. They were aware of the investigation six months ago, and they chose not to disclose it. Yeah, that's not a great look. Yeah. Yeah.

[00:34:26] So, I think it's going to be, they're going to have to have a very good year in 2025 to kind of probably take away a lot of this uncertainty when it comes to management. I mean, it's definitely not a good situation, but I'm just going to continue to hold it and see what happens. I mean, if they hit these numbers in 2025, that's, it's some very strong growth from the company for sure. Yeah. No, it'll be interesting to follow how that evolves, especially, you know, you own it.

[00:34:55] So, I'm sure you'll keep a close eye on it. So, we'll move on here to some of the smallest companies in the world. I'm actually kidding here. So, the largest bank, largest bank in the world, for those not aware, it's JP Morgan, obviously the biggest one in the US, led by Jamie Dimon, which I've been critical of. But I also like to listen to get his pulse on the economy as well. I'm not afraid to be critical on Jamie Dimon, but I also think it's worth listening to him.

[00:35:23] And sometimes he does have some good points to make. And I think just on that point, I think that's just a good mindset to adapt is you can be critical of someone, but you can also get value in listening to them for other things. Like, it doesn't have to be an all or nothing. I know in this world, people are polarized. They either love or hate whoever, especially when it comes to public figures. So, it's just something I wanted to mention quickly.

[00:35:51] Net income increased 5% compared to Q4, so the previous quarter, to $14.6 billion. Yes, you heard that correctly, $14.6 billion for one quarter. Consumer and community banking saw net income go down 2%, in large part because of home lending products. Commercial and investment banking net income was up 5%. Asset and wealth management income was up 4%.

[00:36:15] And they increased their loan loss provision as they are now projecting a worse potential downside scenario for the economy. The total provision for credit losses was sitting at $3.3 billion. And I believe this call just came after the pausing of the 90-day tariff, if I remember correctly. I think it came in Friday. So, the news of the pausing was already out.

[00:36:41] Although, the news of the kind of exemption on iPhones and all that came over this weekend. And something we didn't mention on the podcast, but I'm sure a lot of people are aware of right now. But just to give some context here, because they were aware of that 90-day pause when they made those comments and talked about that. And for context here, Royal Bank, Canada's largest bank, set aside a bit more than $1 billion Canadian in their latest quarter for loan loss provisions compared to $3.3 billion US.

[00:37:11] So, it just gives you an idea of how much larger JP Morgan is. And one other thing is that JP Morgan, as their loan loss ratio, which is the total amount that they have on their balance sheet. Not the amount that they put out every quarter for provisions, but the total amount that sits on the balance sheet compared to their gross loans. It's actually like twice the amount in percentage terms than it is for most Canadian banks, including RBC.

[00:37:41] And I don't know if that's a reflection of them just being more conservative or the Canadian banks not being conservative enough. Like, it is very weird that JP Morgan has double the loan loss, double a loan loss ratio compared to Royal Bank, for example. Like, I don't know what your thoughts are, but yesterday I was playing with it and I actually posted something on Twitter about that. And it was just, I had to double check.

[00:38:09] I actually had to like calculate it manually just to make sure that the custom metrics loaded properly on FinChat. And they did, in fact, load properly. Yeah, that seems like on JP Morgan's end, that actually seems like a high percentage. I'm pretty sure at least. I mean, on the one thing I'll say about the PCLs. Like you had spoke about the size, like just the sheer size. It's sheer, yeah. In dollar value, yeah.

[00:38:38] If you're looking at JP Morgan's AUM, like assets under management, I think they're 4.1 trillion, whereas Royal Bank is around a trillion. But that would be US... You mean total assets, right? Total assets, yeah. Yeah, total assets. So just to give you an idea of how much bigger... Like this is the biggest bank in Canada and how much bigger JP Morgan is. Because that would be on a Canadian level as well. Yeah. So RBC is what, like 700,000 US dollars? So JP Morgan is much, much bigger than it.

[00:39:07] But that ratio is, it's surprising to me. And it's always, as you can see by the chart here, it's always higher. Which is, I don't know why that would be. Well, I mean, it's one thing to be a bit higher. Like if it was, because for a joint TCI listener, so they'll see it. So I'm showing the charts here for those that are just listening. So you're seeing since, let's say, half, the back half of 2022, it was 1.5% for JP Morgan.

[00:39:36] So again, you just take all the money they've set aside on their balance sheet and divided by the total number of loans that they have. And that ratio is actually the money that, you know, in proportion compared to the loans. And back in 2022, it was 1.53%. It's been going up slightly ever since. And now it's going up pretty significantly. Now it's at 1.87%. Where you compare that with RBC.

[00:40:05] And RBC back in 2022, you were looking instead of 1.5% at like 0.5%. So it was almost like three times that of RBC. And now RBC, their latest quarter, and they'll be reporting probably in the next month roughly for Canadian banks. It's still at 0.65%. So it's still probably like actually like a third of what it is for JP Morgan Chase.

[00:40:31] So I don't know if they just have riskier underwriting practices in the US. Like I don't know the exact reason, but something doesn't seem right here. I don't know what it is, but something doesn't seem right. And I don't want to worry Canadians or anything like that. But I would rather the banks be more conservative than not when you enter a uncertain economic environment.

[00:40:58] And it's just a bit of a head scratcher why JP Morgan just has so much more on the books than a royal bank here. Yeah, I don't even know the reasoning for it. I mean, obviously product mix would be a different thing. I mean, I know. Yeah. Well, yeah. The way the loan portfolio will have an impact, of course. Yes. It's got to be relatively similar. Yeah. But that I don't know. I don't know why it'd be so much higher. Yeah, it is quite a difference.

[00:41:28] Like if anyone knows who's kind of plugged into banking, they want to reach out to the podcast or reach out to us directly on Twitter X. You know, if you're plugged into a royal bank or other banks and you would have some of that information because it's not just royal. It's just typically Canadian banks in general. Like they're nowhere. There's none of them that's close to 1%. I think TD might be at like 0.8 something. I think they're the highest, but it's just a really big difference.

[00:41:55] So if anyone has some information as to why this would be, happy to keep it confidential. If you're still working for the bank, but especially Royal Bank, when now the stuff that we've talked on the podcast that Dan Foz from the Canadian Real Estate Investor Podcast has been on for quite some time and some prominent figures in the real estate space.

[00:42:16] You're seeing more and more talk now in mainstream media about RBC being in trouble with these blanket approved appraisals for big condo projects in Toronto. And the reason that they are doing it is because essentially people can't close without these blanket approvals, without having to put in like hundreds of thousands of dollars extra into the condo to just be able to close.

[00:42:41] And if you have a slew of buyers that are not closing, then the project itself could go into bankruptcy. NRBC is apparently the lender for the project itself as well. So it's a way, I guess, for them to delay the pain, I guess. Well, wasn't there, didn't it come down from like CMHC that they would insure those mortgages at the pre-approval price? I don't think for investors.

[00:43:11] And I think, yeah, I think at first that was the understanding. I think when that news had come out, but I'm pretty sure that investors can't get those insured by CMHC. Because I was going to say that would be one way to bail it out is to have them all insured at their pre-construction prices. Yeah. And the reason why it's important for investors is a lot of people at the peak of the market were buying these condos,

[00:43:37] these pre-construction condos at peak prices or even 10, 20% above peak prices, thinking that it would always go up. And now we're seeing prices contract in Toronto specifically to 10, 20, 30% lower than what they agreed to pay. And clearly they can't flip these pre-construction because the idea is you buy the pre-construction.

[00:44:03] When it gets closer to closing, you flip the piece of paper to someone that wants to buy it. You still make a profit because it's gone up, but it doesn't work that well when you're looking at a market that's in the downturn, which is the situation right now. Well, yeah. And I mean, a lot of people are just walking away from, you know, six-figure deposits and stuff because the house is, the value has fallen so much. And getting sued. Yeah, some of them.

[00:44:28] Yeah. Yeah. I mean, the one thing about the allowances is, yeah, like I don't even think the Canadian banks during the financial crisis had that large of allowances. I mean, that's just right off the top of my head, but I don't think they ever got to that high. They boosted them, but it wasn't as high. Yeah, exactly. I don't really know enough. I don't know enough about that situation ever. No, I mean, look, it could just be that the loan portfolios are way safer in Canada.

[00:44:56] But again, something just does not seem like when I see something like that, that's that off, like something doesn't seem right. I mean, the mortgage structure, maybe? Yeah, it could be. You know, there's probably going to be some people getting relief in terms of mortgages as rates come down. Whereas in the US, I think you're booked for your whole like, some people got 7% mortgages in the US. No, I really don't know. But I don't know either. It just surprised me. I didn't realize how big the discrepancy was.

[00:45:26] So overall, they said that their internal data shows that consumer and businesses are doing pretty well. But again, it's hard to say where things will go. During the quarter, they returned $11 billion. Yes, you heard that correctly. To shareholders in the form of buybacks and dividends. When it comes to JP Morgan, these numbers are always massive. Consumers and small businesses spending remains healthy according to data despite a recent downturn in consumer sentiment.

[00:45:55] Some of the surveys that have come out from the US saying that showing that consumer and businesses are becoming more and more pessimistic about the economy. On the call, Jamie Dimon said that as of April 11, they had the odds of a recession at 50%. So that was when the call came out. Of course, if the US enters a recession, they expect provisions for credit losses to increase. So we'll have to see how that loan loss ratio goes from if that's the case.

[00:46:24] Dimon said the same thing we have been saying since Liberation Day basically. So the same thing you and I have been saying. You'll see more and more analysts revise their earnings estimates lower for the S&P 500. He said that those earning gross estimates will likely be revised to zero and then negative. They've already started to be revised down, still positive. But he thinks that you're going to see some revisions.

[00:46:51] And this is where it could put some pressure on the stock market is analysts start revising down earnings for the S&P 500 in the aggregate. Which starts putting some downward pressure on the S&P 500. Because then even if the valuation doesn't change, I mean, the prices have to go down. If the valuation stays the same, prices have to go down just on the base that earnings will not be as high. Because if you have a 20 PE, right?

[00:47:18] And your E is going to be smaller, then clearly the actual price will have to go down. Yeah. And that's one thing that, I mean, the market, forward earnings are really what matters. You know what I mean? A lot of people use the trailing price to earnings or trailing price to free cash flow to value companies. And obviously, as prices go down, that gets lower and people kind of get the impression that stocks are cheaper.

[00:47:44] But I mean, obviously, you know, if they're marking forward earnings expectations down, you know, a stock might not be any more. Well, it might not be any cheaper than it was a couple weeks ago. You know, if it was expected to grow at earnings at a 10% pace, but now it's flat or negative. I mean, even on a big drawdown, it might not be any cheaper than it was, you know, previous to all this mess. Which is why we've said, like, it's so hard to know, you know, first off, what's going to happen over the next year.

[00:48:13] So it's really hard to understand how cheap stocks truly are. And obviously, like analysts got the analyst expectations in terms of earnings. I think there was a study. Well, that was a price target study. That was pretty much they kind of showed that they're not price targets pure, pure guess. Like it was, I think, like 30% of the time they were right or something. So it's like, you know, mostly just luck. But earnings, that's that's got to be even more difficult right now. Yeah, exactly.

[00:48:39] So next time you see someone saying that, like, stocks are cheap or something like that in this kind of environment, just remember what Jamie Dimon said. And whoever's saying stocks are cheap. I'm going to go ahead and, you know, listen more to Jamie Dimon and the experience he has. Again, I can be very critical of Jamie Dimon. I have been in the past. But he does have a lot of experience in the markets in general.

[00:49:05] So I definitely would not dismiss what Jamie Dimon is saying here. And like I said, the call was done on April 11th. So Dimon may have a slightly different view now. But I think it should probably be pretty similar because the tariff exemption or the pause was already in place. The only thing that was in there was the announcement for some products like semiconductors and computer parts.

[00:49:29] I don't have the whole list, but so those are some of the things that the Trump administration said that I guess the the Apple exemption that we can call it pretty much. So he said that you'll see a lot of companies starting to pull their guidance. That's his prediction or offer. He didn't mention that. But I guess like we've seen for ASML, either companies pull their guidance.

[00:49:52] I didn't see what Delta said, but from the headline, it sounded like Delta Airlines provided like two super different scenarios for the guidance and basically said, well, if it gets really bad, it'll be this. If it's like a bit better and not too bad, it'll be this. And it's a super I think it just ends up being a really wide range. So I think you'll just see companies doing that, either providing a super wide range or pulling the guidance altogether, which at the end of the day, it's just the impact is kind of disappointing.

[00:50:22] Same. Yeah. I mean, I know Delta, they said they weren't going to provide 2025. Oh, did they? OK, so I just saw the headlines. So that's all. Yeah, they issued Q2, which was a bit of a range depending on what happens. So they issued next quarter guidance. Yeah. But full year, they just said they're not even going to bother. OK, no, that's fair. So that's it for for JP Morgan ran a little longer than than I thought.

[00:50:48] But we also have BlackRock, but we're running a bit long here. So maybe you want to do it or next week. I think it'll make more sense next week. It'll still be very worthwhile, especially Larry. It's a pretty interesting quarter. Yeah. Like, especially from their inflow perspective, like retail versus institutional. So, yeah, we can talk about it next week because it's probably going to it's definitely an interesting one to talk about right now. Yeah, exactly. It'll be super interesting.

[00:51:17] So definitely we'll keep that one. We promise it'll be back next week. And I haven't looked at the earnings calendar, but I'm assuming there's going to be a bit more Canadian names starting to report. So that'll be fun as well. But with everything that's happening in the markets, I think I find it very fascinating also just to look at American companies and just to see how they're dealing with tariffs, what impacts it's it's placing on their business. And that's another thing that JP Morgan said.

[00:51:45] He's like companies, it'll vary very widely the impact that they see a tariff having on their own business. And they'll probably provide some commentary on that. So it's going to be a fascinating, I guess it would be Q1, right? For most companies that they follow the calendar year. So it'll be very interesting. But I think it's important to also remember that you're likely not going to start seeing the impact of tariffs and the uncertainty in this quarter.

[00:52:13] So the quarter that's going to be released, you're going to start seeing it in the guidance that they'll provide for Q2 like you just mentioned, but also for the rest of the year. So really, I think in June or June, July, when we start seeing Q2 reports coming out, that's when we'll actually see the number impact of tariffs and the uncertainty it's creating.

[00:52:36] Yeah, I mean, I wouldn't want to be running a business right now, especially one that relies like a lot on input costs and everything. I mean, how do you even know? You could pay 25% more, 10%, 25%, 40% more for something that you might not have to pay anything for anything extra next week. Yeah, it's crazy. Yeah, that's why I think people who say tariffs are overdone and the U.S. might roll them back. They may be correct, right?

[00:53:06] The U.S. could, who knows what the Trump administration will do, and they could definitely roll most of the tariff bags. But the reality is, the uncertainty it's creating, it's going to have an impact on growth. To what extent, I guess that remains to be seen. But one of the biggest issues that they've created is they've created that uncertainty climate. And even if they roll back most of the tariffs, that uncertainty will remain for some time because how long will they?

[00:53:35] You never know exactly how long will they roll them back for if that's the case. So I think it's important to keep that in mind, to stay the course, not panic, and just make sure you understand the business well that you own. And if you invest in index fund, dollar cost averaging is a really good way to do it. It's a good way to do it if you own individual businesses as long as you have a good grasp on the actual business.

[00:54:01] And you have a good idea of what impact it will have on its business in terms of the tariffs. It may not be a big impact. It might actually be a positive impact for some. But I think that's important for people to know for the businesses they own. Yep. Well said. I have nothing more. Okay. Well, thank you everyone for listening. We will be back next week. If you haven't done so, you can follow us on Twitter.

[00:54:31] X, I'm at Fiat underscore iceberg. Dan is at Stock Trades underscore CA. Oh man, the lack of sleep last night is starting to hit me. And if you'd like to see some of the charts we're showing, you can, and our portfolios as well, and our monthly updates, you can join us at JointTCI.com. It definitely helps us, support us. We will be increasing the pricing in the next couple of months.

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[00:55:24] But just wanted to plug that there because we've kept the price still since we launched it. I think it was three years ago. So we will be looking to increase in the next few months. So just so people are aware. So thanks again for listening and 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.

[00:55:51] Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.