Everything Is a Circle
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I'm Mary Long, joined today by Mr. Asit Sharma. Asit, great to see you. It is truly a pleasure to have you here today. Same, Mary. I am truly honored to be with you today. There we go. Pleased, honored, all good vibes today. Before we dive into some deeper stories later on in the show, we're going to highlight some of today's headlines up top. So, Asit, we're going to start with some macro stories and then dive a bit deeper into some company-specific news. First big thing that we're keeping an eye on is that

The S&P and Nasdaq both closed at their highest points since February, leaving both indexes hovering around record highs, largely on the news of a ceasefire between Israel and Iran. There are reports that fighting continues, but investors seem to be betting on peace. You got oil futures falling on the ceasefire announcement. Gold moved in a similar direction, dropping to a two-week low. You also will

have another part of the economy that's moving in a different direction. The housing market is falling from its pandemic highs. Data from the latest S&P Case Index reports that home prices rose just 2.7% in April. That's down from their 3.4% gain in March. Redfin says sellers outnumber buyers 3-1 in this market and predicts that prices could slip 1% by late 2025.

Asit, I think you want to double-click on the housing market story. Anything you want to add there? Give us a little bit of color? Mary, this is an industry, at the end of the day, that is a supply and demand story. I think what we saw in the great financial crisis back in 2008, 2009 really put a stick in the story that house prices will always rise inexorably and be a great investment. That's been challenged during the pandemic. We saw the reverse occur.

And now, here we are, where the economy is slowing down, there's a lot of uncertainty, tariffs are a big story, interest rates are still stubbornly high, people aren't earning as much. We see this outnumbering of sellers to buyers.

What does this mean to me? Well, one thing it means is that lots of people have lots of equity tied up in their homes. On the other side of the coin, there aren't as many people now in this economy who are able and willing to buy those houses. So, it becomes a little bit of a buyer's market when the sellers aggregate. I don't doubt that we could start to see prices slip by late this year. Historically, when you look at all the data we have that goes back

an enormously long period, it is unusual for house prices to fall. But we may be in that situation again. Keep an eye on that.

Earnings are kind of slowing down, but we did get news from Carnival Cruise Lines yesterday. And as a result of its results, the stock was up 7% yesterday after market close. The company tripled its net income and raised its guidance. It expects adjusted net income to be 40% higher than last year at the end of the fiscal year. Asit, what stuck out to you in these results?

I think, for me, the thing that sticks out for Carnival in general over the last several quarters is the way that they have managed and boosted their yields. All of their ships, they've decreased the ship supply in the past few years.

They do a really good job of marketing. They're getting more yield per marketing dollar. I think this whole strategy that Carnival has had of acquiring these small islands and making them destination places so the experience isn't all about the cruising has really resonated with cruisers out in the larger world.

So, so many things they have done right. The other thing that really popped out at me this quarter is the amount that they're now spending on the interest that serviced their debt is less than it was just a few years ago. I think their long-term debt peaked at around $32 billion in 2023, and it's roughly $25 billion today. When you look at the commensurate effect of the interest expense on that debt, that's

half a billion dollars to the bottom line that they can add over a 12-month period. Those numbers really start to make the net income look a lot juicier if you're a long-term shareholder. Paying down the debt, cutting the number of ships they have, having these destinations to drive interest and drive the yields, all these things together just make a picture of a well-run Carnival Cruise Line.

Last point, CEO Josh Weinstein has done a tremendous job putting this company back on track. It's not news for me to say that the word of the year certainly seems to be uncertainty. That's in regards to the economy, to geopolitics, any field, you name it. Because of that, a person could be forgiven for thinking, "Hey, in an uncertain environment, people aren't going to be going on vacation as much. They aren't going to be tightening their wallets."

Carnival doesn't seem to be facing that issue. In fact, Josh Weinstein seemed very enthusiastic and excited that people are getting great value out of their cruises. Why do cruise stocks tend to rise even when consumers start tightening their wallets? Consumers tend to fool themselves in one sense, which is, if you're looking at a vacation which is all-inclusive,

Many of us trick ourselves into thinking that's all that we're going to spend on that vacation. Cruise lines historically have enjoyed some periods where we've seen uncertainty in the economy, even a slight recessionary trend, where consumers will drop down from multi-component vacations.

renting a car, staying in hotels, booking air flights, to this one thing that if you book in the right time during booking season, you can get at a massive discount. Now, Carnival is very savvy. Once you get there, they're really good at extracting your dollars anyway. But this is a lure for the general person out there in the economy who's starting to struggle a bit as a way to maybe make sure that they can stay within budget. Doesn't always happen, but this is part of the up-and-down

momentum of this industry, surprisingly, bad times can be good for the cruise line. Bad times can be good for the cruise line? Does that mean that you, Asit Sharma, plan to catch a ride with any cruise ship stocks? Why call on that side of the coin? I am still trying to get some racks put on the top of my car for some kayaks we have that are sitting there. Very appealing. I want to get out on those kayaks at a local lake in Raleigh, North Carolina this summer.

That's very different than a cruise. Yes to kayaks, but it sounds like, no, you're not adding any cruise ships. It's my cruise, Mary. I'm going to cruise the calm waters of Lake Johnson. It sounds like, no, Austin is not a fan of adding cruise ship stocks to his portfolio. With that, we're going to take a quick break. Later on in the show, we'll be talking stablecoins and the luxury watch market.

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Asit, Circle Internet Group has been on a tear since going public earlier this month. Circle is the company behind USDC. That's the second largest stablecoin by market share. So, stablecoin is a token that's backed by an equivalent dollar-denominated asset. Before we get to Circle's rise and, in more recent days, its slight fall, what is behind all of this interest recently in stablecoins?

One of the things that stablecoins bring to the market is an avoidance of the fees that we pay to networks, such as Visa and MasterCard, when transactions are made. Most of the time, the merchant bears the brunt of those fees. But what do they usually do? Maybe they pass them on to you and me.

And as time goes on, sometimes you even see that as broken out as a surcharge in certain service areas. So, the lure of the blockchain didn't really pull a lot of retail interest in where transactions were concerned.

because of so many digital assets that came and went. There was fraud associated with some crypto assets over the last several years. But the idea of a stablecoin, which is backed in many cases by reserves of currency, pegged to a currency like the U.S. dollar, and perhaps regulated, as we see with the Genius Act, which has been in the news lately, that's starting to pull in more interest. Also, I think the technology

of stablecoins has improved over the last few years. We saw Circle announce a partnership with Fiserv, which is a really large payment processing company. You see many strands of the story starting to come together that we could have a viable alternative to some of the established payment systems that have been around for decades. Hence, this explosion in retail stock interest. For those of you who follow Circle and the stock market, a recent IPO, I'm sure you have seen

How this stock has exponentially enjoyed some interest, I'll put it politely there. Whether it stays up in that stratospheric level is another question.

Yeah, to put some numbers behind those adjectives, CircleStock soared 168% on its first day of trading alone. It continued to rise in the weeks following. I think at its highest point, it was like 700 and had grown 750%. It's dipped a bit back down over the past few days. But Asit, we're long-term investors here. So let's zoom out and think not about what might happen over the next month, but maybe over the next five years. Where do you think CircleStock will be about five years from now? It's hard to say.

Of course, I'm going to hedge outright, Mary. I always do that. But I will take a bit of a stand here. I think this company has some potential because the market is so vast.

When you think about transaction volumes for Visa and MasterCard, those are in the trillions every year, trillions of dollars crossing those platforms. So, even getting a slice of that would be a substantial win for a business like this. What do they have to do to get there? They've got to have full transparency. To be this very easily defined and easily followed entity, they've got to comply with regulatory bodies around the world.

They have to scale and be liquid at the same time, so they need a lot of capital to do this.

They've got to seal a lot of deals with companies like Fiserv. In addition to sovereign body licenses, they have to wheel and deal out in the marketplace. But if you can do that, the market is there for an alternative to current payment systems. I should say, this is also an alternative to slower-moving systems like ACH payments and some peer-to-peer payments. We've

Got a story which could emerge, but we're going to have to follow the execution on so many fronts that I just mentioned for that story to pan out, where this becomes a really valuable company. But I'm saying all this just for some investors who might dismiss this company out of hand, just seeing its almost meme stock-like movement since the IPO. That doesn't mean that this can't be a good business. Of the different networks, when you look around this landscape,

This company in particular stands out for the effort it's put in to show it is compliance-minded, it is reserve fund-minded, it wants to be known as the most legit of these networks. It's got some potential over the long term.

Thinking of the broader landscape of this space, a name that a lot of investors are probably pretty familiar with is Coinbase. How is what Circle's doing different than what Coinbase is? And maybe where do these crypto-adjacent companies overlap?

I think Coinbase is a company that's benefiting from the general rise in digital assets. It's a trading platform. It's a company that rises when volumes of different coins rise.

That's a really good place to be in this whole ecosystem. A company like Circle may make it, it may not. It may be usurped by an even better competitor, or regulations may change, or the demand for this may decrease. I'll give you one great example of how this could happen. Although it is blockchain-based, we still don't have really great mechanisms for fraud prevention.

the way that MasterCard does, or Visa, or American Express, these companies that have been around for a long time and have made huge investments in their payment services. The rigidity and structure and backbone of these networks are yet to be proven. Whereas, Coinbase is over here just being a middleman, a broker. I always like those businesses

because as long as there's trading, they'll find a way to make money, whether they're selling order flow, whether they're making it on the transaction, whether they are making it on the spread of holding assets and making interest off those assets. There's so many ways for a middleman like Coinbase to make money. If you ask me, okay, right now, which is going to be around in five or 10 years with a higher probability, I would say Coinbase. So,

Both can succeed in this environment, but they are different. They don't, at this point, have a lot where they have confluence in the things they do.

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We'll close out with a story that I really wanted to be sure to hit on with you, Asit, because you and I have talked about the luxury goods market before. I came across a fascinating story in The Wall Street Journal the other week that I thought you'd have some really interesting takes on. This one is about an American fund manager named Steven Wood who's taken a 0.5% stake in the Swiss watch company Swatch.

And he was gunning, ultimately unsuccessfully, but he was gunning earlier this year for a board seat at the company. And Wood's hope is for Swatch to capitalize on its highest-end brands to lean into its luxury offerings. I'm going to link to this article in the show notes because I think the listeners would be really fascinated at this, just like, this...

wild look at business strategy and family dynamics. There's a lot to unpack there. But we'll focus on Swatch, the company, for now. So, Swatch currently owns 16 brands across various price points. So, you can get a Bruguet for almost $44,000, whereas a Swatch watch could run as low as $40. What do you think of this play? Asit, do you like it, or do you see it more as an example of diversification? Asit Sharma

It might be towards vacation, Mary. It might be too little too late. I like that 0.5% stake. If he can get up to 1%, he might have some more say and maybe get a seat on the board. But Swatch is a business which was in currency years and years ago. Decades ago, actually, was when I think it was at its brand peak.

That would have been a great time to capitalize on that brand and to offer some super luxury items, attract the massively affluent who also loved the watches that were going for whatever it was at that time, probably $30.

inflation adjusted. But I'm not so sure that's a great strategy today because the brand doesn't have the cash, simply put. This is a business which has stalled in its revenue growth. I do think that Swatch is making a little bit of a comeback. I noticed some of the younger generation now are starting to wear Swatch. You see them more in circulation than in the past. That's good for the brand. But trying to do this

sort of barbell strategy with this type of brand, which has been around the block. I think that's difficult. So I'm going to say it's a do worse idea than maybe others would have. So we'll see. I never want to count an enterprising entrepreneur out, but I'm skeptical. You're not the only person that's skeptical. 27% of Swatch shares are short interest. Net profit fell 78% last year.

I asked you the five-year question on our last story. I'll ask you for this one as well. Where do you see Swatch going in five years' time? This is a business that can plod along, maybe meet the market or hang out with the market. The one thing to remember about Swatch is that it's got a really strong balance sheet. It doesn't have much in the way of long-term liabilities. It's got a really great haul of current assets.

something like $10 billion in current assets. Now, about $7.6 billion of that is Swatch inventory. But the company turns its inventory over pretty regularly. This isn't a company that is just about to collapse. I think with a little bit of brand revival, they will plod along. Do I see them outgunning the market and maybe suddenly catching fire?

I don't know. I will say this, though, before we head out. I did actually buy a Swatch in an airport for my wife last year, simply because at one point in our illustrious career as a couple, we were too poor to afford what was then probably that $30 Swatch price point. We happened to see this really beautiful store in the Istanbul airport

I was very surprised at the number of swatches they have now. It's an explosion of color and lots of different styles. Maybe they'll catch fire with something, but I don't see this being an alternative to some other of the really higher-end luxury companies you and I have talked about that make for better long-term investments.

Yeah, I was going to say, you keep an eye on the luxury goods market. Is there a company that comes to mind that has already caught fire or that you think could continue to do so in the future that plays in the luxury space? Well, I've been talking up Ferrari for the last couple of weeks. I've been looking at symbol RACE. The thing that is really dawning on me over time is how well they sell into demand and how disciplined they are in restricting their output.

And I noticed, just for fun, internally here at The Motley Fool, we have something called The Fool's Errand, where we award randomly, through a game that we play every month, some time off to valued Fool members. And

This month's theme was Ferrari. Our team did a great job of explaining that business model much better than I did on Motley Fool Money last week. But I will say, that is catching my eye as a company that's going to benefit from the tailwinds of the F1.

interest that's growing, and also just the amount that they spend in R&D research and development. They really love engineering. It's an engineering-first company. Sometimes, what propels a brand isn't really about status, but it's about the product itself. They've always kept their eye close to that.

That's about all the time that we've got for today. Asit, thanks so much for spending the morning with me here on Motley Fool Money. Always appreciate having you on. Always a pleasure, Mary. Thanks so much. Before we go, a quick programming note that this will be one of my last shows hosting Motley Fool Money. Working on this show each day for the past few years has truly been a highlight of my career.

My favorite part of this job is that I get to read articles and books and go down rabbit holes every day and then have conversations that help me to better understand the world. I have learned so, so much. And it's my hope that by virtue of listening, you feel that you have too.

I don't know exactly what comes next, but I do know that I plan to continue podcasting. So if you want to see what I'm up to, LinkedIn is the best spot to find me. Until then, thank you to each of you who have listened to Motley Fool Money for the gift of your time and your attention. I hope you feel that it was well spent and that you're a little smarter, happier, and richer because of it.

I also can't go without giving a very special thank you to the Motley Fool Money team. That's Chris Hill, Dylan Lewis, Ricky Mulvey, Rick Engdahl, Dan Boyd, Tim Sparks, and all the wonderfully smart and kind and funny analysts that are regulars on the show.

You all are the epitome of foolishness. What a gift it's been to work with each and every one of you. So until next time, Fool on. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers.

Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. From Outlink Full Money, I'm Mary Long. Thanks for listening. We'll be back tomorrow.