B (4:16)

I'm trying to start to think like eventually you see these massive numbers being put up in the private valuation space.

B (4:26)

Granted, the private markets in, whether it be venture capital, whether it be kind of insurance companies, we're seeing companies like Brookfield Asset Management or these kind of alternative asset managers that have a lot more money sloshing around to make investments like this. Eventually the private markets are going to tap out with the amount of money they can give to it. So the public market almost seems inevitable for these companies. And to your point, Anthropic is perhaps getting into it early enough before there's enough, enough doubt or skepticism when it comes to AI spending that perhaps these valuations start to wane before it's time to go public. Now, I'm not the most up to date, most advanced large language models and some of the things that these AI companies are doing, but it does seem based on your other media outlet reports and people tech reviews and things like that, it appears that Google's Gemini 3 is getting rave reviews and so good that there was even a recent Wall Street Journal article that came out talking about a memo at OpenAI declaring a code red to basically improve ChatGPT over some of the, you know, other and kind of delaying a lot of the prod side projects that they were working on outside of chat. GPT is kind of like a, hey, we got to get this right because the competition's coming fast. Thinking about that idea of this space is becoming more competitive. We're talking about an anthropic IPO and Google, Gemini and all of that. With it about to be IPO, we're assuming OpenAI is going to do an IPO because they've been flirting it with a little aisle. Maybe Elon Musk's XAI goes public. I kind of doubt that one. And we have publicly traded Alphabet today with a lot of large language models and kind of the lay of the land here today. Guys, of these artificial intelligence companies, which one, as an investment interests you the most?

D (6:21)

Well, I think you hit the nail on the head, Tyler, when it comes to the AI models themselves. If you have a lead, I don't think it lasts for very long anymore because of just how fast the space is iterating. And so I'm not really all that interested in the businesses that are creating the AI models themselves. I'm more interested in the companies that know what they want to do with the models. As far as creating a business and monetizing it. I think that when you look at the companies that you just mentioned, Anthropic, Open AI, XAI and Alphabet, for me, Alphabet has the clearest roadmap of what it can do with AI. And so that really interests me as an investor. So I would say Alphabet would be at the top of my list as far as companies you just mentioned. But that said xai, with all of the things that Elon Musk is pursuing, all of the companies that he has, I would say that XAI also has probably interesting ways to monetize its AI ambitions.

C (7:22)

Yeah, I mean, the easy answer is Alphabet. I've been calling it the cheapest Mag 7 stock for the past year or so. But to be fair, their AI models really didn't have that much to do with my thesis. It's really just the strength of the Google brand, what they're doing in cloud and things like that. It wasn't their LLMs. And my longer answer is it depends what all these will look like valuation wise and revenue wise and momentum wise when they go public. That has a lot to do with it. Are we talking about a profitable OpenAI that has $70 billion in revenue, or are we talking about a company that's still hemorrhaging money? So for me, it really depends how the IPO process shakes out.

B (7:59)

All right, coming up next, we're going to talk about the evolution of the buy now, pay later landscape.

A (8:04)

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B (9:17)

We are by no means a breaking news sort of podcast, but I think there was a press release from Klarna that actually came out this morning. So it's probably the closest we've ever come to breaking news on the Motley Fool Money podcast. But we thought this would be a great jumping off point to discuss the Buy Now Pay later landscape because it was something that came out and is very topical and really relates to how this industry has been evolving.

C (9:41)

Now.

B (9:42)

A couple months ago Buy Now, Pay later company Klarna rolled out a membership program in Europe talking about membership tiers and various perks that you could get to it. And this morning the company announced it was bringing more or less the exact same structure of those membership tiers to the United States in the press release they mentioned some of the membership program perks that they have like airport lounge access, spending perks like cash back and even a 16 gram rose gold looking not, not a credit card but a 16 gram rose gold card. So whatever that's supposed to be called in the future. Matt, I'm trying to figure out what going on here because what's going on here because Buy Now Pay later was supposed to be not credit cards. This sounds like credit cards. Like what, what are they doing here and how is this, what is the point of what they're doing here?

C (10:37)

Yeah, well one of the most misunderstood parts of Klarna in particularly in the space is that one, they're a bank. Number two, they' disrupt more than the Buy now pay later space. And just to put some numbers out there, about 2% of payment volume in the U.S. overall retail is Buy Now Pay Later. Today credit and debit cards combine for about 70% which about half and half credit and debit. The subscription products are not cheap. Over $500 a year for the top tier membership. But as you mentioned they include things like airport lounge access. Another big one is travel insurance which I currently pay over $400 for an annual travel insurance policy. And they're competing with cards like the Amex Platinum card that charges $895 a year. So it might be a little more of a value than they're getting credit for. And that's just one example of how they're trying to disrupt. I'm not 100% sold that the membership program is going to be a massive success, but it's an interesting approach to try to attract customers who might want some of these perks but don't want to sign up for such a high end credit card.

B (11:44)

Yeah John, I'm maybe reiterating my old guy shouts at cloud question here but you know, this is what I kind of struggle with this a little bit. We were just talking about 2% of payment volume is Buy Now Pay later we have. Credit cards are pretty much the dominant payments way of doing things. Top end clara subscriptions over $500 a year. You get credit card like perks. Other Buy Now Pay later companies like Sezzle also have membership tiers with various. It really seems to me like Buy Now Pay later is doing their best to look more and more like credit cards. So if me not the investor but me like the consumer, like what's the hook really here to get me to actually switch?

D (12:26)

Yeah. What's interesting is it appears that 0% interest is what is attracting people to the Buy Now Pay later platforms? And I know that you and I were talking, we pay off our credit cards at the end of the month, so we pay 0% on our credit card. But not everyone is in that situation. 86% of users for Buy Now Pay later according to one Morgan Stanley report. Their, their motivation to switching to that over credit card was the 0% APR. And so, you know, you have 4 interest, 3 free payments. You can extend it out over the entire year rather than just the month. And so, you know, that's one incentive. Now I think we've all heard the stories of how you can, you know, use Buy Now Pay later for your Chipotle. And I think that we would agree that probably breaking your lunch down into four payments over the course of a year, maybe not necessarily the best thing. But here's what's interesting here. This is some data from Klarna that they're sharing. When it comes to canceling your credit card switching to Buy Now Pay later, people who earn 100,000 or more annually, they're the ones who are making the switch more than anyone else. And so this is actually kind of a higher end consumer thing that is happening not so much at the lower tiers financing a burrito. These are people who are making good money and they're switching. And one of the big motivations is a 0% APR. You look at what Klarna just launched as far as its subscription services. Yeah, they're not necessarily cheap. $20 a month for premium, $45 a month for the maximum. But comparably we're looking at in the same ballpark as these higher end credit cards. And so maybe they're looking at the data saying we see who is making the switch to our platform and we're going to offer them a higher incentive for this kind of a tier of consumer. And so very interesting move by Klarna.

B (14:21)

To that end, using subscription fees as like a major revenue driver for these companies. It seems like they're taking a little bit more of The AmEx model versus the Visa and MasterCard model of just being payment processors and using that membership fee to really fund the business in that sort of way. And I want to get to this as the investment side of it because Matt, we've talked about Buy Now Pay later before, especially when a firm went public. At the time, you weren't necessarily the big fan of Buy Now Pay later as an investable space. Does these sort of evolvements or evolutions of the Buy now, payday Later Space changed your thesis at all?

C (15:02)

Well, I definitely misunderstood some of the key aspects of the buy now pay later model. So I thought that and a lot of people still think this, that it's an inherently risky form of lending. Jason hall said that yesterday on our show and as soon as the economy turned sour that we would see a big wave of defaults. Well, we got the 2022 bear market and interest rate spike that didn't happen. So I decided to look a little closer. And if you look at some of these companies and Klarna's not alone, but I'm just going to quote their numbers. Klarna's net charge off rate is 0.44% of their loan volume per year. That's roughly one fourth of what Amex has, which is considered generally a top notch clientele. The key thing to keep in mind here is these are short term loans. Klarna's typical loan is two months in length. The for payment thing is usually split over a two month period and they're generally linked to the recipient's bank account. So it's really hard to default on them unless you literally don't have money in your bank account. And so it makes the probability of default much lower than you might expect. So klarna gets a 3% fee. Most of their loans are no interest. They get a 3% fee paid by the merchant which is roughly what the merchant would pay to accept a credit card anyway. And if you extrapolate that over a year of say these two month loans, you're talking about roughly an 18% yield, a 4, 4% net charge off rate and low cost deposits funding the business. Because Klarna's a bank, it's a recipe for a pretty strong interest margin.

D (16:27)

I've been dismissive of the buy now, pay later space because I'm not a user of it. And I would say that I fall into the category of not really understanding the, the motivation from a user perspective but also the investment thesis. But I will say that as I've dug in a little bit deeper here with Klarna and tried to understand what they're doing. I mean to, to your point Matt, as far as the, the perceived riskiness of this, if your top adopters are some of your highest income people, that that is actually lower risks than what a lot of people might think. And so definitely something that I need to do a little bit more digging into and not be so dismissive because it does seem like there's something here.

B (17:11)

For investors coming after the break. Stocks on Our radar, the adage goes.

A (17:16)

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B (18:26)

We'Re going to do socks on our radar. And this week, Matt, why don't you kick things off here?

C (18:30)

Yeah. I'm going to talk about one of my familiar favorites. It's Kinsale Capital Group knsl. And the reason I'm bringing this up, even though we've talked about it several times before, is that it's trading at a rare disc. Kinsale's never had a down year and it looks like 2025 is going to be its first one. I've owned the stock for a long time. It's down about 25% from its 52 week high, despite pretty excellent results from the business. Still, there's a big question mark about succession, which I think is giving a lot of investors fear right now. The chief operating officer, essentially the second in command, Brian Haney, who was kind of thought of as the heir to the Kinsale empire, announced his retirement. So when Michael Kehoe eventually steps down, who's CEO then? What? But Kinselo is a deep bench and it's C suite. The general, I mean, insurance stocks, if you look at all of them, they're kind of down right now. It's not down for no reason. I mean, falling interest rates, for example, are going to hurt investment income and things like that. But it's an incredible business that's trading at a rare discount.

B (19:28)

So I'm going to go a Little bit off script for my normal, I'll call them like value companies. I'm going to look at real expensive, call them a deep experimental company. This is Illuma. Ticker is a L M U. This is a company that just recently uplifted to the nasdaq who used to be a over the counter company. And what it does is it actually developed a breakthrough in what are called compounded semiconductors. This is basically the idea of using a, we'll call it a gas layer or crystalline layer over your traditional semiconductor. And it's one of the, we'll call it a, like a breakthrough in terms of trying to build semiconductors for the quantum computing revolution. These, these compounded semiconductors basically let them run on less power, they're more efficient, it allows them to do a much broader spectrum of things, especially when it comes to sensors. And it's, it's not the first time this type of technology has been implemented, but it's one of the, the way that Illuma has implemented their kind of adding that layer to the, to the semiconductor is actually one of the cheaper ways of doing it. And they've been able to get a cons that could actually mass market this product versus being this niche specialty product. And so if we're looking at investments in the potential quantum space, quantum computing, quantum sensing, things like that, this could be one of those kind of breakthrough moments that would make quantum, a lot of the quantum technologies that we have out there today much more affordable. And obviously when you kind of have that Jevons paradox of like once something becomes more affordable, the options for us using it get much greater. It's still, I would say, not completely without revenue, but it is basically a pre revenue company setting up a lot of like deals with DARPA and other kind of government agencies to test what they're doing here. But I think at the company's relatively small size, this is a really interesting opportunity to people at least look at to see if this could be something that's big really down the road.

D (21:29)

Well, for my company today we are going just three in completely different categories of the stock market. I'm going with badger meter symbol bmi. This is a smart water meter company. Its customers are municipalities. So those are hard customers to get, but they're pretty sticky once you have them. I think the value proposition for this company is that if there's a leak somewhere in the water line, you're wasting money, you're wasting water. So it's smart meters detect those leaks, help track it down. So the idea is hey, invest in some of Badger Meter's products and you'll save money in the long run. So when you look at this company financially, it's pretty attractive, I think. Revenue is growing by double digits. Its profits are growing even faster. It has a growing software business to complement its hardware business, so that can help boost margins. There's no debt on the balance sheet, and it's paid a growing dividend for over 30 years. Most recently, it increased it by 18%. The payout ratio is still pretty low at down around 30%. So to me, Badger Meter looks like a safe business. You have a chance for both growth and income if you're an investor. And it's down about 30% right now, which is one of the largest pullbacks it's had over the last decade. So Badger Meter is one that I just found for myself. I just discovered it for the first time, and I think that it's worth looking into.

B (22:56)

That was definitely a Stocks on our Radar segment worthy of the Monty Python line. And now for something completely different. As always, people on the program may have interests in the stocks that 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. The personal finance content follows Motley fool editorial standards and is 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. Thanks to our producer, Dan Boyd and the rest of the Motley fool team. For Matt, John, and myself, thanks for listening and we'll chat again.