Big Tech’s $300B Spending Spree

Summary

Motley Fool Money: Episode Summary – "Big Tech’s $300B Spending Spree"
Release Date: February 7, 2025

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Introduction

In this episode of Motley Fool Money, hosts Dylan Lewis, Jason Moser, and Ron Gross delve into the latest developments in the financial world, with a spotlight on Big Tech's substantial capital expenditures. The discussion weaves through macroeconomic indicators, earnings reports from major companies, investment insights, and a special segment on Super Bowl sports betting.

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Macroeconomic Overview

Labor Market Analysis

Timestamp [01:09] – Ron Gross:
Ron Gross opens the discussion by analyzing the latest jobs data, describing the labor market as "still strong, but maybe with some cracks." He notes that while wage growth is benefiting workers, it also heightens inflation fears, potentially influencing the Federal Reserve's interest rate decisions.

Key Points:

• Mixed jobs report indicating both strength and emerging weaknesses.
• Strong wage growth contributes to inflation concerns.
• Potential for the Fed to consider lowering interest rates if labor market cracks widen.

Tariffs and International Trade

Timestamp [01:51] – Jason Moser:
Jason Moser addresses the reinstatement of 25% tariffs on Canada and Mexico by the Trump administration, explaining the delay in their implementation due to improved negotiations focused on curbing the fentanyl crisis.

Notable Quote:
"Tariffs are always politics versus economics. The delay likely stems from leaders getting their heads together and making progress on their shared goals." – Jason Moser [02:18]

Key Points:

• Initial threat of tariffs linked to migration and drug control.
• Economic impacts of tariffs can be severe, leading to market volatility.
• Ron Gross advises investors to generally "stay the course," especially if invested in broad index funds, while suggesting portfolio adjustments for those heavily weighted in sectors vulnerable to tariffs.

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Big Tech Earnings

Amazon's Earnings Report

Timestamp [04:08] – Ron Gross:
Ron Gross provides an in-depth analysis of Amazon's quarterly performance. Despite surpassing top and bottom-line expectations, Amazon's stock declined by 4%, primarily due to concerns over future guidance and significant capital expenditures.

Notable Metrics:

• Sales Growth: Overall up 10%, North America up 10%, International up 8%.
• AWS (Cloud Division): Revenue up 19%, slightly below expectations.
• Operating Income: Up 61%, with earnings rising 89% to $20 billion for the quarter.
• Guidance: Projected sales growth of 5-9% for 2025, a potential slowest growth rate on record.
• CapEx Guidance: $105 billion for 2025, up from $80 billion in 2024, driven by AI investments.

Key Points:

• Strong current performance overshadowed by cautious future projections.
• Massive capital expenditure increases to stay competitive in AI.
• Market reaction likely influenced by lower-than-expected guidance.

Alphabet's Earnings Report

Timestamp [07:08] – Jason Moser:
Jason Moser discusses Alphabet's quarterly results, highlighting continued heavy investment in AI infrastructure under the "Gemini" project. Alphabet reported a 12% revenue increase to $96.5 billion, with significant growth in YouTube and cloud services. However, the substantial capital expenditure of $75 billion for 2025 raised investor concerns.

Notable Quote:
"They are spending to stay competitive, which is almost essential in this AI race." – Dylan Lewis [09:59]

Key Points:

• Revenue up 12%, driven by YouTube (up 13.8%) and cloud services (up 30%).
• Increased capex reflects commitment to the AI-driven future.
• Stock impacted by modest revenue miss and higher-than-expected AI investments.

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Other Major Stocks

PayPal's Earnings Report

Timestamp [11:06] – Dylan Lewis:
PayPal's shares fell by 10% despite a solid Q4 performance. Jason Moser attributes the drop to concerns over operating margins and branded checkout growth, which, although positive, did not meet market expectations.

Notable Quote:
"We're still looking at a juggernaut here in the payment space. I would not say sell them short." – Jason Moser [12:23]

Key Points:

• Revenue increased by 4% to $8.4 billion.
• Transaction dollars up 7%, with total payment volume rising 7%.
• CEO Alex Kriss focuses on small to medium business growth and Venmo monetization.
• Investor sentiment tempered by questions on future growth and profitability.

Spotify's Milestone

Timestamp [13:26] – Ron Gross:
Ron Gross highlights Spotify's first-ever annual profit, driven by increased subscriptions and strategic cost-cutting measures, including a reduction of 1,500 jobs.

Notable Quote:
"Their monthly active users rose by 35 million to hit a total of 675 million—the largest Q4 increase in their history." – Ron Gross [13:26]

Key Points:

• Revenue up 16%, with YouTube revenue specifically increasing by 13.8%.
• Gross margins improved to 32.2%.
• Strong market reaction with shares up 170% over the past year.
• Management's robust guidance and strategic partnerships bolster investor confidence.

Chipotle's Steady Performance

Timestamp [16:03] – Jason Moser:
Chipotle reported a 13.1% revenue growth to $2.8 billion for the quarter. Despite facing operational margin pressures due to food cost inflation and potential tariff impacts, the company remains on a positive trajectory.

Notable Quote:
"If they can achieve their target of over 7,000 stores in North America, along with increasing average unit volumes, there's a massive opportunity here." – Jason Moser [17:19]

Key Points:

• Total revenue growth of 13.1%, with digital sales accounting for 34% of total sales.
• Operating margin slightly contracted due to higher food costs.
• Forward guidance excludes potential 60 basis point tariff impact, indicating management's uncertainty about tariff implementation.
• Plans to expand store count and enhance average unit volume present significant growth potential.

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Super Bowl Sports Betting

Timestamp [19:08] – Ricky Mulvey & Nick Sciple:
Ricky Mulvey and Nick Sciple explore the booming sports betting industry, especially in the context of the upcoming Super Bowl. Legal sports betting has surged from $300 million in 2020 to $1.3 billion last year, driven by increased legalization and aggressive advertising.

Notable Quote:
"Parlays are exploiting the common cognitive bias that we all have. The sportsbooks are depending on that." – Nick Sciple [29:42]

Key Points:

• Legal sports betting has seen exponential growth, with increasing state-level legalization.
• Online operators like DraftKings and FanDuel dominate the market, outperforming traditional physical operators.
• Regulatory uncertainties, such as proposed tax increases in states like Ohio and Maryland, pose challenges.
• Parlays, while popular, represent higher risk and profitability for sportsbooks compared to straight bets.

Investment Insights:

• Nick Sciple expresses caution about investing in sports betting due to regulatory uncertainties and evolving market dynamics.
• The industry is still maturing, with significant capital flowing in and questions about long-term profitability.

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Fun Segment: Culinary Plans for Super Bowl

Timestamp [34:26] – Jason Moser & Ron Gross:
The hosts share their culinary plans for watching the Super Bowl, discussing favorite dishes like smoked wings and antipasto salads, adding a personal touch to the episode.

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Stocks on Radar

Uber (Ticker: UBER)

Timestamp [36:00] – Jason Moser:
Jason Moser highlights Uber's strong quarterly performance, with gross bookings up 21%, driven by both mobility and delivery services. Notably, Bill Ackman has been building a significant stake in Uber, exceeding $2 billion.

Notable Quote:
"Total trips for the quarter grew 18% to 3.1 billion, or approximately 33 million trips per day on average." – Jason Moser [36:00]

Key Points:

• Revenue growth in both mobility and delivery segments.
• Continued investment in autonomy, though commercialization of AV technology remains a long-term prospect.
• Positive market response despite initial stock volatility.

Academy Sports and Outdoors (Ticker: ASO)

Timestamp [37:16] – Ron Gross:
Ron Gross introduces Academy Sports and Outdoors (ASO) as a hidden gem in the sporting goods sector. With roots dating back to 1938, ASO has expanded to 298 stores, primarily in the Sun Belt, and is noted for strong cash flow generation.

Notable Quote:
"They produce gobs and gobs of cash flow. It's a really strong business that most people have never heard of." – Ron Gross [37:55]

Key Points:

• Rapid expansion in the Sun Belt region.
• Differentiated from competitors like Dick's by focusing on cash flow and store growth.
• Positioned as a strong, under-the-radar investment opportunity in the retail sector.

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Conclusion

The episode concludes with reflections on the intertwining of financial markets, consumer behavior, and lifestyle choices. Hosts emphasize staying informed and maintaining a strategic investment approach amidst evolving economic landscapes and emerging industry trends.

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Notable Quotes Overview:

• "Tariffs are always politics versus economics. The delay likely stems from leaders getting their heads together and making progress on their shared goals." – Jason Moser [02:18]

• "They are spending to stay competitive, which is almost essential in this AI race." – Dylan Lewis [09:59]

• "Parlays are exploiting the common cognitive bias that we all have. The sportsbooks are depending on that." – Nick Sciple [29:42]

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This comprehensive summary captures the essence of the "Big Tech’s $300B Spending Spree" episode, providing listeners with valuable insights into Big Tech's investment strategies, market reactions, and investment opportunities across various sectors.

Transcript

[Dylan Lewis]

What's $300 billion in capex between big tech friends? This week's Motley Fool Money radio show starts now.

[Jason Moser]

Everybody needs money.

[Ron Gross]

That's why they call it money.

[Dylan Lewis]

The best things in life are free, but you can give them to the present.

[Nick Sciple]

Be the money from Pool Global Headquart. This is Motley fool money.

[Dylan Lewis]

It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley fool senior analyst Jason Moser and Ron Gross, Fools. Great to have you both here with me.

[Ron Gross]

How you doing, Dylan?

[Dylan Lewis]

Hey, I'm excited because we have a little bit of a Super bowl sports betting preview on today's show. How could we not? But we also have a look at earnings, the good, the bad, the capital expenditure intensive. And we have, of course, stocks on our radar coming at you this week. We are going to kick off though, looking at the big macro. And Ron, I'm going straight to you on this one. We've got some fresh jobs data this week. What kind of picture is it painting for the labor market?

[Ron Gross]

I think it was a mixed report, which means there was something for everyone here in this report. The labor market is still strong, but maybe with this report showing some cracks which could give the Fed cover to lower interest rates if the cracks widen. But we are not there yet, especially because wage growth was really strong in this report, which is great for workers, but it also it increases the fear of inflation. So my guess is this report will put everyone still on hold. No rate changes through at least March in June. We can talk about it again and we'll see what the picture looks like there.

[Dylan Lewis]

One of the other unavoidable parts of the big picture this week, Jason, tariffs. Before we get into any company results, we got to talk tariffs. Market had to process, I think what was a little bit of a head fake this week, 25% tariffs on Canada and Mexico announced by the Trump administration set to go into place and then delayed a month after talks between leaders of the countries. Market has had to try to process this. How are you factoring it into your picture for 2025?

[Jason Moser]

Yeah, I think to me, when we talk about things like tariffs, I mean, it's always it's politics versus economics. Right. They're serving two very different purposes here. And I'm not terribly surprised to see the fact that we've seen a delay here in the potential tariffs being implemented. And most of that just really was because of the reasoning behind this threat in the first place. I mean, the Trump administration was noting that Mexico and Canada were subject to this because they failed to stop unauthorized migrants and drugs from entering the US in regard to China, it seemed to center more around the fentanyl crisis. And ultimately to me, it just seemed like, well, it's something that could just go away if leaders could get their heads together and say, okay, listen, we've talked, we've made a lot of progress or we've had some productive discourse and we understand our goals and what we want to do now. So. So I'm not terribly surprised to see this delay. I honestly would be surprised to see them implemented a month from now just because the economic impacts can obviously be very severe.

[Ron Gross]

Yeah, agreed. And as far as the stock market and investing goes, it all depends on which countries and the severity and the length of time. But for individual investors, I think you stay the course regardless. Quite frankly, if I was invested solely in broad index funds, for example, I wouldn't be doing anything. I would stay put on the other side of the coin. If I had 15% of my portfolio in a stock that could get hurt. Maybe a Chinese manufacturing company of semiconductors or maybe some auto companies. Well, then I would maybe think about asset allocation a little bit. Bring my 15%. That's a big position. Bring that down a bit to mitigate risk just in case. But for the most part, I think this is one of those stay the course moments or avocados.

[Jason Moser]

Right, Ron? I mean, avocados.

[Dylan Lewis]

Save it for the Chipotle conversation later in the show. Jason.

[Jason Moser]

Sorry.

[Dylan Lewis]

All right, so wait and see a little bit on the macro picture. No need to wait on the big tech picture. We have results from Amazon and Alphabet this week, which rounds us out from Microsoft, Apple and Meta Results last week, Ron. Shares of Amazon down 4% after the company reported even though top and bottom line numbers were ahead of expectations. What's got the market down here?

[Ron Gross]

This was a really strong report. A big beat, as you say. But it was future guidance and some whopping capex. We're going to hear that a lot. Some whopping capex guidance that has investors a little bit spooked. But the report, I'll take you through some of the metrics. These are pretty impressive numbers. Sales overall up 10%. North America up 10% as well. International up 8% now. AWS, the cloud division up 19%. Strong results, but that actually was just shy of expectations. So some disappointment there. The Amazon Advertising business up 18%. That's pretty strong. You had gross margins widening. So they're bringing more money down to the bottom line. Widening by 180 basis points, which is really nice. And they're controlling operating expense as well, after having laid off thousands and thousands of people in previous years. Operating income up 61%. Earnings up 89% to $20 billion just for the quarter. $20 billion in earnings just for the quarter. First quarter. Guidance of this year is where you get a little less exciting and where the train comes off the track just a little bit. Sales expected to grow between 5 and 9% compared with the first quarter of 2024. Less than hoped. If it comes in at the low end of the range, that would be the slowest growth on record for the company. And it's below analyst expectations. Now, it's important to note that guidance does include $2.1 billion, or 1.5% of quote, unusually large unfavorable impact, close quote. From foreign exchange rates. A lot of business comes from overseas on Amazon. That's gonna hurt them. Operating income expected to be between 14 and 18 billion for the quarter. That also is less than expected. So that's why you see the stocks selling off again. Capex guidance, $105 billion for 2025. That's up from 80 billion in 2024, largely driven by AI investments for the AWS segment. I think that's a theme we're going to hear time and time again with big tech. They're spending to stay competitive, so it's almost essential in this race. But this is a very strong report and we'll have to see what happens with reality versus guidance.

[Dylan Lewis]

Jason, you dug into the results from Alphabet. Similar tone there. Spending, spending, spending. When it comes to capital X&AI.

[Jason Moser]

Yes. I think the theme of the call is that the Gemini era is gaining traction. Investments in AI continue to dominate the narrative across the broader tech space. Alphabet clearly no exception here. In December, they unveiled Gemini 2.0. That's what they're building for the Agentic era. They now boast 4.4 million developers using Gemini models today. That's double the number from just six months ago. And I think it's also worth noting they now have seven products and platforms with over 2 billion users. Remember, we talked a lot about how they had, you know, 11, 12, 13 with 1 billion plus users. Now it's 7, with better than 2 billion users each. And they're all using Gemini whether. Whether they know it or not. Dylan. So. So I think when we look at the numbers here, they reported, I think, a very respectable quarter revenue of $96.5 billion. It was up 12% from a year ago, YouTube revenue grew 13.8%. We saw cloud revenue up 30% with cloud operating income up 142%. So doing a lot of good stuff there to bring that cloud profitability down to the bottom line there. I think the market's reaction in selling the stock is likely due to a few things. First, there was just a very modest miss on the revenue line. I mean, a very modest miss. Two, there was slightly, and I say slightly slower growth in cloud than expected. But, but then finally, I think it was the announcement from leadership. And I'm going to go back to Ron's whopping capex comment there. This was another one, right? They're talking about spending $75 billion in capital expenditures here for 2025. That's significantly higher than the around $59 billion that was expected. And you guessed it, Dylan, most of that money is going out to building their AI infrastructure.

[Ron Gross]

Have either of you guys used the Gemini app where you can put it on live and it just stays open and you can talk to it like you would a person and they can give you advice or help you do a task or anything like that? If you haven't, it's kind of, it's pretty cool. I mean, it's the future. I would, I would recommend checking it out.

[Jason Moser]

Well, I'd say I fiddled around with Gemini on the app and, and on my laptop just in, in regard to workflows and research and I, I, I found it very helpful.

[Dylan Lewis]

So putting all those numbers together, I just, I just want to take a step back a little bit on what we're seeing from big tech. Ron, you noted over $100 billion in CapEx spend for Amazon in 2025. Alphabet is going to be deep in the tens of billions as well. With what we saw last week From Meta, over 60 billion, Microsoft 80 billion. All told, we're looking at over $300 billion from those four companies alone. We had the deep SEQ development just a few weeks ago. It seems like that has done nothing, Ron, to phase big tech when it comes to this capex expenditure.

[Ron Gross]

There was one day where it had a big impact and then I think everyone looked under the hood a little bit and calmed down, but also said, well, we are actually going to have to spend this much money. Maybe for a minute or two, people thought they wouldn't have to, but I think it is going to be necessary. Data centers are going to be a huge portion of this spend. So if you're looking to invest in that trend, you can look in that direction. Be careful about valuations. Stocks are already really high in anticipation, but I think the capex spend is, is inevitable, at least for the next couple years.

[Dylan Lewis]

All right, coming up after the break, we've got the latest in payments, streaming, and everyone's favorite burritos. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Dylan Lewis here on air with Jason Moser and Ron Gross and gents, a ton of fool stocks reporting this week. We've got fresh numbers from PayPal, Spotify and Chipotle. Kick off looking at PayPal shares down 10% after dropping earnings. And Jason, I thought the earnings looked pretty good. I don't really understand the market reaction here. Walk me through it.

[Jason Moser]

I think we all thought that they looked pretty good. I mean, PayPal reported a good finish to 2024, Q4 results, exceeded internal expectations. And that's what I care most about. But I mean, it's worth noting, the stock has been on a pretty good tear lately. And I think questions regarding growth and profitability are still fair game. I think some of the concern was on the operating margin side. We saw a little contraction there along with branded checkout growth, which has been a big point of focus for Alex Chris there. And it's not to say branded checkout growth was bad. It was 6% this quarter versus 5% from a year ago. But it does sound like that branded checkout growth was a little short of expectations. When you look at the numbers, I mean, revenue $8.4 billion, that was up 4%. Transaction dollars grew 7%. We saw non GAAP earnings per share up 5%. Total payment volume up 7%. And this I just thought was fascinating. For the year, the company ran $1.68 trillion through its combination of networks. That was up 10% from the previous year. So I think these questions regarding growth are fair. But, but I also think that we're still looking at a, at a juggernaut here in the payment space. I would, I would not, I would not say sell them short.

[Dylan Lewis]

You brought up CEO Alex Kriss, and we're about a year and a half into his time leading the company. Feels like we're kind of heading into that territory of he's had time to lay out the plan and start making some progress on the plan. How are you feeling about his leadership so far?

[Jason Moser]

I think so far so good. You know, he's a leader that's just doing what he says he's going to do. There's been a big focus on the small to medium business, medium sized business opportunity with, with things like PayPal working capital and PayPal business loans. And then another big point of focus has been regarding Venmo. Venmo total payment volume is up 10% in the quarter. They continue to make progress on monetization there they saw Venmo debit card monthly actives up more than 30% for the quarter. And pay with Venmo monthly actives were up over 20%. So that monetization progress is coming along nicely.

[Dylan Lewis]

Different story over at Spotify this quarter. A milestone earnings report, Ron, and a nice market reaction to boot. The music streamer posted its first ever annual profit. Very, very strong market reaction to that.

[Ron Gross]

Strong market reaction. A strong report. Helped by the fact that they did cut 1500 jobs. So expenses were down. But I don't want to take it away from them. It is still a very strong report. Shares are up 170% over the past year, up well above all time highs. So very, very strong performance. And the numbers do bear that out. Their monthly active users rose by 35 million to hit a total of 675 million. The largest fourth quarter increase in their history. They've guided to 678 million monthly users going forward. Revenue up 16%. Gross margins widened to now they're at 32.2% which looks really strong. Operating income beat expectations at 477 million euros. Some of that was lower costs, as I said, was offset by something called social charges of 96 million euros. And those are payroll taxes, but other expenses that go up as the stock increases. So there's a little bit of a negative impact to an increasing stock price. But I think overall people are certainly happy to see that stock go higher. Management guidance was very strong. Operating income of 548 million euros for the current quarter. They signed a deal with Warner Music. They have over 1 million copyrights in the US and other countries. So things are looking pretty strong here. Stock's not cheap, you know, they just turned profitable. So 60 times forward earnings might be a little misleading if they can continue to grow into those earnings or that valuation, as we like to say. Maybe it's not as expensive as it looks on paper, but they've got to execute.

[Dylan Lewis]

Yeah, I'm a shareholder and I've been for a while. I had one of our colleagues reach out to me this week and say, all right, Mr. Spotify, bull, buy, sell or hold. At today's valuation, it's elevated and I think this one lives for me, Ron, in this place of the customer retention story is there, the loyalty story is there. I just don't see anyone stepping into this space and taking the business from them. And it kind of puts them a little bit in like a Costco territory where I'm like, I don't think that they can really disappoint their users to the point where they're going to see mass exodus.

[Ron Gross]

263 million users. You gotta go to maybe Apple music, maybe around 90 million there. Sirius XM and Pandora combined, nowhere near 33 million. They are the top dog. And as you say, they're. They're continuing to deliver for subscribers. So I don't, I don't see that coming down in any meaningful way anytime soon.

[Dylan Lewis]

Jason, you brought up avocados earlier on today's show. Got some guac on the brain as you were digging into Chipotle's results this week.

[Jason Moser]

Of course. Always. I love guacamole. I think this was a good quarter. It wasn't great. It wasn't bad. It was kind of that George Costanza, you know, right there in the meaty part of the curve, not showing off, not falling behind. I, I think the two bigger questions right now for Chipotle are regarding new leadership. Right. Will Scott Boatwright be able to keep the momentum going and then also the overall market opportunity they ultimately envision? And I'll get to that in a minute. But just in, in regard to the numbers, total revenue growth there, 13.1%, $2.8 billion for the quarter, comps were up 5.4%. That was thanks to decent growth in transactions, 4%. And they saw digital sales as 34% of total sales. Now, they did see a little bit of contraction there in the restaurant level operating margin as they kind of continue to work on ensuring generous portions while also dealing with some food cost inflation around items like dairy and avocados. And as you mentioned at the top there, Dylan, if this tariff story does end up moving forward, then I suspect the costs of doing business for a company like Chipotle will get a little bit greater.

[Dylan Lewis]

Yeah, I think one of the things that was kind of interesting with their guidance was they noted that there would be a tariff impact. I think they said it would be a 60 basis point effect on the cost of sales. However, the guidance that they provided to the market did not incorporate that. And so they're kind of doing this interesting move of, we think that this is out there. This is the number we're going to give you if it happens, but we're not building it into our results. And to the point you guys were making earlier in the show, it seems like that management team is saying we're not so sure that these tariffs are really going to go through.

[Jason Moser]

Right. And I appreciate that. I mean, nobody really knows. And so that's something just to keep an eye on there. I think going back to that market opportunity, the question I just have, they have 3,700 stores today. They're targeting 7,000 plus in North America alone over the coming years. Now, that sounds like a lot. If they can achieve that, along with bumping those average unit volumes up from $3.2 million data, $4 million longer term, I mean, we can see a massive opportunity here. I think that's the question we have to ask ourselves. And investors, though, does this sound like a reasonable estimation of that overall market opportunity? I'm the biggest Chipotle fan out there. I'm just not sure, Dylan. I'm just not sure.

[Dylan Lewis]

What I'm hearing is the line is going to get shorter because there are going to be more locations. And I think we can all get behind Jason.

[Jason Moser]

I think so. I think so.

[Dylan Lewis]

All right, Jason, Ron, we'll see you guys a little bit later in the show. Up next, we've got a primer on the business and investing side of sports betting ahead of the Super Bowl. Stay right here. You're listening to Motley Fool Money.

[Ron Gross]

Don't get it in your eye unless you want to cry.

[Dylan Lewis]

Welcome back to Motley for money. I'm Dylan Lewis and I think I'm willing to bet what you'll be up to this Sunday. I'm guessing you'll be on the couch. Like over 100 million people tuning in to watch the Eagles and Chiefs take the field to decide the NFL's champion. This year's Super bowl offers a rematch from two years ago, a Kendrick Lamar halftime show. And if the NFL's regular season has been any indication, plenty of ads for sports betting ahead of the big game. My colleague Ricky Mulvey caught up with Motley fool analyst Nick Scipal for the investor's angle on legalized sports betting. They broke down the surge in interest over the past few years. How the different betting operators stack up and why. Parlays are the penny stocks of sports gambling.

[Ricky Mulvey]

Betting on the super bowl has always been popular. You know, super bowl squares have been a tradition. It parties forever. But interest in legal betting has exploded over the past few years. Legal Sports Report tracks Super bowl bets. And this is just the legal market. So, yes, the offshore books are probably losing some action. When you look at this number. But legal bets accounted for $300 million in 2020. Last year it was 1.3 billion, a $1 billion increase. We've seen the uptake of legal betting across the country. But, Nick, when you look at just that number, is that growth surprising to you?

[Nick Sciple]

You know, not really. If you answer, Ricky. I mean, part of it is what you said, right? A lot of this is people who were already gambling on sports before it was federally legal in 2019. Black market gambling coming out onto the open at the same time, you know, to kind of connect with that. We've seen lots of states legalize sports betting since 2020. Big ones like New York and in Illinois. And at the same time, I don't think anybody who's a sports fan can have missed it. Basically everyone in sports media has pivoted to pushing sports betting. If you just look at TV advertisement that I looked for the most recent data I could find 2023 sports betting ads were 0.4% of TV advertising volume. That's just 0.1% behind alcohol. And this is from a standing start at zero in 2018. So this is a thing people were doing already. It's been marketed super heavily. And, you know, the super bowl is the biggest TV event of the year. So not surprising to see betting increase over time.

[Ricky Mulvey]

We'll take a look at a few of the companies that offer these bets and you've got a good X account to follow. I'll shout out nvesting Nick, because I don't think you would do it yourself, but one of the things I saw you post a little a while ago, and this was in reaction to someone posting about Walmart and how communities used to not welcome Walmarts in with open arms and now you can find them wherever. You wrote that quote, investing in popular things that people are trying to ban is a winning strategy. I think sports betting companies might fall under that. This was a previously prohibited thing. And now about 40% of Americans bet on sports. That's from a Saint Bonaventure University Sienna College research. And there is a. There's a cost to this. You know, one study found that about 10% of young men may have a gambling problem. You have the other side that would say adults can make their own choices, but that's the numbers salad. It's a controversial space that's extraordinarily popular, but now we put the investing lens on it. Is sports betting an investable space for you?

[Nick Sciple]

I think it's potentially investable. For me. It's not as Much of a moral question. I think gambling has been with us for a long time. They found dice at archaeological sites that go back to 3000 BC. So for whatever reason, gambling appeals to folks, it scratches some itch that humans want to scratch and it gives rewards that people respond to. So I think it's an industry that's not going to go away, whether legal or illegal. You know, on this idea of you can, I think generally make money when folks are trying to ban something that's super popular, whether that's an Uber or a Walmart or, you know, the nicotine business has done really well. Even post folks, folks trying to reduce usage of those products. I think investors really get caught up in the headlines around, hey, we'd like to see less of this and the controversy around the business and focus a little bit less on what the business is actually producing, which I think in the long term leads to the business being overpriced. I will say though, if I look at gambling today, maybe it doesn't fit quite in that bucket because we're not really seeing folks try to ban it. We're seeing a legalization trend around the world. Whether it's more states kind of legalizing in the US or Brazil in 2024, really kind of starting to legalize sports betting. We've got capital flowing into the gambling space today, not out, which I think makes it a little bit less attractive. Also, unlike some of these other markets, the markets a little bit less mature than you'd like it to be. You don't really know what steady state profits are going to be in the business. Earlier this week, the Ohio Governor Mike DeWine announced in their proposed budget that they would try to double the state's tax on sports betting from 20% previously up to 40%. You're seeing the same thing happened in Maryland where the governor is proposing doubling their state tax on sports betting from 15% to 30%. All those tax increases would come straight off sportsbook margins. At a time when you're finally seeing draftkings and companies like it get to cash flow positive. So look at me today. I think there's capital flowing into the business and uncertainty about kind of long term what the normalized profits will be. It's hard for me to get comfortable enough with the business to invest. That said, as I kind of let off my answer here, I don't think this business is going to go away. So maybe you get an opportunity to invest at a time where there's more certainty about what the long term, you know, market share and profitability of this business is.

[Ricky Mulvey]

Well, one of the big controversies that's coming is what a lot of these operators are pushing for, in my view, which is iGaming, which is not just sports betting, but it's the ability to put a casino in everyone's pockets. Online slot machines, table games, that kind of thing. And I think that that should be controversial because that opens up a whole other Pandora's box. And if you're an investor in one of these companies, coldly you will be looking at igaming as a potential growth leverage for these businesses which are struggling to make a profit. Nick?

[Nick Sciple]

Yeah, absolutely. And you know, we'll see what happens. Regulatory there certainly could shake up the gambling business. I think a lot of this just comes down to what regulation looks like and we're still not 100% certain on what that will be long term. A lot of this will happen in the statehouse.

[Ricky Mulvey]

Let's take a look at some of the operators. One thing you'll notice if you zoom out on the stock charts is that the online operators have had a much better past few years than the physical operators. Flutter, which operates FanDuel, and DraftKings, which operates DraftKings, have outperformed the physical operators like Wynn and MGM over the past five years and they've been market beaters. Any general thoughts on that outperformance? Even as a lot of these online operators, DraftKings, for example, cannot make a positive operating profit.

[Nick Sciple]

Yeah, I think that that divergence in performance really comes down to where the Online Folks like DraftKings and FanDuel, you know, through Flutter, are exposed as compared to the physical folk. So as we've kind of alluded to earlier, we've seen incredible growth in online sports betting over the past five years. I pulled some numbers before we hopped on here. The Preliminary numbers for 2024 have licensed sportsbooks across 33 markets combined to generate nearly $150 billion in Handle Handle's just the total number of money kind of bet on on sports. You compare that the end of 2019, we're looking about $13 billion. So online sports betting has grown about 10x over the past five years just on the sheer volume of dollars being bet online. At the same time, most of that growth has accrued to the benefit of DraftKings and FanDuel, who together control about 2/3 of the online sports betting industry. So you've got an underlying industry that's grown 10x plus over the past five years, and the vast majority of it has accrued to two players Kind of explains the performance of of those companies. If you look at the physical casino companies, while they have online offerings, they significantly trail the big online players, as I laid out earlier. And they're still really dependent on the physical casinos to drive the majority of the results. In the case of the two companies you laid out, MGM and Wen, really dependent on Vegas and Macau, which is Macau's China's gaming capital. And visitors in both those destinations are still below pre pandemic levels. In Vegas in 2019 had 42.5 million visitors, 2024 had 41.7 million. So we're still just under 2019 level. It's even worse in Macau, 34.9 million visitors in 2024, it's still about 12% below pre pandemic. So while you've seen lots of growth online, you're seeing fewer folks in Vegas. And at least in the U.S. maybe that's partially explained because of, you know, folks can bet at home and don't have to travel all the way out west.

[Ricky Mulvey]

So you mentioned that you're not comfortable enough with this space to invest. What are the flags you'd be looking for to become more comfortable to invest in this space?

[Nick Sciple]

Yeah, I mean, I'd really like to not see policymakers janking around with what their take is going to be off the top line for these companies. I'd also like to see, and we're starting to see some of this of a trend down in the intensity of advertising spend. Part of that is just as the industry continues to consolidate around a handful of players and the smaller folks push out, there's just less need for spending to kind of gobble up the market. Also, as more states are legalized, you have to spend less money rolling out your operation in those states or doing governmental relations efforts to try to encourage the legalization along. So really just maturity of the industry knowing kind of all right, this is what the tax rates are going to be, these are the markets where things are going to be operating. These are the players that we really can look at as the main competitors and hopefully competitive intensity move to a more normalized level as opposed to the real land grab that we're still in today.

[Ricky Mulvey]

Let's get to a personal finance angle because I've actually got a lock for you, Nick. When you tune into the super bowl on Sunday, I will bet you see an ad that encourages you to play a parlay, maybe even a boost if you do that. The Wall Street Journal reported that parlays, which are multi leg bets, someone will score A touchdown and someone will get so many rushing yards and a defense will do X. Often they were connected to different games. So it would be the Eagles will win and also the New York Knicks will win. That kind of thing. They've since been combined into single game parlays. But the Wall Street Journal reports that these bets account for about 27% of the money wagered on all sports bets last year. But they made up more than half of the betting revenue. Nick, to me that sounds like a sucker bet. Why are these sucker bets?

[Nick Sciple]

Yeah, because chances are you're going to lose. As you say, parlays are type of sports bet where you've got multiple wagers that you make at the same time. It's only successful when every one of those underlying wagers hits. So if you bet a three leg parlay, only two of those underlying wagers plays out, you lose it all. For a beginning gambler, beginning better. Optically, parlays look appealing because as you add more legs, your potential odds go up. That means you can risk less and potentially win more. That's great, but really these parlays are exploiting the common cognitive bias that we all have. Whether they're in vet, whether we're investing in stocks or, or engaging in sports betting, we love to ignore the risk and just look at those financial rewards. And the sportsbooks are depending on that. As you add more legs, your chances to win goes down and the house edge keeps going up. So parlays on average are about three times more profitable for this, the house for sportsbooks than straight bets are on average. Which is why getting players to bet more parlays with more legs is our part of the key performance indicators these sportsbooks go after to try to make more money. That's why you'll hear parlays promoted heavily in just about every ad. And if you go on any of these sportsbooks, at the top of the homepage, you'll see promoted parlays. Whether it's from your favorite kind of sports media personality or, or just ones they think that are, that you should be interested in based on the, you know, the bets they've seen you make before. It's because the sportsbook makes more money when you place those bets, not because they're trying to help you out. And I think this is a time of year where lots of people try out sports betting. It makes sense. The big game, it's a huge TV event where very few people actually have a rooting interest. There's lots of Chiefs fans and Eagles fans out there. But most folks watching the game aren't going to be fans of either of those teams. And making a little bet to increase your rooting interest is fine. You just shouldn't be betting more than you can afford to lose. And I would advise you to consider sticking to straight bets where the odds are much more in your favor and you're not going to donate money to the sportsbook.

[Ricky Mulvey]

So if you're not going to make a parlay, let's finish up with, with a little bit of fun. You follow football a lot more closely than I do. If someone's going to bet, let's say $2, $5 on a bet, if they're, if they're going to watch on Sunday, is there one that you're looking at for a little bit of fun?

[Nick Sciple]

Sure. Well, I mean, if you're, if you're picking the winner of the game, I think it's hard to go against the Chiefs. It's a fun story to root for. Also, it'd be the first three peat in the history of the NFL. But the super bowl is a time for prop bets. It's a time for getting a little bit outside. Just the core, you know, your core. Who's going to win and what's the over under? If I'm going to give a prop for the game, I think one fun one is I've seen that you can bet the shortest touchdown score in the game under one and a half yards. Odds on that is minus 166. That means you got to bet $16.60 to win. $10. Basically. What are we betting on here? We're betting on a QB sneak to get in the end zone. If folks have watched the Eagles all year, the Tush push is their go to play. It's the signature play of the Eagles. Anytime they have a yard to gain, pretty much get it anytime they want with Jalen Hurtson behind that, that offensive line. So I think, and even if you don't get the tush push, I think the chances you get down to the one yard line pretty decent in the game. If you want to be a little bit more aggressive, I've seen odds out there that you can bet on. Jalen hurts to get exactly one rush touchdown, which would be that one tush push to get in there. You can get to get those odds up to plus 170. Of course, you run the risk that, you know, maybe he scores more than once in the game and you don't pay out. So, you know, I think there's pretty good chance you See a touch push touchdown on Sunday. And for that reason, I think maybe sprinkle a little money on those props.

[Dylan Lewis]

Listeners, I'm with Nick. I think we'll see a tush push, or as Philly fans might call it, a brotherly shove. We'll be back in a minute with Ron Gross and Jason Moser's thoughts on the big game and the stocks on their radar this week. Stay right here. You're listening to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about. And the Motley fool may have formal recommendations for or against Snowpierce. Sell anything based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Motley fool only picks products it'd personally recommend to friends like you. All right, Ron Jason. Before the break, our colleagues Nick Sciple and Ricky Movey gave listeners the sports betting talking points for Super Bowl 59. You guys are fans of the game, but you're also fans of the culinary arts. So I am curious what will be on your plate in front of you while you're watching the game this Sunday?

[Jason Moser]

Dylan? It's a pretty good bet that I will likely throw some wings on the Traeger. Smoke them low and slow for a bit. Now we like them dry rubbed and for me, Dizzy Pig Crossroads Rub is an absolute no brainer. Now, I wanted to add a second flavor to this rotation thanks to our own Ron Gross here who recently pointed out that McCormick is just named Aji Amarillo as its 2025 flavor of the Year. Playing into that spicy trend. The problem is you have to order it from the site so I won't be able to get in time. But I have ordered it and I will report back.

[Ron Gross]

Please do wait for that.

[Dylan Lewis]

Yeah, Ron, what are you gonna be eating?

[Ron Gross]

I'm going to a big party, but I'm bringing an antipasto, not antipasta, antipasto salad. You're gonna get roasted peppers and fennel and artichoke hearts and olives and pepperoni. You'll get sun dried tomatoes. You'll get mozzarella. You'll get some provolone. It's gonna be pretty good.

[Dylan Lewis]

That sounds delightful. And you know, for people that want something kind of dumb, simple out there, here's my recommendation. You make pigs in a blanket. Everyone knows pigs in a blanket. There's a little crucial step in here. Take that dough, roll it in everything but the bagel seasoning, then pop it in the oven, shout out to My mom. This one's from the Debbie cookbook. It's a favorite and it always goes. It doesn't have to be super elaborate. If you want to go antipasto, you can. But you know, fancy pigs in a blanket works great.

[Ron Gross]

Delicious.

[Dylan Lewis]

Can't wait to eat it. All right, let's get over to stocks on our radar. Our man behind the glass, Rick Engdahl is going to hit you with a question. Jason, you're up first. What are you looking at this week?

[Jason Moser]

Sure thing. Uber Ticker Uber. We just saw some interesting news out here that Bill Ackman has revealed he's been building a more than $2 billion stake in the company. That's a big stake. I just think it's worth noting. Dylan reported a good quarter. It really is. They reported, I thought was a very good quarter. The market had a funny reaction initially, but gross bookings up 21%. Mobility, gross bookings up 24%. Delivery was up 18%. I was really impressed by that. And ultimately trips for the quarter grew 18% to 3.1 billion. Or as they equate it, approximately 33 million trips per day on average. Now, a big theme of the call was autonomy. CEO Dara Khashrashari noted that while AV technology is advancing quickly, the commercialization is going to take a very long time. So if that's your thesis for the stock, that's fine. Just understand it's going to be a little while.

[Dylan Lewis]

Rick, a question about Uber Ticker Uber.

[Jason Moser]

Yeah. I was intrigued by the offerings that you guys are making for the super bowl. Food plates there.

[Nick Sciple]

Can. Can.

[Jason Moser]

Can I use uber eats to order from. You guys feel like there's something here, right? Full food. I mean, I don't.

[Dylan Lewis]

There's a new ghost kitchen in the Moser household.

[Jason Moser]

Yeah.

[Dylan Lewis]

Ron, what are you bringing? What's your radar stock this week?

[Ron Gross]

I'm looking at academy sports and outdoors, aso, which I had never heard of until my friends over at our dividend investor service recommended it. It traces its roots back to 1938, a family run business. By 2011, way fast forward, they had 131 stores, 3 billion in revenue, sporting goods stores. Dick's would be the closest competitor. Now they have 298 stores. They're fast growing in the sun belt. That's where their niche is. That's what makes them a little bit unique. They produce gobs and gobs of cash flow. It's a really strong business that most people have never heard of.

[Dylan Lewis]

You know, I appreciate you being on the sports theme. There, Ron. I think that's a nice little tie in with today's show.

[Ron Gross]

Anytime.

[Dylan Lewis]

Rick, a question about academy sports and outdoors ticker. Aso.

[Ricky Mulvey]

I've also never heard of it before.

[Jason Moser]

I thought brand was important. Is it just not? Is that the sunbelt?

[Ron Gross]

The sun belt knows it. Rick, you got to give yourself over to the sunbelt.

[Dylan Lewis]

All right, Rick, you opting for delivery wings or the sun belts? Favorite sportswear?

[Jason Moser]

I'm hungry. I'm hungry and I seriously, if I can get someone to pick up food from your place and bring it to me. It sounds really good. All three of you. All right, Full food. Let's make it a thing.

[Dylan Lewis]

Coming to you soon. Jason, Ron, appreciate you guys being here and bringing your radar stocks. Rick, appreciate you weighing in. That's gonna do it. For this week's multifamoney radio show show is mixed by Rick Engdahl. I'm Dylan Lewis. Thanks for listening. We'll see you next time.