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- [00:00]
A
Foreign. Billionaire investor Bill Ackman says stocks are stupidly cheap. You're listening to Motley Fool Money. Welcome to Motley Fool Money with the Hidden Gems team. I'm John Quass and I'm joined today by Matt Frankel and Rachel Warren. We're going to get to Ackman's comments in a moment as well as some news regarding the final frontier. But first I wanted to hit this AI news. Is it friend or foe? Basically, here's the headline. Expedia and Instacart stocks, otherwise known as Maple Bear, were gaining a little bit in trading today after Jefferies analyst John Calantuini said these were actually AI beneficiaries. Ordinarily I wouldn't highlight the opinion of a single Wall street analyst, but I was intrigued by these comments because it's very counter narrative. Basically there are these platforms out there called third party aggregators and the prevailing narrative is that AI is bad for these platforms. But this analyst coming out and saying, hey, this is actually a good thing for these two companies in particular, they're going to be beneficiaries of. Rachel, I want to start with you here. Maybe explain what the demand aggregator business model is and then elaborate on how AI could actually be a tailwind for these platforms.
- [01:33]
B
Yeah, it's an important discussion. I mean really first to understand why AI might be a tailwind for the likes of Expedia and Instacart, it is important to understand what that demand aggregator model looks like. And essentially these businesses win by sitting in the middle of this massive three sided seesaw, if you will. Right. They pull in a huge audience of consumers that forced as a fragmented group of suppliers, whether it be thousands of individual hotels in the case of Expedia, or you know, local grocery stores in the case of Instacart, it forces this group of suppliers to come to these aggregators to find customers. So the moat isn't the products they sell, right? It's that data. It's the convenience of having everything in one searchable place. So the fear that we've been hearing is that AI is going to fully disrupt this type of model. Meaning maybe you would just ask a chat bought to book a flight, you'd skip the Expedia app entirely. But I think there's actually a meaningful bull case here to explore and that's that AI actually makes the aggregators data moat much deeper. You think about platforms like Expedia, you've got, you know, decades of high intent search data that a general AI like ChatGPT doesn't have they know exactly what you've swapped out. Let's say in the case of Instacart and your grocery cart when an item was out of stock, or in the case of Expedia, which hotel filters you care about. And a allows these aggregators to turn that raw data into a concierge experience that's way more valuable than just a simple search. And I think AI can help these companies move from being more reactive to proactive. So let's say you are looking for a place to stay, a hotel for your next vacation. Instead of spending 20 minutes filtering for family friendly hotel with a gym near the beach, an AI integrated platform could build that itinerary based on your specific history, maybe within seconds. So I think if these aggregators execute the AI revolution correctly, they're not just going to stay relevant, but they could actually be able to more effectively manage those transactions from start to finish. That could mean higher conversion rates, higher retention rates. I think it's good news in the long run.
- [03:40]
A
That is really interesting and a very important thing to think about. But we do want to provide balance here. We want to provide both sides of the argument. And so Rachel's just kind of given the more bullish AI third party aggregator model narrative. Matt, I want you to counter this here. What are the reasons why investors are a little bit nervous when it comes to AI and these platforms?
- [04:06]
C
Yeah, I'm always the eternal optimist here, so I'm happy you put me on the bear case for a change. Rachel kind of mentioned this. It's the software disruption story. There's that general fear that conversational AI tools are going to be able to answer questions like what's the cheapest flight from Charlotte to Los Angeles directly and without a need for an intermediary. And to be fair, you can already do that. I mean, I use, I use AI to find cheap flights all the time. It goes a step beyond that. The threats really evolved with the emergence of magentic AI, which could potentially allow travelers to, you know, bypass any booking sites altogether and simply have an AI assistant that automatically finds and books the best flight, hotel, rental car, whatever for them for a trip, and just kind of renders these kind of useless. So that's the bear case.
- [04:51]
A
Okay, so we've looked at both sides of the argument here. It seems like there are merits to the bull argument. There are merits to the bear argument. I'm curious though, what is your personal take on this? Where do you fall in this debate when it comes to what we're talking about? Here, Rachel, let's start with you.
- [05:08]
B
I actually do think I'm a bit more bullish on these platforms, and I'm not necessarily singling out Instacart or Expedia Group as the best buys of the next decade per se. But I do think some of these platforms, when you look at them, at the end of the day, the AI is only as good the data it's fed, right? So, you know, a general chat bot can give you a great travel itinerary, a recipe, but it can't actually guarantee, for example, a hotel room that's available, or ensure a bag of groceries ends up at your door. I know the vision is for agents to do that in the long run, but I think the more realistic outcome in many ways would be that AI doesn't replace that infrastructure. It just makes it more efficient to navigate. So I think one example of this in action. A company I really like is Uber right now. People often think of the platform as a ride hailing app, obviously a food delivery app, but they're the ultimate demand app aggregator for mobility and delivery. And they already are using AI to process billions of data points on traffic, on writer, intent on courier efficiency in real time. And because they own the interface, they've got this massive network of drivers. AI has become a tool that makes their marketplace stickier and more profitable, rather than a threat that replaces them. I don't think that will be the case across the board, but I also don't think we're going to reach a situation where all these aggregators and all these software driven companies are just replaced by agents.
- [06:23]
A
Yeah, that makes a lot of sense. If data is the moat here for these platforms, then Uber is definitely one with a lot of data and one to benefit. Matt, how about you? Where do you land on this?
- [06:34]
C
I'm more on the fence. There's a lot to be said for things like loyalty programs, which many of these intermediaries offer, having human available customer service, which is something that as of now, ChatGPT and Claude haven't figured out how to replace. But there is a serious existential threat here and it will be interesting to see how companies like Expedia and Instacart really react to it and use it to their advantage.
- [07:01]
A
And I think that's fair. We don't always have to have our minds fully made up. We're still processing sometimes, so I appreciate that. After the break, we're going to go to the final frontier. You're listening to Motley Fool Money.
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D
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- [08:10]
A
Motley Fool Money with the Hidden Gems team. The countdown is on for the Artemis to launch on April 1st. This is going to take astronauts around the moon. It's going to be the furthest distance that astronauts have ever been from Earth. But that's not the only space related news that we have right now. SpaceX, maybe you've heard, is preparing to go public and it's actually going to be the largest IPO of all time. You've heard us talking about it, but now we're getting reports that it's looking to raise a whopping $75 billion. That would value the company at 1.75 trillion. Rachel, what do you know about this?
- [08:50]
B
Yeah, you know NASA's looking at the moon, Wall Street's looking at SpaceX. Right? And you're right about that expected valuation. It would be the largest IPO in history, aiming to raise 75 billion, as you noted, at 1.75 trillion valuation at the top end. That would make SpaceX one of the top 10 most valuable companies on the planet if it achieved that valuation. And this isn't really just based on, you know, launching rockets anymore, right? It's about this space tech and AI powerhouse that Musk is trying to build. And a big chunk of that trillion dollar expected price tag would come from Starlink, which has scaled to, you know, millions of subscribers. It's already reportedly generating massive cash flow. Another key factor in the business is the new Star Cloud initiative. Right. So Musk's idea is to put AI data centers in orbit to using the natural vacuum of space for cooling. It's a move that would combine satellite infrastructure with AI. Boom. And then of course the money from the IPO is reportedly earmarked to build out the starship fleet to make those orbital platforms and eventually trips to Mars a reality. We will see how far that goes. SpaceX is reportedly planning to allocate up to 30% of the shares to retail investors, which is an unheard of amount. Now one kind of important thing I want to note here, trillion dollar valuations leave very little room for error. And a lot of that expected price tag is based on future state technology. You know, like orbital data centers, Mars colonization ideas that haven't been fully proven out yet. You know, if, if we see for example, the AI in space narrative hit a snag or subscriber growth for Starlink slowdown, if the company reaches that premium valuation while public, we could see that compress quickly. That could have a real impact on those who bought the initial pop. So it's important to understand that as we go into an expected ipo. But I think there's going to be a lot of exciting news for investors to watch here.
- [10:46]
A
Matt, I want to just circle back to some of the things that Rachel just mentioned. She mentioned how much money the company is looking to raise, but also mentioned how many shares are looking to be allocated towards retail investors. Wonder if you could just flesh that out for our listeners just a tad more.
- [11:02]
C
Elon Musk knows this very well that one of the biggest things SpaceX has going for it as far as a giant IPO is a vast amount of retail interest. When you turn Tesla into a 400x stock and then you delay your biggest IPO for 10 years, you're going to build up a lot of retail interest. The plans to allocate 30% to retail, that compares to 5% to 10% for the typical IPO. And even that's higher than it used to be. And it's not just that. There are several platforms that have made it easier for companies to do this. SoFi prioritizes IPO access for everybody. Robinhood so there are a lot of different platforms. I mean, E Trade is now owned by Morgan Stanley, which is one of the investment bankers reportedly on the deal. But Even so, raising $75 billion in an IPO is no small task. The previous record of Saudi aramco that raised $29 billion. But I think it's fair to say that there's more investor interest for SpaceX than a G Saudi oil company. And the 1.75 billion valuation, it's not Just the space business. Rachel kind of alluded to this too. Remember that Elon Musk recently merged Xai, which also owns the X platform, formerly Twitter, into SpaceX. So you're getting this kind of emerging conglomerate here. So although XAI is almost certainly losing money, Starlink is profitable as you mentioned, and Xai reportedly has a private valuation of well over $200 billion itself. There are some grand vis throughout these companies. Rachel mentioned the data centers in space. Elon Musk said he wants a million of those eventually. This kind of sounds like the SpaceX version of Tesla's optimus robots. The real future technology and a big number that just kind of raises eyebrows. But having said all that, that valuation puts us really in uncharted territory for a US IPO. So I don't know what the implications could be. $75 billion is more than the entire IPO market in the US raised in all but two of the last 10 years. Those were the two co booming years when everyone was going public. Once SpaceX's financials are released, which should come when we get a little closer to the ipo, we'll have a better idea of just how ambitious this valuation is. But right now we honestly don't know.
- [13:20]
A
Well, we'll keep an eye on it as it develops. You can definitely count on us for that after the break. There's a billionaire investor out there who says that some high quality stocks are really cheap. Right now you're listening to Motley Fool Money.
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- [13:57]
A
Welcome back to Motley Fool Money with the Hidden Gems team. You know we want to make you part of the conversation here. If you have a stock or an investing question for Matt, Rachel, myself, anyone else who is on the show regularly, you can now email us@podcastool.com we would love to have mailbag segments whenever possible. So send in your questions, but remember, keep them foolish. That email again is podcastool.com podcastool.com so we are finally here at our final topic, the one that we teased right at the beginning. Bill Ackman is a billionaire investor, a manager of the hedge fund Pershing Square and over the weekend, Ackman was posting on social media saying some of the highest quality businesses in the world are trading at extremely cheap prices. Ignore the mainstream media, he said. So he then went on to mention Fannie Mae and Freddie Mac as potential 10x opportun. And Matt, you're kind of our real estate guy here. What is Bill Ackman talking about?
- [15:04]
C
Ackman, he's very prolific on social media and has a history of calling things out. When he thinks that something's going to be a net positive that isn't. A big example is remember the Omicron wave of COVID that initially tanked the market. And he came on and said this is going to be a net positive for a less contagious version that is highly infected would be a net positive. And he was right. The Omicron wave actually turned out to be a net positive for ending the pandemic. So people tend to take them seriously. But on the Fannie and Freddie issue, it's not really a real estate play and I'm going to refrain from turning this into a financial crisis history lesson. So Fannie and Freddie, they're the two government sponsored enterprises, or GSEs for short. They essentially keep the mortgage market functioning smoothly. They don't actually make loans, but when you apply for a mortgage, it has to meet Fannie or Freddie's standards and they'll back the mortgage. It'll help the lender, give you a better interest rate and just kind of provide fluidity to the mortgage market. So after getting in trouble during the mortgage meltdown of 2008 when there were a ton of bad mortgages on the books, we could spend an entire episode on that. Both of these were placed into government conservatorship. The US treasury then owned the majority of both. I think that was 80%. Technically they owned, but they swept 100% of the profits of both agencies once they became profitable again in 2012. Less a little capital buffer to let them operate. Now President Trump, even in his first term, has been discussing re privatizing both agencies, removing the conservatorship and letting them start to distribute profits to shareholders again. These are pretty big profitable stocks. I mean, at one point Warren Buffett owned Freddie Mac. I believe he issued a memo in 2019 to develop a housing reform plan that included an end to the conservatorship. And the treasury then started allowing the two to start retaining significant profits. I want to say it was about a $20 billion profit cap above and beyond what was really needed to maintain enough capital to run in 2021 under President Biden, the profit sweep was ended altogether. So they could really start accumulating money. But both still remain under government conservatorship. The biggest arguments in favor of keeping it there is that removing that could potentially destabilize the mortgage market at a time when interest rates are already kind of high and they've been accumulating capital. But both the US mortgage market is huge. They need a big capital buffer and there's an argument that they don't have the ideal capital levels yet. But as recently as last summer, the president met with bank CEOs to discuss an IPO of the two which would raise up to $30 billion. Not quite an Elon Musk IPO, but a pretty big one. Ackman started accumulating shares relatively early in the conservatorship period around 2012, which is actually when I started writing about Fannie and Freddie for the Motley fool. And he's already sitting on some pretty decent gains. Maybe not for a 13 year investment. His cost basis was about $2.29 a share. For Fannie, for example, it currently trades for about $6 a share. But he's estimated before that it could be worth at least $34 or potentially much more if the conservatorship ended. It's kind of a long term bet that this would eventually happen. So that's where he's talking about Fannie and Freddie. So if you think the government conservatorship could finally end, could be a good thing to look at. But that's not necessarily what he was referring to when he mentioned high quality businesses at a discount. That was a much broader statement and I agree. My watch list. I don't know about YouTube, my watch list has been growing by the day. One in particular. And since we're talking about Ackman, I'll mention one that I have owned for a long time, since probably around 2012 is Howard Hughes Holdings. Ticker symbol is HHH. Ackman is the executive chair of the company. It's an interesting real estate business. They've developed large scale cities. Summerlin and Las Vegas, the Woodlands in Houston are their two examples. It's been beaten down lately. Ackman himself bought shares last year at $100 and it now trades in the low 60s. Nothing really has gone wrong except it's doing exactly what they thought it was going to do. Rachel, I'm curious, beyond Bill Ackman, what's a stock or two that you might think has become irrationally cheap?
- [19:14]
B
Yeah, there's a few. I mean I have to talk about a company from the retail space which I cover a lot and that's Lululemon. I mean they're trading at about 11 times trailing earnings now. And the stock's been under pressure for a while. There's been, you know, obviously concerns about its maturation and of its growth in North America. There's been a few execution misses on product launches. But the underlying engine I would argue is still a very high quality business. I mean you're looking at a brand with industry leading margins, a massive untapped Runway in international markets like China, which they are rapidly expanding in. So that's a company I look at, I, I think of a dominant consumer brand, high customer loyalty. It's trading and evaluation that's often reserved for sort of those average slow growth retailers. One more I'll mention, or maybe a couple more is Microsoft and Alphabet right in the tech space. I mean Microsoft is sort of in this rare place position where I, I personally view it as actually cheap relative to its earnings potential in the AI era. You know, they're both, both Alphabet and Microsoft are trading in the low twenties times trailing earnings. You're looking at incredible growth rates for both these businesses. You know, in Microsoft's case, they're, they've really positioned themselves the essential operating system for AI, of course, Alphabet, with their growing TPU business and their integration of AI across the flagship advertising machine. So I think these are really high quality businesses that are undervalued relative to their growth ability right now. And there's many of those.
- [20:37]
A
Yeah. So there we have Howard Hughes, Lululemon, Microsoft, Alphabet. Definitely many companies out there to look at that might be good values right now and might prove Bill Ackman's point that there are a lot of high quality businesses on sale. You can count on us to be on the lookout. But that is all the time that we have for today. So Matt and Rachel, thank you for sharing your thoughts and to the listeners out there, thank you so much for joining us today. 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. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for each 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 Rachel Matt and myself. Thanks for listening and we'll see you next time.