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Earnings Season Is in Full Swing, and Figma's IPO Is Right Around the Corner
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- [00:00]
Matt Frankel
Foreign Google is spending even more than expected on its AI infrastructure and Chipotle had a so so second quarter Motley fool money starts now. I'm Matt Frankel. I'm joined by my fellow longtime analyst John Quast as well as the Motley Fool's co founder and CEO Tom Gardner. Later in the show we're going to be joined by fool.com analyst Jonathan Wilder. Today we're going to look at some recent earnings from Tesla, Chipotle, Alphabet, ServiceNow and IBM. And a little bit later we are going to look at the Figma IPO that is coming up real soon. First we're going to put Tesla's results under the microscope. So it wasn't a big surprise, but Tesla reported a really weak second quarter automotive revenue was down 16%. Year over year the company's been losing EV market share to traditional automakers like GM. Some will say that Tesla's long term thesis is about a whole lot more than vehicle sales. John, what are your thoughts on this?
- [01:04]
John Quast
Look Matt, I think if you're buying Tesla stock today, you're not buying for the next year. You are looking for the next decade. And so look the report. It's shocking to see its primary revenue generator cars have a 16% drop. For any other company this would be all out panic. But a lot of people say this is just vehicle sales for Tesla. And first and foremost of those would be CEO Elon Musk. He says on the earning call, you know, everything with this business comes down to one word and that's autonomy. So the idea is this company will make far more money in the future with its self driving software, with its robotaxis, with its Optimus robot. All that is autonomy. And that's really the thesis that Tesla bulls and the CEO Elon Musk have for the company.
- [01:51]
Matt Frankel
Direct question here. Do you think Tesla's a buy right now?
- [01:55]
John Quast
Yeah. And so as you're looking at it, right, if you're thinking through this grid of autonomy, if you're thinking through the grid of cars, then there's trouble right now. If you're thinking through the grid of autonomy, you really just have to extend that viewpoint way out because this isn't going to happen right away. Musk said that he's eyeing Robo taxis for half the US population by the end of this year. But keywords there include probably and pending approval. Spoiler alert. I'm almost positive there won't be that much regulatory approval by the end of the year when it comes to Optimus robot. Look, they're trying to scale that up. But they're still working on the prototype number three this year and hoping to get that done before the end of the year. I think that you're looking not at 2025 when it comes to Tesla. You need to be thinking 2035 if you're buying into this concept of Autonomy today.
- [02:42]
Matt Frankel
Tom, I'd like to get your opinion on this. One of the key quotes that stood out to me from the earnings release was from Elon Musk. He said we could probably have a few rough quarters specifically referencing tariffs and the EV tax credits expiring. So there's a lot at play here. How do you see the next year or so playing out for Tesla?
- [03:01]
Tom Gardner
Well, I think it's going to be a bad year. You know, by any normal standard for a great growth company, this is not going to be a good year. But Elon Musk and Tesla, and Tesla's a lot more than Elon Musk. I'm not meaning to diminish the huge impact he has on the business, but this is a massive company now and we have to understand that the really great companies aren't thinking about the next year. Jeff Bezos talked about this all the time at Amazon. Sometimes as analysts, we get really focused on what is this core quarter look like, what's happening with the next 12 months for this business. But great business leaders are really looking forward much farther than that. We have to remember that in the backdrop for Tesla, they have $30 billion in cash, in net cash, on their balance sheet. So they, they, they have so much more capital, such a stronger balance sheet than anyone in automobiles. And Musk's bet here, and Tesla's bet is that we are moving to Autonomy. It might take longer. There might be some, some issues in regulatory process on autonomous driving, but Robo taxis are live in Austin. We see it with Waymo. We see a lot of high customer satisfaction, willingness to pay more. Obviously there's not tipping going on, so you can pay a little extra, but it's going to be a premium feature. The last thing I'll say in my, in my belief that Tesla will beat the market over the next five years. And I do actually agree and have for a long time with what Musk said on the earnings call, which is that he thinks Tesla will be the largest company in the world if Autonomy plays out. And I don't think that there's much question as to whether it's going to play out. We'll see if, whether, whether he's right about what will happen with Tesla. But remember, in the backd, the idea is to have a million optimus robots in less than five years. There is, as John says, a lot that you're holding onto in belief. Let's see if this really plays out. I will say in Hidden Gems we've been an island because we're the only thing in the Motley fool recommending the stock since 2012 with over 60 recommendations. The first one at about $2 a share, it's played out very well for us. But you cannot own this Stock if a 30 to 50% decline in the price of the shares is going to knock you out. Because there's just no way you're going to avoid that. This stock will be down 40 to 60% multiple times every two or three years. You should expect a 30 to 40% decline in the stock, in my opinion. And those have been and I believe will continue to be great opportunities to add.
- [05:11]
Matt Frankel
Let's pivot to Chipotle's earnings real quick. Unlike Tesla, investors are not that excited about what happened. They gave investors a not so pleasant surprise. They lowered their same store sales guidance for the year. Same store traffic declined by year over year. So Tom, I know you follow Chipotle pretty closely as well. Is the weak second quarter something investors should really be worried about?
- [05:35]
Tom Gardner
Not the quarter in itself, Matt. As we discussed with long term thinking for a business like Tesla, however, I'm on the record and my conviction is that for example, Starbucks will be a better stock over the next five years than Chipotle. Part of that is just straight up Brian Nicholl, the CEO who left Chipotle and is now at Starbucks. Is Brian Nicholl closer to Michael Jordan? You know, hoops fans know that Chicago Bulls won six NBA championships in eight years. And then when Jordan left in 1998, they have never been back into the championship series again. So sometimes you have an extraordinary leader and I think that is the case with Brian Nicholas. And my fear for Chipotle is that they're going to lose premium positioning. Now we see flattening out same store sales growth, restaurant margins in decline. And obviously in this economic environment, which I think will persist because of a lot of the changes in the technology landscape and what will happen with employment. Consumers are looking for discounts and getting lower priced protein in the form of chicken. So Chipotle has a billion and a half in cash flow. This is not a company in trouble at all. My fear is that it will become more of an operating company now rather than a vision driven business. That makes me think that this will be at best a market performer here over the next five years. And as I said, I think Starbucks will outperform Chipotle. With Brian Nicol as Starbucks CEO, it's.
- [07:02]
Matt Frankel
Really important to put the quarter into context. John, just to kind of name a few things. We got the initial tariff announcements. At the start of the second quarter, stocks briefly plunged into a bear market. Consumers started becoming really cautious about discretionary spending, especially when that was going on. What are your thoughts on Chipotle as we head into this second half of the year?
- [07:22]
John Quast
Look, Matt, this is anecdotal, but I don't know personally a single person who saw a tariff announcement on the news and said, honey, maybe we should skip our Chipotle order this week. I would say that Chipotle is getting more pushback from other things. As Tom mentioned a minute ago, perhaps there's even a perception on value and portion sizes. This did actually come up last year with the company and they had to address it head on. And it takes time to change a consumer perception of the business. Whether it's real or it's just perceived. It takes time. I think we're still seeing that play out with the traffic being down. They didn't take any pricing. They've been taking pricing in recent years and kind of getting to this point where I think consumers are reaching their limit. So that is playing against them right now. I think that is what's happening rather than tariffs being something that are influencing consumers. Look, I think that long term, I also agree with Tom that I think this is a company that is still fantastic operations. I mean even with a rough quarter, you're looking at 18% operating profit margins. I know restaurants that would be happy with half of that. Long term, I think this is still a company with a lot of promise. It's going to add many new restaurants in coming years. It's going to generate a lot of cash flow. I would agree though. Is this going to become more of an operating thing? I'm not really sure that the unit economics are going to recover fully this year. It's going to take time to win back some consumers that have been lost.
- [08:47]
Matt Frankel
Next up, we're going to take a look at Alphabet's quarter and it was a strong one. You're listening to Motley Fool Money.
- [08:53]
John Quast
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- [09:20]
Matt Frankel
Dairy free.com so another one that just reported Alphabet just reported really impressive results throughout its business. This is the Google parent company. Of course, Google cloud revenue was an extremely strong point with 32% revenue growth. That was an acceleration in the second quarter. And really one of the biggest takeaways that I got from the report is that the AI investments they're making seem to be working. And management now expects to spend $85 billion in CapEx this year primarily on building out data centers and AI infrastructure, up from the previous estimate of 75 billion. So I'd love to get the thoughts from both of you, but John, we'll start with you. What are your thoughts on the quarter and this aggressive AI investment strategy?
- [10:02]
John Quast
Yeah, you know, we human beings are so bad when it comes to big numbers like this. You said it just so casually and so many people are. But let's stop for a they raised their capital expenditure guidance by $10 billion. With this kind of money you could buy Campbell Soup Company, a 150-year-old business with products in every store across the United States. They could buy Huntington Ingalls. This is one of the only companies capable of building a nuclear powered aircraft carrier. And that's just the amount that they raised the guidance by 10 billion. If you're talking 85 billion. Now that's bigger than the GDP of Croatia, Sri Lanka, Panama. That is what they're spending this year on capital expenditures. And that's just one company in one year. This AI trend is unbelievable. And when you look at the spending ratcheting up like that, I get really excited thinking about who's on the receiving end of those dollars, you know. And so there's going to be spending on the GPUs, there's going to be spending on data centers, power needs are going to be going up. There are so many ways that this can trickle throughout the economy. That gets me really excited.
- [11:08]
Matt Frankel
So Tom, all this AI spending could be worth it if they're getting a return. And it looks like so far they are. What are your thoughts on just this general trend toward billions and billions of dollars being pumped into the AI infrastructure right now?
- [11:20]
Tom Gardner
Yeah, well, the first thing is that the reports of Google's demise have been greatly exaggerated. They've been making transitions in their search with Gemini. I'LL talk about that in a second. But the business is fundamentally very, on very solid footing and now they are succeeding and utilizing that AI in profitable ways and breakthrough ways in their overall ecosystem. So Google is a cloud and AI story and companies that aren't in the cloud today and aren't accelerating AI every single day are going to be in deep, deep trouble and it's going to come a lot faster than people think. On the cloud front, Google Cloud is taking market share now from AWS. The revenue run rate for Google Cloud is $50 billion. Their operating margins raced up to 20% this quarter. So Google Cloud is, is vibrant and a force for the company. On the AI front, Google's scaling Gemini across all those search searches, essentially becoming a private label brand for Google. Now, like Kirkland at Costco or 365at Whole Foods, the private label brand search, you know, 60% of all searches are being resolved without any user click. Think about that. The Gemini feature where you're getting that AI expression when you search something on a mobile screen takes up 75% of screen space. So Google is all in on Cloud and AI. And one of the ironies I see with that $85 billion CapEx and one of the things I see about that $85 billion, that increase of 10 billion, as John said, up to $85 billion in CapEx. Is this also a company that will be working people out of jobs at Google. And what that is telling us is that this automation is real. It is significant. People who are investing in AI companies but not using AI in their everyday life and at their companies who are going to fall so far behind so quickly now. And Google is just one of the many companies, one of the many large technology companies that are demonstrating this is real. This is enormous. We're betting our entire company to make sure that we're in the leadership position in our category. And for Google shareholders, thank heavens for that because if Google had fallen behind further, it would be harder and harder for them to catch up both on the cloud front and in terms of AI applications. The one caution I have for Google shareholders is just, you know, anti competitive practices. And whether the regulators are going to get involved with a Gemini search now because Gemini Search is saving them, they may be getting, there may be a decline in search coming to the Google platform because you can get so much right off ChatGPT or Claude Grok, et cetera. Perplexity. But that Gemini application is bringing more and more revenue into search for Google. So they're actually on solid footing. With their search, the business is on solid footing and if they don't run into regulators, I think you've got a double digit market outperformer in Google from here.
- [14:05]
Matt Frankel
Tom Speaking of AI investment ServiceNow, I know that's a company you follow. They just posted a really strong second quarter that was in my opinion the strongest earnings report as far as the surprise of all the ones we're talking about. I believe their CEO would agree with you. Bill McDermott said in the earnings release, every business process in every industry is being refactored for agentic AI. So even after today's upward move, the stock's still down in 2025. For one, I pretty sure you agree with their CEO. But two, what do you make of their future growth prospects now?
- [14:39]
Tom Gardner
Well, I think the growth prospects are bright for ServiceNow. They have excellent underlying financials. You see 30% operating margins just about just short of that, 98% renewal rates among their customers. So this is a fantastic business being run quite successfully. And I do agree, as you mentioned and mentioned from Bill McDermott, that AI is the new UI, that all future product development is coming through AI fundamentally, fundamentally, all B2C experiences, all consumer experiences in digital will be on AI applications. The one question I have as a ServiceNow shareholder ourselves at the Motley fool is the company has a $200 billion market cap. I think it can outperform the market. But we see those great earnings leading to, you know, a marginal increase in the stock today. And that's partially just because it's such a R valued company. A lot of element areas of the market are richly priced right now. So I just be patient every time you get a chance to buy ServiceNow when it's down 10 or 15%, I take advantage of that and I think you'll be rewarded with profitable investments.
- [15:37]
Matt Frankel
Next up, we're going to take a look at IBM's earnings real quick and Figma's upcoming IPO. I'm excited to talk about that.
- [15:44]
Tom Gardner
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- [16:13]
Matt Frankel
John IBM shares are down after earnings despite beating estimates on both the top and bottom lines. And the key reason seems to be that the management team is really cautious right now. Their CEO, some clients are being cautious due to trade tensions. US federal spending is down and there are a few other reasons. So what are your thoughts on IBM's quarter and is the stock a buy right now?
- [16:34]
John Quast
Yeah, I was surprised that the stock was down. After looking over the numbers, most of the metrics were up and above expectations. Of course we should keep in mind that with the drop, it's still outperforming the S&P 500 over the last year and year to date. So context matters, I think. But look, when it comes to IBM, I think it's really easy to dismiss it from the artificial intelligence conversation because it's such an old business. It doesn't scream AI to me. But you know, all these businesses out there right now are trying to figure out how do we use AI in our company and many of them don't know how to do that. So that means that they need consulting. And it turns out that IBM is pretty good at this. And CEO Arvind Krishna said its book of business for generative AI is now at 7.5 billion and accelerating. So essentially companies are coming to IBM and looking to how do we integrate AI into what we're doing. And so that means that they're really actually pretty well positioned and probably better positioned than a lot of investors give them credit for. Now granted, IBM only expects about 5% revenue growth this year. So usually when I'm looking at a tech stock to buy, I want to see a little bit better growth in this. That said, over the last couple of years I've just had this growing conviction that IBM is better positioned than people give them credit for. And so for me it is a stock to watch.
- [17:50]
Matt Frankel
Well, maybe Warren Buffett shouldn't have sold it when he did. So now let's get to the story that I've been really looking forward to. We're going to talk about Figma's ipo. Jonathan, I want to bring you in on this. We're starting to see a resurgence in IPO activity. And one big highly anticipated IPO that's about to go public is figma. So before we dive in, can you just give us a 30 second description of what Figma does?
- [18:13]
Jonathan Wilder
Figma is essentially a Google Docs essentially for UI UX. It allows collaboration between multiple designers to create rapid prototypes which can then be put into the prototype present feedback and iterate loop which most corporations use to develop new products. So that's essentially what they do.
- [18:34]
Matt Frankel
Talking to you before the show, I think it Would be fair to say, maybe this is an understatement that you're not entirely bullish on the growth story here. Can you kind of tell us why you're approaching Figma with so much caution?
- [18:44]
Jonathan Wilder
First came out in 2012. They are very much, in my view, attached to an older way of developing products which again, going back to that is very much the prototype present feedback and iterate. That process can take days, weeks or even months. In a typical corporation with generative AI, that can go down to literally 30 minutes. So instead of getting one prototype back from a design team, you're getting five to 10 prototypes back in less than a day. So that alone is a huge disruption for figma, it's a huge disruption for Adobe and any companies in this space. So that's my major actually one example is Galileo is a generative AI competitor to figma. They were just purchased by Google about a month and a half ago, renamed Stytch and made available completely for free. So if you're taking a look at a 75 seat license for Figma, you now have an option for just to use Google Stitch for free. And if you're I come from a startup background and if I have raised five million dollars at a twenty million dollar valuation, I have the option, should I hire a figma expert for 140, $150,000 a year or should I just hire AI bots in the form of Stitch, Galileo and some other versions of AI versions of a figma and save myself a huge amount of money? I think currently large corporations are the ones that are stuck on figma. However, as the good example is, the Parsons School of Design in New York City are actively now beginning to teach generative AI design. So the new designers that are coming out, the younger designers that are entering the workforce, the first tools that they're moving they're going towards are generative AI tools. They do not go to figma, they do not go to Photoshop even at this point. That's my main thesis where I'm not too bullish on it.
- [20:46]
John Quast
So Jonathan, I think a lot of investors would be reading over the S1 when it comes to Figma and looking at that 46% year over year revenue growth. And I think there's a sense that the generative AI trend is already mature. So how do we take what you've just shared about the business and maybe some of the risks, but then also how do we counterbalance that with the 46% revenue growth that we see?
- [21:11]
Jonathan Wilder
Generative AI really started in 20182019 with the Transformer architecture that was first released for the public with ChatGPT in late 2022. However, the generative AI scope of what it's covering has it first started to attack coding. The models are continuously being evolved. It then started doing things with the ChatGPT of image generation, Runway with video generation. And this area of rapid prototyping is something that is not necessarily a focus of generative AI, because if you use something like a cursor or a Windsurf, you can actually bypass figma completely. Because as you're building a design using one of those tools or a bolt is another example, you can ask it with very specific prompts to build the design. It will also build the code in the background and will also deploy the code and the design live to a hosting environment. So if you're looking, you're talking about Google earlier. Google's doing a very good job of integrating all of these types of tools and that's why they purchased Stitch, where once you create a design on Stytch, which you would have done previously in figma, now it's already creating the code with one click it's in Google Colab, which is their development environment, and another click it's then in Google Cloud. So Figma does not have any of that type of functionality built in. It is going to rapidly the pace of how that's going to evolve is, I would say, exponential over the next year. Most of what Figma has put on in terms of generative AI I see mostly as band aids marketing hype. It's unclear what they'll do over the next year. They could turn it around and put really useful generative AI tools within.
- [23:11]
Matt Frankel
Their.
- [23:12]
Jonathan Wilder
Interface, which hasn't changed a huge amount really in the past decade. So those are my major concerns.
- [23:19]
Matt Frankel
Thanks Jonathan, for that clarity on figma. It will be really interesting to watch once that one goes public next week. 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 informational purposes only. To see our full advertising disclosure, please check out our show notes for John Quass, Jonathan Wilder and Tom Gardner and the entire Motley fool money team. I'm Matt Frankel. We'll see you tomorrow.