Asit Sharma (3:07)

Mary I think maybe the best strategy is recognizing that tariffs and uncertainty that stems from tariffs are going to be a feature of the investing landscape. If you told me a few years ago that there was this great technology, it's called transformer technology, and it's this extension of machine learning and it's going to be a feature of the investing landscape, I probably would have embraced that and said, all right, let's roll with it. Let's see if we can make some money from generative AI. Our brains aren't as well equipped to handle features that have negative implications that could mean that potentially the stock returns won't be as great or that there will be some winners we have to find and some losers that we have to avoid. But acceptance is a really great tool when you hit these periods where the change is in how the outcomes might fall out, and not always for the best. So for me, that this is a way to cope. It does mean, though, that you have to get a little bit more knowledgeable than you were before about different industries and the potential. Potential is such a big word here, isn't it? Because the story changes from one day to the next, but the potential effects. And that's some work. But look, everyone now understands what a large language model is. Everyone knows what ChatGPT is, so we can learn. It's just we don't like to learn as much about stuff that's frightful or tough or uncertain.

Mary Long (4:33)

The S and P, the Dow and the NASDAQ are all up this morning and there are a lot of financial headlines that attribute that upward swing to this, this news about the potential narrowing of of these tariffs that are set to roll out next week. Those headlines assume that the tariff news is what's been causing the downward swing that we've seen the past few weeks in the markets in the first place. Bloomberg opinion columnist Nir Kasser has another idea. He argues that, quote, the freakout was more about big tech than Trump's tariffs, end quote. Kar's argument is that the Magnificent Seven stocks account for nearly a third of the s and P500 and that last week's sell off brought down every single one of Those once high flying stocks. So the median decline among that group, the MAG7, was 14.4%. Collectively, those losses were responsible for nearly half of the S&P's total decline. What's notable is that the rest of the S and P fared better by comparison to the MAG7 stock. So a quarter of stocks in the index posted gains. And interestingly, industrial and consumer companies which you would think would be impacted by tariff news, those were well wrapped among the higher performing group. While tech stocks which are insulated from tariffs, those are the ones that largely fell. So Asit, what's your, what's your take on Kzar's argument? Why might the market be frustrating freaking out, to use his term, over Big Tech? Why might that be actually where the downward swing is here rather than this tariff news?

Asit Sharma (6:03)

Yeah, I'll try to unpack why if we go with this argument, the market is freaking out over Big Tech. But there are some other fun things in what you just posed to us that we should hit as well. Okay, Big Tech, you're supposed to do a job, you're supposed to take a lot of capital that you have on your balance sheet and you're supposed to invest in, in leading edge technology and you're supposed to keep getting returns from that. I think the market is freaking out over Big Tech because the market understands that there's a certain amount of profit and cash flow that's posited to come from all this investment in AI infrastructure, data centers, CPUs, GPUs, et cetera. And mind you, in this group can branch out to the Mag 7 because they're tech stocks too. I mean Tesla is investing as much in GPUs as almost any other business out there. So if you just think about the big picture, it's a story of investing now. So having a little bit less free cash flow on your hands, taking your operating cash flow and then building so that you can get a gain in the future. And I think short term ripples in that narrative. For example, we've been talking, Mary, you, myself, Ricky, about Deep seek the effects of Chinese innovation. I mean there's a story out this morning that Jack Ma's Ant Financial Group has made some advancements in using Chinese GPUs to cut costs by 20% on their training inference models. I think there's just a lot of doubt about this long term idea that the massive balance sheets and the great cash flow that all these businesses have can produce this kind of return on technology. But I would just point out here that okay, if you buy this argument, look back 10 years, 15 years when all these companies were investing in the so called cloud. Most of us didn't even know what that meant at that time. Well, the uses of that investment are harder to see. Where the earnings will derive are harder to imagine on the ground today. Yeah, it looks like there are so many factors that could crimp the ability of these companies to earn off of their investments. But again, the future is really, really hard to see. And that's why I don't take any kind of short term lessons from this. I mean, I like what the article is posing. It's a fun way to look at it. I like the call out to the idea of La freak. So freak can be bad as well as good. I think in this article it's pointing to something bad. But here's something that may surprise those who are listening today. If you go back to the 19th century, if you go back to the 1880s, we had concentrations then. Visual Capitalist, which is a really fun site, charted this out recently. In 1880, the share of top 10 stocks in the S&P 500's market cap was 27%. Now it's 38% today and everyone is freaking out. But these concentrations have always been there. It's because the weighted Capitalization index finds the companies that are making the most impact in the economy and pulls them into the index and then they rise as earnings rise and they become bigger as a concept consequence. So yeah, we should have a little bit of freakiness on the margins, but I don't think we should freak out.

Mary Long (9:27)

In thinking about this argument and just the the weight of the MAG7 stocks within so many indexes. I was initially tempted to ask you whether this was a story about sky high big tech valuations coming back down to earth. But when you actually look at what the valuations for these companies are, with the exception of Tesla which is trading at 132 times earnings this as of this morning, all the other MAG7 stocks are trading at something between 2040 times earnings. Are those reasonable prices to pay for these companies right now?

Asit Sharma (9:58)

They feel like they're at a little bit of premium at those prices. When you look at the price a day versus the projected earnings for the next 12 months. But there's some nuance in there for the bigger companies. They have so many levers to pull the per share earnings up. A company like Apple or a company like Microsoft engages in tremendous dividend payments and tremendous share buybacks. So the shareholder feels okay with a PE ratio 30:1 on a forward basis for Microsoft and 34:P E ratio forward basis for Apple. These are numbers that you supplied to me, Mary, in our notes and I buy them. I think about free cash flow, how these companies are poised versus the free cash flow they generate. And that feels like it's even more expensive because these businesses have less free cash flow. You just read the headlines about Meta investing tens of billions in AI infrastructure. Even Apple's getting into the game with like its $500 billion investment in CapEx over the next several years. So we understand they're going to produce less free cash flow as they build out this next generation in various ways. For Tesla, it's creating this environment where they can build a lot of humanoid robots. For Alphabet, it's making sure that all of its edge in very deep learning and machine learning just doesn't go by the wayside as Microsoft and OpenAI do their thing. For Amazon.com, it's continuing to build out AWS and trying to build their own chip infrastructure. So I have to buy all that expensive stuff from Nvidia. Each one of these companies is really just trying to buy stuff now and build for a future that's still five to seven to ten years down the road. So in that instance they're not that terribly overpriced. There is some risk in this, of course, that all the investments don't pan out. And then we'll look back and say, wow, the 10 biggest capitalization stocks today are no longer Meta Alphabet, Amazon, Nvidia. There are other companies that we might not have seen coming up in that index.

Mary Long (12:03)

We've been talking a lot this morning about the big macro and big companies going to pivot and turn to a story that is about a much smaller company. Especially today, there's been quite a bit of drama unfolding over at 23andMe. That's the genetic testing company that, that was famous especially a few years ago for at home DNA tests. Over the past several months and years they've been facing quite a bit of of trouble. Today marks another chapter in that story, that chapter being chapter 11 bankruptcy which the company filed for late last week. 23andMe, once upon a time was valued at $6 billion. Last week it was closer to 50 million. So it's been quite the steep slide for this company. But again, once upon a time, 23andMe tests were all the rage. The stock went public, yes, back in 2021, but again I mentioned from $6 billion down to $50 million last week. Asit why couldn't 23andMe turn these once amazingly viral testing kits into an actually successful business?

Asit Sharma (13:05)

Two words Mary. Business model. I mean there are so many ingenious things that get created in society that we work backwards from. It's like I've got this amazing idea and I'm going to go sell it out in the marketplace. But the problem with that is sometimes the most beautiful ideas don't have a sustainable market. And in this case, DNA based analysis in a testing kit where you use your saliva and get back these revealing results about your genetic makeup that turns out to be a one time deal. And so the company from the beginning was up against this one off proposition and it never really could figure out a way to have recurring revenue streams. That was the basic issue with this business. I mean, I think it was a wonderful idea and it's fun that we can create so much with technology in this day and age. But if you're going to go and be a business, and especially if you're going to come public via a spac, try to prove to investors that you can make this work. And to their credit, 23andMe did try. I mean they set up a therapeutic division, they set up sort of a drug discovery business because they had a database of genetic material. So this potentially was a way to have revenues that just weren't one off. But it never panned out for many reasons. So that's really the issue here with this business.

Mary Long (14:35)

So we started off today's conversation trying to make sense of ups and downs of the market and larger macro news we do have here at the fool daily newsletter that kind of summarizes all all this news that's going on in the market each day. It's called breakfast News. At the end of that email there's a question which we call the Foolish fun section. And last week one of these foolish fun questions was about how readers tune out market noise. So I wanted to highlight one response that came in to that question from CMF Boiler Pete. They write, concentrate on process over outcome. If you're following a process that historically results in good market returns, it helps to mitigate the noise of market gyrations. That process might include regular investments in stocks or ETFs journaling to quantify your thesis behind a stock purchase or sell, keeping an appropriate amount of cash in cash as an emergency fund, diversifying your investments, et cetera. It doesn't block out the noise entirely, but it does give you comfort that you are doing things right. Asa to close us today, how do you turn out market noise.

Asit Sharma (15:33)

Wait a minute, Mary. You want me to improve on CMF Boiler Pete's answer? Come on, this is a high school answer. Impossible Task is a great answer. Amazon sells a number of white noise machines on discount, so this is one way I do it. The other is the warm fuzzy. To be a little bit more serious here, I used to be an auditor and we had this really weird term called the warm fuzzy. So this is after you've done all your homework on a business, you've put in all the paperwork, the senior audit partner's gonna review all your analytical procedures and tests and your write ups and adjustments to the financial statements stuff. You reach a point where you're like, you know what? I feel like this company is legit. The financial statements are fairly presented in accordance with GAAP principles. I'm feeling good about this and I try to reach a level with the businesses that I own, the companies that I own, and also the industries that I'm excited about. Get to that level where I sort of understand it, I've done my work, I feel good. And that more than anything helps me to ignore sort of the short term market noise, which is scary. I don't think we should ever completely ignore it because sometimes it tells us something very important about the future. Maybe things won't be as great as they were or maybe they'll be better. So we do have to be attuned to market noise. But my answer is really just a variation on cmf. Boiler Pete's answer is like do the fun stuff, the research, the homework, dot the I's, cross the T's, get that warm fuzzy and that market noise will be just something in the ambient background.

Mary Long (17:04)

I'll close this out by posing a challenge to anybody listening. If you listeners have an answer or can improve upon CMF Boiler Pete's answer, leave a comment wherever you're listening or write to us@podcastool.com that's podcastool.com and tell us how you tune out market noise. Asa Sharma, always a pleasure. Thanks so much for chatting with me today.

Asit Sharma (17:24)

Thanks a lot for having me, Mary. It was a lot of fun.

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Mary Long (18:05)

March Madness is in full swing. Up next, full contributor Travis Hoyam joins Ricky Mulvey to take a look at how MGM Resorts is breaking into the online sports betting business.

Ricky Mulvey (18:20)

March Madness is well underway and the American Gaming association estimates that Americans are about to wager $3 billion on the men's and women's tournaments. Figured it's a good time to check in on a gaming stock. Travis, you've been following MGM Resorts for quite some time now and it has sort of an interesting relationship with online sports betting with BetMGM because it's, it's not the company's main revenue driver and it's also in a 5050 partnership owning it. So let's, let's start there since we've got March Madness happening. How does BetMGM fit into this company's overall business and is it important to your investment thesis for MGM Resorts?

Travis Hoyam (18:57)

BetMGM is kind of an extension of the MGM brand. Like you said, it's 50, 5050 partnership with Entane. So it's kind risk bet for them when they got into that business. But it getting me pretty big $2.1 billion in revenue over the past year although it did lose money. That should turn around the bottom line anyway should turn around in 2025 where they're expecting to be e e break even by the end of the year. But the opportunity, I think the bigger opportunity is going to be in their fully owned operations. They do have that BetMGM partnership is only in the US so everything else that they're doing around the world, in Brazil, in Europe, they own all those properties that was $140 million in revenue over the past year but lost 77 million. So it's a decent business. But this is not draftkings or Flutter which are going to be kind of the more focused online gaming companies. And is it central to my investment thesis. The great thing is it doesn't need to be. This can be optionality because you get a great core business with the resorts in, in Las Vegas and in Macau.

Ricky Mulvey (19:55)

Let's look at Las Vegas because that's where about half of MGM Resorts business comes from. And this is one where you your free call option with BetMGM. But I, I wonder if there's a period of softening happening in Vegas with a few phenomenon one is that wallets are getting tighter. You had a lot of the resorts on the Vegas strip sort of change table game rules, things like six to five blackjack which many visitors were not happy about. And now it's at a period where overall gaming revenue is actually falling in in Vegas, table games down 16%. And there's also sort of a some visitors are getting a little less entranced with veg. Las Vegas Convention and Visitors Authority found that 75% of respondents last year said it was extremely or very likely that they would come back to Vegas. That sounds good, but it's down from 84% last year and 87% in 2022. So just a few years down from 87% to 75%. Are these phenomenon. Is this downturn a serious problem for MGM resorts?

Travis Hoyam (20:58)

I think you need to look at a little bit of context with this. So there's natural volatility in Las Vegas. And this can be from a number of different things. For example, in 2023 they had the first F1 race. That may have been the most profitable weekend ever in Las Vegas history. But prior to that you had the deflation from COVID So the bounce back was actually phenomenal. In 2024, online or gaming revenue on the Las Vegas Strip was $8.8 billion. The the first time that Las Vegas passed $7 billion was 2022. So not all that long ago. And the peak prior to Covid was 6.5 billion way back in 2007. So the new normal, as I sort of think about it in Las Vegas is higher than it was pre Covid. And I think long term that's going to be good for companies like mgm. This is going to be a volatile business. But at the end of the day, the meetings and convention space, these entertainment hubs like Las Vegas are going to be more and more valuable. As most of us are working either from home or sort of dispersed all around the country. All around the world. You need to have central locations to meet. Las Vegas has got to be one of the top couple of places to meet in the US So it's always going to have that position. And given the fact they own about half of the Las Vegas Strip or operate about half the Las Vegas Strip, that's a great position to be long term. Even if there is a little ups and downs and hiccups here and there.

Ricky Mulvey (22:20)

Yeah. MGM also has properties in Macau and is building across the world in Dubai. There's talks about a resort that doesn't have a casino, but they might have a casino there later. They're trying to get that going, but also one that they're building, which translates to about US$10 billion in. In Japan. And I Know, this is one that you're bullish on, that you wanted to talk about on. So what's going on with MGM resorts in Japan?

Travis Hoyam (22:44)

Yeah, Japan is a huge story that I think the market's not really thinking about. That property is going to be, like you said, 8 to 10 billion dollars. Always assume it's going to be on the more expensive side. So $10 billion or so, and this is a huge opportunity because it's going to be one resort in Japan. There was thoughts a few years ago that this was going to be multiple resorts, but the Japanese economy is bigger than Singapore, which is really the only proxy that we have here. Marina Bay sands generates about $2 billion in EBITDA each year. That's a proxy for cash flow coming from each of these resorts. So that's where I think the bar for expectations are for MGM. Osaka could be even higher than that. Osaka has 20 million people. It's about the size of the New York metropolitan area. So I, I've never been to Japan, but this is a very densely populated, very wealthy country. And the other thing is, we don't know exactly how big the gaming market is going to be. There estimates years ago was that it was going to be a $40 billion market. I don't think that's going to be the case with a single resort. But think about this. There's 12,000 pachinko parlors in Japan. They generate about $210 billion in revenue. So at least a portion of that is going to end up at MGM osaka. I think MGM's cash flow for their 40% stake could be over a billion dollars. When this, when this resort is open, they're going to only have to put a couple of billion dollars into the property itself. There's going to be a little bit of debt behind that. They have some of that already lined up. So I think this could be a phenomenal property, potentially the most profitable in the world when it opens in 2030. And basically you're getting it for free because the stock is so cheap.

Ricky Mulvey (24:21)

It'll be interesting to see how that plays out. There's some interesting cultural differences that people are going to note where if you're from Japan and you go to the casino, it costs you 40 bucks to enter. They limit it to 10 times a month. Maybe not the worst idea for us to try that out in the us.

Travis Hoyam (24:37)

But they've done this before, too. They've done these kind of things in Singapore. So those sort of restrictions are not unheard of in the industry.

Ricky Mulvey (24:44)

Yeah, the Dubai One's interesting to me because I've gone on some YouTube rabbit holes where I'll look at these like Dubai theme parks, like inside and they look really cool, but they can be empty. All that is to say, like a mega resort in Dubai is not a slam dunk for investors. This is two and a half billion dollars without a casino on the property. How are you looking at this one?

Travis Hoyam (25:04)

Honestly, I don't think about this Dubai property all that much from an investor perspective because we just don't know all that much about it. And I don't think their capital input is going to be all that high. They do have partners with that property that are tied to the leadership in government. Management has basically said we really like this property, but it would be a really great property if it had a casino. So again, probably a low risk, potentially solid reward for MGM to make, you know, but this is more brand building I think in a very high wealth area like Dubai. But ultimately you want those customers maybe spend some money there, maybe you get a casino there. But the better thing would be to hey, come to our casinos in Japan or Macau or Las Vegas and that's ultimately where you're probably going to make more money from. Even the brand building there.

Ricky Mulvey (25:50)

Real reason I wanted to talk about this company with you, it's, it's flashy. We got to do March Madness up top. That's what gets your attention. But this is the stuff that matters. They have a long term buyback story going on. MGM Resorts since 2021 has reduced its overall share count by 40%. They don't pay a dividend. So what, what do you make of this capital capital allocation strategy? It's great to see them rewarding long, long term shareholders like this. But you know, why, why not pay a little dividend, show a little discipline with that, that.

Travis Hoyam (26:17)

So there's a couple of things I think going on here. Management thinks the stock is really cheap and that I generally agree with that. Depending on what you're looking at, this is a company with free cash flow yield of 15%. You could also do things like, you know, pull out sort of their, their partial ownership businesses in Macau or BetMGM. And they've said that the stock trades for about an enterprise value to EBITDA or cash flow of about four, four and a half. So if you look at that, the obvious thing to do is use your cash flow to buy back stock. The other thing is that companies in Las Vegas, particularly in the casino industry have gotten burned by dividends in the past when they had to cut dividends during COVID They were just kind of building up this reputation in the dividend community with investors, hey, we're going to have the cash flow to pay this. And then suddenly you go through something like Covid and you got to say, hey, you know what? Just kidding, we don't have that money. We need to save it. And I think dividends are just looked at differently than buybacks. If you need cash to invest in a new casino in New York or in Japan and you just reduce your buybacks, nobody's going to be mad about that. But if you say, you know what, we're not going to pay a dividend next year because we have this great investment opportunity that's going to be taken very differently by the market. So I think you combine those two things and management just kind of doesn't want to get in the dividend game. But if you want a dividend in the gaming industry, you know, they do pay rent to Vici Properties and that's the company that is going to ultimately pay a dividend for investors.

Ricky Mulvey (27:39)

I want to talk about the balance sheet real quick because Fitch rated MGM secured debt at BB plus unsecured debt at BB minus. This is important for listeners because that is below investment grade junk rating, which is actually not uncommon among gaming operators. Steve Wynn did quite well with Michael Milken back in the day taking on junk debt to build casinos. But you know, is this junk rating a concern for you? Does that mean there's balance sheet concerns for any investor looking at this company?

Travis Hoyam (28:08)

Yeah, junk bonds really built the Las Vegas strip, so not surprising that maybe they just stay there out of sort of nostalgia for the past. But I think the reason that that would be a little bit higher risk for investors is there is a different part of the stack, and that is I mentioned Vici Properties, that's the REIT that owns the real estate for most of MGM Resorts properties in Las Vegas and all around the country. So that's going to be where there's a little bit lower risk if there's some sort of default if the business kind of goes south. Whereas the operating company, MGM Resorts, as we we can invest in today, doesn't own that real estate. So you have a little bit more leverage in the business. That's why debt investors are going to look at it as a riskier business than just the real estate side. So I think that's why it sort of makes sense that they do have a little bit riskier debt. That said, solid cash flow company. So as a investor in stocks. It's not something that I'm super concerned about.

Ricky Mulvey (29:01)

And then as we wrap up here, I know MGM Resorts is a stock that you're really interested in. I think you've, you've bought it personally. Why is MGM Resorts the gaming stock you're into? Why not Wynn Caesars, DraftKings, Flutter Entertainment?

Travis Hoyam (29:14)

I think it's a combination of valuation, the, the solid businesses that they have and the locations that they have. You know, Caesars doesn't have exposure to Macau. Japan is a big piece of this. And then the optionality in online gaming with something like DraftKings or Flutter, you're paying for that digital business, so you're paying a premium for a business that I don't know if we know it's going to be profitable long term. With mgm, I get a great core business in the Las Vegas strip. In Macau, you get the upside from Japan and the online gaming business, all without paying much for that upside. So I like, I think the risk reward is just best with mgm. But look, all the casino operators are pretty cheap right now, so. Wynne Caesar, I, I don't mind doing a basket if that's what investors are interested in.

Ricky Mulvey (29:58)

Travis Swine, appreciate you being here. Thank you for your time and your insight.

Travis Hoyam (30:01)

Thanks for having me.

Mary Long (30:06)

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. For the Motley fool money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.