A (3:46)

These have been walloping numbers and as we were hinting at, this is hidden gem style investing and looking at the magnificent seven, the most probably well known companies in the world, there always can be some like misunderstood or hidden aspects of what is with these companies. So Tom, I want to go to you and say when you look at these four companies, differing reactions in the market for a quarterly earnings, but on a long term basis they've all been incredible winners. When you see these four companies, what are some of the hidden aspects that you see or perhaps the misunderstood parts that as you as an investor are looking at these and be like these market reactions are probably not what I'm seeing when I see these massive growth in spending backlogs?

B (4:28)

Well, I think that the market is actually responding reasonably accurately, I think at least in the short term to what's playing out. Remember as John pointed out, Microsoft, Google and Amazon because of their cloud businesses are racking up incredible backlog numbers. And those backlogs are know this is enterprise cloud revenue, this is very high quality subscription revenue. And the demand for AI enterprise right now is off the charts. Meanwhile, Meta does not have a cloud business and does not have backlog. It's its business is advertisers and advertisers can cancel in in difficult economic times. So the quality of the revenue across these businesses is a very important to distinguish between the companies. Then I will just add that the, that the CapEx spend. So not only we're talking about the quality of the revenues, but the CapEx spend that is so dramatic. We're talking about these four companies collectively spending over $600 billion in CapEx this year. We've never seen anything like this in human history on this scale. But when we talk about Meta's capex they're spending again against advertising markets where there are some real questions about consumer confidence. And you know, the consumer drives 70% of the US economy. It's a very different thing that's developing at Microsoft, Amazon and particularly Google right now again with that enterprise spend. When they spend capex at Google, Microsoft and Amazon, they're trying to catch up to cloud demand. You know, they're basically saying our numbers were lower than they should have been this quarter because we cannot meet the demand. The same is not true for Meta right now in their capex they're spending more into zones of uncertainty out there. So I think the market reaction has been, has been accurate. And I, I will just say again, the AI solutions is the primary driver. Let's take just Google cloud. That's where the real business growth is. And these are, these are, these enterprises across every industry now are racing to introduce AI solutions into their product solution suite in life. And so these are lucrative, resilient and very distributed spends for a company like Google. I'm not surprised to see the stock up here and I think Google's business is looking very, very good today.

A (6:54)

I want to drill down into something that we were taught you talked about with capital spending over $600 billion for these four companies alone. And if we kind of extend out to the whole magnificent seven universe, we're talking almost three quarters of a billion dollars in annual capital spending on all of this. And all these companies raised their capex spending for the year, but it wasn't because they're like we need to build more. A lot of what they were saying they're raising it for was the prices of things are going way up. John, you mentioned in some of our show notes beforehand like memory costs are going way up. But it' the downstream effects that we're seeing talking about electric, even down to the electricians that are doing the installations and stuff like that, so I want to pose this to both of you and I'll start with Tom and then we'll go to John. When you see these massive raises in capital spending, do you see that as risks for the big spenders or opportunities as investors in those downstream sort of companies that are building out the AI infrastructure?

B (7:56)

Well, I do start by seeing incredible opportunities downstream. I mean we're seeing the AI infrastructure build out, as you mentioned, the costs of memory rising. So companies like Micron, what an amazing stock it's been. I mean this is a company that has been through incredible cycles in its history. It's now looking at valuation in the hundreds of billions of dollars at Micron. So I really like to look downstream. There is a part of me that wonders if, when, when we're going to get some government intervention on the, on the Mag 7 because these are, these are truly some of the largest monopolies. They're competing with each other. They're also drawing a lot of free data from the general public. And I think there are going to be pressures coming to bear on some of the Mag 7 companies from a regulatory standpoint and maybe, maybe not in the immediate future, but I mean it's got to be coming but downstream in this capex spend, I mean you have, you have construction companies, you've got H Vac cooling, you have just tremendous opportunities in subcategories like photonics. These spends are going to have a dramatic impact downstream on companies that maybe they were somewhat flatline businesses and now the electrification boom is turning them into high growth margin rising companies with rising returns on invested capital. So I'm continuing to look downstream for investments, but I'd say out of the group that we've talked about so far, certainly I'm most interested in, in Google coming out of these earnings.

C (9:29)

One of the interesting things here for me, Tyler, is yes, Amazon said, quote, memory has skyrocketed. Meta pointed out that when it increased its guidance for capital expenditures, the majority of that is due to higher component pricing, particularly memory. Microsoft said that $25 billion was added to its capex and a lot of that has to do with memory as well. And, and you look at that and you start questioning, okay, what does that mean? Counterintuitively, perhaps this is actually good for the public clouds and here's why. Dell has talked about how many of these large enterprises really want to try to control their costs more and bring some of the AI compute in house with on premise servers and things like that. But when the component pricing is skyrocketing as it is, it actually can drive people to these public cloud companies. And so I think that's a lot of what we're seeing here in the incredible rise in the backlog. Some of these enterprises are saying, man, maybe we can't do this on premise like we thought we could and we are going to need more compute from these public cloud companies. So the higher memory costs and the higher component costs, yes, it does increase the capex, but perhaps it does make these public cloud services even more attractive.

A (10:40)

I would love to drill down in this a little bit more, but we actually have that in our mailbag later on the thing. So coming up next, we're going to open up Tom's Mystery topic of the Day.

D (10:50)

Get a concise daily market preview from Charles Schwab, including stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market Preview delivered in 10 minutes or less. Listen today@schwab.com marketupdatepodcast or wherever you get your podcasts. That's schwab.com marketupdatepodcast Obviously, since we have

A (11:22)

the CEO of the Motley fool with us here today, we gave him guest honors and said since you are the guest, we wanted to leave it open to you and say what direction do you want to go in? And we'll really go like unscripted off the cuff. So Tom, what is the mystery topic of the day?

B (11:38)

The mystery topic of the day is consumer sentiment. When we look at the University of Michigan's consumer confidence scores, I mean these are analysis across 600 households. Scoring system has gone back to 1952 and we are at the lowest reading in history. Typically this sentiment score might break down along political lines, but of course it's scoring income and age and education as well as as key factors. And yet all categories are showing numbers is at historic lows. So the the economy right now is being powered by super tech and those large technology companies are also setting some signals to the marketplace by cutting the size of their workforce as they're growing. And you know you see Meta laying off 8,000 people and and cutting back on 6,000 jobs it had listed while you know, spending tens of billions of dollars in capex. So the drive to AI compute is a much more aggressive spend in society than the drive for employment and we're just seeing that rippling in the white collar market right now and in large tech. But what's going to happen with the impact across the marketplace as this spreads out across every industry? And we see that AI tooling really does drive greater productivity gains, will deliver higher gross margins, higher operating margins, higher returns on capital for a lot of businesses. But the question is what will happen to the labor markets with all of these automations? We're all asking this question. It's showing up in the sentiment studies now by the University of Michigan. And so consumer confidence is at historic lows. And, and I would just say that we're, we're in this zone today where we're getting almost true Pareto principle on spending where, you know, 20% of households are spending and are, you know, controlling 80% of the wealth in the U.S. and my concern is what happens if the labor market begins to fall because we obviously have, still have persistent inflation. A number of other, you know, gas prices on the rise with the conflict in Iran. So the question that I ask is what, what happens to the consumer that is driving 70% of US GDP historically? And I think these confidence numbers out of the University of Michigan are pretty concerning.

A (14:08)

One of the things that I have noticed, because in that similar vein that I've been following, if you watched the consumer sentiment survey for, I don't know, probably maybe up until like four or five years ago or two or three, you could almost do an inverse correlation of consumer sentiment to gas prices. And it was like almost a perfect mirror rising gas prices, consumer sentiment would fall to the floor. And it was only as a couple years ago again when we started seeing a lot of this AI anxiety, I guess you could say, in society of, you know, labor consumer sentiment, you started to see this decoupling where we would have low, relatively low gas prices. But consumer sentiment continued to decline. And it's been a fascinating like topic of how the number one, like maybe gasoline is not like the, you know, end all, be all price signal that people used to think of in terms of consumer anxiety anymore. Perhaps they are looking at other things like health care costs, insurance costs, a lot of the other things that have been rising at rates above inflation for quite some time. And yes, there's been relief elsewhere. You know, a lot of durable goods prices have, at least in terms of total spend, have gone down. But a lot of, we call them the things in our lives that don't necessarily spark joy, like buying your health insurance or your housing have gone up at rates kind of disproportional to what we are normally used to. And so there's just this additional layer on Top of what you're talking about because you have jobs anxiety as well as, you know, the household no joy costs seem to be going up as well.

C (15:43)

Well, I mean certainly Tyler, there's, there is what we call non discretionary spending. Right. And that's kind of what you're talking about. It doesn't necessarily bring us happiness, but we need to spend it to survive. We need to spend it just to live. However, I would say there's a lot of contradiction out there in the, in the data. I mean on hand we are seeing that the sentiment is low. I think that pessimism is high. And yet at the same time you do see some non discretionary spend continue to hold up quite good. And just as one case in point, look at Carvana reporting yesterday after the Bell reporting a record number of cars sold. And as I understand the used car market right now, prices aren't exactly great if you're a buyer, the financing terms aren't fantastic either. And so it's not necessarily an ideal market to have a sudden surge in used car purchase activity. And yet Carvana really knocking it out of the park with the number of vehicles sold. And so that would seem to kind of contradict this, this low sentiment and then buying cars and then gas prices could continue to rise. That's always out there on the horizon. So it's hard to know what to make of this exactly when you see

A (16:58)

these sort of signals, consumer anxiety perhaps like you said, going to Carvana, maybe used cars instead of new cars and spending going to the unessential places. Is that to you any signal in terms of like perhaps I want to be holding more cash in my portfolio for opportunities, maybe some of my more highly valued companies I'm going to take more look at perhaps trimming those. How does what we're talking about here with a theme of consumer anxiety, low sentiment affect your portfolio and investing decisions?

B (17:33)

Well, I think we always have to put things in the context of valuation. So we have to remember in some areas where there are declines or flattening out, maybe the valuations have moved below those realities and now there's going to be a long term opportunity to invest. But I would say that what we're looking at today is an enterprise world that the safest places to invest right now are in the capex boom, the AI infrastructure boom. Valuations are rich, but demand is unlimited. So I would be looking at the infrastructure, build out B2B spending, enterprise driven revenue. I think when we start moving into the category of the consumer and how the consumer will spend. It's not just the risk, the layoffs that we see coming through from large tech, right? So those are big headlines that we're all going to keep seeing because these companies are going to continue to remap their employment towards the automations that they're seeing. They're the most advanced technological companies in human history and they're telling us it's the canary in the coal mine. They are letting us know automation works. We're not going to need as many people on the payroll to complete massive amounts of work. And so I think that is a headline signal that is causing the consumer to worry now downstream of the large tech companies and if you have friends that have worked in some of these companies, you know that they had salaries in the couple hundred thousand dollars and they've exited out into the marketplace and they can't find comparable jobs at the same salary level. So I think what we're going to see is an increased caution in the consumer spend. So I would be looking at anything that's discretionary travel related businesses, any big ticket items, automobiles, big renovations. I think that what we're looking at is this bifurcation in wealth right now that is getting to somewhat extreme levels in the US and around the world because of the technological boom. And we have to begin looking at the health of the consumer and the companies that we're investing in that we're counting on those consumers to spend towards.

C (19:36)

One thing here that is somewhat related. We were talking about gas prices. It does not seem like the conflict in the Middle east is ending as quickly as everyone has hoped. It does seem like maybe the gas prices will stay higher for longer. And that is kind of interesting to to what Tom was just talking about with when it comes to travel. It does seem to, there does seem to be some chatter that's starting around what are my summer travel plans? Am I going over to Europe, Am I going overseas on a vacation? Or am I staying here in the US because of how, how high fuel prices are getting? Am I having more of a local vacation than a long distance vacation? And it does seem like that could be something to watch. So generally speaking I don't make many changes in my portfolio based on kind of short term data and how sentiment is, because sentiment changes fast. But that's one thing that I am watching. What's going to happen with summer travel? I think that there could be some changes there.

B (20:31)

Now this may not be allowable in our format but I would like to know what Tyler thinks too.

A (20:36)

One of the things that I agree to a large extent on the downstream effects of the AI build out that you were talking about, Tom. That seems to be the growth megatrend that is relatively immune to consumer sentiment because enterprise spending is going to be wholly tangential to what's happening on the consumer market as far as consumer sentiment. One of the things that I as an investor tend to do in these situations is look a little bit like the Maslow's hierarchy of needs. And so when I do look at the consumer spending levels, it is going back down to the the grocery stores of the world, the durable spendings, the Walmarts, the targets, things like that, where the wallet share is going to be a bigger proportion there as people start to prioritize their spending in places like that. And so that seems to be the big trend that I would be focusing on in this in general. But as to John's point, I'm not going to be making any drastic portfolio changes in the next couple of months based on what we're seeing because to John's point, we could be moving along rather quickly in terms of sentiment. Coming up after the break, we're going

E (21:42)

to jump into the mailbag hey, it's Parker Posey. How did I get here? I love improvisation when it comes to acting, but when it comes to a real life plan, I stick to a script. Cue the music.

F (21:54)

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A (23:16)

so much for your questions. We really appreciate getting all of these. There's actually way more than we'd like to get to. Hopefully we can start to whittle those down as our earnings season starts to wind down as well. But if you do have a question for us, please email us@podcastool.com that email is podcastool.com Two requests when asking any questions. Number one, keep it foolish and two, keep it short enough that we can read it on air. Today's question comes from Tay Morgello and it seemed very relevant considering our discussion about the Mag 7 earnings earlier today. So here's the question. Hi fools. So Google, Microsoft, Meta, Apple, Tesla and others have all made announcements over the last year about how they're creating their own chips so they can risk reliance on Nvidia. Part of the both the thesis for Nvidia includes their outstanding margin because their chips are in such high demand. So if all the bigger companies are going to be creating their own chips and is this an existential threat to Nvidia over the long term? Thanks so much. I'm going to toss it to John first and then Tom, you get to have the concluding thoughts here.

C (24:18)

Yeah, it's the classic question regarding supply and demand, right? Let's look at Nvidia's net profit margin. Net profit margin, okay, it's at nearly 56% right now. That is absolutely world class. And if we rewind the clock five years ago, the profit margin now is about double what it was five years ago. And it was good five years ago. And so the question here from Tay is valid. There is extremely high demand for Nvidia's products and that is leading to historically world class good profit margins. So that's supply and demand at work. And his question is basically is this custom silicon coming in from these other tech giants? Is that going to bring balance to the market? Is supply now going to meet demand and if it evens out, that would be bad for Nvidia's profit margins. And to that question I would say it's complicated. So on one hand it is logical to assume that if there are more custom silicon things coming in that that is going to increase the supply and it's going to then come into parity with demand. But there's a lot happening right now with AI that is continuing to boost that demand and it's really hard to predict just how high it's going to boost it. But if you look at what is happening in the realm of agentic AI, I mean, we talked about Meta, we talked about Google, and we talked about Alphabet and Amazon. Here's how many times they mentioned Agent on the conference call for Microsoft, 38, Meta 33 times, Alphabet 36 and Amazon 45. This is a huge thing and it is actually accelerating the use of AI tokens. And so, for example, here's one of the things that Amazon said. Amazon Bedrock. So this is one of its AI models, right? It processed more tokens in the first quarter than in all prior years combined. That's how much compute is the demand for AI. Compute is accelerating. And so on the one hand, you know, there's more things coming into the market. On the other hand, the market is growing so fast that it's possible that this imbalance between supply and demand remains even with the newer entrants into the market. Moreover, it's not necessarily you unplug an Nvidia GPU and just plug something else in. It's not that simple. There's a software component that goes with this. Nvidia's Cuda software is very important. Really what I think you're going to see is you're going to see these new products coming in, such as the TPUs and whatnot. They're going to be coming in, handling some of the workload. But I don't think that that reduces Nvidia's demand over the next several years at least.

B (26:55)

Well, I have so many things to respond to that that I'm just going to extend Today's podcast by 45 minutes. So thank you very much. You know, it's so interesting to watch companies go through technical transformation. If you go back to when the Motley fool was beginning, you really got an advantage if you were Internet native, right? If you didn't have to transition out of magazine, newspaper, print, big distribution, Inc. All of a sudden you're just native HTML. You're building right to the Internet. Next stage would be native cloud. Are you a cloud native company? You know, do you have to migrate into the cloud, move everything onto aws, decide what to keep on premise, or can you just build clean in the cloud? So companies that were doing that got a very big advantage now. The pace of this technical change is happening so quickly is how can you get to the next native environment as quickly as possible? You want to be AI native. Every company would wish right now that they were AI native with their workflows 100% of workflows in AI and we're very quickly moving to agent native, you know, and how, and the proliferation of the demand here is, it's beyond comprehension when looking at almost any other growth scenario in human history. So to that extent, this is why we see a $5 trillion market cap for Nvidia and the demand is massive. As John mentioned, they've locked in their clients with their Cuda software. Their software ecosystem is the, one of the greatest competitive advantages in human history. So you have enterprises, startups, governments, researchers, everyone is relying and they can't on Nvidia and they can't spend $5 billion to build their own custom chip. Right? So the mass of the market is completely locked in with Nvidia. However, the hyperscalers, the, the Googles, the Amazons, the Metas that are building their own chips. And Amazon now has a run rate of $20 billion for its semiconductor, for its chip, internal chip business. And what they're going to do is they're going to move their internal workloads, their repetitive AI workloads onto their own chips. This will place margin pressure on Nvidia because we're not talking about the hyperscalers just being some side businesses that aren't that important.

C (28:57)

Right?

B (28:57)

They are significant. So I do think we're going to see a flattening out of Nvidia's margins and their returns on invested capital. Now as John's pointed out, that comes against the tidal wave of demand everywhere else for what Nvidia has to offer. I would simply say that as an, as an Nvidia shareholder, and I'm sure most of our listeners here have individual shares of Nvidia and definitely have it in index funds. Of course, the thing to look for in the business now is the direction of grow, I would say gross margins, operating margins, return on assets, return on invested capital. Just see are they losing? Is that rim of demand from the hyperscalers that they're now able to build their own custom chips to meet that internal work that they're doing, is that going to start to impact margins? If we see any material margin declines? And then I think you do need to start getting a little bit worried about the valuations for Nvidia. Obviously Nvidia's business is going to be glowing for the next 10 plus years. The question is the price we're paying for a share of Nvidia stock tied to the historic margins and returns on capital and if those begin to diminish, then we could see some cap and some ceiling on Nvidia's valuation. But as far as that I can see right now, I think Nvidia has rewarded its shareholders for so many good reasons. Jensen Huang is arguably the greatest leader in American history in business and I don't see any reason to part ways with shares of Nvidia. But I would just be watching their margins and returns on capital and see what happens. Particularly take a look, follow Amazon's chip business and start to see what those impacts are on on long term margins for nvda.

A (30:35)

Yeah, just my quick thought on it is it really does seem like a Rorschach test of how much do you see growth in AI Capex spending? Because if it's going to remain incredibly high, then maybe not as much of an issue because it's a little bit of a the tide lifts all boats sort of ways. Because as we've said throughout this entire podcast, demand right now is overwhelming. We could probably go, as Tom said, another 45 minutes, but he is a very busy man and we need to give him back some of his time and I think that's going to be all the time we have for today. As always, people on the program may have the 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. The CR Full Advertising advertising disclosures Please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motley Pool team for Tom, John and myself. Thanks for listening and we'll chat again soon.