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Transcript30 lines
- [00:00]
Rachel Warren
Foreign.
- [00:06]
John Quast
Doubles down on the moon. You're listening to Motley Fool Money with the Hidden Gems team. Welcome to Motley Fool Money with the Hidden Gems team. My name is John Quast and I'm joined today by fool contributors Matt Frankel and Rachel Warren. So today we have some important developments with AI infrastructure and the space race. But we first wanted to touch on a company near and dear to many of us, and that's Berkshire Hathaway. Now, Berkshire Hathaway is a trillion dollar conglomerate. It has insurance operations, a railroad dairy Queen. Don't want to forget that one. But maybe before we go any further, Matt, I think we need to pause and address the Omaha elephant in the room. We why are we talking about a trillion dollar company on the Hidden Gems show?
- [01:01]
Matt Frankel
Well, first of all, I think Pilot Travel Centers is the one I wouldn't want to forget because I can't do a road trip without them. Yeah, it may sound weird that we're talking about a trillion dollar company on hidden Gems. And it's really important to point out that a hidden gem doesn't have to be small or unknown. It has to be, among other things, misunderstood is one thing we're looking for. And Berkshire definitely qualifies. I mean, there are, if you look at just the price to earnings of Berkshire, for example, it looks very expensive. But you got to realize there's more to Berkshire than just its operating businesses, which is literally a third of its value. You have the $370 billion in cash that doesn't show up in the earnings results. You have all the stocks they own and all those companies earnings don't show up in Berkshire's results. It's a really tricky company to value and in a lot of ways it's really misunderstood just how to analyze the company.
- [01:53]
John Quast
Yeah, there's a lot of moving pieces for sure. And the reason that we're bringing up Berkshire Hathaway today is, you know, it was led by Warren Buffett for 60 years, but Warren Buffett has now stepped down from the CEO chair. That has allowed Greg Abel to step up. And on Saturday, Abel released his first letter as the CEO to shareholders. And here on the Hidden Gems team, we love talking about leadership. And so, Matt, I was just wondering if what stood out to you in this inaugural letter from Greg Abel?
- [02:25]
Matt Frankel
Of course, he went through the motions of discussing the business segments, insurance and all that stuff. But the main theme was really to reassure investors that not much is going to change. And in a very good way, he cited Charlie Munger's comment that was Made shortly after they announced that Greg Abel was going to be CEO. Charlie Munger said Greg will keep the culture. He discussed maintaining the decentralized model where all of Berkshire's subsidiaries operate pretty independently. All the value Warren Buffett placed on corporate integrity over profits. There were some very famous quotes about that. Similar thoughts on Berkshire's cash hoard, what Buffett said about risk management, capital allocation and all the other things that make Berkshire, well, Berkshire. He also clarified Buffett's role as chairman a little bit, which was really nice to me saying that as Berkshire's chairman he is still in the office five days a week, which I'm actually surprised to hear and available to Greg Abel and the rest of the senior leadership. So that was actually really nice to hear.
- [03:26]
John Quast
At over 90 years old, Buffett is a machine still going into the office five days a week. Rachel, we did want to get your thoughts as well here. It wasn't just a letter to shareholders from Greg Abel. It wasn't just some leadership commentary. The letter also had some of the financial numbers for Berkshire Hathaway. And so I'm just curious what stood out to you?
- [03:45]
Rachel Warren
Yeah, there were some interesting takeaways. I think one of the most striking takeaways from the numbers was the contrast between what continues to be really a fortress like cash pile that Berkshire has accumulated, right about 373.3 billion as of this most recent report and the takeaway between that cash pile and really a notable dip in performance in terms of quarterly operating earnings. Those Q4 operating earnings slid about 30% to 10 billion and that was primarily caused by significant downturn in insurance underwriting. There was a sharp reduction in investment income. So Berkshire's pre tax underwriting profit plummeted by 54% in Q4 and insurance investment income fell about 25%. And you know, there's a few different factors here, right? I mean, despite that record cash pile, I noted you have falling short term interest rates that significantly reduced the interest that Berkshire could collect on its treasury bills. And Abel noted that the insurance industry's multi year run of favorable pricing and terms be to decelerate or even reverse in late 2025. And so that had an impact as well. And we're also seeing this trend of new capital entering the market that really forced rates down. And so Berkshire intentionally wrote less property and casualty business rather than sacrifice underwriting discipline for volume. So you've got this massive hoard of dry powder, lack of share buyback since last May. I think we're seeing a leader who's refusing to force a play in an expensive market.
- [05:16]
John Quast
That is one thing that I'm glad is continuous here for Berkshire Hathaway is that it is never playing the short game. It's always going to set itself up for long term stability. But that said, it does want to continue to grow its operating income long term and it did take a hit here in the most recent quarter. So just curious of your thoughts here on Abel. What do you think his approach is going to be and what do you think of his leadership style?
- [05:42]
Rachel Warren
I think it's going to be very measured. I think he's very much signaled that he's not going to be pressured into average investments just to appease those that might be itchy for action. There was that $4.5 billion write down on Kraft Heinz Occidental. We've got BNSF Railway that's still lagging behind its peers. And I think the math proves that Abel really has his work cut out for him in terms of operational tightening. I think he's also shifting a bit. We were used to Buffett's handoff visionary style. I think maybe Abel is going to take a more granular operational stewardship. I really admired his intellectual honesty in this report. He isn't hiding behind Buffett's shadow. He's not sugarcoating the underperformance of legacy assets. And so there's really, I think, a long term strategic approach that he's applying here. There's very much that tactical discipline of an engineer. I think looking ahead, we should be expecting a CEO who's maybe less of a stock picker, more of a master allocator. He's already taken over the direct oversight of the equity portfolio. His focus seems to really be on making Berkshire's existing subsidiaries, like the energy and rail sectors, more efficient and resilient. So I do think that we are going to see that continue to be a focus moving forward. He isn't trying to be the next Oracle of Omaha. I think he's really positioning himself as the guardian of the company's culture for the next few decades.
- [06:57]
John Quast
After the break, an important player in the artificial intelligence space just secured a historic round of funding. You're listening to Motley Fool Money with the Hidden Gems team.
- [07:06]
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- [07:30]
John Quast
Welcome back to Motley fool money. OpenAI just secured a $110 billion funding round that values the private firm here at $730 billion. And what's crazy to me is OpenAI was only founded about 10 years ago, and just for perspective, it's valued now at 730 billion. If it were in the S&P 500, that would make it the 14th most valuable constituent in the index. It's an absolutely massive funding round here with investments from Nvidia, SoftBank and Amazon. Rachel, let's start with you here. Where is OpenAI going to spend all of this money?
- [08:09]
Rachel Warren
Well, I mean, obviously there's the hardware investments, but beyond that, OpenAI is investing heavily in their Stargate initiative. This is a sprawling $500 billion multi year plan to construct world class data centers and secure, stable energy sources. We're in a time where, with the advances we're seeing in AI, the current energy grid is really struggling to keep up with those demands. And So I think OpenAI's approach seems to be spending to pay their own way, so to speak, to fund local grid upgrades and power generation. And this really ensures that the massive training run or future models aren't throttled by electricity shortages or local utility constraints. These are very practical concerns and this could effectively turn OpenAI into an infrastructure developer as much as it is a software firm. Importantly, there's a considerable portion of these funds that are being deployed to secure high quality data and elite talent. You know, we're in a time where they are aggressively striking licensing deals with media organizations to ensure their models learn from premium human created sources. It's a very fierce global talent war and they've been offering a lot of lucrative equity packages to the world's top researchers. And this is, I will note, finally very vital to maintain their lead over competitors like Alphabet and Anthropic. So it's an exciting time for OpenAI and the business.
- [09:28]
John Quast
Okay, so it's spending on the physical assets and resources. It's also investing in the human side of things. But this is more than just securing a funding bag. With Nvidia and Amazon in particular, the funding is also a partnership deal. And so, Matt, is there anything from these partnerships with Nvidia and Amazon, with OpenAI, anything that we need to pay attention to?
- [09:51]
Matt Frankel
Yeah, I mean, it feels like at least once a week we're hearing about new partnerships OpenAI is forming. I mean, it would probably be shorter to tell you the list of companies of large cap tech companies they're not partnering with at this point. But it's worth noting that these were rather large investment, even by OpenAI, Amazon and Nvidia standards. The whole funding round came from three companies. Amazon's committing 50 billion, Nvidia's accounting for 30 billion. The rest came from SoftBank, if you're curious. Based on the $730 billion, that's the pre money valuation. So add the 110 billion and it's even more. This means that Amazon and Nvidia both bought stakes of 6% and about 3.5% of the business of OpenAI. And that's in addition to any prior investments they made. Nvidia has been an investor since at least 2024. For example, with Amazon, the partnership, in addition to everything that Rachel was talking about with the hardware and things like that, OpenAI is going to help develop customer facing applications, presumably things like agentic commerce tools and things like that to deploy across Amazon's platform. And that's a pretty high potential tech trend that we're still just seeing roll out with both of those. Rachel's right. A lot of this is essentially prepaying for compute power. Though OpenAI, they recently revised their spending number downward to $600 billion by 2030. So they're going to need some money.
- [11:14]
John Quast
Yeah. I think it's so interesting that many of these AI companies now they're measuring what they're building in terms of gigawatts of electricity that they need, not so much how many of the physical components of the hardware that they need. Just as a follow up here, Matt, is there anything in the AI infrastructure space that you want to highlight here in light of OpenAI's recent funding round?
- [11:35]
Matt Frankel
They're going to need more money, as I said. That's one thing I do want to highlight. They even came out and said that they expect this funding round to be ongoing, not like they're not capping it at 110 billion. And in the AI infrastructure space, I'd say that the data center companies are really worth a look right now. They're an interesting kind of below the radar beneficiary of literally everything Rachel was talking about with, you know, prepaying for compute power and things like that. I'm, I'm a big fan of that part of the, the industry.
- [12:03]
John Quast
Okay, so I have to ask, is this the final funding round, do you think, before we see an OpenAI IPO on the public market?
- [12:12]
Matt Frankel
My, my gut feel is. Yes, but I, I'm curious as to what Rachel says.
- [12:17]
Rachel Warren
I think it's possible, but I also think we're in a time where the company is spending so rapidly, I, I wouldn't be surprised if they seek another for dipping their toe in the public market, so to speak. But whenever, if and, or when that IPO happens, I think a lot of investors are going to be very excited to see what's in store.
- [12:36]
John Quast
It'll be a momentous day, without a doubt. Okay, so we're saving my favorite story here for last on the show. We're going to go to outer space. You're listening to Motley Fool Money with the Hidden Gems team.
- [12:47]
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- [13:54]
John Quast
Welcome back to the show. Yeah, we are going to outer space right now for our final topic of the show. It's my favorite one. That's why we saved it for last. On Friday, NASA announced that we're doing everything that we thought we were going to do, only faster. So Artemis 1, that happened in 2022. Artemis 2 is currently scheduled for April 1, but beyond that, Artemis 3, it's. It was supposed to land on the moon in 2028, but Rachel, those plans have now changed.
- [14:23]
Rachel Warren
Yeah. So NASA has announced a major overhaul of the Artemis program and this just happened last Friday and it's really all about incre increasing mission frequency, reducing risk through a very step by step approach. This is all under the leadership of NASA Administrator Jared Isaacman. And so the agency is essentially shifting from launching every three years to pursuing a new target of one mission every 10 months. Really something that would put them on track to match the pace of the Apollo era. So perhaps the most significant change is the redefinition of Artemis 3, which you alluded to, John, that was originally slated to land humans on the moon. It's now scheduled for mid-2027. Artemis 3 will instead be a low Earth orbit test mission where the Orion capsule will practice docking with commercial lunar landers from SpaceX and Blue Origin. It's basically like a dress rehearsal, right, to ensure that the docking systems, the new spacesuits, are fully flight proven before an actual landing attempt.
- [15:17]
John Quast
Basically, Artemis 3 is kind of inserted as a new mission in the lineup. And what was supposed to be Artemis 3 is now Artemis 4. And the interesting thing here in this press release from me from NASA is that, okay, we want to land on the moon here in 2028. That's still there with Artemis 4, but we want to be there at a minimum every year after that initial landing if we're going to really go to the moon this frequently and establish a permanent presence. Who are some of the beneficiaries here, Matt?
- [15:53]
Matt Frankel
There's a wide range of public companies that could be big winners here. Just for example, the Orion crew capsule that was just mentioned. Lockheed Martin is the main contractor on that. So every time there's a manned mission, they'll make money. Boeing, Northrop, Grumman, they're both involved with the propulsion of the capsule. Intuitive machines. Their ticker symbol is lunar. So that should be a pretty obvious beneficiary there that's been selected by NASA to develop cargo capabilities for a, for Artemis missions. Kratos Defense and Security, which I'm sure you've heard me talk about before. It's one of my favorite space stocks. They're best known for drones, but they're also a leader in satellite communications that would be a big player, likely in the Earth Moon. Communication relays that would be needed to have more permanent presence on the moon. I could go on, but those are just a few examples of what I see as potentially big winners.
- [16:44]
John Quast
So what we're seeing here from NASA is that hopefully we go around the moon here soon. This year, next year we kind of get up there close. By 2028, we put boots on the ground and then we continue to do that every year thereafter. Okay, talk is cheap, but whiskey costs money. NASA has the plans, but I'm Curious. Both of your takes here. What is your personal thesis or ideas on us establishing a permanent human presence on the moon within the next 10 years?
- [17:17]
Rachel Warren
I mean, this is a fun one to talk about. I personally don't think that this is going to be an achievable reality within the next 10 years. Maybe the next 20 or 30. Obviously we're seeing very ambitious goals here from the Artemis program, but the idea of establishing a permanent settlement, there's massive technical radiation, infrastructural hurdles. I think it's a really exciting concept. There's a lot of long term problems that have to be solved to make that happen. I don't think we're going to get there in the next decade, but I think a decade from now we are going to be closer than we are at the time of this podcast.
- [17:49]
Matt Frankel
Yeah, so it really depends on what you mean by a permanent settlement or permanent presence on the moon. So do I think that there's going to be like a moon City within 10 years? No. But assuming, and this is a pretty big assumption, that the 2028 timeline that we've talked about actually holds. Where we land on the moon in 2028, have another landing at least once a year thereafter, we could see some form of sustained presence on the moon within a decade. Right now, the NASA timeline calls for the Artemis 10 mission, which is scheduled for 2035 at the soonest, to carry astronauts to the moon to remain for 180 days. Again, 2035 at the soonest. And there are a lot of factors that will determine if that will even happen. Delays are absolutely not unheard of in space travel. There are logistic challenges, like Rachel mentioned, of building a permanent moon base that deals with radiation and temperatures and things like that. There's budgetary concerns. The budget for the next 10 years might not always be as space friendly as it is right now. I believe we will have regular manned moon missions a decade from now and maybe even like an Antarctica style outpost where people go and spend a little bit of time. But I don't think we're going to have a permanent habitation within a decade.
- [19:04]
John Quast
Well, no matter what, I'm sure that we will be keeping our eyes on it. Matt and Rachel, thank you so much for being on the show today. Especially thanks to our listeners for sticking with us. But that's all the time that we have for this show. 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. 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 chat again.