A (2:58)

Yeah. Rachel, what do you think when you saw this? Like Lou said, some of this we kind of knew was coming and we knew they needed a bunch of cash because the projections are just an insane amounts of cash burn over the next few years. But it does still seem notable that some of the biggest companies in the world are just throwing tons of money at them.

C (3:15)

Yeah, I mean, so this funding round values OpenAI at around $852 billion. So you put that in perspective, that's more than the market cap of most blue chip companies on the S&P 500. OpenAI hasn't even hit the public markets yet. Obvious. We have seen, of course, in the past, a bit of a gap between the private market valuation and what a company looks like once they hit the public markets. As Lou mentioned, they're bringing in about 2 billion a month in revenue, but they're looking at a projected $14 billion loss in 2026. They've already said they're planning to burn through about 115 billion in cash over the next two years, you know, due to their investments in data centers and artificial general intelligence. So, you know, then you're thinking, okay, so does how does an IPO make sense for investors? If you're an institutional investor, Right. You're bet. Sitting on the foundational layer of the entire AI economy, we've seen institutional investors essentially salivating to own a piece of the business. I'm curious about whether that appeal, how that's going to translate to a public listing. So when you're looking at evaluation of this magnitude, a significant chunk of at least near term future success is already priced in. And so for the stock to really pop post IPO, OpenAI doesn't just have to succeed. It has to become one of the most valuable companies in history. What would be really interesting is when we see that S1 filing, right, really pulling back the curtain on their exact margin structures, their compute costs. I think if those disclosures show diminishing returns or even that open source rivals are eating some of their pricing power, that kind of growth at all costs narrative could Sour quickly. So those are some things I'm thinking about right now.

B (4:52)

Well, the IPO is fascinating because you can game an ipo. This isn't news, right, and we're not talking about anything, but you can do. For example, one of the reasons SpaceX will achieve their 1.5 billion trillion or whatever is they are not going to sell a lot of shares. So you can kind of set supply based on demand. OpenAI is a very different story. Arguably, even if they're a success from here, the buzz is gone. So there are going to be a lot of insiders who are looking for exits. Plus, you have a huge need for money. They're not really positioned to just sell a small sliver because they actually need to raise this money as soon as possible. It's a tough IP to get right, I think. And yeah, I think that's the next move here, if they get there. I wouldn't be surprised, actually, if you see an additional bridge round before then. I don't know if an IPO is looking likely in the at least next six months for them.

A (5:51)

That does seem like a challenge, Lou, that they are in this position. We've seen this with companies just back in my history, I mean, I remember Sun Edison, right, was one of the hottest stocks on the market for a little while, but their entire business model was predicated on raising the next round, which was theoretically going to pay off. And that worked, literally, until it didn't. And OpenAI sort of seems to be in the same situation today where if AGI, you know, you keep moving the goalposts further and further out. AGI is this, you know, panacea of cash flow, but we're going to need a ton of cash to get there if the market rejects that. And you go from being a $800 billion company like they are today, and let's say that IPO price is at $400 billion, still one of the biggest companies in the world. That's really problematic. The other thing that I wanted to bring into this was the companies funding them are some of the biggest companies in the world and they're getting more and more stretched. I'm just looking at Amazon's free cash flow and balance sheet. So their free cash flow over the, over the past 12 months, less than $8 billion. And that will be negative in 2026. And they have $66 billion worth of debt. You're getting a little bit different story at, like Microsoft and Google, they have a little bit more cash flow. They don't have the same investments that they need to make in some of their non data center businesses. But SoftBank is taking out debt to fund these kinds of rounds. It seems like the private markets are stretching to a point that we've probably never seen before. Louis, is that at least a reasonable way to think about it? Cause I know we talked on Friday about how would the market react if a company like Amazon said, you know what, we're going to spend less next year. Are we at the point where the market would react positively? That would be probably trouble for OpenAI.

B (7:38)

Yeah, we can talk about that later too when we get to some of our other stories too. I think exactly what situation that some of these companies are in right now. You just made the case for why OpenAI. I'm going to be wrong and OpenAI will go public because I do think that there are less options from here on additional private funds. Look, I think the best time for OpenAI to have gone public was a year ago and they didn't. And so now they're faced with this reality. I think there will be money there for them, but will it be at the levels they need versus some of these venture capitalists facing that? Maybe the redemption won't be at a profit from this round. That's going to make it really difficult for them to do private funding from here, too. I think they're in a bind and I think that's why you're seeing all this press and some pretty dramatic cutbacks. I think they're in a hey, remember us moment.

A (8:33)

Yeah, it'll be fascinating to watch because like you said, anthropic is kind of the bell of the ball right now. All right, when we come back, we are going to get to the other hot stock of the day that is Nike, which is plunging in trading. You're listening to Motley Fool Money. It's spring cleaning season and this year we decided it was time to clear out our old mattress and settle into a Legend Hybrid from Lisa. Like a lot of parents, getting a good night's sleep is critical for being refreshed when the chaos begins in the morning. And in the month I've been sleeping on the Leesa Legend Hybrid, I've fallen asleep faster and I'm sleeping deeper, which means I wake up more refreshed. We like the Leesa mattress because it's made in the USA. It ships with 120 night sleep trial. But after using the Leesa sleep quiz to find our perfect match, we couldn't be happier. This isn't just about sleep. Leesa is making a positive impact on the community with over 43,000 mattresses donated to local nonprofits to date and eco friendly materials and manufacturing processes. To find out what Lisa Mattress is right for you and take the sleep quiz, go to Lisa.com and you can get 20% off of their spring sale plus take an extra 50 off with the promo code fool exclusively for our listeners. That's L E-E-S a.com promo code fool for 20% off plus an extra $50 off. Support our show and let them know we sent you after checkout. That's Lisa.com promo code fool. Welcome back to Motley Fool Money. Nike is down 14% as we're recording early on Wednesday. They reported kind of ho hum quarterly report, you know, after the market closed yesterday. This isn't a company that's really been knocking it out of the park for a while now. But revenue was flat. Constant currency sales are actually down. Rachel, what did you see and what is the market just kind of rejecting today?

C (10:15)

Yeah, I think the market is somewhat losing patience with the grueling multi year restoration of the business that CEO Elliot Hill is still spearheading. So this was their Q3 report. Revenue was a little over 11 billion earnings per share, $0.35. Both of those were actually a slight beat compared to what analysts were looking for. But I think what we're seeing in terms of the market's response, which I think is close to an eight year low at this point, really reflects a lot of kind deep anxiety over their upcoming guidance. So they're projecting a 2% to 4% sales decline in this upcoming quarter. And that's also against the backdrop of a 20% anticipated revenue drop in Greater China, which has been a significant market for them. We're also seeing a time where management is intentionally pulling back inventory of some of their classic footwear franchises to try to clean up the marketplace. That's putting pressure on some of the numbers. There's also margin pressure from tariffs that is still a notable factor for a business like Nike. So there are some kind of pockets of resilience that maybe suggest a bit of a U shaped recovery for the business. You know, the performance running category has been making strides, so to speak. North American wholesale business as well as Nike's really kind of re embracing its its former relationships with its retail partners. Management is expecting positive gross margins by Q2 of their fiscal 2027. I think for now though, we're really waiting to see and I think this is the market's sort of tepid response to their Results showing that how can Nike out innovate rivals like on holding and Hoka while managing a lot of the trade costs and other headwinds they're facing as a business right now. And I think we still need a few more quarters to see how that's all going to shake out.

A (12:02)

Lou, the fascinating thing here is I have analogized them to Under Armour, which is not a flattering analogy, but if you look at this, Nike's stock first passed the $45 stock price in 2014. The stock has gone nowhere for 12 years. We're in a 74 drawdown as we're recording, and still shares are trading for 30 times earnings and 30 times forward estimates. So we're not in a. We talked about a couple like Target before where, you know, they kind of can't seem to do anything right, but then you look up and the stock trades for 10 or 11 times earnings and you go, ah, you know, I may find some value in that. If they can kind of turn things around. This has still got to be a huge turnaround for Nike and it just doesn't seem like it's sticking.

B (12:45)

Yeah, we like to talk in terms of, you know, like, hot takes are our job, right? And we like to say things like, they're doomed, they're going to make it, they're a success. A lot of times the truth is the boring middle Nike is fine as a company and it's just not interesting as a stock. And both of these things are true. For all the gloom and doom, it's a profitable company generating 45 billion in annual sales. Anemic growth, but growth, it's not going anywhere. There is a turnaround plan. I don't think it's going to be like the rocket ship from the 80s again, but there is signs that the turnaround plan is working. It's just not an attractive investment. And I don't know, to your point on valuation, I don't know what it could be. We talk about they have to out innovate on holdings. But the point is, is that on holdings exists. It used to be that with your muscle and marketing, Nike could just flood the market and dominate. That was before Instagram. That was before TikTok. One good influencer can get you in the game now, especially for kind of a niche or a sport. The world has change in ways that don't benefit Nike. I'm not saying it can't continue on as a company. I'm not saying that it won't be the biggest seller of athletic shoe wear from Here, I think it could be. I still don't think it's going to get my attention as an investment.

A (14:03)

It is fascinating how this has changed those supply demand dynamics. The interesting thing I saw in the report was that they're actually gaining share in wholesale. That was up nicely mid single digits, but their direct to consumer is down. So the strategy that they put in place during when the pandemic started and what you think these companies would like to be growing is that building that direct relationship to customers just still not clicking.

B (14:28)

And to be fair, that is intentional because that is what they said, that, okay, we overdid that, we have to get back in good graces with wholesale. So it is partially intentional. Whether or not it's a good long term strategy, we'll see.

C (14:39)

Yeah.

A (14:39)

And still they've lost a lot of that shelf space to the companies like we've been talking about. All right, when we come back, we're going to go back to artificial intelligence and Oracle's news. You're listening to Motley Fool Money.

B (14:50)

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A (15:11)

Welcome back to Motley Fool Money. Oracle is back in the news this time for maybe not great reasons. 30,000 people have lost their jobs. I think all those notifications went out yesterday as we're recording. This has just been an absolutely crazy ride for Oracle. We went back and looked. Remember that announcement? That seems like it was 10 years ago. They added $300 billion worth of remaining performance obligations. A lot of that was coming from OpenAI. Their stock popped on that news. Shares were up 30% in a, in a day or two. They're now down 40% since that, since before that announcement. So the market is kind of rejecting what their new strategy shift is. Rachel. And it seems fascinating that they're now saying, you know what, we're still going all in on AI and we're going to sacrifice the jobs that have kind of gotten us to be the company that we are today.

C (16:04)

Yeah, that's right. I mean, these reports of about 30,000 layoffs, it's kind of staggering. I mean, one number I saw with it's about 18% of their global workforce. You know, they're very much caught up in a high stakes AI arms race, if you will. You know, they've committed 50 billion in CAPEX for fiscal 2026 to build out the data centers needed for clients like OpenAI and Nvidia. They beat expectations on the top line in the recent quarter, but they dealing with negative free cash flow. Now these job cuts are expected to free anywhere between 8 billion to 10 billion in annual cash flow. So that's very much a calculated move, I think, to perhaps satisfy Wall Street's MO anxiety over their debt load, so to speak. I think it's also an interesting question. I mean, is Oracle fundamentally trying to change its business model, you know, from a high margin software provider to a capital intensive AI landlord? That's sort of what we're seeing. We saw Oracle stock jump immediately following the layoff news, but as you noted, Travis, shares are still down significantly from recent high. I think what we're seeing as well is they're essentially betting the house that AI cogeneration is going to allow the company to build more software with fewer people and justify that human cost as a necessary step to fund their, you know, 300 billion partnership with OpenAI and other partners. So they've proved they can cut costs, but now they have to prove that they can convert that AI backlog into actual profit before that debt service becomes unmanageable.

A (17:28)

Yeah, Lou, it seems like Larry Ellison is going big or going home with this bet on AI.

B (17:33)

Yeah. And isn't it funny how. Look, I, I don't honestly know what's going on here. I think six months ago if you announce this because our AI is so great, the market might be cheering it. And again there's still. Now there's the skepticism. Look, all of these companies over hired during COVID I do think some of this is just using the smokescreen of AI to kind of right size. But everything said here, they have a ton of capital commitments coming up. A lot of the revenue sources is OpenAI a lot of that rpo. So there is real questions about revenue. So they do need to cut corners. Interesting thing, Travis. And we kind of hinted at this before OpenAI. I think right now game theory would suggest that even if any of these hyperscalers are having second thoughts, their most rational move is to keep spending. And we can deep dive on that if you want, but even if you think it's a mistake, you almost have to keep spending right now. And I wonder if that is true. We don't know that's true. Maybe they don't see it as a mistake. It's a, you know, the whole premise might be false, but it could be a period of really weird kind of volatile decision making if that's the case though, for these companies.

A (18:53)

So you're saying that, let's take Google as an example. Hey, if we over build, we would be better off over building in artificial intelligence and data centers and GPUs and all that kind of stuff, rather than under building and missing out on the opportunity. But then you look at a flip side like Oracle and they're building with debt, so it seems like the calculus is just very different. And if they have to keep up with those other bigger hyperscalers, they just don't have the fallback. And that's what seems to be the challenge to me, is that if Google spends all their cash flow for the next three years and then realizes it's not a great return on investment, they can just reverse course and they'll be fine. Microsoft will be fine, Amazon will be fine. Right?

B (19:35)

I think that's part of it. But look, very simple. They have all said, we are pursuing this because it is the future. If they all blinked together, it would be fine. But if one of them blinks, even if everybody's seeing the same thing and even if it's the rational move, I think the read will be ours isn't as good as everybody else's or we have failed. And so I do think that just the short term decision making matrix is to keep doubling down, even if you have doubt, until there are clear signs that your competitors are like, if they could all get in a room, what would they actually talk about? Who knows? But I don't think that's going to happen. It just kind of sets up. There could be remarkably bad decisions made where 10 years from now you look back and say, what were they thinking? I'm trying to get at maybe what they were thinking.

A (20:27)

Yeah. The other thing that we need to think about as investors is the market is starting to send those signals. And the market is, we talked about it on the Friday show. Management teams are going to have to start thinking about, hey, if we cut back, is the market going to cheer? Because if you've got a crashing stock price, eventually somebody's going to lose their job and implement a different strategy and they're going to look like a hero. So up. A lot of game theory, as you said, going on in Silicon Valley right now, will be fascinating to follow over the next few years. 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 the Motley Fool's editorial standards. It is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please out our show. Notes for Lou Whiteman, Rachel Warren and Dan Boyd. Behind the glass, I'm Travis Hoyam. Thanks for listening. We'll see you here tomorrow.