Jon Quast (3:51)

I'm on the fence between the two sides that Tyler mentioned. On one hand, Tesla's auto Segment revenue declined 11% in the fourth quarter. And I don't really think it's a surprise to anyone. There's just a lot more competition for EVs than there were just a couple years ago. And it's only going to intensify, like GMs making a big push into EVs and others are following suit. So I'm not sure if Tesla is necessarily papering over its declining auto business or that its leaders suddenly have a renewed sense of urgency to adapt to it before things get worse. I'm also not surprised to see the Model S and X discontinued. As John mentioned, it's roughly 5% of sales, and that includes the Cybertruck in that 5%. So these were aging vehicles. They hadn't received a substantial refresh since their introduction, other than the powertrain itself. The Model S in particular has been in production since 2013, essentially looks exactly the same today. So another issue is that I'm not sure how close Tesla is to actually producing a mass produced autonomous humanoid robot like they say they're going to. Elon Musk has said it's going to be available by the end of 2026 this year, but they don't have the best track record here. Right? I mean, the new Tesla Roadster was unveiled in 2027 as a concept, or 2017 as a concept. It was supposed to be in production by 2020 and now the reveal date is set for April 1st of this year. So that timeline, I'm a bit skeptical.

Matt Frankel (5:18)

Yeah. And if you want to add to it too, I mean, there was the Tesla Semi that was supposed to be unveiled somewhat a long time. There's been a lot of missed deadlines here. And here's my thought and I'd like to get your take. I'm probably of the three of us, the most skeptical of the group on Tesla's ability to pull this off, but it has about $44 billion in cash on the books and it's free. Cash flow is it's there, but it's kind of dwindling. So, you know, that kind of pegs it with $20 billion in capital expenditures. That's like two years of investing, give or take, before these robotaxi and robot bets really need to start paying off in a big way in a cash flow sort of sense. Unless we have to go to the market and you know, add something to it. Do you believe that we will see a fully realized version of either, whether it be taxis or human eyed robots in that two year window?

Jon Quast (6:08)

I think they're closer on the taxis product than the robot product. Within two years, maybe we'll see some robo taxis. I think they're testing in Austin, I think is where they're testing robo taxis. And I push back that you're the most skeptical of the three on pulling off the robot thing. But yeah, you're right, they have limited capital. They do have a good ability to raise more. If I'm being fair. Tesla has sold shares to raise capital in the past and with a $1.3 trillion valuation, they wouldn't need to dilute shareholders very much to get another 20, $40 billion if they needed to. So I don't think we're going to see mass production of robots or robo taxis in two years, but I'm not sure that we need to.

Tyler Grow (6:55)

Yeah, I would push the timeline a little bit beyond two years for sure for partly the reason that Matt just mentioned. But on top of that, yes, looking at 20 billion in capital expenditures here in 2026, that's about double its previous all time high. It doesn't necessarily need to spend that much for the next several years. Not to mention it'll be interesting to see if some of these things start ramping up. They will contribute to the cash flow in theory. Now I'm with Matt. I don't think that we see fully realized versions of either of these things in the next be my take. I would push it for maybe Optimus, I think I'd push that personally closer to five. But it does need it to pay off though, for sure because it is investing a lot of resources.

Matt Frankel (7:38)

Whatever end side of it you put it on either before two years or after two years. I think today's announcements really start to set the clock on expectations for robotaxis and humanoid robots in a way that we haven't seen before in Tesla's earnings. After the break, we're going to talk about the dichotomy of Meta and Microsoft's earnings happening today in the market.

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Matt Frankel (8:28)

Your podcasts, or@explorerspodcast.com in other Magnificent Seven earnings this week we kind of had the tale of two reports coming out today. Shares of Meta are up about 9% as we record this show. It beat revenue and expectations, but what blew me away was the Capex guidance. We were just talking about $20 billion at Tesla, but Meta plans to spend a close to double its 2025 CapEx, and that's between 115 and $135 billion in 2026. On the other side of the coin, we have shares of Microsoft, which are down 12% as we're recording after the company reported that its Azure cloud computing unit growth slowed a bit. It too is ramping up capital spending and it also said its future sales backlog nearly doubled, with a significant increase coming from its kind of its investment in OpenAI. Guys, it feels like we're having a Freaky Friday moment because we did this last quarter, more or less, and it felt like we had the exact opposite reaction here where everyone looked at Meta's ambitious spending and went whoa, whoa, whoa. And while Microsoft was wholly solid and people were like, yeah, there's a business behind this to really drive this forward. And now we're getting like the exact opposite reaction three months later. I'm curious if both of you saw this as well, but I really want to start to wonder is are we betting on AI or OpenAI specifically with a lot of these AI investments? You know, with Microsoft this quarter, that backlog number we saw it was very much a OpenAI story and a lot of it going to them. We saw this kind of reaction last quarter after Oracle announced its massive backlog was basically a bet on OpenAI as well. So should investors in companies with Large exposure to OpenAI like Microsoft or Oracle be a little more nervous than perhaps some of these other AI bets we've been talking about?

Jon Quast (10:26)

Tyler, I noticed that trend too. In the third quarter there was a clear theme of Meta and a few others being punished for increasing their capex outlooks. But now it seems the market's buying into it, or at least just assuming that capex is going to be more than initially expected, no matter what. In Meta's case, as he mentioned, it's a very big increase, roughly double 2025's level. And what makes it even stranger that the market's fine with it is that Meta is spending all of this money to largely provide infrastructure for the least profitable parts of its company. So, I mean, they gave fantastic first quarter guidance. So I have to think that's the main reason we're seeing the stock rally higher on Microsoft. You really hit the nail on the head with the OpenAI concern. Look how much Oracle is off of its highs recently. You know, OpenAI is substantially all of their backlog, but with Microsoft, it makes up 45% of the company's remaining performance obligation, or RPO, which we can call it the backlog. CapEx turned out to be higher than expected in the fourth quarter, and I think that made the slowdown in cloud revenue, which wasn't a big slowdown. It was 39% this quarter versus 40% a year ago. It made it a little bit worse in the minds of investors. The stock has been largely priced for perfection recently though, even after falling 25% from its 52 week high. Yes, Microsoft is officially in a bear market. Microsoft trades for 30 times earnings now, so that's after a 25% decline.

Tyler Grow (11:55)

Yeah, I don't think that we should necessarily look at how the stocks are performing this week or today and make broad statements about how investors feel. I mean, yeah, maybe the reaction was different last quarter than this quarter, but I think that what's going on in a more general sense is investors are saying, hey, we're seeing all of these capital expenditures and can we just pause a moment and just appreciate the fact that we're using numbers over a hundred billion dollars here annually. That's insane that that's even coming out of my mouth. But investors are looking at the capital expenditures and saying, what is the return on investment. And it's really hard to quantify. And I think that for sure, with Microsoft, they were looking at, yeah, the growth of the cloud unit and looking at the capital expenditures and saying, am I getting a return here based on what it's paying out? And management pointing out, listen, we're not just investing in capital expenditures for our cloud unit for the AI models. There's plenty that we're investing in for ourselves, not just our customers. And so look at it holistically. Meta, a little bit more straightforward. I think that they saw the big increases in ad revenue production for the company. Some of that is attributable to AI and how its models are improving. And so I think that in one hand, investors are like, okay, we see the return a little bit more today with Meta, but it's really hard to quantify. But really looking at what Meta is building here, it is interesting, Matt, as you point out, that it's kind of spending in the most, in the least profitable parts of its business and just kind of feels like a coiled spring, you know, just spending and building aggressively behind this the scenes. And then we're expecting it to suddenly launch something impressive. That's what Zuckerberg is talking about. It's talking about wanting to build and control its own technology. So it's not beholden to any of the other players in the industry. And interesting as well, Zuckerberg kind of talking about how I think we've all written off the Metaverse at this point, but Zuckerberg's kind of talking about it like, listen, we're going to build personalized AI that's going to know you and create content on the fly for you to consume. And perhaps you're going to be consuming that in a Metaverse context, maybe not with a headset from Oculus, but maybe with the AR glasses. So I'm not sure that we have a full grasp on where Zuckerberg and Meta are planning to go here with AI and how it intends to incorporate that into the Metaverse, but it'll be interesting to watch.

Matt Frankel (14:20)

To your guys's point of trying to pick the winner each quarter, it seems a little bit silly. I think it's a reminder to all of us. This time last year, most of the market chatter was, Alphabet is the AI loser. It's falling behind. There's no idea whether or not Alphabet is ever going to be able to catch up to all these. And then for the rest of the year, sentiment changed. Everyone started thinking of Alphabet as the AI darling. They're the ones that have it figured out. And now I think over the past 12 months, excuse me, they have been obviously the large best performer in terms of stock performance of the MAG7, especially with those related to AI. So it'll be interesting to see if any of these companies. We'll probably change our mind like four times by the end of 2026. Coming up after the break, we'll do our traditional stocks on the radar, as is our Thursday show. We like to head on out with giving some stocks on our radar, probably not in the Mag 7, even though we did just do a lot of earnings reviews of them. But I'm sure we got some other stuff to think about. Matt, what is on your mind?

Jon Quast (15:27)

Yeah, I'm watching Southwest Airlines ticker symbol is L U V. Although maybe not enough to actually buy an airline stock. But it's really interesting right now. It's up more than 15% today after earnings as we're recording this. And the short answer is that its management finally decided to join its competitors in caring about profitability by ending the long standing free bags policy. Just yesterday, they ended their open seating policy, which had been a big differentiator for a long time. Their guidance calls for at least $4 in earnings per share this year. Analysts were expecting closer to three. And that gives it a price to earnings of less than 12. Even after this move. With revenue per seat mile, essentially how much they're making off each passenger rising by almost 10% as travelers pay for things that were previously free. And I would say that over the years, Southwest's biggest strength has been its best in breed balance sheet. It's got under $5 billion of total debt, compared with a $25 billion market cap. For context, American Airlines has about a $9 billion market cap and $43 billion in debt. So with the adoption of this upcharge model, it has more profit potential and needle moving potential than its competitors. So it's an interesting company to be right now.

Matt Frankel (16:42)

Be interesting to see if that actually does impact some of their most loyal customers who have gotten accustomed to picking their seats and not having to pay for bags. But we'll see from there. So for me, I want to go back to kind of the picks and shovels of AI infrastructure. And I'm looking at a company called Aion Ticker A a o n and they are a H vac, cooling, chilling, whatever you want to call it, facilities construction company. Basically they build a lot of these, you know, rooftop style air conditioners, chillers. What have you been very, very successful in working with like big box retailers, hospitals, schools, things like that. But in 2023, they made an acquisition for a data center specific cooling company, it was called. And basically what ended up happening was with that acquisition, their sales have gone through the roof, backlog is growing like crazy. But the company had struggled a little bit making that transition from their traditional H vac equipment to this data center specific stuff. And sales and stock performance has suffered because of it. And if you look at it right now, it looks like a lot of the issues they were having with that integration of its acquisition have gone away. And it's starting to look like they're ramping up and really bringing data center chilling cooling to the forefront here. Its backlog is up like 100% compared to this time last year. Management is starting to put some operational efficiencies in place at some of the manufacturing facilities to make this all happen. It really looks attractive, especially in an industry where you're seeing a lot of companies trading for very, very high premium valuations for the simple fact that everyone's onto this AI picks and shovels play. This seems to be like a turnaround company where the stock is still beaten down in an industry that is clearly poised for growth. So it's something that's very interesting to me right now. John, what do you have?

Tyler Grow (18:39)

So 120 years ago, two guys in Wisconsin figured out how to make a water meter that could withstand freezing temperatures. Now Wisconsin is called the Badger State. And so they named the country the company Badger Meter, ticker symbol bmi. Today this business is thriving more than ever. It provides smart meters to track flow, water pressure, even water quality. And in the background, it provides analytics software for its grid based customers. The tailwinds guys here are strong. They, they're not making any more water. And there's over 8 billion thirsty people in the world. So we need to manage our water better. And that's what Badger Meter can help grids do. Data centers and nuclear power plants also need water. Those are some trends that are pushing adoption here. Listen, Badger Meter, the reason I wanted to highlight it today was it just got crushed after its earnings results earlier this week. Basically, the company expects slower growth over the next five years compared to the previous five years. That said, there will still be growth and there are some big projects coming online, such as 1.6 million meters in Puerto Rico. This gives management the confidence that it can continue to grow, albeit at a slightly slower rate. Margins are hitting all time high. I think that's important. The operating margin is around 20%. The balance sheet is pristine. It's paid a dividend for over 30 years. This is the newest stock to my portfolio. Personally, I wish I'd have bought it after it fell after earnings, but still, it's one that I expect to be a long term drama free contributor to my stock performance and one that I like here.

Matt Frankel (20:13)

Well with airlines, H Vac equipment and water meters. Compared to our Mag 7 discussion earlier it's really like that Monty's Python joke and now completely different. But that's all the time we have for today. Matt John, thanks for sharing your thoughts. I'm gonna hit the Disclosure and we'll get out of here. As always, people on the program may have interests in the stock they talk about, and the Motley fool may have formal recommendations for or against. So don't buy 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 Matt, John and myself. Thanks for listening and we'll chat again.