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- [00:02]
John
Box office results were reaching for the sky. You're listening to Motley Fool Hidden Gems and dusting. Welcome to Motley Fool Hidden Gems Investing. Today we're going to talk about some data center news that we have. Also taking a question from our mailbag. But first, we need to talk about Toy Story 5 coming out over the weekend, and it was not falling with style. It was flat lying. This movie was incredibly well received. And Matt, Rachel, I have to be honest with you here as I think about this. I thought Toy Story 3 was the perfect ending for that franchise. I really did. I did not like Toy Story 4. I can't imagine myself going out and seeing Toy Story 5. A lot of movies at the box office these days. I'm not really a huge fan of I'll wait till it comes out on streaming. But I think I'm alone there because the results are telling a different story.
- [00:53]
Rachel
Yeah, it's actually been pretty incredible. Massive win for Disney. So Toy Story 5 shattered expectations. They had a stunning $160 million domestic opening weekend. That's the single biggest debut of 2026 so far. If you look globally for opening weekend, the film raked in about $312 million. So definitely a sign that Pixar's legacy intellectual properties are still commanding really exceptional pricing power and audience draw in a really crowded media landscape. I think another point to make here as well, we're seeing really the box offices back in 2026. We're seeing this on track to be the highest grossing theatrical year of the post pandemic era. There was a report that came out from Gower Street Analytics. They revised their global box office projections upward to just under $35 billion. That's up 16% from 2024. And we're seeing this across a variety of popular franchises. You had the Super Mario Galaxy movie crossed the billion dollar milestone. You had Lionsgate's Michael closing in over $900 million. So. So we're seeing that sustained traffic. I think it's showing that theatrical distribution is reestablishing itself. We're seeing a real core driver of entertainment economics with some of these releases. So pretty exciting if you follow this space.
- [02:04]
Matt
Yeah. And I'll just add a little bit more context here. So as Rachel mentioned, this is the best year for the box office since before the COVID pandemic. And it's not just Toy Story. Some of the other franchises have outperformed expectations. The Devil Wears Prada, too is another recent one. It isn't just because inflation is making ticket prices higher either that's what a lot of people kind of push back with. Okay, if movies cost 10% more, isn't that just what's driving revenue? The number of tickets sold is actually up 7% compared to this point last year. So bigger audiences as well is just more money per ticket. Rachel mentioned the global numbers, but domestically, $10 billion in box office revenue, which is now what they're expecting. And that's up from 8.9 million in the best post pandemic year so far, which was 2023. We're now within striking distance of the pre pandemic highs of the late 2010s which were in the 11 billion range. So really good year so far.
- [02:53]
John
Yeah, and I think that that really bucks the narrative that I've been hearing about that the box office is pretty much dead. And I like that you pointed out the ticket sales themselves because we do have to adjust for inflation to make sure that we're comparing apples to apples. And so actually yeah, more people going to the movie theater. I don't think that a lot of people who are sitting on the sidelines really expected that to happen. And I know that Toy Story 5, the results it's putting up are somewhat of a surprise. And so that leads us to our next little topic here as we discuss this. What are some of the winners in a box office market that is seeing this resurgence of interest from audiences?
- [03:31]
Rachel
Yeah, I mean there's a few ways to look at this obviously and I'm sure Matt and I both have thoughts on this. Disney is, is sort of the most direct operational winner here. And you know, when you see a theatrical event like Toy Story 5, obviously they're not just making money on ticket sales. There's the downstream effects for theme parks, consumer merchandise sales, you know, a lot of long term benefits there. But I mean to think of sort counterplay to this entire trend, right. You can think about Netflix. You know, they were toying with this massive multi billion dollar distribution footprint during their pursuit of Warner Brothers, ultimately backed out. We've heard CEO Ted Sarandos explicitly state, you know, that building this massive theatrical distribution engine is not something that is a priority for them. And they've really remained keen on keeping their films out of traditional theater. So they've bypassed that volatile box office space with their high margin streaming subscription and rapidly expand banding ad models. That's sort of a counter play. But if you're wanting to benefit from the tailwinds for entertainment, spend one other kind of interesting company to bench it here is Apple. You know you think about not to have too many spoilers here, but the thematic core of Toy Story 5, the toys are facing a major crisis because Bonnie's obsessed with her new digital tablet. And it actually mirrors the real world consumer discretionary spend trends we're seeing. You know, Apple very much bridges that gap. People are leaving the house for entertainment, but they are consolidating their digital spend into premium devices. So Apple's another kind of interesting way to look at this.
- [04:51]
Matt
John, I wanted to mention what you just said about a lot of people think that the box office is dead, that that's a very common narrative. I think in cases like mine and yours, we're just getting old and we don't go to the movies as much. I think definitely a lot of it. You know, if I were in my 20s and didn't have kids yet, I'd probably go out to see more movies. But Rachel's right. Disney is a clear winner. They own this Toy Story franchise. They're one of my larger investments in my portfolio. I think it's an incredible value right now, not just because of their film franchises, but because of just what they're doing with their theme parks. Massive investment wave there, it's being largely ignored by the market, but it isn't exactly a hidden winner when you're talking about how well Toy Story's doing. So I'd like to highlight a stock called EPR Properties that I also own, Ticker Symbols epr. It was one of the worst performing real estate stocks in, during the pandemic and for a few years after, because of that narrative that theaters are dead. And its number one property type in its portfolio was movie theaters. AMC and Regal are two of their top three tenants. Regal actually went through a bankruptcy a couple years back, but there are a few reasons that I really like this stock going forward. Number one, EPR has been actively trimming its theater exposure. And what that means is that it's been disposing of some of its worst theater properties. The ones that aren't performing well, that aren't in desirable locations. The ones they have now are those big megaplexes that are like in the downtown shopping districts and things like that, so high quality. The ones that when you hear people are still going to the movies, they're the ones that people are going to. Second. When Regal emerged from bankruptcy a couple years back, they signed a new master lease on their properties after they emerged with epr. And a component of the rent is actually based on box office performance. And there was a threshold that they would cross where if the box office did well enough, they would actually be making more rent from their theater properties than they did before Regal went bankrupt. And now they're at that point. So they're actually making more money from the same properties than they were before the company that operates and went bankrupt. And finally, EPR. Now roughly 40% of their rent comes from theaters. The other 60% is from other types of experiential properties. Topgolf is the number two tenant. They have ski resorts in their portfolio. Vail Resorts is a big tenant of theirs. And all of those are doing very well. Experiential properties are generally performing really nicely right now. This is a stock that has a 6.2% dividend yield. It pays monthly and has a lot of potential upside, especially if interest rates start to cooperate.
- [07:00]
John
Fascinating little tidbit of information there regarding the lease agreement and how that really does benefit it in a hot box office environment. So thank you for that. When we come back from the break, we're going to be talking about a new deal in a data center market. You're listening to Motley Fool Hidden Gems Investing.
- [07:18]
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- [07:46]
John
welcome back to Motley Fool, Hidden Gems Investing. We have talked a lot on this show about data centers and specifically AI data centers. As AI grows, as it becomes just more embedded into our technology workflows, we need more data centers. They're popping up everywhere, it seems. And the top hyperscalers certainly investing a lot in building out their capacity. And we got some news this morning. It's becoming increasingly a problem on the question of how we are going to power all of these properties. And the news that we got this morning was a deal between Chevron and Microsoft. And this is for its new facility going in in Pecos, Texas. Essentially it's going to be a 20 year deal, Chevron supplying natural gas to power that facility. This is as Microsoft is looking to double its AI data center capacity over the next two years. But it's a 2.67 gigawatts of power that we're talking about. And so I wanted to break this down. Rachel, how common is it to power a data center with natural gas. And could there be any ripple effects here, particularly in the Texas market?
- [08:53]
Rachel
Yeah, it's becoming more common than you might think. You sort of want to think of it this way, right? AI has this, you know, unquenchable 247 computing demands and this is rapidly forcing tech hyperscalers to really prioritize energy reliability over their strict net zero climate goals. So by signing this 20 year agreement with Chevron, Microsoft is accepting obviously a massive carbon footprint that very much complicates its previous carbon negative pledges. But the environmental silver lining here is location. So this facility sits in the Permian Basin. It's going to largely burn associated gas. That's the natural gas byproduct of oil drilling that's frequently trapped due to lack of pipelines and otherwise wasted through what's known as atmospheric flaring. Now to kind of talk about the broader trend of whether we're seeing natural gas be used by the big players to power data centers. So Microsoft is far from alone in this pivot. We're actually seeing. Just about every tech giant is quietly turning to natural gas to solve the AI power bottleneck. You've got Meta, for example, they're funding a multi plant natural gas footprint in Louisiana to support support their massive Hyperion AI fleet. You've got Alphabet and Amazon that have filed permits for their own multi gigawatt off grid gas campuses. You even got third party infrastructure groups getting in on this. I mean you think of for example, Pennsylvania's Homer City Energy campus. They partnered with the top gas producer, EQT Corporation. They're working to build a staggering 4.4 gigawatt on site gas facility for high performance computing. So this is very much something that we are seeing across the industry and I expect we'll see more deals like this.
- [10:21]
Matt
Yeah, I mean it's really a function of what's needed versus what is practical at this point. Grids are, they're stretched in many areas. Nuclear power is often mentioned as the big solution, but this is going to take some years to get online. I mean, solar and battery storage are a reasonable near term alternative, but there's a big need for near term solutions and especially those that bypass the public grid entirely. As Rachel mentioned, there's a legitimate argument that this is a pro environmental move, even though it goes against Microsoft's policy. It's burning gas that's a byproduct of extraction that would typically just be flared away, which is kind of the standard practice of operators. So I would add one thing that the off grid nature of this product, it's actually good news for regular electricity consumers in Texas and in any other markets where these pop up as this is data center power demand that won't strain the public grid like we're seeing in other areas. In some places right now, just providing capacity for newly built data centers has increased people's electric bills by as much as $18 a month per household. So this is a way to avoid things like that happening.
- [11:19]
John
I don't think many of us have a concept of what a gigawatt is. I can speak from my personal experience. I didn't even know how to pronounce this word correctly. For a while I was calling it a gigawatt because of Back to the Future. But how do we frame this? How big is 2.67 gigawatts of electricity?
- [11:37]
Rachel
Rachel, to put that in perspective, a single project is gargantuan. So 2.67 gigawatts generating enough raw electricity to simultaneously power about 2. 2 million average American homes. That's one of the largest disclosed co located independent power and data center developments in US history. And just to give additional context, a standard large scale data center operates on roughly 100 megawatts. This Pecos, Texas facility is nearly 30 times that size and it spans about 2,000 acres as planned. One other thing I'll note is this is being built in a way that's called behind the meter. What does this mean? So essentially Chevron's on site gas turbines are going to plug directly into Microsoft's data infrastructure. The idea is to generate their own power to avoid the years long utility wait lists. And obviously there are huge benefits for those local inhabitants who already have a lot of concerns over their power grid, which is particularly fragile in Texas. So those are a few additional details there that investors might want to know.
- [12:35]
Matt
Yeah, so just to add some clear stats, to put that 2.67 gigawatts into perspective, the entire state of Nevada runs on about 3 gigawatts. That's everything in the state. Not just people's homes. That's all the casinos, the bright lights, everything that's going on in Vegas, all of it.
- [12:50]
John
That's unbelievable.
- [12:51]
Matt
Right? So the Hoover Dam, which is one of the largest infrastructure projects ever in the United states, has a 2 gigawatt capacity. So I mean, on Rachel's behind the meter point, high capacity on grid connections, not only are they straining power grids, they're currently in a roughly four to seven year backlog. So that would be a major delay on Microsoft's AI infrastructure buildout plans if it relies on just utility produced power. I mean, moves like this are literally the only viable way Microsoft and some of these other hyperscalers can get the capacity they need on a timeline that works for the infrastructure buildout they're trying to accomplish.
- [13:26]
John
And I guess that leads me to my final question here. Is this an actual trend in the market that we're seeing? That the data centers, they need electricity and increasingly natural gas is going to be one of the ways that we're powering that up? And if that is actually a viable trend, what are some of the players here that stand to benefit?
- [13:46]
Rachel
I do think that we are seeing this as very much the frontier of a long term secular trend. I mean, we're seeing industry trackers showing that developers of about a quarter of all data center capacity in the works now plan to build independent off grid power plants. And as Matt noted, that's not only essential, you know, from a human level, but also from a build out perspective. Now, I think as investors, obviously there's multiple ways to capitalize on these trends. Of course there's the tech giants, right, that we've talked about today, there's some of the oil producers. But you can also really focus on the industrial suppliers that are going to be responsible for a lot of the infrastructure behind these physical micro grids. I mean, you've got stocks like GE, Vernova, ticker, GeV, caterpillar cat. I mean, going back to Project Kilby that the project details we're seeing show that a lot of their electricity footprint is going to be generated by large gas turbines supplied by GE Vernova. You've got additional critical capacity that's going to be handled by solar turbines. That's a subsidiary of Caterpillar. So just a couple names to consider.
- [14:44]
John
Well, when we're talking about power generation on the scale of Nevada, it's certainly worth thinking about some of these players as it becomes a trend. But when we come back, we're going to turn to our mailbag and talk about how investing has changed over over the decades. You're listening to Motley Fool, Hidden Gems Investing.
- [15:03]
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- [16:17]
John
welcome back to Motley Fool Hidden Gems Investing On a quick note here, we do want to make you part of the conversation. So if you have a question for for anyone on the show, you can send that in now to our email@podcastool.com if you keep the question shortish, if you keep the question foolish, we would love to take it on air and answer it to the best of our ability. That email again is podcastool.com podcastsool.com and this was an interesting question from our mailbag today from a 19 year old listener who is very active in listening to our show, but the question was a little long so we're going to reframe it here. I think I'm going to sum up the question here that they asked essentially like this. Buffett used to buy undervalued companies, but should investors be looking at future expectations nowadays more than undervalued opportunities? I think I'm trying to sum that up pretty succinctly in what they were asking. I want to ask this to both you, Matt, and Rachel, but maybe offer my own little input here. I don't know if this is the right framing of the problem. I appreciate the question, but I don't think it's necessarily that Buffett wasn't buying into future expectations or that investors can't be rewarded for buying undervalued companies today. Just want to put that out there, but I'll turn it over to you for a response.
- [17:35]
Matt
Yeah, so I mean, to be fair, a lot of the principles Warren Buffett used to build Berkshire Hathaway's stock portfolio are tougher to utilize today for example, in the early days of Berkshire, online brokerages, algorithmic trading, social media, real time news feeds that we all have, other things we take for granted, they didn't exist. So I'm not going to say it was easier to find market inefficiencies and exploit them back then, but they certainly were more abundant. You know, algorithmic trading itself just kind of gets rid of a lot of the inefficiencies in the market. So markets are far more efficient today. There's a much more level playing field in terms of the information available. So I would argue in a lot of ways you can't invest like Buffett did earlier in his career. But on the other hand, while the headline AI stocks are clearly trading based on just future expectations, that isn't the case everywhere. There's a difference between paying for future expectations and being able to do fundamental analysis and just stocks that completely defy any type of valuation. You know, conventional wisdom. So some of the biggest AI opportunities, for example, like data centers, have ways to invest that are mainly trading on fundamentals that really make sense in terms of Buffett's value investing context. Data center real estate investment trusts or REITs. There are companies that supply the power and cooling infrastructure for data centers. Chevron is one that we've mentioned in the, in the last segment. Companies that have AI focused operations, but also have legacy businesses that they could be interesting opportunities. I think IBM, just to name one, is one of the most overlooked and undervalued AI stocks right now. But the point is, yes, if you want to invest in the explosive growth side of AI, to some degree, you're going to have to throw fundamental analysis to the side. But on the other hand, if you look to like the picks and shovels plays and kind of think outside the box a little bit, there are many cases where Buffett investment principles still really apply.
- [19:13]
Rachel
I think this is a really great question from our listener. And I would say, you know, Buffett style investing is far from gone. But it's also true that the market has always priced stocks based based on future expectations. You know, when Buffett would buy a business, he'd estimate the total cash that a company would generate over the next, say 20 years, discount it back to the time of buying the business. That's very much an exercise in future expectations. Now the difference with AI infrastructure plays that we're seeing today and other AI investments, you know, think of companies like Lumentum, Coherent, Marvell, the list goes on. The difference is really the velocity as well as the volatility. Of those expectations. And I think it's, as always, it's really important to evaluate each business on its merits for our individual respective portfolios. But going back to Buffett, he famously bought Coca Cola in 1988 at a premium valuation because he recognized there was a very important future global growth inflection point that they could benefit from. So paying a premium for future growth, it's not a departure from traditional investing. Now we see that calculus change, whether it's applied to technology versus, say, consumer staples. Matt makes a great point. The market has really shifted in the accessibility of information. Back in sort of the earlier Buffett era, you could beat the market by doing more of that manual legwork, right? Flipping through physical manuals to find the really undervalued, forgotten stocks that no one else noticed. And in a, in a day and age of high frequency screening algorithms and AI, that information asymmetry is gone. So I think the key takeaway here is as the modern investor, our edge isn't just about finding a secret undervalued stock. It's really about analytical judgment, having an accurate, grounded long term thesis that really drives every stock buy, whether it is, you know, capitalizing on the AI, build out or otherwise.
- [20:48]
John
Yeah, so good. There are so many great stories from Buffett's investing career, such as times where he did find companies that were trading below their cash value and he was driving around the plains of America trying to find anyone who owned shares so that he could buy them from them. I mean, it's just a different era in that regard. You could find those undervalued companies relative to current financials. But I'd say that you both are pointing out that we're still looking for companies that are undervalued based on future realities. Maybe it's just becoming a little bit more challenging to project that future because of how fast things change. But it's still an exercise that we are actively engaged in. What does the future look like? And can we find opportunities that are undervalued relative to that future? Thank you both for pointing that out. And we appreciate very much the question. That's all the time that we have for our show today. So thank you so much for listening. As always, people on the program may have interest in the stocks they talk about, and the Motley Multifool 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, Christy Waterworth, behind the Glass and the rest of the multifool team for Matt R. Rachel and myself. Thank you for listening and we'll see you again soon.