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A
What do Alphabet's earnings tell us about the future of the market? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoyam, joined today by Lou Whiteman and Jason Hall. And, guys, we got to talk about the big story of the week that is Alphabet, their spending plans, and the implication on trillions of dollars of value of market cap out there.
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B
The.
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A
The big thing I was looking at what the stock has done over the past week or so, and since early Monday morning, shares are actually down 11%. So that's. This is a pretty big move for a lot of people who have this in their portfolio, whether it's through an index or through the individual shares. But, Lou, the big story here was that the. The core business is doing okay, but they're spending even more than expected on this AI buildout. And they're now free cash flow negative, which is a huge change for them historically.
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C
Yeah. So, look, I'd say the core business is doing better than okay. Right? The cloud revenue is up 82%. They.
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A
The cloud revenue is doing amazing. But, you know, search, the growth rate is slowing a little bit. YouTube was a little bit weaker than it's been in the past. So I'm saying those other businesses that actually drive the cash flow.
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C
And look, the spending part, you're right. The spending is what we got to focus on. And I think that spending is fine until it's not. I don't think the market is really trading off on this spending number. This was telegraphed. It's not great that we're going into free cash flow negative, but right now, there needs to be an answer of one of two questions, and Alphabet doesn't seem to have an answer to either. One is, when will this, all this spending turn into a return on invested capital? Or when will it slow down? And right now, both of those. The answer is eventually. Okay, let me paint the bare picture here, and I don't know if I necessarily believe this, but I think this is what's weighing on markets right now. We tend to think of Alphabet as capital allocator, but massive cash generation covers up a lot of sense. There is a whole website called Killed by Google that lists more than 300 things Google has tried and failed. Some. We remember Google, Google Reader. I still miss Google Reader, but, you know, most we don't. What's the difference between Google Reader and AI? Google Reader didn't cost all that much money. None of this mattered relative to the cash that they were generating. What's different now Is this latest product, this latest initiative is consuming all of the cash they're making and more. I don't think the AI initiative is going to go the way of Google Reader, but anything short of a massive, you know what, return on invested capital over time has been 15%. They got to make a lot of money on this or they need to slow spending. And I think that's sort of what investors are grappling with right now.
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B
Yeah.
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A
Jason, do you look at this and see more risk in Alphabet? Because obviously the market has got more questions today after earnings than they did a week ago. But you can make an argument on both sides of this.
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B
Yeah.
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D
And I think largely and for the record, I own some Nvidia, but in terms of like the real hyperscaler businesses, Alphabet is the only one that I own individual shares of. And I think looking at that negative free cash number, the fact that they are deploying so much capex, there's a lot of bullishness there for me because it's happening at the same. This is not like there's a collapse in operating cash flow. Everything else is working fine. Google search, despite some deceleration there, despite the reality that we know that people are using LLMs now, including, you know, OpenAI and Claude for more search related things, we know that the ad revenue is holding up very well for Google search. YouTube is helping drive some of that. But YouTube is also doing good. Again, like I said, not great, but doing good. And look at Google Cloud revenue almost doubled in that business. The kind of more AI focused specific part of that was up like triple. So that part of the business is going gangbusters. This is a time for a company that's generating this much free cash flow to be doing this because it is so central in what their future is. Talk about killed by Google. Other capital allocation decisions, other bets they've made that didn't work out. Yes, this is expensive, but it's also in their wheelhouse. This is a company company that they know how to build and run this infrastructure. So I'm certainly less concerned about making bad decisions. This is something that they almost don't have a choice but to do. I also think looking at the strength of the balance sheet, well over $120 billion in net cash, $242 billion in cash and equivalents at the end of the quarter versus 117 billion in debt. I promise you by the end of the year there will be less cash and there will be more debt. But that's okay. There's still plenty of margin in this business to spend right now in bringing more supply online. I think Travis is so critical right now. What we're hearing from the enterprise is finding return on the AI. Spend is getting harder because it's getting more expensive, not because it's not helping businesses become more efficient and better. It's getting more expensive because there's so much more demand then supply is being brought online right now. And Alphabet is trying to solve the part of that equation that it can and it can be fine with prices coming down.
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A
You tease the prisoner's dilemma. I want to get to, in just a moment before, before we get to the next piece, I do want to highlight that over the past year Alphabet has recognized $151.6 billion in non operating income, that is the paper profits from investments that they made in SpaceX and Anthropic. So to add to everything that they have going for them from an infrastructure standpoint, from a distribution standpoint, you know, you can critique lots about Alphabet's business, but they have also made massive investments in some of the most successful startups in the past 20 years. So just wanted to highlight that as well. I wanted to turn this to Jason, you talked a little bit about the debt piece. Debt is interestingly not as much of a problem for Alphabet as it is even for some of the other big tech companies. I mean Amazon is really adding to their debt load. Oracle, it's starting to be a bigger and bigger problem. Some of their debt now trades with an 8% yield. Those yields are going up, their stock is going down. That's going to make it harder to finance a lot of these projects. But the other piece that came up in Alphabet's earnings report in the conference call was hey, we're going to actually sign some deals with some of these third parties, we call them neoclouds, who are going to be able to take, take on some of this, compute that we're, we're constrained on right now and we'll sign some short term deals. But those neoclouds, that may be short term demand, where they're taking out a lot of debt to be able to finance that. So when you look, when we look across this landscape, are those neoclasses, is that a position of strength or is that something that you worry about when you go, okay great, you have a bunch of demand for the next year or two while Alphabet builds out these huge data centers. But what happens then?
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D
So for those who don't know the neoclouds, companies like Core Weave, that was a Big IPO recently and then you've got Irin and Nebbys as some other ones. What's happening right now I think is really good for them because they need revenue, they need to be right in the middle of this growth. But maybe not so much when Alphabet starts bringing more of the capacity that they're spending on online. So instead of sending that capacity over to these other companies, the NEO clouds, they can bring it back in. But also adding that supply could result in prices coming down. And these companies are more leveraged, they are very concentrated. This is their business. They're being built on the thesis of AI demand continuing to grow. They don't have optionality. And what we've seen is the businesses that are more pure plays. When we do go through these kind of boom and bust phases, even if there's not a bust, even if demand for AI Compute doesn't fall, it can continue to grow. It can just kind of soften a little bit. We could see these companies struggle because pricing comes down and now they can't live because their marginal costs are higher than an Alphabet.
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C
I don't know what I think of any one of these neoclouds. I don't really want to invest in them, but I am more bullish on cloud capacity than I am even the hyperscaler models. We've talked about this before, but I am convinced that most of the economic value that comes out of AI is not going to come from the frontier models. In fact, I'm a little afraid that these science projects that are consuming so much of the capital will never pay for themselves. But There are what, 2.5 million open source models out there? Not all of them are good, not all of them are safe. But I do think most of the economic value, most of like the business processes are going to fall onto those and not these frontier science projects. And we need data capacity for that. So if it's not ideal, if Alphabet's need for NEO cloud capacity is temporary, but I think there are plenty more. I know of hedge funds that are building data centers right now. If AI plays out the way we think it is, there's going to be a lot of need for this capacity and there's going to be a lot of people to fill it.
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D
Last quick point I just want to make is AI is software. Software is massively deflationary. Software has been massively successful and profitable, but not for everybody. Right? So that's kind of at the heart of how this is going to potentially play out for these marginal players.
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A
I wanted to end with this. And that is what I think we've been kind of alluding to, which is a bit of a prisoner's dilemma. You know, Jason talked about it. You've got to invest in this. If you're Alphabet, you've got to invest it in. If you're almost any one of these hyperscalers, if you're a Neo cloud, you've got to take on debt to be able to fund this, because that's your business. But when you look at the market's reaction recently that it's telling us that investors want a return and eventually, if you're issuing debt, if you're issuing equity, it matters what your stock price is. So Alphabet's down 11% over the past five days. Oracle's down 64% since they announced that deal with OpenAI for $300 billion worth of remaining performance obligations. So quickly, guys, Lou, I want to start with you. Who blinks first in this and maybe gets rewarded by the market and says, you know what? We're not going to spend more like Alphabet has done both of the last two quarters. We're actually going to spend a little less. We're going to increase that cash flow.
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I think Apple already did and they have been rewarded. I actually think Microsoft is probably the one that says anything because they can sort of say, we have other irons in the fire. So they can kind of that they have a better escape route.
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A
And Satya has been pretty loud about saying, hey, we got to do something a little different.
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But Travis, who blinked? The consumer of AI is already blinking.
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A
Well, see, what do you mean by that?
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C
Well, just we are already hearing moaning about token maxing and all of this. This is the beginning of it. This is just the. We're not going to pay this. We're not here yet. But that's where the blink starts.
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A
Well, we'll see who the market rewards if there is a pullback in some of this AI spending in the future. When we come back, we're going to talk about some updates from Elon Musk's companies. You're listening to Motley Fool, Hidden Gems. Investing.
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Explore further@rangerover.com welcome back to Motley Fool.
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Hidden Gems Investing. The first of Elon Musk's major companies reported earnings this week. That's Tesla shares are down 18% in about the past week and are actually down 36% from their high late in 2025. Lou, when you looked at their results, what did you see?
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C
First of all, this is still at its core in automotive business. And automotive, you know, look, automotive is looking more like an automotive business every day. They've always absurdly high margins for a carmaker. No longer. Automotive margins were down to 1.4%, which, hey, you know what? This is why I don't want to buy automakers because that's kind of how the business is supposed to work. What's going on here? It's spending. And on one hand we knew it was coming, on the other hand, it's really, really bad. Just to see it play out, it almost seems like they're in liquidation mode in the auto business. What happened there? Auto profits were up 1% despite deliveries up 35%. That's not margins, that's raw numbers. So they moved 35% more metal, but the profit only barely nudged. It was basically the same profit they made a quarter ago. Like Tesla has been saying, this is going to be an error of spending. Okay? They are building out robotics, they're building out AI. It's all these things that investors are focused on. I don't think anyone's really looking at the car company anymore. The issue Here is the CapEx was actually under planned for the second straight quarter, but they held their full year CapEx guidance steady. If they underspent in the first and second quarter and still intend to spend what they were going to for the full year, that implies that we've only just begun. The ramp is only beginning. So more spending is in our future.
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Yeah. So we talked about Alphabet increasing their spending, but they're using operating cash flow to do it. The challenge here for Tesla is They don't have the same operating cash flow to be able to fund this spending. Jason, the other piece that caught my eye is the robo taxi business for years has been sort of the future of Tesla. They had a chart in their earnings report in their shareholder letter that showed that the growth of miles per week is slowing. They are expanding to more cities. But where does that sit in your mind?
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D
Yeah, it's an interesting kind of conundrum. They're standing up manufacturing line for Robotaxi and at the same time those problems are happening. But one thing that I did notice notice is that they are selling more full self driving.
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Right.
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That number jumped a ton. And I think you have to look at full self driving and Robotaxi kind of combined because the thinking about like the technology and what can it accomplish, but at the same time there is that slowing metric with Robotaxi. They're in seven cities now, it is expanding. I didn't think they would be in seven cities by this point. I do think that the risk to start building standalone robotaxis is a risk that the business absolutely has to take. I also think we have to look at Tesla Semi too. As much as everything that's happened with the, you know, retiring their two original EV models to shift that line over to build robots, Tesla Semi could be a sleeper hit for them because we've heard from a lot of the, these large enterprise trucking businesses that are using it in kind of the beta testing that love it and they are going to buy it. So maybe that's a bigger part of the business's future. Probably in the near term even the robo taxi will be.
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Yeah, the other thing they have coming is they're changing the Fremont plant over to the Optimus robot. So we will see, we'll see what that looks like. I want to see Lou buy a robot and see what he does with it. But we'll see.
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Did you see, by the way, they said the S curve is going to be. Because everything with Tesla is always an S curve, but the first part of it is going to be really, really, really drawn out. So I don't think, I don't think they were telegraphing us that we should put that into our earnings estimate anytime soon.
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Wow.
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I just want to be able to get one and test it out, see if it can mow the lawn for me or pick up after the kids.
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D
I think there's these two camps on robotics, right? There's the purpose built robot, that's basically an arm and some optics and that's what's worked really well in industrial settings. And everybody screams from the rooftops that humanoid robots are a terrible idea and they don't work. And I think that's true in the wild. But I do think that there are more controlled industrial environments that might become mixed environments with people and humanoid robots where there could be some real success. And we're going to find out, right? We're absolutely going to find out. But it's going to be years before we really know if they're going to deliver anything close to the promises.
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A
Yeah. And they are testing some of these things in factories. I know BMW is always one that's kind of early on. As someone who worked in a factory for a while, I always have questions about how many more robots you can have in factory. And that was 20 years ago. The people were there to fix the robots that broke. But I did want to touch on SpaceX as well because SpaceX is Elon Musk's other company. And Lou, I think the idea here is that they will eventually merge these two. The challenge is if you own shares of Tesla because you're eventually going to merge with SpaceX. SpaceX's shares are down 44% from that IPO price. It doesn't. This seems like a strange position for these companies to be in because the operations aren't going great at Tesla right now. And SpaceX, which is the new story, is seeing its stock fall after jumping up.
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Yes. Slow down here. It's been six weeks. We'll see. Look, we know more than half of
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we want to jump to conclusions here, Lou.
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Well, I mean, no, I do think, and look, I think it makes sense to merge them because nobody's really buying a car company or an AI company. They're buying this belief that Elon Musk can create economic value over time. So why have two competing tickers? So that's the I think bull case for a merger. Look, most IPOs trade down in the first year. I think everything is on steroids with SpaceX right now. It's so visible. I think we were really surprised that the stock didn't jump on the triple Q inclusion. That was because the counterparties that had to sell those shares front ran it. That's why the stock jumped up. I sort of think it's trading down now because people are front running the lockup expirations. Give this time to settle out and see where we are. We need to stop. As someone who is super focused on the day to day move, I hate to say we have to stop focusing on the day to day move.
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D
Yeah, I think the declining stock price probably just helps provide some justification to merge these two businesses because Elon Musk has to have lots of things to do. And if you have lots of things to do in one business, then it's a lot easier for the market. But I think the problem is how does the market value that very complex business if the narrative of growth is not driving it? That's the risk.
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Yeah, I think we can all see this coming, but we'll see when it actually comes to fruition. When we come back, we're going to see how well Lou and Jason can value stocks. You're listening to Motley Fool Hidden Gems Investing.
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Vanguard Marketing Corporation Distributor welcome back to
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Motley Fool Hidden Gems Investing. In this segment, we like to have a little fun with investing. This week we're going to play a little game called the Price is Right. Lou and Jason are going to try to guess the market cap of the company that I'm going to give them a few metrics for. So we're going to start with the first company. I'm going to give you the industry as well. I'm going to just say broadly, this is a manufacturing company that manufactures high tech stuff. All these companies are going to be companies that everybody, everybody knows. So maybe, maybe this will give it away a bit. But I want you to guess the market cap into the company if you can. So the revenue for this company over the past 12 months is $140 billion. The compound annual growth rate over the past five years is 23%. So pretty good growth rate. And the operating profit is 56%. I will also say they have net cash of $80 billion on the balance sheet. Jason, if you're looking at a company like this, where do you think it's valued at?
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D
I'm going to guess it's worth about $675 billion because I think I might know the company you're talking about.
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Okay, Lou, $675 billion.
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A
I like the specificity with the 75 there.
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C
Wait, you said 140 billion in.
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A
140 billion in revenue.
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Gosh, I'm going to go higher. You said high tech manufacturing, which I think is. So it's probably something caught up in the AI boom. So I'm just going to slap a trillion dollar valuation or whatever this is.
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A
This is a $2.2 trillion company. The company in question is Taiwan Semic TSMC Manufacturing Company. Much more valuable than. I don't know if that's what you had in your mind, Jason.
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D
I was thinking ASML, but ASML's revenue is about half that. That was my miss.
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A
Yeah, really getting to the point where they're pretty high multiples. I remember a few years ago when the AI boom started, TSMC was trading for like 9, 10 times earnings and had a 50% net income margin. So a pretty solid multiple expansion for them. Okay. Second company is another manufacturing company a little less high tech, but we have revenue of $100 billion. The growth rate is slower to 2% growth rate over the past three years. Operating margin over the past 12 months is 4% and it's actually in decline. A little bit of cash on the balance sheet, but nothing really notable. Where would you value this company at, Lou? Oh, $100 billion in revenue, but it's
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declining margins and it's not tech. Gosh, watch. It's going to be Tesla or something. But I'll say 500 billion.
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D
Yeah, I'll say 501 billion.
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C
Still highly valued, isn't it?
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This is Tesla. I knew it was 1.3 trillion dollar valuation. Felt like Tesla.
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D
Right? Travis was going to 4D chess us on that one though.
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C
Yeah, you're right, Jason. Doing the price is right thing. Just go a dollar.
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A
I have one more manufacturing company here that I wanted to touch on again. A company that you guys know. Revenue, I think higher than both of the companies we Talked about previously. $185 billion. Operating margin is a little lower at 1%, but the growth rate is a little bit higher. About 8% compound annual growth rate over the past five years. And a. Those are the metrics I'm going to give you.
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D
What was the operating margin you gave?
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Operating margin is 1% and I think rising just slightly.
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D
Lou, you got to go first again.
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This is either. Wait, how much revenue?
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185.
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C
I don't know. I'm going to guess this is Ford Motor Company, but I don't know what it's. Its market cap is 65 billion, but it's probably not Even Ford, Jason. So think of something else.
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D
Yeah, that kind of sounds rightish. That kind of sounds rightish.
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C
Those operating margins, it feels. Auto.
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A
I will give you this one, Lou. It is gm.
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D
Gm.
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A
I should have given you the cash flow, the free cash flow margin, which is 8%. So a little bit higher there, that may have tripped you up, but only a $70 billion market for general Motors.
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D
So finance business just.
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C
I got the company wrong and still almost got the market cap right. So I'm a double idiot.
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A
All right, this is, I would say a technology company. Revenue is $6.5 billion. Compound annual growth rate over the past five years, 15%. Free cash flow margin is 17%. What are your guesses on the valuation of this company? Six and a half billion dollars worth of revenue, Jason.
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D
God, that could be a hundred different companies.
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C
Yeah, that could be almost any company.
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A
Yes, it could be almost any company, but how would you value the company is the question of the day.
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C
Yeah.
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D
So what was the margin?
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Free cash flow margin is 17%.
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$6 billion in revenue.
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A
Yep, 6.5.
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D
I'm going to go with $80 billion market cap.
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A
$80 billion market cap.
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C
Okay, Lou, $1. Because I don't think this price is right.
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D
Me here for sure.
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A
Just under.
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C
Well, I don't think this is. This feels AI affected, not AI aided for some reason, just the way you're talking. So I, I don't know, 40, 40 billion.
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F
Okay.
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A
This is a 5 billion dollar company. The company in question is Lyft Lift. Oh yeah, Lyft. Much stronger revenue growth than you would think with a company that's trading for, I think right now, four times free cash flow. Right, right. So there are, we talk about, you know, a lot of these highly valued companies in the market, but there are also just complete barbells where there's really very lowly valued companies.
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D
Well, that's it. And I was going on the other end of the barbell where it was trading for, you know, closer to 10 times sales. That's entirely what I was thinking.
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A
Yeah, yeah, exactly. So that's going to be the question here. Is this a highly valued company or a lowly valued company? Here's another tech company for you. Company has $5 billion worth of revenue. So a little less than the company we just talked about. The growth rate's a little higher. 5 year growth rate, 27.6% on a compound annual basis. Free cash flow margin is 52% though. So high, high free cash flow margin. What do you think the value of this $5 billion revenue company.
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C
Is Lou going to go high again here, Jason, so you can undercut me? I'm going to say 250 billion.
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A
Okay,
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D
I'm going to say 50.
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A
50 billion dollars. You are both low. The company is Palantir, Holy cow. Has a 300 billion outliers. Billion dollar market cap.
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Yeah.
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A
This is one that I always go back and look at. You know, is a company that I'm looking at too highly valued right now. And you go, well, you still have palantir trading for 55 times sales, which is down 50% from. From when it was well over 100 times sales. Okay, here's another.
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C
You should do a tangent on them sometime, Travis, but not now.
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A
But yeah, maybe we should have a full show on Wednesday for that. Okay, here's another Tech Company. Revenue $215 billion. Compound annual growth rate over the past let's. Let's do 10 years. Just take some lumpiness out of it. 23% compound annual growth rate. Free cash flow margin is 22%. Operating margin is 41%. How would you value a company $215 billion in revenue? Jason, you're up first.
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D
Oh, that's a couple trillion dollars.
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A
So 2 trillion is the gas, Lou?
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C
Yeah, I think. Yeah, that's 3 trillion. I don't know.
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A
3 trillion. You have $1.5 trillion for the company. Meta platforms.
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D
Meta. Yeah.
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A
The growth rate is a little goofy there because you do have that pandemic impact. So only a 12% growth rate over the past five years maybe could have tripped you up with a little.
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D
Well, there's a little bit of a bull case right now for Meta, that it's pretty cheap.
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A
And on a historical basis, that is true. 18 times forward earnings, 22 times trailing earnings. Okay, I want to give you one last one. This, I would say is a technology company as well. Revenue $2.4 billion. So the smallest company that we've talked about from a revenue perspective, but one of the faster growing five year compound annual growth rate is 54%. The operating, the free cash flow margin is 3.4%. So relatively low margin, but high growth business revenue, $2.4 billion. What do you think for valuation? Jason, you're first.
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D
I mean, this sounds a lot like a data dog, but that revenue seems a little bit low. I'm going to go with 50 billion.
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A
50 billion, Lou.
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D
50 billion? Yeah.
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C
I'm going over, I don't know how much over150.150 billion.
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A
You can buy this company today for $7.6 billion. The company is Hims and hers. Okay.
- [29:23]
D
So here you go.
- [29:24]
C
All right. Well, that's a little. Yeah. So that's all over the place.
- [29:28]
A
It is all over the place. But it is again, it's just, it is interesting to see it's in today's market where there's extremely highly value high valuations, where there's extremely.
- [29:37]
D
That's a healthcare services business. I just want to say that's a. Yeah, could.
- [29:40]
A
Could be. But those margins are going up. They are in AI. If it's an AI story that you want, they've got a good AI story for you. You never quite know how the market is going to think about some of these companies.
- [29:50]
C
Sure, Jan.
- [29:53]
B
All right.
- [29:54]
A
When we come back, we are going to get to what's going on at Intel. You're listening to Motley Fool, Hidden Gems Investing.
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As always, people in 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 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 One of the big earnings reports for this week was Intel. The company reported a $1.8 billion operating profit after reporting periodic pretty sizable operating losses over the past few years. But Jason, as recently as 2021 the company is regularly generating $4 billion or more in operating profit and yet the Stock is up 330% over the past year and seems to be just on an absolute tear. So what did you see in the numbers?
- [32:24]
D
Yeah, so we'll talk about the stock first really quickly. This is a turnaround. This is a government backed bet on the business turning around and the real national security interest in having a high bleeding edge domestic company that can meet the semiconductor needs for the US government.
- [32:43]
A
And TSMC, investing $100 billion doesn't count because I think their investment in Arizona is up to $100 billion now.
- [32:51]
D
Yeah, I mean it's just, it's a start, right? I mean it really is. It's only just a start. But I think the thing to remember is that the bottom line is that the results aren't that that nice little return to operating profit that didn't come from the pivot. The, the business still has to demonstrate that it can be a contract foundry. Pat Gelsinger started the company on that track and he got pushed out. It was timing as much as anything. The tailwind of AI. If it had have happened a year sooner, Gelsinger would still be the CEO. But I think Lip Bhutan is a great CEO to drive it. But they have to prove that they've actually turned the business around by manufacturing for contract customers chips off of their foundries. And it's still TSMC and Samsung to a lesser degree, not intel doing that.
- [33:39]
A
Yeah, Lou, the interesting thing is it seems like they're just selling the same stock stuff they've been selling for a while, just at a higher price.
- [33:45]
C
Some of their stuff, you know, and I think that's the interesting thing. The market, you're right, the stock's up huge market kind of yawned at these results, which seems appropriate. This kind of felt like held serve, not wow. Yes, they are getting great pricing for the High end right now. The CPUs for data centers, that is really working. They're also running those fabs as much as possible. So that's great for margins. But look at that PC business. Remember Wintel? Remember when that's what we looked at. It looks like they are at best losing a bit of share to amd. They're cutting prices so this is turning into their exposure to AI is only going up. You talk about yes, they are supposed to be our champion and yes it's good to have the government in your corridor but you know, 20 billion in CapEx sounds like impressive but that's a third of what TSM is going to spend this year and intel is supposedly playing catch up. So I don't know what I think about this for the long term. You know the funny thing is we are in a world now where I don't think it's hard to imagine 10 years ago like saying wow, we'd be in trouble if intel ceased to exist. That is less true than it was. But they are sort of at least establishing themselves thanks to AI and thanks to the government as a, as a player here, just not the giant.
- [35:04]
A
Jason, we've talked a lot about the AI story here today and this seems like one of those companies where the story is really positive. The way that AI is developing needs more CPUs than it did previously than kind of the first generation of ChatGPT, things like that. So that's driving part of that demand for data center CPUs from Intel. But the other thing that matters long term, especially for foolish investors, is the operations. At the end of the day the fundamentals are going to drive a stock. So do you see enough with intel to even be intrigued by the company or is this more hype story, you know, like you said government story than anything else at this point?
- [35:46]
D
Yeah, a lot of things are going to happen that are completely outside of Intel's control with AI writ large over the next couple years to earn the valuation right now. And that's assuming that intel continues to do everything right. We got like one here's a thing that's good for intel in ASML's earnings they talked about that the first foundry that's using the High NA machines, ASML's High NA machines for a commercial application instead of just testing is intel for their 18A chips. They're using those high NA machines for part of the process. That's a good step like indication that they're starting to kind of close the gap between them and TSMC and Again to a lesser degree, Samsung, but there's so much catch up that they need to do. It's really going to be a year from now before we even have evidence that they can be a successful commercial foundry for outsourced business. We don't know that they can do that yet. So this is very much a narrative story. And so much of that is going to mean the tailwinds for AI broadly have to continue blowing because the business doesn't have the fundamental operational results right now to even come close to supporting the stock price.
- [36:57]
A
That tension between operations and the story is definitely something we're going to be covering in the AI space over the next year or two because I know a lot of these things kind of get ahead of themselves and sometimes that still undervalues companies and sometimes it means they get very overvalued. We want to end with stocks on our radar. Jason, you're up first. What are you looking at this week?
- [37:17]
D
So I want to throw a business out there that it's a retail business, it's a price leader, it's in a low margin business, but it's excellent at turning inventories, it's growing comps at mid teens rates and it's opening new stores at mid teens rates. Has less than 4,000 stores and management just told us last fall they have a goal to get to 14,000 stores. That's BBB Foods, the Mexican hard discount grocer trades under the ticker. Tbbb.
- [37:49]
A
Dan, behind the glass, what do you think about a Mexican grocery store?
- [37:53]
B
I mean, everybody's gotta eat, right? Seems like might be a good bet. Is this company going to be spreading into other regions in Latin America?
- [38:03]
D
It is focused entirely on Mexico right now. It's a market that the founder and CEO of the business, who's actually not Mexican but has been in the country for a long time, understands extremely well. And the opportunity is so large there, it makes sense to continue to focus. You can build supply chain, you don't have to deal with crossing borders. You can leverage that. And my favorite thing actually is not just the size opportunity but the optionality or the fact that it's countercyclical. Everybody needs to eat, they're selling basic needs and they get really good margins through a lot of private labels there.
- [38:36]
B
I'm liking what I'm hearing.
- [38:38]
A
Maybe we should do a field trip and do a little more research.
- [38:40]
D
Let's go.
- [38:42]
A
All right, Lou, what are you looking at this week?
- [38:43]
C
So Dan, I'm looking at government contractor Booz Allen Hamilton, ticker bah bah. They beat on earnings by 22% despite sales coming in in line with expectations. So yeah, the story here is profitability. Ebitda margins up 110 basis points well ahead of expectations. And for every $1 they build in the quarter, they booked a buck 50 in future business. That is a great telegraphing of growth. Dan, Booze started the year with a disappointing earnings report. They've been bogged down by all the Doge cuts. But look, never in its history as a public company has Booz Allen Hamilton ever traded at such a severe multiple discount to its peers. I don't think the discount holds up 13% post earnings. I think there's more. The run. It's a really intriguing time for long term holders to look at Booz Allen Hamilton.
- [39:34]
A
Dan. Lou likes to bring these companies that have funny names and this one is a booze company that doesn't sell booze.
- [39:42]
B
Yeah, well, this one is all over the D.C. area where I live. I'm very familiar with Booze Allen Hamilton and it is one of those companies where you see the first word you get excited and then you're Alan. Oh man. Come on. Yeah, Lou, They've been slashing headcount like crazy in the past year or so. Is this company timed for an upswing?
- [40:03]
C
I think it is. I'll tell you, I don't like when headcount falls. I think that was the telegraph that it was going to be a bad quarter because they hire for business. But I'm predicting they're going to start hiring in real soon.
- [40:15]
A
Single digit growth rate but relatively low price to earnings multiple. So very compelling on a valuation standpoint. Okay, Dan, which one of these stocks is going on your watch list?
- [40:24]
B
You know Travis, people got to eat. So. So we're going to go with bbb.
- [40:29]
A
Congratulations to Jason hall or Lou Whiteman. Jason hall and Dan boy behind the glass, I'm Travis Hoyam. We'll see you here tomorrow.