A New Chapter in AI’s Most Powerful Partnership

0:01Matt Frankel:We have a new chapter in AI's most powerful partnership. You're listening to Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm Jon Quast and I'm joined today by Fool contributors Matt Frankel and Rachel Warren. We have some news in AI and we don't want to bludgeon you with it, but when these companies are growing as fast as they are, we have to talk about it when there's a significant development. And there is, and we're going to get to that. But first, we wanted to kick off our show. We are in earnings season, and one of our companies just reported this morning, and that's Domino's Pizza, reporting its first quarter 2026 results this morning, and the stock is down.

0:45Matt Frankel:We do want to look at this company because as the largest pizza chain in the world, it can really tell us a lot about what's going on in the world and in the state of the economy. So, Rachel, what did the Q1 results show us? Yeah, this is one of those companies that you could look at as something of a bellwether for consumer spending, certainly within the food industry. So, Q1 results, they actually missed on both the top and bottom lines, although not by that much. So, adjusted earnings came in at$4.13 per share against the$4.28 expected. Revenue hit about$1.2 billion or$1.15 billion to be exact.

1:24That was trailing the$1.17 billion mark that Wall Street was looking for. So again, very slight misses. It's worth noting, total revenue actually rose about 3.5%. That was thanks to a range of factors, including new store openings. U.S. growth was actually just 0.9%. International sales actually dipped slightly. So We're seeing some of these mixed results. I do think it signals that even a business as stalwart as this one, historically speaking, might be feeling a bit of a squeeze as customers are cutting back on discretionary spending.

2:01Jon Quast:They're sending good signals to the market that they believe in what they're doing here. They allocated an extra billion dollars for share buybacks. Their management generally just gets a really big gold star from me for capital allocation. Over the past decade, the share count's been down 38 % or so. The company's produced 192 % total return over that time. Buybacks were a big part of that strategy. I like this move. I don't know if it's enough to make investors happy, and judging by the stock's response, it's not. But the numbers were not great.

2:35Matt Frankel:Well, one of the interesting things here, you look at the company, same store sales, this tracks sales at locations that have been open for some time. Generally speaking, well, probably universally speaking, you want to see same store sales rise. And in this case, same store sales did increase for Domino's marginally. So that usually translates to an increase in profitability as well, but both the sales are up, but the profits are down. And I'm just curious what your thoughts are with that, Rachel. Yeah. And it's an important thing to talk about. So that disconnect between rising sales, marginally so, is correct.

3:15That's a good way to put it. This isn't obviously a high growth business, but still the growth was slim. We're also seeing those falling profits. It's actually a bit of an accounting illusion for this particular financial report. So Domino's operating income actually jumped about 10 % in the quarter. That was thanks to more efficient supply chain, higher franchise fees. It was actually bolstered by a nearly$8 million gain from the sale of a fully depreciated corporate aircraft. But net income was dragged down by a$30 million non-cash, so a paper loss, on their investment in DPC Dash, and that's their partner in China.

3:50So essentially, the core business is profitable, but because the market value of their investment in China fluctuated this quarter, they had to record a technical loss that masked their actual operational growth. And you see that sometimes with businesses like this. And it's always important to dig beyond those headline numbers to understand what's actually at play.

4:10Matt Frankel:For sure. It's important to do, but it doesn't seem like many investors are doing that today. Kind of just looking at that headline earnings per share number, seeing that it's down, reacting negatively today. And really, it's been an ongoing trend now for a couple of years, that Domino's Pizza's kind of the stock topped out and just kind of been not doing well, not beating the market anyway. And so for that reason, I'm curious, is this a business, Domino's Pizza, largest pizza chain in the world, down right now? Is this a stock that either of you like right now? And what are things about the business that you do like?

4:48Yeah, you know, this is, I think, for me an example of a company that I think is a really great business, but a great business does not always translate to a great stock. In fact, there's many examples of that. There are a few things I like about the business. I mean, in terms of their actual model, right? I mean, they are a massive logistics and manufacturing powerhouse. They act as the sole provider for their franchisees. So unlike most competitors who rely on, say, third-party vendors for ingredients, they actually operate their own network of regional supply chain centers that manufacture fresh dough.

5:22They procure everything from cheese to pizza boxes in bulk. And actually, that vertically integrated model, that supply chain business accounts for about 60 % of Domino's total revenue. So by far and away, more that they're making for pizza sales, for example. And so controlling that entire process has been something that has helped them really strip out a lot of the middleman costs that usually eat into restaurant margins. And so they have built, I think, a really massive moat where their scale tends to make them cheaper and more profitable for a local owner to stay in the system of franchisee than to leave because they actually share around 50 % of their supply chain's pre-tax profits back with the franchisees who buy from them.

6:05All of that translates to a great business. For me though, this hasn't been a stock that I've personally wanted to add to my portfolio.

6:11Matt Frankel:I really appreciate you bringing that out, Rachel, because Domino's management here pointing out that its top competitors are really getting into the value war with it and trying to match it on price. So it's really becoming a competitive pricing environment and Domino's management really feeling confident because of what you just pointed out, the vertical integration, its cost control, that it would be able to weather that environment better than some of its top competitors. Very prudent thing to point out here. Matt, what is something that you might like about Domino's?

6:49Jon Quast:As I mentioned, I'm definitely a fan of their capital allocation. Adding a billion-dollar buyback shows pretty nice confidence that the stock is undervalued. That translates to about 9 % of its outstanding shares right now. Domino's, they have a nice dividend yield, another part of their capital allocation strategy, and it trades for less than 17 times forward earnings, which is historically cheap for this company, especially with the operating income growth that we saw. But that's really where it ends. I was in the restaurant business for years. It's a tough business, even when things are going well.

7:20Jon Quast:Right now, consumers are feeling squeezed. The same-store sales growth was less than 1 % in the U.S. If we're looking at inflation, in real terms, that's actually a decline. If you have 1 % same-store sales growth and 3 % inflation, you're actually losing sales, consumers are feeling squeezed. Domino's strategy really needs to go beyond, let's buy back more shares. I didn't see much that is going to turn that 0.9 % same-store sales growth into 3%, 4 % or more that investors would want. I have to think that that has something to do with the stock prices reaction as well.

7:58Matt Frankel:The reason that we wanted to bring Domino's Pizza to our listeners today was not just the pizza results, although you certainly might be interested in taking a look at Domino's Pizza here, but also just what it can tell us about the economy. And so I appreciate Matt bringing out what is going on with the consumer. Keep an eye on this because this does translate into many takeaways for the broader economics picture. After the break, we have to talk about AI's most powerful partnership in a new chapter that it just entered. You're listening to Motley Fool hidden gems investing.

8:28Jon Quast:Hey, it's Parker Posey. How did I get here? I love improvisation when it comes to acting, but when it comes to a real life plan, I stick to a script. Cue the music. Invest in your story with DIA, the only ETF that tracks the Dow. From State Street, getting there starts here. Before investing, consider the fund's investment objectives, risks, charges, and expenses. Visit statestreet.com slash IM for perspectives containing this and other information. Read it carefully. DIA is subject to risks similar to those of stocks. All ETFs are subject to risk, including possible loss of principal. Alps Distributors, Inc.

8:57Matt Frankel:Distributor. Welcome back to Motley Fool Hidden Gems Investing. So Microsoft, big company, it took a stake in OpenAI pretty early on in the, I don't know what we want to call it, the AI gold rush. And OpenAI really took off. Microsoft was holding that equity stake in the business, but it has seemed like the relationship between Microsoft and OpenAI has been becoming increasingly strained in the most recent years. Today, we got news. This was right before we aired. We got some news that the duo here has modified the terms of its partnership. And as I'm looking at this, it seems like Microsoft is getting the better of the deal here.

9:45Matt Frankel:I don't know if that's fair, though, Matt.

9:46Jon Quast:I would call it somewhat of a win-win for both companies. I can see it in both ways. OpenAI, they pay Microsoft 20 % of revenue, which is a lot. That remains the same under the New Deal, although there is an overall cap now, which could be a big deal if you believe the exponential growth that OpenAI believes it can achieve. The company reached$20 billion in ARR in 2025. It's expected to reach$25 billion this year. But OpenAI's management has said that they predict total revenue of more than$280 billion by 2030. That total revenue cap will be more of a big deal in the future than it is today, especially if it hits those targets.

10:25Jon Quast:Note that Microsoft's total investment in OpenAI since 2019 has been about$13 billion. To call this a successful relationship doesn't even really tell the story. It definitely feels like a win-win. It gives OpenAI more flexibility and saves Microsoft money, which Rachel's going to discuss a little bit in more depth. Yeah. One of the things that I think is really interesting, and Matt did a good job of highlighting some of the key elements there, you know, Microsoft's no longer going to pay a revenue share to OpenAI for the models that it uses in its own products. So this, for example, like Copilot.

10:57So this significantly boosts its own margins. And then as Matt said, OpenAI will continue to pay a revenue share to Microsoft through 2030. Those payments are subject to a total cap. But still, I think this is a clear win for Microsoft. You know, Microsoft's license to OpenAI's technology is no longer exclusive. So for OpenAI's part, they're now free to license their models to competitors like Amazon, Google Cloud. You know, they can serve their products across any cloud provider. And that, of course, can allow them to tap into the massive compute resources needed for the next generation of AI.

11:30Microsoft also extended its license to OpenAI's models and products through the early 2030s. But the really notable element that stuck out to me, and I think this is where there's a clear win for Microsoft, is the removal of the AGI trigger, if you will, or the artificial general intelligence trigger that previously threatened to cut off Microsoft's access to open AI if open AI reached human level intelligence with its models. So under this new deal, Microsoft now retains its rights even to post AGI models. They locked in their access to OpenAI's IP essentially for the next decade. So I think this is good news for both businesses, but if I had to pick a winner, I'd say it's Microsoft.

12:11Matt Frankel:And the reason that I view it that way too, Rachel, is that it seems, you know, OpenAI still has to pay some money to Microsoft here, even if there's a cap now, but Microsoft doesn't have to do it the other way around. And when you think about a startup company and revenue is really important, I mean, you are taking a hit on your revenue stream. And I think that the idea is I'm willing to do that because I'm hoping to make it up by going into other cloud providers. And so it's a little bit of a gamble on OpenAI's part that it's going to be able to not only replace the lost revenue from Microsoft, but also then it's going to increase because it's going to be provided on other cloud providers.

12:57Matt Frankel:Any of you have thoughts on that?

12:59Jon Quast:Basically, the way I would sum it up is that Microsoft gets a lot of tangible benefits from this deal. They don't have to pay their revenue share to OpenAI, things like that. OpenAI is all based on things that could happen in the future. Like you mentioned, we could get more revenue from AWS or Google Cloud. We could reach$300 billion of revenue by 2030 and no longer have to pay Microsoft any revenue share because we've hit the cap. It's more hypothetical and more forward-looking than Microsoft's deal, which provides immediate benefits. So I definitely see the angle that Microsoft is the winner here.

13:33I agree with that, Matt. And I think the other thing I would add is I think for a long time now, we've been seeing an interest from OpenAI. There's been a lot of reports that have come out over the last year. They really wanted to diversify the licensing agreements that they had. They felt a bit strangled, if you will, by the exclusivity agreement with Microsoft. And so I do think to that end, management there sees a lot of benefits. But certainly in terms of tangible achievements from this agreement right now, Microsoft is experiencing certainly a benefit to their margins, their profitability.

14:04And again, being able to access those models from OpenAI if they reach that AGI, artificial general intelligence threshold, is a key change. So, I definitely think Microsoft emerges the stronger one from this deal, but we'll see what things look like in one, two, three years from now.

14:23Matt Frankel:Well, speaking three, maybe more years from now, we didn't just get this news here about Microsoft. Just briefly, we wanted to touch on the fact that there are reports breaking that OpenAI is considering an AI-native smartphone, and it's tapping Qualcomm for help there to build this AI-ready kind of a device. And if you look at Qualcomm stock, it's gone nowhere for five years. It's up today. But wow. So if this is a hit, right, Microsoft won't necessarily benefit from that. But what do you guys think of an AI native phone?

14:58Jon Quast:On-device AI has been a big priority of Qualcomm for some time. So Tom and I interviewed Qualcomm's chief technology officer last year, and this was a big focus of the company's AI strategy. So I'm not totally surprised to hear this. Essentially, if you use your smartphone today to prompt chat GPT or Claude, the actual work takes place in a data center somewhere. It doesn't take place on your phone. The chips on your phone can't handle complex AI calculations. What Qualcomm wants to do is develop chips that integrate directly into a phone that can handle AI tasks on the device without any external help.

15:35Jon Quast:They're doing that already. So Qualcomm has been developing chips called NPUs, or neural processing units, as part of its Snapdragon chip family. It unveiled its local AI chips for PCs at CES this year, for example. So this is a natural next step. And for Qualcomm, it could be a big needle mover, especially now that we see this on-device AI strategy really starting to play out, especially if the phone is a hit when it finally comes to market. Yeah, I do think that an AI-first phone, it wouldn't be just another device with apps, right? I mean, it would be a shift towards a world where the AI is the operating system, potentially bypassing the app store models that have really dominated mobile for the last two decades.

16:16And I think there's this idea that if OpenAI can actually deliver a device that makes apps feel obsolete, it could spark a massive hardware upgrade cycle. I mean, this is very much, I think, the bullish long-term idea of what this could look like. It's definitely a gamble, you know, building a phone from scratch just from a technical standpoint in terms of the teams that they would have to build and the capital intensity required. It's a notoriously hard and expensive process. Now, OpenAI is building the team to do it, right? You know, you had the$6.4 billion acquisition of Johnny Ives' design startup last year.

16:51Certainly, Qualcomm investors seemed happy. I mean, the stock jumped about 13 % today last I checked on the news after, you know, years of stagnant growth. So it's an interesting idea. I think we're seeing OpenAI looking at where the business can go and trying to explore new frontiers. And I think it's still very unclear what are going to be really the drivers of the business in the long run.

17:11Matt Frankel:Smartphone hardware just run up. That would be interesting, wouldn't it? We'll have to keep our eyes on that. Well, after the break, we're talking about how stock prices work. You're listening to Motley Fool Hidden Gems Investing. 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 Lisa Legend Hybrid, I've fallen asleep faster, and I'm sleeping deeper, which means I wake up more refreshed.

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18:23Matt Frankel:Support our show and let them know we sent you after checkout. That's Lisa.com, promo code FOOL. Welcome back to Motley Fool Hidden Gems Investing. We want to make you part of the conversation. So if you have a stock or an investing question for Matt, myself, or Rachel, anyone on the show, you can email us at podcastatfool.com. And we'd love to have mailbag segments like this whenever possible. So send in your questions, but remember to keep them foolish. That email again is podcastatfool.com, podcastatfool.com. And we do have a question today. This comes from Lisa in Oregon. And she writes, hello, I'm a newer investor to individual stocks since joining The Motley Fool a few months ago.

19:08Matt Frankel:I wondered if a stock price is just a popularity contest. I've heard you talk about Nike and how they have good earnings along with Disney. And yet those stocks aren't doing well. I also saw a major drop in Unity with the AI software sell-off, and it really makes me wonder if stock price is determined by popularity and not necessarily earnings. Thanks for your help. And guys, since this question does come from a newer investor, I thought it would be good just to lay a solid foundation here before we move on. I wanted to talk about a stock's price, the share count, the market valuation, and how those concepts work together.

19:50Matt Frankel:I think that some newer investors, they come in and they see a stock trading at$100, and they think it's twice as expensive as a stock trading at$50.

20:01Jon Quast:Yeah, that's definitely something that we need to emphasize to newer investors. It is 100 % true, and we'll get to this in a minute, that stock price, at least in the short term, is determined by popularity and not earnings. But let's say if Disney and Walmart are both trading for$100 per share, that doesn't mean that the companies are worth the same amount of money. It's important for newer investors to familiarize themselves with the concept of market capitalization or market cap as it's commonly referred to. That's the share price multiplied by the number of outstanding shares. And it's essentially how much the market is saying that the company is worth.

20:34Jon Quast:So that's an important figure to know as well. Yeah, I think it's important to underscore that in and of itself, not considering any other factors, a stock's price doesn't tell you that much on its own. So you wanna think of a company like a giant pizza, right? So the market valuation is the value of the entire pizza. The share count is how many slices you've cut into it. And the stock price is just the cost of a single slice. So say you have a company that's worth$1 billion, has 10 million slices, each slice costs$100. You have company B that's also worth a billion dollars, cut into 20 million slices, each costs$50.

21:08Both companies are worth the exact same amount. One just has smaller pieces. Popularity can drive a hype premium in the short term. That's certainly the case. But over the long haul, that total value is generally anchored to earnings. So the market's essentially weighing how much cash that pizza is going to generate for you over time to stick to the analogy.