Earnings Season Ramps Up -- And We've Seen Some Surprises

0:04Tyler Crowe:Earnings season is ramping up and we're here for Tesla. This is Motley Fool Money.

0:21Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe and today I'm joined by longtime contributors Matt Frankel and Jon Quast. You know, it's inadvertently become Elon Musk week. This on Motley Fool Money this week, I think this is actually the fourth day in a row that we've discussed an Elon Musk company, either Tesla or SpaceX in some form or another. But today, it's yesterday's earnings release from Tesla is going to be the big starting point. In addition to that, we're going to do a lightning round of several other companies that are reporting earnings. And as well, we're going to jump into a mailbag question related to the insurance industry.

0:53Tyler Crowe:But as I said at the top, we're going to talk about Tesla here. Tesla reported an adjusted$0.41 per share and beat analyst expectations for vehicle deliveries, revenue, and earnings. But it did fall short ever so slightly on energy storage deliveries. Now, there's a lot of ways we could go here because it is Tesla. It is Elon Musk. I'm sure we could, if we wanted to, we could do podcasts for the next five days just on the earnings release alone. But before we get too, too deep into it, I want to ask you guys is like maybe one or two things that stood out to you, either in the earnings release or the conference call.

1:29Matt Frankel:Yeah. And kind of apologies to our listeners, right? I mean, we don't mean to hit you over the head with Tesla every single day, but I think we all had that friend in high school who just somehow finds his way into every conversation. I mean, that's certainly Elon Musk. Entertaining is the most probable outcome, right? Musk normally says something pretty headline grabbing in his opening monologue of the earnings call. He didn't really do that this time. It was kind of ho-hum, kind of everything that we've already heard. Nothing really to talk about there from my view. But as we got down into the question and answer portion of the earnings call, Elon Musk started talking about something called TerraFab.

2:07Matt Frankel:And TerraFab really, really intrigues me. This is kind of Tesla's internal semiconductor operation that it's working on here. It's thinking very, very big things with this. But what fascinates me and intrigues me about the TerraFab concept, even though it's probably still years and years into the future, is this thing called a feedback loop. I love feedback loops. I love coming up with something, testing it out, seeing how it actually goes, and then iterating on that and improving it as we go. And feedback loops that are short work better. It's one of the things that frustrates me about being a long-term investor.

2:46Matt Frankel:There is a lot of time in between me researching a company, coming up with an investment thesis and seeing if my investment thesis was right, seeing if my right thesis even mattered in the end, and then adjusting my investment process as I go. A feedback loop that takes a long time isn't as attractive as a short feedback loop. And that's really what Tesla is envisioning with TerraFab. Essentially, it wants to have everything in the semiconductor process all under one roof, and that way it can go through the entire iteration cycle all the way to the finish, test it out, and then go back to the beginning and go again.

3:23Matt Frankel:And I think that's just so interesting. As Musk put it, there is some new physics we would like to test out. That might be overstating things a little bit, but I think directionally what he's getting at here is, hey, we want to try things. We want to try it fast and see if it works, and we want to adjust and try again. It's looking to put about$3 billion to work to make a few thousand wafers a month. But at scale, it wants to be 50 times bigger than the entire industry combined. I think this is just something that is very interesting to watch in the coming years.

3:53Tyler Crowe:I want to step in here a second and talk about the scale that we're talking about here, just to give one example. So one of the things that they were talking about was using Intel's new 14A process for some of this TerraFab work. Intel is building a facility in Ohio, and they believe that the manufacturing costs for the facility itself is somewhere in like$160 billion range. And this is for one facility. The idea we're going to like 50X something like this, the numbers that are going around with this Tesla TerraFab thing, our jaw dropping doesn't quite encapsulate at all. It's more like I live on the 18th floor of an apartment building.

4:28Tyler Crowe:My jaw somehow hit the street.

4:30Matt Frankel:No, exactly right, Tyler. And I mean, why is it called TerraFab? because it wants to output a terawatt of compute power annually. A terawatt, right? Oh, it's just one word. That's a lot of watt.

4:44Jon Quast:Yeah, and I mean, there are a lot of big numbers that Elon Musk throws out there. What was the latest one? One million data centers in space was one that I've heard. If this one isn't really a big surprise on that note, but one thing that really stood out to me in the call is how all in on robotics Tesla is becoming. So along with the earnings release, Tesla said that preparations for the first large scale Optimus factory, which is at the Fremont plant, will begin in Q2, the quarter we're in right now, and that the first generation line, the first generation, will be designed for 1 million robots per year.

5:15Jon Quast:They're prepping Gigafactory Texas to be their second generation robot manufacturing facility, and they're designing that for a capacity of 10 million per year. So that's not surprising. But the one thing that did surprise me, and this is kind of on the part of the business that no one talks about, but it's what makes Tesla money these days, is the ramp up in Model 3 and Model Y production. It was up 14 % year over year in the first quarter, despite that tax credit having been in place a year ago and it's not there now. I would have thought that demand was dropping for those, but it doesn't seem to be the case.

5:47Jon Quast:So that's what surprised me. These two models, the Model 3 and the Model Y, account for about 97 % of Tesla's vehicle sales. And management said that lower cost versions of both models are in the works. So Tesla is not just a robotics, autonomous driving, chip making, whatever you want to call it story. The car business could still have significant potential from here. Yeah.

6:07Tyler Crowe:And here's the thing I found. So I guess you could say peculiar is the right word to figure out because we talked about these grand, ambitious numbers, like the amount of money that it would take to do the things that we're talking about here and the 10 million robots a year. And, you know, there's obviously the plans for robo taxis and cyber cab and things like that. And this is where it became peculiar for me was like, you know, they said they were going to spend$20 billion this year. And then this quarter, they bumped that spending plan up to$25 billion for the year. So obviously they're seeing the direction of this.

6:39Tyler Crowe:But Q1 capital spending came in at$2.5 billion. It was actually quite small. It was, you know, more or less on pace with what they've been doing for the past six to eight quarters. And it's also why it posted free cash flow this quarter when analysts were mostly expecting cash outflows because it was way less spending than I think a lot of analysts were expecting. You know, I acknowledge that spending can ramp throughout the year, but considering how ambitious the plans were, how much they said they're going to be more they're going to be spending. I mean, it's going to be a massive ramp up in the second half of the year.

7:09Tyler Crowe:It'll be interesting to see how that happens because we're talking about like AI data centers and like supply chains in the United States are really strained for manufacturing construction capacity right now to the further that stuff gets pushed down the line. I think it's going to be a little bit harder to secure a lot of things to do a lot of what Tesla wants to do in terms of procurement, in terms of construction, stuff like that. So it's an interesting thread I want to follow. And again, like in all of that somewhere, there has to be a massive ramp up in production for its CyberCab or the Robotaxis as well.

7:41Jon Quast:Yeah, I mean, I mentioned the robotics plans. They're ramping up the Fremont factory conversion in Q2. So I have to think that has to do somewhat with kind of the delayed fuse and spending that we're seeing. But you're right, that doesn't have anything to do with the Robotaxis. That doesn't have anything to do with TerraFab, as John was talking. But there is some sort of ramp up in progress here.

7:59Matt Frankel:Yeah. And to that point, Matt, I mean, Musk pointing out on the call that when you're talking about building robots, a production line of robots, there are many, many things that you have to get out on that production line before you actually start ramping. And there's many components, many processes, many even robotic assembly line things that you need to have in place. And all of that takes time to disassemble what's already there and source and then reassemble a new production line. And so it is logical to assume that your higher spending is going to come later than sooner.

8:37Tyler Crowe:Well, that was a pretty good coverage of Tesla, probably a little bit longer than we normally go. But hey, it's Tesla. There's always plenty to talk about. So coming up over the break, we're going to do a lightning round of several other companies that have been reporting earnings this week.

9:19Tyler Crowe:Well, we don't have as much time to spend on the rest of the companies we just had here versus Tesla. So what we're going to do is we're going to do a quick lightning round of earnings wrap-ups. Each of us picked one stock. We're going to do a quick coverage of what we saw, what was interesting, perhaps some challenges along the way. Matt, you drew the best number, I guess, for the three of us. So you're going to start. What was the company you saw and what was most interesting?

9:43Jon Quast:Yeah, IBM earnings is one that I was really anticipating, and I like the stock even better, honestly, after its earnings fall. So they beat expectations on both the top and bottom line, but the stock is down by 10%. There are a few reasons. So first, it beat expectations and simply maintained its full-year guidance. And that's usually a sign that the next couple of quarters might become weaker than expected. If you have full-year guidance, you already beat your expectations for the first quarter. Just the law of averages says you're not going to do that well in the rest of the year. Second, their consulting revenue grew by just 4 % year-over-year and missed expectations.

10:15Jon Quast:And this is the part of the business that investors worry the most when it comes to AI disruption, like Cloud Code could do COBOL software updating. And that's why IBM stock plunged earlier this year when Cloud announced that new update. Generally, their numbers were strong. Revenue was up 9 % year-over-year. Software and infrastructure revenue both grew by double digits. Gross margin expanded by 100 basis points, so that made their operating cash flow grow by 18 % year-over-year. And management really had positive things to say about the AI tailwinds they're seeing throughout the business. So I'm not that worried about the software updating consulting long-term.

10:47Jon Quast:It's really the AI part of the business that seems to be moving in the right direction.

10:51Tyler Crowe:Yeah, I think all three of us picked something that was either directly or tangentially related to AI here, because I went with GE Vernova, ticker as GEV. Funny thing is, is not too long ago, this was considered like the problem child of the conglomerate that was General Electric. You know, they had the great aerospace business. You had this really steady healthcare business. And then you had this electricity business that nobody really liked that much, but it's spun off. And over the past year, GE Vernover is up 253%. And hoo boy, there is a reason. First quarter free cashflow was more than all of its free cashflow in 2025.

11:27Tyler Crowe:And, you know, a lot of that had to do with bringing in a lot of revenue for its backlog. You posted an incredible jump of$12 billion in basically unearned revenue. That's just basically stuff that people have ordered and they want built sometime down the road. It's just going to sit as unearned revenue cash sitting on the books. So it's this nice like injection of cash because there's going to be a big ramp up to do a lot of things that they want to do because total backlog for all of its segments. So this is gas turbines. It's nuclear reactors that has a joint venture with Hitachi in Japan for.

11:59Tyler Crowe:It's wind turbines are actually growing. It's grid and like transmission equipment, stuff like that. It's all growing. And now right now its backlog is somewhere around$200 billion of like work that it needs to do. And this is a$300 billion company. And it's basically busy for the rest of the decade. On top of that, it acquired a 50 % JV stake or bought back would be a better way of saying it, a company called Prolec, which again is like transformers and a lot of other electrification and grid equipment really leaning into that. hey, AI, electrification of transportation, we need this stuff. And it seemed like a very opportune time because it's pretty flush with cash right now.

12:35Tyler Crowe:And this was actually, there was two really surprising things for me in the conference call was from CEO Scott Straszak. Basically what he said was previous quarter, he said that basically they had about 10 gigawatts of available production in 2029. That was last year or last quarter, excuse me. So basically they're booked all the way out to 2029 minus like 10 gigawatts of power. This quarter, what he said is, so what's changed is we still have about 10 gigawatts remaining, but that's cumulatively through 29 and 30. So basically he's saying, you know, they booked all of 2029, 2030 is booking up really fast.

13:14Tyler Crowe:And so, yeah, this is all the way through the rest of the decade. Like if there's a company that has really strong revenue growth and a lot of visibility in what it's going to do, I think GE Vrnova is really looking interesting. John, what do you have?

13:26Matt Frankel:Well, yeah. I mean, Tyler, you're talking about how we're all picking companies that are somehow related to AI. It's honestly hard to find things that aren't related to AI at this point. I actually shudder to think, what would the state of the economy be if there wasn't so much AI infrastructure spend right now? And I think that the results from GE Vrnova are good, just kind of a data point there to prove that point. I'm also going AI here with Texas Instruments. This is ticker symbol TXN, often forgotten in the conversation. It's a huge company. It's kind of disrespectful. But let's talk about it a second.

13:58Matt Frankel:It just reported its financial results for the first quarter of 2026. Revenue up 19%. And that's actually the highest growth rate it's had in over four years. And I think that's worth pointing out. And you look at what is driving it. Good guidance for the next quarter too. What's driving it is data center revenue up 90 % year over year in the most recent quarter, up 25 % sequentially, and that's an acceleration from the data center growth rate in the previous quarter. So when it comes to the data centers, Texas Instruments has chips that it makes for power management. It has some things for temperature detection control, those sorts of things.

14:33Matt Frankel:Not necessarily completely core to what's happening in the AI trends and the compute and all that, but still they're products that are necessary and they do benefit. The sales cycle does benefit from all the spending going on. And when you look at some of the demand trends here, here's a signal. Texas Instrument Management was expecting the prices of its products to kind of take a small step back in the first quarter. Not huge, but a small one. But in reality, the prices were flat. And so what that means is the demand, like Texas Instrument Management knows this business inside and out, and demand was stronger than what it anticipated.

15:11Matt Frankel:The pricing held up better for its products than it thought it would. That led to the small beat that it did report. And I think that that is just one of those things. If you're one of these investors who says, are we in a bubble? Just remember that there's so many data points that say demand continues to be stronger than even the industry insiders have expected. One other thing to note is the company is acquiring a company called Silicon Labs. That's ticker symbol SLAB. What's interesting here is that this is an unprofitable company. and Texas Instruments management says it's going to be accretive to earnings.

15:46Matt Frankel:And here's the thing, Texas Instruments always reports generally accepted accounting principles, gap numbers, not these adjusted numbers. So it'll be interesting to see how this unprofitable company is somehow accretive to Texas Instruments earnings. It obviously won't be right away, but it says eventually. And I think that's worth pointing out.

16:06Tyler Crowe:Ah, the magic of synergies. You can make anything look profitable. All right, coming up after the break, we're going to go into the mailbag.

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17:19Tyler Crowe:Hey, just a quick reminder. If you like asking questions, we want to be answering your questions. Go ahead. Send an email over to podcasts at fool dot com. We'd love to answer any questions you have on air. Our two requests are one, keep it foolish. and two, after reading lots of these, try to keep them short so we can read them on air. So again, that email is podcasts at fool.com, podcasts at fool.com. So today's question comes from Matt Koziak. I apologize if I misspelled your name, but he wants to know a little bit more about the insurance industry. And the question is Progressive, company ticker is PGR, has fallen quite a bit from its highs and it's currently yielding 7%.

17:57Tyler Crowe:What are your guys' thoughts? We're gonna go around the room. So John, what did you see first?

18:01Matt Frankel:Yeah. And Matt's going to give more substantial analysis for the insurance company itself and the industry. But just a note there on that 7 % dividend yield, not all dividend payers are created equal. There are some that you can count on a quarterly dividend that steadily rises. And that's what that dividend yield is that you're looking at. It's calculated off of that. But there are companies that also pay one-time dividends or annual dividends. And those tend to be a little bit more up and down. They fluctuate. And for Progressive, it paid a really big annual dividend recently. And so it's not necessarily going to pay that much again next year in the annual dividend.

18:46Matt Frankel:So the 7 % yield, that has an asterisk on it. It's not necessarily the same as a dividend king that you can pretty much count on what it's going to be paying next year. The other thing to mention here, why is Progressive stock not performing as well? It's related to why it was able to pay that huge annual dividend. It's that its profit margin is close to an all-time high. And that's good, but it's been a favorable underwriting environment. And that's for the entire industry. That's not just a Progressive thing. And that happens. There are cycles where it ebbs and flows. There are better times, harder times.