ETFs are for the Memes (again)

0:04Tyler Crowe:Looks like meme stocks are back on the menu, boys. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe, joined by longtime Fool contributors Jon Quast and Matt Frankel. Today is Thursday, October 9th. We've got a great show today. We're going to talk about meme stocks because there was recent news about a new ETF that's trying to capture the zeitgeist of meme stock investing yet again. Of course, we'll do stocks on our radar like we do every Thursday here. But before we begin, we actually want to start with today's news from a company you don't hear much about the news because they're a great company that tends to stay out of the limelight, and that's Ferrari.

0:56Tyler Crowe:Shares of Ferrari are down about 14.8 % as we are taping this after the company announced changing to its electric vehicle strategy and financial guidance that was lower than expected. The company now projects its electric vehicles out to 2030 will be 20 % of its total lineup versus the original plan of 40 % of the lineup. Also, 2030 projections for its financial performance, it's adjusting down its operating profit from 3.2 billion euros to 2.75. Just for reference, over the past 12 months, adjusting to operating profit was$2.1 billion. Pretty modest growth here. Now, Ferrari is a luxury brand stock.

1:39Tyler Crowe:I would say masquerading as an automotive stock. Its shares have traded at a premium to the automotive industry ever since going public, probably with Tesla being the one exception. That premiums, because Ferrari is much more of a consistent performer because of luxury. With this lower projection, I'm going to toss it to both of you guys, is the stock really worth the rich market premium that it still has?

2:02Jon Quast:Probably not. If you compare it to a GM, for example, which is trading at six times earnings, and this is trading at something like 40 times earnings, yes, there's consistency, Yes, it's a premium brand. Is it worth eight times the valuation of the average legacy auto manufacturer, if you will? Not really. I don't think that the electric vehicle news is anything really material. They're just the latest in a long line of companies, including some of the leaders like GM that have reduced their EV targets. I wasn't surprised at that. It's really the profit projections. A city analyst said that this falls below their low growth case.

2:47Jon Quast:It's not surprising that the market's reacting like this. But keep in mind, not only has Ferrari historically traded at a premium, Ferrari is still up by 645 % over the past 10 years. It has been an excellent performer for investors. One of the big reasons is it was a big winner of the pandemic era luxury surge, is what I call it. A lot of people spent money on different luxuries during the pandemic because there was a lot of stimulus. You couldn't go out and spend money. I bought a house in Orlando, for example. A lot of people bought Ferraris. You saw their sales surge during that era, and it really hadn't cooled off.

3:23Jon Quast:And we're just starting to see a delayed post-pandemic cool-off. So, I'm not that worried, but it does still look like an expensive stock.

3:32Matt Frankel:Yeah, I agree with Matt here. I don't think it's quite worth what the market says it is, even still after the pullback. And that's nothing against Ferrari. And that's nothing against people who really like this business. I think there is a lot to like with Ferrari's business. But any stock at the wrong price can be a bad investment. And I think we can just zoom out and think a little bit about how is shareholder value created. And I think that one of the main ways it often happens is with business growth. But then you look at Ferrari and it's only expecting a 5 % compound annual growth rate through 2030.

4:06Matt Frankel:That's not a huge growth rate there. Profit margin expansion is another way that shareholder value is created. It is expecting some Ferrari, but not a ton necessarily, going from a 39 % adjusted EBITDA margin to a 40 % one. And then you think about capital return to shareholders. Now, Ferrari expects to return 7 billion euros to shareholders cumulatively by 2030. That's around 10 % of its current market cap. But of course, that's spread out over the next several years. So that's not a ton on a per annual basis. So yeah, it's not enough juice to justify the current valuation, in my opinion.

4:44Tyler Crowe:I want to kind of dig a little bit more into something you were alluding to, Matt, with kind of the luxury pull forward a little bit here, because this is the part of the puzzle I've been trying to figure out when it comes to Ferrari. And we could kind of, this could go out to a little bit more. Is this really a Ferrari problem or a consumer spending problem? Like, you know, ask you guys both, but here's what I'm thinking. On the one hand, you know, Ferrari said it's cutting its EV lineup because it's a pretty clear sign that its projected lineup out to 2030 wasn't really reverberating with its clientele.

5:20Tyler Crowe:And so it's going back to that traditional conventional engine and that distinct Ferrari sound you hear. And that's what the ultra wealthy want to pony up for when it's this type of business. Getting back to that makes sense, but it was pretty clear that they might have missed with this EV push, with it still being an uncertain product on the market. But at the same time, if you look at a lot of other luxury brands out there, LVMH, Louis Vuitton, Moet Hennessy, Hermes, I call restoration hardware, it's not quite that level of luxury, but similar sort of sentiment. None of them are really doing too hot over the past couple of years.

5:58Tyler Crowe:Part of me is wondering, is this really a Ferrari story or a people pulling back on luxury discretionary goods?

6:09Matt Frankel:I don't think it's necessarily the latter. I don't think it's necessarily a pullback broadly in consumer spending. You look at Ferrari specifically, it always has more demand than it intends to supply. It always intends to make less cars than what the market wants. That's just how the business works. And so, you're looking at, for example, Ferrari's growth rate over the next five years. You're looking at what they're projecting. I think that investors simply just want it a little bit more. And it's hard to know how big is its potential customer base. You know, there are some data points out there.

6:44Matt Frankel:You look at the world's billionaire list. It increased by 8 % in 2024. And Ferrari's only expecting 5 % annual growth from here. So maybe you would expect it to go up at least by the amount of billionaires that are going up in the world. I don't know. I don't think that it's a broad thing that we're looking at here, not necessarily a data point for that. I think that you're just looking at Ferrari's results and Ferrari saying, we don't think that we're going to have as much demand in 2030 as what some investors might have hoped.

7:14Jon Quast:For one thing, it's not just billionaires who buy Ferraris. There are at least three that I know of in my neighborhood, and they ain't billionaires. It's people who just have a taste for luxury, for the most part. To Tyler's point, the EV cut is pretty dramatic, but Ferrari is, as you mentioned, really good at not building cars that its customers don't want. I can't remember any duds that Ferrari ever released, at least in the past 20, 30 years. We are seeing people cut back on luxuries. It's common not only if consumer sentiment's low, which it is right now, but it's also a function of the interest rate environment.

7:51Jon Quast:Even if I wanted a Ferrari right now, I wouldn't be willing to pay 10 % interest to get one. I guarantee you, a lot of people have Ferraris financed them. Not everyone's a billionaire who pays cash, was my point with what I said earlier. But they do a great job, like John said, of keeping demand just ahead of supply for that reason. They tend to hold up better than most automakers. They don't oversupply their dealers. They don't put out cars that don't have long wait lists when they come out. And the last point I'd make is that for Ferraris, compared to most other cars, the used Ferrari market is very strong right now.

8:27Jon Quast:So maybe a lot of customers, they're just not buying new ones. They're going to the used market where they can get a little more for their money. So Ferrari has so many different dynamics than the average car company.

8:37Tyler Crowe:I once saw a used Ferrari for$19 ,000 in a used car lot, but I'm pretty sure it had a Honda Civic engine in it. So I don't know if that would still count as a Ferrari. Thanks for that, guys. Coming up next, we're talking about meme stocks.

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9:20Tyler Crowe:Back in 2021, Roundhill Investments really captured the investing zeitgeist with a meme stock ETF. SPACs were booming. The Wall Street Bets Reddit page was sending stocks up double digits in a matter of minutes. And there was a sense of euphoria around how the pandemic was going to turn all of our lives digital. goals, and everything was different. By 2023, this ETF, under the ticker M-E-M-E, meme, actually closed up shop because a lot of those companies didn't quite make it. But to use social media parlance from it's so over, we're so back, we are so back because Roundhill announced yesterday that it is relaunching the meme stock ETF with a whole new set of holdings.

10:03Tyler Crowe:Now, I wish we had video for this podcast, because I would like to take that iconic lineup from the usual suspects and just put the tickers over their faces. If we look at the Roundtable meme ETF, under the same ticker again, M-E-M-E, that last period during 2021-2022, it was certainly the top in terms of market euphoria in a particular set of companies. What camp are you in when we look at this new iteration of the meme stock ETF. Do you think this is an old song and dance and it's probably going to have the same results or is this perhaps going to a different rhythm?

10:43Matt Frankel:I think that people hear things like last time it was close to the top and then there was a market crash. If I've learned anything over my years as an investor, I can't predict when a market crash is about to happen, I can't predict when a market is about to bottom out and a bull run is about to start. I think that the launch of the meme ETF, it's not necessarily a predictor, a precursor of, oh, man, the stock market's about to crash. I would say it is indicative of what you said, Tyler, a lot of euphoria in the market. There's perhaps a lot of stocks that have gone up by an astronomical amount relative to the business results.

11:23Matt Frankel:I think it's good, though, to keep in mind, this isn't necessarily predicting that the stock market is reaching a top and it's about to fall. I think that this is why a lot of Fools, capital F Fools, use the always be investing framework. We can't time the best entry, the best exits in our stocks based on market conditions. There is normally something that we can find right now that's attractive that we can buy and hold for the long term.

11:48Jon Quast:Yeah, I think this is kind of the same old in the sense that you're going to have a few meme stocks that win long-term. A few. Which we saw in 2021. Robinhood was considered a meme stock back then, and its investors have done very, very well. But most will cool off and exactly what happened to most meme stocks in 2021. I almost view this ETF as being riskier than buying individual meme stocks or trying to find the ones that are actually going to be decent businesses and work out well, like the Robin Hoods of the world. You're buying a basket of stocks, and you know 80 % to 90 % of them are not going to work out well.

12:27Jon Quast:You might as well just take a chance and buy the ones that you think are going to be the winners. Like John said, I can't call a top here or anything like that. If anything, I think we're a little bit away from a top just because the people who launched this ETF, they already had the framework in place. They already knew what to look for. It's less reactionary than the first time around. Less, not completely unreactionary. I'm not investing in it, but I don't know what you guys are going to do.

12:52Tyler Crowe:On the reactionary thing, and that's actually where I kind of landed when I looked at this, and I find myself this is a looking backwards sort of ETF. When I think of meme stock ETF, it's like trying to identify the next big meme stocks that you can really benefit from their run-up. I would think that a company that wants to put out a product like this, this particular ETF that Roundhill has done, I thought they would be trying to do that instead of trying to, I guess you could say, ride the coattails of all these companies that are in the portfolio that have already had jaw-dropping returns. We have companies in here that are up 400 % over the past year.

13:33Tyler Crowe:That's a lot. And I'm just wondering if it's just trying to catch the last bit of fumes rather than being a forward-looking, trying to identify the next big thing. So with that, I do have a little challenge for us because as you've got, Matt, there's probably a couple of them in here that over the long term are going to work out. So before the show, I sent you a list of the entire MEME ETF holdings. So let's set aside valuation and market hype and all this stuff. And let's just look at the core businesses themselves. Of that list, I told you to pick one and make the best business case for them.

14:08Tyler Crowe:So John, Let's start with you.

14:09Matt Frankel:I'm glad that you let me pick first, Tyler, because I couldn't make a business case for all of the stocks in the ETF. But SoundHound AI, ticker symbol S-O-U-N, I can make a business case here. This is a 3.4 % allocation in the ETF. And I think there is a real business here. It's a first mover when it comes to AI speech slash conversation. It's used by many of the top auto companies for its tech, for voice controls in the car. Many top restaurants use it for ordering at the drive-thru, for example. And the thing is, it has nearly 200 patents, which does give it something from a competitive standpoint.

14:51Matt Frankel:And it's also growing like crazy. It expects to generate at least$160 million in revenue this year. That would be up roughly 100 % from what it generated last year. Look, the stock valuation is something that I question. There are ongoing losses here. That's an issue. But there is a real business here.

15:09Jon Quast:I was actually narrowing it down to the two on the list that, to me, are not real businesses yet. And that's QuantumScape and Oklo. And I went with Oklo. They are a pre-revenue nuclear reactor company. They're building small-scale nuclear reactors. Generally, the thesis here is that the latest tech trends, specifically AI, are going to have a lot of power demand that really wasn't accounted for. Even the future power forecast from 10 years ago, AI power demand wasn't included. No one wants to build the old dirty sources of power. The newer renewable sources of power, like solar and wind, may not be able to meet all the demand by itself.

15:48Jon Quast:Nuclear is a very, very natural option. The problem is, it takes forever. There's a lot behind the scenes that goes on with building big nuclear plants. They're trying to build smaller nuclear plants to be more local to where these data centers and things like that are. They're building a prototype right now. It's called a small modular reactor. The first revenue is a couple of years away. The first profit isn't expected until 2030. They might not even have enough revenue on their balance sheet to get there. They have a little over half a billion dollars in the bank. It's estimated they're going to need a billion to a billion and a half over the next five years in just cash burn.

16:29Jon Quast:But at the current valuation, they'll have no problem raising that. It's about a$20 billion market cap. And this is really a lookout to 2050 stock. It's not about what it's going to do in 2030 when it's generating its first dollar of profit. It's a lookout to 2050 stock where if they could figure out how to make these small reactors viable and profitable, there's a massive opportunity here with the ever-expanding power needs of AI. So that's one that I think could turn into a really interesting business. I think the$20 billion market cap, kind of, as you said, for all of these, the valuation is a little bit stretched, to put up mildly.

17:09Jon Quast:It's 10X, more than 10X in the past year. That's one that I think will be really, really interesting to watch, just because I really like the technology and think it does have real potential.

17:19Tyler Crowe:The one that I actually found the most interesting, at least from a business perspective, in that similar vein on the power growth, demand for electrons, I guess if you will, especially with AI and everything that we've been talking about over the past couple of shows. I went with Bloom Energy, it's a hydrogen fuel cell manufacturer, that same idea. Fuel cells are going to be part of the backup, spare power, not quite baseload, a little bit of a similar vein of an electric battery in terms of storage and on-demand power for data centers. Because when it comes to data centers, you need 100 % uptime.

18:00Tyler Crowe:There's a lot of going on in the background to make that happen. Bloom Energy just happens to be one of the ones that can effectively deploy things relatively quickly, which is actually getting harder and harder when it comes to building out these facilities. The best part about it is over the past 12 months, it's actually profitable on a gap basis. It's actually earning earnings per share. I think of all these, it is the most profitable, at least compared to what else is on the list. Yeah, valuation is way out of hand here with the meme stock rally carrying it. But this is a real business and it's actually growing at a pretty good way.

18:39Tyler Crowe:After the break, we're going to wrap up with stocks on our radar that a little less meme-y and a little bit more business. As a podcaster, my voice is heard by thousands.

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19:20Tyler Crowe:That was our Thursday tradition. We're going to be doing stocks on our radar. I know we just talked about meme stocks, but we're going to try to get a little bit more down into the business, the things that probably stick to our knitting, I guess, if you will. So Matt, why don't we start with you and then we'll go around the horn. Yeah.

19:34Jon Quast:The stock that's on my radar right now is Target. I mentioned this one a while ago, right after it reported earnings and the stock went down. It's gone down even a little bit more. Its yield is about 5.1 % right now, close to its highest ever. Trades for about 10.5 times earnings. It's down for a good reason. Consumers have shifted away from Target, which is a little bit more of an upscale big-box retailer toward Walmart, which is common when consumer sentiment is low and It just favors discount retailers. They have new leadership now. They're making the necessary moves to get back on track. Target has a very strong history of navigating difficult environments for the business, including the pandemic.