IPO Season: Why Patience Is The Name of the Game

0:01Travis Hoium:It's IPO season and we're going public with our takes. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium today joined by Lou Whiteman and Jason Moser. Guys, we are going to get to the IPOs that are coming up. They're coming fast and furious and the numbers are huge. But I did want to get your thoughts on the market today because we've had kind of a, the entire story over the past few months has been everything AI related, these bottlenecks, these stocks are going absolutely crazy. Today, the NASDAQ, as we're recording, down almost 3%. The Dow, interestingly, close to flat.

0:41Travis Hoium:So some of these kind of unloved, you know, industrial stocks, not doing all that much, but these hot technology stocks are just taking it on the chin. What do you think is going on today? And is this a real reverse or just kind of a one-day phenomenon? Yeah, I was saying, how do you like me now, right?

0:56Lou Whiteman:With all of that. And look, this is arguably healthy, is one read on it, because when one thing goes up indefinitely, it's bound to not last forever. So if we can have some sort of leveling off during a bull market, that is sustainable for a bull market. um nasdaq is up three percent over the last month even with today whether or not this is the beginning of the end or just a blip i think we'll see none of us know that i think what we're learning is and this is all coming off of broadcom and we're talking about this as far back as nvidia the market is less impressed quarter to quarter with pretty amazing ai related numbers we're just kind of i don't know if we've normalized it or we've come to expect it or we just kind of believe this is great, but even if it plateaus for a while, it can't keep going up forever.

1:48Lou Whiteman:Maybe all of the above, but we're just not getting as much juice out of the day-to-day AI trade, at least this week as we have. Again, does that continue? Tell me what AI does in the next few weeks. Tell me when Anthropic releases their actual -

2:08Travis Hoium:The world-destroying model.

2:09Lou Whiteman:Or even their numbers. If the rumors are true and they're doing 50 billion right now in recurring revenue and it's jumping 2x, that might be the next spark. I can't get too caught up in the moment, but you should at least notice what's going on so you're not blindsided if this is the beginning of something.

2:31Travis Hoium:Yeah, Jason, you know, I like to look at the history of these kinds of things. and I was investing back in the dot-com bubble. And going back on some of our live shows, one of the interesting things was the peak from a stock standpoint was not the same as peak from a company performance standpoint. And this is where we talk about the market being a forward-looking mechanism. But if you look at Cisco's performance, Cisco's stock peaked six months or a year before the company stopped growing the way that they were, 100 % plus a year. So is this sort of the market going, hey, these customers are now talking about we got to be a little more efficient.

3:12Travis Hoium:Maybe we don't want to spend so much on this. And then extrapolating that out to maybe memory prices don't go to the moon forever. Maybe demand for chips is not infinite. Is that maybe what the market is thinking about today? Well, I mean, I think at some point that has to be central to the conversation. I mean, you look at some of these companies, the way they performed over the last year. I mean, look, little companies like Coherent and Lumentum, right? I mean, companies that know, people didn't know those two companies. I know them because I'd recommended them in a couple of our services, but that wasn't based on the AI trade.

3:48That was long before the AI trade even really became a thing. But if you look at over these, just this last year, the last 12 months, Coherent is up better than 400%. Lumentum is up better than a thousand I mean, there is just so much enthusiasm there. So we're seeing valuations start to reach levels where you got to ask some questions. We just saw the Continuum IPO yesterday that's been out from Honeywell. I mean, I think that's the company that's value around$15 billion market capitalization. Now, it generated like$30 million in revenue over the last.

4:21Travis Hoium:I was going to say the revenue rounded about to zero. Yeah, exactly. So, I mean, there is, yeah, there is a lot of forward looking going on right now. And I think, yeah, the questions regarding the ROI on some of this spend, right, the ROI on this AI investments that companies are making, as those questions start to grow louder, I think that we're going to see a little bit more focus on these valuations. And, yeah, they don't go up forever. But it does seem like that just the enthusiasm has not waned yet. Yeah, well, maybe there's a little bit more rationality coming into the markets, at least over the past couple of days, where there's a little less rationality is in the IPO market.

5:03Travis Hoium:So let's move over to that side of things. SpaceX is coming in the next week or so, it sounds like. So this is going to be potentially the biggest IPO ever. Still looking at nearly a$2 trillion valuation. I still can't believe those numbers and that it's trading to be trading for somewhere around 100 times sales. We talked a lot about SpaceX on this show over the over the past couple of weeks. But, Lou, I wanted to start with just some of the mechanics, because I think this is what gets a little bit confusing is these are massive IPOs. But where does that money come from? Where is there just, you know, 80 billion dollars sitting around for SpaceX and then another, you know, 60 to 100 billion for Anthropic?

5:45Travis Hoium:And then we've got potentially open AI coming later this year. Is that money just sitting around somewhere waiting to be put into the market?

5:52Lou Whiteman:Well, I think Jim did the research for me, so I want to give him credit. But yeah, about$8 trillion right now sitting in the US money markets. The money exists. Now, that's kind of a weird... I mean, some of that money is not going to go... A good bit of that money. I know my money market money isn't dying to get into the equity. So I don't think that's a total pool. but there is always money available even at these levels these are huge massive ipos though uh the thing to think about too is there's a other side of that coin and this could take time to level out but even if there is a great sucking sound where this takes attention from other opportunities there's a lot of built-up equity in these companies from the just the investors that were in before the IPO.

6:42Lou Whiteman:Over time, and it's kind of with SpaceX, it's kind of shaky, you know, when, but these investors will at least have the option of liquidating some of their stake, all of their stake. I would wager that over the next six months, as much money will be taken out of SpaceX as money put in. So over, you know, as a long-term investor, I'm not really worried about just this IPO sucking all of the life out of the other investments. But if nothing else, it could cause volatility in the near term because it isn't going to be a one for one. There's not going to be like 80 billion of fresh capital coming on to just offset whatever is bought up on day one.

7:21Lou Whiteman:So it's going to be ugly. It's going to be volatile. It's going to just cause all sorts of turbulence. But I would think of it more as like if you're at the beach and a boat goes by and you get bigger waves for a second, not like, you know, a long-term thing. We'll see what becomes of it all. But I do think the market can handle it whether or not it will be smooth this is not a no wake zone is what you're saying right yes very well the other interesting piece of and i think spacex was the

7:52Travis Hoium:impetus for this but jason we've got rule changes to indexes it sounds like that's been kind of pulled back even in the last 24 hours or so as we're on the s &p side well yes on the s &p side So, you know, SpaceX may end up in some of these indexes, which means that people who are buying index funds are going to be piling their money into these IPOs, whether they realize it or like it or not. Yeah. But the other thing that I thought was interesting is that even a company as conservative as Fidelity is lowering their requirements. I mean, we've seen, you know, Robinhood and SoFi are, you know, trying to get into the IPO game.

8:28Travis Hoium:You can buy a share or two here or there. Yeah. But Fidelity is, you know, kind of a bigger player, bigger accounts there. And they're even lowering the threshold to get into some of these IPOs. So how do you think about that as an investor as they're really leaning on retail? Yeah, well, I'm glad you brought that up. That was something I wanted to mention because all these rule changes and exceptions kind of chapped my hide. I mean, I don't really – it doesn't sit well with me. I kind of wish that they were playing a little bit more with the rules that everyone else has been subjected to. But, yeah, the Fidelity thing where they're lowering that limit.

9:01I mean, it can be anywhere from$100 ,000 to$500 ,000 in some cases. They're lowering it down to$2 ,000, which means that, yeah, the retail investor is going to have an opportunity to get into this. And that's, I think, clearly why they're doing it. And I think that's where they need to be really, really careful. I mean, I'm kind of of two minds when it comes to SpaceX. I mean, on the one hand, I do really think this company is one of one. I mean, it is a unique company, and I don't think that what they have is very easily replicated. But by the same token, you look at the state of the business today and you think, all right, well, I mean, how in the world it commands this valuation is beyond me.

9:43And that's where I think retail investors would be better served to, hey, just kind of sit and wait. Give this thing some time to play out. This is a company I'm going to enjoy following because I love space and all that stuff that comes with it. I'm not saying I won't ever own shares. I possibly could, but I can tell you that I'm going to wait at least a year before I ever even consider it because there is just a lot of moving parts that comes with this company. And it does seem like there's been some just sort of, I don't want to say impropriety, but they're trying to massage the rules and make all these things happen.

10:16And it's for a very obvious reason, right? I mean, they're trying to raise as much capital as possible. I get it. But yeah, it's, it's, it's, it's, it's, you just got to go into, I think you got to go into situations like these as a retail investor. I think it's, it's healthy. It benefits you to go in with a healthy dose of skepticism.

10:34Lou Whiteman:Yeah. Thing is, I don't even think they're trying to raise more capital. I think they're trying to just hit a target valuation, which is just more frustrating. Look, I could make a very uninspired academic argument for why maybe the index changes. make sense. I just don't think the rules were written envisioning IPOs of this size. And if you're going to represent the market, you kind of have to include$2 trillion companies. So I can at least, I agree with you, J-Mo. I will tell you what really gets my blood boiling. I don't know if you've gone over to the kind of roadshow site where the SpaceX will give you their roadshow, but the top of that website, there is a click, open a brokerage account here with all of the underwriters you can go in.

11:20Lou Whiteman:And I know we are not supposed to provide individual advice to anyone, but I dare say, if you don't currently have a brokerage account, like, so that is your experience with stocks, please, please, please think twice before opening a brokerage account just to jump into this IPO. It seems like that is the worst form of investing to say, to go, this is literally going from I've never driven before to, hey, NASCAR looks fun. Well, and we're going to see a lot of the same sort of hubbub with with anthropic and open ai right i mean they're coming so i mean

11:55Travis Hoium:definitely be something for us to watch but i think you know i i agree with you this is something i'm going to be sitting on the sidelines for a while uh even those index funds i'm a little bit concerned about about what happens there and the history of some of these ipos even these massively popular and eventually very profitable ipos is not great you know coinbase coinbase dropped. Facebook dropped around 50%. There are a lot of these very well-known companies that don't perform very well. Don't look at the first day move. What happens six months, 12 months later? That's why waiting maybe isn't the worst idea.

12:31Uber, same thing. Yeah.

12:34Travis Hoium:There's a chart going around this week that showed dozens and dozens of huge IPOs weren't a great time to buy on that opening day. When we come back, we're going to talk about the autonomous future. You're listening to Motley Fool Hidden Gems Investing. In a world full of noise, long-term thinking stands out.

12:52Lou Whiteman:On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc.

13:10Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. As recently as 12 months ago, the future of autonomous driving was supposed to just be Tesla and they were going to dominate the market, have effectively a monopoly in robo taxis. But that is not the way that things have played out. And over just the past year, it's been fascinating to see how quickly some of these companies and partnerships have advanced. Companies like WeRide, AVRide, you have the you see this industry playing out? Is this one of these huge growth industries where there's going to be lots of winners or is there just going to be just kind of a battle for market share over the next five to 10 years?

13:56Yeah, that's a really good question. I mean, it does seem like there are all sorts of sort of like startup companies that are getting into this space and partnering up with bigger players in the space. And I mean, it's something that clearly it's there, right? The technology exists and i think it's going to be something that serves some parts of the country very well and there are other parts of the country where it's not it's not going to really be a thing

14:18Travis Hoium:and i don't think we're is that is that a direct shot at the minneapolis area no no no no i'm not taking shots at anyone i love everybody you know but um i i do think it's just you know i mean you gotta look past also like what does having a driver's license and having a car represent to the individual, right? I mean, there are a lot of people that want that license and want to be able to drive because it represents freedom. You can get behind that wheel and go wherever you want, whenever you want. There's still a lot of questions regarding technology, right? I mean, we're seeing just more and more articles every day of Waymo's going through, you know, deep standing water and causing trouble.

14:59I was just reading a headline here earlier today about a Waymo in Dallas. Dallas Police Department was responding to just some big explosion. And on their way to deal with that, right, they came across a Waymo car that I guess was attempting to do like a three-point turn in the middle of the road and then got stuck. And so it just was sitting there blocking the road. That's what it does. Exactly. I mean, it's blocking the road. The police officer has to get in. He can't do anything because the car is locked up. So then they have to go, you know, get in touch with Waymo and Waymo unlocks the device so that he can then get in there and actually manually move the car out of the way.

15:35I mean, just those things happen, right? And so, I mean, I think there is going to be a level of hesitation on a lot of folks' part until we see just some sort of redundancy and confidence that these things are just going to be truly safer than someone being behind the wheel. Now, that obviously some people drive better than others. So I'm not putting everybody on a level playing field there. But yeah, I think Waymo has clearly witnessed a lot of success so far. I mean, Waymo, what revenue grew from$125 million at the end of 2024 to$355 million by February 2026. And, you know, that's a company that's benefited a lot just from the Google relationship, right, being a part of Alphabet.

16:18So there's a tremendous capital resources there and they can kind of tuck those results in. So they don't really have to be so obvious. But Tesla, I mean, it's really weird to me to see Tesla almost taking a backseat to this now. Like you just don't hear much about Tesla anymore. And I wonder if Musk is doing that on purpose, but obviously he's got a lot of pokers in the fire as it is. Yeah. So it's very distracted right now.

16:45Lou Whiteman:Right. Right. And yeah. And JMO, I know exactly that Dallas story. I was late for a reservation in Atlanta not long ago because of a Waymo trying to do a three point turn and not doing it well. I couldn't figure out if I should be impressed that the robot was trying or or. But but look, I think to your point, whether or not I haven't heard Elon talk about making money off your car for a long time. And I feel like that dream is dead. It probably was always impractical for insurance and other reasons. I personally don't want some drunk stranger coming home in the backseat of my car while I sleep.

17:16Lou Whiteman:I don't know if that's... But the focus, it feels like, right now is driver assist on the vehicles we own and robo-taxis where it makes sense, which is a very, very different market opportunity.

17:29Travis Hoium:That almost seems rational. Right, right.

17:31Lou Whiteman:And it's still a very big market opportunity. I think Waymo is certainly out in front. I think Uber is well-positioned for now, but I can't help but wonder, Waymo, it feels like they have the opportunity to bypass the middleman with Google Maps, Gen and I, personal assistant, all sorts of things. So I don't know how long Uber's moat here lasts. I also think just the bigger automotive picture, if you look at tariffs, if you look at like just what American consumers want versus the rest of the world, it feels like we are kind of ending up splitting the whole industry, including autonomy with what the Chinese companies are doing, where the American companies are well positioned in the U.S.

18:09Lou Whiteman:and only the U.S. and the rest of the world is sort of going in a different direction. I mean, the good news is the U.S. is a huge market, but I mean, I know Waymo is trying to get into London. I think if I'm Alphabet, maybe even if I have to slow my roll in the U.S., I'm trying to go international because it really feels like the international market is just moving away from the U.S. companies in a lot of ways.

18:32Travis Hoium:The other question that we may get an answer to by the end of next year for sure is how many players are going to be viable in this space? If you're, I'm an investor in Uber, and part of that thesis is there's going to be dozens of companies who are going to be making these vehicles, not just Waymo. But we'll see if that's true or not. Maybe Waymo does have a big moat here. When we come back, we're going to talk about some of the predictions about today's market. You're listening to Motley Fool, Hidden Gems Investing.

19:00Study and play.

19:01Travis Hoium:Come together on a Windows 11 PC. And for a limited time, college students get the best of both worlds. Get the Unreal College deal. Everything you need to study and play with select Windows 11 PCs. Eligible students get a year of Microsoft 365 Premium and a year of Xbox Game Pass Ultimate with a custom color Xbox wireless controller. Learn more at windows.com slash student offer. While supplies last, ends June 30th. Terms at aka.ms slash college PC. Welcome back to Motley Fool, Hidden Gems, investing. There's been a lot of predictions about the market, a lot of stories being told about a lot of the stocks that we maybe own today.