Mag 7, Markets, and Mailbag with CEO Tom Gardner

0:02Tyler Crowe:57 % of the MAG7's earnings today on Motley Fool Hidden Gems Investing.

0:09Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing, new name, same great investing podcast. I'm Tyler Crowe, and today I'm joined by longtime Fool contributor Jon Quast. And we have a special guest today, Motley Fool CEO Tom Gardner. Tom, thank you for joining us today. Pleasure to be here. I want to put you on the spot because we just did the name change to Motley Fool Hidden Gems investing. Give me the quick elevator pitch with the name change. Well, the spirit of our podcast of The Motley Fool, our Hidden Gems Investing Podcast, and our Rule Breaker Investing Podcast is to present our two primary approaches to long-term investing.

0:42In the case of Rule Breakers, it's to look for innovative breakthrough businesses. And in the case of Hidden Gems, it's to really look at the ownership, leadership, and the financial management of companies on a growth path. Both styles are very similar, but in that they both share a passion for holding stocks for the very long-term, being investors in the stock market throughout our entire lives. But we have two different wrinkles on how to look at companies, and we love having those two different brands in The Motley Fool, and they're expressed here in podcast form.

1:10Tyler Crowe:Great that we get to do this on this podcast. And for today, on the docket, we're going to pull a question out of the mailbag that we're getting lots of responses for. We're going to do what we're calling Tom's mystery box topic, because he's the guest of the honor today. But first, we're going to start with the magnificent seven earnings, or specifically four out of the seven, because within the past 24 hours, or at least since we posted our last show, we've had Alphabet, Amazon, Microsoft, and Meta all post results. And it's remarkable how the market seems to be playing this, one of these things is not like the other right now.

1:42Tyler Crowe:Go up and down the press releases for all four of these companies, and you more or less see the same thing. Massive top and bottom line beats of analysts, to the point where maybe Wall Street analysts are bad at their jobs. You've got cloud revenue for all of these companies growing 20 % to 30%, and all are raising capital spending plans for 2026. Maybe not for the reason people were hoping, but big raises nonetheless. And yet the market reactions, we have Alphabet up 6%, Amazon's about down 1%, Microsoft down 4%, and Meta down a whopping 10 % as we're recording. John, I'm going to go to you first.

2:16Tyler Crowe:As far as what you saw, these similar reactions across the board. What were some of the big themes across all four that you saw? Well, for sure, three out of these four companies that you just mentioned, Tyler, are the large public cloud providers with Microsoft, Amazon, and Alphabet's Google Cloud. As you look at these three businesses, all three of them posting just massive growth, some of them acceleration on a scale that it's hard to comprehend. We're talking tens of billions of dollars added. You look at Microsoft Azure, for example, 39 % year-over-year growth, but its AI, annual recurring revenue, that portion is up over 100 % year-over-year to$37 billion.

3:00And you look at Amazon AWS, 28 % growth. That's its best in over four years. And then here's the real surprising one. Alphabet's cloud revenue, up 63 % year-over-year. If that wasn't impressive enough, you have spending commitments, you have performance obligations, you have a backlog with this kind of a business. And Alphabet's backlog nearly doubled in a single quarter. We're talking a$460 billion backlog compared to$240 billion in the previous quarter. That tracks with what AWS is reporting as well. It added$120 billion to its backlog in a single quarter. So we're talking hundreds of billions of dollars added to future spending commitments for the public cloud providers.

3:44And that is just massive.

3:45Tyler Crowe:These have been walloping numbers. As we were hinting at, this is hidden gem-style investing. Looking at the Magnificent Seven, the most probably well-known companies in the world, there always can be some misunderstood or hidden aspects of what is with these companies. Tom, I want to go to you and say, when you look at these four companies, differing reactions in the market for quarterly earnings, but on a long-term basis, they've all been incredible winners. When you see these four companies, what are some of the hidden aspects that you see, or perhaps the misunderstood parts that as you as an investor are looking at these and be like, you know, these market reactions are probably not what I'm seeing when I see these massive growth and spending backlogs.

4:28Well, I think that the market is actually responding reasonably accurately, I think, at least in the short term to what's playing out. Remember, as John pointed out. Microsoft, Google, and Amazon, because of their cloud businesses, are racking up incredible backlog numbers. And those backlogs are, you know, this is enterprise cloud revenue. This is very high quality subscription revenue. And the demand for AI enterprise right now is off the charts. Meanwhile, Meta does not have a cloud business and does not have backlog. Its business is advertisers. And advertisers can cancel in difficult economic times.

5:07So the quality of the revenue across these businesses is very important to distinguish between the companies. Then I will just add that the CapEx spend, so not only are we talking about the quality of the revenues, but the CapEx spend that is so dramatic. We're talking about these four companies collectively spending over$600 billion in CapEx this year. We've never seen anything like this in human history on this scale. But when we talk about Meta's CapEx, they're spending, again, against advertising markets where there are some real questions about consumer confidence. And, you know, the consumer drives 70 % of the U.S.

5:47economy. It's a very different thing that's developing at Microsoft, Amazon, and particularly Google right now, again, with that enterprise spend. When they spend CapEx at Google, Microsoft, and Amazon, they're trying to catch up to cloud demand. They're basically saying our numbers were lower than they should have been this quarter because we cannot meet the demand. The same is not true for Meta right now in their CapEx. They're spending more into zones of uncertainty out there. So I think the market reaction has been accurate. And I will just say, again, the AI solutions is the primary driver.

6:23Let's take just Google Cloud. That's where the real business growth is. And these enterprises across every industry now are racing to introduce AI solutions into their product solution suite in life. And so these are lucrative, resilient, and very distributed spends for a company like Google. I'm not surprised to see the stock up here. And I think Google's business is looking very, very good today.

6:53Tyler Crowe:I want to drill down into something that you talked about with capital spending. It's over$600 billion for these four companies alone. If we extend out to the whole Magnificent Seven universe, we're talking almost three quarters of a billion dollars in annual capital spending on all of this. All these companies raised their CapEx spending for the year, but it wasn't because they're like, we need to build more. A lot of what they were saying they're raising it for was the prices of things are going way up. John, you mentioned in some of our show notes beforehand, memory costs are going way up, but it's all the downstream effects that we're seeing, talking about even down to the electricians that are doing the installations and stuff like that.

7:37Tyler Crowe:So I want to pose this to both of you, and I'll start with Tom and then we'll go to John. When you see these massive raises in capital spending, do you see that as risks for the big spenders or opportunities as investors in those downstream sort of companies that are building out the AI infrastructure? Well, I do start by seeing incredible opportunities downstream. I mean, we're seeing the AI infrastructure build out, as you mentioned, the costs of memory are rising. So companies like Micron, what an amazing stock it's been. I mean, this is a company that has been through incredible cycles in its history.

8:14It's now looking an evaluation in the hundreds of billions of dollars at Micron. So I really like to look downstream. There is a part of me that wonders when we're going to get some government intervention on the MAG-7, because these are truly some of the largest monopolies. They're competing with each other. They're also drawing a lot of free data from the general public. And I think there are going to be pressures coming to bear on some of the mag seven companies, uh, from a regulatory standpoint, and maybe, maybe not in the immediate future, but I mean, it's got to be coming, but downstream in this capex spend, I mean, you have, you have construction companies, you've got a, you know, HVAC cooling, you have just tremendous opportunities in subcategories like photonics.

9:02Uh, there, there, these spends are going to have a dramatic impact, uh, downstream on companies that maybe they were somewhat flat-line businesses, and now the electrification boom is turning them into high-growth, margin-rising companies with rising returns on invested capital. So I'm continuing to look downstream for investments. But I'd say out of the group that we've talked about so far, certainly I'm most interested in Google coming out of these earnings. One of the interesting things here for me, Tyler, is yes, Amazon said, quote, memory has skyrocketed. Meta pointed out that when it increased its guidance for capital expenditures, the majority of that is due to higher component pricing, particularly memory.

9:43Microsoft said that$25 billion was added to its CapEx, and a lot of that has to do with memory as well. And you look at that and you start questioning, okay, what does that mean? Counterintuitively, perhaps, this is actually good for the public clouds, and here's why. Okay. Dell has talked about how many of these large enterprises really want to try to control their costs more and bring some of the AI compute in-house with on-premise servers and things like that. But when the component pricing is skyrocketing as it is, it actually can drive people to these public cloud companies. And so I think that's a lot of what we're seeing here in the incredible rise in the backlog.

10:23Some of these enterprises are saying, man, maybe we can't do this on-premise like we thought we could, and we were going to need more compute from these public cloud companies. So the higher memory costs and the higher component costs, yes, it does increase the CapEx, but perhaps it does make these public cloud services even more attractive.

10:40Tyler Crowe:I would love to drill down on this a little bit more, but we actually have that in our mailbag later on the thing. So coming up next, we're going to open up Tom's mystery topic of the day. Get a concise daily market preview from Charles Schwab, including stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less. Listen today at schwab.com slash market update podcast or wherever you get your podcasts.

11:18That's schwab.com slash market update podcast.

11:21Tyler Crowe:Obviously, since we have the CEO of The Motley fool with us here today. We gave him guest honors and said, since you are the guest, we wanted to leave it open to you and say, what direction do you want to go in? And we'll really go like unscripted off the cuff. So Tom, what is the mystery topic of the day? The mystery topic of the day is consumer sentiment. When we look at the University of Michigan's consumer confidence scores, I mean, these are analysis across 600 households. The scoring system has gone back to 1952, and we are at the lowest reading in history. Typically, this sentiment score might break down along political lines, but of course, it's scoring income and age and education as well as key factors.

12:09And yet, all categories are showing numbers at historic lows. So the economy right now is being powered by super tech. And those large technology companies are also setting some signals to the marketplace by cutting the size of their workforce as they're growing. And, you know, you see Meta laying off 8 ,000 people and cutting back on 6 ,000 jobs it had listed while, you know, spending tens of billions of dollars in CapEx. So the drive to AI compute is a much more aggressive spend in society than the drive for employment. And we're just seeing that rippling in the white collar market right now and in large tech.

12:56But what's going to happen with the impact across the marketplace as this spreads out across every industry? And we see that AI tooling really does drive greater productivity gains, will deliver higher gross margins, higher operating margins, higher returns on capital for a lot of businesses. But the question is, what will happen to the labor markets with all of these automations? We're all asking this question. It's showing up in the sentiment studies now by the University of Michigan. And so consumer confidence is at historic lows. And I would just say that we're in the zone today where we're getting almost true Pareto principle on spending, where 20 % of households are spending and are controlling 80 % of the wealth in the U.S.

13:42And my concern is what happens if the labor market begins to fall, because we obviously still have persistent inflation, a number of other gas prices on the rise with the conflict in Iran. So the question that I ask is, what happens to the consumer that is driving 70 % of U.S. GDP historically? And I think these confidence numbers out of the University of Michigan are pretty concerning.

14:08Tyler Crowe:One of the things that I have noticed, because in that similar vein that I've been following, if you watched the consumer sentiment survey for, I don't know, probably maybe up until like four or five years ago, or two or three, you could almost do an inverse correlation of consumer sentiment to gas prices. And it was like almost a perfect mirror. You know, rising gas prices, consumer sentiment would fall to the floor. And it was only a couple of years ago, again, when we started seeing a lot of this AI anxiety, I guess you could say, in society of labor, consumer sentiment. You started to see this decoupling where we would have relatively low gas prices, but consumer sentiment continued to decline.

14:50Tyler Crowe:And it's been a fascinating topic of how the, number one, maybe gasoline is not the end-all, be-all price signal that people used to think of in terms of consumer anxiety anymore. Perhaps they are looking at other things like healthcare costs, insurance costs, a lot of the other things that have been rising at rates above inflation for quite some time. and yes, there's been relief elsewhere. A lot of durable goods prices have, at least in terms of total spend, have gone down. But a lot of them call them the things in our lives that don't necessarily spark joy, like buying your health insurance or your housing, have gone up at rates kind of disproportional to what we are normally used to.

15:33Tyler Crowe:And so there's just this additional layer on top of what you're talking about because you have jobs anxiety as well as, you know, the household, no joy costs seem to be going up as well. Well, I mean, certainly, Tyler, there's there is what we call non-discretionary spending, right? And that's kind of what you're talking about. It doesn't necessarily bring us happiness, but we need to spend it to survive. We need to spend it just to live. However, I would say there's a lot of contradiction out there in the in the data. I mean, on one hand, we are seeing that the sentiment is low. I think that pessimism is high.

16:06And yet at the same time, you do see some non-discretionary spend continue to hold up quite good. And just as one case in point, look at Carvana reporting yesterday after the bell, reporting a record number of cars sold. And as I understand the used car market right now, prices aren't exactly great if you're a buyer. The financing terms aren't fantastic either. And so it's not necessarily an ideal market to have a sudden surge in used car purchase activity. And yet Carvana really knocking it out of the park with the number of vehicles sold. And so that would seem to kind of contradict this low sentiment and then buying cars and then gas prices could continue to rise.

16:52That's always out there on the horizon. So it's hard to know what to make of this exactly.

16:56Tyler Crowe:When you see these sort of signals, consumer anxiety, perhaps, like you said, going to Carvana, maybe used cars instead of new cars, and spending going to the unessential places. Is that to you any signal in terms of like, perhaps I want to be holding more cash in my portfolio for opportunities, maybe some of my more highly valued companies, I'm going to take more look at perhaps trimming those. How does what we're talking about here with the theme of consumer anxiety, low sentiment affect your portfolio and investing decisions? Well, I think we always have to put things in the context of valuation.

17:36So we have to remember in some areas where there are declines or flattening out, maybe the valuations have moved below those realities. And now there's going to be a long term opportunity to invest. But I would say that what we're looking at today is an enterprise world, that the safest places to invest right now are in the CapEx boom, the AI infrastructure boom. Valuations are rich, but demand is unlimited. So I would be looking at the infrastructure build out, B2B spending, enterprise driven revenue. I think when we start moving into the category of the consumer and how the consumer will spend, it's not just the layoffs that we see coming through from large tech.

18:19So those are big headlines that we're all going to keep seeing because these companies are going to continue to remap their employment towards the automations that they're seeing. They're the most advanced technological companies in human history. And they're telling us it's the canary in the coal mine. They are letting us know automation works. We're not going to need as many people on the payroll to complete massive amounts of work. Right. And so I think that that is a headline signal that is causing the consumer to worry now downstream of the large tech companies. And if you have friends that have worked in some of these companies, you know that they had salaries and a couple hundred thousand dollars and they then they've exited out into the marketplace and they can't find comparable jobs at the same salary level.

18:59So I think what we're going to see is an increased caution in the consumer spend. So I would be looking at anything that's discretionary, travel-related businesses, any big ticket items, automobiles, big renovations. I think that what we're looking at is this bifurcation in wealth right now that is getting to somewhat extreme levels in the U.S. and around the world because of the technological boom. And we have to begin looking at the health of the consumer and the companies that we're investing in that we're counting on those consumers to spend towards. One thing here that is somewhat related, we were talking about gas prices.

19:40It does not seem like the conflict in the Middle East is ending as quickly as everyone had hoped. It does seem like maybe the gas prices will stay higher for longer. And that is kind of interesting to what Tom was just talking about when it comes to travel. There does seem to be some chatter that's starting around, what are my summer travel plans? Am I going over to Europe? Am I going overseas on a vacation? Or am I staying here in the U.S. because of how high fuel prices are getting? Am I having more of a local vacation than a long-distance vacation? And it does seem like that could be something to watch.

20:17So generally speaking, I don't make many changes in my portfolio based on, you know, kind of short term data and how sentiment is because sentiment changes fast. But that's one thing that I am watching. What's going to happen with summer travel? I think that there could be some changes there. Now, this may not be allowable in our format, but I would like to know what Tyler thinks, too.

20:36Tyler Crowe:One of the things that I agree to a large extent on the downstream effects of the AI build-out that you were talking about, Tom, that seems to be the growth megatrend that is relatively immune to consumer sentiment because enterprise spending is going to be wholly tangential to what's happening on the consumer market. As far as consumer sentiment, one of the things that I as an investor tend to do in these situations is look a little bit like the Maslow's hierarchy of needs. And so when I do look at the consumer spending levels, it is going back down to the grocery stores of the world, the durable spendings, the Walmarts, the Targets, things like that, where the wallet share is going to be a bigger proportion there as people start to prioritize their spending in places like that.

21:23Tyler Crowe:And so that seems to be the big trend that I would be focusing on in this in general. But as to John's point, I'm not going to be making any drastic portfolio changes in the next couple of months based on what we're seeing, because to John's point, we could be moving along rather quickly in terms of sentiment. Coming up after the break, we're going to jump into the mailbag. 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.

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