Making Sense of Market Hyperbole

0:04Tyler Crowe and Matt Frankel

0:05Tyler Crowe:Making sense of market headline hyperbole, the space industry is taking off, and companies are still posting surprisingly strong earnings results. This is Motley Fool Money.

0:20Tyler Crowe:This is Motley Fool Money. Thanks for listening. I'm Tyler Crowe, joined by longtime Fools Matt Frankel and Jon Quast. You know, we've got a pretty busy slate today. We're going to cover big earnings from Sea Limited, Circle Internet Group, and DLocal. And we're going to tackle some of the most significant developments in space investing in quite some time. But first, we're going to talk about animal spirits and kind of take a pulse of the market, because I think it's something really on people's minds lately. Now, gents, you and I have been writing about companies in the market for several years now.

0:50Tyler Crowe:And one thing our editors love is when there's gigantic numbers in the headlines. Now, John, when we were doing a little show prep, you showed us going in and said there were some rather large headline numbers that made your eyes pop out a little bit. What'd you see?

1:06Matt Frankel:Well, it regards money on the sideline, Tyler. The most recent number that I've seen here is that there's$7.4 trillion in money market funds, which is far and away a record high. This is money that could be invested in stocks, but right now, it's just sitting there and passively earning interest. I think the knee-jerk reaction to a number like this is that maybe stocks could soar if investors decide to suddenly move that money out of money market funds and into stocks. Maybe when the Fed lowers the rates, that will be incentive enough for people to change up their strategies, and then stocks will moon, as the kids say.

1:44Tyler Crowe:As the kids say. Certainly not the three of us are saying that, because that's way beyond our age category. But, Matt, when it comes to big headlines, and getting back to our editors, we actually got to deliver on what those numbers mean. When we hear$7.4 trillion, it sounds like a lot, but in context, is that really a lot compared to what the market is?

2:06Jon Quast:I mean, it is. Just to run down some of the numbers, there is roughly$60 trillion in U.S. stock market valuations combined. That means more than 12 % of it is in potentially investable money sitting on the sidelines. As long as interest rates remain relatively high, I don't see a big rotation into the stock market. It is likely to be gradual over time. You get a quarter-point rate cut, some of it would come into stocks. It wouldn't be$7 trillion jumping into the market at once. But if risk-free interest rates come down, which a money market fund is a risk-free interest rate, it could be another story altogether.

2:41Jon Quast:There's only so much money that would ever rotate out. Investors always keep some cash. That wouldn't go from$7.4 trillion to zero. But it could have a big impact. And it's also worth mentioning, that's just money market funds. That doesn't include people who put money in high-yield savings, CD accounts, short-term treasuries, and all these other risk-free investments just because rates are high. Yeah.

3:04Tyler Crowe:I mean, look, we're not going to accuse anyone of clickbait here. But let's be real. Investors being completely reasonable and holding 12 % of their portfolio in cash, it's really not going to get a lot of people looking at the top of the news site for that sort of information. But that said, I mean, beyond the $7.4 trillion, there's an important lesson here for investors when it comes to signal and noise, don't you think, John?

3:29Matt Frankel:Yeah. And I was being facetious earlier. There's totally a lesson here that we can learn. The headlines are what they're trying to get you to read, right? And it's always better to have a good, unprecedented record number in the headline to get your attention. But it's always good to keep an open mind and say, OK, what is there more to this headline that maybe I'm not being told? So here's another unprecedented thing that's out there right now. If you've ever heard of the so-called Buffett indicator, named after famous investor Warren Buffett, this is a measure of market valuations compared to the GDP.

4:05Matt Frankel:It just hit 212 % whereas Warren Buffett says 100 % is a more fairly valued market. So, essentially, what this is saying is that the market is two times or more overvalued. On the same token, a Bank of America just had a survey that said a record number of fund managers, 91%, say that stocks are overvalued. 91 % of these people who make a living by investing money, they're sitting there waving the warning flag. Stocks are overvalued. But again, maybe that's only half the story in both of these cases. So take the Buffett indicator. The economy wasn't globalized back when it first came out. We're a much more global economy.

4:46Matt Frankel:So comparing U.S. stock markets to U.S. GDP isn't as good of an indicator as it used to be. And then you take the Bank of America survey. Yeah, 91 % are saying it's overvalued. But at the same time, fund managers' cash levels are dropping and are below 4 % right now. So, they're saying overvalued, but at the same time, they're still investing their money.

5:06Tyler Crowe:Yeah, it's throwing up a lot of different signals here. I mean, you're talking about surveys saying things are overvalued. The case, Shiller, cyclically adjusted price to earnings ratio stands at 37.5. That's like the third highest reading after the dot-com bubble in the 2021 boom. Similarly, the potential growth indicator, which is a metric actually developed here at The Motley Fool, and something that's used to inform decisions about the Hidden Gems portfolio, is also signaling similar market signals that things are a little overvalued right now. When you hear these things of overvalued, all these survey numbers, things like that, I'm going to start with you, Matt.

5:45Tyler Crowe:Sorry. How does this inform or influence your investing decisions?

5:50Jon Quast:It does, but it's important to mention what these valuation metrics are all talking about. When you hear the Buffett indicator says the stock market is overvalued, that essentially is talking about the S &P 500. That makes up over 80 % of the stock market. You're talking about the big companies, and that's really what's been driving the growth. If you apply that same indicator to, say, just the Russell 2000, or just emerging markets, or any of these other smaller indices, it tells a completely different story. But yes, I absolutely use these valuation metrics to inform my decisions, especially in regards to deciding what parts of the market to invest in.

6:26Jon Quast:And Tyler, I know both you and I see a lot of opportunities in international stocks right now, because they're not nearly as frothy-looking as U.S. large caps. So, that's just one example of how I use this in my thought process.

6:40Tyler Crowe:John, same question to you. Do numbers about the market conditions that we just talked about actually change your approach to buying stocks?

6:46Matt Frankel:No. Market conditions don't really change my approach. If I've learned anything over the last decade of investing, I've learned that it's really important to put new money to work regularly. This is a core part of the Motley Fool investing approach. It really works. I don't know what the market can do and information can change on a dime. If you remember the banking crisis just a couple of years ago, that started with just a post on social media and quickly spiraled out of control. Nobody could have predicted that that would have been what happened. So why bother trying to predict something if it is futile at the outset?

7:22Matt Frankel:And especially when you consider every single year, every three years, over a five-year span, there are always some stocks that have rewarded shareholders quite well. My job is not to find out what the market is going to do tomorrow. My job is to find those investment opportunities that are going to be good over the next three to five years.

7:40Tyler Crowe:Letting businesses do the heavy lifting for you is always a great approach. So coming up next, we're going to look at space, the final frontier of investing.

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8:48Tyler Crowe:We're back and I'm glad that this is an audio podcast because the looks of exasperation from that really cringy transition from John and Matt would make for not so good video. But let's talk space investing because it has been a very busy week for the industry. We won't be able to cover all of it. So I want to focus on three stories from the past week. One, the Trump administration has issued an executive order to loosen regulations on commercial space companies, especially around licensing and permitting launches. The United Launch Alliance, the Boeing and Lockheed joint venture that's kind of been the backbone of commercial space for decades, just launched its new Vulcan rocket for its first commercial mission and kind of trying to compete again with SpaceX.

9:31Tyler Crowe:And then we also have Firefly Aerospace, which is another orbital launch company with its own set of bona fides in terms of what it's capable of. Had a rather successful IPO last week where shares popped 38 % on its debut. Now, Matt, you follow Hidden Gems, darling, Rocket Lab very much in this space area. Now, when you see this trio of stories, you've got looser regulations and then two competitors kind of showing bona fides again. Do you see this as a net positive or a net negative for Rocket Lab?

10:05Jon Quast:Well, the looser regulations are definitely a net positive. But when it comes to the competitors, the space economy, for one thing, it's so massive that there are terms for several big winners, especially in terms of future potential. I'm not terribly worried about the others. Rocket Lab, next to SpaceX, is the most successful launcher ever and has done 64 successful launches. There's a lot of future need for, the simple way to say it is launching things into space. There's room for a lot of growth for a lot of companies here. Rocket Labs also uses a lot more of a razor and blades model. They're more of an integrated provider of space.

10:44Jon Quast:They not only manufacture and launch rockets, they manufacture components for rockets, they provide servicing. As the business grows and as the space economy evolves, there's a lot of different ways they could take that, which could give them a nice little competitive edge.

10:59Tyler Crowe:I read the prospectus for Firefly Aerospace, and to be honest, knee-jerk reaction is that this business model looks an awful lot like Rocket Lab. Now, John, you recently studied up on and wrote about the Firefly Aerospace IPO. Did anything in particular stand out to you?

11:15Matt Frankel:I think the thing that stood out most to me was that this company really wants you to know that it landed on the moon. I mean, it feels like Like every answer to every question in every interview was that Firefly Aerospace has landed on the moon. And look, I get it. Landing on the moon is a really cool thing. I'm happy for the company. I'm fascinated by space exploration personally. I love the idea of a permanent moon base. The company has talked about maybe it can be involved in getting a nuclear reactor on the moon. That's something that the current administration wants to make happen. So look, I get it.

11:49Matt Frankel:The moon landing is reason for optimism when it comes to the long-term prospects of this business. Now, I will say that according to Firefly's own filings, it's targeting markets that could be worth$40 billion one day. It's not targeting the entire space economy. As of this taping, it's valued at more than$7 billion. So, that's actually a pretty steep valuation in relation to the size of the market it's going after. It's also, what stood out to me is it's still operating at a gross loss. And that's probably going to continue for a little while. Now, it is going to try to make reusable rockets.

12:21Matt Frankel:It's working in collaboration with Northrop Grumman. So, that should be able to get some costs down eventually. But for now, the financials look pretty rough. It doesn't really have a predictable revenue stream. Think SpaceX has Starlink, right? That's kind of a predictable thing it can count on. Firefly Aerospace is going to be a little bit choppier. It's going to depend on its launches. It's going to depend on its moon landings. So, I think there's still a little bit of risk here. The valuation is high. So, I'm on the sidelines personally. but very interesting company. Yeah.

12:50Tyler Crowe:I think my biggest thing from kind of reading all of this, especially with the Firefly Aerospace, Aerospace IPOs, both for Rocket Lab, Firefly, the biggest question I actually have right now is how much success will they have building relationships with clients that basically aren't NASA, the DOD and Space Force and other in basically government contracts. I mean, those are great clients to have and customers, but you know, they can only spend so much money and this industry is becoming more competitive by the day. I mean, I wouldn't be surprised if we saw a few more orbital launch companies go public in a year or two.

13:21Tyler Crowe:So I think it's something we certainly want to keep an eye on. So coming up next, the best of last week's earnings.

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14:33Tyler Crowe:mostly through earnings season and the post-mortem of the second quarter is starting to come out. Now, according to FactSet, a data aggregator, 81 % of companies that have reported so far this quarter have reported earnings per share results actually above Wall Street analyst estimates. Now, if it holds for the entire quarter, we're only about 90 % of companies reporting, it'll be the most companies to report above estimates in two years and well above the 10-year average for beating markets. Now, I'm tempted to rant about analysts giving easy hurdles to clear, But this is a family show, so we'll keep that for another time.

15:10Tyler Crowe:What we know is that a lot of companies have beat earnings, but there were some recent results that have really stood out in the past week or so. John, I want you to go first. Which one did you see?

15:21Matt Frankel:Yeah, thanks, Tyler. I was quite surprised with results from Dlocal, symbol DLO. Stock is up nicely here after earnings. This is a small Uruguayan fintech company that specializes in cross-border payments. It's led by former Mercado Libre executive Pedro Arndt. So it does have some experience management, but investors have historically been really nervous with this one. So basically, D-Local is building some payment rails on its own that help cross-border payments. And over time, it's been taking a smaller and smaller cut of transactions. This is called its take rate. And so the gross profit margin has been going down over time, even though revenue growth has been quite substantial.

16:02Matt Frankel:And you can see this in its most recent guidance here for 2025. It expects total payment volume growth of 40 % to 50%. That's red hot. But it only expects revenue growth of 30 % to 40%. So a smaller cut of that payment volume to actually be its revenue. So the fear here is that it's going to keep deteriorating more and more over time. The profit margins are going to go down. That said, even with that long-term concern, I think that at some point, there's a really interesting business here that could be worth earning. And so, it's really focusing on these emerging market economies. That's where the growth is happening.

16:39Matt Frankel:Think Africa. Think South America. Revenue has doubled over the last three years. It's getting approval to operate in more countries. Its net revenue retention rate of 145 % says that its customers are using it more over time. It's free cash flow positive. The share count is down. There's a lot of things to like here. And if we can start getting clarity on how low is that gross profit margin going to go and stabilize, once it does stabilize, this could be a rewarding investment.

17:07Tyler Crowe:Yeah, it's interesting. There's a lot of growth because cross-border payments is one of those things that people can be very frustrated with. Somebody who spent some time overseas can very much attest to that. But also, like the discussion about space, there seems to be a lot of companies coming out of the woodwork to fix cross-border payments, which actually kind of explains the declining take rate you alluded to here. And since we're talking about cross-border payments, Matt, I'm going to kind of interject and do mine first. But it's the stablecoin company Circle Internet Group, which is CRCL.