Meta Has Been Busy

0:02Tyler Crowe:Meta is making even bigger AI bets today on Motley Fool Hidden Gems Investing.

0:09Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors Matt Frankel and Jon Quast. Today, we're going to dive into a couple mailbag questions. We got questions about GE Vernova. We got questions about REITs, which I think definitely had Matt excited to talk about today. But we want to start today with two relatively large announcements from meta platforms today, all of which related to AI. One of them was the launch of its Muse Spark 1.1 artificial intelligence model, kind of the next iteration of what they've been doing with AI models.

0:43Tyler Crowe:And the second was it announced that its plans to put its own AI chip into production is going to start in September with both Broadcom and Taiwan Semi as kind of the designers, manufacturers, helping them build out their own chip production capacities. Now, guys, these sound like really big moves. So help me wrap some context about what we're seeing here with these. Yeah, as far as the model goes from meta platforms, this is actually a pretty big upgrade in a couple of areas. You wouldn't normally be inclined to think so. I was tempted to overlook this just going from 1.0 to 1.1 here with MuseSpark.

1:21But in here that I think is significant, one is the context window. window. So they're going to provide a 1 million token context window. What this does is it allows an AI agent to essentially work longer on a task without forgetting what it's doing. That's actually a problem with some models out there. You'll send an AI agent to work, it loses context, it forgets what it's doing, it keeps working and keeps spending your money. That's a problem. So a 1 million token context window. This is roughly four times as big as the 1.0 version of Muse Spark. So that's a really significant upgrade. The other big change here that I'm seeing here is this is now being launched to people to use.

2:08There's pricing to go with this. And if you look at the pricing, it's more than 50 % times cheaper than competitive products from Anthropic and OpenAI. That's both for the input and the output. That is really significant when you think about these two businesses, because Anthropic and OpenAI, you know, they kind of need the products that they have out there. That's what they do. Meta has a whole other business paying the bills, and it does this on the side. So it has the luxury of this aggressive pricing. And so that is something really significant to note with MuseSpark 1.1.

2:48Jon Quast:So with the chips, I'm not sure if it's as significant as the model. So this is essentially what Google and Amazon do. These chips, as Tyler mentioned, they're designed with the help of Broadcom and manufactured by Taiwan Semi. This is the essential model that Apple uses to design its own iPhone chips. And the goal here is to really reduce the company's dependence on NVIDIA and AMD processors that are really expensive, as the company aims to build out its compute power and double it again next year. And really the idea is that these chips are gonna handle the easier side of AI tasks. They're still gonna need the more powerful NVIDIA ones for that.

3:24Tyler Crowe:Yeah, I wanna put this in kind of context of everything we've seen from Meta recently, because this isn't what to me seems like the biggest major announcement, or it's a couple in like what I would say is major announcements from Meta. It's been using a lot of creative financing to build data centers. To your point, the amount that they're adding this year, doubling that next year. It's made some announcements with smart glasses. It recently announced a prediction market asset. And I know I'm missing a few deals and announcement there, but I think it kind of gets to the broader point. There's a lot of things going on here.

4:00Tyler Crowe:And when I look at Meta and I see all of these things that it's doing, I am less impressed. I see an unfocused company that's throwing a lot of spaghetti at the wall to kind of see what sticks. You know, the company seems to be all in with these new ideas that end up maybe not doing as much. And it all kind of reverts back to the basic advertising model that they've had for so long with Facebook, Instagram, what have you. Now, I've brought this up before, but the company really dodged a bullet, I would say, with all of that investment in data centers for its reality labs, virtual reality efforts, being able to basically pivot quickly to AI and be like, yeah, we don't have to write this down because now it's all AI stuff.

4:39Tyler Crowe:So here's my kind of broader question, putting all that in context, should investors be excited about these kind of new moves and things that they're doing? Because to me, I just see an undisciplined company trying to look like something that it isn't.

4:53Jon Quast:Well, yeah, I mean, throughout Meta's history, the company has proven that it's exceptionally good at doing one thing, and that's making money from its core advertising business. Like if you compare Facebook's average revenue per user to that of Pinterest or Snap, for example, it's not even in the same ballpark. But to your point, Tyler, any attempt that they've made, and they've made quite a few, to build out a second significant revenue stream hasn't really gone anywhere, like all the metaverse spending you mentioned. As far as the chips are concerned, I'm not really sure what to make of it from a potential standpoint.

5:24Jon Quast:On one hand, I mean, if it meaningfully reduces their spend on NVIDIA and AMD GPUs, it could be a positive in the sense that their CapEx is going to go a longer way when they're building out all their compute power. But on the other hand, they're still going to to have to buy a lot of NVIDIA and AMD chips. They actually signed the biggest AI deal in history to buy AMD chips for the hardest AI jobs. And in the near term, you know, focusing on building out their own chip production could actually increase the company's CapEx needs. So, I mean, in a nutshell, they're doing what Google and Amazon have already been doing for years, building chips to handle the easier AI workloads and still relying on NVIDIA and AMD for the rest.

6:04Jon Quast:This could be an efficiency win for the company, but I really don't see it as a major needle mover, even in terms of cost structure. If it pans out as expected, I'd actually see it as a bigger needle mover for Broadcom than I would for Meta. Yeah, I mean, if we say that Meta is just throwing spaghetti at the wall, then I say andiamo mangiare, let's eat, because this is actually going really well for them. I mean, you look at 2025, 20 % growth in income from operations. We come into 2026, it's accelerated it even more. We have a 30 % jump in income from operations. And I know that we can say that the gains are coming from that core advertising business.

6:41And that's a fair point, but I don't know if it's so simple. I don't know if we can completely disassociate all that it's investing into AI and say, well, that's over here and the advertising business is over there. I think that in reality, there's more overlap between the two than we can really parse out. I do believe that there are some gains happening as a result of what it's investing in the AI side of the market. So I think it's good investment. I think that, you know, you look at the growth speaks for itself growing at this scale, at this speed, it's doing something right, even if it's throwing spaghetti at the wall.

7:20And on top of that, I mean, you have a stock here that is cheaper than the overall market at just 22 times earnings and growing this fast. So I don't know. It's hard to find too much for me to complain about with meta.

7:31Tyler Crowe:I didn't have John speaking Italian on my bingo card for today. Coming up next, we're going to get into listener questions. First one on GE Vernova.

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8:58Tyler Crowe:Today's question comes from Stevens Cox and it says, hello fools. I was wondering if the team on the Hidden Gems Investing podcast could cover GE Vernova. I really love the company. I think it's an essential player to the future, but it seems to be priced to perfection regardless. What does the team think? John, I'm going to let you start and then we'll see where this goes because I have some pretty deep thoughts here. Yeah, my thoughts probably not as deep. You know, Right before it was spun out, when GE kind of split up into different companies, I was tasked with writing an article for fool.com on GE Vernova.

9:34And diving down deep into that at the time, I really came away just impressed with this business. I like this business. I was hesitant to invest only because it's not a space I typically follow. And I was nervous I didn't hear other people talking about it. Just kind of doubted myself. But wow, what a mistake to not invest. This has been an incredible stock since GE spun it out. I believe it's up over 700%. What I will point out here is that most of the gains recently have been valuation. And just take that for what it's worth. Essentially, the stock has, the business is doing one thing, the valuation is driving a lot of the stock gain.

10:13So let's just pretend for a moment here as we try to say, all right, here's where we are now. Let's assume no expansion or contraction in the valuation from here. What can this business do for shareholders? And you look at the business right now, I mean, that revenue growth in the most recent quarter, 16 % growth for a business of this size maturity for the products that it offers with energy generation, solar, wind, turbines, many things. You look at that growth, that's really quite outstanding. And then you look at the backlog, even greater growth than the revenue. So that would point to ongoing gains in the revenue.

10:54I do think that you have a business here that might be able to produce 15 % annual returns for the stock. You add in things such as the dividend, the buybacks, all these things. Maybe a 15 % when you just look at the business fundamentals itself. Now you take a step back and say, okay, but what about the valuation? I don't think that's going to be a tailwind from here on out, just looking at the valuation today. Probably a little bit of a headwind. How much of a headwind? That's what I personally don't know.

11:24Jon Quast:Let me chime in before Tyler gives his deep thoughts here. So there's a solid argument to be made that Vernova is the best position power stock for the AI infrastructure buildout. And I mean, just look at its backlog. It's$163 billion backlog. It expects that to reach$200 billion by next year. The company's electrification segment, which deals with grid equipment, transformers, and other components, it booked more data center orders in the first quarter than it did in all of 2025. Their turbine production is essentially sold out for almost a decade into the future. So I'd push back on John a little bit that, yes, the valuation has outgrown the business, but there's a lot, especially all the things that I just mentioned that aren't really showing up in the numbers quite yet.

12:08Jon Quast:So on the other hand, this is an expensive stock, especially if you consider it's, even if you consider that backlog, the growing order book, the bull case essentially assumes that the demand cycle we're seeing is going to last for years into the future. And the reality is there are physical constraints on their ability to fully capitalize on that demand. So my bottom line on Vernova is that the demand is clearly there to justify today's pricing. The company has more orders than it can physically build for many years, but that valuation only holds up if that demand holds up for like the next decade or so, and there isn't any significant kind of breaks in that AI CapEx story anytime soon.

12:48Jon Quast:Tyler, on to your deep thoughts.

12:50Tyler Crowe:There was actually a reason I picked this one specifically. And the reason we did is because GE Vernova was actually a recent recommendation in the Hidden Gems service. And I wanted to get that out there. I did even clear it with like marketing to say if we could say that on the free site, but I wanted to get that out there. And, you know, Stephen, you seem to be like in tune with what we're thinking here. And normally I am the valuation of the three of us. I would probably be the most curmogeneity with Vernet valuation. But I'm going to make the case to you guys that even when you look at this valuation today, looking at the energy space in general, this is probably one of the companies actually worth paying up for.

13:29Tyler Crowe:And let me get into why. You were talking about its backlog of equipment or orders that it has for new turbines, because it makes turbines for every type of power. It's natural gas turbines, hydroelectric turbines, coal turbines, nuclear power, anything that runs a turbine for electricity, GE makes it. And there's three companies in the world that make up two thirds of the market for this. It's them, it's Siemens and Mitsubishi. Here is the most interesting aspect of their business. They don't make a lot of money selling the actual turbine. It's like maybe high single digits, maybe 10 % margin.

14:10Tyler Crowe:when they're lucky on these engines. It's not much. The actual money is made servicing aftermarket parts and service for decades after the actual turbine is sold. And so when you have these really high periods of engine orders, it actually has some of the lowest margins in its business because its aftermarket parts and service business is nearly triple the margins that they get for equipment orders. So right now, it's arguably at one of its lowest margin points in its period because as it builds out that fleet of turbines that it's going to be putting in every single piece of power equipment out there, those long-term orders of aftermarket sales, servicing, checking in on the things, maintenance and stuff like that, that's going to be much higher margin, much higher return business that lasts for decades after that thing is actually installed.

15:04Tyler Crowe:And so not only do we have like a decade runway of orders coming in, you have a decade of fleet build out. Right now, there's about 400 gigawatts of GE Vernova turbines powering something in the world right now. And they're expecting over the next five to seven years to put 200 gigawatts of additional power out there. So they're almost adding 50 % to their fleet. And that's going to give that long-term service sales aftermarket sort of business. And so when I look at GE Vernova, of all the businesses out there that I want to pay up for, I want to pay up for this one because I have so much more visibility into the long-term aspects of the business relative to some of the other one-time sales that you might have with the infrastructure build out with electrification.

15:54Well, I mean, Tyler, as I listen to you talk, the first thing I ask myself is where were you when I needed you two years ago? But the second thing I ask is, OK, you're saying all this, but you don't own the stock today. So what would actually get you off the sidelines and into the buyer's arena?

16:12Tyler Crowe:Well, one, Motley Fool trading restriction says that I can't buy it right now. So we'll start with that. But yeah, this has been a candidate for me for a little while. To your point about two years ago, it's kind of funny. When they spun GE Vranova out, it actually looked like the problem child of the three companies. I think we talked about this with the Honeywell spinoffs a couple of days ago, where it's like, oh, they had all these bad servicing contracts with wind and all these other things. And everyone thought that GE Healthcare was going to be like the gem that threw off all this cash and was going to reward investors.

16:45Tyler Crowe:And lo and behold, Vranova has become the true champion here. Yeah, I don't own it. I probably should throw my hand up and say guilty as charged. But, you know, perhaps once the trading restrictions that we have now that I've talked about it, I can't trade for it or buy it for a few more days. But certainly something I'm going to be putting on my radar come time soon. Coming up next, we're going to get another listener question going into the real estate investment trust.

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19:05Tyler Crowe:Matt, question about American Tower, AMT is the ticker. The question is, is the debt manageable? And will satellite technology erode the land-based tower business? And yes, just for some context for people who may not know, American Tower is a real estate investment trust that specializes in owning the towers that, you know, companies like Verizon, T-Mobile, AT &T put all their communications equipment on. So basically it's like the landlord for the telecommunications network. So with that slight introduction and because we need to feature Matt in this whole section, Matt, what do you got?

19:43Jon Quast:Yeah, so well, first American Tower, to add to your company description, their name's kind of misleading because they are not just American. They are literally all over the world. You know, they have towers all over the place and their chief rival, Crown Castle International, is only in America. So they're, you know, I've always argued they should swap names. But so Bruce is right that from, you know, their debt is elevated. A debt to EBITDA ratio of 4.9 is on the high end for a REIT. They have 4X interest coverage, meaning that their earnings before interest in taxes are roughly four times what they're spending on interest on their debt.

20:18Jon Quast:So that's comfortable, but not ideal. The company, they've done a solid job of extending their debt maturities at favorable interest rates, but the debt pay down hasn't been as much of a priority as I feel it should have. I mean, for example, they just raised their dividend by 5%. They've been buying back stock, which is kind of rare for a REIT. And while I get it, the stock is cheap on paper, as I'll talk about in a minute, I feel like deleveraging would be a somewhat better use of their money. I mean, I'm not worried about the debt in the sense that it's any kind of real existential threat to the company.

20:51Jon Quast:But I would love to see somewhat of a shift in capital allocation over the next couple of years. Yeah, it's hard for me to imagine that we would see much of a shift, though, I mean, because a lot of those capital allocation priorities, they're kind of hard to move around too much. I mean, as a REIT, right, we pay out 90 % of the taxable income. But then there's also kind of expectations from investors that, yeah, we are going to raise our dividend on a regular cadence and not change where we're putting that money. I was just kind of looking at this. American Tower paying over a billion in interest payments annually and roughly 3 billion in dividend payments annually.

21:33Wouldn't you say that that high debt load does impact the ability to raise the dividend? I know that there is some flexibility, but I don't know. At a 4 % yield, that's good, but not necessarily great for a REIT. wouldn't you say there are probably better options out there with lower leverage?