Micron Day Is Here!

0:01Travis Hoium:It's Micron Day on Wall Street. Motley Cool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Cool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Rachel Warren. And guys, I never thought I would say this, but Micron has a huge earnings report after the market closed today. This is a company that most of us just didn't pay attention to for most of the last couple of decades. but they are the company that everybody is watching at least for the next 12 hours or so. So Lou, I'll just kind of leave it there. What are your thoughts on Micron being the talk of the day?

0:37Lou Whiteman:Yeah, no pressure, Micron. Just the fate of the entire global stock market is on your shoulders. No pressure at all, right? So context, why am I saying that? Right now, no company is more emblematic of the AI rally than Micron. Believe it or not, the stock is up 270 % this year. It's up a lot more over the last 12 months. It is the single biggest point contributor to the S &P 500. It is literally the engine that is driving this rally. But look, historically, the reason, Travis, we don't think about these companies is memory chips are a commodity. And there are a lot of competitors with a lot of options for capacity expansion, a lot of people like flirting with rivals as we speak now.

1:17Lou Whiteman:And the last few weeks, we've suddenly become a lot more skeptical about how much higher the AI rally can go. So back to the fate of the entire global stock market. It's fair to say, I hate to make short-term predictions, but it's fair to say that any flinch tonight when they release earnings, any disappointment would reinforce the fears that driven the sell-off in the last few days. But a strong showing, I think it might just ease concerns and draw buyers back in. You know, so good luck, Micron. Apparently, we are basing the entire AI trade on a kind of historically commoditized memory. provider.

1:54Travis Hoium:Yeah, Rachel, this is going to be an interesting one, because there's a lot of threads to pull on, you know, a lot of times you look at earnings, and you go, how did the company do compared to a year ago? How did they do compared to analyst estimates? That's kind of typically how stocks react is what were analysts expecting? Or were they pricing in? And then what did the company actually report? What did they guide? There's gonna be a lot more to it than that has to do with high bandwidth memory, what's happening with, you know, competitors and pricing. So what What are the things that you're looking for in this earnings report that may actually extend far beyond Micron?

2:27There's a lot to look at here, and it's important to note. This is not the Micron of a couple of years ago, right? I mean, Wall Street's guiding for a 1 ,000 percent jump in earnings per share. Just kind of going to take a moment and take that in. This is not the business that we used to know. This is a newly minted trillion dollar company. They've sold out their high bandwidth memory or HBM capacity all the way through the end of 2026. They've got their advanced HBM3E chips. Those are essentially digital gold. They're the backbone for that next-gen hardware like NVIDIA's Blackwell architecture.

2:56This is also a company that just inked a major enterprise deal with Anthropic to power their clod models. You know, demand is very much outstripping supplies. There's a lot of pricing power there. Management has guided for an 81 % gross margin. Revenue is looking to pass$35 billion for a single quarter. So just to set the stage a little bit for where the business is at, and that really brings us back to what we saw in the markets yesterday. There are a few factors at play. You know, we had the announcement from South Korea's XK Hynix that sent shockwaves through the sector in terms of their shifting production timelines.

3:25But also we're seeing news about how competitors in China are aggressively leveraging their own semiconductor capacity. You've got major competitor CXMT. They are building out a truly massive fabrication facility with really one defined clear goal, which is to flood the global market with cheap legacy drape. They've got multi-billion dollar state investments, massive Shanghai facility. So essentially looking to outproduce established players. That's something that I think the market is worried about when it comes to the likes of Micron. What I will note, though, I mean, this is a company, Micron, that's building very highly specialized, high margin, ultra complex HBM infrastructure.

3:59It's required for advanced AI applications. And we're also looking at a reality, despite the pressure that it was under yesterday. This is a business that skyrocketed more than 700 percent over the last 12 months, trailing P.E. multiple of about 49. nine. So I like the business. This is not a stock that's even close to being undervalued right now.

4:19Travis Hoium:Lou, do you agree with that? Because this is one of those businesses where we've seen a lot of these cycles in the past. And I think if you go back to the dotcom bubble, Micron was one of those companies. Hey, you know, there's going to be demand forever. And then suddenly you overbuild. Rachel talked about, you know, high bandwidth memory is really the thing that they're focusing on right now. But they're giving up DRAM as a result. And who's popping in? China comes in and says, hey, we would be happy to take that business. The company that I am really curious about is Apple here. My understanding is that Apple would love to have some of these Chinese suppliers as one of their suppliers, and they're feeling a lot of pricing pressure, but that's been something the US government has not been super fond of.

4:59Travis Hoium:But if we're going to see $2 ,000 iPhones, maybe those things are looked past just a little bit. Yeah.

5:08Lou Whiteman:So here's the thing. This is why you never invest based on one metric. Because Micron today trades at under 20 times forward earnings. That looks really, really good. But what you miss there, the context is, I think, as Rachel said, the 1 ,000 % jump in earnings per share. So it is cheap if that is sustainable. If this is the new normal, if from here this is how they earn, if they really are just a different company now, this is a buying opportunity call me skeptical here because i think as you say there's just a lot of choices i think it's actually a risk here that if they put too many i guess chips in the ai basket and sort of abandon the core business that drives a lot of their volumes or at least allows others to build up there while they're focusing on what you're talking about dram in particular yeah yeah they better hope this ai sustained spending pace lasts forever and again we've talked about what that means for the rest of the ecosystem.

6:08Lou Whiteman:It just doesn't seem like that's possible, you know, you know, that everybody wins here, but yeah, it's all based on what has happened. It works today. May it long continue as someone who doesn't have any short positions, but I am personally, I have zero desire to buy this company in general and definitely not right now. Yeah.

6:26Travis Hoium:I want to put some numbers to those valuations that you were talking about. Estimates for fiscal 2027 is for$121.80 per share in earnings. The earnings for fiscal 2023, negative$5.30. So the big question here is, as this stock is trading for over$1 ,000 per share, is that$100 the real earnings number long term? Or is it the closer to zero that we've had over most of the past decade? We will maybe learn a little bit more after the market closes. When we come back, we are going to get to Meta's prediction market. You're listening to Motley Fool, Hidden Gems Investing.

7:28Lou Whiteman:Join us now. BetterTakeAction.org.

7:58So they're building a new app called Arena, and it's designed to be essentially a direct play on the fast growing world of prediction markets. So if you're curious how it works, you've got to think of Arena like sort of like a video game where you trade real world outcomes. So the app asks a simple yes or no question. You don't use cash. You use free points to buy a yes or no ticket. And then the more popular an answer gets, the more points that ticket costs to buy. If your guess actually comes true, the ticket pays out. If you're wrong, you lose your points. Right now, there's no real money involved, which is very essential from the legal front because it essentially allows Meta to sidestep a lot of the global gambling laws.

8:34They can launch the app everywhere instantly. My view of this is Meta is going to be using a lot of these free guesses to harvest millions of pieces of data on human behavior to train their AI models. I think that is seemingly the most valuable use case here. I'm still curious whether this is actually going to be a needle mover for the business.

8:51Lou Whiteman:You might be right, but do we really need AI models trained off of what random Facebook users are? Well, Reddit's pretty good data for Google. That's different. I mean, there's a lot more there. I mean, look, here's the deal. For one, remember, this is not gambling. They named it after a sports venue, but it's not gambling arena. I love that. But look, always count on Zuck to be distracted by whatever the shiny object is that's out there. And that is what's going on here. I don't, maybe it is some like master AI play. I think it's just what's hot. Can we get in on that? And there is logic here, right?

9:26Lou Whiteman:This is another thing that should be easily spread over their massive social media customer base. I don't think it's a massive use of resources here. And look, Facebook marketplace, I think is a good example here. It is at best the second best option and probably I'm being kind here, but they've leveraged it over the massive customer base. So it is worth the time, even if it isn't the dominant player. I think predictions can be the same here. It's inferior to the standalones, but yet is still viable. At the end of the day, if you're an investor, this is meta reminding you of who they are. You know, Alphabet, Amazon, there's a lot of these big tech names that are diversified, that are betting on different things.

10:05Lou Whiteman:But there isn't the same throw it at a wall and see if it sticks attitude. This is always what meta has done. It hasn't been an issue for investors before. and don't think it will be from here, but don't say you weren't warned.

10:16Travis Hoium:The one thing this reminds me of is Marketplace, you know, them kind of going into the Craigslist business, if you will. And that's been a massive, massive success. I know we use that all the time, even though we don't really use Facebook all that much. I also wanted to touch on the Kylie Jenner is now getting into the meta glasses. And so Lou, as our fashion and tech early adopter on the show, what are your thoughts of the Starfire glasses that Kylie is showing off?

10:43Lou Whiteman:Yeah, Kylie. Full disclosure, I had to Google exactly who Kylie was, like what Kylie was. I did think of other Kylies from like the 90s or 2000s, but yeah, no, I didn't. I've heard of Kylie Jenner. I'm happy that she's happy with these glasses. I sort of think that Meta is onto something here. I'm going to reverse course only because by comparison to what Snap announced, Meta looks like a real winner. They're not charging$2 ,000 for something with a couple hours of battery life. They're not saying it's going to replace the phone and yet you're going to have to charge it every couple hours. So I think, wow, this looks common sense.

11:18Lou Whiteman:Meta generates$56 billion in sales per quarter. This is not a needle mover. And I'm skeptical about the whole this we're going to defeat the iPhone and create a new ecosystem and kind of, you know, a stealth play on that. I think it's just going to be a novelty product. But Meta generates cash and Meta likes to spend cash. We know that. And like I say, I am much more bullish about this than I am the snaps.

11:42Travis Hoium:Yeah, Rachel, this seems at least a little bit meaningful. This is a huge sponsorship and they're moving at least further into the fashion direction, which is clearly not what Snap was doing last week. These kind of celebrity partnerships are sort of nothing new in the world of big tech. So I think it's probably a smart move on their part. You know, the frames look very trendy. They're like trendy, slim fashion sunglasses. The case actually has a built-in makeup mirror. There's a digital AI assistant built into the glasses. It's actually voiced by Kylie Jenner herself. You've got a standard version that costs$299.

12:13And then if you want that voice profile, it goes up to$399. So I'm not sure yet if this is a project that is going to be a real driver of Meta's business moving forward. I think we've seen so far that the adoption curve for this type of hardware isn't necessarily there. But I do think experimenting with more fashion-oriented glasses versus a lot of the clunky competitors that we've seen, perhaps that's a smart angle to take. I don't think this is something that Meta needs. I think this is something they're looking to try out, as we've seen with a lot of their projects in the past. If you're an investor, I think it's something to pay attention to.

12:45I don't think it's something that's going to be driving the business, at least not in the near term.

12:49Travis Hoium:A decade into the VR and AR experiment, we're maybe getting a little bit closer to something we can actually buy as regular consumers and not feel too goofy wearing around. We'll see if there's a prediction market on when we can get Lou in a pair of these glasses. When we come back, we're going to touch on Alphabet joining the Dow. You're listening to Motley Fool, Hidden Gems Investing.

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15:05Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. We have talked a lot about SpaceX going into indexes over the past couple of weeks, but Alphabet is now making its way into the Dow Jones Industrial Average. Rachel, what do we need to know? So Alphabet's joining the Dow. This is effective before the opening bell next Monday, June 29th. They're replacing Verizon. So this is a pretty massive shift away from obviously a legacy telecom player and very much into the core of the AI economy. The Dow is a price weighted index. So stock price dictates how much influence a company holds. So Verizon's low share price meant that they had represented a very small portion, 0.5 % of the index.

15:40Alphabet with their share price is going to instantly have a 4 % weighting. That is going to be the seventh largest component in the entire index right behind American Express. Alphabet's going to be the fifth member of the MAG7 to enter the Dow. Now it's worth noting, this isn't necessarily a big mover of share price actually. Back when Amazon and NVIDIA were added back in 2024. Their actual inclusion days were big duds. But I think the big takeaway for me is you're swapping out a sort of a slow growth utility like Verizon for a hyperscaler like Alphabet, very much aggressively increasing exposure to the mega cap tech and cloud infrastructure plays.

16:12Lou Whiteman:Basically that. It's irrelevant for Alphabet shareholders. To me, this is the DAO telling on itself. This is a reminder of how pointless the DAO is. You have 30 companies picked largely well after the world has realized their value. Verizon was the only representation from the communication sector. And so what the committee finally heard about the internet and is giving up on Ma Bell. As Rachel said, the price weighting means that you're 0.5 % of an index of 30 stocks, meaning that Verizon's movement had zero impact on the Dow. So the index basically had zero meaningful representation from communications here.

16:47Lou Whiteman:It's tempting to be the, you know, shock jock and say, okay, this means alphabets on their way down. I don't think that's the case, but the committee has a terrible track record of being late to the party. So I don't know, maybe it means that Alphabet is so mainstream now that it can't significantly outperform. I doubt it though. I think this is just them trying to stay relevant and Alphabet would just go about their business.

17:13Travis Hoium:Yeah. It's so interesting to see the difference, these indexes and the way that they're covered on a day-to-day basis. When I was growing up, the Dow Jones Industrial Average, First of all, it was mostly an industrial average. And second of all, it was the thing that was quoted every night on the evening news. The Dow was up 15 points today or down 10 points today. And people generally knew what that meant. Now we talk about the S &P 500 or the NASDAQ 100. Those are better indicators. And those are market cap weighted, meaning that they're weighted based on how big the actual company is. So it's maybe a better indicator overall.

17:45Lou Whiteman:One more just kind of not related to this, but just public service announcement here on the point. 100 points were a lot of points when the index was like, I don't know, 1 ,000 points. But the index is 52 ,000 today. And we are still going crazy about 100 points. I don't really want to have to get into the math here, but it's a lot less significant. Yeah, always, always look at things in percentage, but just ignore the Dow.

18:08Travis Hoium:We have moved on, I guess, from the Dow, but I think it's still interesting that this is something that we talk about. And now it's become a tech index more than it is an industrial index. As always, people on the program may have an interest in the stocks they talked about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards. It is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertisement disclosure, please check out our show notes.

18:37Travis Hoium:For Rachel Warren, Lou Whiteman, and Christy Waterward behind the glass, I'm Travis Williams. Thanks for listening. We'll see you here tomorrow.

18:48Thank you.