Nano Banana Steals the Spotlight From NVIDIA

0:04Travis Hoium:NVIDIA is the talk of the market once again after reporting earnings after the market closed on Wednesday. Motley Fool Money starts now.

0:19Travis Hoium:Welcome to Motley Fool Money. I'm Travis Hoium joined by Jon Quast and Dan Caplinger. And we have to start today with NVIDIA. The company reported earnings after the market closed on Wednesday. The results were fine. We don't need to go through all of the numbers. But I think the big thing was the data center was a little bit weaker than expected. This is kind of the opposite of what we've heard basically since the chat GPT moment. So, Dan, when you look at NVIDIA's results and where those expectations are and where results are actually coming in, what are you seeing? So the numbers that I looked at most closely, you're seeing slower sequential growth in revenue.

0:57But when you look a little bit beneath that, I think that you're still seeing a lot of the favorable trends that NVIDIA has shown in past quarters. This quarter, we saw a more normal cost of goods number that helped boost the profitability line. and guidance going forward looks like we're going to return to a faster re-accelerated growth trajectory going forward.

1:20Travis Hoium:And that would be bringing things like Blackwell in, they're ramping that up. So I think that was kind of the big story with their guidance. And a lot of the conference call was about that ramp. Exactly. John, what are we seeing from a supply demand standpoint? Because it seems like that is ultimately where NVIDIA's pricing power lies. And that's how they get to the massive margins that they have, which are really leading the semiconductor industry right now. Yeah, Travis, I think it's apparent that there continues to be an imbalance in supply and demand when it comes to NVIDIA's products. And as you mentioned, the profit margins are a wonderful way to look at that.

1:58So, just for some perspective, from 2018 through 2020, this company averaged a 30 % net profit margin. Over the last two years, it's averaged a 52 % net profit margin. When that kind of a spike happens, that shows that there's far more demand than what you are supplying to customers. And that's why you're able to charge basically whatever you want and make a ton of profit. And so, that continues to happen for NVIDIA, even with the minuscule so-called miss when it comes to data centers.

2:29Travis Hoium:The question here is, how much can that continue to grow? And the projections, I think Jensen Wong was talking about$600 billion in data center spend in 2025. I've heard other estimates. But the number is huge and it continues to grow. But John, there's only so many companies that can spend$150 billion a year. And that's the kind of scale that we're looking at here. So does that start to be a concern? And is the future for NVIDIA just reliant on what we hear from CapEx budgets for 2026, for 2027 from some of the big hyperscalers? Yeah. When you're talking about something of this magnitude, of this scale, you're exactly right.

3:12There's only a handful of companies that can move the needle for NVIDIA. And even in this most recent quarter, there are just two customers who accounted for 44 % of all of its data center revenue. That's presumably Microsoft and Meta. And I think it's one company accounted for 23 % of all the data center revenue. So, just a couple of players are accounting for this. And that does introduce a little bit of customer concentration risk. But when you look at, for example, Microsoft and Meta, and we don't know for sure that those are the companies, but assuming they are, I mean, Microsoft is planning to spend $100 billion in 2026, an increase of 14 % from this year.

3:52Meta could spend around the same,$100 billion. It's expecting its growth in capital expenditures for AI to accelerate in the coming year. So I would say that things still look pretty good for NVIDIA.

4:03Travis Hoium:Dan, the big question is not just the amount of spending, but where are they going to spend that money? John brought up Meta and Microsoft. They're not really developing their own chips or doing so effectively. Alphabet would be the other big customer. They are developing TPUs. We have AMD out there. How does NVIDIA continue to stay ahead? And is that going to be the case for the foreseeable future? I think it is the case for the foreseeable future. And I think the way that they do it is simply by using their first mover advantage and making the case to would-be enterprise customers, Hey, you can't do better than us.

4:42Yeah, sure. Maybe there are competing chips out there somewhere. They don't have the performance. They don't have the track record. You're not going to get fired choosing us over a competitor. Yeah, sure. Maybe you could save on price if the thing doesn't blow up in your computer. So why not stay with the tried and true player in NVIDIA?

5:04Travis Hoium:Yeah, it does seem to be the case. There was a lot of talk even on the conference call about ASICs, which is going to be the competitors, the TPUs. Amazon has their own chips. I think Alphabet has a big business with their TPU business, but they're building out their own cloud and they're doing their own vertical integration on that. I do want to touch quickly on the China point because that was a huge topic. H20 is not something that they were able to sell into China last quarter, not in their guidance for the next quarter. But even this morning, we heard that there's discussions with the White House about potentially, again, paying that 15 % fee to sell Blackwells into China.

5:45Travis Hoium:My question for you guys is, is that going to be a big thing for NVIDIA? And is China going to want to buy those chips? Because the administration put this out there that they want to get basically China and Chinese tech companies addicted to the NVIDIA platform. And China doesn't want to be stuck on the NVIDIA platform. So there's really some competing tensions there. Dan, what is the future of this relationship? Because it's obviously something investors are thinking about. Jensen Wang is spending a lot of time trying to get China to be a real market for them. But is that going to be something that's going to be successful for NVIDIA?

6:21It's an interesting question, Travis, because it brings in a whole bunch of geopolitical issues that are kind of beyond the scope of kind of the corporate look. I do think that for NVIDIA, NVIDIA is smart enough to understand China's geopolitical ambitions are not to rely on a foreign supplier for anything. And so the question becomes, does China have the leverage to do some of the same things that you're seeing the U.S. do in terms of getting foreign companies from the U.S. to locate manufacturing facilities domestically? if China can align its political interests with NVIDIA's aspirations for global growth without jeopardizing NVIDIA's relationship with the US, then that's the needle that they have to thread.

7:12I think that's what Jensen Wong is going to be trying to do. It's a tall order. But if they succeed, then they get both the US and China. That's a huge strategic win.

7:21Travis Hoium:This will obviously be a huge story for the market for the foreseeable future. Interesting that the stock was up slightly early in trading today. Now it's down slightly. So not actually that much of a reaction, which is new for NVIDIA. And maybe this is the case where the expectations and the reality for NVIDIA have caught up to match each other. Investors and analysts seem to understand what to expect quarter to quarter. But there will be obviously more to come from NVIDIA. We will come back and talk about another fun AI topic. That is Nano Banana. You're listening to Motley Fool Money. They say leadership isn't just about where you're going.

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9:21Travis Hoium:huge muscles. So we had a lot of fun with this over the last day or two. And that's just kind of the toy side. That's not the actual commercial applications. We're seeing this already starting to roll out with Adobe suite of products. And I think there's going to be much more of that to come. John, is this going to be a big deal? I know it's kind of a fun topic, but it actually seems like we may be reaching a point where AI is going to provide some productivity with some of these tools? Well, it doesn't take much poking around Nano Banana to realize that it's actually a really good AI photo editor.

9:57It really works well. And all this talk about Alphabet being behind when it comes to AI, that's been the conversation for a couple of years now. And then it drops this product, which is really, really turning heads about the competition in this space. It's all of a sudden looking like, hey, Alphabet is far ahead of everybody else. And this has brought up conversations of, if that's the case, if Google is ahead, or if Alphabet is ahead when it comes to Nano Banana, then who is on the, let's say, the wrong side of that development? And so, there's questions when it comes to Adobe Photoshop, which is estimated to have 30 % to 40 % of the market share in the space.

10:40All of a sudden, people are wondering, is this a Photoshop killer?

10:45Travis Hoium:Yeah, that's a big question. But Adobe was really excited about this. They had their own press release saying, hey, we're going to be an early adopter of Nano Banana. The thing that's interesting with Adobe is they're also creating their own models. And part of the thesis behind that originally was, if we have commercial customers and we have to make sure that what those models are training on is commercially viable, that we're not going to get sued, that our customers aren't going to get sued. So Dan, does this answer that question that maybe the model isn't the differentiator for a company like Adobe and they are going to be using these standard or generic models from a huge model maker like Google?

11:27A company that has a huge brand in a specialty area like Adobe does, the most important job they have is defending that brand. If that means making partnerships or entering collaborations with companies that could arguably be competitors, if it means adopting some of those third-party platforms rather than trying to fight against them, then that's the good move. Because what you want people to think of when it comes to photo manipulation and editing is Adobe. And as long as Adobe has the best tools, no matter where they come from, they get to keep their Adobe brand at the top of mind for the consumers and the commercial customers that they rely on.

12:12Travis Hoium:I want to get both of your thoughts on this because I think one of the things that's interesting with artificial intelligence in general and a tool like Nano Banana is you can now create an image right in the Gemini app. You can create it in Photoshop if that's what you're comfortable with. Or you can use a product like Canva. I'm not sure if Canva is actually using Nano Banana right now, but they do have some really great AI tools. And that's sort of like the bottom end. Typically, disruption comes from the bottom. It does not come from the better products. It comes from an easier-to-use product that proliferates and then gets better and better over time.

12:45Travis Hoium:So, John, I want to start with you. Is this the kind of AI tool that solidifies Adobe's position in the market? Or does this create more competitive pressure from beneath, whether that's from Gemini itself or from a product like Canva or another system like that? Yeah, it's a really good question. And one of the things I do want to point out with Nano Banana, and this is something that Google DeepMind itself points out, is that it's still not perfect. It can't really do small faces. It can't spell things correctly. There are fine details that it can't render with the AI. And so when you think about who is using Photoshop, that's a professional community.

13:26You have to have those fine details fine-tuned. And so, I would imagine that Adobe predominantly keeps its professional customers. You'd look at something like a Canva. That's a lot of just regular Joes out there using this for... A lot of YouTube thumbnails would be probably, yeah. And so, maybe this is something where Nano Banana is ahead of Canva. And so, maybe Canva actually has more to lose than Adobe Photoshop. That's interesting. Dan, what do you think? I think that Adobe is smart enough that they will always be looking down at would-be disruptors. And if those would-be disruptors stay in their lane, if they stay with relatively low revenue areas, if they stay with casual users, then they're not a threat.

14:11But if individual companies turn into threats, Adobe is big enough. They can do the big tech thing. They can just pull out their cash, pull out their wallets, do the acquisition. And they're small enough that those acquisitions are unlikely to raise antitrust concerns. And one way or the other, they'll make sure that their competition stays under control.

14:35Travis Hoium:I do think one of the takeaways does need to be that Google is definitely not playing from behind. That's something that John led with. And they are in a much better position. They just seems to be figuring out how to make these products useful and maybe even a little viral. If Google can figure out how to go viral, that's going to be a big thing for them. I want to touch quickly on one of the news items for one of the hottest stocks over the past few years. Over the last three years, I don't know if you knew this, guys. Spotify stock is up 540%. So they are absolutely doing something right. But they're adding social features.

15:07Travis Hoium:This is one of the things. All these platforms want to be stickier. They want to be a social network. This is a company that has over 600 million users. It's one of the biggest networks of users in the world. If you're adding things like DM features where I can send you my playlist or send you a song, is this a compelling way to make Spotify stickier, Dan? Or is this just another company that's going to fail trying to get into the social network? Hey, I get it. You want to keep people in your ecosystem. You want to expand the walls of your ecosystem so that you're not having people when When they listen to a good song on Spotify, you don't want them going to meta and talking about it there.

15:48You want them talking about it on Spotify. But the concern that I have here is we've spent so much time training people when they get a message or an email or something that has an attachment, has something that they're supposed to click and play. We've trained people. All those are bad. That's phishing. You're going to get a problem with your hardware. I'm not sure Spotify can untrain that. And the files, what Spotify is sending, music files are big. Even links to playlists, then you have to... Is the person of Spotify's subscribers, there's going to be a sign-in, that kind of thing. You have to get the interface right.

16:31So there's a lot to get right for Spotify to have a good chance of making this work.

16:35Travis Hoium:Well, and are they going to try to make it commercial too? Would this be bands reaching out via DMs and saying, Hey, I'm going to be in your area, John. Do you want to come to our concert? Maybe a can of worms, but maybe it's worth testing too. Yeah. I think that's my biggest fear is that my Spotify inbox starts to be spam messages from all these people I don't know. I know that it says that, Hey, you can reject messages if you want, but still there's going to be something for me to do. And I'm not sure that people actually want this feature. In fact, Spotify used to have messaging inside the app and it got rid of it in 2017 because nobody used it.

17:16I would imagine that that is because I think that's how I'm going to be. I'm not going to use it. I think that most people are going to be like me. And so I don't really see this as a game changer for Spotify.

17:28Travis Hoium:You heard it here first. John doesn't want messages from people he doesn't know. So when I send him K-pop Demon Hunter song, he's going to happily listen to the latest. No, that's rejected right there. All right. When we come back, we are going to talk about consumers trading down and where there may be money to be made in retail. You're listening to Motley Fool Money. As a podcaster, my voice is heard by thousands of people. And now with Vanguard Investor Choice, I can be heard by the companies I invest in too. Vanguard Investor Choice makes it easy for eligible Vanguard fund investors to have a say in how their funds vote at company shareholder meetings.

18:05Travis Hoium:With just a few clicks, you can set your proxy voting preference and make your voice heard on topics like executive pay, board director elections, and more. Investor participation is the heartbeat of a healthy corporate governance ecosystem. You have a voice. Let it be heard. Visit vanguard.com slash investor choice to learn more. Vanguard investors own shares of Vanguard index funds and those funds own shares of the companies they invest in. available for Vanguard index funds that participate in investor choice. Vanguard Marketing Corporation Distributor. Welcome back to Motley Fool Money. Dollar General reported earnings this morning.

18:44Travis Hoium:The big retail trend from all the other retailers we heard from a couple of weeks ago was consumers trading down. John, how much of their performance is consumers trading down, and how much is them just getting better at executing their business? Yeah, as far as the stock performance goes, this is better execution on the business. they've never had a demand problem in the last several years. And so, once again, their same-store sales were up in the most recent quarter, 2.8%. I mean, that's not red-hot growth, but it's still growth. And that compares to some companies that are having negative comps.

19:15Travis Hoium:I think Target was negative comps. So, whether you're looking at restaurants or retail companies today, same-store sales growth is a positive sign. Exactly. Any growth has continued to be a positive. And Dollar General has had that mostly for this entire time that it's been underperforming the stock. And the reason why it's been underperforming is its inventory got too high. It's had an inventory problem since 2022. In the most recent quarter, inventories came down another 6%. We're down to our lowest level since then. And so, this is why they've been having profitability problems, is because they've had to lower prices to move inventory.

19:51And now we're starting to get past some of that headwind, and now profits can bounce back. Dan, what did you see in the quarter? So it validates for me the investing thesis for Dollar General. And it kind of shows a mistake that I think that traditional grocery store chains are making. Dollar General made a move to move toward those sort of essential items as a way to get people into their stores. I think grocery stores could have nipped that in the bud, but they didn't. They took their pricing power for granted. They rode the inflation wave higher. The result of that, Dollar General is now competitive on many staple items, and they have aggressive discounts.

20:29That, I think, is building habits in consumers. It's like, yeah, come in every week. We have a new flyer. We have new discounts. We have new specials. Those frequent visits, I think, are adding to traffic in a way that's going to be a long-term boost for Dollar General. And it could be a long-term behavioral shift that's not just economically sensitive, not just a matter of trading down, but really tapping into the idea of people want the best bargain all the time, no matter what the economy is doing.

21:00Travis Hoium:I want to get out of here on this with all the retail earnings that we've had over the past couple of weeks. Where do you think there's opportunities for investors, John? Well, interestingly enough, Travis, I don't think that this dollar general stock trend is over yet. I mean, you're looking at this year, they were predicting 580 in earnings per share would be on the high end of what they would earn this year. Now, that's the low end. And that is roughly about 14 % growth. And so, they are able to now improve their profits from their low point. And they were priced according to the low point.

21:34So now, as those profits do grow at a double-digit rate, as they presumably continue to improve operations, I think this stock still has more room to run. Dan, what are you looking at? I'm a big fan in the dollar store area of Canada's biggest chain by far. It's Dollarama. It's ticker DOL on the Toronto Stock Exchange. Maybe the best name in the dollar store business. It is. I'm telling you, it's the nano banana of the dollar store world. It just flows off your tongue. They've got a great business, too. It's huge market penetration. There's hardly a town in Canada that doesn't have a Dollarama.