Nvidia and Intel Make a $5 Billion Bargain

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe and today I'm joined by longtime Fool contributors John Quast and Matt Frankel. We were intending to put a ribbon on this will-they-won't-they story with the Federal Reserve and cutting interest rates. But this morning, I got thrown out the window when we got the news of this really big deal that Intel and NVIDIA signed earlier today. Also, on top of that, we're going to discuss some of the other newsworthy things that happened this week, such as the importance or lack of importance in quarterly earnings, and then we'll finish with stocks on our radar.

0:54Tyler Crowe:But we're going to start today, of course, with the NVIDIA deal, because that's what everyone's been talking about. You hear NVIDIA, you hear multi-billion dollar deal in AI infrastructure, and investors want to know. And so we're going to go through a little bit of what we saw. So before the bell today, we learned that NVIDIA has signed a deal where it will take a$5 billion equity stake in Intel, and then they will be co-developing some custom products, both for data centers and for personal computers. Now, John, I'll likely bungle some of the tech terms here. So I'm just going to let you cook for a little bit and give us the breakdown.

1:27Matt Frankel:Yeah, I'll bungle them for you, Tyler. So there's a press conference happening right now as we tape this. So they may have mentioned something that we don't know about. So apologies in advance for that, but I'll just start with what the press release itself said. So NVIDIA and Intel are going to jointly develop multiple generations of custom data center and PC products. So, this is a deal to co-develop hardware. Why? Well, NVIDIA is the market share leader in GPUs. They have like 90 % market share. But GPUs get their marching orders from CPUs, and NVIDIA is not the market leader in that. So, the industry standard architecture is x86, whereas NVIDIA uses ARM-based architecture.

2:13Matt Frankel:So, for x86, your leaders are Intel and AMD. So, NVIDIA links its GPUs together. They don't work by themselves, so you got to connect them. They connect them with something called NVLink. That allows the connection between GPUs to be super fast. But earlier this year, NVIDIA launched NVLink Fusion, which allows companies to build semi-custom CPU chips with MVLink. So, it allows for faster communication from the CPU to NVIDIA's GPUs. So, it looks like Intel is jumping into this customization opportunity with this deal. And getting$5 billion from NVIDIA, it strengthens Intel's balance sheet, but it also helps Intel with some of the costs of doing this.

2:59Tyler Crowe:Also, tying together with a 90 % market share is awfully nice. Now, I'm going to be the unfrozen caveman investor here for a second, because back Back in July, there was an announcement that Indel was backing away from manufacturing foundry work and stuff like that. Is any of this deal related to that? And could Intel be taking some of that manufacturing or foundry work away from other companies in the space, like, say, Taiwan Semi?

3:24Matt Frankel:Yeah, I wouldn't necessarily be worried if you are a shareholder of Taiwan Semiconductor. The short answer is there weren't details in the press release when it comes to manufacturing. Again, maybe they're talking about it on their call right now. But I'll just use the key word from the press release, and that was develop. So, the deal is to develop, but manufacturing is another subject. So, to me, this seems like it's more of an AMD thing. Intel is a little bit worried about AMD taking market share from it when it comes to CPUs. And so, Intel kind of maybe giving NVIDIA some favorable terms here for the investment.

4:03Matt Frankel:and it may be trying to better protect itself from this competition.

4:07Tyler Crowe:Well, that gives us a nice transition into AMD because, Matt, I want to put you on the spot because last week we were discussing Oracle's earnings and you mentioned AMD as a company really like in this space as a potential Oracle acquisition with all that extra money walking around. Now, considering this Intel deal involves Intel's x86 ecosystem, on a scale to 1 to 10, How much does this change your view or your investment thesis in AMD?

4:35Jon Quast:Maybe a three. It's important not to read too much into this deal. Put things in perspective. NVIDIA is investing$5 billion in Intel. They got a great deal for it, but that's a little bit more than 0.1 % of their market cap. They're such a big company. Another thing, there could be court challenges to this partnership. It would not surprise me at all if someone, maybe AMD, AMD went and said that this seems like an uncompetitive move. After all, you have the largest company in the world joining forces with the largest CPU maker in the world. That could be construed as an anti-competitive move. But assuming for a second that the partnership is allowed to proceed as structured right now, it certainly is a competitive threat to AMD.

5:23Jon Quast:Intel is still the largest CPU manufacturer, although the gap has certainly narrowed over the past decade or so. And one of AMD's competitive advantages has been that they produce both CPU and GPU products, and if those two are joining forces, that's kind of the same thing. On the other hand, I'm not that worried. It's historically been a mistake to bet against AMD, especially under current CEO Lisa Su's tenure, which has been roughly the past decade. And over that time, AMD has been steadily taking CPU market share from Intel year after year. So, it's not that much of a surprise that Intel sees AMD as a threat.

6:04Jon Quast:And NVIDIA clearly sees them as a threat, too, on the GPU side of the business. So, there's a case to be made that it's a strategic and defensive move by both NVIDIA and Intel to prevent AMD from getting more market share. But hey, if a company's scared of you, that's a good thing, in my opinion.

6:22Tyler Crowe:There's a lot going on with this deal. I'm sure that we missed some details. As we said, there's going to be a press conference happening as we tape. So perhaps further details coming in later shows. But we're going to move on to this. And we're going to talk about quarterly earnings and whether or not we should still be doing them after the break.

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7:34Tyler Crowe:Claude.ai slash fool. Earlier this week, President Donald Trump locked into his favorite social media platform and made some statements about his kind of, we'll say, distaste for quarterly earnings reports and how it'd probably be better for companies to go to a six-month report instead and let them, I think the words were, focus on managing their businesses. Now, I think we all kind of had a knee-jerk reaction. Us talking about it here and even listeners who are involved in investing have probably had a knee-jerk reaction thinking like what they either agree or disagree with it. And the discussions on our show, when we were planning this, we wanted to get a little bit introspective about the idea of quarterly earnings reports and how important they actually are.

8:16Tyler Crowe:I mean, there is a job component for the three of us on earnings where we discuss them to help people understand what's happening. And then there's, as investors ourselves, how much do we actually use them? And how important are they to our investment thesis? So, thinking about it not just as our media talking head sort of thing, Matt, how do you actually view quarterly earnings from your personal perspective as an investor?

8:43Jon Quast:I mean, like you kind of mentioned, aside from liking them professionally because they give us more to do, They are important in the sense that, especially when it comes to companies that are a little bit earlier in their growth maturity, to get regular snapshots of how a business is doing. That's why they're required to issue quarterly reports. But the reality is that a single quarterly report rarely has much of an effect on my investment thesis one way or another, unless it shows a clear reversal of a trend or something of that nature. Going to semiannual reporting, it's not entirely unprecedented.

9:17Jon Quast:The U.K. and most of Europe only require semiannual reporting, as does Hong Kong. There's a fair argument to be made that it would save businesses a lot of money in compliance costs. I've seen estimates that it costs about$1.5 million to issue a quarterly report. For some of the small-cap companies, that's not insignificant. However, in the U.K., which switched to semiannual reporting in 2014, this was studied the first time that it was brought up, it didn't really have much of an effect on the short-term focus of businesses. They still gave quarterly guidance. They still shot for very short-term targets.

9:55Jon Quast:In fact, fewer than 10 % of the companies in the U.K. actually even made the switch to semi-annual reporting, fearing that it would send signals that there's something bad they're trying to hide or something like that. For me, I'd rather see companies simply move away from issuing quarterly guidance. Some have done that. Apple doesn't issue regular quarterly guidance. Berkshire Hathaway is a good one. JP Morgan Chase. That would help focus on long-term results. But to be fair, analysts will still have consensus estimates. Stocks will still rise or fall based on whether they beat or missed earnings.

10:29Jon Quast:But it would help management keep their eye on the ball, if you know what I mean.

10:33Matt Frankel:Well, Matt, I love that you bring up the difference between a quarterly report and issuing quarterly guidance. Because I think it's worth noting here that President Trump, he made similar comments about this whole quarterly report thing back in August 2018. Nothing happened then, so maybe nothing happens now. But at the time, Warren Buffett, investing great, weighed in on President Trump's suggestion. And he pointed out that he loves reading the quarterly reports, but he actually dislikes it when the companies give that quarterly guidance for exactly what you just said. it can promote a short-term mentality when it comes to the business.

11:11Matt Frankel:We're trying to meet the guidance that we just put out for the next three months, and we're not thinking about the long-term health of our company that we're trying to run. And so, look, this is the Hidden Gems episode of the Motley Fool Money podcast. And the goal of Hidden Gems is to beat the market over a five-year span, not a three-month span. And so, when we are developing an investment thesis, an explanation of why this stock is going to rise. We're trying to build that over a five-year span. And so, by definition, we are looking for management teams that are also thinking about the long-term like we are.

11:45Matt Frankel:So, regarding quarterly reports, I do find them helpful. I find it helpful to look at trends, and especially to what you pointed out, Matt, the younger companies. It's really helpful for that. An example I'll give is a company named Xometry. This is one of my favorite companies, ticker symbol XMTR. But I was hesitant to invest at first because its gross margin needed to improve. So that was what I was monitoring when I read these quarterly reports. Every quarter I was saying, is the gross margin getting better? And as it did show consistent improvement, that was when it validated my thesis. And that's when I was finally comfortable to invest.

12:25Matt Frankel:So I do think it's helpful to use.

12:27Tyler Crowe:Yeah, it's been like a few days and I've been thinking about this one probably more than And I should, because I've had this dichotomy where I personally try to actively invest in businesses where I really don't even have to look at the quarterly report. Most of the time, it's because I'm trusting in management's incentives to grow the business, whether executive compensation packages or the way that they're using their measuring sticks that don't really line up with checking in a quarterly report. But at the same time, I think they're incredibly important because they don't let bad actors get away with things.

13:04Tyler Crowe:They don't let things fester for that extra three months or something like that that could happen on a semi-annual or even annual basis. I think they're incredible. Think of some examples where we've had what we thought were great companies that ended up being either bad or sometimes even dishonest companies. Like, we as stock pickers have probably picked them before and didn't even realize it. Think of companies like Enron or Valiant Pharmaceuticals where there was, like, legitimate accounting concerns. And if it was done on a semi-annual basis instead of quarterly, you know, those things would just kind of sit on the market or fester longer than they should have, and more investors would get hurt.

13:45Tyler Crowe:So, from a compliance thing, I think it's actually worth the cost that they do it because it roots out the bad apples as much as most of the companies that we invest in may not necessarily need that much compliance. It's more to keep out the bad actors. So with that in mind, thinking about the good companies that we want to invest in, after the break, we're going to talk about stocks on our radar.

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14:41Tyler Crowe:As we finish up, wrap up the end of the show here, we always like to do stocks on our radar. I think we're going to try to make that our regular shtick here. We played a little rock, paper, scissor before we started the show today, and John eventually won out with all the three of us. John, you get to go first.

14:57Matt Frankel:Yeah, I've been practicing rock, paper, scissor with my kids. Listen, I want to go ahead and preface this radar moment with, this is a stock that I'm watching, not necessarily one that I'm ready to buy today, but the company is The Trade Desk, ticker symbol TTD. This is the worst performer in the S &P 500 year to date. And it's down about 62%. Usually, I would say, don't bottom fish in the market. But this has been such an incredible company over the past decade that I believe it's worth an exception to the rule here. So basically, the stock is down because investors are reacting to management's guidance.

15:37Matt Frankel:It's guiding for the slowest growth that it's reported as a publicly traded company for the upcoming third quarter. The rub here is it just released its new platform. It's AI-powered. It's called Kokai. You would think that if Kokai is any good, it would accelerate growth, not lead to the slowest growth that it's reported since going public. As it turns out, there's some reports coming out that are suggesting that Kokai is actually kind of hard for customers to use, and they're getting frustrated and perhaps moving to other advertising technology platforms such as Amazon and Yahoo. But these reports also say that the Trade Desk's management is listening and making those changes to KoKai to make it more user-friendly.

16:21Matt Frankel:And this is actually something that CEO Jeff Green mentioned on the Q2 call, so that it's listening to its customers, it's iterating quickly, using this customer input. So, you know, maybe this Q3 growth slowness is just a blip. Maybe the trade desk is about to make the changes that it needs to make. Customers are going to get more excited about the new platform and that will reignite its growth. We'll see. It's something I'm watching.

16:46Tyler Crowe:I got to say, I think that's the first time I've in a long time I've heard Yahoo taking market share for somebody. But Matt, what do you got? Yeah, I know. Right. Yeah, it's surprising.

16:55Jon Quast:I like that. I completely agree with John on the trade desk, especially in terms of this being a blip. They have an excellent track record of pivoting when something isn't working. I think they're going to do the same here. For mine, I'm going to go with General Motors. GM is my stock to watch. For one thing, I think the auto industry could be a winner of the falling rate environment in terms of more auto loan demand, just generally more consumer confidence to borrow money. I think that this is underappreciated by the market right now. GM has done a great job of aggressively buying back stock while it trades for a PE of less than eight.

17:29Jon Quast:It's reduced its share count by 37 % over the past three years alone. They have recently restructured their China business, and it's now showing surprisingly strong growth. They have emerged as the clear number two in the US EV market. As someone who's technically my wife just bought a GM electric vehicle. I have to say, I can see why. I see a bright future for GM from here.

17:55Tyler Crowe:We got a couple of dumpster diver stocks with GM and trade desk. I'm going to flip the script and do a little bit more of a high flyer right now. With all this talk of the NVIDIA, Intel, Voltron going on in AI right now, it had me thinking about a, well, a lot of people probably haven't heard of it. It's called Celestica, ticker is CLS. This is an electronic manufacturing services company, kind of does a lot of the dirty work behind the scenes of assembly and manufacturing and things like that. So the business was spun out at IBM back in the nineties. And, you know, for decades, it was an okay business, relatively low margin, okay revenue growth.

18:32Tyler Crowe:Nobody, nobody really wanted to talk about it or were, or really overwhelmed with what Celestica was doing. But with the AI infrastructure data center boom that's going on right now, it has this company basically working around the clock to assemble components and server racks for a couple of hyperscaler clients that have taken up like 40 % of their revenue. Now, I wish I knew what they were. They don't disclose. But hyperscaler, lots of build-out, we can pretty much be like a... There's only probably two or three companies it could actually be. So, there are dozens of these Celesticas out there, these companies that are really sleepy for most of the time that have turned into market darlings thanks to AI and largely because of the AI infrastructure build out.

19:15Tyler Crowe:The how long this party lasts is the challenging question. I think there was an interesting piece from Ben Carlson over at Ritholtz Wealth Management a few weeks ago discussing if we were kind of in that 1996 or 1999 part of the AI versus.boom.com craze. If we're still very early, it's clearly going to benefit companies like Celestica from all these deals that we were just talking about with NVIDIA Intel, and perhaps this party could go on for a lot longer. Now, I don't think this NVIDIA Intel deal that we just talked about will directly affect Celestica that much, but it'll certainly help the vibes around this company and probably a lot of other ones like that.

19:54Tyler Crowe:As always, people on the program may have interests in the stocks they talk 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 Motley Fool editorial standards and is not approved by advertisers. Advertisers are sponsored content and provided for informational purposes only. To see our advertising disclosure, please check out the show notes. Thanks to our producer, Dan Boyd, for keeping us in line. And for Matt, John, and myself, thanks for listening, and we'll chat again soon.