Oracle Calls Force Majeure Already?

0:01Tyler Crowe:Oracle is forcing the issue with AI. Motley Fool Hidden Gems Investing starts now.

0:09Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Lou Whiteman and Jon Quast. And guys, you know, we had a plan for today, but using the term from one of our prior hosts, the news fairy showed up right before we recorded and we decided we had to change it up a little bit. We're going to start today with the news that Oracle has called force majeure on a new data center project in New Mexico. And I want to channel my like Ron Burgundy voice from Anchorman because boy, that escalated quickly. I mean, basically Oracle is claiming that it isn't liable for costs or expenses if this project, I think it's called the Jupiter project is delayed.

0:51Tyler Crowe:It's supposed to come online in 2028. And this story almost reads like a usual suspects line up of the infrastructure play or, you know, theme that we've seen. And especially a lot of the ones where the thesis is a little bit shakier. I mean, we have a subsidiary, a private capital company, Blue Owl is the developer. Obviously, private capital and developing has been a challenge one there. It is one of the big projects backed by OpenAI and SoftBank. And additionally, on the energy side, it's the one project that has committed to using fuel cells, which has been part of the thesis for Bloom Energy getting into the AI infrastructure trade.

1:30Tyler Crowe:We've got a lot of things kind of up in the air here. This project was announced two years ago and wasn't expected to come online for a bit. Like all of these stocks are down today. Guys, what was your reaction to this? Because I found this one kind of alarming. It makes total sense to me that Oracle would make this move. And here's why. Nobody is going to argue that Oracle isn't pushing the limits when it comes to extending itself to fund the data center infrastructure build out. It is absolutely extending itself. Now, you can succeed even when you extend yourself. You just have to make sure that money coming in is going to cover the money going out, right?

2:11And when it comes to this data center in particular, there are reasons to think that maybe this doesn't come up when Oracle wants it to come up, when it expects it to, when it needs it to. The tide of opinion, public opinion, has turned violently against data centers. And I would say it's maybe even worse in left-leaning states such as New Mexico, where this particular project is. So there is real reason to say there might be delays from regulatory bodies, from all sorts of things that could push back when Oracle is able to monetize this data center. So it makes sense to me that it would put this clause in place so it's not having to make payments before it is generating revenue.

3:05That doesn't necessarily mean that the project is doomed. It doesn't necessarily mean that Oracle is now in big trouble, but it does point to the fact that Oracle has extended itself and it really can't start making those payments before it is getting the job done there on the project.

3:26Lou Whiteman:Here we go, right? Tyler, exactly what you said, that we have all of these companies that have been in the headlines. I think the most I think John's right that like a lot of this is just technicality, like reserving rights. I do think it's fun and we should talk about in a second, like why now? Why this second? Because I want to speculate there. But look, I think this is really useful for investors, whether or not it's good news or bad news. John says that, you know, left-leaning states, but look, we're seeing moratoriums in Texas. We're seeing moratoriums all over the place. This is, we've been saying forever, this is going to come up.

4:00Lou Whiteman:And there's been an open debate among pundits, among analysts, among lawyers about exactly what would happen, who's liable, how much liability, where it all falls. I think it would be really useful for it to play out once. And so we could answer these questions instead of yell across the aisle at each other. So, you know, bring it on. If Oracle is successful in this, it takes pressure off Oracle and maybe some of the other ones that are making commitments. Maybe it means more predictive commitments, you know, it might mean people are more aggressive because they can kind of go further onto thin ice and be safe.

4:35Lou Whiteman:If they get slapped here, it could at least cause a rethinking. If they do walk away, can blue owl backfill? We get a kind of a test on demand. There are so many kind of questions that have been out there just as hypotheticals or as stuff for people like us to argue about without anybody knowing that maybe if this plays out, we'll start to get answers to. And as an investor, that's clarity over time.

4:59Tyler Crowe:I've got a couple of questions here. And one of them, I may actually have to put on like a conspiratorial tin hat. You may have to walk me off the ledge here a little bit. But here's here are like some of the reactions I immediately thought of when I saw this was number one, like Oracle's calling Force Majeure two years before they even have to like make a payment on anything. That was in some senses to me alarming, like coming from oil and gas. When I hear Force Majeure, it's like something bad happened right now. And I can't deliver on a contract like three months from now, not, you know, two years is a long development time.

5:30Tyler Crowe:And the fact that they're already calling this is somewhat questionable because I think of when we have been talking about this development, Oracle has been, as we've said, one of the shakier ones. It's been using off-balance sheet deals to get it done, not taking on a lot more debt relative to the alphabets, the Amazons, the worlds to do it. And so to as quickly call force majeure, I found fascinating and also a little bit on the competitive position here. And here's my conspiratorial thought. And again, you can walk me off the ledge here, but Oracle has been doing a lot of these deals with open AI where it's like open AI, they take an investment in open AI.

6:12Tyler Crowe:And we've talked about these circular financings. And now all of a sudden, all of these AI companies are delaying their IPOs for safety reasons, or they're saying safety reasons. We've seen a lot of stories coming out about obvious safety questions. And so part of me is saying like, well, maybe Oracle's doing this because they know they are going to struggle to get paid from the people that they said they got the commitments from.

6:35Lou Whiteman:I think that's interesting. I mean, look, I think that my conspiracy theory on these safety things is that these companies pre-IPO want to focus on revenue and not the science project. And that would mean kind of, you know, maybe not the frontier models getting all of the attention. and so less compute needed. It's hard to say, but I think that's possible. I do think, you know, I said like, why them and why now? I think are very interesting questions. I think the why them versus, I don't know, Alphabet or someone else that's doing this is because, as we know, Oracle is starting from a weaker foundation.

7:08Lou Whiteman:They do have kind of thinner ice here. Not that it's too thin, not that they're going to fall, but they do have, you know, they do have less resources to back this up. The why now fascinates me because you're right. It could just be that or it could be that either Oracle is taking questions on this based on what they've already borrowed and some of their creditors are asking questions or it could mean they want to do more deals. And this, you know, kind of the threat of this or the liability attached here is kind of holding things back. The big takeaway, we don't know. A lot of it is a speculation, but the big takeaway here is I guess what we already knew is that Oracle isn't coming from a position of strength, period.

7:51I'll meet you halfway, Tyler. I mean, when you think about where everything is going, it's undeniable that the long tail is still in place. We are reimagining the entire infrastructure of the internet, and I don't think that anything stops this train. But everything is so fast changing that who is leading, how are they leading and what are the compute requirements to do that, it changes so quickly that anything is up for debate and whether or not, yeah, OpenAI specifically is saying, oh, we're needing to rethink some things here with our situation with Oracle. I mean, that is a valid question to be asking and wondering if that conversation isn't happening in another room.

8:38Tyler Crowe:All I'll say is if there's one thing that can stop this train, it's been very good at stopping trains in the United States. It's litigation in court. So I think we could have a fascinating story coming up here. We'll get a little bit back more on schedule coming up after the break.

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10:24Tyler Crowe:Now, normally we do a listener question at the end of the show. But today, we got a pretty meaty question here. So I wanted to give us a little bit of extra time to discuss it. Remember, if you have a question, go ahead and email us at podcast at fool.com. That's podcast with an S. We have also got the email in the show description, in case you need it there. Today's question comes in from Zach. And guys, I'm going to split it up because it's a, like I said, meaty question, several questions, and I thought it was worth diving into. Hi, Motley Fool team, longtime listener and love the show. With Medtronic recently launching a voluntary exchange offer to separate its diabetes business, MiniMed, I have been thinking about how everyday investors should evaluate these types of corporate actions.

11:04Tyler Crowe:Since you provide great high-level educational perspectives in the mailbag, thanks, Zach, could you break down how splits and exchange offers work? And we'll start with this first question that he wants specifically. The dividend investor dilemma, how should income-focused investors weigh keeping an established dividend payer versus swapping for a fast-growing non-dividend pure play, even with a built-in incentive. And in this case, for the Medtronic MiniMed thing, there's a 7 % valuation discount that you get as an investor as part of the spinoff. So guys, a dividend investor getting a non-dividend stock in an exchange, how does this work?

11:41Tyler Crowe:What are your thoughts? There's a reason why we don't give personalized investing advice on this show. It's not just covering our back end. It literally is because so much of investing is personal and you would need to know somebody's personal situation so intimately. And we don't. So we don't speak to individual situations. And in this, it's very relevant for this question, the debate between dividend income and growth, revenue growth specifically. I would say that on paper, it makes sense to go with growth. Boston Consulting Group did a long, long study over 20 year rolling periods, I believe it was, or maybe it was 10 year rolling periods, showing that among the top quartile of best performing stocks, growth was the biggest contributing factor to the gains.

12:34And so on paper, that to me points to, I want to maximize my portfolio for growth because that's going to outweigh the boosts that dividends provide. However, real life investing doesn't take place just on paper. It takes place in the real world where I have real concerns, I have emotions, and I have things that I want to see in my portfolio. And maybe people don't want to have the volatility that comes with growth, and that is part and parcel to that method of investing. So it really depends on the situation. I think that having a stack of just consistent dividend, paying stocks makes sense in a diversified portfolio.

13:15I also see the rationale in saying, I'm going to trade out this dividend payer for a better growth opportunity. I think either can make sense depending on your situation. Right.

13:25Lou Whiteman:I think, yeah, Zach kind of tipped the scales for me in kind of how he worded the question, because he said, how should an income focused investor? And again, I don't know, Zach, I can tell you how I would think about this. If I bought Medtronic for the dividend. If I'm focused on income, I'm probably keeping the income and I'm going to be more swayed by keeping Medtronic and keeping the dividend. The great thing about this, and he kind of asks also like how to split all and exchanges work. It's basically a tax free. Sometimes you get both. Sometimes you got to choose one or the other, like in this case, but it's a tax free kind of carving up at the company.

13:59Lou Whiteman:Here's the great thing. You can have both. You can keep your Medtronic and buy the other company, Minimet, buy shares for the same tax implications if you want. So you kind of don't have to choose. Your choice would be you have to keep, you know, commit new capital. But look, if you are an income focused investor and that's the reason you bought a dividend stock, I think if it was me, I'd probably lean towards keeping the dividend stock. If you're focused on growth and you bought Medtronic because you were excited about the growth, then probably the dividend means less to you. And maybe you look at the other one.

14:33Tyler Crowe:So here's the second part of the question, and I'm going to try to make it a little bit more general because, you know, Zach's question is a little bit focused on the healthcare part. But what does it, for in terms of your portfolio strategy, what does it signal when an established giant company divests a smaller unit that as a result, you know, it drives up top line revenue, but kind of makes for lower margins? It can go in a lot of different directions here, and I'll let you guys go, and then I'll finish up.

15:06Lou Whiteman:Well, the first thing that comes to mind, I think with any split or any time a company breaks itself in two, there is, if you think about it, a war for capital inside any company with multiple divisions. Not everybody gets the same amount of capital. The parent, the CEO, only has so much allowance to give to his subsidiaries, and they're fighting for it. In general, in theory, why splits work is that competition goes away. Both companies, in this case, you have a maybe slower growth and a faster growth. They can allocate capital towards the needs of their specific business. So that is kind of the bull case for splits in general.

15:43Lou Whiteman:Whether or not it's a good idea, a bad idea, I think, again, that's an individual case-by-case thing. I will say in this case, a huge flag is, is that they are offering a premium for investors to take Minimet. You know, they are offering that, as Zach mentioned, a 7 % valuation discount. Now, it could be because Medtronic is a dividend player, they think their investment base is less interested in growth. So they're just trying to even the playing fields that way with their target audience. Or it could be a signal that the market is probably favoring Medtronic. I, You know, it's again, it's hard to just give one size fits all answers here.

16:21Lou Whiteman:But I do think you have to read the individual situation and kind of figure out, like, what are the what are the signals telling? Like, if I'm playing poker with Medtronic here, what is the tell here? What are they telling me that they're not telling me that I can use to make a decision? Yeah, I like this move as far as splitting out MiniMed from Medtronic. I think it was a good move when you talk about the difference of the growth rates. It's not that different. I mean, MiniMed is better, but it's not drastically in another category of growth level. It's, you know, mid-single digits and high single digits.

16:58It's not that huge of a difference, but the profit margin difference is quite significant. And so it does make sense to me for Medtronic to spin out MiniMed and then be able to dedicate its own capital to growing its higher margin business. That to me is going to potentially grow profits faster at Medtronic than what the profits are going to grow at Minimed. So it makes a lot of sense to me that it would make this move. But stop me if you've heard this one before. I mean, if we're taking broad takeaways here, every deal is different. Everything is unique. And so each one does need to be examined on the merits.

17:37There are times in the past where I thought that a business made a mistake to split up a company, make a corporate move like that. And there are other times that it was clearly the right move. I would say, do your best to see what is motivating it. Is it a good business decision? Can you see the business rationale? Or does it feel like we're just trying to win some shareholder, you know, rally the shareholder troops or something and make it seem like we're doing something when really both ships are going down?

18:05Tyler Crowe:To speak more generally to it, and I think you guys would likely all agree with this is sometimes the consensus thesis is wrong and perhaps your own thesis is wrong as well. We've seen plenty of cases where we've had splits or divestitures or spinoffs or something like that. And the market consensus was, oh, this was the great part. And you're left with the duds. And what ended up happening was that theoretical dud ended up doing much, much better. I think the GE split was a great, or General Electric split was a great example. Everyone thought that GE Healthcare was the cash generating crown jewel that got split off.

18:44Tyler Crowe:And it's true, it generates a lot of cash, but they thought GE Vernova was going to be the problem child. We look, since the split, GE Vernova has been by far the greatest performer out of all those in large part because of shifting dynamics and whatnot. But whatever your initial thoughts may be with a lot of these spinoffs, reserve the right that it could change. Coming up after the break, we're going to talk about fintech and the changing landscape there.

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20:53Tyler Crowe:We're actually going to start today's show with this news story, but with the Oracle news, we thought we needed to stop there. And to this particular story here, I think goes under the category, be careful what you ask for, because we've seen a lot of fintech companies going public recently, doing actually relatively well. And a lot of them have been, you know, kind of arguing against regulations in the banking industry because they're protecting the entrenched interests. Well, they've kind of gotten what they've asked for with more lax regulations as of late. And as a result, we're going to see some very large competition coming into the space.

21:31Tyler Crowe:Latin American fintech company, NewBank, and European fintech giant, Revolut. These are companies that are much, much larger than a lot of the fintech companies we see in the United States today, they are actually looking to get banking charters and looking to come to the United States. And in large part, because the United States banking industry is so much larger than in their current markets, and they see it as an opportunity for growth, despite all of the entrance in the market already in the United States. So guys, when I read this report, the immediate thing that I said was, wow, the barriers to entry in this industry mustn't be as much as some of the bulls in the fintech business thought it was.

22:13Tyler Crowe:I mean, what does this say about the industry?