SpaceX IPO Nears & Retail Makes a Comeback

18:20Travis Hoium:Meaning they've moved too high up on that consumer scale? Higher. Higher.

18:26Lou Whiteman:You know, and, and so now like, like things like, like times when they used to be the clear beneficiary, it's just a little more wishy-washy and you know, that's who they are. That's fine. I think it's still in that positive, but it's funny. Like, it's a reminder that we can't let our conventional wisdom on these companies really rule us. Well, and I think that it's so tempting to say, look, the consumer is stressed. And so it is trading down to a lower priced retailer. But that explanation doesn't totally cut the mustard because you look at the restaurant results here recently. Cava. Look, I'm not saying it's the most expensive place, but I don't think that we go there when we're trying to save money.

19:01We saw a 7 percent increase in guest traffic there, 10 percent same store sales growth recently. that's incredible meanwhile Wendy's same store sales in the USA down nearly eight percent so

19:13Travis Hoium:not everything makes sense yeah trying to draw a through through line and make perfect sense is has been impossible and I think we've been trying to do it on this show it just it just isn't there but I was shocked that both of these companies reported really really good numbers so hopefully that's a good sign for the economy when we come back I'm gonna have John and Lou pick some stocks for us. You're listening to Mighty Full Hidden Gems Investing.

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20:23Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. In this section, we like to have a little bit of fun with investing. And I want to get an idea of which stocks Lou and John like right now. So I'm going to give you guys two stocks. I know if you pick between the two, do something like an either or. Let's start with a topic that we started with here, SpaceX coming public. Lou, would you rather buy SpaceX's IPO? Are we going to be at a$2 trillion valuation? Sounds like something like that. Or would you rather own shares of Tesla?

20:55Lou Whiteman:I mean, obviously the answer is it doesn't matter because they're going to be one company in a year, so you're going to hold either in a year. But look, at least in the near term, I'd actually take SpaceX. And although my answer is probably neither, but here's the thing. I do believe there is at least a portion of the investing community that is more interested in investing in Elon's brain and Elon's potential to build cool stuff in the future than they really are interested in investing in Grok or an electric vehicle maker. So I do think that naturally, if you have two securities in which you can do that, they're going to compete with each other, right?

21:35Lou Whiteman:One of them is a brand new flashy story with a total addressable market that basically equals US GDP. The other is, I think, still an attractive story and with areas where they're trying to grow, but there's a lot of water under the bridge there. So I do think there's a real risk, at least in the near term, people will trade out Tesla to buy SpaceX to get the fresher, newer version of invest in Elon's brain. So in the near term anyway, I think I'd rather be sitting in SpaceX right now. It's so interesting. Morgan Housel, the author, Morgan Housel, he talks about how two very smart, logical investors can disagree over something here.

22:14So I'm going to disagree with Lou, but Morgan Housel points out that oftentimes a disagreement is just over time horizon. And so when I make an investment, I'm thinking five years. If I am buying a stock today for the next five years, I'm picking Tesla. But I agree with Lou's point here that maybe over the nearer term, SpaceX is the one to own. But when it comes to Tesla, and kind of the reasoning goes back to what Lou was just saying, investing in Elon's brain. And, you know, for whatever criticism there might be, he does have this just incredible tenacity to stick with something. And I know that we disagree on that.

22:52But when you look at what he has been able to roll out in the electrical vehicle market, I've seen a lot of other players come into this market and give up before they reach the finish line. It has he has really built this into an incredible business. And I really think that he is going to see the optimist program, the robots. I may have my doubts about that. At the same time, I do think that there is going to be a marketable opportunity there. And I do believe he's going to stick with that and create something pretty impressive. So if I'm thinking five years out, I am thinking Tesla here. I have questions about SpaceX, even though I do love the space economy.

23:29Travis Hoium:One of the things that's interesting with these two companies is it seems like the story is going in the same direction, meaning AI and particularly the CapEx related to AI is happening at both of them. You know, I think Tesla said in the most recent quarter that their AI investment is going to explode to, off the top of my head, I think it was$25 billion this year. So they're not going to be the biggest investor in AI. But then you see the SpaceX numbers and you're seeing the exact same thing. So is it almost like you're buying the same future, even though one of them is starting with space and satellites and the other one's starting with electric cars?

24:03I absolutely think that is true, Travis. I think that these are going to be very similar in direction. and even similar in focus, you look at one of the big, we didn't talk about this, one of the big expenses coming up for SpaceX, like it or not, is the TerraFab project that Elon Musk wants to create.

24:23Travis Hoium:Tesla will also be involved, yes. Exactly. And that's the point, is that that's a joint collaborative effort, and Intel is also in the mix there. ASML CEO just going on record recently saying, hey, I've been talking to Elon Musk directly. He is very serious. And so the ASML machines are necessary for everything that he wants to make in the TerraFab and already having those discussions. So yeah, that's going to be a big capital outlay. They want to be vertically integrated in semiconductors, in AI. So definitely something to watch. It's definitely going to be interesting to see how investors are pulled when there's two Elon Musk companies.

25:00Travis Hoium:And if we do get to the point where they merge into one, as Lou said. Let's talk about the other companies that we talked about a little bit, Target and Walmart. And I just want to give a couple of numbers, John, before I have you pick between the two. Target currently trades for a trailing price to earnings multiple of 17. Walmart has a trailing price to earnings multiple of 42. So very different valuations. But if you have to own one of these stocks, Lou said it, Walmart has been the better performer over the past five years. But if you had to buy one of these stocks now, which one is it? It would be Target.

25:34And it has been Target for a while now. You know, I do believe that this is a company that is potentially able to run the same playbook that Walmart ran. Walmart was able to create more revenue and higher margin revenue thanks to the advent of its digital businesses and its rise and things such as its marketplace, its digital advertising, other things. even its membership program. Target is trying to run the same playbook. It's been slow to do it. It was slow to get started. But I think we're seeing some of that guest traffic coming back. We are looking at historically lower profit margins for Target right now.

26:14And it's trading at that cheap valuation at the lower profitability. What happens when those margins start to improve? All of a sudden we could see a big jump in earnings and the stock would look quite cheap today by those standards.

26:27Lou Whiteman:Yeah, I'll be honest. I'm not fully convinced the target can execute from here, but look, there was a non-zero chance that this was going the way of JCPenney's or Sears. And I know it wasn't likely, but we've seen this in retail too many times. You do not have the right to exist. I think this quarter, if nothing else, has done a lot of work just kind of eliminating that possibility. With Walmart, it's an incredible company. I still think it probably is the better ultra long-term investment, but I'm not going to pay 45 times earnings for a company with decelerating sales in the same store sales and in a tough economy.

27:06Lou Whiteman:I think my answer is neither, but I would, I would invest in Target.

27:11Travis Hoium:It's going to be interesting to see what they're going to be able to copy from Walmart. The other thing to highlight with, from John's point is Target is leaning more into what they call their frequency, which is food and beverage and beauty are two of the things that they called out in the conference call. You know, they have not been driven by grocery the way that Walmart has over the past decade or two. They're trying to follow those footsteps. They're not there yet. And there's a lot of work with the physical infrastructure, you know, changing stores, you go into a Walmart, you know, it's almost a grocery store with a Walmart attached.

27:46Travis Hoium:Target is not quite at the same point. So it'd be interesting to see if they are able to copy that. All right, let's talk about the world of AI chips. Lou, NVIDIA reported this week, AMD's stock is on fire. If you have to buy one of them right now, which one is it?

28:02Lou Whiteman:I'm going with the winner. I'm going with NVIDIA. I like what AMD has done. I think they've kind of positioned themselves as the insurance policy for the industry. But look, for all we talk about NVIDIA, look, we got what, a 26 times multiple versus an almost 60 times multiple or so. On a forward basis, we're at 22 right now. Yeah, you get the undisputed leader. And mind you, even after, if this does turn out to be a bubble, a company that has multiple times been through a bubble and come out the other side and found ways to grow value again, I'm still going with the big dog here. I'll take the other side of that.

28:42I'm going with AMD. This is actually one of the most recent additions to my own stock portfolio. and the reason being is agentic AI. You have the AI agents coming in and that is more CPU intensive than GPU intensive. And so NVIDIA has been able to benefit from just this massive increase in GPU demand. In fact, CEO Jensen Wong saying, we think that our Vera Rubin system is going to be supply constrained through its entire life cycle. That's such an incredible statement to make. But with AI agents, and you talk, speaking of Wong, he says, we're going to have all of our employees running 100 AI agents.

29:21Whether or not that actually is true, you're talking about an incredible increase in CPU needs. For some people, that means an investment in Intel, but for me, that's an investment in AMD. I really think that it's going to be a beneficiary here and I think you're going to see those margins rise pretty fast and that PE multiple that you cited, I think it's going to look a lot cheaper very quickly.

29:44Travis Hoium:Yeah, their forward price earnings multiple, just for comparison, is 26. So there's a lot of growth in margins that are priced into the stock, but not quite as expensive as it may seem on the surface if you're looking at trailing numbers. CPUs, by the way, also something that NVIDIA is talking a lot about, now that they are also in the CPU game. Which is a fair point, a fair point and a fair risk. When we come back, we are going to talk about the parent cancellation of the SaaSpocalypse. What do John and Lou think? You're listening to Motley Fool, Hidden Gems Investing. In a world full of noise, long-term thinking stands out.

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30:52Travis Hoium:Advertisements are sponsored content and provided for informational purposes only. To see our full advertisement disclosure, please check out our show notes. One of the things that we have talked about a lot on this show and the market has obviously been thinking about is the SaaSpocalypse. A lot of software stocks are down significantly in 2026. But John, as we get through the first quarter earnings season, and we got a couple of reports this week, it doesn't seem like things are nearly as bad as projected a couple of months ago. So what should we be thinking about software right now? Is this an undervalued sector we should be looking for opportunities?

31:29I think that some parts of this sector are undervalued, but definitely not all of them. I don't think that we saw any financial results this week that changed the big picture. And so I want to start with that for just a moment. Why should anyone listen to me? I'm just a dude. But if you're going to listen to somebody, how about we choose somebody who's smart and close to the situation? And I'm thinking Cloudflare CEO, Matthew Prince. Prince says that there are three areas of work. There are builders, there's sellers, and there are measurers. And when it comes to software that helps you build a product or software that helps you sell a product.

32:08Both of those things are fine. But when it comes to things that help you measure work results, that is where AI is disrupting. And so he actually gave two examples of this. First, it talks about finance. So think internal auditing. Think, you know, where's the money going? Are people spending the money correctly? That's one area. And then another area is marketing. Always measuring, you know, Are we hitting our campaign goals? Is it working just right? AI tooling can make that kind of instantaneous, more precise. And that is the areas of the software market that I really think the disruption is coming for AI.

32:44So the companies that are doing that, I'm actually worried if I'm Salesforce or into it here. This is a customer retention management software. This is financial software. I think that these areas are being significantly disrupted by AI.

33:00Travis Hoium:And is that because they're so established in a legacy workflow, you know, where, okay, this is how I do my taxes. And then if things are going to completely change, and I'm just gonna, I don't know, put all my tax papers on my desk and just take a picture, and then AI figures it out, it's probably not going to be Intuit who wins that market. And you could say the same thing with Salesforce, where, you know, entire businesses are built on Salesforce. But if we change everything, why are we going to stick with Salesforce? Is that kind of right? Yeah, that's kind of how I'm thinking about it. To be fair with Intuit, I'm not really thinking TurboTax as much as I'm thinking QuickBooks.

33:34But yeah, this is definitely something these domains are areas that I'm worried about.

33:39Lou Whiteman:So here's what I'd say is that I don't think it's going to be a zero sum all or nothing. But with the examples you just gave, Travis, maybe AI doesn't destroy these businesses, but what does it do to their pricing power? I've joked about this before, but if I was the purchasing manager at a big company, whether I intended to or not, when I got my renewal from all of these SaaS vendors, I'd say, that's great. I'm just going to talk to OpenAI, and then I'll be back with you in a week and see what that – see if I don't get in the next few days. I'm like, you know what? We found a way to make it work where we're not going to up your bill by 3 % this year.

34:15Lou Whiteman:So I don't think it is, I think what's lost in the SaaS apocalypse talk is the all or it's an all or nothing, zero sum game. I think the truth is probably somewhere in the middle that maybe these businesses aren't destroyed, but their attractiveness of an as a long term investment because of their ability to generate margins, growth, increasing profitability, profitability. That's where they're vulnerable. So I think it's just hard. The other thing is I'd really like to see it instead of just trade stocks down 70 % on the assumption. And so far, we haven't really seen it. But I do think that the answer is probably somewhere in this strange, fuzzy middle where, yeah, the best times are over, but there are ways to adapt.

35:05Travis Hoium:Yeah, John, to talk about some of the specific results we got this week, Workday, their revenue actually accelerated from 12.6 % growth a year ago to 13.5 % in this most recent quarter. Zoom also accelerating. A year ago, they reported 2.9 % growth, and now it's 5.5 % growth. Not quite as impressive, but Zoom, you know, arguably one of those huge values. So it seems like the numbers aren't that bad from the companies that you would think would be affected by this SaaSpocalypse disruption. Yeah, I don't know if I want to call Zoom's most recent quarter a return to glory. I don't know if I want to own a software stock that is trading or that is growing revenue at 5%.

35:45I mean, that's just not enough to do it for me. With Workday, I want to be fair. I think it was a perfectly fine quarter. But, you know, I'm going to tap the brakes. Management kind of bumping its chest a little bit saying, hey, this is our moment. AI is great. If you look at the guidance for the rest of the year, it could potentially hit its slowest growth rate as a publicly traded company. So I don't know if AI is the catalyst that Workday is making it out to be. But for now, it is doing fine.

36:13Travis Hoium:We like to end the show with the stocks that are on our radar. John, what are you looking at this week? Yeah, this week I am looking at one that is definitely off the radar. And this is Onto Innovation, ticker symbol O-N-T-O. This is one that's already up a ton. I wish I brought it earlier. it's up about 60 % this year, trades at over 100 times earnings. This might be the most expensive stock I've ever brought to the show, but I do think it can outgrow its lofty valuation. So what does Onto Innovation do? It makes equipment that inspects semiconductor products for defects. So as these products get smaller and smaller, we're talking about atoms at this point, the need for checking for defects gets higher and higher.

36:54It does become greater. Onto has been able to acquire other businesses, and it's really kind of developed good technology for this. We're talking 2D measuring. We're talking 3D measuring. So really great equipment as manufacturing for semiconductors is increasingly brought into the US. All of the major players are talking about this. We're talking Micron, Intel, even SpaceX. We're talking about the TerraFab. These are coming into the US. I think that that provides a growing market for Onto Innovations measuring products. Revenue is near records, growing low double digits. Operating margin close to 20%.

37:32Balance sheet is debt-free. I think it's a business poised for the long term.

37:36Travis Hoium:Dan, what do you think about Onto Innovation? This is a truly strange business, y 'all, because it started in 1940. It's been public since 1999. Does not even have a Wikipedia page. So I don't know much. True hidden gem. Yeah, really. I'm not a huge fan of the big PE ratio, but I'm curious. Lou, what do you got? Maybe another hidden gem on the radar this week, Lou?

38:02Lou Whiteman:Again, no, I think this one probably has a Wikipedia page. I didn't check. But Dan, I am looking at IBM. I think, you know, the ticker is IBM. Shares of Big Blue were up 11 % on Thursday after the U.S. Commerce Department announced a$1 billion grant to fund their quantum computing effort. I'm just going to gloss over the discussion about government picking winners, et cetera, et cetera. Look, we're not going to solve anything there. It's always happened. And I also am not going to try to make the case that quantum is really investable right now. IBM thinks it's a multi-billion dollar opportunity, but in 2040.

38:36Lou Whiteman:So I'm not going to try and say it's anytime sooner. To me, though, the investment is a reminder that IBM, which has been left for dead numerous times since the mainframe era, just keeps chugging along. And yeah, they are likely to still be in business doing things in 2040. Let's be honest, the jury's still out on some of these SaaS stocks or even AI stocks and whether or not that's true for them too. And the company's mix of consulting and tech, it seems to be doing a pretty good job winning AI business these days too, based on the results. Stock, even after Thursday's rally, is basically flat over the last year, priced at 22 times earnings.

39:12Lou Whiteman:Not outrageous for a tech company. Probably not a 10x here. But Dan, if you want tech ballast in your portfolio, I think you can do a lot worse than this one. IBM, big blue for the win.

39:22Travis Hoium:Dan, have you been to IBM's Wikipedia page? Yes, I have. It does exist. I can confirm. Also, Lou was being funny before the show and he was, you know, introing his radar stocks and was like, Dan, do you need the ticker? And so that was really funny, Lou. You're a hilarious guy. Dan, which one is going on your watch list? Like I said, I'm curious about Anto. So Anto it is. Congratulations to John. For Lew Wyman, John Quast, and our production leader, Dan Boyd, I'm Travis Hoyme. Thanks for listening. We'll see you here next time.