Tesla’s Daring Move

0:04Tesla makes an awfully daring move. This is Motley Fool Money.

0:20Welcome to Motley Fool Money. I'm Tyler Groh, and today I'm joined by longtime Fool contributors Matt Frankel and John Quast. Guys, the earnings fire hose has been set to full blast this week because we have seen a slew of earnings reports across just about every industry. We can't hit everything in this one show alone. So we're going to kind of focus on the big companies and the bold moves today. We'll look at Meta and Microsoft moving big time in the market. But we're going to start with what's mentioned in the headline here with Tesla. The company reported earnings per share of 50 cents for the quarter.

0:55It beat estimates, but it was down 63 % from this time last year. And it was the lowest fourth quarter earnings result since 2020. Now, what likely surprised anyone more than anything else in the numbers was Tesla's very ambitious capital spending plan and the things they were talking about on the conference call. Tesla announced it will more than double its annual capital spending to$20 billion for 2026. Elon Musk floated the idea of building his own semiconductor fab factories. Tesla expects to invest$2 billion in Elon Musk's private XAI, their AI startup. And it announced it would discontinue production of its S and X models so it can repurpose its Fremont plant for building optimist robots.

1:44Guys, I feel like I read a 10K just listening to the transcript and trying to get through all of this. It's been huge moves and a lot of announcements in Tesla. And I see it as two ways of looking at it. Either one, Tesla is pushing all of its ships into the autonomy, robot, and AI table. Damn the torpedoes, we're going this way. Or two, these ambitious announcements might be papering over the fact that its auto business is a little bit in decline and its financials are not what they were. Now, of those two camps, which one are you in? Or is maybe there some secret third camp that I'm missing here?

2:21I think it's a little bit of both, Tyler. Love them or hate them, I think we can all agree that nobody tells a better story than Elon Musk. And to be sure, there's an element of storytelling in here somewhere. So there's a desire to create a narrative. I think that part of the narrative creation has to do with its recent change of the Tesla mission statement. And this is kind of a big thing. The mission statement was to accelerate the world's transition to sustainable energy. Now the mission statement is to build a world of amazing abundance. As Musk tells this story, Optimus robot program, autonomy, this is all part of creating abundance.

3:02And so considering that that is now the mission statement of Tesla, it makes perfect sense to go all in on production of Optimus and these other autonomy efforts. Discontinuing the lines of S and X models to repurpose them for robot production is what's going on. This fits that narrative. But here's the thing. Matt pointed this out before the show. X and S models, they account for less than 5 % of Tesla's overall vehicle sales. So the truth is, these models aren't really selling anyway. It made sense to get rid of them whether or not autonomy was the big picture plan here. It's a little bit of both, in my opinion.

3:43X and S aren't selling. It makes sense to get rid of them. But the push is towards autonomy. It is towards abundance. It makes sense to go all in here. I'm on the fence between the two sides that Tyler mentioned. On one hand, Tesla's auto segment revenue declined 11 % in the fourth quarter. I don't really think it's a surprise to anyone. There's just a lot more competition for EVs than there were just a couple years ago. It's only going to intensify. GM is making a big push into EVs, and others are following suit. I'm not sure if Tesla is necessarily papering over its declining auto business, or that its leaders suddenly have a renewed sense of urgency to adapt to it before things get worse.

4:22I'm also not surprised to see the Model S and X discontinued. As John mentioned, it's roughly 5 % of sales, and that includes the Cybertruck in that 5%. These were aging vehicles. is they hadn't received a substantial refresh since their introduction other than the powertrain itself. The Model S in particular has been in production since 2013, essentially looks exactly the same today. Another issue is that I'm not sure how close Tesla is to actually producing a mass-produced autonomous humanoid robot like they say they're going to. Elon Musk has said it's going to be available by the end of 2026, this year.

5:01But they don't have the best track record here, right? I mean, the new Tesla Roadster was unveiled in 2017 as a concept. It was supposed to be in production by 2020. And now the reveal date is set for April 1st of this year. So, with that timeline, I'm a bit skeptical. Yeah. And if you want to add to it, too, I mean, there was the Tesla Semi that was supposed to be unveiled for a long time. There's been a lot of missed deadlines here. And here's my thought, and I'd like to get your take. I'm probably, of the three of us, the most skeptical of the group on Tesla's ability to pull this off. But it has about$44 billion in cash on the books.

5:37And its free cash flow is there, but it's kind of dwindling. So that kind of pegs it with$20 billion in capital expenditures. That's like two years of investing, give or take, before these robotaxi and robot bets really need to start paying off in a big way, in a cash flow sort of sense, unless we have to go to the market and add something to it. Do you believe that we will see a fully realized version of either, whether it be taxis or humanoid robots in that two-year window? I think they're closer on the taxis product than the robot product. Within two years, maybe we'll see some robo-taxis. I think they're testing in Austin, I think, is where they're testing robo-taxis.

6:19And I push back that you're the most skeptical of the three on pulling off the robot thing. But yeah, you're right. They have limited capital. They do have a good ability to raise more, if I'm being fair. Tesla has sold shares to raise capital in the past, and with a$1.3 trillion valuation, they wouldn't need to dilute shareholders very much to get another$20-40 billion if they needed to. I don't think we're going to see mass production of robots or robo-taxis in two years, but I'm not sure that we need to. Yeah, I would push the timeline a little bit beyond two years for sure, for partly the reason that Matt just mentioned.

7:01But on top of that, yes, looking at$20 billion in capital expenditures here in 2026, that's about double its previous all-time high. It doesn't necessarily need to spend that much for the next several years. Not to mention, it'll be interesting to see if some of these things start ramping up, they will contribute to the cash flow in theory. Now, I'm with Matt. I don't think that we see fully realized versions of either of these things in the next two years. That would be my take. I would push it for maybe Optimus. I think I'd push that personally closer to five. But it does need it to pay off, though, for sure, because it is investing a lot of resources.

7:38Whatever end side of it you put it on, either before two years or after two years. I think today's announcements really start to set the clock on expectations for Robotexies and humanoid robots in a way that we haven't seen before in Tesla's earnings. After the break, we're going to talk about the dichotomy of Meta and Microsoft's earnings happening today in the market.

8:30In other magnificent seven earnings this week, we kind of had the tale of two reports coming out today. shares of meta are up about nine percent as we record this show it beat revenue and expectations but what blew me away was the capex guidance we were just talking about 20 billion dollars at tesla but meta plans to spend a close to double its 2025 capex and that's between 115 and 135 billion dollars in 2026 on the other side of the coin we have shares of microsoft which are down 12 % as we're recording after the company reported that its Azure cloud computing unit growth slowed a bit. It too is ramping up capital spending.

9:12And it also said its future sales backlog nearly doubled with a significant increase coming from its investment in OpenAI. Guys, it feels like we're having a freaky Friday moment because we did this last quarter, more or less, and it felt like we had the exact opposite reaction here where everyone looked at Meta's ambitious spending and went, whoa, whoa, whoa. And while Microsoft was wholly solid and people were like, yeah, there's a business behind this to really drive this forward. And now we're getting like the exact opposite reaction three months later. I'm curious if both of you saw this as well, but I really want to start to wonder is, are we betting on AI or open AI specifically with a lot of these AI investments.

9:58With Microsoft this quarter, that backlog number we saw, it was very much an open AI story and a lot of it going to them. We saw this kind of reaction last quarter after Oracle announced its massive backlog was basically a bet on open AI as well. So, should investors in companies with large exposure to open AI, like Microsoft or Oracle, be a little more nervous than perhaps some of these other AI bets we've been talking about? Robert Brokamp, Jr.: Tyler, I noticed that trend, too. In the third quarter, there was a clear theme of Meta and a few others being punished for increasing their CapEx outlooks.

10:35But now, it seems the market's buying into it, or at least just assuming that CapEx is going to be more than initially expected, no matter what. In Meta's case, as you mentioned, it's a very big increase, roughly double 2025's level. What makes it even stranger that the market's fine with it is that Meta is spending all of this money to largely provide infrastructure for the least profitable parts of its company. They gave fantastic first-quarter guidance. I have to think that's the main reason we're seeing the stock rally higher. On Microsoft, you really hit the nail on the head with the OpenAI concern.

11:09Look how much Oracle is off of its highs recently. OpenAI is substantially all of their backlog. But in Microsoft, it makes up 45 % of the company's remaining performance obligation, or RPO, which we can call it the backlog, CapEx turned out to be higher than expected in the fourth quarter. I think that made the slowdown in cloud revenue, which wasn't a big slowdown. It was 39 % this quarter versus 40 % a year ago. It made it a little bit worse in the minds of investors. The stock has been largely priced for perfection recently, though. Even after falling 25 % from its 52-week high, yes, Microsoft is officially in a bear market.

11:49Microsoft trades for 30X earnings now. That's after a 25 % decline. Yeah, I don't think that we should necessarily look at how the stocks are performing this week or today and make broad statements about how investors feel. Maybe the reaction was different last quarter than this quarter, but I think that what's going on in a more general sense is investors are saying, hey, we're seeing all of these capital expenditures, and can we just pause a moment and just appreciate the fact that we're using numbers over$100 billion here annually? That's insane that that's even coming out of my mouth. But investors are looking at the capital expenditures and saying, what is the return on investment?

12:30And it's really hard to quantify. And I think that for sure with Microsoft, they were looking at, yeah, the growth of the cloud unit and looking at the capital expenditures and saying, am I getting a return here based on what it's paying out? And management pointing out, listen, we're not just investing in capital expenditures for our cloud unit for the AI models. There's plenty that we're investing in for ourselves, not just our customers. And so look at it holistically. Meta, a little bit more straightforward, I think. They saw the big increases in ad revenue production for the company. Some of that is attributable to AI and how its models are improving.

13:09And so I think that in one hand, investors are like, okay, we see the return a little bit more today with Meta, but it's really hard to quantify. But really looking at what Meta is building here, it is interesting, Matt, as you point out, that it's kind of spending in the most, in the least profitable parts of its business. It just kind of feels like a coiled spring, just spending and building aggressively behind the scenes. And then we're expecting it to suddenly launch something impressive. That's what Zuckerberg is talking about. It's talking about wanting to build and control its own technology so it's not beholden to any of the other players in the industry.

13:47And interesting as well, Zuckerberg kind of talking about how, I think we've all written off the metaverse at this point, but Zuckerberg's kind of talking about it like, listen, we're going to build personalized AI that's going to know you and create content on the fly for you to consume. And perhaps you're going to be consuming that in a metaverse context, maybe not with a headset from Oculus, but maybe with the AR glasses. So I'm not sure that we have a full grasp on where Zuckerberg and Meta are planning to go here with AI and how it intends to incorporate that into the metaverse, but it'll be interesting to watch.

14:19To your guys' point of trying to pick the winner each quarter, it seems a little bit silly. I think it's a reminder to all of us. This time last year, most of the market chatter was Alphabet is the AI loser. It's falling behind. There's no idea whether or not Alphabet is ever going to be able to catch up to all these. And then for the rest of the year, sentiment changed. Everyone started thinking of Alphabet as the AI darling. They're the ones that have it figured out. And now, I think over the past 12 months, they have been obviously the best performer in terms of stock performance of the Mag7, especially with those related to AI.

15:01So it'll be interesting to see if any of these companies, you know, will probably change our mind like four times by the end of 2026. Coming up after the break, we'll do our traditional stocks on the radar. The Civil War and Reconstruction was a pivotal era in American history. When a war was fought to save the Union and to free the slaves. And when the work to rebuild the nation after that war was over turned into a struggle to guarantee liberty and justice for all Americans. I'm Tracy. And I'm Rich. And we want to invite you to join us as we take an in-depth look at this pivotal era in American history.

15:41Look for the Civil War and Reconstruction wherever you find your podcasts. As is our Thursday show, we like to head on out with giving some stocks on our radar. Probably not in the MAG-7, even though we did just do a lot of earnings reviews of them. But I'm sure we got some other stuff to think about. Matt, what is on your mind? Yeah, I'm watching Southwest Airlines. Ticker symbol is LUV, although maybe not enough to actually buy an airline stock, but it's really interesting right now. It's up more than 15 % today after earnings as we're recording this. The short answer is that its management finally decided to join its competitors in caring about profitability by ending the longstanding free bags policy.

16:21Just yesterday, they ended their open seating policy, which had been a big differentiator for a long time. Their guidance calls for at least$4 in earnings per share this year. Analysts were expecting closer to$3. That gives it a price to earnings of less than$12 even after this move, with revenue per seat mile, essentially how much they're making off each passenger, rising by almost 10 % as travelers pay for things that were previously free. I would say that over the years, Southwest's biggest strength has been its best inbreed balance sheet. It's got under$5 billion of total debt compared with a$25 billion market cap.

17:00For context, American Airlines has about a$9 billion market cap and$43 billion in debt. With the adoption of this upcharge model, it has more profit potential and needle-moving potential than its competitors. It's an interesting company to me right now. It'd be interesting to see if that actually does impact some of their most loyal customers who have gotten accustomed to picking their seats and not having to pay for bags. But we'll see from there. So for me, I want to go back to kind of the picks and shovels of AI infrastructure. And I'm looking at a company called ION, ticker A-A-O-N. And they are a HVAC cooling, chilling, whatever you want to call it, facilities, construction company.

17:39Basically, they build a lot of these rooftop style air conditioners, chillers, what have you. Been very, very successful in working with big box retailers, hospitals, schools, things like that. But in 2023, they made an acquisition for a data center specific cooling company. It was called, and basically what ended up happening was with that acquisition, their sales have gone through the roof backlog is growing like crazy, but the company had struggled a little bit making that transition from their traditional HVAC equipment to this data center specific stuff and sales and stock performance has suffered because of it.

18:18And if you look at it right now, it looks like a lot of the issues they were having with that integration of its acquisition have gone away. And it's starting to look like they're ramping up and really bringing a data center, chilling, cooling to the forefront here. Its backlog is up like 100 % compared to this time last year. Management is starting to put some operational efficiencies in place at some of the manufacturing facilities to make this all happen. And it really looks attractive, especially in an industry where you're seeing a lot of companies trading for very, very high premium valuations for the simple fact that everyone's onto this AI picks and shovels play.

19:01This seems to be like a turnaround company where the stock is still beaten down in an industry that is clearly poised for growth. So it's something that's very interesting to me right now. John, what do you have? So, 120 years ago, two guys in Wisconsin figured out how to make a water meter that could withstand freezing temperatures. Now, Wisconsin is called the Badger State, and so they named the company Badger Meter, ticker symbol BMI. Today, this business is thriving more than ever. It provides smart meters to track flow, water pressure, even water quality. And in the background, it provides analytics software for its grid-based customers.

19:40The Tailwinds guys here are strong. They're not making any more water. And there's over 8 billion thirsty people in the world. So we need to manage our water better. And that's what Badger Meter can help grids do. Data centers and nuclear power plants also need water. Those are some trends that are pushing adoption here. Listen, Badger Meter, the reason I wanted to highlight it today was it just got crushed after its earnings results earlier this week. Basically, the company expects slower growth over the next five years compared to the previous five years. That said, there will still be growth, and there are some big projects coming online, such as 1.6 million meters in Puerto Rico.

20:18This gives management the confidence that it can continue to grow, albeit at a slightly slower rate. Margins are hitting all-time high. I think that's important. The operating margin is around 20%. The balance sheet is pristine. It's paid a dividend for over 30 years. This is the newest stock to my portfolio personally. I wish I'd have bought it after it fell after earnings, but still, it's one that I expect to be a long-term drama-free contributor to my stock performance and one that I like here. Well, with airlines, HVAC equipment, and water meters compared to our MAG7 discussion earlier, it's really like that Monty's Python joke, and now something completely different.

20:58But that's all the time we have for today. Matt, John, thanks for sharing your thoughts. I'm going to hit the disclosure and we'll get out of here. As always, people on the program may have interests in the stock they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes.

21:25Thanks to our producer, Dan Boyd, and the rest of the Motley Fool team. For Matt, John, and myself, thanks for listening, and we'll chat again soon. Thank you.