The $1 Trillion Club Gets a Little More Crowded

0:01Travis Hoium:We have a new member of the$1 trillion club. Motley Fool Hidden Gems Investing starts now.

0:11Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Rachel Warren. Guys, we have a new member of the Trillion Dollar Club. I believe there's now 14 companies that are worth over a trillion dollars. This used to be a really big number and now it It seems like we hit a new company every week. But Lou, the company that we're talking about is Micron. Past a trillion dollars. I thought it was interesting to look back at their financials. Five quarters ago, they were free cash flow negative. Now they are the hottest stock on the market. This is a cyclical industry, typically a cyclical industry, but this is now also one of the most valuable companies in the world.

0:49Travis Hoium:Is this time around different from Micron?

0:51Lou Whiteman:Maybe. But let's pause for a second and look at kind of what they've done. This was a$350 billion company on January 1st. Guys, it's still May. They've had a heck of a career in a couple of months, right? Gained 19 % yesterday, basically on an analyst price target move. These are not normal times. That said, there is a there there. These AI models need memory. Micron has done a decent job shifting its business just away from this brutal commodity cycle and towards a higher value product. So they are, I think, special among memory. The note in question, the note that triggered this move over a trillion dollars, that analyst sees long-term contracts in place through 2029.

1:32Lou Whiteman:If that's correct, and I do think they're directionally correct anyway, this is not a fluke. This is not a one-time thing. This is the market responding to real demand. And with AI, just the numbers are all huge, but the demand is huge.

1:47Travis Hoium:Yeah, Rachel, it does seem like this time is a little bit different. They are in maybe a little bit higher value segment of the market. But there's also more players coming into the market at the end of the day. Memory is the kind of thing where supply and demand ultimately matters. But free cash flow does too. And it seems like they're going to have a really good year. Yeah, absolutely. I mean, it's kind of interesting to take a step back, right? Because historically, memory was sort of this unglamorous, sort of brutal corner of tech. So companies like Micron, they made standard DRAM for PCs and smartphones.

2:16And so, you know, demand would dip, inventory piles up, prices crash. It was a really pure commodity cycle. And there has been a lot that's changed over the last few years. And a lot of that goes back to high bandwidth memory. So modern AI accelerators, you think of NVIDIA's Blackwell chips, for example, they can't function without massive amounts of premium ultra fast memory stacked directly next to the processor. And Micron has pivoted from selling, you know, what was essentially in comparison a cheap commodity to selling this very high margin, highly customized strategic asset. So we're really seeing the physical reality of chip manufacturing is creating a massive bottleneck as well.

2:54And that actually benefits Micron, right? They've sold out their entire high bandwidth memory chip supply for all of 2026 under fixed long term contracts. The CEO is saying that they can only fulfill about 50 percent to 67 percent of current customer demand. And because building these semiconductor fabs takes years, right, so new supply from their domestic expansions won't even hit the market until 2028. So that is creating tremendous tailwinds for the business. And I think we're seeing a lot of that enthusiasm bear out, certainly in that analyst note and, of course, in the broader markets response.

3:30Travis Hoium:Lou, I want to just touch on their valuation, too. This is one of those companies that you look at the stock and a very low price to earnings multiple, especially on a forward basis. It has been even in the low single digits, not just single digits, but four or five, as recently as a few weeks ago. I think we're a little bit over that now. But historically, we're trying to give a little bit of historical context here. When these cyclical companies get to this point where everyone can see that they're incredibly cheap, that's also when things are really dangerous for investors because the E part of the price to earnings multiple is typically starting to peak.

4:06Travis Hoium:What should we be looking for in these commodity markets? I know it's not a commodity. HBM isn't a commodity market today, but it's potentially commoditizing over the future. There are things that customers can do to use less HBM to be less reliant on companies like Micron. So the market will react at some point. What should we be looking for as investors?

4:27Lou Whiteman:I mean, I feel like we go back to a conversation we had 24 hours ago about how something has to give here, right? Not everything can keep going straight up. And where does it give? I do think, yeah, when you're looking at this market right now, it's like, how do customers react? It may be that they can't for now, but that for now does a lot of work in that sentence. This whole thing, I think I can say with great confidence that it It won't go on forever. So what we're looking for is when will that turn? And all we really know right now is not now. There is a sustainable there, there through this year.

5:03Lou Whiteman:You don't get rich calling a bubble. Nobody got rich declaring a bubble. They got rich acting on it. And a lot of people didn't get rich because they acted at the wrong moment. Right now, I think this sustains until it doesn't, to kind of say the obvious. and just any sort of sign of a pivot one way or the other or more capacity coming online or just I still think it's going to be the CFOs that some of the hyperscalers said we're just going to tap our brakes ever so slightly but I think we need to see a flinch and until we do the standoff just continues.

5:40Travis Hoium:Yeah the long-term contracts sound really great I have followed the solar industry for a very long time. And those long-term contracts, that was silicon and a little bit different kind of silicon, but kind of the same concept where you need to get this supply, you got to lock it up long-term. And that became really problematic for actually both sides. The companies that were signing those long-term deals signed them at really high prices that ultimately led to some of their downfall. If your customers are no longer buying those products, then that leads to problems for the manufacturers as well.

6:11Travis Hoium:So yeah, I think you're right, Lou. This is not going to be the same forever for at least the foreseeable future for the next few quarters. It seems like memory is going to be a business that's going gangbusters. We'll see when it turns. When we come back, we're going to turn our attention to the pharmaceutical space and what's going on with Eli Lilly. You're listening to Motley Fool, Hidden Gems Investing.

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7:07Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. we got some really potentially big news from Eli Lilly who seems to be absolutely on fire right now they introduced some trial results some early trial results that could impact the future of heart disease Rachel this is all a little bit over my head so explain this this trial and exactly what they're doing to me like I'm my nine-year-old son okay sounds good so Eli Lilly they just released phase 1b trial data, right? So we're in the early stages of testing at this point on a gene editing therapy, which is unnamed right now. So it's just called Verve 102.

7:45They acquired this asset last year from a company called Verve Therapeutics. They purchased Verve Therapeutics for about$1 billion. This is a candidate that the FDA has already fast-tracked. So that could mean that we see it developed and hit the market at a much faster pace. Phase 2 trials are scheduled to begin by the end of this year. But why is this candidate so notable? So in this early trial, a phase 1b trial, you had a single intravenous infusion that slashed LDL cholesterol. Remember, that's the bad cholesterol, slashed it by up to 62%. And there was a durable reduction in bad cholesterol, lasting up to 18 months and counting in trial participants.

8:28The drug uses a very precise form of CRISPR technology called Avivo-based editing. It basically uses these tiny nanoparticles that travel right into the patient's liver cells. And once there, acts like a genetic eraser, actually changes a single DNA letter to permanently turn off a gene that otherwise holds the liver back. And that way the liver can clear the bad cholesterol from the blood naturally. Why is this so important? Well, historically, managing heart disease, it means taking a statin every single day for the rest of your life. Data from this early trial showed that about half of all patients stopped taking other daily cholesterol meds.

9:06And so this therapy is really completely shifting the medicine that could be available for these patients from continuous chronic management to a permanent one-time preventative measure. It's still very, very early days. We will have to follow this closely, but it is really exciting news.

9:23Travis Hoium:Yeah, I saw one comment say that this could eliminate heart disease. That's probably going, you know, to the extreme extent, but it seems like the doctors who are looking at this are just incredibly impressed with the results. The other thing, you know, and you mentioned, but I want to highlight it. This was one infusion. This was not taking a pill every day. This is not doing an injection every day. This is a one-time infusion that lasts at least, you know, a year, 18 months. We're still early in what this would actually look like in commercial patients, but this is potentially the kind of thing that could have a dramatic impact on people's lives and longevity with relatively minimal invasiveness.

10:03Absolutely. And the other thing that I think is important to note is Eli Lilly has been on an acquisitive streak, right? And one other sort of a note to what I was saying, they just announced that they're acquiring three new companies. You know, they are flush with cash from the GLP one successes that they have enjoyed. Of course, They have a broad portfolio outside of that. But they're spending up to four billion dollars on three clinical stage vaccine developers. One is a company called Curavo that's developing a next generation vaccine for shingles. Another company is really designed to buy out their vaccine against the Epstein-Barr virus.

10:41There's no approved vaccine for this virus. Causes mononucleosis. It's been linked to chronic conditions like multiple sclerosis. And third, they're acquiring a company called Limatec Biologics. It's a Swiss firm, and they focus on developing vaccines against severe bacterial pathogens. So the company is really, really on a run up right now. But if you look at what they're doing with their business, with the profitability and cash they have on hand, it's really, really strategic use of their capital.

11:07Travis Hoium:Lou, this seems like the kind of thing where they're on a roll and they're just building a moat around their business. We didn't even talk about Red Hatru Tide, which is potentially coming in the next year or so. I think they're in phase three. That is a GLP three is what they're calling it. Just phenomenal results for that. So it seems like everything is going incredibly well for Eli Lilly right now.

11:30Lou Whiteman:Yeah, I don't know if they're building a moat because I don't know what that would look like, but they are building optionality. And that's what's really important. I mean, look, Verve 102, I hope for the best here. I've been on a statin since I was in my 20s. Okay, so I mean, I get this. it's not going to cure heart disease. The heart breaks in a lot of different ways, but it could really, really help in one of the leading causes of death. And that's what matters. Also, though, this was a study of 35 patients over 18 months. So as Rachel said, we have a long ways to go. We'll see. The thing is, and this is what Rachel was focused on, and it's absolutely right.

12:04Lou Whiteman:There's this, there's all of these acquisitions. Verve was just an acquisition a year ago. Lilly has just this ton of cash because of GLPs, and they are making sure they are buying options on the future to a time when patents go off or when GLPs aren't the next big thing. They are making a lot of strategic bets, smart bets. They're just not throwing money at the wall, but they are buying promising technologies. Truthfully, if one of these four turns into a blockbuster. They will have done better than most. So it's, you know, it's almost hard to invest on any one of these things. But for a pharmaceutical company with all of the risks, with all of the hurdles that come with this business, all the patent expirations, what you want is for them to take in times when they have the cash to expand their portfolio and find good uses of that cash.

12:59Lou Whiteman:And Lilly gets really, really high marks on that.

13:02Travis Hoium:Yeah, we talk about building portfolios at the The Motley Fool, diversifying your risk. That's exactly what Eli Lilly is doing. So it seems like things are going incredibly well on multiple fronts. We'll see if that continues for investors. When we come back, we're going to talk about Zscaler's results and the market's reaction. You're listening to The Motley Fool, Hidden Gems Investing.

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14:57Travis Hoium:Welcome back to Motley Fool and Gems Investing. Zscaler reported earnings after the market closed yesterday. And Rachel, the stock is down 30 % as we're recording. The numbers didn't look terrible, but investors are looking at guidance here. And that's what they didn't like. What did you see in the quarter? Yeah, so they beat their quarterly expectations on both the top and bottom line. They delivered adjusted earnings per share of$1.08,$850.5 million in revenue. That top line figure, that's 25 % growth year over year. So not bad to be sure. They actually are forecasting Q4 revenue between$875 million and$878 million.

15:34That would be 22 % growth year over year. Now, the top end of that range missed Wall Street's expectations just slightly, right? So again, the top end of that guidance,$878 million. Wall Street was looking for$879 million. I think what the market did not like was the fact that Zscaler cut its full year free cash flow margin guidance from about 26.8 percent down to 23 percent. And this is because they're spending heavily on AI CapEx, right? I mean, rising data center and hardware costs to power their new AI tools. They also had two key sales executives that departed right at the end of the quarter.

16:07I mean, the core business is still really healthy. They're seeing a lot of generous growth from AI bookings. You know, their data security annual recurring revenue topped 500 million. We're seeing a lot of software phobia in the market right now. And I think punishing really any company that displays sort of a temporary speed bump, I think that's what we're witnessing here. I'm not a buyer of this stock, but this was not a bad quarter. This is not a company that's flailing by any means. So kind of interesting to see how the market's responding.

16:35Travis Hoium:Lou, we talked about the increase in prices or margins for some of the memory companies earlier. This is the downstream impact is you're hitting things like the cash flow for hyperscalers, for Zscaler. So is this just sort of the ebbs and flows of the market? I also wanted to note that the stocks skyrocketed over the past month or so. And so this is just undoing that return from the SaaSpocalypse. So it just seems like nobody really knows what to think about these companies long term.

17:06Lou Whiteman:And that's the bottom line, right? Because look, this is an overreaction today, period. the results were not bad enough to justify 30 % down. However, I'm not sure there was any rational move by this stock in the last few years, like you say. So, you know, we can't now certify the market for not being rational today when we've just been in a weird market for a while. I don't know if Zscaler will quadruple from here or go to zero, but I do know that these results aren't worth 30 % down. Rachel mentioned it, data security growth solid. There was a lot of weird sales things. Here's the bottom line for me.

17:46Lou Whiteman:I don't know what AI is going to do to software, but I will be very, very surprised if the first thing CEOs look to replace is cybersecurity. I feel almost certain that it's going to be something less mission critical, or at least less dangerous to replace. So I don't think this idea that Zscaler is just going to go away because we can do this with AI tomorrow is going to happen. The question for me, and the question I can't answer, and I've talked to some cybersecurity people, I don't think they know the answer yet is, will AI fundamentally change the threat in a way that makes the incumbents vulnerable to newcomers?

18:28Lou Whiteman:Will Zscaler get replaced by an AI-focused Zscaler? It seems kind of far-fetched to me, but I do think that's the bigger risk here. I think caution here and caution throughout software makes sense, but I don't think down 30 % because, you know, they're investing in the business and they might've just had a choppy sales cycle. I can't tell you that makes sense.

18:52Travis Hoium:It's interesting to look at some of these valuations too. You talked about the market being irrational and the enterprise value. So the stock is down significantly today. It's also down from a high of over$300 at the end of 2025, but still it's trading for six times sales and 30 times forward earnings estimates. So this is, despite the fact that the stock is down as much as it is, still not necessarily a cheap stock. So lots of things for investors to weigh, but I think you're right. cybersecurity has a bright future, just a matter of who's going to be the winners there. As always, people on the program may have interest in the stocks they talk about in The Motley Fool and they have formal recommendations for or against.

19:32Travis Hoium:So don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's 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. For Lou Whiteman, Rachel Warren, and Austin Morgan behind the glass, I'm Travis Hoyam. Thanks for listening. We'll see you here tomorrow.