The Trade Desk’s Woes & A New AI Donut?

19:08Travis Hoium:When we come back, we're going to play value or value trap, you're listening to Motley Fool Hidden Gems Invest.

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20:25Lou Whiteman:Claude.ai slash fool.

20:28Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. In this segment, we like to have a little bit of fun with investing. So we're going to play a game called Value or Value Trap. We're going to ask John and Lou whether these companies are a great value for investors or whether this is a trap that looks really cheap but doesn't end up being that long term. The first stack we're going to talk about, we just covered a little bit. That is the trade desk. But Lou, I want to know, is this now a value? We were just going over the numbers during the break. $5 billion enterprise value. The price earnings multiple on a forward basis is 6.6.

21:02Travis Hoium:By the way, all of these companies have a forward PE under 15. So theoretically, they could be values. But is this a is this a trap?

21:09Lou Whiteman:Fool me once, shame on you. Fool me twice, shame on me. At this point, I am not going to see value here until I see some articulation from them that they know how to solve the mess they're in. Right now, I think it's a trap or it's too risky to try and catch this fallen knife. John? Yeah, I agree with that value trap for now. Now, I mean, you point out the forward earnings multiple, but I would assume that that is actually going to go up here in the coming weeks because the guidance showed that we're going to have a revenue decline. We don't know how long that's going to last and the margins are getting pressured.

21:46So I don't think it's as good of a deal as it looks. It's kind of a show me story at this point. All right, if you're going to have traps,

21:54Travis Hoium:I do want to hear what companies are more attractive in this space. I'm going to just throw one out because I think, you know, one that I have been interested in recently and been adding to my position too is Zeta Global. Here's a company that's growing almost 50 % year over year. But John, Lou, what's on your radar in this area that is more attractive?

22:15Lou Whiteman:I just said the walled garden. I mean, give me an Amazon just because I get a lot of things going on there. But that works for me. Yeah, I agree with Lou. I mean, go with the ones that are working for sure. Meta platforms will be at the top of my list. But Zeta is at the top of my watch list, the one that I need to do more research on.

22:34Travis Hoium:Let's talk a little bit about Shift4. This is in the payment space. And some of these companies, I mean, PayPal, you can throw into this as well, have gone from being sort of market darlings to incredible value stocks. Forward price to earnings multiple is 7.4 for Shift4. But after they reported earnings earlier this week, shares fell almost 20%. So, John, I know this is when you follow a little bit, is shift for today value or value trap? Value all day long. And if you are a shift for shareholder as I am, you are used to the market just dogging on the earnings results that are consistently good.

23:12And this is a company growing at a very high growth rate and doing so profitably, not really any dilution to shareholders to speak of. I think that this is a company that is going through a little bit of a transition as it kind of expands into more international markets. The financial technology sector is extremely not it's not just unloved. It's hated by investors right now. So that's going against it. But you look at the business itself. This is one of the few companies in the space putting up growth and profits.

23:41Lou Whiteman:Yeah, but I mean, I guess toast. I don't know. This feels so commoditized to me and it doesn't feel like everyone could be a winner. I'm not sure I really like any of these in the long run. I don't know if this is a value trap as in there's anything really wrong with the business, but I don't find it a compelling investment. I'd buy toast before I'd buy shift four.

24:01Travis Hoium:Yeah, both companies that I have on my watch list, I have not bought either of them, but I actually like the case for both of those. All right, let's talk about one that has been in the talk of the market over the past year or so. That is Micron. Shares are actually down 26 % from their peak. But if you look at the forward price earnings multiple, it's still just six. So, Lou, with everything going on in the memory market, is Micron a value today or a value trap?

24:29Lou Whiteman:This to me is a good textbook example. If I ever have to go back and teach a college class about why there is no one financial metric that you should focus on and make all your decisions based on. Yes, that's a great PE, but this is a commoditized business and the commodity is red hot. So is that sustainable? I don't think it is. I still think that this is a value trap. I know Micron, I actually sort of like Micron better than any of their competitors, because I think Micron has made more of an effort to differentiate itself and actually try to break out of the commodity trap. I'd rather be late on this one buying in, though, because it's still just, I know the history and memory, and I know how this story ends.

25:10It's not the first time that Micron has been valued this cheaply. In fact, I think in a lot of the past cycles, it has been valued at under 10. I know for a fact it's been valued at under 10 times forward earnings many, many times in the past. I would say, though, even though I agree directionally with Lou, I would say this is a value stock. And the reason being that I would say it is a value stock is that I think that the red hot commoditization or the red hotness of the commodity right now is going to continue for several years more. I don't think that this is a short boom and bust like it's been in the past.

25:46I really think that there is so much to be done in the AI space. Memory is still such a shortness of supply that I do believe that Micron is able to maintain its pricing power for, I would say, the next three years at least.

26:04Travis Hoium:I've got a little quiz for you because the last time that memory was this hot was early in 2000, the year 2000, 26 years ago. So, John, do you know how far Micron stock fell from its peak in mid 2000 to its low? And I've got that at late 2008. I would imagine it's over 90 percent because it took it, I think, 20 years to recover and hit recapture highs. Yeah. 98 percent drawdown. Ninety eight point two percent to be exact. this is one of those markets that yep if you get it right you can have a 10x stock like we've had over the past 18 months or so but man if you get the timing wrong this can fall apart really quickly so this does make me a little bit nervous as an investor all right let's talk about salesforce this is another one of these companies that you would think has a lot of staying power but has had trouble in the market.

27:00Travis Hoium:John, is Salesforce a value today or a value trap? It's a value trap, in my opinion, for a variety of reasons. But as you look at what this company is doing, I think that it is taking on a huge risk as it tries to change its business model from a per seat business model to a per task business model. When you integrate AI tooling into your product, but then you start charging per task, you're really not looking too much different from just the direct AI tools that are available themselves because you're paying for tokens when it comes to a coding AI agent. So I don't think that that's a smart move.

27:40I think that there's a lot of aggressiveness here with high goodwill on the balance sheet. And yeah, it does look cheap, but I do wonder about this business long term. So for that reason, I'd say value trap.

27:50Lou Whiteman:I'm probably more bullish on the business's survivability than John, but I'm not really compelled to buy in here. I'm pretty lukewarm on value, value trap. We have decelerating growth. We have a lot of headwinds. And as John says, there's a lot of debt, just a lot of garbage on kind of on the balance sheet. I also my fantasy in this world is to see Slack disappear. And since that's, you know, so I mean, I'm kind of rooting against them for that reason. But I feel like this is likely just going to be not get worse, but not get a lot better for a while. Lou, anything in this space that does intrigue you?

28:32Lou Whiteman:Not particularly. I do think there is a path for and it might be a company that John is going to talk about on the radar. But I do think that companies are going to emerge that can actually package and use AI to actually sell AI value to enterprise customers. And I do think there's a path here. I don't think Salesforce is the best vehicle for that, but I do think that that's coming.

28:58Travis Hoium:This is going to be such an interesting case study in the disruptors and the legacy companies, because it does seem like Salesforce, the trade desk, they are serving some of those bigger, older companies that don't necessarily have the disruption mentality of a lot of their competitors. All right, let's talk about another one that we have talked about a few times on this show, always seems to be a bit of a value. That is Adobe. John, Adobe's shares are currently trading for just 10 times earnings and the stock's in a 62 % drawdown. Is this a value or a value trap? Yeah. Oh, I hate to be negative Nancy here, but I'm going to go with value trap again.

29:39And the reason I'm going to go value trap is I am seeing concerns over growth. I am seeing concerns when it comes to margin. We have ongoing questions in leadership. And then there's also the prioritization of the freemium model. This is what management is saying it wants to focus on, get these free users into the ecosystem. But to me, that's kind of moving the wrong direction. It signals to me that the space is becoming, the creative space is becoming more competitive due to just superior AI tooling that is out there. And so I do wonder about this business. I'm not ready to buy into Adobe at this valuation, even though it does look attractive.

30:18Lou Whiteman:I took a flyer on this one, so I have to say value. I mean, I get the risks and I think they're real. I am still skeptical that the people really using Adobe are going to switch over anytime quickly. especially with Adobe working on their own AI tools and trying to make their own tools. I get if AI tools get really, really good, there's going to be a lot of corporations saying we can save money here. But with tokens, will they? Stuff like that. I do think that there is a runway for Adobe to figure it out. The management turnover is an unfortunate time in giving everything that's going on. I mean, look, a person who's done a great job and it's been there decades.

30:57Lou Whiteman:So I get it, but that's unfortunate. But I do, I have hope for this one. So I'll say value. All right.

31:05Travis Hoium:I want to quickly touch on one of the companies that has actually outperformed the market over a period of time and also outperformed its high profile competitor, Tesla. That is General Motors trading for just six times forward earnings. Lou, I'm going to let you go first because I know you're always my negative voice in my head when it comes to automakers. But is this a value? Have they actually got this figured out with a reasonably good strategy and autonomy too?

31:31Lou Whiteman:They do. And it's still not good value to me because this is just such a cutthroat business. I mean, they are very good at what they do, but I am a long-term focused and at best with an automaker, you trade cycles and I'm just not interested in doing it. Their margins stink even when things are going well. This is just, there is no more complex supply chain in the world, not even any of my defense contracts, anything like that, than the automakers. This is just, this is just, you're asking for trouble if you try and go long-term in an automaker. So every time it looks appealing, it's, this is just Lucy and the football all over again.

32:14Yeah, I would agree with Lou here is that maybe the stock kind of looks attractive, but for me, the automakers, the businesses never look all that attractive to me. And so that is why I am disinclined to ever get into GM or others. I have looked at Ford in the past and just at the end of the day, I don't love the business. And so for that reason, even when the stock does kind of look attractively priced, I stay away. Now, of course, you point out this has been a stock that has been gaining. So I have been missing out here, but it's just not one that I am attracted to because of the business.

32:49Travis Hoium:Always one of the toughest debates for an investor when you see a stock that looks cheap, but the question is really, is it long-term? Hopefully that is helpful in understanding some of these cheap looking stocks today. When we come back, we are going to get to the stocks on our radar. You're listening to Motley Fool and Gems Investing.

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34:15Travis Hoium:As always, people on the program may have interest 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 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. I did want to touch on one of the bigger topics of the week, and that is Alphabet losing a bunch of its best researchers, people who have been there.

34:44Travis Hoium:Jeff Dean has been there for, I think it was 27 years. This is not the first time, John, they have lost some of their major talent, but this is now a trend over the past six months or so. They're showing really good numbers at GCP, but the existential question seems to be getting stronger for Alphabet. Is AI going to be disruptive if they lose their smartest people? What do you think? Yeah, I don't know what to make of some of these announcements of the departures from Google talent. With Jeff Dean in particular, he's been at Alphabet so long, you have to imagine that he's accrued somewhat of a nest egg.

35:19And who can blame him for going out and starting his own company to pursue something at this point that he wants to pursue? I mean, that's what I would be tempted to do if I was in his position. So it's hard to fault him too much for that. You look at some of these companies, too. I mean, Anthropic losing some talent, yes, but also gaining some talent from Google as well. So you have somebody such as John Jumper, who is a big part of Google's Alpha Fold. And I really think that Alpha Fold is a really important thing that Google is doing that we don't talk about enough, trying to figure out how proteins fold.

35:53And I think that's going to be revolutionary for medicine and more. But Jumper leaving Alphabet for Anthropic. So Anthropic is also gaining some talent. And so, yeah, I mean, some they're losing talent, but they're also gaining talent because all the chairs keep or people keep jumping from one boat to the next. It makes sense because changes happen in the space so quickly that businesses and models kind of take new directions. And so it makes sense that as talent is looking at where its own ship is sailing, that as they change directions really quickly, that I'm going to jump on a different boat that's more in the direction I want to go.

36:30Lou Whiteman:This is all just, I think, you know, parlor gossip. I don't think it's investable. I don't think it really tells us anything we don't know about the frontier models. We don't know that Google doesn't have a 50 % stake in whatever Dean's doing next.

36:43Travis Hoium:Yeah, they did say that they have a stake in the company and it's going to be running on GCP.

36:48Lou Whiteman:Okay. And, you know, so they're moving some of the more speculative stuff off balance sheet. That's okay. As an investor, it's just kind of go play your games.

36:57Travis Hoium:The other thing that's so interesting is Google was the company that, you know, the show Silicon Valley was kind of making fun of being in the place that you just go to work and collect a giant paycheck. But now we're now we're really worried about, you know, losing specific people. So it does seem to be the market kind of talking out of both sides of its mouth. I think the thing that is undeniable with Alphabet and Google in particular is this is a company that has more and better infrastructure than any of these other companies, whether you're talking about hyperscalers or the startups. You know, Anthropic is building its business on top of GCP.

37:32Travis Hoium:So a lot for investors to digest, but I don't think Alphabet's going to go anywhere. All right, let's get to the stocks on our radar. John, I'm going to have you go first. What are you looking at this week? Yeah, I'm looking at service now. This is ticker symbol N-O-W. I am not a big fan of enterprise software stocks, generally speaking, but this is one that stands out in my opinion. This company is embedded across many important businesses around the world doing, you know, just some customer service management, some information technology service management, just some really boring stuff behind the scenes.

38:07but it is really embedded. And this whole space, I believe, is poised to be disrupted due to AI agents. And NVIDIA CEO Jensen Wong saying that ServiceNow is actually at the forefront of deploying AI agents. If you've tried to build an AI agent on your own, you realize how difficult it is. If ServiceNow can make it easier for businesses, I think that gets adopted. The company is still growing at over a 20 % growth rate. You look at the remaining performance obligations, still growing at an over 20 % growth rate as well. Trading at around 30 times forward earnings, not particularly cheap, but not unreasonable given that growth.

38:43So ServiceNow is one that I'm looking at.

38:45Travis Hoium:All right, we need our thoughts from Dan Boyd behind the glass. Dan, what do you think about ServiceNow? Yeah, ServiceNow is one of these companies that just kind of does stuff in the background. And y 'all, you know I love that kind of stuff. The companies that nobody knows quite what they do, but they must do something really important. It's got to be important, right? Especially now. Service now.

39:06Lou Whiteman:All right, Lou, what are you looking at this week? Dan, I'm going to give you something where I do know what they do, but you can't see it every day. I'm looking at warehouse automation company Symbotic, ticker SYM. Company beat on earnings and revenue this week, but Wall Street was disappointed by the guidance or kind of the lack of enthusiasm around the guidance. Stock traded down about 10%. Dan, I think the market has this one wrong. Symbotic is methodically building its business. They added a really important new customer, Southern Glazer, a big beer and wine distributor in the quarter. Symbotic is conservative in the way it books future business.

39:41Lou Whiteman:It's basically just bolting in one warehouse at a time on these big things, even if they're going to get 30 eventually. So that kind of understates to guidance some. I think there's huge growth potential here. And Dan, I'm convinced there's a whole new generation of warehouse automation that's actually going to create a lot of value coming out of this AI wave. Symbotic has a big role to play here. stock's not cheap relative to current business, but I'm bullish that that current business is going to grow from here. And this one is really intriguing to me.

40:10Travis Hoium:Dan, what do you think about warehouse robotics? Okay. So I've never worked in a warehouse, but get this, I'm looking up Symbotic and apparently their robots can travel up to 25 miles an hour, which again, I've never worked in a warehouse, so I don't, I don't know how all that stuff works, but it seems very scary to me to have a robot blasting around at 25 miles an hour while I'm trying to walk to the bathroom.

40:36Lou Whiteman:That's why the bathroom's got to be separate. The robot bathrooms are separate, so you're fine.

40:41Travis Hoium:Okay, Dan, what's going on your watch list? I'm going fast, robots. Let's go Simbotic. All right. Congratulations to Lou. Thanks, everybody. See you here next time.