Walmart Stands Tall In a Rocky Retail Environment

14:43Matt Frankel:I think that if you're in a market where you're getting good deals, you're not turning over your inventory fast enough. So I feel like it's a really difficult place for Open Door to be. So I'm not sure it gets to 10 billion in revenue. I'm not sure if the market values that it's six times sales.

14:59Travis Hoium:Yeah, this is one of those businesses I really want to like. I liked Zillow when they got into iBuying because in theory, it makes a lot of sense. But then John touched on it. You get into the actual nitty gritty of the individual transactions and you end up buying homes you don't necessarily want to buy. It just becomes really, really complicated. Nobody's proven the ability to actually make it profitable long term. But Open Door was one of the hottest stocks when they came public because they were a SPAC. And it seems like SPACs are back. Chamath Pali Kapitia released another SPAC called the American Exceptionalism Acquisition A, which as you would expect is a Cayman Islands company.

15:38Travis Hoium:I looked at their filing. The Cayman Islands are mentioned 238 times and America or any derivative of America is mentioned 43 times. So I think that's a, that's a fun data point if you're betting on American exceptionalism with this SPAC. But Matt, are we back in a SPAC boom?

15:56Jon Quast:I'm hoping we don't get to the 2021 type of SPAC boom. I mean, the worst thing you could hear in investing is this time is different. And we're not seeing the, I mean, I used to do the SPAC show and at one point there were 17, 18 a day going onto the market. I don't think we're going to get back to that, but it is a legitimate way for companies to go public when it's done right. The question is, are they going to do it right this time?

16:22Travis Hoium:Yeah, that really is the question. And Chamath's track record is sort of hit or miss. I know that, you know, I bought into a few of these over time. Virgin Galactic was a big winner for me before the SPAC boom. Then I've proceeded to lose a whole bunch of money on that. SoFi is another one. Matt, what would make this time different for the SPAC boom if this is actually going to be a little bit more sustainable?

16:51Jon Quast:You mentioned his record. He's launched 10 SPACs altogether. For long-term investors, I would give him a 1 out of 10. SoFi is the only one that's really made anyone any money. We could talk all about the other ones like Virgin Galactic, which is down 98 % from its initial price, which I don't have to tell you that if you invested in it. Again, the worst thing you could say is this time is different, but he's making some tweaks to make this feel like it's not just a money grab for the insiders. There's no warrants, which was a big staple of SPACs last time. The founder shares, which is a nice way of saying that the sponsor essentially gets 20 % of the SPAC for free, is actually being bumped up to 30 % in Chamath's favor.

17:32Jon Quast:But in order for him to cash it out, the stock needs to rise by 50 % or more after he finds a deal target and the deal closes. So, it's meant to align his interest with shareholders a little bit more than it was last time, which really wasn't aligned at all.

17:46Travis Hoium:John, do those changes actually change the incentives enough for you?

17:52Matt Frankel:I was ready to write this off completely, Travis, and these incentives are drastically different. I think it was Charlie Munger who said, show me the incentive and I'll show you the outcome. Too many SPACs failed because the incentives weren't in favor of retail investors. It was all in favor of the insiders. This one gives Chamaa some credit. This is very drastically different, especially with no warrants. With the vesting period, it has to increase in value before his shares can vest. So, you know what? I'm going to keep an open mind with this one. This is very radically different from what we've seen before.

18:28Travis Hoium:The devil's always in the details. The detail here is what in the world is the target? What do you think he's going to be going after?

18:32Matt Frankel:That is a great question. He was talking about needing unlimited energy in the United States. If you read between the lines, maybe he's looking at fighter robots for the U.S. military. And he says he's looking for a great company at a great valuation. These seem like very futuristic ideas and not so much a current reality idea. And so it seems unlikely to me that you're going to have a business that is at a great valuation. You're probably going to have more of an idea of a business that he's going to take public, not so much something that's already fully operational.

19:08Travis Hoium:Yeah, the challenge with SPACs is that you can make these grandiose predictions about what the future is going to look like. And we only find out in the future, four or five, six years down the road, like we are with those original SPACs, whether they live up to them. And a lot of them really haven't. Next up, we are going to play Would You Rather. You're listening to Motley Fool Money.

19:31Matt Frankel:inspiration got no concentration and I dream how things could have been different

19:43Travis Hoium:hoping that someday I'll change the mood so I said I got no bottle of liquor

19:53Matt Frankel:knowing nothing's gonna bring you to my side

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21:16Travis Hoium:Welcome back to Motley Fool Money. At this point in the show, we like to play a game and I'm going to play Would You Rather with John and Matt. Pretty simple game. I'm going to give you two stocks. Which one would you rather own in your portfolio? Let's start with the retail trend that we talked about a little earlier. Walmart is a much hotter stock than Target, but it's trading for 39 times earnings. Target is trading for 11 times earnings. John, would you rather own shares of Walmart or Target?

21:47Matt Frankel:I'd rather own shares of Target. And my answer is predicated on an assumption. That assumption is that Target is not a Kmart. I believe that Target is going to find a way through this. It's going to stay one of those top retailers for a long, long time. And as you look at Target, one of the only things that's growing right now are its digital businesses. So things like its subscription services, its third-party marketplace. I think that those can continue to gain traction and provide just an incremental boost to its profitability. And so, that's why I like it at 11 times earnings. If I'm wrong, at worst-case scenario, you get a huge retailer at 10 times earnings and a 4 % dividend yield.

22:27Jon Quast:I'd agree with John. I'll go with Target as well on this one. I think the new management is going to get it right. They've identified the problem pretty early on. They're being proactive about it. And I do think they're going to do all the right things to keep Target relevant. They're not another Kmart. They've coexisted with Walmart for a long time already.

22:43Travis Hoium:One of the things I want to hear from some of these companies is how they're bringing autonomy into the business. You look at something like Target, but Walmart could be the same case where you're having autonomous vehicles all over the place. Why aren't we just filling those and my groceries can be sitting in my driveway when I wake up in the morning? John, is there a sort of, we have the boxes, you know, these are big box retailers that that's still a point of leverage, whether you're looking at Target, which is going to be a little bit more urban, or Walmart, which is going to be a little bit more rural.

23:17Travis Hoium:That still seems to be like an untapped market, a lot like these digital services you're talking about.

23:22Matt Frankel:Generally speaking, I would say that autonomy is good for any retail business, because you can drive a little bit of incremental profit from these huge operations. I think that's more of a, perhaps a 10-year boost to profitability, not so much in the three to five-year range.

23:39Travis Hoium:It's probably fair. I would like the future to be here a little sooner, though. Let's stay in retail and look at Home Depot and Lowe's. Home Depot, trading at a premium, but not all that much of a premium. 27 times earnings. Lowe's is at 21 times earnings. Matt, would you rather own shares of Home Depot or Lowe's? I'm going to go with Home Depot here.

23:59Jon Quast:Even with the premium valuation, I think Home Depot has done a much better job of Omnichannel, much better job of getting professional customers. Lowe's playing catch-up with that with their recent acquisition, with getting the contractor crowd to be customers there. And I just think Home Depot's done a better job of executing, and that's worth something.

24:18Matt Frankel:Yeah, I can't disagree too much with Matt here. Home Depot, just so reliable over the years. But I would go with Lowe's here at 21 times earnings, just because I think it can continue to close its profit margin gap with Home Depot. Home Depot's historically have better margins. But, you know, I think Lowe's can still slowly and surely chip away at that. And for that reason, I think it may have more earnings upside.

24:40Travis Hoium:These two have been such an interesting comparison over the past 20 years or so. Even just my own shopping. Well, I would prefer to shop at a Lowe's. I never go to Lowe's. I always go to Home Depot. So, John, is this just momentum that allows Home Depot to sort of be that center of gravity for home improvement, for contractors? It just seems like there's something that they're doing a little better. I can't always put my finger on it, but from an investment perspective, this has been the better stock for really since these companies went public.

25:13Matt Frankel:Yeah, I think that's just right, Travis. It is hard to put your finger on exactly what Home Depot does that's so much better than Lowe's. And so I guess that's why I say, why bet on the guy who's already won rather than bet on the guy who can improve and close the gap? Man, they're always across the street from each other, right? I mean, they're not that different. So I just feel like Lowe's has opportunity.

25:37Travis Hoium:We're going to have one more retail comparison here. Let's stay with discount companies, TJ Maxx and Costco. A little bit different business model here with the membership model at Costco. But John, TJ Maxx is trading for 31 times earnings. This has actually been a phenomenal stock over the long term. Costco, another huge winner for investors long term at 56 times earnings. Which one would you rather have in your portfolio?

26:04Matt Frankel:I'd prefer to have TJ Maxx. And that said, Costco is a top tier company. But ultimately, single digit growth at 56 times earnings is just too steep for me. And look, as you mentioned, TJ Maxx stock is up over 150 % in the last five years, beating the S &P 500. It's really putting up some solid operating results. And so, of these two companies, yeah, I think that TJ Maxx is going to be better for investors from here.

26:31Jon Quast:In full disclosure, this is a category I wish I didn't have to pick one. But TJ Maxx, I would have to go with, I mean, just from a risk-reward standpoint, I see a lot more upside potential from here than with Costco to justify that multiple. I mean, I'd go with TJ Maxx if I had to pick one, but I'd choose Walmart or Target before either of them.

26:52Travis Hoium:Since 1990, TJ Maxx stock is up 28 ,000%. Just phenomenal results for a company that, you know, when I was being dragged to TJ Maxx in the early 90s, I should have told my parents to just buy their stock instead of buying whatever thing I wanted to buy. Let's go to a tech comparison. And these two are in an interesting position because they're both investing a ton of money in artificial intelligence. They have a little bit different strategies, but they do seem to have a bright future, whether we're looking at AI or just their core businesses. Meta Platforms, aka Facebook, trading for 27 times earnings or Alphabet at 21 times earnings.

27:34Travis Hoium:Matt, which one would you rather have in your portfolio?

27:38Jon Quast:Alphabet, it's the best value of the Magnificent Seven. It's a high-margin business, tons of cash generation, tons of cash on the balance sheet. Google Cloud has so much potential, and it trades like a value stock. 21 times earnings is less than the S &P 500 average for one of the best companies in the world.

27:57Matt Frankel:Man, I really can't disagree with what Matt is saying too much. This one, for me, was the hardest of all of the would-you-rather that you put before us here, Travis. But I'm going to go meta. And the simple reason I'm going to go meta is because Mark Zuckerberg is so willing to swing for the fences when it comes to a big idea. Now, granted, that hasn't worked out with things like the metaverse. We'll see if it works out with AI. But when a business is already rock solid, taking a swing for the fences with something new is something that I appreciate as an investor.

28:31Travis Hoium:John, his reputation among investors has really improved over the past few years. And I think there's good reason for that. There's a lot of operational improvements. But you're talking about swinging for the fences. The last swing for the fences was the metaverse. That's I don't even know what the number is. Fifteen, twenty billion dollars a year. They burned on that. Nothing really to show for it. The VR business hasn't done much of anything. AI kind of came out of that. But if you go back to the original business was Facebook. That's more than 20 years ago. Instagram, they acquired. They've obviously built a business around it, but has Zuckerberg shown that he is somebody that you can trust spending tens of billions, potentially hundreds of billions of dollars investing in this next big thing?

29:16Travis Hoium:I mean, has he just sort of earned it because he is one of the richest people in the world and most successful tech entrepreneurs?

29:24Matt Frankel:Yes. It's hard to answer that. I mean, yeah. Hey, the other bets haven't really worked out so much. It does seem like, hey, maybe we're being a little bit too loose with our money. But, you know, as I've said before, this is a company that is still thinking about shareholders, paying that dividend, repurchasing shares. It's just printing money like crazy. And so, you know what? You have a responsibility when it comes to the rest of that cash. And so, if you're willing to spend it to grow the business, even at this scale, that's something that I'm willing to give them the benefit of the doubt.

29:58Travis Hoium:So final, would you rather is on holding or on running as they're kind of popular becoming popular becoming called right now by investors. Take your symbol is O N O N. If you're just in that one versus Nike N K E on is trading for 4.2 times sales. We're using sales here instead of earnings because on is not really optimizing for their earnings or net income yet because they're still a very high growth company. Nike, on the other hand, is in a turnaround. They're trading for two and a half times sales. So, On is trading at a premium, but not a massive premium. Matt, I want to start with you. Which one would you rather have in your portfolio?

30:38Jon Quast:I'd go with On. And it's really like a Peter Lynch invest in what you know type thing. I noticed at the gym, more and more people are wearing On shoes than ever before. Nike is very much in turnaround, and they're really trying to win back their cool factor. That's one thing that's really hard to do. Like, you know, think of when in the 90s, when we were growing up, how cool Nike shoes were. They kind of got away from that. They're in turnaround. I take On because it's just it's a high growth company and it's it's a it their products cool.

31:09Matt Frankel:Yeah, I agree with Matt. I would also take On stock here. And for two reasons, one, growth. So it's growth is better now. And it's long term growth potential is more promising, I think, than Nike. two, its profit margins are better. And so you look at the gross margin on is over 60%, Nike around 40%. And so I think that it deserves a higher sales multiple that it does. But I also think that it's going to pay off better for investors. It's hard to invest in a turnaround such as Nike. You really have to have a lot of faith, even at 2.5 times sales. I mean, that's not necessarily a great valuation for Nike if it doesn't dramatically turn things around.

31:51Travis Hoium:The one thing I took away from On's conference call is their comments about tariffs are very different from most companies. They just simply say, you know what? We're going to raise our prices and we've got a premium consumer. They're going to pay it. And that's exactly what's happened. So it will be interesting to see what happens to those two companies because there's a lot of debate and a lot of big investors betting on Nike. Next up, we're going to talk about stocks on our radar. You're listening to Motley Fool Money.

32:21Matt Frankel:At night we ride to mansions of glory and suicide machines Sprung from cages on Highway 9

32:31Travis Hoium:Drum wheel, fuming, checkered, and stepping out over the line Oh, baby, this town rips the bones from your back It's a death trap, it's a suicide rap We gotta get up while we're young As an investor, I'm buried in data and making sense of it all is hard. That's where Claude helps me every day. I regularly give Claude a company's financial statements going back a few years and ask it to flag anything that looks like an outlier. Line items moving in a way that didn't match the trend around them. It surfaced a lot of things I probably have skimmed past before. Things like expenses growing faster than revenue, or margins quietly improving while the headline numbers look flat.

33:15Travis Hoium:Claude doesn't tell me what to think. It helps me see just where to look closer. That saves me time, helps me find more opportunities to invest, and more risks to avoid. Claude is the AI for minds that don't stop at good enough. It's the collaborator that actually understands your entire workflow and thinks with you. Whether you're debugging code at midnight or strategizing your next business move, Claude extends your thinking to tackle the problems that matter. And with Co-Work, Claude actually builds real spreadsheets with working formulas, not just a CSV dump that leaves me with 90 % of the work undone.

33:46Travis Hoium:For problems worth solving, get started with Claude at Claude.ai slash fool. That's Claude.ai slash fool. And check out Claude Pro, which includes access to all of the features mentioned in today's episode. Claude.ai slash fool.

34:05Travis Hoium:As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks solely based on what you hear. All personal finance content follows multiple 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. Meta Platforms has been an AI story for a couple of years now. And Mark Zuckerberg was actually scooping up A100s when NVIDIA was writing them off right before the ChatGPT moment.

34:38Travis Hoium:But Meta is now at something of a crossroads. They've spent billions of dollars acquiring talent. But then the news this week was that they had some sort of hiring freeze. So, John, what is going on here? Is this growing pains or is this actually a change of directions just in the last few weeks with Meta?

34:57Matt Frankel:No, I don't think it's a change of direction at all. To me, I liken it to a sports team. So if you had a brand new sports expansion team in a league, let's say that the owner goes out there and spends all the money he has spares no expense to acquire the biggest and brightest names in that game right you're going to bring them in-house but then you're going to say all right well who's playing for this team well you're going to let those minds that you brought into the room have some time to get organized and develop a plan develop a team identity who do we want to be and i think that's what's going on with meta here it spent its money to bring in the talent to form the team, but now it still needs to spend some time and develop a strategy.

35:39Travis Hoium:They've also been spending a lot of money on data centers, chips, all of that stuff that all these big hyperscalers are buying, but their CapEx isn't quite as big as companies like Microsoft, Amazon, and Alphabet,$65,$70 billion is what they're expecting to spend this year. And they can use a lot of that internally to make their core products better. The interesting announcement this week, John, was that they said that they were going to spend$10 billion with Google Cloud, GCP, over the next six years. So at least putting some of that off on Google, is that a notable shift in their spending patterns?

36:14Travis Hoium:And what does it mean for Google and Alphabet?

36:17Matt Frankel:Whether or not it's a shift, I can't say, but I think it's a brilliant move because here's the thing. Google has a third-party cloud service. So no matter what, Google has to spend on AI to stay relevant in the space, or you give up your cloud service. That's just how it is. Meta, on the other hand, doesn't have a third-party cloud service. And so it's trying to figure out where it's going with AI. It can actually use Google as it builds out the infrastructure and kind of push the envelope with what it's doing with AI. And then as it develops a strategy, it can bring things in-house. And so that's what I see going on here.

36:55Travis Hoium:Matt, this could potentially allow Now, Google to be sort of the overflow, turn that instead of having that fixed cost capex into a variable cost in the future. So is that the right way to think about this for Meta? And is that the right thing to do? Because a lot of these companies are vertically integrating. They seem to be at least going a little bit of a different direction.

37:16Jon Quast:Yeah, one good thing I can say about Meta is they definitely seem to be adaptable when it comes to their AI strategy. You mentioned the hiring freeze. one of the things I found most interesting is that they internally label one of their AI teams as the TBD team. They're giving people, in some cases, nine-figure signing bonuses and not giving them a job to do, which to me sounds like the need.

37:36Travis Hoium:This is taking the hire good people and leave them alone thing to another level when you're paying them that much money.

37:43Jon Quast:Right. To not give them a job then? So, the pause makes sense. And the$10 billion deal with Google Cloud, it gives credibility to that narrative that they are, in fact, taking a pause. It's not a shift in their strategy. They're still investing heavily in AI, but they just want to make sure everyone's getting their value out of all these new hires.

38:02Travis Hoium:Matt, is this a win-win for Meta and Google?

38:05Jon Quast:Yeah, it's not as much of a needle mover for Google. $10 billion over a six-year deal, which is what this is. It's not nothing, but for a multi-trillion-dollar company, it's not that big of a deal. I think it's definitely a bigger win for Meta. It shows that their AI strategy is proceeding as they want it.

38:22Travis Hoium:Yeah, Google Cloud is doing$49 billion in revenue right now. So I think it's notable, and they can count OpenAI as a customer as well. We'd like to end the show with stocks on our radar and get some thoughts from Dan Boyd behind the glass. Matt, you're up first. What's on your radar this week?

38:39Jon Quast:One that's a little out of character for me, NXP Semiconductor, but it's not as out of character as it seems because it's trading like a value stock. It trades for less than 18 times forward earnings. This is a business with stellar margins. They are a big, big chipmaker, especially in the automotive industry where 60 % of their revenue comes from. The autonomous vehicle industry, which is a big driver of chip demand, is expected to grow at a roughly 30 % annualized rate through at least the end of the decade. This is trading as a value stock. It has a great dividend, almost 2 % dividend yield on top of being a cheap stock.

39:15Jon Quast:I'm looking for chip exposure in my portfolio. And being the value investor of the group, this is where I think I'm going to get it.

39:21Travis Hoium:Dan, what do you think of NXP semiconductors? Motley Fool Money listeners know that I love a dividend stock, Travis and Matt. But here's the thing. I was looking up this company and I read that their name is an abbreviation of Next Experience. And they've capitalized the N of Next and the XP in Experience. And I just think that's dumb.

39:49Travis Hoium:Deep thoughts from Dan behind the glass. John, which stock is on your radar this week?

39:56Matt Frankel:OK, if Dan likes dividends, then I've got one for you. Dollar General, symbol DG. It reports its next earnings on August 28th. And it goes back to what we were talking about earlier. It seems like the discount retail is where the consumers are going right now. I think that plays into Dollar General's favor. But more than that, it trades at 21 times earnings right now, which is cheaper than the market average. But if you look at its profit margins, they're actually down right now for some self-inflicted mistakes. It took on too much inventory in 2023. Its sales kind of stalled out. And so it's had to mark down merchandise to bring its inventory back down.

40:34Matt Frankel:It's down about 12 % now. I think that we're getting back to a place where it's kind of optimized for its inventory. And so I think we're pushing past that headwinds. I think it's profit margins are poised to bounce back. And so with a sales boost on the horizon from shifting consumer behavior, I think that Dollar General is in a good spot.

40:53Travis Hoium:Dan, do you have questions about Dollar General? Well, you know, Dollar General love me some cheap stuff. Who doesn't? But interestingly enough, Dollar General used to be a big sponsor for Joe Gibbs Racing and NASCAR. And Joe Gibbs, of course, won two Super Bowls with the Washington football team, my favorite football team. So I'm feeling pretty good about them right now, gang. All right, Dan, you have two very different companies, NXP, Semiconductor, and Dollar General. Which one is going to end up on your watch list? I'm not going to lie, Travis. I'm a simple man. I do understand discount retailing.

41:26Travis Hoium:I don't understand semiconductor production. So we're going to go Dollar General. That is probably the right call right now, given how complicated it is in the semiconductor space. NXP does have to deal with a little company called NVIDIA as well. But Matt, that's one I want to dig into a little bit more over the next few weeks. For Jon Quast, Matt Frankel, and our production magician Dan Boyd and the entire Motley Fool team, I am Travis Hoyam. Thank you for listening to Motley Fool Money. We'll see you here tomorrow.