In short
The episode argues that Alphabet’s earnings-driven stock drop reflects investor anxiety about AI spending: shares fell about 11% over five days after results. Topic: Alphabet’s core business is “doing okay” (cloud revenue up 82%), but AI CapEx pushed the company into free-cash-flow negativity, raising questions about when spending will translate into returns or slow down.
Key claims
Alphabet’s cloud/AI demand is strong, but search growth is decelerating and YouTube is weaker; investors fear “cash generation covering sins” like past “Killed by Google” failures.
Notable examples
Google Plus, Google Reader, and the “Killed by Google” site listing 300+ failed products; Alphabet’s non-operating income $151.6B from SpaceX and Anthropic investments.
Guests
Lou Whiteman and Jason Hall (co-hosts) discuss hyperscalers, “neoclouds” (CoreWeave, IREN, Nebius), Tesla earnings/robotaxi, SpaceX merger narrative, and Intel turnaround.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOAlphabet's Earnings Overview
0:15 to 0:39
Discussion about Alphabet's recent stock performance and spending plans.
“And guys, we got to talk about the big story of the week.”
Core Business Performance
0:39 to 1:37
Analysis of Alphabet's core business, cash flow, and spending on AI.
“But Lou, the big story here was that the core business is doing okay, but they're spending even more than expected on this AI buildout.”
Investors' Concerns
1:37 to 2:24
Investors grapple with Alphabet's spending and future returns.
“And right now, both of those, the answer is eventually.”
Market Implications of AI Spending
2:24 to 4:23
Exploration of AI spending impact on market perceptions and Alphabet's strategy.
“that what's different now is, is this latest product, this latest initiative is consuming all of the cash they're making and more.”
Debt and Cloud Capacity
4:23 to 5:53
Discussion on Alphabet's debt situation and cloud capacity management.
“So I'm certainly less concerned about making bad decisions.”
Neoclouds and Market Dynamics
5:53 to 9:18
Insights on neoclouds and their relevance in the AI supply chain.
“you can critique lots about Alphabet's business, but they have also made massive investments in some of the most successful startups in the past 20 years.”
Investing in AI and Market Reactions
9:18 to 11:16
Discussion regarding AI investments and the market's response to spending cuts.
“So if AI plays out the way we think it is, there's going to be a lot of need for this capacity and there's going to be a lot of people to fill it.”
Tesla's Earnings Report
12:01 to 13:20
Overview of Tesla's recent earnings and their implications.
“the first of Elon Musk's major companies reported earnings this week.”
Challenges in Tesla's Future
13:20 to 14:00
Exploration of challenges facing Tesla, including spending and robo taxi developments.
“They under plan for the second straight quarter, but they held their full year CapEx guidance steady.”
Tesla's Expanding Ventures and Risks
14:00 to 17:08
Learn about Tesla's expansion into robotics and the potential risks involved.
“Yeah, it's an interesting kind of conundrum.”
Show all 17 chapters
SpaceX and Tesla: A Potential Merger
17:08 to 19:16
Explore the implications of a potential merger between Tesla and SpaceX amidst market challenges.
“aren't going great at Tesla right now and SpaceX, which is the new story is seeing its stock fall.”
Guessing Market Caps: The Price is Right Game
19:30 to 21:08
Join the hosts as they guess the market caps of major companies based on provided metrics.
“Vanguard Marketing Corporation Distributor.”
Analyzing Major Manufacturing Companies
21:08 to 25:15
Delve into the market valuations and financials of leading manufacturing companies.
“Much more valuable than, I don't know if that's what you had in your mind, Jason.”
Evaluating Tech Companies and Market Trends
25:15 to 28:00
Examine the market valuations and growth rates of various technology companies.
“Much stronger revenue growth than you would think with a company that's trading for, I think right now, four times free cash flow.”
Discussion on Hims and Hers Valuation
28:00 to 30:17
Analyzing the valuation of Hims and Hers in the current market context.
“This, I would say, is a technology company as well.”
Discussion on Hims and Hers Valuation
30:24 to 30:56
Analyzing the valuation of Hims and Hers in the current market context.
“All investments involve risk, including the potential loss of principal.”
Intel's Earnings Report and Future Outlook
30:56 to 39:38
Examining Intel's recent earnings report and discussing its future in the semiconductor market.
“The company reported a$1.8 billion operating profit after reporting periodic, pretty sizable operating losses over the past few years.”
Transcript
Automatic transcript. May contain errors.0:01Travis Hoium:What do Alphabet's earnings tell us about the future of the market? Motley Fool Hidden Gems Investing starts now.
0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Jason Hall. And guys, we got to talk about the big story of the week. That is Alphabet, their spending plans and the implication on trillions of dollars of value of market cap out there. The big thing, I was looking at what the stock has done over the past week or so. And since early Monday morning, shares are actually down 11%. So this is a pretty big move for a lot of people who have this in their portfolio, whether it's through an index or through the individual shares. But Lou, the big story here was that the core business is doing okay, but they're spending even more than expected on this AI buildout.
0:50Travis Hoium:And they're now free cash flow negative, which is a huge change for them historically.
0:55Lou Whiteman:Yeah. So look, I'd say the core business is doing better than OK. The cloud revenue is up 82%. The cloud revenue is doing amazing.
1:05Travis Hoium:But, you know, search, the growth rate is slowing a little bit. YouTube was a little bit weaker than it's been in the past. So I'm saying those other businesses that actually drive the cash flow.
1:15Lou Whiteman:And look, the spending part, you're right. The spending is what we got to focus on. And I think that spending is fine until it's not. I don't think the market is really trading off on this spending number. This was telegraphed. It's not great that we're going into free cash flow negative, but right now there needs to be an answer of one of two questions. And Alphabet doesn't seem to have an answer to either. One is, when will this, all this spending turn into a return on invested capital or when will it slow down? And right now, both of those, the answer is eventually. Okay. Let me paint the bare picture here.
1:50Lou Whiteman:And I don't know if I necessarily believe this, but I think this is what's weighing on markets right now. We tend to think of Alphabet as a great capital allocator, but massive cash generation covers up a lot of sins. There is a whole website called Killed by Google that lists more than 300 things Google has tried and failed. Some we remember, Google Plus, Google Reader. I still miss Google Reader, but, you know, most we don't. What's the difference between Google Reader and AI? Google Reader didn't cost all that much money. None of this mattered relative to the cash that they were generating.
2:24Lou Whiteman:that what's different now is, is this latest product, this latest initiative is consuming all of the cash they're making and more. I don't think this is the AI initiative is going to go the way of Google Reader, but anything short of a massive, you know, what return on invested capital over time has been 15%. They got to make a lot of money on this or they need to slow spending. And I think that's sort of what investors are grappling with right now.
2:51Travis Hoium:Yeah, Jason, do you look at this and see more risk in Alphabet? Because obviously the market has got more questions today after earnings than they did a week ago. But you can make an argument on both sides of this. Yeah, and I think largely, and for the record, I own some NVIDIA, but in terms of like the real hyperscaler businesses, Alphabet is the only one that I own individual shares of. And I think looking at that negative free cash number, the fact that they are deploying so much CapEx, there's a lot of bullishness there for me because it's happening at the same. This is not like there's a collapse in operating cash flow.
3:30Everything else is working fine. Google search, despite some deceleration there, despite the reality that we know that people are using LLMs now, including OpenAI and Claude for more search related things. we know that the ad revenue is holding up very well for google search youtube is helping drive some of that but youtube is also doing good again like i said not great but doing good and look at google cloud revenue almost doubled in that business the kind of more ai focused specific part of that was up like triple so that part of the business is going gangbusters this is a time for a company that's generating this much free cash flow to to be doing this because it is so central in what their future is.
4:14Talk about Killed by Google, other capital allocation decisions, other bets they've made that didn't work out. Yes, this is expensive, but it's also in their wheelhouse. This is a company that they know how to build and run this infrastructure. So I'm certainly less concerned about making bad decisions. This is something that they almost don't have a choice but to do. I also think looking at the strength of the balance sheet, well over$120 billion in net cash,$242 billion in cash and equivalents at the end of the quarter versus$117 billion in debt. I promise you, by the end of the year, there will be less cash and there will be more debt, but that's okay.
4:52There's still plenty of margin in this business to spend right now. And bringing more supply online, I think, Travis, is so critical right now. What we're hearing from the enterprise is finding return on the AI spend is getting harder because it's getting more expensive, not because it's not helping businesses become more efficient and better. It's getting more expensive because there's so much more demand than supply is being brought online right now. And Alphabet is trying to solve the part of that equation that it can, and it can be fine with prices coming down.
5:27Travis Hoium:You tease the prisoner's dilemma I want to get to in just a moment. Before we get to the next piece, I do want to highlight that over the past year, Alphabet has recognized$151.6 billion in non-operating income. That is the paper profits from investments that they made in SpaceX and Anthropic. So to add to everything that they have going for them from an infrastructure standpoint, from a distribution standpoint, you can critique lots about Alphabet's business, but they have also made massive investments in some of the most successful startups in the past 20 years. So just wanted to highlight that as well.
6:03Travis Hoium:I wanted to turn this to Jason. You talked a little bit about the debt piece. Debt is interestingly not as much of a problem for Alphabet as it is even for some of the other big tech companies. I mean, Amazon is really adding to their debt load. Oracle, it's starting to be a bigger and bigger problem. Some of their debt now trades with an 8 % yield. Those yields are going up. Their stock is going down. That's going to make it harder to finance a lot of these projects. But the other piece that came up in Alphabet's earnings report in the conference call was, hey, we're going to actually sign some deals with some of these third parties.
6:35Travis Hoium:We call them neoclouds, who are going to be able to take on some of this compute that we're constrained on right now. And we'll sign some short-term deals. But those neoclouds, that may be short-term demand, but they're taking out a lot of debt to be able to finance that. So when you look, when we look across this landscape, are those neoclots, is that a position of strength or is that something that you worry about when you go, okay, great, you have a bunch of demand for the next year or two while Alphabet builds out these huge data centers, but what happens then? So for those who don't know, the neoclouds, companies like CoreWeave, that was a big IPO recently.
7:12And then you've got IREN and Nebius as some other ones. What's happening right now, I think, is really good for them because they need revenue. They need to be right in the middle of this growth. But maybe not so much when Alphabet starts bringing more of the capacity that they're spending on online. So instead of sending that capacity over to these other companies, the neoclouds, they can bring it back in, but also adding that supply could result in prices coming down. And these companies are more leveraged. They are very concentrated. This is their business. They're being built on the thesis of AI demand continuing to grow.
7:56They don't have optionality. And what we've seen is the businesses that are more pure plays, when we do go through these kind of boom and bust phases, even if there's not a bust, even if demand for AI compute doesn't fall, it can continue to grow. It can just kind of soften a little bit. We could see these companies struggle because pricing comes down and now they can't live because their marginal costs are higher than an alphabet.
8:24Lou Whiteman:I don't know what I think of any one of these neoclouds. I don't really want to invest in them, but I am more bullish on cloud capacity than I am even the hyperscaler models. All right. We've talked about this before, but I am convinced that most of the economic value that comes out of AI is not going to come from the frontier models. In fact, I'm a little afraid that these science projects that are consuming so much of the capital will never pay for themselves. But there are, what, 2.5 million open source models out there. Not all of them are good. Not all of them are safe. But I do think most of the economic value, most of like the business processes are going to fall onto those and not these frontier science projects.
9:06Lou Whiteman:And we need we need data capacity for that. So if it's not ideal, if Alphabet's need for neocloud capacity is temporary, but I think there are plenty more. I know of hedge funds that are building data centers right now. So if AI plays out the way we think it is, there's going to be a lot of need for this capacity and there's going to be a lot of people to fill it. Last quick point I just want to make is AI software. Software is massively deflationary. Software has been massively successful and profitable, but not for everybody. Right. So that's kind of at the heart of how this is going to potentially play out for these marginal players.
9:46Travis Hoium:I wanted to end with this, and that is what I think we've been kind of alluding to, which is a bit of a prisoner's dilemma. You know, Jason talked about it. You've got to invest in this if you're Alphabet. You've got to invest it in if you're almost any one of these hyperscalers. If you're a neocloud, you've got to take on debt to be able to fund this because that's your business. But when you look at the market's reaction recently, it's telling us that investors want a return. And eventually, if you're issuing debt, if you're issuing equity, it matters what your stock price is. So Alphabet's down 11 % over the past five days.
10:20Travis Hoium:Oracle's down 64 % since they announced that deal with OpenAI for$300 billion worth of remaining performance obligations. So quickly, guys, we want to start with you. Who blinks first in this and maybe gets rewarded by the market and says, you know what, we're not going to spend more like Alphabet has done both of the last two quarters. We're actually going to spend a little less. We're going to increase that cash flow.
10:42Lou Whiteman:I think Apple already did and they have been rewarded. I actually think Microsoft is probably the one that says anything because they can sort of say we have other irons in the fire so they can kind of that they have a better escape route. And Satya has been pretty loud about saying, hey, we got to do something a little different. But but Travis, who blinked? The consumers, the consumer of AI is already blinking. What do you mean by that? Well, just we are already hearing moaning about token maxing and all of this. This is the beginning of it. This is just the we're not going to pay this. We're not here yet, but that's where the blink starts.
11:19Travis Hoium:Well, we'll see who the market awards if there is a pullback in some of this AI spending in the future. When we come back, we're going to talk about some updates from Elon Musk's companies. You're listening to Motley Fool Hidden Gems Investing.
11:30Lou Whiteman:Trading at Schwab is now powered by Ameritrade, giving you even more specialized support than ever before. Like access to the trade desk, our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy gut check. Need assistance? No problem. Get 24-7 professional answers and live help and access support by phone, email, and in-platform chat. That's how Schwab is here for you, to help you trade brilliantly. Learn more at schwab.com slash trading.
12:00Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. the first of Elon Musk's major companies reported earnings this week. That's Tesla. Shares are down 18 % in about the past week and are actually down 36 % from their high late in 2025. Lou, when you looked at their results, what did you see?
12:18Lou Whiteman:First of all, this is still at its core in automotive business and automotive, you know, look, automotive is looking more like an automotive business every day. They've always had absurdly high margins for a carmaker. No longer. Automotive margins were down to 1.4%, which, hey, you know what? This is why I don't want to buy automakers because that's kind of how the business is supposed to work. What's going on here? It's spending. And on one hand, we knew it was coming. On the other hand, it's really, really bad just to see it play out. It almost seems like they're in liquidation mode in the auto business.
12:52Lou Whiteman:What happened there? Auto profits were up 1 % despite deliveries up 35%. That's not margins, that's raw numbers. So they moved 35 % more metal, but the profit only barely nudged. It was basically the same profit they made a quarter ago. Tesla has been saying this is going to be an error of spending, okay? They are building out robotics. They're building out AI. It's all these things that investors are focused on. I don't think anyone's really looking at the car company anymore. The issue here is the CapEx was actually They under plan for the second straight quarter, but they held their full year CapEx guidance steady.
13:28Lou Whiteman:If they underspent in the first and second quarter and still intend to spend what they were going to for the full year, that implies that we've only just begun. The ramp is only beginning. So more spending is in our future.
13:40Travis Hoium:Yeah. So we talked about Alphabet increasing their spending, but they're using operating cash flow to do it. The challenge here for Tesla is they don't have the same operating cash flow to be able to fund this spending. Jason, the other piece that caught my eye is the robo taxi business for years has been sort of the future of Tesla. They had a chart in their earnings report in their shareholder letter that showed that the growth of miles per week is slowing. They are expanding to more cities. But where does that sit in your mind? Yeah, it's an interesting kind of conundrum. You know, they're standing up manufacturing line for robo taxi.
14:15And at the same time, those problems are happening. But one thing that I did notice is that they are selling more full self-driving, right? That number jumped a ton. And I think you have to look at full self-driving and RoboTaxi kind of combined because the thinking about like the technology and what can it accomplish. But at the same time, there is that slowing metric with RoboTaxi. They're in seven cities now. It is expanding. I didn't think they would be in seven cities by this point. I do think that the risk to start building standalone RoboTaxi is a risk that the business absolutely has to take.
14:50I also think we have to look at Tesla Semi too. As much as everything that's happened with the, you know, retiring their two original EV models to shift that line over to build robots, Tesla Semi could be a sleeper hit for them because we've heard from a lot of the, these large enterprise trucking businesses that are using it and kind of the beta testing that love it and they are going to buy it. So maybe that's a bigger part of the business's future, probably in the near term, even the robot taxi will be.
15:20Travis Hoium:Yeah, the other thing they have coming is they're changing the Fremont plant over to the Optimus robot. So we'll see what that looks like. I want to see Lou buy a robot and see what he does with it.
15:31Lou Whiteman:Did you see, by the way, they said the S-curve is going to be, because everything with Tesla is always an S-curve. But the first part of it is going to be really, really, really drawn out. So I don't think they were telegraphing us that we should put that into our earnings estimate anytime soon. Wow.
15:49Travis Hoium:I just want to be able to get one and test it out, see if I can mow the lawn for me or pick up after the kids. I think there's these two camps on robotics, right? There's the purpose-built robot that's basically an arm and some optics. And that's what's worked really well in industrial settings. And everybody screams from the rooftops that humanoid robots are a terrible idea and they don't work. And I think that's true in the wild. But I do think that there are like more controlled industrial environments that might become mixed environments with people and humanoid robots where there could be some real success.
16:21And we're going to find out. Right. We're absolutely going to find out. But it's going to be years before we really know if if if they're going to deliver anything close to the promises.
16:30Travis Hoium:Yeah. And they are testing some of these things in factories. And BMW is always one that's kind of early on. As someone who worked in a factory for a while, I always have questions about how many more robots you can have in factory. And that was 20 years ago. The people were there to fix the robots that broke. But I did want to touch on SpaceX as well, because SpaceX is Elon Musk's other company. And Lou, I think the idea here is that they will eventually merge these two. The challenge is, if you own shares of Tesla, because you're eventually going to merge with SpaceX, SpaceX's shares are down 44 % from that IPO price.
17:07Travis Hoium:it doesn't this seems like a strange position for these companies to be in because the operations aren't going great at Tesla right now and SpaceX, which is the new story is seeing its stock fall.
17:19Lou Whiteman:After jumping up, yes, slow down here. It's been six weeks. We'll see. We know more than half of the conclusions here. Well, I mean, no, I do think and look, I think it makes sense to merge them because nobody's really buying a car company or an AI company. They're buying this belief that that Elon Musk can create economic value over time. So why have two competing tickers? So that's the, I think, bull case for a merger. Look, most IPOs trade down in the first year. I think everything is on steroids with SpaceX right now. It's so visible. I think that we were really surprised that the stock didn't jump on the triple Q inclusion.
17:57Lou Whiteman:That was because the counterparties that had to sell those shares front ran it. That's why the stock jumped up. I sort of think it's trading down now because people are front running the lockup expirations. Give this time to settle out and to see where we are. We need to stop. As someone who is super focused on the day-to-day move, I say we have to stop focusing on the day-to-day move. Yeah, I think the declining stock price probably just helps provide some justification to merge these two businesses because Elon Musk has to have lots of things to do. And if you have lots of things to do in one business, then it's a lot easier for the market.
18:36But I think the problem is how does the market value that very complex business if the narrative of growth is not driving it? That's the risk.
Read the full transcript
18:44Travis Hoium:Yeah, I think we can all see this coming, but we'll see when it actually comes to fruition. When we come back, we're going to see how well Lou and Jason can value stocks. You're listening to Motley Fool, Hidden Gems Invest.
18:57As a podcaster, my voice is heard by thousands. And now with Vanguard Investor Choice, I can be heard by the companies that I invest in too. Vanguard Investor Choice makes it easy to set your proxy voting preference for your Vanguard Index funds. In just a few clicks, you can make your voice heard on important shareholder topics like executive pay and director elections. Visit vanguard.com slash investor choice to learn more. Vanguard Investors own shares of Vanguard Index funds and those funds own shares of the companies they invest in. Available for Vanguard Index funds that participate in Investor Choice.
19:30Vanguard Marketing Corporation Distributor.
19:33Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. In this segment, we like to have a little fun with investing. This week, we're going to play a little game called The Price is Right. Lou and Jason are going to try to guess the market cap of the company that I'm going to give them a few metrics for. So we're going to start with the first company. I'm going to give you the industry as well. I'm going to just say broadly, this is a manufacturing company that manufactures high-tech stuff. All these companies are companies that everybody knows. So maybe this will give it away a bit. But I want you to guess the market cap into the company if you can.
20:03Travis Hoium:So the revenue for this company over the past 12 months is$140 billion. The compound annual growth rate over the past five years is 23%, so pretty good growth rate. And the operating profit is 56%. I will also say they have net cash of$80 billion on the balance sheet. Jason, if you're looking at a company like this, where do you think it's valued at? I'm going to guess it's worth about$675 billion because I think I might know the company you're talking about. Okay, Lou.
20:37Lou Whiteman:$675 billion?
20:38Travis Hoium:I like the specificity with the 75 there.
20:42Lou Whiteman:Wait, you said$140 billion in travel.
20:44Travis Hoium:$140 billion in revenue. Gosh, I'm going to go higher.
20:50Lou Whiteman:Okay. You said high-tech manufacturing, which I think is, so it's probably something caught up in the AI boom. So I'm just going to slap a trillion dollar valuation or whatever this is.
21:00Travis Hoium:This is a$2.2 trillion company. The company in question is Taiwan Semiconductor. TSMC. Manufacturing company. Much more valuable than, I don't know if that's what you had in your mind, Jason. I was thinking ASML, but ASML's revenue is about half that. That was my miss. Yeah, really getting to the point where they're pretty high multiples. I remember a few years ago when the AI boom started, TSMC was trading for like nine, ten times earnings. and had a 50 % net income margin. So a pretty solid multiple expansion for them. Okay, second company is another manufacturing company, a little less high tech, but we have revenue of$100 billion.
21:40Travis Hoium:The growth rate is slower, 2 % growth rate over the past three years. Operating margin over the past 12 months is 4%. And it's actually in decline, a little bit of cash on the balance sheet, but nothing really notable. where would you value this company at lou oh 100 billion dollars in revenue but it's declining margins and it's not tech um gosh watch it's gonna be tesla or something but i'll say 500 billion yeah i'll say 501 billion still highly valued isn't it this is tesla I knew it was Tesla. $1.3 trillion valuation. It felt like Tesla, right? I knew you were going to do that. Travis was going to afford each S's on that one, though.
22:31Lou Whiteman:Yeah. You're right, Jason, doing the price is right thing. Just go a dollar open.
22:37Travis Hoium:I have one more manufacturing company here that I wanted to touch on. Again, a company that you guys know. Revenue, I think higher than both of the companies that we talked about previously. $185 billion operating margin is a little lower. at 1%, but the growth rate is a little bit higher, about 8 % compound annual growth rate over the past five years. And those are the metrics I'm gonna give you. What do you think? What was the operating margin you gave? Operating margin is 1 % and I think rising just slightly.
23:10Lou Whiteman:Lou, you gotta go first again. This is either, wait, how much revenue? 185. I don't know. I'm gonna guess this is Ford Motor Company, but I don't know what its market cap is. 65 billion, but it's probably not even Ford, Jason. So think of something else. Yeah, that kind of sounds right-ish. That kind of sounds right-ish.
23:35Travis Hoium:Those operating margins, it feels auto. I will give you this one, Lou. It is GM. GM, GM. I should have given you the cash flow, the free cash flow margin, which is 8%. So a little bit higher there. That may have tripped you up. But only a$70 billion market cap for General Motors. So I love the good finance business.
23:57Lou Whiteman:I got the company wrong and still almost got the market cap right. So I'm a double idiot.
24:04Travis Hoium:All right. This is, I would say, a technology company. Revenue is$6.5 billion compounding your growth rate over the past five years. 15 % free cash flow margin is 17%. What are your guesses on the valuation of this company? Six and a half billion dollars worth of revenue, Jason. God, that could be a hundred different companies. Yeah, that could be almost any company. That's, yes. It could be almost any company, but how would you value the company is the question of the day. Yeah. So what was the margin? Free cash flow margin is 17%. Six billion dollars in revenue? Yep. Six and a half. I'm going to go with$80 billion market cap.
24:46Travis Hoium:$80 billion market cap. Okay, Lou? $1.
24:49Lou Whiteman:Because I don't think the prices write me here for sure. Just under. Well, I don't think this is, this feels AI affected, not AI aided for some reason, just the way you're talking. So I don't know,$40 billion. Okay.
25:09Travis Hoium:This is a$5 billion company. the company in question is Lyft. Lyft. Oh, yeah. Lyft. Much stronger revenue growth than you would think with a company that's trading for, I think right now, four times free cash flow. Right, right. So there are, we talk about, you know, a lot of these highly valued companies in the market, but there are also just complete barbells where there's really very lowly valued companies. Well, that's it. And I was going on the other end of the barbell where it was trading for, you know, closer to 10 times sales. That's entirely what I was thinking. Yeah, exactly. Exactly.
25:40Travis Hoium:So that's going to be the question here. Is this a highly valued company or lowly valued company? Here's another tech company for you. A company has$5 billion worth of revenue. So a little less than the company we just talked about. The growth rate's a little higher. Five-year growth rate, 27.6 % on a compound annual basis. Free cash flow margin is 52 % though. So high free cash flow margin. What do you think the value of this$5 billion revenue company is? Lou?
26:09Lou Whiteman:I'm going to go high again here, Jason, so you can undercut me. I'm going to say$250 billion. Okay.
26:17Travis Hoium:I'm going to say$50 billion. You are both low. The company is Palantir. Holy cow. Has a$300 billion market cap. Yeah. This is one that I always go back and look at. But, you know, is a company that I'm looking at too highly valued right now? And you go, well, you still have Palantir trading for, you know, 55 times sales, which is down 50 % from when it was well over 100 times sales. Okay, here's another...
26:50Lou Whiteman:We should do a tangent on them sometime, Travis, but not now, but yeah.
26:54Travis Hoium:Maybe we should have a full show on Wednesday. Yeah. Okay, here's another tech company. Revenue,$215 billion. dollars compound annual growth rate over the past uh let's let's do 10 years just take some lumpiness out of it 23 percent compound annual growth rate uh free cash flow margin is 22 percent operating margin is 41 percent how would you value a company 215 billion dollars in revenue jason you're up first oh that's that's a couple trillion dollars couple so two trillion is the guess lou
27:27Lou Whiteman:Yeah, I think, yeah, that's three trillion. I don't know.
27:32Travis Hoium:Three trillion. You have one and a half trillion dollars for the company, Meta Platforms. Meta, yeah. The growth rate is a little goofy there because you do have that pandemic impact. So only a 12 % growth rate over the past five years. Maybe it could have tripped you up with a little. Well, there's a little bit of a bull case right now for Meta that it's pretty cheap. And on a historical basis, that is true. 18 times forward earnings, 22 times trailing earnings. Okay, I want to give you one last one. This, I would say, is a technology company as well. Revenue,$2.4 billion. So the smallest company that we've talked about from a revenue perspective.
28:11Travis Hoium:But one of the faster growing five-year compound annual growth rate is 54%. The free cash flow margin is 3.4%. So relatively low margin, but high growth business revenue,$2.4 billion. What do you think for evaluation, Jason? You're first. I mean, this sounds a lot like a data dog, but that revenue seems a little bit low. I'm going to go with$50 billion.
28:39Lou Whiteman:$50 billion, Lou? $50 billion, yeah. I'm going over.
28:43Travis Hoium:I don't know how much over. $150. $150 billion. You can buy this company today for$7.6 billion. The company is hims and hers. Okay. So here you go. All right. Well, that's a little, yeah. So that's all over the place. It is all over the place, but it is, again, it's just, it is interesting to see it's in today's market where there's extremely high valuations, where there's extremely low value. That's a healthcare services business. I just want to say. That's a. Yeah. Could be, but those margins are going up. They are in AI. If it's an AI story that you want, they've got a good AI story for you.
29:18Travis Hoium:you never quite know how the market is going to think about some of these companies. Sure, Jan. All right. When we come back, we are going to get to what's going on at Intel. You're listening to Motley Fool and Jams Investing.
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30:10Fundrise says their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. Visit fundrise.com slash fool to check out Fundrise's venture portfolio and start investing in minutes. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement.
30:34Travis Hoium:As always, people in 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. One of the big earnings reports for this week was Intel. The company reported a$1.8 billion operating profit after reporting periodic, pretty sizable operating losses over the past few years.
31:08Travis Hoium:But Jason, as recently as 2021, the company is regularly generating$4 billion or more in operating profit. And yet the stock is up 330 % over the past year and seems to be just on an absolute tear. So what did you see in the numbers? Yeah. So we'll talk about the stock first really quickly. This is a turnaround. This is a government backed bet on the business turning around and the real national security interest in having a high bleeding edge domestic company that can meet the semiconductor needs for the U.S. government and - TSMC investing$100 billion doesn't count because I think their investment in Arizona is up to$100 billion now.
31:53Yeah, I mean, it's a start, right? I mean, it really is. It's only just a start. But I think the thing to remember is that the bottom line is that the results aren't that nice little return to operating profit. That didn't come from the pivot. The business still has to demonstrate that it can be a contract foundry. Pat Gelsinger started the company on that track and he got pushed out. It was timing as much as anything. The tailwind of AI, if it had happened a year sooner, Gelsinger would still be the CEO. But I think Lip Boutin is a great CEO to drive it. But they have to prove that they've actually turned the business around by manufacturing for contract customers chips off of their foundries.
32:35And it's still TSMC and Samsung to a lesser degree, not Intel doing that.
32:41Travis Hoium:Yeah, Lou, the interesting thing is it seems like they're just selling the same stuff they've been selling for a while just at a higher price.
32:47Lou Whiteman:Some of their stuff, you know, and I think that's interesting. The market, you're right, the stock's up huge. Market kind of yawned at these results, which seems appropriate. You know, this kind of felt like held serve, not wow. Yes, they are getting great pricing for the high end right now. The CPUs for data centers, that is really working. They're also running those fabs as much as possible. So that's great for margins. But look at that PC business. Remember Wintel? Remember when that's what we looked at? It looks like they are, at best, losing a bit of share to AMD. They're cutting prices. So this is turning into, you know, their exposure to AI is only going up.
33:26Lou Whiteman:You talk about, yes, they are supposed to be our champion. And yes, they are, you know, it's good to have the government in your quarter. But, you know,$20 billion in CapEx sounds like impressive, but that's a third of what TSM is going to spend this year. and Intel is supposedly playing catch up. So I don't know what I think about this for the long term. You know, the funny thing is, is we are in a world now where I don't think it's hard to imagine 10 years ago, like saying, well, we'd be in trouble if Intel ceased to exist. That is less true than it was, but they are sort of at least establishing themselves thanks to AI and thanks to the government as a as a player here, just not the giant.
34:05Travis Hoium:Jason, we've talked a lot about the AI story here today. And this seems like one of those companies where the story is really positive. The way that AI is developing needs more CPUs than it did previously, than kind of the first generation of ChatGPT, things like that. So that's driving part of that demand for data center CPUs from Intel. But the other thing that matters long term, especially for foolish investors, is the operations. At the end of the day, the fundamentals are going to drive a stock. So do you see enough with Intel to even be intrigued by the company? Or is this more hype story, you know, like you said, government story than anything else at this point?
34:47Yeah, a lot of things are going to happen that are completely outside of Intel's control with AI writ large over the next couple of years to earn the valuation right now. And that's assuming that Intel continues to do everything right. We got like one, here's a thing that's good for Intel and ASML's earnings. They talked about that the first foundry that's using the high NA machines, ASML's high NA machines for a commercial application instead of just testing is Intel for their 18A chips. They're using those high NA machines for part of the process. That's a good step, like indication that they're starting to kind of close the gap between them and TSMC and again, to a lesser degree, Samsung, but there's so much catch up that they need to do.
35:33It's really going to be a year from now before we even have evidence that they can be a successful commercial foundry for outsourced business. We don't know that they can do that yet. So this is very much a narrative story. And so much of that is going to mean the tailwinds for AI broadly have to continue blowing because the business doesn't have the fundamental operational results right now to even come close to supporting the stock price.
35:59Travis Hoium:The tension between operations and the story is definitely something we're going to be covering in the AI space over the next year or two, because a lot of these things kind of get ahead of themselves. And sometimes that still undervalues companies, and sometimes it means they get very overvalued. We want to end with stocks on our radar. Jason, you're up first. What are you looking at this week? So I want to throw a business out there that it's a retail business. It's a price leader. It's in a low margin business, but it's excellent at turning inventories. It's growing comps at teen mid teens rates and it's opening new stores at mid teens rates has less than 4 ,000 stores and management just told us last fall, they have a goal to get to 14 ,000 stores.
36:43That's BBB foods. The Mexican hard discount grocer trades under the ticker TBBB.
36:50Travis Hoium:Dan, behind the glass, what do you think about a Mexican grocery store? I mean, everybody's got to eat, right? Seems like might be a good bet. Is this company going to be spreading into other regions in Latin America? It is focused entirely on Mexico right now. It's a market that the founder and CEO of the business, who's actually not Mexican, but has been in the country for a long time, understands extremely well. And the opportunity is so large there, it makes sense to continue to focus. You can build supply chain. You don't have to deal with crossing borders. You can leverage that. And my favorite thing actually is not just the size opportunity, but the fact that it's counter cyclical.
37:31Everybody needs to eat. They're selling basic needs and they get really good margins through a lot of private labels there.
37:38Travis Hoium:I'm liking what I'm hearing. Maybe we should do a field trip and do a little more research. Let's go. All right, Lou, what are you looking at this week?
37:45Lou Whiteman:So, Dan, I'm looking at government contractor Booz Allen Hamilton, ticker B-A-H. Bah! They beat on earnings by 22 % despite sales coming in in line with expectations. So, yeah, the story here is profitability. EBITDA margins up 110 basis points, well ahead of expectations. And for every$1 they build in the quarter, they booked$1.50 in future business. That is a great telegraphing of growth. Dan, Booze started the year with a disappointing earnings report. They've been bogged down by all the doge cuts. But look, never in its history as a public company has Booze Allen Hamilton ever traded at such a severe multiple discount to its peers.
38:26Lou Whiteman:I don't think the discount holds up 13 percent post earnings. I think there's more to run. It's a really intriguing time for long term holders to look at Booze Allen Hamilton.
38:36Travis Hoium:Dan, Lou likes to bring these companies that have funny names. And this one is a booze company that doesn't sell booze. Yeah, well, this one is all over the D.C. area where I live. I'm very familiar with Booze Allen Hamilton. And it is one of those companies where you see the first word, you get excited. And then you're like, Allen, oh, man, come on. Yeah, Lou, they've been slashing headcount like crazy in the past year. So is this company timed for an upswing?
39:04Lou Whiteman:I think it is. I'll tell you, I don't like when headcount falls. I think that was the telegraph that it was going to be a bad quarter because they hire for business. But I'm predicting they're going to start hiring again real soon.
39:16Travis Hoium:Single-digit growth rate, but relatively low price-to-earnings multiple. So very compelling on a valuation standpoint. Okay, Dan, which one of these stocks is going on your watch list? You know what, Travis? People got to eat. So we're going to go with BBB. Congratulations to Jason Hall. For Lou Whiteman, Jason Hall, and Dan Boyd behind the glass, I'm Travis Hoyam. We'll see you here tomorrow.
From the publisher
Alphabet’s stock is down double digits this week after the company reported negative free cash flow in the second quarter. We discuss what that means for big tech, neoclouds, and the entire supply chain. Plus, we get to Tesla’s earnings and the stocks on our radar.
Travis Hoium, Lou Whiteman, and Jason Hall discuss:
- Alphabet’s Free Cash Flow
- Who Blinks?
- Tesla’s Stock Drop
- The Price Is Right
- Intel’s Earnings
- Stocks On Our Radar
Companies discussed: BBB Foods (TBBB), Booz Allen Hamilton (BAH), Alphabet (GOOG), Microsoft (MSFT), Meta (META), Amazon (AMZN), Taiwan Semiconductor (TSM), Tesla (TSLA), SpaceX (SPCX), General Motors (GM), Lyft (LYFT), Hims & Hers (HIMS), Palantir (PLTR).
Host: Travis Hoium
Guests: Lou Whiteman, Jason Hall
Engineer: Dan Boyd
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