When AI Execs Say the Market Looks Bubbly

0:04Tyler Crowe:The AI market is in a frothy mood again, and there's some big shakeups in retail. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe, joined by longtime Fool contributors Lou Whiteman and Rachel Warren. Second quarter earnings are coming to a close, but we still have some big companies reporting earnings and making some big management moves. So today, we're going to cover management shakeups at Target and Estee Lauder, and also some mergers and acquisitions activity in an arms race between Lowe's and Home Depot. But before we begin with that, we're going to start with everyone's favorite family dinner conversation, which is, are we in an AI bubble? So, it's been a driving force, the AI story, for much of the market in 2025.

0:59Tyler Crowe:I mean, we've seen a lot of companies more than double and post some incredible numbers so far this year. But it hasn't been without hiccups. Like, we had the DeepSeek crash, I guess, if you will, back in January that sent markets into a tizzy. Then this week, I think it was actually over the weekend, OpenAI CEO Sam Altman actually said to reporters, and I quote, are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes. Pretty bold and evocative statement from San Altman. In addition to those comments, we've seen some pretty sharp stock declines with some AI companies reporting earnings.

1:44Tyler Crowe:And some of these darlings are down pretty considerably. Palantir is down almost 18 % over the past week as of our recording. And CoreWeave, the AI data center company, is down 40 % since its reported earnings last week. So, Rachel and Lou, I want to toss this to you. Rachel, you can go first. What do you make of Sam Altman's statement about AI? And is the AI market looking bubbly to you? I do think this was a really interesting comment from Mr. Altman, particularly given that OpenAI remains one of the most public and prominent players in the AI race. You remember, many fears of an AI bubble sort of hit a fever pitch earlier this year, back when the Chinese startup DeepSeek released their competitive reasoning model.

2:31They claimed that one version of their advanced large language models had been trained for under$6 million. And that's compared to billions like OpenAI has spent. And then, you know, earlier this month, Altman said that OpenAI's annual recurring revenue is on track to pass$20 billion this year. But they're still unprofitable. And then the release of their latest GPT-5 AI model earlier this month, it wasn't so great either. I mean, so much so that the company restored access to legacy GPT-4 models for paying customers. So, I do think that we can trace some similarities to the dot-com bubble when you're looking at the current AI boom.

3:08You have rapid surges in investment, companies receiving massive funding rounds based on the potential of the underlying tech. Sometimes there isn't a clear path to profitability. So I do think that some companies might be getting a bit ahead of their skis in terms of valuation. But I think it's important to underscore AI is not just a blanket catch-all term, even though it tends to be used that way. You know, AI is everything from AI algorithms that are analyzing medical images to assisting doctors in faster and more accurate diagnoses to the AI that we see being used to control and automate robots and manufacturing, logistics and other industries.

3:43Major companies like Pfizer, Eli Lilly, Amazon and others are incorporating AI into their everyday operations. So the technology is real. It's rapidly evolving and it is here to stay. And I think that's the important point to remember.

3:56Lou Whiteman:Jason Moser, CEO, I think it's so interesting because there's what Altman said and the way the headlines have taken off with it. The idea, we're in a bubble, everything's trouble. That's not really what he said. We sometimes think of the word bubble and we think of worthless and think the same thing. We know that isn't true. Stocks can be in a bubble, but yet there's also something going on that's creating something profoundly profitable, profoundly society changing over time. I think what Altman was trying to say is that, yes, some valuations are getting frothy, but hey, investors, workers who might be getting poached by other companies, if things are frothy, if there could be winners and losers here, why don't you want to just stay with one of the big winners, one of the big guns?

4:44Lou Whiteman:I think he was talking to a specific crowd. I don't think he was predicting gloom and doom.

4:49Tyler Crowe:Yeah, I mean, certainly my take is, and I've said this before in other spaces, but the idea that the winner of AI has emerged, I think, is a little early. The best example I can give is Google, which emerged many, many years after internet search had been a big thing with Yahoo, Netscape, Ask Jeeves, all these other options that have pretty much gone the way of the dinosaur. And I think we could see something relatively similar with late emerging opportunities as well. So, Lou, when we think about opportunities, and maybe a little bit from the lens I just mentioned, where are you seeing the opportunities for AI right now?

5:32Lou Whiteman:Well, for one, back on the bubble thing, let's just point out that we both had a dot-com bubble and companies like Amazon emerged. So, even if there is a bubble, valuations may be stretched, but there still will be long-term winners among the companies we're talking about. For me, right now, it's all about diversification, whether it's Amazon or if it's Apple or Microsoft and Alphabet. These are companies with a lot of ways to win, and AI is part of that. But take that versus a Palantir or CoreWeave, where all of your eggs are in the AI basket. I would much rather be with a diversified company.

6:09Lou Whiteman:I don't really like the picks and troubles, though. I think these have gotten just as overvalued, or maybe even more so than some of the main players. I love the idea that we're going to need energy, we're going to need data centers. I think that's all true. But I also think that that's very priced in. And if there is a bubble, I almost think it's there and not just the big companies that are using it.

6:33Tyler Crowe:Rachel, for investors who are trying to identify things with durable growth stories, durable advantages versus kind of an AI hype play. How do you think investors should look at it as separating between the two? Yeah, I think fundamentally, there needs to be a real business that's underpinning that technology. Looking for companies that are solving tangible real-world problems, or maybe is being used to optimize existing processes, not just a company using AI for the sake of using AI. And then also, when you're looking at some of these businesses, Are these AI applications providing clear value?

7:11How does a company plan to generate revenue from its AI business? Is this a sustainable model with potential for growth? I mean, ultimately, I think especially amidst the AI boom where you're trying to really separate the wheat from the chaff, so to speak, you need to be looking for companies with sustained revenue growth, healthy profit margins, and positive free cash flow, which suggests they're generating enough cash to fund their operations and invest in their future AI growth. And I think that's why we get back to a lot of these major players like the Amazons and Alphabets, because there is a real business there.

7:41And they are incorporating massive, revolutionary AI elements into their businesses, which have remained sort of the crux of their respective industries for decades.

7:52Tyler Crowe:The AI story, I feel like we could go in so many different angles, but we are still in the midst of earnings season. So we're going to move on and coming up next, we're going to talk about, look at two retailers who are looking to new leadership right now to kind of turn their prospects around.

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8:36Tyler Crowe:Target reported earnings earlier today that were, well, less than great. Before we recorded this episode, we were planning on discussing Target's earnings through the lens of tariffs because it's been such a hot topic of lately. But then the company threw us a little bit of a curveball and announced that current Chief Operating Officer Michael Fidelke will be taking over the CEO spot from Brian Cornell starting in February of 2026. Now, Target's earnings did beat Wall Street's expectations, but they were pretty low expectations to begin with, and it maintained its meh guidance for the rest of the year.

9:12Tyler Crowe:And its stock was down 7 % today as of this taping. What stood out to you in the earnings or the announcement of the CEO change? And what can Fidelke do to actually turn things around here? I do think it's important to highlight it. Target has a range of issues it's facing right now, and they do predate the tariff environment. Some of these problems are related to the consumer. But a lot of Target's issues also go back to the waning days of the pandemic. We saw consumers pull back on expenditures as inflation increased, and they focused more on needs-based categories. There has been this real significant shift to value.

9:49In many cases, that has led consumers to competitors like Walmart. Targets also faced criticism and boycotts in recent years that have severely impacted sales. And it has yielded ground to competitors in key areas where it used to lead, home goods being one vital category. As you noted, they just reported their Q2 sales and earnings. Net sales in the quarter were down 0.9 % from a year ago. Comparable sales fell 1.9%. Operating income fell by 19.4%. They did see about a 14 % increase in non-merchandise sales. Their digital sales grew about 4%. Tariffs, of course, are likely to erode some of their profit margins.

10:31There's also a very likely reality that they're going to need to raise some prices, and that could impact consumer expenditures. Cornell will remain executive chairman, but I do think it's clear that management is looking to right the ship, and they think that a new leader at the CEO helm is an important step. I do think Target can come back from this, but it's going to require time and patience. And again, a lot of these issues predate what we've seen in its industry the last several months. One thing I'll note, this is still a major dividend payer for investors, 54 consecutive years of dividend increases and counting.

11:03So, that might be one reason to look at Target on the dip right now.

11:07Lou Whiteman:Ken, come back from it, but a big emphasis on Ken for me. I'm not ready to make a call. I don't want to be too scared here, but retail is full of seemingly just powerhouse brands that just suddenly disappear or lose their mojo. Again, I don't know if that's what's going to happen to Target, but I think Target investors have to be a bit worried here. Ask Kohl's investors, ask Sears investors, ask JCPenney's investors. Big, well-established brands can go from all is well to things go terribly wrong and not recover. As Rachel said, this has been a long time coming. On the back end, you talk to target suppliers and they'll say, we get dealing with two or three people a year.

11:53Lou Whiteman:It's just chaos. I'll say this. I think Michael Fidelke has a big task up ahead just to stabilize a business that doesn't feel stable to me. and I'm hopeful, but I don't think it's a slam dunk because guys, honestly, what does target bring to the retail table that you can't get somewhere else? What is their go-to thing? I can't answer that question. And if I was thinking of investing, that would really scare me.

12:20Tyler Crowe:It is a tough question to ask. And at the same time, it's, I don't think it's a coincidence that a lot of the retailers and brands and a lot of the companies we've been talking about have been struggling, is coming in a pretty volatile post-COVID world. I think a lot of companies have been shaken to their core and haven't quite found their way out of the woods yet. In that same vein of new leadership, Estee Lauder reported fiscal fourth quarter earnings today as well. Sales were down 8 % for the year. Net income swung to a huge loss, but a lot of that came from significant impairment in our unstructuring charges because new management came in and is looking to make significant changes.

13:06Tyler Crowe:CEO Stéphane de la Favre came in in January and took over for a long-time serving CEO, as well as kind of displacing the Lauder family a little bit, who have been kind of tied to the C-suite, kind of tied to the board. There was a little bit of corporate drama. I know the Wall Street Journal covered it pretty extensively coming up to that. But Rachel, I'm going to toss this to you. Do you think that this corporate shakeup that De La Favre is proposing is going to really work? And will it allow Estee Lauder to get back on track to being a winning company that it was for as long as it was? You're right.

13:47This does have such an extensive history of being a winning company as one of the legacy players in the beauty space. I think the jury is still out as to whether this turnaround will be effective. I mean, I do think that they still have a place in the industry, but it's going to be an uphill battle. You know, they are seeing sales declines across pretty much all of their core segments. And there are some very kind of practical reasons for that. You know, one being that Estee Lauder heavily and historically had relied on the Chinese market for growth, especially, you know, through tourist spending as well and in European markets.

14:18But China in particular, their luxury market has experienced a significant slowdown, and that's really impacted Estee Lauder's sales. And a lot of their strategies through the years, which had been really successful in the past, have failed to resonate with the latest and youngest generation of beauty consumers. And it has become an increasingly competitive space in the years since Estee Lauder's heyday. And this is also a company that was slow to adapt to the shift towards online beauty sales and online shopping. We saw even competitors like L 'Oreal that invested more heavily in online channels.

14:53And Estee Lauder continues to face really fierce competition from other emerging beauty and skincare brands. I mean, one obvious example is Elf, which just acquired Haley Bieber's brand, Rode, and also owns many other key brands in the modern beauty space. And of course, now there's the tariff factor that is compressing margins across the industry. So, Estee Lauder, they have had significant workforce reductions. They've been shifting their marketing strategy. They've been reevaluating some of their supplier relationships. But time will tell. The environment they're operating in now is very, very different than that of 15 or 20 years ago.

15:28Tyler Crowe:Yeah. In the age of TikTok, airport duty-free seems a little outdated in terms of your dedicated sales model. So next up, we're going to talk about Home Depots and Lowe's who are taking a very different approach to sluggish growth in the past couple of years.

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16:35Tyler Crowe:So we just discussed two retailers looking to new leadership to shake things up, but home improvement retail has also been moving and shaking quite a bit in the past couple of years. But instead of fresh faces in the front of the C-suite, they're actually looking to acquire their way out of a slump. Just today when Lowe's announced their earnings for the quarter, it was also announced it was buying Building Products Distributor Foundation building materials from a private equity company for about$8.8 billion. Now, this just comes a few months after Home Depot announced it was acquiring GMS, its second specialty building products distribution company, in as many years.

17:13Tyler Crowe:Now, home improvement retail has been in the dumps for a myriad of reasons of interest rates, COVID, name your crisis over the past five years. So, I want to start with you, Lou, this time. What do you make of these moves of moving into professional contracting specialty product distribution? Yeah.

17:36Lou Whiteman:So, you know, Tyler, I can't answer this without bringing up a third company, QXO, which is also trying to consolidate this industry. They, of course, are run by Brad Jacobs, who has consolidated the tool rental industry, has consolidated trucking, has consolidated waste. Whether or not QXO ends up being a success, I do believe Brad Jacobs knows how to identify a market ripe for a roll-up. I have no idea if he assumed Home Depot and Lowe's would go as aggressively in when he started QXO or if this is turning into a problem. But I do think if you look at there's 75 ,000 very, very small little companies here, it's fragmented.

18:15Lou Whiteman:The logic of a roll-up and a logic for a Home Depot or Lowe's to go in and try to roll up this industry. It's there. And I think on paper, at least it makes sense. Whether it works for Lowe's, whether it works for Home Depot, that we'll have to see. I think if you take a step back, this makes a lot of sense. I mean, first of all, it's worth pointing out that Home Depot commands a much larger market share and significantly higher revenue than Lowe's. And it has a more extensive store network. It's historically really focused on serving professional contractors. and those represent something like half or about 45 % of its sales.

18:50And Lowe's needs to gain ground here. So, its recent moves make sense. I mean, they also recently acquired a company called Artisan Design Group for$1.3 billion as they're really trying to strengthen their presence in the new home construction market, expand their pro services. They have rolled out their total home strategy where they're looking to be a one-stop shop for DIY as well as pro customers. But the reality of the environment in which Home Depot and Lowe's are operating in remains. We know that high interest and mortgage rates have discouraged home buying and selling. Consumers are allocating their spending to other areas.

19:23And I think that these are both solid value-driven businesses. Focusing on the pro market, I think, is a right move for them. But I do think we're going to continue to see sluggish growth figures unless and until the environment in which they're operating starts to relax and we start to see growth again.