AI, Space, and Defense: Separating Hype from True Moats

32:06Or you could wait until the story plays out and then you could wait until a company achieves the story that they've laid out for investors. And not every time, but a lot of times the story catches up with the stock price. And so a good example of this was...

32:29Crap, I forgot.

32:33There's countless stories of stocks where you look at their business and it's like 10x'd. They have 10x'd revenues where they've gone from huge losses to very, very profitable. And now it's like trading at a decent valuation. And the stocks stayed flat the entire time. because it was already priced in. And so if you can have the discipline and the patience to let these companies earn their stories that they're telling investors, then I think your success rate will go much, much higher. And it's just a much more sustainable way to invest. I love that. Beautifully said. Absolutely. And for just 100 % honesty here, Andrew and I were talking before we were talking off air before we were recording.

33:26And I told him, I'm totally going to buy SpaceX one day. That's going to happen. Like, I love that company way too much to not. And I believe in the company way too much to not. It's just right now, you know, I'm just going to lose money. Like you said, we're waiting on the price to catch up with the narrative. And when that happens, I will start finding a way to get SpaceX into my portfolio. Hashtag, see you later, Google. No, I'm kidding. I'm not going to put that.

34:03All right. So what's the next industry we got here? All right. Well, speaking of SpaceX, it is space. and I'm very new to looking at this. The backstory is I used to own Northrop Grumman and I sold it because I was chasing growth elsewhere. What a stupid mistake that was because that stock's done great and the growth that I thought I was buying into was not growth. So there's a little lesson in there along with that. But space is interesting because you do have a few companies that are doing it profitably as we speak, and there could be more, but Northrop Grumman, defense contractor, they have a space segment.

34:47Lockheed Martin has a space segment, and L3 Harris has a space segment. Are there any others that you're aware of that have profitable space segments?

35:02No. Blue Origin? Would you throw that one in there? Yeah, but they're not public, so I don't know how to... Yeah, that's a good point. They're not.

35:18No? I guess you're right. Yeah. Well, Gemini was right, but there's a... I do remember... Do you remember when Netflix came out with that show, Space Force, with Steve Carell? Did you ever watch that? no oh man are you an office fan no i absolutely despise that show are you serious 100 dude like i get that from everybody it is like very seldom do i see clips i'm like yeah okay that's funny but yeah steve steve corral is like the 40 year old virgin guy right yeah so the only part of that movie i thought was funny was when he got his chest wax that was hilarious um but other than that i just i don't think he's funny and i don't think like that that dude with the glasses that that dorky guy um drives me nuts like he just what a schmuck and the only time i think the office is funny is when the guy that sits across from him i don't remember his name is picking on him.

36:33One time I saw a clip where he put all his stuff in Jell-O. That was pretty funny. But other than that, no. I've tried because everybody has the same reaction. Like, dude, how do you not like The Office? And I've tried. I sincerely have tried. Can't do it. Sorry. Wow. If you were a stalker now, I'd be shorting you aggressively. The Office is an all-time great show, and you can't convince me otherwise. I'm going to try to.

37:12I don't even know how we got there. So the whole idea of a Space Force, and that was when I was first exposed to this idea of space revenues. And so it's interesting how the president did that whole thing with building a space force so we could defend ourselves in space. And now we're seeing SpaceX kind of play out that vision in real time with real revenues and real government backlogs, which makes it even that much more interesting. but that's all to say that Northrop Grumman Lockheed Martin and L3 Harris might actually be decent ways to get exposure to space without having to go into something crazy speculative because a lot of the other names that are like more pure play space names are not profitable yet and they fit in that category of what we were talking about earlier where it's like they have great stories they may or may not execute on those stories and so it is not quite investment territory yet for investors looking for margin of safety.

38:17The way I was going to rank this industry, these stocks, so we're just looking at SpaceX and then the three defense contractors I mentioned. One would be which stock do I think would be a better investment over the next 10 years? And then one would be who has the strongest moat. So do you have a preference on which way I go first? No, but I like this. You're speaking my language. Let's do it. Okay. So strongest moat. I think bar none, you don't have to do a ton of digging to figure this out. SpaceX has an incredible moat and it's like not even close. They just did their first earnings call not too long ago.

39:00And in the earnings call, Elon said, if you took a chart and you looked at SpaceX versus their next closest competitor, their next closest competitor would be one pixel on the chart compared to SpaceX. So it just kind of tells you like they are a one of one company led by a one of one visionary. And like you said, they're doing incredibly cool things and they actually have for being this growth, growth, the growth company, they actually have a capital allocation plan. Believe it or not, they said they have their three pillars of the business, which if you're not familiar with this stock yet, they have the Rockets, basically.

39:42They call it something else, but I'm going to call it the Rockets. They have the Starlink, which, by the way, has a TAM to connect the entire global. That would be the next internet. And then they have the AI stuff they're doing with their data centers and Grok and all of those things. So it's super, super interesting. and I really do think when you analyze a stock like this I mean who knows they're claiming that they can get to $100 billion run rate which would basically be$100 billion annual revenue by December which they're at$20-ish billion now,$25-ish billion now that's a pretty high bar but if they can achieve it at the valuation they're at now that's like 1.4 trillion they could get to like a 14 price to sales which it's not the craziest idea in the world because they IPO that this insane valuation no definitely I that's that's cool I

40:57love Elon or not like you got to give the man credit like Andrew said for being the visionary that he is and doing doing some of the crazy cool stuff he's done and i really like i want to say like you say if you if it was anyone else the jeff bezos i'd be like okay but if anyone's gonna pull it off it's probably him so okay well we'll see what happens I mean, but you're right. If they hit that suddenly, you know, it becomes okay. Like that's exactly what I was talking about. That's whenever it's the conversation shifts to no, not right now to let's, let's dig into this and see what we can figure out.

41:46100%. That makes me excited. I need to go listen to the earnings call. I haven't listened to it yet. I know. It's hard to not get excited about a stock like this. But I do think it provides a valuable lesson for beginner investors and a good reminder for people who have been doing this a while. When you look at a stock in its very growth-y growth stage, you're really betting on the guy who's driving the car. You're betting on Elon. If you look at the way the most successful venture capitalists have invested, you have Sequoia. you have a lot of these different VC guys, Andreessen Horowitz. They all talk about how you're betting on the team, you're betting on the leader because you don't have financials to go off of.

42:34But the way they invest is they do a lot of small bets. They spread out and just do a ton of different companies and stories that are really exciting. And they're really evaluating the people at the company rather than the company itself with the idea that the people will figure it out because they're so driven or brilliant or whatever it is. SpaceX is kind of one of those interesting mixes of that in that they are generating a ton of revenue now. But Wall Street, like they have lately, does not like the CapEx that SpaceX has been doing and continues to punish them. The other thing, you had asked me, what had the stock done recently.

43:19And so I was reminded of the fact that August 6th, they released 20 % of the shares. So the shares are still being released for this company because the employees that have been there for a long time have a certain period of time where they couldn't sell their shares. So 20 % were released on August 6th. And then they have these different milestones where you have another 7%, another 7%, another 7%. And then potentially the big one is June 12, 2027, when Elon, they call it the one-year founder lockup anniversary, Elon's 6.4 billion shares could be sold if he wanted to sell them. So those are all different interesting numbers to watch.

44:03And so you're dealing with, again, a super high valuation. And this is why in the next ranking we do, where I look at which stocks do I think will be the best 10-year investment, I put SpaceX on the bottom because I think there's just too much unknown. And I think you're taking on a ton of risk at where the price is now. Now let's say they do get to that$100 billion run rate and they have like some sort of path to profitability. Then maybe I changed my mind. But as it stands now at like$25 billion in revenue, spending like crazy on CapEx. and these headwinds of employees selling shares after IPO, which is common.

44:46You see a lot of IPOs dip as employees sell their shares. I just think there's just a lot of uncertainty that makes it hard, even though it arguably might have one of the greatest moats. This might be a generational company, but maybe we miss it, but sometimes being patient can pay off. And so I'm like 15 years too late on Google or however many years it was. Google's still arguably one of the best businesses on the planet. And it was worth the wait. I mean, maybe not. But I still feel good about having a really great company in my portfolio and waiting for it to be investable and a conservative addition to the portfolio.

45:34and so I just think that's a better way to invest it's more prudent and it's not as exciting and it won't win you headlines but if we're talking about investing with a margin of safety that's where your mind has to go

45:50I agree

45:54SpaceX as much as I hate to say it like you said there's just too much of a risk which is, you know, there are two main reasons I have not bought it as much as I want to. One, I don't buy IPOs. Two, there's just too much unknown. We just got to let the price settle. Like you said, you know, people selling their shares, all that stuff. You know, that always hits a stock real hard when it first IPOs. It's a good point that we haven't brought up recently, at least. But I think I would agree with them probably being in last place. As much as I want to like, like yell at you, I can't. It's logical.

46:45It's logical. It's sucking all the fun out of this. It is. I'm depressed now.

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48:30Well, should we move to the defense then? Because I almost think if you're going to look at Northrop, Lockheed, and L3 Harris, you might as well look at all the rest of the defense names too. And please chime in if I miss anybody. I'll blame a software program for that. But basically Lockheed Martin, Northrop Grumman, RTX, General Dynamics, Boeing, and L3 Hares. Solid? Okay. So again, I've invested in this space before, so I know enough to be dangerous. But kind of the way I've always approached it is their big customer is the U.S. government, right? So it's not in the US government's best interest to let Northrop Grumman or Lockheed Martin become the Google of defense contractors.

49:25They're not going to make bids to let one company consolidate and take all the pricing power away or relative. So the idea I've always had as a mental model for these companies is that there's multiple winners. It's very unlikely that one will swallow the rest. and so because of that you don't necessarily need to buy the number one leader this is Andrew's opinion maybe you don't need to buy the number one leader but you want to buy a company based on what the valuation is and how they're doing on profitability trends and are they growing at a decent rate so if I compare the companies can I interrupt you a second yes so you say there's no winner and from from like a numbers standpoint fair but you can't really argue with that what one of the things i look at which i i don't know if i've talked about before um so like general dynamics the they are the sole provider of the m1a2 actually i think it's m1a3 abram's main battle tank they're the sole provider of the m1 whatever bradley fighting vehicle they're the sole provider of the paladin they're they're you know when it comes to like our tracked force they are the sole providers of it when you look up or look at northrop they are the sole provider of the b2 um so that's when we talk about there's no winner that's that's what I look at.

51:08And so, um, you got to look at things like who, who's making what and how much of, how much of it is the U S government buying? How much is the rest of the world buying? Um, uh, you know, uh, but I mean, there's also a lot of, a lot of stuff you have to pay attention to in that because, you know, because these are U S companies, the U S government dictates to them who they can sell to as well so um who was it turkey i think just bought a ton of f-15 eagles um i think it was turkey i could be wrong but someone that the u.s previously had said no they're not allowed to have them just bought a bunch.

52:03So these are all things you have to take into account. And from that regard, I would say they're definitely winners. I wanted to bring that up before I let you go too far and I forgot about it. So, sorry. Yeah, it's a really great point because there are important nuances to these companies, right? Like you said, the B-2 bomber and some of the other things. So going back to some of the numbers on here, if you want to talk about the most capital-efficient defense contractor, it's Lockheed Martin. That's not even close. Their return on capital in the 18 to 22 % range for the last six years. you have Northrop and General Dynamics low double digits and then Boeing their chart just does not look like the type of chart you want to see however they are rebounding now and they've actually gotten to positive ROIC after years and years and years of losses so that's a whole other conversation they've had their issues with some of the jets that they've made.

53:22And then the other two, which they're kind of like faster grower from a revenue perspective companies, but they are not very capital efficient. That'll be RTX and LHX, which is L3 Harris. So capital efficiency wise, Lockheed is winning. I look at revenues and revenue growth and if we go back to 2019, LHX has the highest and then RT. So like I said, LHX, RTX, higher revenue growth, but they're also growing through acquisition. And so that's why their ROIC is lower. So you know me, like if a company is tanking their ROIC to grow, I don't, I don't buy it. I don't, I don't like those types of situations.

54:11So those two companies automatically go on the bottom of the pile for me. And then just from a earnings per share perspective, which in this case, because these are not growing that quickly, share buybacks have been a pretty decent story here. And so, again, back to 2019, I have Northrop as the highest growth story in earnings per share. if I change this to 2020 let's go to 2021 I guess you could argue they've been shrinking since then so it all depends what story you want to paint here on the growth but Lockheed they've just had kind of flat earnings per share Northrop has had good growth other than 2021 was like a big up year so I don't know you remember we were talking about like you don't want to make these stocks your pets and so for a long time i think i've i've thought of stocks as like an x you know you sell it and then you don't want to look at it because it's like your ex but it's not it's not your ex it's not your pet it's a stock in the stock market and so if i had to go back to a defense contractor i mean gd is really close up there too though let me check valuation real quick i might be changing my mind here.

55:37So definitely GD and Northrop are at the top. Again, you can rip me for this because this is so numerical and so not based on company fundamentals, but I put GD number one especially because you're big on them. So GD one, Northrop two, and then I'll put Lockheed three, and then those two fast growers that I mentioned are at the bottom, and I won't say who's bottom bottom and then boeing is just too hard pile i maybe i'll come back to boeing some other day but um they've had so much history that i would have to really dig into that and feel comfortable that they've gotten past that and so that's my rankings for these so um i mean i I'll agree with 100 % with your rankings.

56:33You had Northrop too, right? And then Lockheed. I might switch those. Okay, I'll start with General Dynamics. For me, why is General Dynamics number one? So I listed the key things that they fight or they, they, they bring to our military. Um, but I didn't talk about like some of the advancements they've also brought. Um, so general dynamics, uh, were the first to put a multi-tier targeting system on a ground fighting vehicle, meaning that a tank can target um multiple targets and engage them in synchronous order um which is unheard of in a fighting vehicle we're the only country um or we were the only country i don't know if we still are that could do that with with our main battle tank um they They came up with that.

57:39They're working on putting HUDs in soldiers' helmets so that they can have full situational awareness and see exactly where targets are, see exactly where friendlies are. So for the first, I would say, well, okay, so we've heard Desert Storm. The most catastrophic loss the United States had during Desert Storm, at least in the very beginning of it, was what we call blue on blue. It was friendly fire. It's so easy in combat to lose your friendlies and think that because they're shooting in a general direction that might be yours, that they're an enemy when they're not. And that's exactly what happened in Desert Storm.

58:36So this would this takes that away. One of the most devastating factors on the battlefield, which is blue on blue, that's completely gone. And GD is at the forefront of trying to bring this technology to our troops. So just the the the avenues they've taken, they're big in AI, bringing that to the to the battlefield as well for the for the troops. um love it the reason i say i would probably put lockheed above northrop um lockheed is the sole provider of the f-35 lightning 2 um it's being phased out but the f-22 raptor the f-16 uh fighting falcon and the f-16 v viper um so i mean the the heavy hitters in our air force right now like uh lockheed martin makes um and then north rip like they're right there because that they have the b2 spirit which is probably is the most expensive aircraft we and i think that thing's like two billion dollars a unit um and i don't remember how many we have but it's quite a few um so i mean like yeah that makes total sense but um But with that being said, Northrop also makes key components for Lockheed Martin and their aircraft.

1:00:12So, I mean, Lockheed Martin really revolutionized the stealth technology that we use today. They gave us the world's first stealth aircraft with the F-117 Nyhawk. um so i mean lockheed martin is really cool um the only reason i don't own stock in them is i don't want to get lopsided in industry um and i think gd is just a better company um but yeah i totally agree with your rankings um north rip and lockheed i think they're neck and neck and so So you're probably right using numbers to see who wins there. Either way, one thing you said, it benefits the government to not let any one company win over the other.

1:01:15It also benefits the government for any one company to stay in business. And so, like for me, there is just plenty of security in that. the fact that even if the U.S. is not actively engaged in a war, which I am not a war hawk. I, you know, war is an ugly thing and it's just an unfortunate reality. General Dynamics has provided immense support to Ukraine. General Dynamics provides an immense support to Taiwan. all these countries that need to protect themselves from what would we call them ill-willed doers they need to protect themselves and General Dynamics helps them do that so no I actually like your rankings where does space come into all of this though because I don't general dynamics isn't huge in the space sector.

1:02:26I mean, they have some, but they're not huge. Yeah, I should have touched on that. I forgot to. So Northrop from a profitability standpoint, Northrop and Lockheed are neck and neck. And then L3 Harris is maybe half as profitable as the two. But Lockheed has continued this momentum and Northrop has come down a little bit. So I have no idea how to analyze the space segments outside of just looking at where their numbers have been. But I think it's kind of interesting to just have that upside to know that like, hey, in 2056 or whatever, maybe these companies are still around because they're patrolling Mars and keeping bad guys away from Mars or whatever.

1:03:12I don't know. I don't know. What do you think the main takeaway for a beginner investor listening to this conversation would be? I think you see the dichotomy just in this conversation of some of the most exciting stories and businesses that are out there versus some of the more boring ones. One, you can analyze quite clearly with numbers. And these companies have been around a while and you can make a prudent investment strategy. the other one might be closer to gambling. So you really have to be careful that sometimes the most exciting things to talk about aren't always the best investments.

1:03:56So if we can remember that, keep things in context. And I hope that that metaphor landed. Metaphor analogy, I don't know what ever to call it, but just this idea that like, there's going to be so many companies with so many stories. You can wait for companies to grow in and earn their stories and then make more pretty investments. I really like that phrasing. We need to coin that trademark that grow into the story. Like that's a really cool way to phrase that. And I agree. I think, you know, anything else, you're just gambling. And I don't have the capital to do that. So, you know, let's be smart with our money.

1:04:41Let's invest in the Google. even though we missed the moonshot of Google, that's fine. Google's still making us money quite effectively. You know? Yes. Lots of big companies out there. GD's been around, I want to say, close to 100 years, maybe longer. No, it's been longer. So, I mean, they're an old company, but still making me money. So, I mean, did I miss the moonshot? sure but that's okay i'm okay missing moon shots as long as it you know pays out and don't now if i hit one great you you will hear me brag about that till the end of time and everybody will know that steven got it right but um i mean if i if i never hit one it'll be fine as long as i'm safe until I'm to a place where I can take risks.

1:05:42So, and you know, this is funny. When, you know, we were talking about billionaires, when you look at billionaires, everything they do is a very strategic, calculated maneuver. It's not a feeling or an assumption. you know it's you know you watch shark tank you know and i know shark tank is for for entertainment but we can actually learn a lot by listening to the questions they ask and so i mean the and that's how they've become billionaires by asking those questions and by saying no so i agree with you totally uh i hope if you're a beginner for me the thing you takeaway is that it's okay to say no.

1:06:34It's okay to just sit on the sideline and let all the other people go play. And then when it's right for you, get in. Awesome. I appreciate that, Andrew. Good job on your rankings. I will be the nicer, more gentler Simon Cowell now. Instead of the grumpy, borderline abusive Simon Cowell of the early 2000s. In his defense, though, some of those people were horrible. I mean, come on. And I can only imagine sitting there all day listening to that would have been painful. So anyway, we hope you guys enjoyed it. Let us know how you would rank some of these companies and why. We would love to hear that in the comments down below.

1:07:26Or you can email us at Evan. that's E-V-E-N no I'm kidding it's E-V-A it's Evan at einvestingforbeginners.com he would love to hear from you or you can drop in the comments we will respond always but it's going to wrap it up for today we will see you next time in the meantime never ever ever forget invest with a margin of safety emphasis on the safety peace

1:07:56you've been listening to the Investing for Beginners podcast. All show notes can be found on our website at einvestingforbeginners.com. To master the basics of stocks in seven days, sign up for our free email series at einvestingforbeginners.com slash newsletter. Until next time, have a wonderful day. the information contained is for general information and educational purposes only it is not intended as a substitute for legal commercial and or financial advice from a licensed professional the hosts may own positions in the securities discussed review our full disclaimer at e-investing for beginners.com

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