Motley Fool Hidden Gems Investing - 2 Hidden Businesses to Watch as AI Keeps Heating Up

Starting point is 00:00:00 Growth is accelerating for the world's largest chipmaker. You're listening to Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm Jon Quast, and I'm joined today by Fool contributors Matt Frankel and Rachel Warren. We're going to take a question from the mailbag later in the show about selling a stock for personal reasons. But first, I wanted to hit this news from Taiwan Semiconductor. That is ticker symbol TSM. Now, the reason that I want to talk about this is not because it's a hidden company. I know I'm going to get skewered for this, but it's a $2 trillion company. Okay. It's large. I get it. It's not hidden, but I think that

Starting point is 00:00:40 some people still underestimate how important it is. The company fabricates over 90% of the world's most advanced computer chips, and it's an estimated 60% of all computer chips. So it's a very important company. And when we see things with its business, it's really a leading indicator of global AI demand. And so I did want to highlight TSMC today because AI stocks have pulled back in recent weeks. I think some investors are saying, listen, the trends have peaked, the downtrend is coming, but this company just reported monthly numbers and it throws cold water on the fear narrative. Rachel, walk us through some of the important things we need to know. Yeah. I mean, you can look at trends in terms of looking at how share prices are performing,

Starting point is 00:01:20 but the numbers are what really tell you what's happening behind the curtain, so to speak. And TSMC is, if you want to think of it this way, essentially the whole factory floor for the entire AI boom. And that's why their monthly sales report, their first half sales reports are really important reality checks for the market. They are not seeing a slowdown. TSMC just announced that June revenue jumped nearly 68% compared to last year. And why is that so important? Well, June sales usually dip because of normal summer seasonality. But this year, they actually rose for May. And it shows that demand isn't just steady, it's actively accelerating. It very much pushes back against the narrative that the AI buildout is losing steam. And I think that's

Starting point is 00:02:02 something that's really, really important for investors to pay attention to. For sure. And this is one of those companies that does give us kind of these periodic monthly updates on what's happening. And you look in April, 18% year over year growth, May, 30% growth. And now that 68% growth that you just highlighted. So clearly an acceleration trend. But I'm going to zoom out just a little bit and ask you just to walk us through what does that look like? What's the context here now for the first half of the year? And what can we expect maybe for the back half? So for the first half of 2026, TSMC's total revenue reached 2.4 trillion new Taiwan dollars. In USD, that's about $75 billion. That was up 36% compared to the same

Starting point is 00:02:44 period in 2025. You know, I noted that 68% year over year increase in June revenue. The company also reported it was a 6% sequential increase, so up from the prior month. So TSMC, you know, they manufacture semiconductors for a wide range of applications, spanning smartphones to high performance AI computing systems. Their key clients are all the big US tech leaders, including the likes of NVIDIA and Apple and advanced micro devices. So TSMC is on track to generate over $40 billion just from AI chip revenue in 2026. That's about 25% of its total revenue overall. And the reality is that the companies from Microsoft, Alphabet to Meta are locked into massive capital expenditure budgets. They're essentially waiting in line because TSMC's advanced manufacturing

Starting point is 00:03:28 lines are booked solid. Now, TSMC reports their full earnings this Thursday. A lot of the focus is going to be on their capacity bottlenecks, whether they can raise prices for their core products. But essentially, when the primary supplier of the world's most critical tech shows this kind of momentum, it would indicate that the hardware cycle still has a lot of runway left. For sure. And to be clear, it is not just Taiwan Semiconductor. I also want to highlight some news here from Meta Platforms. And again, I realize that it is not a hidden company, but I think that we're going to hit here just a moment. If you hang with us, there are some underlying trends that we want to get to. But Meta Platforms making another announcement that just kind of throws cold water

Starting point is 00:04:05 on the AI trend is peaking narrative, you look at its Hyperion data center in Louisiana. This is a very important data center for the company that is currently being built out. Originally, a $10 billion facility announced late 2024, then late last year, upping that to $27 billion. But the company coming out today, and it is increasing this project yet again, Matt. Yeah, so there's a lot to unpack here. So Meta announced today, you're right, the Hyperion project, it's getting even bigger after two big increases that already happened. Even after that jump to $27 billion in estimated costs last year, the company bought an additional 1,400 acres of adjacent land. So we kind of saw this coming. So now we're expecting at least $50 billion in direct investment, yes,

Starting point is 00:04:52 to one facility in a site that's now expected to be a five gigawatt project originally scheduled for two. And that's more than 3,200 acres in size. Just for context, that's roughly four times the size of Central Park in New York. So not only that, but reports have indicated, this is from Bloomberg, that the total expected investment for this project, including things like the power infrastructure that has to go with it, could eventually be more than $250 billion. So the details really matter here. So the full build-out isn't expected to be completed until about 2036, so over a decade. So it's not like they're spending all of this money tomorrow from their balance sheet. And Meta, to handle the power problem, you can't just connect the facility

Starting point is 00:05:30 this big to the grid. It would collapse. Meta's paying for 10 new natural gas plants, 10, to support this one site and is contributing over a billion dollars toward local infrastructure like roads and to make sure the water and sewage infrastructure can handle this increased capacity. And one of the things I want to ask here, Matt, is that we have seen so many what we're calling bottlenecks in the industry. And that is really essentially there's so much demand for certain things in these data center build outs that the demand is far outpacing supply that is boosting the cost of things. I think we've seen this in memory in particular, the cost of certain things are going up because the price per component is going up. So it's not necessarily that the project

Starting point is 00:06:12 is getting bigger, but is this a issue of the project is getting bigger or everything's just getting more expensive? Well, it's both. It's not just a bigger scope. The cost of building data centers is soaring. And this is kind of a good tee up for our next section. The original $10 billion estimate for a two gigawatt facility, it was going to be a build cost of about $5 billion per gigawatt, just dividing one by the other. So now at $50 billion for five gigawatts, the cost per gigawatt has doubled to 10 billion. The power infrastructure for data centers, the specialized cooling they need, the other costs of building a data center, the chips that go inside have risen along with the massive demand. So it's worth noting, however, that last year's

Starting point is 00:06:53 $27 billion figure that you mentioned earlier kind of took this into consideration because that was still based on the original two gigawatt projection. So the per gigawatt costs have actually come down since then for this round. It could be maybe they're expecting more efficiencies to come with the scale of a larger data center. Maybe their original estimates just weren't that great because they were based in 2024 when AI was like back at a previous generation. So there's a lot of moving parts here when it comes to the cost. So we've talked about Taiwan Semiconductor. We've talked about meta platforms. These are two of the biggest, most important companies in the world. But after the break, we're going to go under the radar. You're listening to Motley Fool

Starting point is 00:07:28 Hidden Gems Investing. Save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today, because we have your number. Welcome back to Motley Fool Hidden Gems Investing. We've just highlighted some trends here. Meta expanding the data center expenses that it is putting out. We're looking at Taiwan Semi showing the accelerating growth rate. In light of that, in light of these things, we want to highlight some hidden companies.

Starting point is 00:08:18 companies. And so this isn't necessarily a list of stocks to buy because we don't give personalized investing advice on this show, but we are Motley Fool hidden gems investing. So we do want to go under the radar. So I've asked Rachel and Matt to give us a company that a lot of investors don't know about, but that they should. I've asked them to explain what they do to make money and what could go right in light of the trends that we just looked at. Matt, you're up first this time. What is a company that many people don't know about, but they should? If you listen to the podcast frequently, you've probably heard me talk about the AI picks and shovels is my favorite way to play the trend. So one that I'd like to bring to the table is

Starting point is 00:08:57 Comfort Systems. The ticker symbol is FIX. It's one of the largest heating, ventilation, air conditioning, plumbing, electrical contractors in the United States. And not for like your house, they specialize in commercial properties. They've historically served healthcare systems like large hospitals, manufacturing plants, and other really large-scale commercial property types. Over the past few years, the company has smartly and through necessity pivoted to AI data centers. And to say it has paid off would be a real understatement here. I mean, their revenue grew 56% year over year in the most recent quarter, and it wasn't hospitals that did it. Their earnings per share more than doubled. The backlog grew by 80%. Data centers need enormous

Starting point is 00:09:34 amounts of cooling and precise cooling and electrical work. And that's really becoming true, the more sophisticated the data centers come. Data centers now being built are generally liquid-cooled. They used to be air-cooled just because of how sophisticated and how much heat the chips inside of them put off. Comfort systems, they're one of the few companies that can really handle the scale and the scope of these projects. So related to today's stories in particular, Taiwan Semi's CapEx is now guiding for the high end of its previous range. That's a positive item for companies like Comfort Systems that profits on this build-out. The company's sold-out language they're using and the discussion of lead times of well over a year on new orders. It indicates a

Starting point is 00:10:13 more durable demand curve than we previously expected with AI. In projects like Meta's massive build-out, it's exactly the kind of complex situation that companies like Comfort Systems can handle that most others can't. Yeah, Comfort Systems USA is a great company, in my opinion. I wish I had found it several years ago. All right, Rachel, it's your turn. I'm going to ask you the same question. What is a company that you want to highlight here for our listeners, what does it do and what could go right in the coming years? We were talking about TSMC. We look at that company, they make the silicon chips. We look at Meta, they buy those chips to power their AI models. But you can't just plug a loose chip into a wall outlet at a Meta data

Starting point is 00:10:50 center. That is where the company I'm bringing to the table enters the picture. And that is Celestica, ticker CLS. So Celestica is an electronics manufacturing services powerhouse, but they're also very much one of the companies that I would count as an architect for AI infrastructure. So Celestica essentially takes the advanced chips from companies like NVIDIA and AMD, mounts them onto custom circuit boards and assembles them into these massive liquid-cooled AI server racks. They also build the high-speed networking switches that allow tens of thousands of these chips to actually talk to each other. They essentially sit in the middle of the supply chain. So they take the raw tech components, they turn them into the really functional supercomputers

Starting point is 00:11:30 systems that hyperscalers need. And if TSMC's massive 68% revenue spike is to be our guide, a tidal wave of new silicon is about to hit the market. And the big tech companies like Meta are moving away from that off-the-shelf hardware. They want the custom-designed proprietary AI server racks to help them save on power and maximize efficiency. Celestica is one of the very few companies globally with engineering expertise to build these complex bespoke systems at scale. And because they work hand-in-hand with the major chip designers, think of companies like Broadcom, Celestica gets locked into these multi-year data center build outs early. So as we continue to see these expansions of CapEx from the big tech companies,

Starting point is 00:12:09 the build out of next gen AI clusters, Celestica just needs to keep assembling the digital bricks that it continues to use to fund the AI software race. And if this hardware cycle has a multi-year runway, which I personally believe that it does, I think Celestica is very well positioned to capture a nice chunk of that growth. Yeah, I think one of the reasons that this company does continue to sit beneath the radar is it's not exactly an easy business to understand, but certainly very important to the whole underlying infrastructure that we're talking about. So thank you both for highlighting these. I'm curious, Matt, do you own either of these? I don't own either of them yet, but Comfort Systems is very high up on my watch list.

Starting point is 00:12:46 How about you, Rachel? These are also both on my watch list right now. All right. Well, we hope they go on the listeners' watch list as well. We're going to head to the break. After the break, we're going to dip into the mailbag. You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. One quick note, we want to make you a part of the conversation. As I said earlier, we can't give personalized investing advice because we're not certified financial assistants or anything like that, but we do like to answer questions that you have for us about stocks or general investing

Starting point is 00:13:18 questions. So you can send those in at podcastatfool.com. We'd love for you to keep them foolish. We'd love for you to keep them short enough to read on air, but we do enjoy taking those questions. So get those into us again at podcastatfool.com. And we have a great question teed up for you here, and I'll just read it. It says, hi fools. I'm going to skip a little bit of the intro, but he says, I'm considering going back to grad school and could cover all the tuition by selling about a third of my portfolio. I've been debating this versus taking out student loans. And so essentially the question from Ben in Sacramento is, what should I do here? Should I take out a loan or should I sell a third of my portfolio? Now I will reiterate, we can't speak to Ben directly because we don't know his full financial situation, but we are going to just kind of explore this question. When I have a need in my life, and I would be able to cover it with an investment, what should I do? And I'll just throw out an anecdote here. This was something that I came up with recently in my life. Last year, I had a sudden need for a vehicle. I had an investment that was roughly a 10x that could cover the cost. And so I did sell that investment to fund a real need in my life. So I can relate to this question. But I'm going to throw it here to Matt, who probably has faced similar things in his life. Matt, what do you think about this question from Ben?

Starting point is 00:14:38 What a great question. And for me, it's going to be the next time I see this happening is when my kids go to college and need some money. So there's a lot to unpack here. So for starters, you're exactly right that investing is a means to an end. It's not just that something that has no end point, you're saving for something, paying for planned life expenses. It's a completely valid reason to sell stocks, especially if it keeps you out of debt. It's also true that psychologically, it can be difficult to sell large volumes of stock, especially if you've spent years building that buy and hold mentality. So here's kind of a good mental framing for this. Your investment portfolio is a representation of the purchasing power that you've stored away over your lifetime. By selling stocks to pay for grad school, assuming that you're getting a degree that will either boost your income or boost your job security, you're not exactly withdrawing or spending your money. You're transferring that capital from one productive asset, stocks, to another, which is your own earnings power. And depending on the earnings power of degree you're thinking of getting, it could certainly be the better return option of the two. There are some negatives though. So avoiding debt,

Starting point is 00:15:40 and I know I'm going to catch flack for saying this, avoiding debt isn't always as black and white as Dave Ramsey is going to have you believe. As one example, what kind of capital gains tax bill would you be looking at by selling one third of your stock portfolio? Because if you do that all at once, it could certainly move the needle here. What are the interest rates on the student loans available to you? Are you talking about private loans that if you have really good credit, you can get for 4%? Are you talking about loans that you can get for 10%? Those also move the needle based on your expected returns in the market by just staying invested. The question of which third of your portfolio is an important one, meaning which individual stocks are you going

Starting point is 00:16:15 to decide to sell? Which are you going to decide to keep is an important one. And that's the tougher piece of the puzzle to solve. And without knowing your holdings, that's a whole nother conversation for another episode. Yeah. Which third of the portfolio makes a big difference? Which two thirds of my keeping. All right, Rachel, your turn here. What do you think about Ben's question? I think Matt makes really good points. And it is important to note, we don't know the composition of your portfolio or what that looks like. So bear that in mind. We appreciate you listening. And I think what you're feeling is completely normal as well. As long-term investors, we often spend years training our brains to think that selling stocks is a mistake. It can even sort

Starting point is 00:16:52 of feel like you're breaking the rules of wealth building by pressing that button. But I'm going of kind of take a more holistic view of this. I think it helps to remember an investment portfolio, you know, it's not a museum piece just to be looked at it is it can be a tool belt that can help you build your life to build and gain greater financial freedom to compound your wealth over the years. And that can also give you the flexibility to buy back your time to change your career path. And there is a very real world usefulness to having a portfolio that is structured in that way. Shifting some of the money that you have built and gained through appreciation your portfolio into your education, it moves that investment from your portfolio, yes, but it directs it into

Starting point is 00:17:31 yourself, you know, where your own hard work, your skills decide the outcome. So if you do decide to put that capital into your education, you're making a bet on an asset where you dictate the success. So if it was me, you know, it would certainly be something that I would consider to use the tools you built to go get that degree if you feel that it's the right decision. Regardless of the choice you make, we wish you the best of luck. And we thank you so much for listening to the show. For sure. It sounds like there's a lot for Ben to think about. And I'll just leave with some wisdom from John Michael Montgomery, life's a dance, you learn as you go. That's going to be all the time we have for today's show. As always, people on the program may have interest in stocks

Starting point is 00:18:08 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 Motley Fool 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. Thanks to our producer, Christy Waterworth, and the rest of the Motley Fool team. For Matt, Rachel, and myself, thank you so much for listening to our show today, and we will see you again next time.

Motley Fool Hidden Gems Investing - 2 Hidden Businesses to Watch as AI Keeps Heating Up

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.