Motley Fool Hidden Gems Investing - Alphabet Soars While Meta Sinks

Episode Date: October 30, 2025

2025 has been the year of AI capex (so far). Companies have been announcing huge spending increases and signing deals to secure critical supplies like semiconductors for years into the future. So far, the market has responded well to these announcements. Except today when Meta announced the most ambitious AI capital spending plan of the Magnificent 7 companies and the market blinked. Tyler Crowe, Matt Frankel, and Jon Quast discuss: - Meta’s ambitious spending plan sending the stock down -Microsoft’s and Alphabet’s earnings and outlook getting mixed reviews -One year without Brian Niccol at Chipotle -One year with Brian Niccol at Starbucks Companies discussed: META, GOOG, MSFT, CMG, SBUX, AMZN Host: Tyler Crowe Guests: Matt Frankel, Jon Quast Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Tyler Crowe. 42.8% of the Magnificent 7 earnings were in the past 24 hours, so you know we're covering it. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors, Matt Frankel and John Quast. We are neck deep in earnings this week. About 875 companies are reporting in this week alone. And we're not going to get to all of them this week, but we did want to zero in a few. We'll hit restaurant earnings from Chipotle and Starbucks, maybe a little bit of who's doing best with Brian Nicol or without, and three of the MAG7 stocks that reported yesterday, Microsoft, Alphabet, and we'll kick it off with Meta. Now, since the three of the

seven reported today, we kind of divvied up the assignments. So, each of us is going to give our knee-jerk reactions to what we saw for each quarter. And we're going to start with Meta, because, John, considering the market's reactions, I think we need to start here. The stock's down about 10% as we're taping. And looking through the numbers, they were all fine, But what was it, either in the earnings or the commentary, that has everyone so bearish, I guess you could say, compared to Alphabet and Microsoft? Yeah, Tyler, I think that the commentary was what was more surprising. And I think we should talk about surprises, because when you see a market reaction of

this magnitude, clearly investors didn't expect something. So, what exactly was it? investors, I think, are reacting to how much Meta said it's going to spend on AI in the next year or in 2026. Now, investors knew that Meta was going to spend money and that expenses were going to go up. I don't think that that is a surprise. I think the surprise or what spooked them is the magnitude of what we're talking about. So, Mark Zuckerberg basically said that he would rather overshoot when it comes to spending on AI than undershoot. So if you look at their capital expenditures for 2025, obviously not all of it is AI, but a large percentage of it is going to spend

around $70 billion this year compared to $39 billion in 2024. That's an 80% year-over-year increase as it builds data centers, buys GPUs. But in 2026, Meta says it plans to increase spending by a quotation, notably larger amount. So essentially the company is saying it doesn't have enough computing capacity to do what it wants to do in AI. And so whether that's improving the core advertising business or building out meta super intelligence labs. So it would rather aggressively overbuild now it's compute than underbuilt. And it doesn't think it's going to overbuild. It thinks it's going to use it all, but worst case scenario, it's going to overbuild and maybe wait for its business to catch up or maybe provide cloud services to other companies.

I think that was kind of surprising. But the fact that Meta is spending as much as it is, and it's still not enough, that's surprising. And that is, I think, what the market is reacting to. Meta's plans were certainly the largest of the three, or at least they didn't give numbers, but certainly sound the most aggressive of the three Magnificent Seven companies. And we're going to get to Microsoft and Alphabet right after the break. Matt, the results from Microsoft were better than Meta's, I guess you could say, or at least the commentary was. But the stock's still down about 2.7% as we're taping. If I'm counting right, for Microsoft, that's about $100 billion in market cap, or maybe a few

data centers here or there. For the slightly down revision, or slightly bearish sentiment, I guess, if you will, for the earnings quarter, was it the results not meeting expectation? What was the outlook? Which one was it? Well, it wasn't the earnings results. Microsoft, they beat expectations on both the top and bottom line, and pretty handily. Cloud revenue from the Azure business soared by 40%. All the other business segments delivered revenue that was well ahead of expectations. But there were a few negative points. Just like with Meta, it was spending. It was the big one. Essentially, the data center and infrastructure that's needed to keep up with AI demand, it needs money. At the

time of the second quarter earnings report, Microsoft told investors they were going to spend about $30 billion during the third quarter. They spent just under $35 billion. The company specifically said that CapEx in 2026 is going to be significantly higher than it is in 2025. That seems to be what's dragging the stock down. But a really interesting note, and I don't want to spoil too much about your alphabet discussion, is that all three of these companies increased their spending or their spending guidance, but investors are reacting to each one of them in a different way. To John's discussion on Meta, they have a history of what I would call questionable spending, especially on Mark Zuckerberg's Metaverse ambitions.

But investors seem a little bit less concerned about the ROI that they're going to get from Microsoft spending. It also didn't help that there was a massive Azure outage that was affecting a lot of websites while the earnings report was being released. This is like if Amazon had released its earnings during that big AWS outage a week ago. As we saw then, that should be completely forgotten by investors within a few days. But it certainly came at an inopportune moment. But Microsoft Quarter looks good. It's just whether or not the hundreds of billions or over $100 billion in annualized spending is going to turn into actual money in investors' pockets. Yeah. Returns on money spent seems to be a little bit more in the forefront,

because when Microsoft's conference call, I did remember mentions of, hey, we're going to have some of the best ROI, which I think might be the first time I've heard that when it comes to AI spending. And also, at the same time, we saved the best for last, and I covered Alphabet here, which is actually up 4% at the time we're taping. The numbers all looked great, pretty much across board. I mean, 45% year-over-year growth for a $3 trillion market cap company is kind of absurd, right? It's not just me. How does a company that large grow this fast? It's kind of mind-boggling. And just about every part of the business performed well, which I think can come as a surprise, since we've been talking about OpenAI, ChatGPT, and all these other AI query tools that were

supposed to be the death of Google Search, but Google ads are still chugging along just fine. YouTube is strong. It's getting adoption with Gemini as well. All the things seem to be working in some way. They discussed Waymo, but Waymo isn't really a revenue or a returns thing yet. I think it's funny to read the headlines about Google being an AI winner over the past 24 hours, when it seems like we all read so many thought pieces on why it was going to be an AI loser like, what, six months ago? We in the market, we tend to change our mind pretty quickly here. Also, Alphabet's increase in capex spending was, I would say, the most measured of the three, going from about $85 billion for the whole year

to somewhere in the range of $91 billion to $93 billion. Of the three, it's still a lot, but not certainly the jumps that we're seeing with the other ones. Maybe the market's becoming a fan of discipline and staying true to initial forecasts. And I think there was, to kind of sum up all three of them, and I'd love to see if you guys agree or thoughts on this as well. These are my two big thoughts about Alphabet's quarter and kind of the Mag7 in general. And number one was optionality. And I think this applies to Microsoft a little bit as well. But there's going to be some value in a company's optionality when it comes to AI. Some of the biggest winners from the internet age came years after the internet frenzy because the business

models didn't materialize. I think AI will follow a similar path. Having those options to pivot the business, whether it be the AI tools themselves or just providing the compute and storage and inference for everyone else to build their models on, I think that's going to be valuable for somebody like Google and Microsoft. The last thing we'll consider here is the expectations games. I said six months ago, they were the loser of AI, but now they're looking really well. And for well over a year, Alphabet has traded at the lowest multiple of the MAG7 companies. We were talking 16X earnings back in April for them. Outperforming expectations at 16X earnings is much easier than 40X earnings. In fairness, Tyler, the meta expectations

are quite down. It is now the cheapest of these three that we just talked about. Just for what it's worth. Beating low expectations is one of the best things you can do. We're going to go for a quick break, and then we're going to talk about earnings on the restaurant side of things. AI may be getting much of the attention today, deservedly so. I mean, we just talked about hundreds of billions of dollars in CapEx spending. But loads of companies reported today, and we elected to go with restaurant stocks because this quarter represents a full year for Brian Nicol at Starbucks. And because Chipotle, well, let's just say they might be missing Brian Nichol right now.

Shares of Chipotle Mexican Grill are down about 16% as we record. And John, you took a look over the report and the commentary. So should Chipotle's board kind of be standing outside of Nichol's office with a boombox like Lloyd Dobler and say anything? Just being like, come back to us, please. That would be entertaining. Look, Chipotle is essentially a victim now of Nickel's success when he was at the company. I think this is a complicated story to unpack.

You look at it, Chipotle's revenue, its sales are still up, both on an absolute basis because it opened new restaurants, but also on the same store basis. Barely, but 0.3%, but they're still up. But the profit margins are what are coming down, in particular, the restaurant-level operating margin. This is a metric that Chipotle breaks out down to 24.5%. That's a decent decrease year over year, but it peaked back in the second quarter of 2024. Just over a year ago, right before Nickel left the company, it was almost at 30%, up at 29%. If you look at the discrepancy from

where the restaurant-level margin is now versus where it was just five quarters ago, you're talking about a difference of over $100 million per quarter in profit just based on that margin difference. It's interesting. The pricing still came up barely for the quarter. Transactions were down a little bit. I think this is a noteworthy trend because back in mid-2024, consumers and analysts started pushing back on Chipotle's pricing. Whether it's real or just imagined, that value perception seemed to have shifted in the market. People don't feel like it's a good value. And it seems like that's coming out here. Maybe those margins are coming back down, transactions are stalling. And look, management mentioned value 14 times in this conference call

in the prepared remarks. They mentioned it about 25 times in all when they were answering the questions from the analysts. So clearly, pricing is still this issue that is creating a little bit of headwind resistance. Those portions may be coming up relative to the pricing, but margins are getting hit. And I think they soared so much under nickel, that was good, but they kind of hit a ceiling, and now they're coming back down. And I think that's the difference in Chipotle stock right now. Yeah, I would agree with that. And it's not a brand that you would think... Starbucks, everyone expects to pay five times for a Starbucks coffee that you would at a gas station. But that's not necessarily true of Chipotle's products. So it does seem like they're getting

a lot of pushback on their food prices. John, kind of tying to our AI conversation ever so slightly, and the idea of expectations. Obviously, there's, based on management's commentary on value, really trying to say, hey, we're worth it. Let's pivot that to the stock. Based on where it's trading today with a 16% decline and where management thinks it's going to go. Are we at a good point of expectations for the stock for better performance? It's one of the better moments that it's ever had. It's the second cheapest price-to-earnings valuation that it's had in an entire decade. Cheaper even than the COVID-19 pandemic stock crash. The only time it was cheaper in the last decade was when it had that E. coli scare,

and the stock price came way down, then it's under 30 times earnings right now. I wouldn't necessarily call it cheap on an absolute basis, still at 29 times earnings. But for Chipotle, that's quite cheap comparatively. And look, if it can find ways to say, hey, this is who we are, we do offer good value, assuming that management commentary there is accurate, that, hey, this is a good value. If they can communicate that, get those transaction trends, start going in the right direction again, get those profit margin numbers coming back up again, yeah, then this is a good place that it can outperform from. But I think that these margins, personally, I think that they're a little bit more what we should expect with Chipotle.

Now, on to Brian Nichols' current job as the CEO of Starbucks. And the numbers were fine? I mean, Matt, you looked into it a little bit more, and you mentioned in our pre-show that there were some really interesting points in this quarter. So, tell us what those interesting points were? First of all, fine is good when the last two years have been bad. That's the first thing I would mention right off the bat. But you're right that this was an interesting quarter. For one thing, it does feel odd to celebrate a quarter where same-store sales grew by 1% year over year. That's roughly what Chipotle did, and John's saying how bad it was. The company had 107 net store closures during the quarter for a company that's been growing

like a weed since the 90s. But there's more to the story. So, for one thing, we're now a year into Nichols' back-to-Starbucks plan. Let's call it some missteps by previous leadership. This is the first same-store sales increase that they've reported in seven quarters. Revenue is up by 5% overall. And really, the kind of between the lines is that the company's just doing a better job of introducing products that customers actually want, rather than telling them what they want, which is what the former leadership was doing. For example, in the third quarter, they rolled out their protein cold foam, which has been a big success so far. That's something Americans actually want in their diets. They need more protein. The line of olive oil-infused

coffees they were telling us we should drink, which was, I think, the last straw in their previous leadership. Not so much. No offense if you guys like the olive oil coffees. But Starbucks has largely also fixed its issues of the mobile order bottlenecks we were seeing and the long wait times. On that issue of store closures, it is important to note that Starbucks still aims to gradually increase its footprint over time, but the closures impacted stores that either weren't performing well or that didn't really fit into Nichols' vision, which is essentially the warm, cozy coffee shops that Starbucks operated 20 years ago. For example, a drive-thru-only store doesn't really fit that vision, so those are an example of what closed.

Starbucks isn't really giving an annual forecast, but they've scheduled an investor day in January, and we should get some answers. And before we go, I want to know what both your Starbucks orders are. Mine is now the protein cold foam, I have to tell you. It doesn't matter what coffee shop it is, Starbucks, whatever. It's just a straight double espresso black. I'm actually heading there pretty soon. I'll probably get a Pike's Place black. There we go. Black coffee. I like the sound of it. All this olive oil and proteins. Oh man, I sound like a grumpy old man complaining about this stuff. But hey, you know what? I'm in my 40s now. I get to do that. We like to give stocks on our radar as part of our Thursday show, but we've actually got another

870 companies to look at this week, so we're going to have to boogie on out of here. As always, people on the program may have interests in the stock 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 from producer Dan Boyd, from Matt, John, and myself.

Thanks for listening, and we'll chat again soon.