Motley Fool Hidden Gems Investing - Another Day, Another Massive AI Infrastructure Deal

Starting point is 00:00:00 John Quast. It's another day on the stock market, and we have another massive AI infrastructure deal to talk about. This is Motley Fool Money. Welcome to Motley Fool Money with the Hidden Gems team. I'm John Quast. I'm joined today by Fool contributors Matt Frankel and Rachel Warren. You know, guys, the weekend news was rather thin. We're going to talk about Dollar Tree's 2025 results in a moment, and we're also going to do some high-level stock picking ideas, provide some of those thoughts. But the biggest news that we did get this morning was we did get word that NeoCloud company Nebius signed an AI infrastructure deal with Meta Platforms. Matt, I want to start with you here. For listeners who may not be aware,

Starting point is 00:00:56 What exactly is Nebius, and how do the economics of this neocloud business work? Yeah. So, John, even on lighter news days, it seems like we can always count on some AI infrastructure deal being announced. That's always a good go-to. Nebius, they're a Dutch company. They provide AI infrastructure. Think of them as kind of a landlord for AI computing power. They own data centers throughout the U.S., Europe, and Israel, but they're not like a data center REIT, in the sense that they just own the building. They own all the chips inside, the NVIDIA chips that are used to train AI models, things like that. They own the storage. They own the hardware. They own all of the stuff that is needed for companies who want to train or deploy

Starting point is 00:01:37 AI models. It rents this as a hardware-as-a-service, I guess you'd call it. Their customers range from small AI startups to massive players like Microsoft, who they also have a deal with. Nebius, they charge their customers for access to their hardware on an on-demand basis. In other words, the more the customers use their hardware to train their AI models or run AI applications, the more that they're going to pay. It's a capital-intensive model upfront, which is where these billion-dollar deals come in. It involves a heavy capital investment to buy all the equipment, but then it's a very high-margin recurring revenue stream, kind of like a utility almost. We'll get into the deal

Starting point is 00:02:19 specifics in just a bit, but it's not surprising to see companies that have grand AI ambitions and a limited amount of hardware that they currently own to be interested in a partnership like this. And so, Rachel, I want you to walk us through the details of this deal between Nebius and Meta Platforms. On top of that, what is Meta Platforms actually getting out of this, And why is it that Nebius shareholders seem to enjoy this so much? Nebius stock up today sharply. Yeah, I mean, think of this deal as Meta booking a massive five-year reservation at the world's most advanced digital hotel, right?

Starting point is 00:02:57 That hotel is Nebius. And as Matt explained, they're the specialized cloud provider. They build data centers specifically for AI. So Meta has agreed to pay up to $27 billion to ensure that Nebius, to ensure that they have enough computing power to run their future AI models. And then starting in 2027, Nebius will provide Meta with $12 billion worth of capacity. They're going to be using NVIDIA's next-gen Vera Rubin chips. Those are basically the most powerful engines ever built for AI to date. And the deal is a really dramatic expansion of their initial $3 billion partnership they signed

Starting point is 00:03:32 late last year. Meta's committed to purchasing up to $15 billion in further capacity from upcoming Nebius clusters. So for Nebius, the deal is life-changing. The contract's actually worth more than the entire company was valued at yesterday. It also proves that even though they're a smaller neocloud player, they can play in the big leagues with tech giants. And I think for the market, this deal kind of serves as a massive validation of that neocloud model, where you've got these startups like Nebius that build data centers from the ground up specifically for GPU-intensive AI workloads. Another thing I'll note, it really solidifies nebius's position as a critical global player this is a deal that sits alongside a recent two

Starting point is 00:04:14 billion dollar investment from nvidia a separate 19 billion dollar agreement with microsoft now what about for meta platforms for meta it's really a strategic move to lock in scarce compute power ensure that it's not left behind in the ai arms race you know they're chasing these frontier ai models and this is at a time where they're actually planning significant layoffs and they're still planning on putting forth a staggering, I think at last count, $135 billion in AI CapEx for 2026. So good news all around. I think this fits very much into Meta's broader strategy that we've been seeing them implement of late. Well, and you alluded to it right then, it's not the only player in the neocloud space. You have Iron, you have CoreWeave. There are many

Starting point is 00:05:01 actually, neocloud players that are coming more into the investor awareness. I want to ask to you, Matt, basically, is this a good place to invest, this neocloud industry? Is this a good place to put some money, or is there something that you like better that's related to this whole thing that we're talking about with AI infrastructure? Yeah, so I have CoreWeave on my watch list, but I haven't pulled the trigger on it yet. It's a really interesting business. This is going to be definitely something that's fulfilling a need, clearly, with all these deals. These are highly volatile stocks. They're very richly valued. They're difficult to evaluate by any valuation metrics that I normally use. My preferred way to invest is the actual data center real estate

Starting point is 00:05:49 operators. Digital Realty Trust is a core holding of mine. Companies like CoreWeave and Nebius are tenants of these companies. These are the companies that lease the space. It's not like an on-demand model like Nebius uses. You sign a long-term lease to rent space inside these data centers. They can't build these properties fast enough. Their backlog keeps growing. I think digital realty and Equinix is another big one. Those are my preferred way to invest right now. But then again, I'm the value investor at heart, so that's why I answer it that way. Yeah, I feel like for me personally, this is a really interesting space that I'm watching closely. But I tend to, in my personal investing approach, go with these bigger tech companies that are operating as the core partners to the nebbiases of the world, right?

Starting point is 00:06:37 And I think a lot of that goes back to what Matt was saying. And again, this is my own personal investment approach. I think some of these companies can be difficult to value. I think there are some real questions about some of the financial structural integrity there of their balance sheets. So, for me, I tend to approach this still from looking at the Microsofts, the NVIDIAs, the meta platforms. But there are a lot of ways to approach this space. And I think that what we are going to be seeing more and more moving forward is more fragmentation in infrastructure. And I think that's going to create a lot of exciting opportunities for

Starting point is 00:07:10 investors. When we come back, we're going to take a look at the consumer and spending trends with a discount retail chain. You're listening to Motley Fool Money. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.

Starting point is 00:07:49 Welcome back to Motley Fool Money with the Hidden Gems team. Earnings season is winding down, but we did get some financial results this morning from discount retail chain Dollar Tree. It reported its finalized results for 2025. And I want to note that this is Dollar Tree here, not Dollar General. Dollar General reported last week. And maybe just before we jump into things in full force,

Starting point is 00:08:14 Rachel, can you just walk us through for our listeners, what's maybe the biggest difference between Dollar General and Dollar Tree? Yeah, I think people understandably confuse the two. So Dollar General is essentially the leader in rural America, right? About 75% of their stores are in towns with fewer than 20,000 people. So Dollar General, they function more like a mini Walmart, maybe a rural convenience store where people go for weekly essentials. Actually, about 80% or more of what they sell is consumables, basically the stuff you use up and have to buy again. Now, Dollar Tree, on the other hand, they're much more of kind of that suburban treasure hunt. They tend to set up shop in strip malls. They tend to target a much broader range of shoppers.

Starting point is 00:08:57 And they have a lot of households in the six-figure range that tend to shop at Dollar Tree looking for things like party supplies, seasonal decor, and other bargains. So those are kind of the core differences. Yeah. You wouldn't expect that six-figure income, but indeed, that is what is going on there with Dollar Tree. Maybe now we can just turn to the fourth quarter results themselves. Rachel, just kind of walk us through here. What stood out to you? The reason I think it's interesting to talk about this is we are at a time where the consumer is constrained financially. And I think that we see during those times, we've seen this during past periods like this, consumers tend to gravitate towards these type of stores.

Starting point is 00:09:37 And what's interesting about Dollar Tree, they're showing that even the dollar store isn't really a dollar store anymore. So, they actually brought in $5.5 billion in revenue in Q4. That was a 9% jump year over year. That's a pretty solid growth rate for a business like this. But the big secret behind their growth is that they're really aggressively moving away from that $1, $1.25 price limit. They have these new stores that they've been opening, basically Dollar Tree 3.0. And they're selling items for $3, $5, $7. And these types of locations are seeing a really significant boost in sales compared to some of those old school stores. I think it shows that shoppers are willing to pay a bit more for better stuff. Obviously,

Starting point is 00:10:17 their prices are keeping up with the pace of inflation, so to speak. But it also provides an alternative to some of those big box retailers. Their profits came in at $2.56 a share. It was a little bit better than Wall Street expected. Now, management said, you know, we're dealing with higher tariffs on goods that are coming from overseas. They're dealing with issues like retail theft. But one of the things I think we could take away from this as investors, whether or not you are excited by the idea of investing in Dollar Tree, is that the macro environment is in something of a trade down phase. People have jobs, people are spending money, but they are hunting for every bargain they can find to stay ahead of rising costs. And that's really apparent in Dollar Tree's

Starting point is 00:10:55 results. I think that people underestimate how strong a business like this is. When sales at retail chains, existing locations, when they go up from one year to the next, that is measured with a metric called same-store sales. Looking at Dollar Tree, its same-store sales have increased for 20 consecutive years. Its guidance for 2026 expects further gains, extending that to 21 unconsecutive years. That's actually incredibly strong for a retail chain. And to Rachel's point here, it's not just that there are more people shopping there. In fact, traffic is down. But the gains are coming from those higher price points that Dollar Tree is starting to be able to access with those $3, $5, $7 price points that she mentioned. Matt, I think here my question for you,

Starting point is 00:11:48 in light of everything that we just looked at, is there some high-level takeaways that we can take from here about the consumer or about the economy? What are some things that this is signaling to you as an investor? We're definitely seeing consumers squeeze. Discount-oriented retailers, they tend to perform their best in times when consumers really need to cut back on spending. It's been a while since we had a time when people had to do that. I don't even count the 2020 COVID shutdowns because there was so much stimulus being pumped into the economy. People cashed those checks and were still buying things. But if we think back to 2008, which is included in that 20-year period John mentioned where they increased same-store sales, that was the worst year

Starting point is 00:12:31 economically for consumers in the past quarter century, hands down. That year, the S&P 500 declined by 37% in that year. The worst single-year performance in a really long time. Dollar Tree's stock increased by 61% in 2008. There were very few parts of the market that were working that year. To give credit where it's due, Dollar Tree has done a great job of growing those same store sales, as John mentioned, regardless of what was going on. Weak economy, strong economy, inflation, pandemic, high interest rates, low interest rates, whatever. But it's been a long time since we've seen a period where consumers were really squeezed. And this is a stock that's really set up to perform well in such an environment. So, of course, if we do get a

Starting point is 00:13:13 recession or other economic weakness, there's no guarantee that Dollar Tree is going to perform well. As Rachel mentioned, they're focusing on, I want to say, high price points, but definitely higher than their traditional $1.25 limit. So, that remains to be seen how well that would react in a recession or something like that. Tariff uncertainties and others, still really a headwind. The suburban treasure hunt characteristics, as Rachel mentioned, that gives it a really nice tailwind in tough times when people who would typically shop elsewhere need to find a way to cut back. And Dollar Tree is really well positioned for that. When we come back, we're going to peel back the curtain a little bit and take a look at something that we consider when we are looking for

Starting point is 00:13:53 stocks to invest in for the long term. You're listening to Motley Fool Money. Welcome back to Motley Fool Money with the Hidden Gems team. For our show today, listen, we're going to acknowledge that the news is a little bit lighter today, but we see this as an opportunity. We like to talk about some high-level ideas and thoughts about picking a stock to invest in, and this gives us an opportunity to do that. There are several factors. We all work for the Hidden Gems team. There are several factors that go into our process for picking which stock to buy. One of the things that we do look at as a team is the leadership of a company. We really like it when there is a visionary leader or

Starting point is 00:15:04 somebody who really believes in the thing that the company is doing from a very big picture perspective. And I guess I just want to put this question to both of you. Why is leadership something that can make a difference in an investment? Yeah, I mean, I think it's really important to understand when you're investing in companies that are led by long-term founders or leaders with significant ownership, it really matters because it does fundamentally change how the company makes decisions. You know, for many founders, the company is their legacy, right? It's not just a job. And that ownership mindset means they tend to take personal responsibility for costs and risks that a hired CEO might ignore to, you know, protect their own

Starting point is 00:15:48 career or otherwise. This is obviously not true in every case, but it's interesting because long-term believers, long-term founders often have that fortitude to endure really the difficult work of growing the company, maybe dealing with years of thin margins or high R&D spending to build a more durable future that rewards shareholders in the long run. And there's actually data that backs this up. There's research that shows that S&P 500 companies with active founders have outperformed the rest of the index by more than three times over a 15-year period. So I do think one of the key takeaways is high insider ownership ensures that a leader's financial interests are aligned with ours as shareholders. When they're losing money, we're losing money. It keeps them

Starting point is 00:16:30 focused on the fundamentals. I think that's something that's really important to look for as investors. I love businesses that are founder-led or led by a person who has what I call a founder's mentality. It doesn't necessarily have to be the person who actually started the business, just one who treats it like they did. These types of leaders, they view long-term growth, total returns for their investors, and responsible capital allocation as a personal report card on their progress. Having skin in the game, as Rachel mentioned, is certainly a big factor. But right now, I can name founder-led businesses where the leader still owns 65% of the company and some where they barely own 1%, if that. In my mind, the real X factors is how much

Starting point is 00:17:11 founders tend to have a long-term mentality as compared to those who were a hired CEO. It can actually work against returns in the short run, because these type of leaders tend to sacrifice short-term returns for durable profits, which could be a great investment opportunity for our Hidden Gems methodology. But when you're looking at the long-term investment results, this is a big reason why founders tend to outperform. Okay. We don't just want to talk about it. We want to do show and tell here for this episode. I thought as a closing question for both of you, again, what is a company that has a leader that really has this sort of X factor component, something that we'd look for in a leadership

Starting point is 00:17:53 team? I mean, I think one really kind of notable example, you look no further than Jensen Huang, co-founder and CEO of NVIDIA, right? He bet the company on its CUDA software platform and specialized AI chips long before the world knew what a large language model was. And that really relentless focus has turned NVIDIA into the backbone of global AI infrastructure. And I think it is an example of a situation where you have a leader who's obsessed with staying deeply connected to the inner workings of the company and how that can create a really, really robust competitive mode. One other example I'll give, I mean, you have the transmedics group, the founder and still CEO, Dr. Waleed Hassaneen, you know, he founded the company back in the 90s with the goal of

Starting point is 00:18:39 revolutionizing organ transplant therapy. Their organ care system is becoming the new standard of care for preserving human organs for transplant. So, a couple examples that come to mind. Yeah, Rachel's right. NVIDIA is the textbook example. But there's something to be said about the fact that three of the MAG7 companies, trillion-dollar businesses, are still founder-led today. Netflix and Amazon were founder-led until not very long ago. And I'd even go so far as to say that Tim Cook at Apple has what I would consider a founder's mentality when it comes to running that business. But one example that comes to my mind from my own portfolio is Toby Lutka, CEO of Shopify, who co-founded that business 20 years ago. After personally realizing

Starting point is 00:19:22 that solid e-commerce software was a massively underserved market opportunity, I think he had an online snowboarding shop and built his own software. He's a self-taught programmer. He had no prior leadership experience, which makes us more impressive. But he's grown Shopify from nothing into a platform that has a greater e-commerce market share than Walmart, Target, and Costco combined. It's a really impressive business, and that's one founder-leader that I'm very happy to invest in. To all of our listeners out there, we appreciate you joining us today. That is all the time we have for this episode. I'm John Quast. Thank you so much to Rachel and Matt for sharing their thoughts. Thank you to Dan Boyd and the rest of the production team behind the glass.

Starting point is 00:20:04 As always, people on 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 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, Dan Boyd and the rest of the Motley Fool team for Rachel, Matt, and myself. Thank you for listening. And we'll chat again soon.

Motley Fool Hidden Gems Investing - Another Day, Another Massive AI Infrastructure Deal

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