Motley Fool Hidden Gems Investing - Broadcom’s CEO said What?

Starting point is 00:00:00 Broadcom had a record scratch moment today. This is Motley Fool Money. Welcome to Motley Fool Money with the Hidden Gems team. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and John Quast. Before we begin, we've been watching the situation in the Middle East and the conflict in Iran, just like most everyone else here probably listening to this podcast, there will surely be a lot of investing worthy topics to come out of this. And it felt a bit awkward not to acknowledge it at the top, even though it's not on our topics for today. There will likely be a lot of investing related topics to come out of this and we'll get to them as we better digest and understand it. But I just want to acknowledge that even though

Starting point is 00:00:49 it's not on the show, it is on our minds and we're trying to deliver the best information we can to you in analysis when we are able to do it. But on today's show, we're going to discuss a recent string of insider stock purchases, and we're going to discuss Vail Resorts and their plea to get Generation Z on the mountain. But first, I was getting a lot of, holy cow, did you see Broadcom's earnings report messages this morning? So it seemed like the appropriate time to open the show with this one. Shares at Broadcom are up 5.6% today as we're taping in a down market after reported fiscal first quarter earnings. Earnings and revenue beat expectations, but not so much that it would be getting all these messages in the morning. So, John,

Starting point is 00:01:28 you were one of those messengers on Slack to me being like, holy cow, did you see this? What did you see in the numbers? Well, here's your headline, Tyler. Broadcom says it has a line of sight for $100 billion in annual AI revenue in 2027. $100 billion in AI revenue. Now, if my math is right, it's generated less than $30 billion in AI-related revenue over the last 12 months. So compare that $30 billion to $100 billion in 2027. It's calling for a massive gain in this part of the business. You might say that it's at an inflection point right here. And one of the really underappreciated aspects of Broadcom's business is it actually has the raw materials to pull this off. And so if you've listened to this podcast, you know we've talked

Starting point is 00:02:13 about potential bottlenecks in the AI industry. And I know that's a little bit vague. Often we're talking about electricity. But another, if you will, bottleneck in the industry is something called T-type glass or T-glass. This is basically a material that is needed to make these AI chips. And a little known Japanese company called Notobo is one of the only ones that supply this material. And Broadcom kind of saw ahead around the corner and saw that there could be a potential shortage year, and it went ahead and secured supply through 2028. So it actually has the materials it needs to be able to service $100 billion in AI-related revenue. So that's a really big thing. And then when you look at profitability, have you ever heard a CEO tell an analyst that they're hallucinating?

Starting point is 00:03:02 Well, Broadcom CEO Hawk Tan did on the earnings call. An analyst basically was saying, well, it looks like certain products are going to bring down your gross margin in the future. And Tan said, no, you're hallucinating. Our margins are fine. So if you look at this, this massive revenue gain and the margins being fine, Broadcom stock might not be overvalued at all right here if all of these things are true. Yeah. I mean, John, on the surface, you're right. It might not be overvalued. It's trading for roughly 28 times forward earnings. You mentioned AI revenue. Yeah, they're projecting it's a triple year over year. I'm taking that with a big grain of salt, but it did grow by 106% year over year in the fourth quarter, their AI revenue did.

Starting point is 00:03:43 So there's some precedent for that. I mean, compare that to NVIDIA's 73% growth. So really impressive results. They do have the raw materials. That's absolutely true. But you need customers to be able to spend the money. And doubling from $15 million to $30 billion is one thing. More than tripling from $30 billion to $100 billion is something else.

Starting point is 00:04:02 And it's going to require a lot of spending. And if the spending doesn't really meet what their forecast is, it could be an issue. They do have pricing power. Their margins are not excessive. I'm more worried about NVIDIA's margins than I am Broadcom's, but really solid quarter, great AI revenue. And there's not much to not like here. NVIDIA's stock went down after earnings, Broadcom's is up. There's a reason for it. It's because investors seem to be buying their story a little bit more. Matt was kind of foreshadowing here with all that discussion about NVIDIA,

Starting point is 00:04:30 because this really ties into our discussion last week about NVIDIA earnings. We all kind of landed in the NVIDIA can't keep this up sort of camp with its spectacular growth. And part of the reason for that was companies would start to look elsewhere. And none of us thought Broadcom would be discussing that kind of growth that they just displayed this most recent quarter when we were discussing NVIDIA. But it does underscore the idea that purchasing managers and hyperscalers, the ones that are buying Broadcom and NVIDIA chips, they're going to start having wandering eyes for other equipment other than NVIDIA in their various data centers. And I think this was evidence of that. So, after looking at NVIDIA's results last week, which were spectacular in their own right, and Broadcom's this week, I want to put you both on the spot here.

Starting point is 00:05:14 Like, if you're forced to pick between these two companies over a five-year investment time horizon, which one would you pick? So, yeah, both companies posted very solid quarters. I joke that I refer to both of them as having just so-so earnings because they did exactly what was expected. But that really doesn't take into account the stellar growth potential and stellar growth numbers that they're putting up. right now nvidia looks like a bargain at least on paper 22 times forward earnings for a company with 73 percent revenue growth 56 percent net margins and that's on track to get hundreds of billions of dollars in ai infrastructure spending over the next few years but as you and i have discussed before i'm wondering if nvidia is going to face margin pressure as those competitive threats ramp

Starting point is 00:05:55 up for gpus as lower cost alternatives improve on the other hand broadcom trades for 28 times earning. So it's the more expensive stock on paper. It does have stellar margins, but in my mind, it has a more diverse revenue stream than NVIDIA. And it depends on data center GPUs, you know, for all of its business, NVIDIA does almost. And I like the diversity. It's the same reason I own AMD instead of NVIDIA. So I'd have to go with Broadcom here for a five-year investment. Yeah, man, I'm really glad that you mentioned the diverse revenue because I did fail to mention when I mentioned a hundred billion earlier, that's just AI related revenue. It has other sources of revenue that contribute as well. So I think that's important to keep in mind.

Starting point is 00:06:32 Tyler, this question of which I prefer, NVIDIA or Broadcom, it's incredibly hard to answer this, but I will try to do it anyway. Call me Chicken Little. I'm always leery of investing in the top dog when its profit margins are at historic highs. To me, the top dog is always going to face that margin pressure. And I really think that most times it returns to historical norms. In the case of NVIDIA, its margins are still at those historic highs. I still expect them at some point to come back down to what would be considered historically normal for the company. That would put a little bit of pressure on the profits. By contrast, I think Broadcom is hitting an inflection point and could actually see some margin improvement over the coming years. And on top of

Starting point is 00:07:15 it, it does have a slightly better dividend than NVIDIA's. So I would choose Broadcom today if I had to choose between the two, but it's an incredibly hard choice. I'm just glad I'm playing the host today and actually don't have to give an answer. So I'll punt on it for until maybe you guys put me on the spot. After the break, we're going to dive into insider buying and what that can mean as an investor. And what better way than with a delicious Pret Organic Coffee Starting with just $1 all day

Starting point is 00:07:55 Every day now until December 31st At participating A&W locations in Ontario So last week we were discussing the Trade Desk's decelerating growth, and we did a little premature grave dancing with some potential companies that could take over Trade Desk because it was trading so cheap, you know, maybe it's a takeover target. But today the stock is up over 17% after some news that it is discussing helping OpenAI sell ads on its platforms or wherever ever it wants to do it. And there was also an SEC filing showing that CEO Jeff Green had made

Starting point is 00:08:37 a $148 million open market purchase of the Trade Desk stock. In similar stock buying news, Berkshire Hathaway CEO Greg Abel, which it's going to take me a minute to get used to saying that, said a Warren Buffett, but we'll get through this, right? Abel said he's going to purchase a whole year's worth of salary at Berkshire Hathaway stock every year that he's in charge. I mean, it's kind of funny. I guess clearly he doesn't need the salary. I want to tie these two stories together into a topic about like insider stock purchases. Many investors out there follow insider stock purchases and sales almost as religiously as they do like earnings and things like that. You know, others not so much. We all have our flavors in this sort of investing world. Let's start with these two news stories. Neither the Trade Desk or Berkshire Hathaway seem to have been knocking out of the park lately for various reasons, very different for the two of them. Do you see these moves as real signals of better times ahead for both companies or more or less small gestures to change the market narrative around them a little bit? You know, I don't grade all insider buys or share repurchases in the same way. I think that investors really need to take a step back and evaluate each one on its own merits. Honestly,

Starting point is 00:09:53 here I give greater weight to the Berkshire Hathaway news, and that might be a little bit surprising. But historically, Berkshire Hathaway's management does not like to repurchase shares unless they're trading below its intrinsic value or this number that they say, this is what our business is intrinsically worth and when it goes below that, that's when they start repurchasing and they're pretty strict on that, or at least Warren Buffett always has been. Now you have a new CEO, Greg Abel. He really is eager to preserve the culture. He wants to really project this concept that he knows intrinsic value, like his predecessor, Warren Buffett, right? I don't think Greg Abel is going to risk buying back Berkshire Hathaway stock too early here. If he's buying

Starting point is 00:10:35 back, he really does believe it's a good deal. And so to me, that's signal there. I think that's worth paying attention to. With the trade desk, I don't think it's that simple. I think there's a lot of things going on here. On the one hand, this is the largest insider purchase in the company's history. And so I think that is worth noting. On the other hand, CEO Jeff Green, who just bought these shares, he already owns over 10% of the company. And so relative to what he already owned. It's big, but maybe not quite as big as it first looks. Also keep in mind that Green sold shares back in January, 2025 and in dollar terms, he's buying back less than what he sold then. So I'm not saying that, you know, sell the top and buy the bottom, but I'm just

Starting point is 00:11:16 saying it's worth noting. And also it's interesting the timing of this. It's right when the deal with OpenAI is coming out. So there's a lot of things going on. We don't know fully all of Green's motivations. He did say he's going to announce and explain his decision on LinkedIn tomorrow, so tune in for that. But I just put more weight on the Berkshire Hathaway news than on the Trade Desk news. Yeah, I mostly agree. So with the Trade Desk, I'm not sure if it signals that there are better times ahead as much as it signals confidence by Jeff Green that the stock's cheap right now, even if growth continues to be kind of muted in the near term. So even after today's rally, and the stock is rallying pretty big on other news, the OpenAI news that Tyler mentioned,

Starting point is 00:11:54 But even after the rally, the trade desk gets priced at about 14 times forward earnings. So it's not a surprise to see some insider buying. I'd be surprised if we don't see more insider buying at that level. With Berkshire, I'm not too impressed with Abel's purchase. I mean, he added $15 million to the roughly $170 million of stock he already owned. And it's pretty common when an executive jumps to the CEO role to see their skin in the game rise. On the other hand, the restarting of buybacks is a more significant development for me because

Starting point is 00:12:22 one, and John kind of alluded to this, he still has to get Buffett's permission. Although Abel wants to put his own mark on it, the buyback program has been rewritten that he needs the permission of the executive chairman, which is still Warren Buffett, to sign off before he can do it. And they can only do it if they both agree that the stock trades at a significant discount to intrinsic value. So to me, and I am a Berkshire investor in full disclosure, that's the more significant of the two. Look, I'm a weirdo. I think anyone who's been listening for the past few months already knows that. But executive behavior is one of my favorite topics. Executives, how much do they own? How much are they paid? What are the incentives for taking home those

Starting point is 00:13:01 paychecks and how can those incentives be good or bad for shareholder outcomes? I really ascribe to that Charlie Munger line, show me the incentive and I'll show you the outcome. I think it's a pretty good investing philosophy to follow. In that same vein, kind of thinking more broadly about how executives behave, how they buy stock, how they're compensated, things like that. How does that work into your investment analysis? And what are some of the words of advice for someone out there listening to this who wants to incorporate those sort of things into their analysis of a company? I mean, I'm somewhat a fan of incentive pay, but there are two big caveats I'd mention. So first, I prefer when incentives are paid in cash or at least in

Starting point is 00:13:42 performance stock units, as opposed to just simply getting a block grain of restricted stock units or just shares. If the executive wants to be an owner, they can choose to use their incentive to buy stock, which is exactly what Greg Abel's doing, except he gets a whole big flat salary, regardless of how well Berkshire does. There are some incentive pay packages that are based on short-term goals, and I don't like those. Not just meeting stock price targets, which there's plenty of that out there, but meeting things like this year's earnings per share goal or things like that. There's financial engineering that executives can do to make their earnings per share look better. Like, you know, aggressive buybacks, for example, can boost

Starting point is 00:14:17 earnings per share to a level that they need. I'd rather see something long-term oriented. Like I love it when CEOs are incentivized to produce a certain level of revenue growth over like a five year period. I like long-term incentives and if it's done right, it's a good thing, but you have to really pay attention to the details. Yeah, Matt's hitting it right on the head. The devil is in the details. Generally speaking, I'm a fan, but there are incentive pay packages that I wouldn't be a fan of just because of those details. Whether it's, as Matt said, they can be short-term oriented, they can be overly tied to stock price. I don't really think that those are the incentives that matter, but the ones that Matt pointed out, the ones that are tied to business

Starting point is 00:14:58 results over long time periods. And those incentive packages do exist out there. The ones that are saying, hey, if our revenue is here five years into the future, those can be really strong incentives because you can't fake those over the short term. You've really got to build for the long term if you're going to achieve those. And then you have to assume if the business does achieve those, then it's going to be good for shareholders more than likely. So those tend to be good. Even the ones that do come with some dilution, I think that those can be okay so long as the goal that we're trying to reach is big enough that it rewards shareholders even after factoring in the potential dilution. Personally, I'm a bit of a fan of some combination of growth,

Starting point is 00:15:39 some rate of return, and some sort of guardrail to preserve per share value because last time I checked, we are shareholders and we own a small portion and I want to guard that portion like It's dear to my life. After the break, we're going to do something a little different. I'm going to hand over the host chair over to John as we discuss Vail Resort and its plan to entice the younger generation to hit the slopes. I have lots of thoughts on this topic, and I don't want these two to sit through a soliloquy. So after the break, John's going to take over.

Starting point is 00:16:20 And what better way than with a delicious Pret Organic coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Welcome back to Motley Fool Money with the Hidden Gems team. So we wanted to talk for a moment about Vail Resorts. That's ticker symbol MTN. Great ticker symbol, by the way. Shares of the ski resort company are hitting 10-year lows. If you're a shareholder, I'm sorry that you've gone up and all the way back down to where you were 10 years ago. Tyler, why isn't Vale stock going up? Because I look at

Starting point is 00:17:04 this, revenue is near an all-time high. It looks like it's still generating a lot of cash. What gives? Yeah. And thanks for you and everyone letting me indulge in this one. I've seen more Wall Street Journal articles about Vail Resorts in the past two weeks than I think in like the past 10 years. So it seems like an apt time to discuss this. Let's roll this back to that 10 year ago sort of window. Like for the longest time, Vail's major growth levers came from industry consolidation. Every single ski resort in America to the most part was either owned by a single person or like a mom and pop or maybe like two or three mountains together. And what Veldt is, it had this solid business model with its multi-resort epic pass, and it used that more

Starting point is 00:17:45 predictable revenue stream to acquire other resorts across North America and become this conglomerate. But here's where it gets tricky. That growth lever really isn't as available to them anymore. It and private company Altera have basically spent the past like 10 years in an arms race to nab the crown jewel resorts across North America. And now the only ones that are left are some of the smaller independents that aren't going to really move the needle in terms of like past growth and total revenue and things like that. And honestly, good luck building a new resort in North America. We've actually, I think over the past 30 years, we've lost more resorts than we've gained. So it's on a net downtrend, finding new acquisition targets really hard.

Starting point is 00:18:25 And to make matters more complicated for Vail, they really levered up to get a lot of this done. So we're now in a situation where growth is more or less coming from increasing revenue the existing resorts. Maybe you raise your passes. Maybe you can squeeze a few more people onto the slopes in any given time. It's just harder to do. And I think the stock price and its valuation reflect that. It used to be this faster growing industry consolidator and it traded for a premium valuation as a result, which today just doesn't really exist anymore. And I think the market is valuing it differently because of that. And that's why we've really landed like a round trip of a company that's now trading at like 19 times earnings. Yeah. So essentially the market

Starting point is 00:19:04 is looking ahead into the future and saying, where's the growth going to come from? If we keep looking off into the future, we need to talk about the kids here. And Vail Resorts is seeing a drop off with Gen Z. And so it's lowering its prices for that demographic, trying to boost demand. I don't know. Is this something that can get things going again? Can the stock get going or does Vail Resorts need something else? Vail claims to be doing this for, quote, increased accessibility for younger skiers. But this is a business. It's not a charity. They're doing this to boost revenue and not just at some point in the future. This makes annual passes more reachable for younger people who might typically buy just

Starting point is 00:19:43 a few day passes each season. And with any type of resort entertainment destination, annual pass holders tend to spend more when they're in the resorts compared with day pass holders. It's the same reason why Disney gives annual pass discounts to Florida residents. It's not because they're having trouble filling their parks. They're not. It's because annual pass holders buy more merchandise. they spend more money on special experiences and add-ons, food and drink, et cetera. The same

Starting point is 00:20:09 logic really applies here. So I think it's a smart move. I don't know if it's going to move the stock, but that's why they're doing it. I saw the logic, but kind of from a different perspective, you know, it's get them hooked while they're young and they'll keep coming back at higher prices when they're older. I mean, that's why I started my kids skiing when they were two years old. Got to get them started early, right? I don't know if this is enough to completely change the growth trajectory for the company in terms of like increasing revenue across the board with Gen Z spending a higher wallet spend at these particular resorts. What I think it more likely does is increase the odds of repeat customers for many, many years to come. And that's, I think,

Starting point is 00:20:44 going to be the new goal here is milking more out of that existing portfolio. I think considering where the company is at this point, maintaining that slower growth before 5, 10, even 20 years, and instead of thinking about ways to grow via consolidation and acquisition like they've done before, move to kind of that stodgy way of growing in a mature industry, pay down debt, pay a dividend, buy back stock. Those could be more than adequate ways to generate adequate returns for investors without doing aggressive things like trying to find the next big resort in Europe or, God forbid, try to actually build another giant ski resort here in North America. So, I want to thank John for letting me go on my long tirade about Vale.

Starting point is 00:21:31 That was a lot of fun. Maybe we'll do a little bit of chair switching every once in a while. But that is all the time we do have for today. Matt, John, thanks for sharing your thoughts. I'm going to hit the disclosure, and then we're going to go to the end 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.

Starting point is 00:21:50 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, Bart Shannon, for the day and the rest of the Motley Fool team. For Matt, John, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Broadcom’s CEO said What?

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