Motley Fool Hidden Gems Investing - Did Anthropic Just Give Investors Another “DeepSeek Moment?”

Starting point is 00:00:00 Tyler Crowe. Software companies, terrible, no good, very bad day. This is Motley Fool Money. Welcome to Motley Fool Money. My name is Tyler Crowe, and today I'm joined by longtime contributors, Matt Frankel and John Quest. Guys, sometimes decades happen and nothing happens and sometimes decades happen in a month. Yes, I'm using a Lennon quote on an investing podcast, but it really does feel like that this week because it has been a busy one. We're going to talk about jobs numbers. We may make a couple of cracks at Google's earnings and their stock going down today, but we're going to start with software companies, especially like SaaS companies and a lot of things that's been going on in that space

Starting point is 00:00:53 recently. It was right around this time last year when we were talking about AI having this deep-seat moment. Investors were terrified that a Chinese company had built some impressive AI algorithms that kind of ran on commodity hardware and were much more efficient than some of the AI models that we were seeing from open AI. Well, this week, software companies, I think, had what we could call their anthropic moment. That's when AI company Anthropic launched Claude Cowork. It's an AI tool designed to replace many software tools on the market today. And just to give some examples of the software companies that were reeling from this, over the past week, shares of Shopify are down 23%. Monday.com and Fastly are down 15%.

Starting point is 00:01:36 Bill Holdings down 16%. And this is all as we're recording today. I could keep going. The list is long. And this is just kind of a brief encapsulation of what we've seen at a lot of software and SaaS companies in the last few weeks and months. So I want to put this to both of you. With the deep seek moment that we had last year, it seemed to have passed. AI spending is exploding and meta, alphabet, all these companies are full steam ahead and there doesn't seem to be as many issues as we thought about a year ago. Will this anthropic moment for software have a similar result or are there deeper concerns for these companies? First of all, Tyler, I love the quote you pulled out, because I feel like New Year's Day was seven months ago, and it was like

Starting point is 00:02:22 one month ago. We're in a very slow time period right now. But yeah, the answer to your question is, it depends if this is another deep-seek moment or not. I really think the risk here varies based on the type of software company we're talking about. In some ways, it could be an overreaction. in some ways that could be legitimate concerns. I think of software stocks in three baskets, I guess I'd say. One, there's the massive and deep-pocketed software leaders. Think like Microsoft in that case. They're not going anywhere. Then there are what I call the ecosystem companies, the ones that are mission-critical for their customers and are just so rooted into their customers' business. Shopify is a great example of that from the stocks that you just

Starting point is 00:03:07 mentioned. Then there are the software companies that essentially do one thing. Sometimes they do it really well, but essentially perform one function for a business that not only the business would be fine without, but if Claude Cowart could make an AI-driven alternative, they wouldn't feel any difference. Not that these companies are going to go away or anything, but HubSpot and Atlassian, those are down way off the highs. Those are two examples I'd put in that third basket. Now, I don't think AI is going to completely destroy any of them. And as earnings trickle out over the next couple of weeks, we're going to get some really valuable insights from CEOs who are almost guaranteed to get questions about all this in their conference

Starting point is 00:03:48 calls. But my general feeling is that the more mission-critical a software company is to its customers and the more different things that it does, the better off that it's going to be in this anthropic moment, as you put it. Yeah, this anthropic moment is really fascinating because on the one hand, this is what everyone has been saying all along, ever since AI really started to take hold of the headlines, that it was going to replace certain softwares. And so we've been expecting this, but on the other hand, everyone's acting surprised. Now, in the comparison to DeepSeek, I'm not certain that the DeepSeek moment is fully over. What DeepSeek showed us is that it's possible maybe to do more with less when it

Starting point is 00:04:37 comes to the AI hardware. And I would say when you look at the bottlenecks in this industry, it's all physical. There's a lot of physical bottlenecks. And I think that that points to a continuation of, we need to learn how to do more in AI with less physical components. So I don't think that that trend has fully played out. I think the panic, initial panic, That was what the market was down by, and it's like, oh, it didn't collapse overnight. I think we might see something similar here with Anthropic. The general trend is pointing towards what Matt said. There is going to be software that is replaced by AI.

Starting point is 00:05:14 I think that we saw Anthropic come out with its new products. This is the initial panic to that. I think in coming months and quarters, we're going to see, okay, it's not an overnight collapse, but I think the general trend is pointing in that direction, and I think that that is why, as Matt said, it's so important to distinguish what software can't we do without, we're going to still go to the software provider, and what is AI going to replace? Yeah, I find myself landing in a very similar place, you know, the mission critical versus the relatively easy switching costs. You know, when I think of mission critical, I think like banking

Starting point is 00:05:49 software, you know, Fitserv, Fidelity, National, Jack Henry are kind of companies that I don't really see getting affected by AI nearly as much as just to get, I'm not going to name any names here, but like working here at The Fool the past several years, we've swapped out like productivity SaaS vendors like two to three times. And life seems to have gone on with relatively not a whole lot of bumps in the road. And so I, with that in mind, I'm going to, I mentioned Fiserv, Fidelity National, Jack Henry. I want to put you two on the spot here. I want you to highlight one stock in the software industry where you're not nearly worried about AI disruption? For me, that is CrowdStrike, ticker symbol CRWD. This is a cloud-based AI cybersecurity company.

Starting point is 00:06:34 I don't think that this is a business that you want to have some internal tech geniuses vibe coding a cybersecurity product to replace it. I don't see that happening. Businesses need cybersecurity. The threats are always increasing. And look, CrowdStrike is a fast-growing, hugely profitable business. It does have plenty of resources at its disposal to defend itself. And if you look, shares are flat over the past year, down 25% from 52-week high. Maybe still a little bit pricey from a valuation perspective, but if this SaaS sell-off intensifies, maybe 2026 will hand investors a very good bargain for CrowdStrike stock. Yeah, I love the cybersecurity space here. I like that you brought that up. The one I was

Starting point is 00:07:19 going to highlight is Toast, T-O-A-S-T. It just hit a 52-week low today, and it's kind of ridiculous that it's sold off so much. It's a business that is so entrenched in its customers' businesses. It provides an entire restaurant ecosystem, payroll, ordering, delivery, payments, mobile apps, many other things that restaurants have historically had to pay dozens of different vendors for. A lot of those, they're not disruptable by just coding. You're not going to code a new delivery platform that's that ingrained in a business. I just don't see each of the things it does all together as being completely disruptable. I think that's one that people shouldn't have to worry about. Yeah, I think we got some really good ideas here.

Starting point is 00:08:05 And coming up after the break, we're going to talk about maybe some not great news as well. We're going to talk about job productivity and current job numbers after the break. Unfortunately, today is not the most positive news day for this podcast because we got some jobs numbers that were, to quote one of my favorite 1990s movies, Office Space, not great, Bob. Job openings were the lowest since 2020 and announced layoffs were the highest since January high layoff numbers were the highest since we saw in January of 2009. Now, I don't know about you,

Starting point is 00:08:39 but I'm kind of struggling to put these numbers in perspective because thinking about the past five or six years of hiring and firing trends, we had some massive hiring rounds in 2021, 2022, just kind of as we were coming out of COVID. And even though some companies admitted they may have overshot their needs for labor, they were hesitant to lay off because of various reasons. So, I'm struggling with this concept. Is this just part of the natural ups and downs of the hiring cycle where we overshot early and now we're correcting? Is this related to AI productivity that we were just talking about? I'm really of many minds on this topic, and I'd love to get your guys' input because I haven't come down on one side or the other. I think yes and yes, Tyler.

Starting point is 00:09:19 So, you look at some of the places where jobs are pretty good. So, healthcare looks like it's still generally adding some workers. Leisure and hospitality, not doing bad. But where we are seeing decreases is right where you expect them to be. And that is entry-level tech jobs. I think that AI does have something to do with that for sure. But I do think that some perspective is important here. So unemployment rates remain well within the historical average for the last 20 years. And so I don't want to make light of anyone losing their job. And I don't want to just wave my hands at the significant spike in layoffs in January, but nothing yet screams to me that the economy is in trouble, it would take a few more months, like January, for me to really start to

Starting point is 00:10:03 say, okay, there's a trend that we really need to pay attention to here. I know that I'm definitely, especially out of me and Tyler, I know I'm the glasses half-full type of guy. But if we're going to see elevated layoffs here, it's more common in the first quarter, although this is still a pretty high number. Companies anticipate the needs for the busy holiday quarter and then in the first quarter. There's just that trend. Although the headline number of about 108,000 announced layoffs sounds like a lot, and it is, a lot of it is single-company announcements, not just in AI. John correctly mentioned that a lot of this is entry-level tech jobs, but UPS announced over 30,000 layoffs. That was included in that 108,000

Starting point is 00:10:45 number. Amazon announced 16,000, which is some of the entry-level tech jobs, but a lot of it is single company. Between those two, that's almost half of that big headline number. Not that the news isn't scary, but it is important to add context like this to it. Some of the job reductions seem to be natural, like companies focusing more on efficiency. Some definitely seem to be AI-driven, and not just because of AI fears, but because companies are ramping up spending in AI infrastructure and have to get the money to pay for it somewhere. But I do agree with John, one month's job status does not frighten me. But if this trend continues, that could change.

Starting point is 00:11:24 Yeah. To your point of the UPS numbers, I think that's also expected, too, because they have been trying to wind down their e-commerce delivery a little bit much to focus on small, medium business, healthcare stuff, a little bit more value over volume. So that one kind of comes in line with what UPS has been thinking about wanting to do. so guys we're a podcast from the motley fool and some of the core tenants of our investing philosophy here at the motley fool is to buy companies a little long term and not let a short term thing or two kind of really lead to rash decisions but you know as investors and when

Starting point is 00:11:59 we're making our decisions what to you guys constitutes enough bad news to alter your thesis you know take these job numbers what kind of trend in macro numbers would you need to see to either one, drastically alter your current investment in something, or when you have wanting to put new money into an investment? Yeah, it's a good question, Tyler. I think it would have to be case by case. As Fools, I think that there's good reason to be perennially optimistic about the stock market in general. And so, we are very, almost 100% of the time, if not 100%, we are looking for what can we invest in today? What's a good opportunity right now. Individual stocks, I could flip to bearish on some economic data. It's possible. I try to

Starting point is 00:12:45 build an investment thesis that takes into account that the economy does regularly go up and it does regularly contract. I want to build an investment thesis that looks through the economic cycles and isn't going to break just because the economy goes through its normal contractions or its normal slowdowns. But it is possible that I would build a thesis that is a little bit more dependent on the economy. I hate to single out a single company by name, but I think a company like Polaris, this is ticker symbol PII, they make four-wheelers and stuff like that. Listen, it can struggle in a recession. This is a company that is dependent on product sales, really requires a strong consumer with plenty of discretionary income. There is a scenario where this net debt company could go

Starting point is 00:13:31 through a prolonged economic downturn and really, really struggle. But there is a scenario where Polaris could be a very cheap stock, maybe we're towards the bottom of the economic cycle, and maybe I could make a case for investing in it at that time for the next three years or something like that as the economy heats up. But normally, I would build an investment thesis that is not dependent on an economic cycle. Yeah, I'll almost never stop investing entirely because of any type of macro concerns. Even during the initial COVID crash, when the sky was falling, Tyler and I lost hours of productivity just game-planning what stocks we wanted to buy. But depending on the nature of the bad news, I can alter my investment focus.

Starting point is 00:14:17 That's what we did back then. For example, if jobs data stays this bad for several more months, I might stop putting money into some of the cyclical areas like banking, where, even though I like some of the businesses there a lot and focus on more evergreen industries like, say, insurance, because no matter what the jobs market's doing, people still need to pay their car insurance and things like that. In a speculative sell-off, that's what I consider the current software sell-off to be. I use it as a time to selectively look for opportunities, kind of like we discussed in the first segment. I will start paying close attention to company earnings reports, I will say, when macro data is bad, just to take a little bit of an extra

Starting point is 00:14:57 microscope and see where cracks are forming. But I don't stop investing. Matt, I think you and I would be embarrassed to tell our wives how much we were looking at debt confidence of Tanger during the COVID breakdown. So, yes, I can fully attest to some of the things that Matt's talking about. And speaking of crazy stocks and looking at debt covenants, after the break, we're going to do stocks on our radar. Just a quick aside before we get to stocks on our radar here. We joked last week when we were discussing Meta that it was a freaky Friday moment. Third quarter, they reported they were going to spend a ton of money, the stock dropped. Then this quarter, they said they're going to spend a ton of money, and then the stock

Starting point is 00:15:34 popped. We were joking. It was the opposite of what happened at Alphabet in the third quarter. Guess what? This most recent quarter, they announced today, they announced massive capital spending. I think the stock is down about 3% or 4% as we're recording today. Another the Freaky Friday moment. Insert whatever investing trope that you have about Mr. Market or be greedy when it's fearful. There's a whole bunch. Pick your favorite one and add it right there. So, for Stocks on the Radar, I'm going to go first today. And the one that I've been looking at is Powell Industries. Now, I've been known to pick sleepy businesses from time to time. And most of the time, Powell Industries, I almost forgot the ticker, P-O-W-L, that would fall into

Starting point is 00:16:18 that basket of those sleepy businesses. Circuit breakers, switchbacks, and other electrical equipment for industrial or municipal facilities, AI data centers maybe, LNG export terminals, the big stuff. But man, was their most recent earnings anything but sleepy. Net new orders for the most recent quarter were up 63% compared to this time last year. It's book-to-bill ratio, which basically means the amount of orders that it brought in versus the amount that they sent out the door as completed equipment was 1.7 times, which means way more stuff's coming in than out the door. I wouldn't even call Powell Industries like a picks and shovels investment in AI infrastructure. This is like the blacksmith making the steel components of the picks and shovels to

Starting point is 00:17:05 make them to sell them. Companies like Powell, and this is actually to John, I think it was your statement on those bottlenecks in AI infrastructure, that physical stuff and needing to find those efficiencies. Companies like Powell are going to be where the pain points of AI build-out are going to happen. These relatively smaller companies that are facing massive demand for things that are often a much more sleepy business. I think the companies that are able to meet that growing demand are going to do spectacularly well in the coming years. And certainly, based on the quarterly numbers at Powell, there's an opportunity for them to make that happen. Matt, you go next. Yeah. So, I'm going to kind of piggyback

Starting point is 00:17:48 on what John mentioned earlier, because I think cybersecurity is such a great call in the current environment. I'm going to go with Zscaler, though, ZS. They provide secure access to all their enterprises, apps, their data. And in full disclosure, I used three different apps provided by The Motley Fool today, and I logged in once. It was super easy. I got into all of them. The stock just hit a 52-week low. The surge in AI technology that we've been talking about is going to increase the need for cybersecurity, not decrease it. And it's going to be a growing market for years to come. And I just can't say enough good things about how great of an opportunity I see in cybersecurity right now. And I'm going to go with GoDaddy, ticker symbol

Starting point is 00:18:31 G-D-D-Y. This business is not new. It's a company that allows you to buy a domain name, host a website, and implement some e-commerce tools. There are aspects of this business that I do think would be replaceable with AI in theory, particularly the e-commerce tools. But then there are other aspects of the business that really aren't. And so, for example, web hosting. GoDaddy provides its own web hosting with its own data centers. There's something physical here. It's not just software. And so, that does give GoDaddy something defensible, in my opinion. You look at the business growing by double digits. It's getting more profitable as it's embraced AI in its own workflows. And now it trades at just nine times its forward earnings.

Starting point is 00:19:17 That looks really just too cheap for me. It just repurchased $1.4 billion in its own shares for the first three quarters of the year, which is good for more than 10% of its market cap right now. I think this business is important. It's profitable and the stock is darn cheap right now. That gives us GoDaddy, Zscaler, Powell Industries, and we go back through the episode. I think there was a lot more companies that we mentioned along the way. As always, people on the program may have interests 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.

Starting point is 00:19:56 Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our notes. Thanks to our producer, Dan Boyd, 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 - Did Anthropic Just Give Investors Another “DeepSeek Moment?”

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