Motley Fool Hidden Gems Investing - Earnings Season Ramps Up -- And We've Seen Some Surprises

Starting point is 00:00:00 Earnings season is ramping up and we're here for Tesla. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime contributors, Matt Frankel, and John Quast. It's inadvertently become Elon Musk week on Motley Fool Money this week. I think this is actually the fourth day in a row that we've discussed an Elon Musk company, either Tesla or SpaceX in some form or another. But today, yesterday's earnings release from Tesla is going to be the big starting point. In addition to that, we're going to do a lightning round of several other companies that are reporting earnings. And as well, we're going to jump into a mailbag question related to the insurance industry. But as I said at the top,

Starting point is 00:00:55 we're going to talk about Tesla here. Tesla reported an adjusted 41 cents per share and beat analyst expectations for vehicle deliveries, revenue, and earnings. But it did fall short ever so slightly on energy storage deliveries. Now, there's a lot of ways we could go here because it is Tesla. It is Elon Musk. I'm sure we could, if we wanted to, we could do podcasts for the next five days just on the earnings release alone. But before we get too, too deep into it, I want to ask you guys is like maybe one or two things that stood out to you either in the earnings release or the conference call. Yeah. And kind of apologies to our listeners, right? I mean, we don't mean to hit you over the head with Tesla every single day, but I think we all had that

Starting point is 00:01:37 friend in high school who just somehow finds his way into every conversation. I mean, that's certainly Elon Musk. Entertaining is the most probable outcome, right? Musk normally says something pretty headline grabbing in his opening monologue of the earnings call. He didn't really do that this time? It was kind of ho-hum, kind of everything that we've already heard. Nothing really to talk about there from my view. But as we got down into the question and answer portion of the earnings call, Elon Musk started talking about something called TerraFab. And TerraFab really, really intrigues me. This is kind of Tesla's internal semiconductor operation that it's working on here. It's thinking very, very big things with this.

Starting point is 00:02:20 But what fascinates me and intrigues me about the TerraFab concept, even though it's probably still years and years into the future, is this thing called a feedback loop. I love feedback loops. I love coming up with something, testing it out, seeing how it actually goes, and then iterating on that and improving it as we go. And feedback loops that are short work better. It's one of the things that frustrates me about being a long-term investor. There is a lot of time in between me researching a company, coming up with an investment thesis,

Starting point is 00:02:52 and seeing if my investment thesis was right, seeing if my right thesis even mattered in the end, and then adjusting my investment process as I go. A feedback loop that takes a long time isn't as attractive as a short feedback loop. And that's really what Tesla is envisioning with TerraFab. Essentially, it wants to have everything in the semiconductor process all under one roof, and that way it can go through the entire iteration cycle all the way to the finish, test it out, and then go back to the beginning and go again. And I think that's just so interesting.

Starting point is 00:03:25 As Musk put it, there is some new physics we would like to test out. That might be overstating things a little bit, but I think directionally what he's getting at here is, hey, we want to try things, we want to try it fast and see if it works, and we want to adjust and try again. It's looking to put about $3 billion to work to make a few thousand wafers a month,

Starting point is 00:03:44 but at scale, it wants to be 50 times bigger than the entire industry combined. I think this is just something that is very interesting to watch in the coming years. I want to step in here a second and talk about like the scale that we're talking about here, just to give one example. So one of the things that they were talking about was using Intel's new 14A process for some of this TeraFab work. Intel is building a facility in Ohio, and they believe that the manufacturing costs for the facility itself is somewhere in like $160 billion range. And this is for one facility. The idea we're going to like a 50x something like this, the numbers that are going around with this Tesla Terafab thing are jaw dropping doesn't quite encapsulate it all. It's more like I live on the 18th floor of an apartment building.

Starting point is 00:04:28 My jaw somehow hit the street. No, exactly right, Tyler. And I mean, why is it called Terafab? Because it wants to output a terawatt of compute power annually. A terawatt, right? Oh, it's just one word. That's a lot of watt. Yeah. And I mean, there are a lot of big numbers that Elon Musk throws out there. What was the

Starting point is 00:04:47 latest one? One million data centers in space was one that I've heard. If this one isn't really a big surprise on that note, but one thing that really stood out to me in the call is how all in on robotics Tesla is becoming. So along with the earnings release, Tesla said that preparations for the first large-scale Optimus factory, which is at the Fremont plant, will begin in Q2, the quarter we're in right now, and that the first generation line, the first generation, will be designed for 1 million robots per year. They're prepping Gigafactory Texas to be their second generation robot manufacturing facility. And they're designing that for a capacity of 10 million per year. So that's not surprising. But the one thing that did surprise me, and this is

Starting point is 00:05:27 kind of on the part of the business that no one talks about, but it's what makes Tesla money these days, is the ramp up in Model 3 and Model Y production. It was up 14% year over year in the first quarter, despite that tax credit having been in place a year ago, and it's not there now. I would have thought that demand was dropping for those, but it doesn't seem to be the case. So that's what surprised me. These two models, the Model 3 and the Model Y, account for about 97% of Tesla's vehicle sales, and management said that lower cost versions of both models are in the works. So Tesla is not just a robotics, autonomous driving, chip making, whatever you want to call it story. The car business could still have significant potential

Starting point is 00:06:06 from here. Yeah. And here's the thing I found. So I guess you could say peculiar is the right word to figure out because we talked about these grand ambitious numbers, like the amount of money that it would take to do the things that we're talking about here and the 10 million robots a year. And, you know, there's obviously the plans for robo taxis and cyber cab and things like that. And this is where it, like, it became peculiar for me. It was like, you know, they, they said they were going to spend $20 billion this year. And then this quarter they bumped that spending plan up to $25 billion for the year. So obviously they're seeing the direction of this. But Q1 capital spending came in at $2.5 billion. It was actually quite small. It was more or less on pace

Starting point is 00:06:46 with what they've been doing for the past six to eight quarters. And it's also why it posted free cash flow this quarter when analysts were mostly expecting cash outflows because it was way less spending than I think a lot of analysts were expecting. I acknowledge that spending can ramp throughout the year, but considering how ambitious the plans were, how much they said they're going to be more they're going to be spending. I mean, it's going to be a massive ramp up in the second half of the year. It'll be interesting to see how that happens because we're talking about like AI data centers and like supply chains in the United States are really strained for manufacturing construction capacity right now. The further that stuff gets pushed down the line, I think it's

Starting point is 00:07:21 going to be a little bit harder to secure a lot of things to do a lot of what Tesla wants to do in terms of procurement, in terms of construction and stuff like that. So it's an interesting thread I want to follow. And again, like in all of that somewhere, there has to be a massive ramp up in production for its cyber cab or the robo taxis as well. Yeah. I mean, I mentioned the robotics plans. They're, they're ramping up the Fremont factory conversion in Q2. So I have to think that has to do somewhat with kind of the delayed fuse and spending that we're seeing, but you're right. That doesn't have anything to do with the robo taxis. That doesn't have anything to do with TerraFab as John was talking, but there is some sort of ramp up in, in progress here. Yeah. And

Starting point is 00:08:00 And to that point, Matt, I mean, Musk pointing out on the call that when you're talking about building robots, a production line of robots, there are many, many things that you have to get out on that production line before you actually start ramping. And there's many components, many processes, many even robotic assembly line things that you need to have in place. And all of that takes time to disassemble what's already there and source and then reassemble a new production line. And so it is logical to assume that your higher spending is going to come later than sooner. Well, that was a pretty good coverage of Tesla, probably a little bit longer than we normally go, but hey, it's Tesla. There's always plenty to talk about. So coming up after

Starting point is 00:08:43 the break, we're going to do a lightning round of several other companies that have been reporting earnings this week. And what better way than with a delicious Pret Organic coffee, starting with just $1 all day, every day, now until December 31st. You gotta try Pret first at A&W. At participating A&W locations in Ontario. Well, we don't have as much time to spend on the rest of the companies we just had here versus Tesla. So what we're going to do is we're going to do a quick lightning round of earnings wrap-ups.

Starting point is 00:09:28 Each of us picked one stock. We're going to do a quick coverage of what we saw, what was interesting, perhaps some challenges along the way. Matt, you drew the best number, I guess, for the three of us. So you're going to start. What was the company you saw and what was most interesting? Yeah. IBM Earnings is one that I was really anticipating and I like the stock even better, honestly, after its earnings fall. So they beat expectations on both the top and bottom line, but the stock is down by 10%. There are a few reasons. So first, it beat expectations and simply maintained its full year guidance. And that's usually a sign that the next couple of quarters might become weaker than expected. If you have full year guidance, you already beat

Starting point is 00:10:04 your expectations for the first quarter. Just the law of averages says you're not going to do that well in the rest of the year. Second, their consulting revenue grew by just 4% year over year and missed expectations. And this is the part of the business that investors worry the most when it comes to AI disruption, like cloud code could do COBOL software updating. And that's why IBM stock plunged earlier this year when Cloud announced that new update. Generally, their numbers were strong. Revenue was up 9% year-over-year. Software and infrastructure revenue both grew by double digits. Gross margin expanded by 100 basis points, so that made their operating cash flow grow by 18% year-over-year. And management really had positive things to say

Starting point is 00:10:40 about the AI tailwinds they're seeing throughout the business. So I'm not that worried about the software updating consulting long-term. It's really the AI part of the business that seems to be moving in the right direction. Yeah, I think all three of us picked something that was either directly or tangentially related to AI here, because I went with GE Vernova, ticker is GEV. Funny thing is, is not too long ago, this was considered like the problem child of the conglomerate that was General Electric. You know, they had the great aerospace business, you had this really steady healthcare business, and then you had this electricity business that nobody really liked that much, but it's spun off. And over the past year, GE turnover is up 253%. And

Starting point is 00:11:20 hoo boy, there is a reason. First quarter free cash flow was more than all of its free cash flow in 2025. And a lot of that had to do with bringing in a lot of revenue for its backlog. It posted an incredible jump of $12 billion in basically unearned revenue. That's just basically stuff that people have ordered and they want built sometime down the road. It's just going to sit as unearned revenue cash sitting on the books. So it's this nice injection of cash because there's going to be a big ramp up to do a lot of things that they want to do because total backlog for all of its segments. So this is gas turbines. It's nuclear reactors that has a joint venture with Hitachi in Japan for. It's wind turbines are actually growing. It's grid and transmission

Starting point is 00:12:03 equipment, stuff like that. It's all growing. And right now its backlog is somewhere around 200 billion dollars of like work that it needs to do and this is a 300 billion dollar company and it's basically busy for the rest of the decade on top of that it acquired a 50 jv stake or bought back would be a better way of saying it a company called prolec which again is like transformers and a lot of other electrification and grid equipment really leaning into that hey ai electrification of transportation like we need this stuff and it seemed like a very opportune time because it's pretty flush with cash right now. And this was actually, there was two really surprising things for me in the conference call was from CEO Scott Strazic. Basically what he said was previous

Starting point is 00:12:45 quarter, he said that basically they had about 10 gigawatts of available production in 2029. That was last year or last quarter, excuse me. So basically they're booked all the way out to 2029 minus like 10 gigawatts of power. This quarter, what he said is, so what's changed is we still have about 10 gigawatts remaining, but that's cumulatively through 29 and 30. So basically he's saying, you know, they booked all of 2029, 2030 is booking up really fast. And so, yeah, this is all the way through the rest of the decade. Like if there's a company that has really strong revenue growth and a lot of visibility in what it's going to do, I think GE Vranova is really looking interesting. John, what do you have?

Starting point is 00:13:26 Well, yeah. I mean, Tyler, you're talking about how we're all picking companies that are, that are somehow related to AI. It's honestly hard to find things that aren't related to AI at this point. I actually shudder to think, what would the state of the economy be if there wasn't so much AI infrastructure spend right now? And I think that the results from GE, Vernova are good, just kind of a data point there to prove that point. I'm also going AI here with Texas Instruments. This is ticker symbol TXN, often forgotten in the conversation. It's a huge company. It's kind of disrespectful, but let's talk about it a second. It just reported its financial results for the first quarter of 2026, revenue up 19%, and that's actually the highest growth rate it's

Starting point is 00:14:06 had in over four years. And I think that's worth pointing out. And you look at what is driving it, good guidance for the next quarter too, what's driving it is data center revenue, up 90% year over year in the most recent quarter, up 25% sequentially, and that's an acceleration from the data center growth rate in the previous quarter. So when it comes to the data centers, Texas Instruments has chips that it makes for power management. It has some things for temperature detection control, those sorts of things. Not necessarily completely core to what's happening in the AI trends and the compute and all that, but still they're products that are necessary and they do benefit.

Starting point is 00:14:44 The sales cycle does benefit from all the spending going on. And when you look at some of the demand trends here, here's a signal. Texas Instrument Management was expecting the prices of its products to kind of take a small step back in the first quarter. Not huge, but a small one. But in reality, the prices were flat. And so what that means is the demand, like Texas Instrument Management knows this business inside and out, and demand was stronger than what it anticipated. The pricing held up better for its products than it thought it would. That led to the small beat that it did report. And I think that that is just one of those things. If you're one of these investors who says, are we in a bubble?

Starting point is 00:15:23 Just remember that there's so many data points that say demand continues to be stronger than even the industry insiders have expected. One other thing to note is the company is acquiring a company called Silicon Labs. That's ticker symbol SLAB. What's interesting here is that this is an unprofitable company and Texas Instruments Management says it's going to be accretive to earnings. And here's the thing. Texas Instruments always reports generally accepted accounting principles, gap numbers, not these adjusted numbers. So it'll be interesting to see how this unprofitable company is somehow accretive to Texas Instruments earnings. It obviously won't be right away, but it says eventually. And I think that's worth pointing

Starting point is 00:16:05 out. Ah, the magic of synergies. You can make anything look profitable. All right. Coming up After the break, we're going to go into the mailbag. You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with a delicious Pret organic coffee, starting at just $1 all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario,

Starting point is 00:16:40 hey just a quick reminder if you like asking questions we want to be answering your questions go ahead send an email over to podcasts at fool.com we'd love to answer any questions you have on air our two requests are one keep it foolish and two after reading lots of these try to keep them short so we can read them on air so again that email is podcasts at fool.com podcasts at fool.com. So today's question comes from Matt Koziak. I apologize if I misspelled your name, but he wants to know a little bit more about the insurance industry. And the question is Progressive, company ticker is PGR, has fallen quite a bit from its highs and it's currently yielding 7%. What are your guys' thoughts? We're going to go around the room. So John,

Starting point is 00:17:25 what did you see first? Yeah. And Matt's going to give more substantial analysis for the insurance company itself and the industry. But just a note there on that 7% dividend yield, not all dividend payers are created equal. There are some that you can count on a quarterly dividend that steadily rises, and that's what that dividend yield is that you're looking at. It's calculated off of that. But there are companies that also pay one-time dividends or annual dividends, and those tend to be a little bit more up and down. They fluctuate. And for Progressive, it paid a really big annual dividend recently. And so it's not necessarily going to pay that much again next year in the annual dividend. So the 7% yield, that has an asterisk on it. It's not necessarily

Starting point is 00:18:16 the same as a dividend king that you can pretty much count on what it's going to be paying next year. The other thing to mention here, why is progressive stock not performing as well? It's related to why it was able to pay that huge annual dividend. It said its profit margin is close to an all-time high. And that's good, but it's been a favorable underwriting environment. And that's for the entire industry. That's not just a progressive thing. And that happens. There are cycles where it ebbs and flows. There are better times, harder times. And Progressive's own profit margin history shows that there are times when it gets up close to the margin that it's at right now because of favorable conditions, but those conditions eventually turn and lead to

Starting point is 00:18:57 lower margins down the road. And so in other words, what we're saying here is the numbers are pointing to the fact that progressive is maybe close to a cyclical peak in earnings, and therefore the dividend will be lower and earnings will be lower maybe a year or a couple of years from now. And so that's what the market is reacting to. What a nice response there. I I don't know much about industry, but I'm going to go through 10 years of its cyclical earnings to give you an idea of what you're talking about here. So John's speaking modestly here, but I want to actually kind of like interject with a point about the cyclicality here too, because I was looking at some analyst projections,

Starting point is 00:19:30 you know, industry analysts basically thinking like what the earnings and stuff like that for Progressive and several other companies in the industry are looking like over the next couple of years. And for example, for fiscal year 2026, analysts are projecting 10% reduction in earnings per share. And basically, all the analyst projections I've seen for earnings and revenue across the insurance industry, not just Progressive, we're talking about Travelers and Allstate company, very similar companies in the property and casualty sort of lines, all of them are

Starting point is 00:20:00 more or less projecting either slightly down or flat earnings all the way out until 2028. So yeah, it does look like we're in a very cyclical moment. Now, of course, analyst projections can change. These are all just kind of looking into the crystal ball of what has happened in the industry before, it could change. And so take those numbers with a grain of salt, but it does appear that the industry is in one of its like downward cycles that would help to explain why people are probably not chomping at the bit to be wanting to buy shares of Progressive right now. Matt, you are probably the more optimistic of all of us. So go through the business a little bit more and tell us

Starting point is 00:20:37 why, even despite this like tepid, I guess you could say projection, this is probably worth buying. Well, to be fair, I'm not the most optimistic when it comes to like over the next two or three years, like the numbers you just quoted on the screen. I agree with those. I think that's pretty spot on. I mean, we can go on and on about the insurance business, but generally premiums, they kind of rise in reaction. It's like a delayed fuse. Like, you know, insurance companies have to get state approval for rate increases, things like that. So like you'll see inflation, you'll see the replacement cost of vehicles going up. Then they'll have to raise rates in response, which is why you're seeing, you know, insurance rates go up a lot now. whereas the actual cost of vehicles went up two or three years ago. But there's a few things to unpack with Progressive. I mean, first, growth has slowed considerably. It's worth mentioning that. This is an insurance company that was rapidly gaining share. And in the first quarter, their net written premiums grew by just 6% year over year.

Starting point is 00:21:28 And when you adjust for inflation, that's really like 3% actual growth. We've also had a pretty excellent year when it comes to natural disaster losses. We didn't have any catastrophic hurricanes in the U.S. last year, for example. That helped the profitability last year, and it's going to be a tough comp in 2026. And we're already seeing that. So Progressive is not down for it for no reason, in addition to the cyclicality that you mentioned. But having said all that, I'm a big fan of Progressive at these levels, and really dividends have nothing to do with it.

Starting point is 00:21:55 The company has been the tech leader in the insurance industry for about 15 years. That's not going to change, regardless of what point of the cycle we're at. It's allowed it to not only be more profitable than its competitors consistently, even in down cycles, but to take market share. Progressive was the number three auto insurer in the US just a few years ago. And now it's a legitimate contender to take the number one spot away from State Farm. The auto insurance industry itself is expected to grow by about 40% by 2030. I mean, simply put, it costs a lot more to replace a vehicle that's been in an accident than it did a few years ago, even if it's just got minor damage. If someone hit my car today,

Starting point is 00:22:33 you know, there'd be six, seven computer systems that need replacing. That wasn't the case 10 years ago. So that's not going to change anytime soon when you talk about all the self-driving software and hardware that's going to be put on all these new cars. So to kind of wrap it up, I'm optimistic about Progressive long-term. I think it's really rare to be able to get a chance to buy Progressive 20% off of its recent highs, just historically. But I do agree that it could be a tough point in the cycle for the next two or three years. Yeah, I think we all kind of landed at this base. Great company. I don't think anybody's going to be too excited with what the results it's going to post over the next couple of years. Well, that's all the time that we have

Starting point is 00:23:07 for today. Matt, John, thanks for sharing your thoughts. I'm going to have disclosure. We'll get out of here. 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. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. thanks for producer Bart Shannon 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 - Earnings Season Ramps Up -- And We've Seen Some Surprises

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