Motley Fool Hidden Gems Investing - Easy Money Returns

Episode Date: September 12, 2024

The European Central Bank cut rates this week and the Fed is expected to cut rates next week. When money gets cheaper, the party gets started. (00:21) David Meier and Ricky Mulvey discuss: - OpenAI��s $50 billion valuation jump in one week. - A space SPAC that’s more than 10xed since April, 2024. - One of Warren Buffett’s top lieutenants selling $140 million of Berkshire Hathaway stock. Then, (16:27) Asit Sharma joins Ricky to look back on Meta’s turnaround story and what it means for investors today. Companies discussed: MSFT, ASTS, RKLB, BRK.A, BRK.B, META, LE Visit www.factormeals.com/foolpod50 to get 50% off your first box plus 20% off your next month. Host: Ricky Mulvey Guests: David Meier, Asit Sharma Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Get ready for an easier money era. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by David Meyer. David, thanks for being here. Thanks for having me. It's good to be here. So I've got the glow sticks. You've got balloons. We'll have chocolate ice cream cones. Welcome to the Easy Money Party. Are you ready to get started? Absolutely. I love easy money. We got a rate cut this week from the European Central Bank. The Fed is widely expected to cut interest rates at their meeting next week. This is the second cut for the ECB. And the Central Bank

also ticked down its growth forecast over across the Atlantic. I mean, I said it a little tongue in cheek, but this is a sign that money is getting easier, growth is slowing down. What should investors make of it? Should they celebrate? Yes, I think they should celebrate a little bit. What's happening is, it's definitely marking a change in monetary policy. For the longest time, rates have been higher, money has been tighter, to use the other side of the language. But the thing is, right now, we're going to see how many cuts are actually made, and we're going to see how quickly the various central banks make them across the world. But yeah, I think this is a good thing.

With lower interest rates, presumably comes a more risk-on environment. Does this change how you think about investing in some of those riskier speculative plays? Not entirely. The reason is that some companies stay risky no matter what the interest rate is, and that's because their business model comes with risk. Whatever they're trying to do as a business, maybe it's more difficult, maybe it's a science project, and it's going to take more time and therefore has more risk with it. Other companies, lower rates can actually cause sales to pick up. Let me give you a quick example from the productivity software space that I follow quite closely. Lots and lots of small and medium-sized businesses actually

postpone their software investments while rates were rising during the COVID period when the Fed was fighting inflation. Now with access to cheaper capital, or at least the promise of cheaper capital on the way, I would say many of those are going to start looking at those investments again. From that standpoint, software companies that were struggling with their small and medium-sized businesses as customers may actually see a little bump. So again, it depends on the perspective, but typically lower rates tend to help most companies and many investors. Well, after this recording, I'm going to be looking through my full account to see what some of those software companies are, David. You got us to a good place, which is that we are at

an interesting point in the business cycle. And I have three quick stories I want to run by you. and you're going to tell me if you think they're meaningful or not meaningful are they real indicators of where we are in the business cycle sure thing quick hit number one open ai just upped its fundraising round this week open ai is looking to raise 6.5 billion dollars at a valuation of 150 billion this is a tricky company that acts as a for-profit and non-profit it is there's a 501 C3 part of it. I've had a lot of trouble raising money for it standing outside of grocery stores. That's a different story, David. But just last week, OpenAI was doing a fundraising round at $100 billion. The math on this is that the valuation changed by $50 billion over just one

week. David, what's happening here? Obviously, technology is changing much, much faster than we realize. A little tongue-in-cheek there, but in a bit of seriousness, I think two things are happening. First, we're getting a clear signal that OpenAI still needs lots of capital to fund all the amazing things that it wants to do. That's a good thing. But right now, we're also learning that it's not able to do that without outside capital just yet. We can debate about valuations, 100 to 150, those are big. The other thing that we can say is, based on those valuations, it is absolutely the right thing for management to be raising as much capital as possible right now. Look, if investors are willing

to pay that much because of the opportunities they see, absolutely, do it. $100 billion one week, $150 billion next week, $200 billion the following week, you got to get in early, so to speak. I struggle to think about that amount of money. One way I do that, David, that is a full Kroger, the entire market cap of one of the largest grocery store chains in the United States, Kroger, and all of their future earnings, all of that future cash flow has been absorbed in one single week by this valuation change. I mean, is this what a hype cycle looks like? Yeah, I actually think that's a great analogy. Look, I probably pretty safely say that we have not hit the peak of expectations.

If you're following along at home, that's the first part of the hype cycle curve. However, valuations like this probably show we're moving well away from the technology trigger phase and closer to the peak. These are pretty high given where we think OpenAI's revenue is and how fast it's growing. And I want to spend a second because the technology is truly unbelievable. We're talking about a demo earlier before the recording, something called Strawberry, which in the next release of ChatGPT basically is going to allow people to program their own small video games with just prompts. You don't have to know how to code anything and you can pretty much make your own like late 1990s style video game. This goes to a point that you were saying, which is that the leaps and bounds are really for programmers right now, too.

I completely agree. What the technology is really promising is productivity, helping people when doing whatever work they want to become more productive. And things that I keep reading that we talked about, like we talked about our programmers, those deeply involved in technology development are seeing huge productivity benefits. What that can spur then is actual creativity. So getting back to the valuations, we actually don't really have a good way to value these types of companies right now because the future is very bright and we don't necessarily know what direction it's going to go. We just, directionally, it's going to get better. What they're saying they are going to do is,

quote, build a highly autonomous system that outperforms humans at most economically valuable work, end quote. If they're real about that, you know, $50 billion might not be so unreasonable. No, it might not. Let's go to the next story. Next one, SPACs are back. Excitement over SPACs are back. Special purpose acquisition companies where you can really focus on the future.

This is specifically going on in the space industry. There's a company called AST Space Mobile. They launched five satellites this morning on the back of SpaceX rockets. Yes, SpaceX carried a competitor as AST has investments from Verizon and AT&T, essentially with the goal of eliminating dead zones for cell phone internet. They're going to do a broader cell phone coverage with these satellites. And there's a lot of investor

excitement. The stock story is that shares for this company were trading at $2 in April. Now they're at $12. We're in another SPAC cycle. Many of our listeners have heard a little bit of this story before. Is this song different? So the answer to that is yes. And I would even say very much so. If we go back in time, the first part of the SPAC cycle was about raising money and buying companies. Literally, that was it. If you wanted to raise some money via SPAC and absorb a company, there was a time when that was extremely popular. Unfortunately, that first part of the phase ended badly for many of the companies who have seen their stock prices fall dramatically from all-time highs. Now, fast forward to today, fast forward

to let's say the beginning of 2024. We are seeing some of those companies that came to the public markets through the SPAC process, building businesses, producing results. They're getting a second look from the stock market. If we take AST SpaceMobile, investors have cheered the launch of its satellites into space, as well it should, because those are the things that AST is going to use to generate revenue. They're going to go out, capture demand, turn that into revenue, hopefully turn that into profits. The thing that makes my hair stand up just a little bit, number one, anytime I'm looking at a parabolic curve, I have some questions. Something a little odd to me right now is this

company's market cap is at about two times that of Rocket Lab, which is sending a whole lot of things into space. Is that odd to you? So, yes and no. So, we'll start with the no first. No, because Rocket Lab is mainly a launch company, much more so than a satellite company. It gets paid to put satellites into space, and it also gets paid to provide some components for people who build satellites. But if we take a market perspective here, the market sees what Rocket Lab is doing and has valued it accordingly. Revenue growth is a little more known right now than AST's. But going back to your question, is this a little odd? Yes, because AST is essentially still a pre-revenue company. Think about that

for a moment. It has not really generated any revenue based on the business model that it wants to have. That's it. The market is definitely seeing great things happening on AST's top line and has discounted them to today's valuation. I think the parting shot that I would like to leave listeners with here is always remember, markets are part fundamentals and part psychology. The ratio between the two can change depending on the circumstances. Let's do the third quick hit. I don't know how quick we're being, but we've had a good conversation, I hope. Berkshire Hathaway's vice chair of insurance, this is one of Warren Buffett's top lieutenants, Ajit Jain, sold more than half of his stock in the company. I know insiders sell

for a lot of reasons, yada, yada, yada. This is $140 million worth. That is some walking around money. One thing before I ask you this question, too, is Berkshire does not give out stock-based compensations. Also, this is the insurance guy at Berkshire Hathaway, so I assume he's pretty good at assessing risk as he cashes out $140 million. Are you less pessimistic than me? I think so. Let's think about this simply. It's nearly impossible to say, as none of us know what his personal financial situation is, why he truly sold. But we have to remember Ajit Jain is he's older. Maybe he wants to retire soon. Perhaps he's doing some estate planning for his extended family. As you alluded to in the beginning, there's plenty of speculation out

there about why someone sells. But I would bet that the simplest explanation about planning is much more likely than something like, oh my goodness, something's wrong with Buffett, or oh my goodness, Berkshire is getting ready to collapse. I can safely say that Berkshire is not getting ready to collapse. I think he's just looking to do, he's at a stage in his life where he probably needs to make some plans for his extended family. Maybe I came in a little too hot there, David. Not that Berkshire is ready to collapse, but rather many observers are taking this as a sign. Berkshire just hit the $1 trillion market cap mark. Maybe it's fully valued and maybe one of the insiders is seeing it that way. That's very possible, because if you think

about the Berkshire business model of how it generates capital, generating more value with a trillion-dollar market cap becomes an enormous task. That said, Buffett and company have cleared many, many psychological hurdles like that on the way up, $1 billion, $10 billion, hundred billion. So I wouldn't put it past them to figure out what to do with that war chest of capital that they have going forward. For the transcript, I am not a Berkshire bear. Let's put it all together. These stories with some mindset advice. What's your advice to newer stock investors listening to this show who are entering their first cutting cycle? My goodness, this is actually a phenomenal question, especially given the context of

where we are. Let me see if I can give at least an adequate answer based on all the gray hairs that I have, my 20-plus years of experience in the market. First, rates are one part of the equation when assessing the value of a company. New investors should not be overly focused on rates, even though that's going to be a dominant headline in the news cycle right now, because rates are likely changing and going down. The second thing is, always remember, we're investing in a business. Analyze the business first. What does it do? How does it make money? What advantages does it have? What advantages does it not have? Who's leading the business? Those questions should be first on your list of things to do because those answers will

shape your valuation analysis way more than interest rates will. Then third, I think it's helpful to understand the historical impact of interest rates. A great book that I've read called The Price of Time by Ed Chancellor looks at the history of interest rate movements and provides some incredible context about what can and what has and has not happened as a result. But most recently, let's say over the past 20 years, going back to the great financial crisis, the Federal Reserve has cut rates in response to something bad happening in the economy. I don't think that's what's happening right now, but investors should continue to pay attention to the macro environment going forward. Even with falling rates, there's likely to be bumps along

the way. That's what happens with economies and stock markets. That's why at The Motley Fool, we focus so much time and attention on investing in quality companies, because they're the ones that make it easier to deal with all that volatility along the way. It's a great place to end it. David Meyer, thanks for your time and your insight. Appreciate you being here. I really appreciate it too. Thank you. in november of 2022 meta stock traded at about 90 bucks a share now it's above 500 up next my colleague asit sharma and i take a look at the turnaround story over at meta and its lessons for investors

awesome now we've been doing this show for a few years as a daily show and we can finally kind of look back on a full turnaround story and that's meta and you know to set the table i want to be clear i've been burned on a few turnaround ideas as an investor and i'm looking specifically at big lots right now, which recently went bankrupt. And I even made some mistakes on the meta turnaround investment that we'll get into. But I wanted to talk with you because you're good at looking at narratives. And I want to look at how the narrative shifted in just a couple of years around one of the most powerful tech companies. Before we get to 2024, let's go back to late 2022. The introduction is that meta is one year into its rebrand. It's no

longer Facebook. It's all in on the metaverse. And at this point in the company's life cycle, it's a value sock. It's very mature. It's at 10 times forward earnings. Today, it's above 20. Mark Zuckerberg is very excited to discuss the metaverse and investors are very dour about this company's future prospects. Why the rain clouds? Why the doom around meta as we get in the time machine back to 2022 well we're gonna hop back for two seconds to 2024 to the future okay who's spending the majority of their time in the metaverse so you can see why there was a bunch of skepticism around zuckerberg's vision meta was burning a bunch of cash to fulfill this vision which at the time and still sort of seems like the whimsical fancy of a very powerful ceo with

a huge balance sheet who wants to build it so people will come. There was skepticism around the core business that's always been very strong for Facebook. But when we look back a couple of years ago, Facebook was such a mature property for the company. They were just getting into what would become a little more important for them, which is this whole monetization of ad revenue around video. Instagram Reels was a thing then, but smaller than it is today. Competition was just eating Meta's lunch wherever it tried to poke outside of its core business, always strong in advertising revenue. I look today, again, flipping to the present day, that's still where Meta makes all its money, is in advertising.

When we think of narrative, yes, it seemed like we were in the third chapter of a not-so-interesting chapter story here who wanted to participate i can see why that price to earnings ratio for price to earnings ratio was so low at that point in time i was trying uh i guess it still is trying data it was or dating excuse me it's always been trying date uh data but getting a little bit outside of the core things of the continuous scroll and keeping you on the platform since then zuckerberg got into brazilian jiu-jitsu he's been looking a little stronger a little slicker he's been speaking a little bit better on earnings calls and in that meantime in the past two years did the business it meta really change did the focus really change was it more or what is this

a narrative change or is it both i think it's both one thing that we have to understand about this company is that it is going to operate at scale and as long as it can continue to add users and further monetize those users, it can do a lot of things wrong. It can spend billions of dollars on a mini company called Reality Labs, which to this day accounts for a tiny fraction of total revenue and still be successful. It can pop back from a gross margin, which has historically been very high, started to sag a little bit, pop up again over 81% percent and take home a lot of money and institute a dividend. There's so much in this story that depends on the company just tacking on numbers of users, engagement numbers. I'm

going to give you a stat, Ricky. When I was at peak pessimism on Meta, this is the first quarter of 2022, family, daily, active people, yes, DAP, their favorite metric and famous metric was $2.87 billion on average in March of 2022. You see that's a lot of people that can lead to a lot of engagement. Today, DAP is $3.27 billion on average for June 2024. Just this expansion is one metric, this inexorable adding on of family, daily active people and starting to pinpoint that maybe we can, again, return to younger users at Facebook and add some of those, which surprisingly they've been doing, we can keep growing Instagram and we can grow this property called WhatsApp, has been very powerful for the results of

Meta. It has enabled tremendous capital expenditure investment into AI, which is the thing we haven't mentioned yet, but I think we got to talk about it. Yeah, I think AI is almost something that happened to Meta, and they knew how to be in the right place at the right time. In the April earnings call, Zuck said, quote, one strategy dynamic that I've been reflecting on is that an increasing amount of our reality labs work is going towards serving our AI efforts, end quote. Asit, that's a very strong signal to the street of, hey, can you forget about the Metaverse

thing for a second? Don't worry. I know that AI is the future. And also, Hey, there's a real application, which is that if you're an advertiser, you can run a bunch of AB tests and you can use our AI systems to sell your ads a little bit better. They've also got, you know, an open source chat bot that a lot of computer programmers are contributing to. And then the other thing that meta did not just had something happen to them is that they instituted a dividend. You know, maybe we are a mature company, but we also are a little bit more mature. We're going to give some of that capital back to you

and also to our CEO and founder, Mark Zuckerberg. Asit. Look, Microsoft did this as well and kept growing. Microsoft instituted a dividend and showed that they could constructively invest their capital. But I want to go back to this point you made, which is an astute point, Ricky. Being in the right place at the right time is all important in life and in business. And sometimes being prepared is even more important Going back again to 2022, an executive at Facebook, his name is David Wehner, was talking about how Meta was going to increase its CapEx intensity, meaning thereby, we're not going to stop buying tons of server space, buying GPUs, and building out capacity. because one day we think it's going to be so important to have a bunch of cloud capacity and the ability to really generate a lot of stuff out of AI, because we're going to all

be in this metaverse. So we got to spend the billions a day. Now, that capacity came in pretty handy. All of the machine learning that Meta was focusing on the metaverse came in handy as they themselves became data scientists. And like Microsoft entered this world of building large language models. Of course, they have their famous own open source model, Lama 3. Everything that they were doing for the metaverse came together with a great application for generative AI. And as you're pointing out, now they have so many ways that they can increase their monetization by using some of their own expertise in generative AI, by using all that capacity they built up. So, sometimes, I don't want to sound pejorative here, but sometimes you get lucky, but let's

give it to Zuckerberg and crew, they were prepared. Whether it was happenstance or not, or they saw the day where generative AI could really hit a gear with consumers and business use cases, that remains to be seen. But they certainly were prepared. So, maybe Betta got a little lucky, and maybe that happens with stock investing sometimes, as much as you like to think you're good sometimes you get a little lucky let's go to a parallel universe maybe one where elvis is still alive uh the united states looks a little different and in this version meta is a languishing giant it's a has-been asset it's the former great showing off his state championship ring at a dimly lit bar while no one listens to his stories

What happens in this version of Meta? When stocks fall, that doesn't mean they're going to bounce back up. There's a time late in the summer when you've heard your uncle's stories about his high school football glory a million times, but still, it's just the twilight is setting in and everyone's in just this nice mood. Suddenly, you want to hear that story again. Don't count out that part of the business. They can still be a mature business that investors will periodically come around to and appreciate, as you point out, that the dividend could play a role in that. But I'd like to focus on this Elvis metaphor. We all know Elvis had so many comebacks. The greatest of his comebacks was his Aloha from Hawaii concert. This was the first

satellite concert beamed around the world. He came on stage with a full orchestra and a little side soul band, and they were in perfect sync, and he nailed it. and this goes to show you this innate talent that some performers have, this innate talent that some businesses have, they can make for a lot of comeback. Even if we see Meta now start to normalize a bit, because again, how big can it actually grow? I named some insane numbers for active users, only eight billion of us on the planet. This vision that you're painting, Ricky, I think it could still be beneficial to investors, either from the point of view where You've got a very solid company. It's got stable cash flows. It's not going to keep you up at

night. You should have it in your portfolio. Or the Microsoft story, where you have all the balance sheet power, you've got great tech, you've been executing, and maybe you've got a few second acts left in you. I could see it going either way. I mentioned that I made a mistake with this turnaround story as well. I'm okay being public about it. I sold some of my shares on the way up is meta kept rising and rising. I told myself that, you know, this could turn back around at any moment. The streets can remember the metaverse. I didn't like how much of my, uh, portion of my portfolio was invested in meta. And I was getting ticky tacky with it and I would have been significantly better off if I just didn't touch it. If I closed my, uh,

my Schwab screen and went outside. So that was my personal lesson from this turnaround story, which is, it really applies to that Motley Fool fundamental of when you buy a stock, hold it for three to five years to let the story completely play out. I didn't do that and I lost some money, but now I still own some meta shares and they've done all right. I'll zoom out on a narrative perspective with you. What are some broader themes that can be applied to the next turnaround story that investors are looking for as we look back on metas? Going back to this one point that you made. This is really important. Before I answer your question, Ricky, for all investors, when you have a position that's just become an uncomfortable

part of your portfolio, sometimes it's not the best investing sense. But if you need to, just for the personal sense of like, I don't have to worry about this anymore. I see it recovering. I'm going to trim some shares. That's okay. I'm going to applaud you for that. Because I know you, personally, you have your fingers in a lot of pies. You're an interesting guy. You're not just you know, a fellow colleague, but you've got a life. So good for you if you had to make that decision. I don't think that's necessarily a bad decision. If it were a smaller part of your portfolio, the takeaway is yeah. Like leave it alone. Let it do its thing. I've been there myself and on meta in general, like learnings I take, because I was very publicly, I think early 2022

pessimistic about this company. I want to own that now to my, the other side of the leisure. I didn't see generative AI coming and the effect that that could have on the business. But I did underestimate just the ability of a scale company to keep doing its thing and growing, even though that growth was slowing. So we can apply this to turnaround situations. When you see a company hitting its groove in a turnaround situation, getting back to what it did well before it had a fall from grace, that may be the time to let it keep just turning out those business results and building back up its resources, we should all be patient in those situations. Don't, don't try to sell yourself if it's, if that's not happening that, oh, well,

maybe, you know, one of these days, who knows? But when you see those results start to happen in real time, maybe that's a time to just take a step back, read some past earnings and just be patient. I want to close out with, you know, I, one of the things that bothers me on investor social media is that people really like posting their wins and they're very, uh, not as, not as quick to mention their losses. One of the things I appreciate about you and the other, a lot of the other analysts we have at the full, this is getting sappy. I don't like how sappy it's getting. So we're going to stop at a moment. We'll take the violin strings out in post-production. Dan Boyd will, we'll make sure that we mute those violin strings, but, but go ahead, my friend. You're

very, you're very open about, uh, mistakes because there's an understanding, which is that if you have misses that will be made up for by the wins, by the big winners. So you mentioned you missed Meta, but have there been any turnaround stories that have worked out for you as an investor? And what did you learn from them as we close out the segment? Sure. So I've had large and small ones. One of my favorite stories, just fairly recent, that's picking up lands and felt like pennies on the dollar during the peak of the pandemic. And that wasn't any kind of rocket science. It wasn't that I understood retail better than anyone else. It wasn't that I had a lot of financial expertise, it's just I looked at this financial statements and I was like, they're still making

money. I know they're closing some locations, they disassociated themselves from Sears, but I don't think this brand is really going anywhere. There's so much pessimism around it, I'll pick up some. That was a very nice multi-bagger for me. Then one that maybe is in the realm of Meta was, I purchased Microsoft at not peak pessimism, but in a pessimistic day and age when Satya Nadella had just taken over. I got a multi-bag out of that through patience just thinking that this guy had at least more vision than Steve Ballmer. I hope Steve Ballmer is not listening. But on that, again, not rocket science. These are fun ones. you think that a story can work out and you see a company's not in dire trouble, it's not about to

go out of business, then put a little money into the idea and just watch it like, as you would a plant growing. And that was a fun plant for me. That's the trauma. Thanks for being here. Appreciate your time and your insight. Thanks for having me, Ricky. So something Dylan, Mary, and I really enjoy hearing is where and how you listen to the show, whether it's your drive to work, on a run, or doing chores. It is something that makes the job rewarding. So if you found value in the show, one place to let us know is on Apple Podcasts under a review. It's sort of the front porch of the show, and we really appreciate it when you leave a five-star review and let us know where and how you listen. All right. 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 anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.