Motley Fool Hidden Gems Investing - Intel's $5 Billion Bet

Episode Date: February 15, 2022

(0:20) Buying Tower Semiconductor for more than $5 billion in cash is only part of Intel's plan to manufacture chips. John Rotonti analyzes Intel's acquisition and what executives at Taiwan Semiconductor might be thinking in response. John also discusses Arista Networks wrapping up a strong fiscal year and taking market share from Cisco Systems. (16:00) Now that Valentine’s Day is over, Robert Brokamp and Alison Southwick tackle the top money arguments that couples face and discuss some ways to create more financial harmony in your relationship. What are you doing February 18th? Join us at the "Investing Essentials 2022 & Beyond" event by clicking here: http://2022.fool.com Stocks discussed: TSEM, INTC, TSM, ANET, CSCO, PTON Host: Chris Hill Guests: John Rotonti, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. If you've got a special someone in your life, listening to today's episode is going to help. If you don't have a special someone, listening sure can't hurt. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst John Rotondi. Thanks for being here. John Rotondi. Thanks, Chris. Glad to be back on the show. Today is the one-year anniversary of Pat Gelsinger becoming the CEO at Intel, and he celebrated in the usual way. He spent $5.5 billion to buy Tower Semiconductor. It's a great day for Tower Semiconductor shareholders with that stock up more than 40%. I'm assuming this is a good price since shares of Intel are up slightly as well.

To the broader point though, what does this acquisition tell you about Intel and their their plans for the future? Pat Gelsinger has a plan to turn Intel into a leading third-party semiconductor manufacturing company, or foundry as they're called. He's announced plans to build two massive facilities in Arizona and another two in Ohio. And now he's buying Tower, which is based out of Israel and gives them an international footprint. Altogether, Intel is going to spend about $50 billion in capital, either building or buying manufacturing facilities that they have so far announced. I don't think it's over. I think they're going to continue to build and buy new manufacturing facilities. Intel stock is up about 1%.

Intel is paying all cash for this deal. Interestingly, when a company pays all cash for an acquisition, it shows that they have a high degree of confidence that the deal is going to work out because they're not giving away any ownership. They're not giving away any stock. they want to keep all of the spoils for themselves. That's another reason Intel stock is up today, because they're paying with all cash coming right off their balance sheet. Obviously, when a deal like this is announced, it's not just the immediate shareholders who are paying attention, it is the competitors as well. If you're Taiwan Semiconductor and you see this news, what are you thinking? I don't think Taiwan Semiconductor

that word at this point. The truth is that Intel still is in a very strong financial position, but they underinvested in innovation and technology for the last seven to 10 years. Taiwan Semiconductor during that time was able to surpass them to become the most advanced semiconductor manufacturing company in the world. They have a head start. They are investing between $40 billion and $44 billion in capex just in 2022 in building their own facilities. They're going to invest over $100 billion in building facilities over the next three years combined. Yes, it sounds like Intel is investing a ton of capital, but Taiwan Semiconductor is as well. Let me zoom out a little bit here. You talk about the amount of money that Taiwan

Semiconductor is investing. Gelsinger and his team have this $50 billion plan to build factories. Obviously, the acquisition of Tower Semiconductor is part of that as well. Is this land grab going on, for lack of a better term? Is this an investing opportunity for people like you and me? Because it really seems like it is. I think it is. The portfolio that I run at The Motley Fool for Showdown would suggest that I think it is. I'm invested in semiconductor companies. The fact of the matter is, right now, we have a massive demand and supply imbalance in semiconductors in the world. Demand is strong, very strong, and supply is very short because of a variety of reasons. The truth is, sovereign governments around the world also want

to build semiconductor manufacturing facilities on their own soil because of the supply chain disruptions we've seen. Semiconductors run our modern digital societies. Everything that we do, from cloud computing to electronic medical devices, everything we do, every electronic device has semiconductors in it. These are really important products. They power our modern world. and countries are falling over themselves trying to get more semiconductor manufacturing facility close to home. Let's move on to Arista Networks. Their fourth quarter results surprised Wall Street in a good way. Their revenue guidance for 2022 was pretty modest, although I've said before, I don't know why any company in the current environment would decide to be bold with their

guidance for 2022 and beyond. It just seems like conservative guidance is the way to go for now. Nice to see that Arista Networks is getting some respect in the market, both for the results and for their guidance for 2022. I think you're spot on, Chris. Arista had a fantastic 2021. Their full-year 2021 revenue and earnings per share, both grew about 27%. So this is a company that is still growing at a very attractive rate. Their fourth quarter, so fourth quarter 2021, they finished with revenue growing 27%. So the same rate that they grew for the full year. And their fourth quarter was also 10% sequentially higher growth from their third quarter 2021.

2021. Really strong results from Arista. The growth rate for 2022 is 30%. They could have gone higher, but its supply chain disruptions are actually holding them back. 30% growth, I'll take it. What is the right way to think about Arista Networks as a business? Obviously, it's a networking company, it's right there in the name. I see some people talking about the software part of the business. How do you think about Arista Networks as a standalone business, but also relative to its main competitors? About 78% of their business comes from hardware, and about 20%, 22% of their business does come from software. The software component is growing faster, I believe. But even their

hardware is infused with their proprietary EOS software. It's a combination. They're vertically integrated, kind of a combination, hardware, software. But they sell the switches and routers that basically run the cloud. And so, that's why they have Microsoft as a 15% client. About 15% of their revenue comes from Microsoft, one of the largest hyperscale cloud companies in the world. And Meta, formerly Facebook, is roughly a 10% client, and they're going to be more than a 10% client soon. So, yeah, this is the hardware and software that powers the cloud. Arista is taking share from their largest competitor, which is Cisco. Cisco is still a really good business, it's just growing slower. Arista is growing a lot faster.

They have what industry insiders would suggest is superior technology and superior customer service, because Cisco is doing so many things these days. Cisco is now a technology conglomerate, but Arista is laser-focused on switches and routers and the software to run those things. things. Rightly so, they're a younger company, earlier in their growth cycle, and so they are taking some share from Cisco. Yeah. Cisco Systems is probably the go-to reference point when people start talking about networking. But in a weird way, Arista has quietly become a $40 billion company. To the extent that they were ever under the radar. They probably aren't anymore. What do you think the next two to three years looks

like for this business? Is it similar to what they've been doing the last few years? Growth will probably slow down. If I'm modeling out Arista, I don't model them growing 27% for the next five years. In fact, management has guided. Most companies don't provide long-term guidance. Arista does. They've guided for mid-teens revenue growth through 2025. So mid-teens revenue CAGR, compounded annual growth rate through 2025. So however you interpret that, 13% to 16% or 17%, let's say. So somewhere in that band is probably where Arista will grow over the next five years. But it's also highly profitable. 63%, 64% gross margins, operating margins well above 30%. So it's growing, but also growing very profitably.

Do you think it's at the point where it's no longer a takeover candidate? It's too big at this point. Yeah, it's pretty big at this point. Yeah. I mean, there's maybe one or two companies that would roll the dice and try to spend that much. But yeah, I think they're just going to keep compounding on their own. That's my guess. John Rotonti, great talking to you. Thanks for being here. Thank you, Chris. By the way, John is just one of the many Motley Fool analysts who will be a part of our Investing Essentials Summit on Friday, February 18th. It's an all-day event focused on helping investors like you master your investing mindset, make sense of the current market, and pave the

path to a $1 million portfolio. If you're a member of any Motley Fool service, I hope to see you there. If you're not yet a member and you're interested in getting more details, just go to 2022.Fool.com. You can get 60% off a subscription to our Stock Advisor service just in time to access this event. Again, go to 2022.Fool.com. Now that Valentine's Day is over, Robert Brokamp and Alison Southwick are tackling the top money arguments that couple's face and discuss some ways to create more financial harmony in your relationship. Last week, we covered how to talk to your honey about money by playing the Follywood game. Hopefully, you took some time to have a real heart-to-heart discussion

about your hopes and dreams and money schemes. But it's February 15th and Valentine's Day is over. What if all that fancy dining and whining and moneying means you're waking up with a financial hangover? No worries, fool. Everyone disagrees about money now and then with their partner. Today, we're going to talk about five common money problems couples face and some steps you can take to overcome them together. Bro, does that sound like a plan? Sounds like a great plan, Alison. All right, here we go. The first money struggle we're going to talk about is disagreements about spending. A recent survey conducted by The Ascent. They're a Motley Fool website that reviews financial products like credit cards and discount

brokers. Anyway, they found that 82% of couples have argued overspending. It's not surprising. After all, one of the easiest traps in the world is to judge someone else for how they spend their money while giving yourself a free pass for buying stupid stuff that you value. Value really is the key word here because what we spend money on represents what we personally value. One partner might say, I don't think we really need to buy a jet ski. There's probably a somewhat deeper psychological reason behind why their partner values a jet ski. Maybe they spent their summers on a lake and it was a fun experience they want to relive. Or maybe people who ride jet skis just look really bitchin'. I mean, maybe that's reason enough. So, quick question. Who do you think

spends more, men or women? Bro, did you want to answer this question? Because I know you already know the answer. Well, so I know that there are stereotypes that probably would say that women spend more, but I know that the truth is not so clear. That's right. So while women tend to have the reputation of being frivolous spenders, oh my God, shoes. The answer is that men are actually the bigger spenders. Yes, women spend more money on clothes, but men actually spend way more money on cars, takeout food, and alcohol. What this shows is that men and women have a tendency to place higher value on different things. And by the way, men and women actually spend about the same money on shoes. But of course, same-sex couples also might have very different ideas

about how much money to spend and what to spend it on because much of our relationship of money goes back all the way to our childhoods and is highly influenced by the adults in our lives and how they manage money. So, Bro, what can you do when you and your partner disagree on spending money? Well, I would say, like most things in marriage, it's a mixture of compromise and giving each other some space. So, regarding the latter, it could be a good idea for each partner to have an amount that they could just spend however they want, no judgment or anything. So, I know of couples who handle this even with separate accounts. So, when they get paid, the bulk of the paycheck gets deposited in a joint account, but some money gets deposited in separate accounts

for each spouse. This does two things. It gives each partner a certain amount of freedom and autonomy to do whatever they want, but it also keeps it to a limit. For where to compromise, I think it's important to figure out the pain points. I would say that for most couples, really, they're not arguing about every single expense. It's just a few key categories. Find your common ground, but then find ways to meet in the middle on the categories that are the most contentious. You could literally meet in the middle on some expenses. You could determine, for example, how much each spouse feels should be spent on holiday and birthday gifts, and you split the difference. You could also decide that one partner gets his or her way in

one category, and the other gets his or her way in another category. Or you could alternate who gets the final say. For example, this year, you set the vacation budget, and then next year, I do. I think it's also really important to keep in mind that the more you spend, the less you can save, and that means the longer it'll take to accomplish your financial goals. Back in 2000, when my wife and I were first married, we wrote what we called our Financial Manifesto, which laid out five principles we'd follow when it came to managing money as a couple. We were actually both working at The Motley Fool at the time. We published it on fool.com, so you can actually go still find it and read it if you want.

Looking back on it, I would say one of the more important principles of our manifesto was that we would try to frame our spending in terms of what's more important, buying this thing now are saving more money for the things that are really important to us, like a house, our retirement, our kids' college educations. We actually even kept a little list of our goals in our walls so we'd see them before we spent money on anything. The bottom line here, I think, is that deciding on your joint financial goals can be a big part of getting on the same page when it comes to spending. We're going to talk about goals later on in the show. If you're having disagreements about spending, that could easily lead to keeping

financial secrets. Or the next money struggle, financial infidelity. Oh, such a big term. The previously mentioned survey from The Ascent also showed that 67% of men and 73% of women have committed financial infidelity or being dishonest with their partner about money matters. The most common lies were hiding a purchase price, hiding a purchase that was made, and lying about either a price or a purchase. If you've done any of these things, it's because you feel judged and ashamed, perhaps. Shame takes up a lot of space between you and your partner. Yeah. Financial infidelity is surprisingly common, but that doesn't mean it's okay. A recent survey from creditcards.com found that 42% of respondents feel that financial and physical

infidelity are equally bad, and 11% said that financial infidelity was worse. According to the National Endowment for Financial Education, 76% of people report that financial infidelity has harmed their relationship, and 10% said it led to divorce. It could be a serious issue. As you said, Allison, shame could be a big part of it. According to that creditcards.com survey, 26% of respondents said they hid aspects of their finance because they were embarrassed about the way they handled money. But another issue is that many spouses want just a certain measure of independence. 36% chose to cheat, so to speak, in order to maintain privacy and control. Besides hidden purchases, financial infidelity can include hidden debt or secret accounts.

Author Valerie Rind wrote about how she married a man who said he owned the condo that they shared, but it turns out he was just renting it. She didn't find out until it started being cagey about it. Her dad suggested that she check the public property records. If you suspect something fishy is going on, besides property records, the places to look are credit reports for you and your spouse and your tax returns. See if there are dividends, gains, interest, other sources of income that are being reported that you didn't know about. A couple of other signs are large frequent withdrawals from the ATM that aren't easily explained, or if someone makes a lot of effort to be the first person to get the mail. That said, most financial infidelity is really not

that drastic. It often comes down to just a misunderstanding. Here's how to be more upfront with your finances. You start by setting the rules and deciding how much each partner can spend without the other partner's knowledge. This is also where each spouse having a small mad money account can help. Research suggests it also helps to have a money management routine. According to a study on financial infidelity published in the Journal of Financial Therapy, quote, couples who pay their bills in a less structured manner are more likely than those who had a more established budget and plan to keep a financial secret from their partner. And then I would say, finally, it's crucial to dig into why you or your spouse

feels the need to hide things. As we said last week, issues with money are often really not about money. They're about other things like trust, resentment, shame, maybe a past trauma, maybe even an addiction. And if it's a big problem, it's a good idea to get professional help from a therapist who specializes in couples counseling to get to the real heart of the matter. Our next money struggle is something probably every couple will go through at some point, and that is disagreements about financial goals and priorities. According to Fidelity, 34% of couples disagree on their family's next big savings goal. Any financial planner will tell you that there are some general rules of thumb when it comes to financial goals. For example,

you should probably pay off your credit card debt before you set money aside for that jet ski. That's an easy one. But how do you manage the goals of investing for retirement versus buying a house, going on a family vacation versus saving for your kid's college fund? Well, that's a tricky one. I mean, you can't send your kids to college without them knowing how to ride a jet ski, right? All the other kids are going to laugh at them. So how do you get aligned, not just based on both of your values, but also with what is the smart money move to make? Well, so you're right, Allison. This is an area where there are some generally right answers, but also some wiggle room. So here's what I would say just about every financial professional would

say are the non-negotiable priorities. Pay off high-interest credit card debt, don't accumulate any more high-interest debt, build an emergency fund, get life insurance and an estate plan, especially if you have kids, and save for retirement. But the other things really will depend on what's more important to you as an individual and as a couple. What size house do you buy? Are you going to pay for your kid's college, or do you expect them to at least partially foot the bill, which probably means that they have to take out loans? Do you buy a new car every five years or every 15 years? As for spending, this is a situation where you could choose to be in the middle or have

some give and take. You could say, well, we'll save this much for this goal that's important to you, and we'll save this much for a goal that's important to me. Just like you could have separate spending accounts, you can have separate savings accounts as long as you're upfront about it. Also, I think this is a situation where a fee-only financial planner could really help. You can pay one by the hour to act as an objective third party. She or he will give their expert opinion on how you should order your goals. They're also going to use their professional software to crunch the numbers so you can see how much you need to save for each goal. That brings some reality to the situation, takes some emotion out of the process.

The planner might even come up with solutions you hadn't thought about. All right. Our fourth common point of money contention for couples is disagreement about retirement plans, such as, when are you going to do it and how much money do you need? Retirement can often seem so far away, but failing to plan for it is a fantastic way to being forced to postpone it. There are so many different things to ponder and get aligned on, like, when do you want to retire? According to Fidelity, 48% of couples disagree on this topic. What about where you want to retire or how cushy of a retirement you want? Do you envision drinking Dom on the waterfront in West Palm or Coors in a condo in Cleveland?

Because one of those is going to take more money. And it turns out 51% of couples disagree on how much they need to save for retirement. But I think you can have a jet ski in both locations, right? So how do you get aligned on the when and what of retirement, bro? So when it comes to retirement, you actually don't have to be on the same page, though it does help to be in the same chapter. Research from the early 2000s indicated that about half of couples retire together. The more recent research suggests that the current figure is lower. You don't have to retire at the same time. In fact, when both spouses retire, that can have a potentially negative impact on the wife in a heterosexual couple,

because on average, wives are three years younger than their husbands, but also live three years longer. Retiring sooner means that they'll have fewer resources that have to be stretched over a longer retirement. Then there's just the relationship dynamics of both spouse being home with nothing to do, which gave rise to the saying, I married you for life, but not for lunch. If you can't agree on retirement plans, start by breaking it down to see what you can agree on and what you disagree about. For example, one item of agreement could be, and I'd say should be, that you save at least enough to take full advantage of the employer match in a 401k, if that's available to you. Then, depending on the situation, spouses can chart their own

retirement courses, at least to some degree. Yes, it's certainly better to coordinate resources, Social Security, joint assets, things like that. But retirement accounts like 401ks and IRAs are by law individual accounts, not joint accounts. Spouses do have some rights to retirement accounts in the case of divorce or death. But before then, the account owner pretty much has full control. If you can't agree on retirement goals, each spouse can save at least somewhat according to their own retirement aspirations. And this is also a situation where a good fee-only financial planner could help. I think everyone should consult one every five to 10 years just to make sure their retirement plans are on track. But it would be especially important if the couple can't

agree on how much to save. All right. The fifth and final common source of money conflict that we're going to talk about today for couples is disagreements about investments, particularly how much risk to take. Again, going back to fidelity, 40% of couples disagree on how much risk they are comfortable taking in their investments. I remember a Motley Fool wealth management planner once told us that more than once they had a client who kept secret brokerage accounts from their partners because they think their partner would be uncomfortable with the amount of risk they were taking with their investments. It's like they're sneaking off to Vegas, but instead of going on tilt at the poker table, they're doubling down on

shares of Peloton. I swear one day I'll stop bringing up Peloton, but it's killing me right now. Well, totally understandable with a stock that's down almost 80%. This is also a situation where it might help to get an objective expert opinion. That could be from a financial advisor, but it doesn't have to be, because there are already ways to see how big-name financial services firms think you should invest your money. That is by looking at the allocations of target date retirement funds. As we said in our February 1st episode, these are funds that have an allocation to cash, bonds, and stocks according to a certain year of retirement. It gets gradually more conservative as that

year approaches, reaching around 50% in stocks on average by the actual retirement date. You could also look at the age-based funds found in most 529 college savings plans. For example, Utah's plan is regularly rated as among the best in the country. The funds for kids who are younger than seven are invested 80% in stocks, gradually drops to 50% in stocks for kids who are ages 10 to 12, and then continues to glide down to 0% by the time the kid is 18 and ready to go to college. These are reasonable, moderate risk, plain vanilla allocations. For couples who can't agree on how much risk to take, I think looking to these funds for guidance for the foundation of your portfolio is a pretty good first step. But then you

do have to adjust for your individual risk tolerances. If they're significantly different, then perhaps you could have a good portion of your money invested along the lines of the target retirement or target college funds, but then you each have your separate investment accounts for some of your money. We've covered a lot of contentious ground here. Bro, what's your parting advice to bring couples together when it comes to co-managing money? I actually would like to start by adding a couple of caveats to what we've covered. First, many of the recommendations, such as each person having their own spending and

savings accounts, it really works best for partners who are both working and earning somewhat similar amounts. But if there's a big disparity in income, or if one spouse is staying home to raise the kids, it can get more complicated and a what's mine is mind mentality is just not going to work. You have to consider how much each partner is contributing to the relationship and to the household, and not just in terms of a paycheck. Make sure that everyone feels like they are sharing in the benefits of the person who's working. Secondly, these solutions are for people who have basically reasonable run-of-the-mill disagreements. But for some couples, the troubles

are caused by one or both having a disorder, frankly, like compulsive spending, compulsive gambling, maybe drug or alcohol addictions. And in those cases, you really do need to get professional help. And I would just say, finally, that it's just important to accept that you want to grant everything, because no couple does. It'll never be perfectly equal or perfectly fair, and you just have to accept that. According to Fidelity, 24% of people say they're often frustrated by their partner's money habits, but let it go for the sake of keeping the peace. And in my opinion, that's perfectly fine, as long as the couple has arrived at a consensus on the most important things, and then built in some allowances for individual choices.

All right, listeners, there you have it. Go forth, make money love, not money war. All we are saying is give money love a chance. That's all for today, but coming up tomorrow, America's bestselling drug is about to face new competition. We'll talk about how investors can look at the new wave of biosimilar drugs entering the market and find opportunities. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.