Motley Fool Hidden Gems Investing - Is Nvidia a Vibe Stock?

Episode Date: August 27, 2024

In less than two years one company became the driving force of the S&P 500. That rise is unprecedented. (00:21) Bill Mann and Ricky Mulvey discuss: - Expectations going into Nvidia’s earnings results. - Temu’s owner, PDD, shedding $55 billion in value. - One possible reason why a co-CEO is talking down his company’s stock. - Red Lobster’s new CEO. Then, (15:35) Robert Brokamp interviews Dan Otter and Scott Dauenhauer about the challenges that teachers face while saving for retirement. Learn more about the Range Rover Sport at www.landroverusa.com See how your 403(b) stacks up at www.403bwise.org Companies discussed: NVDA, CSCO, PDD Host: Ricky Mulvey Guests: Bill Mann, Robert Brokamp, Dan Otter, Scott Dauenhauer Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Want to fast-forward your career? Discover the Chang School of Continuing Education at Toronto Metropolitan University. Our programs are the perfect way to boost your success. Visit the Chang School online today. Today's news is cancelled and video reports tomorrow. You're listening to Motley Fool Money. today's news is canceled and video reports tomorrow you're listening to motley fool money i'm ricky mulvey joined today by bill man uh bill i i need to i need to kill some time uh and not a lot to talk about so uh you know what if what have you been up to these past couple weeks is that how we start we're just going to start drawing things up we can turn this into a clip show. There you go. I can, I could show you some cool articles I've been reading and, uh, some,

some different tweets and memes if you like, but no, that's, that seems to be what the market is waiting on, which is Nvidia and CrowdStrike or more so Nvidia. We're going to be covering Nvidia and CrowdStrike on Thursday's show, but Nvidia is really kind of driving the market right now. So I thought it'd be good to sort of, you know, get some mindset ready because this is just expectation. So what are some scenarios that investors should be ready for, you think, on Wednesday afternoon? I like the fact that you're setting up NVIDIA, a $3 trillion company, as a vibe stock. Is it? Well, let's put some structure around what NVIDIA is and what it does. And not that this is a

particularly useful measure in terms of assessing an investment. But in the S&P 500, which oddly enough has 505 different stocks in it, NVIDIA is only the 42nd largest company by revenue. Its revenues are less than a quarter of those of a company called Sincora, which I guarantee has never been brought up in this show, which is the 205th largest company in the S&P by market cap. So, NVIDIA is the dominant provider of the chips that are needed to operate artificial intelligence, and that's prompted massive buying of its products at high prices and big profit margins. So, I mean, it's a great success story. But in terms of multiples of earnings, it isn't all that expensive. But they do have a relatively small revenue base, and they sell

products with a huge ticket price, and their customers are in an arms race, and so they have an incentive to hoard in support of an industry that has done nothing so far but incinerate capital. And chip makers, or chip designers incinerate capital. I'm talking about AI. And it's 6% of the total stock market by valuation. Its four largest companies, its customers are Microsoft, Meta, Alphabet, and Amazon. So, everything that NVIDIA sells, some other company within the S&P 500 is buying. I don't want to paint a terrifying picture, but it is fairly unprecedented. In fact, by fairly unprecedented, I mean absolutely unprecedented

that a company has gone from being one of the largest companies in the world and 10x'd in a year. So yeah, there's a lot riding on the report for NVIDIA tomorrow, but underneath what is riding on it, there's not a whole lot of there there from a commerce perspective. So maybe it is vibes. That's what we got back to. I think there are a few things that could happen. One is that NVIDIA has the best house on the block with its Blackwell chips and sales continue to boom beyond analyst expectations and the party keeps going. And then there's another side of this, which you mentioned, AI is incinerating capital. CFOs may be wondering, hey, when are we getting some of that return on our spend? Expectations change a little bit for

NVIDIA and then the market maybe catches a cold. My point with this is that I'm not making a prediction. I'm not going out here on CNBC, Bill Mann, and saying, this is my unique perspective on NVIDIA. But I think there are multiple scenarios in which things go really, really well, things go poorly, at least in the short term. And I think it's good for investors to be ready for both of those. John Authors pointing out in his Bloomberg column, basically, quote, since ChatGPT launched in November of 2022, NVIDIA's market cap has risen by more than $3 trillion. There is no precedent for a company rising so quickly to become this much of a weight in the S&P 500. Do you think this is meaningful when we think about the life cycle of companies

and there's the Jimmy Cliff song, the harder they come, the harder they fall. There's a part of my brain that thinks that has to be true with this quick rise. Do you expect a shorter life cycle for a company like NVIDIA? You know, I don't. A lot of people have tied in an equivalence of NVIDIA with what Cisco was in the early 2000s, when it was basically the equipment maker for the stars. Every company that wanted to be on the internet or part of surfing the worldwide web needed to have Cisco equipment. And I think that that is somewhat true of NVIDIA today. What we're talking about here is that the overall influence on the stock market from NVIDIA's report tomorrow comes from a relatively teeny slice of revenues. It's not a huge part of the U.S. economy.

It's not a huge part of the global economy, but it's being painted as it's going to be incredibly important. Just like you, I happen to think it is and it will be, but I don't think that it will develop in the same way or in the same speed in which people think. You're already seeing from its largest customers, the hyperscalers, questions being asked by their shareholders about why they're spending so much money. Let's move on to, uh, the owner of Timu pin duo do had a, had a rough day, the Chinese e-commerce firm slash what it's an agricultural SAS platform, which I didn't know it shed $55 billion in market cap or 29% of the company. Take your pick. This had to do with the sales outlook. So, uh, for, for Timu, when we're

talking about it, are we talking about an e-commerce platform? Are we talking about software for farmers? What are we talking about, Bill? Soybeans as a service, I think maybe that's what their SaaS stands for. Yeah, I mean, Pinduoduo, and the company is now called PDD, and it's actually organized in Dublin, but it is in all ways a Chinese-dominated company. It's a multinational commerce group, but Timu, which advertises everywhere, I mean, the memes that have come out about where Timu ads have shown up are absolutely legendary. Pinduoduo has been, I guess, what you might describe over the last three to five years as the Chinese success story as Alibaba has taken a step back and JD.com has taken a step back.

Timu is by far the largest component of it. Their earnings report was great. I mean, their revenue grew 86%, their operating profit grew 156%, but they couldn't get out of their own ways to talk about the ways in which the company was going to struggle over the next year or so. We heard a lot. The word of the call was inevitable in terms of struggling and competition. I don't know if co-CEO Lee Chen recently watched Avengers Endgame, but I was getting some Thanos vibes quote as shown in this quarter's results, high revenue growth is not sustainable and a downward trend in profitability. Inevitable. You, you usually think of CEOs in terms of, uh, you know, are, are things really as bright as the CEO is painting? But in this case,

it's man, are things really this bad for team? What's going on, Bill? I'm trying to think whether inevitable is a word that you ever want to hear in an earnings call. yeah right something's being inflicted upon us if we can get into the conspiracy theory part of the show let's go i i think in some ways uh lee chen and the owners and the managers at pin are a little bit worried about walking the same path that uh that that alibaba walked a few years ago and jack ma uh who came off seeming maybe a little bit too powerful within the context of the People's Republic of China. So, I think in some ways that they were maybe laying the path that this is still a company that is struggling a little bit. So, in which case, they have managed

to talk down their stock an extraordinary amount. And now, actually, it's cheaper than JD.com or Alibaba on a price-to-earnings basis. So, pretty extraordinary for a company that's grown that fast now let's step back from the uh conspiracy theory just a moment this is not to say that they are not telling the truth about the inevitability of the slow of slowing of revenues there were some writers talking about how this says something about the the economy in china which is uh consumer spending tightening up a little bit and um you know normally when we see consumer spending slowing in the United States for a company like I'll use TJ Maxx, which is for the purposes of this discussion I'm using as a comp bill, but it's, it's a treasure hunt in a bargain. Now

shopping at TJ Maxx, lovely experience. Shopping on the Timu website is one of the most frustrating things you can do on the internet. Okay. Treasure hunt, bargain shopping. You know, does this say anything about the economy in China? You think is there, is there a macro story worth looking at here. I'm not sure that I would put a whole lot of weight on the quarterly results or the quarterly comments, because after all, 86% more people went through the frustration of dealing with the Timu website this quarter than they did the same quarter a year ago. But we know for a fact that the Chinese growth story is broken at this point. So there are huge issues in China. I think what we're seeing from Pinduoduo now is they're taking market share from other competitors.

I have a conspiracy theory that Timu is actually just run by a cat because a lot of the products on their bill is just like small, shiny things that don't seem to be effective, but are like good at capturing someone's attention. Well, they certainly captured your attention, which may be the point. You may be being tracked by them in a very bizarre way. And I have no questions. I can't even see the best sellers on Timu without giving them my email address and doing a puzzle piece. They want me to do a puzzle piece and give them personal information to just see what's selling on your website. Cool. Let's go to Red Lobster. There's so many questions. This is the story I actually want to talk to you about, which is that Red Lobster

has a new CEO. Damola Adelaikum is previously the leader of PF Changs. He's now the sixth CEO of Red Lobster since 2020. First CEO in a while without tie union there. So first, let's set the table. What is Mr. Adelaikum walking into at Red Lobster as the new leader? Well, he's walking into a really fantastic brand that has lost a bunch of shine over the last couple of years. And we have talked and we've joked a little bit about how the endless shrimp deal tanked Red Lobster, it bears remembering that over the year prior to Red Lobster going bankrupt, their guest count was down 30%. So, there are a myriad problems at Red Lobster. They've just announced the closing of 23 additional stores, including one in Peoria,

Illinois. So, next time you're in Peoria, you're going to have to look for someplace else to get your cheddar biscuits i think ultimately when you have a brand that is that still resonates that the way that red lobsters does you do have the potential to hit the reset button a little bit they have announced to get back to the endless shrimp that that's not what they're doing anymore they have a new value shrimp strategy but yeah he's got his work cut out from him from for him from an operating standpoint as well. Yeah. There's a lot of debt on the Red Lobster balance sheet. Also a lot of sale leasebacks where they're going to sell the land in which the restaurant is located and then just pay rent forever, which gets some cash onto the

balance sheet. I think of it as a move that gives you a little bit of oxygen if you're in that sort of crisis. But the new owner for Red Lobster is a company called Fortress Credit, which is a private equity outfit, got Red Lobster in a deal around $375 million. This was the only bidder for the company. When you look at this, when you look at the difficulty here of the turnaround story, what is the bet that this company is making, these investors are making? They have a dent and scratch asset on their hands. This is not a company that is a long-term owner of Red Lobster, I would almost guarantee they're going to try and get it shined up, get some of those dents removed, maybe roll back the odometer a little bit and try and

sell a stabilized company. And I say that by virtue of the magic word within the middle of that name, which was credit. Credit companies and credit investors are not operators. They are looking at this as a way of taking an asset that they were able to get at pennies on the dollar and turning it to more pennies on the dollar and then having someone else over the long term operate Red Lobster. Because keep in mind, it is still a very, very hard environment for casual restaurants to operating. This is a hard operating environment. So that's not what they are looking they are looking to flip assassin found some cigar butts at the seafood restaurant bill man appreciate you being here thank you for your time and your insight thanks so much

all right up next some financial advice for teachers as we get the new school year started Dan Otter is the founder of 403bwise.org, a not-for-profit website dedicated to educating teachers about retirement plans. And Scott Danhauer is a certified financial planner and the author of Wild West, providing fiduciary advice to public school employees. They joined my colleague Robert Brokamp for a discussion about how teachers save in one account that they may want to open. So Dan, you and I have known each other for more than 20 years. Both of us are ex-teachers and know what it's like to try to learn about planning for your retirement as a teacher.

And we bonded many years ago about the challenges and frankly, how the insurance industry and many others in the financial service industry are really trying to rip off teachers. So tell us little bit about 403bwise.org and how it's a nonprofit that is really dedicated to educating teachers about saving for retirement. Sure. Robert, my first year teaching, I was probably third month on the job. The kids had left for the day. There's a knock at my door and a woman pokes her head into my classroom and I'll never forget what she said. She said, do you care about your financial future? I think there's only one answer and that is yes. So she took that as an invitation to come into my room and try to sell me these high-cost products.

I patiently listened. I had no idea what she was talking about. I had some vague notion of a pension. She finally said, look, if you're interested, why don't you get back to me? Thankfully, I never did. But as I began to self-educate myself, I learned that this was a problem not just at my school, not just at my school district or my state, but this was a national problem. So it made me mad. So in 2000, I launched 403BWISE, and the whole goal of the website is education and advocacy. In 2016, the New York Times did a series of articles on the problems with the K-12-403B. Scott and myself aided these reporters. And to our great fortune, a phenomenal philanthropist named Tim Ranzetta out of Palo Alto, California, read those articles

and reached out to us and said, I am horrified to hear how teachers are being treated. Have you ever thought about turning this into a nonprofit? And my joke was, well, it's always been a nonprofit. We've never really made money on it. So he said, I can help you with this. So we met with him and thanks to his generous support, I left my job teaching and working at a university to run 403bwise.org full-time, and this was five years ago, we sell nothing. Everything we do is free. All of our content, we do free one-hour Zoom sessions on the 403b and 457b for any school district in the country that wants us to do that. And Scott and I are closing in on probably at least 100 we've done in the past couple of years. 403bs are often described as sort of like 401ks

for nonprofits. But it can actually be more complicated than that. Saving for retirement in a 403B can be particularly challenging for people who work for public school systems. Dan, why is that? The K-12 403B is quite simply an inferior retirement plan for one simple reason, Robert. It doesn't enjoy the same fiduciary protections as the 401K. This means that school districts aren't required to offer quality, low-cost products. And surprise, surprise, wouldn't you know it? Most don't. So, too many educators are stuck with multi-vendor plans stuffed with high-cost companies sold by sales agents who troll schools in teacher email inboxes. Additionally, school districts rarely educate

employees about the 403B. And even worse, too many of them leave the education, quote-unquote, to the sales agents. When you say multiple vendors, I think people who work for companies with 401ks, they might find this surprising. But if you work for a company with a 401k, you just have one 401k. It's from Schwab or Vanguard or Fidelity. That's it. But you're saying that in many of these districts, you have 40 to 50 choices, not of mutual funds, but the actual company running the plan. And then you got to choose that plan and then choose the mutual funds. Exactly. If you teach in the school district where I live in Redlands, California, Robert, you have 38 different companies, and

35 of them are high-cost, each one selling maybe dozens and dozens of products. Robert Brokamp. Let's discuss some ways that teachers can start off the new school year by making the most of their retirement accounts, starting with, see if you have a good 403B or a good choice of 403Bs. Robert Brokamp. Yeah, that's really the issue. Do you have the choice of a good 403B. And for years, educators asked us, they came to us and like, how do we know if we have a good plan? How do we know if we have a good option within our plan? And we kind of didn't know what to tell them without seeing their plan. So, we actually decided to create a couple tools to assist educators in figuring out, one, do they have a good plan? And two,

are, you know, how do they choose within that plan? So we came up with what we call the school district ratings tool, and it's available at 403bwise.org, actually built into our homepage. You can literally click the dropdown and put in your state and then find your school district. Now we've collected a little over 5,000 school districts in our database. And I realized that that doesn't cover, I think there's something like 14,000 school districts, but we have the overwhelming majority of the population of school teachers or school districts that teachers are in. So there's a good chance that your school district is going to be in there. And if it's not, we'll give you some resources to help us get that information in there. So once you do that,

you're going to see a list of the vendors that are available in your school district. As Dan said, it might be as long as 38 or it could be fairly short and we give you a grade an a b c d f grade i'll get into kind of how that works in just a moment but the way that we create those grades is we actually take a look at the individual vendors that are available and we rate those based on the traffic light system we wanted to make this as simple as possible if you're driving you come to a traffic light, you see a green light, green means go. If you have a green vendor in your school district, you're good to go. You should use one of those green vendors. Hopefully you have more than one green vendor, but if you have a green vendor, we have looked at these

vendors and we have rated them as high quality. That generally means low in cost. You don't have to pay excessive fees. There's nothing that's going to some intermediary. So green means go. Now, there are some vendors that kind of fall in the middle, and when you come to a yellow light, I know the conventional wisdom is that you should speed through it, but really you're supposed to proceed with caution. So if you don't have any green vendors, but you have a yellow vendor or a few yellow vendors, that might be an option to consider, but you do need to proceed with caution because sometimes they're a little more expensive or perhaps they've had regulatory issues. they might be associated with a red vendor. But it still might be an option to consider,

what's a red vendor? Well, when you come to a red light, you are supposed to stop. And if you have a red vendor, if you're already contributing to a 403B and you find that your vendor is in our red list, we think you should stop and reconsider whether your money should be going to that vendor. Generally, that means you're in a high-cost plan that forces you to use an intermediary. We don't think that's the best of ideas. That's where you should really start. Try to find your vendor list through our tool. If it's there, look for a green vendor. And we actually put a check mark next to the green vendors. Some of those vendors would be Aspire in California, CalSTRS, Nationally, Fidelity, and Vanguard, and Aspire are the

biggest green vendors. T. Rowe Price is also a green vendor. So, when you take a look at all that, we've actually graded over 5,000 school districts. And what's shocking to me, Robert, is that 40%, over 40% get a D or an F. And what that really means is they don't have any green vendors. 40% of school districts don't have even one green vendor. We rate only 4% of school districts with an A or a B. Those are the school districts who have really decided to take control of their 403B plans and make them high quality. The rest get Cs. Luckily, about 60% get Cs. And While that sounds terrible, what a teacher wants to be in a C, the good news is, it means it has at least one green vendor.

The problem is, most people aren't in that green vendor. They're in the yellow and the red vendors. We want to get them into the green vendors. But it's not bad news when you see a C next to your school district. What it means is, you have the opportunity to put your money with a really good vendor. The question is, are you going to take advantage of that opportunity? So, if you don't have a grade 403B, one account you may want to consider is opening a Roth IRA. Yeah. In many ways, you can make the argument that this should be step one.

We frankly think that all teachers should have a Roth IRA. There are so many upsides to this plan. It's easy to open. You get to choose any financial company you want. You want Vanguard, you can get Vanguard. You want Fidelity, you can get Fidelity. Plus, a Roth IRA isn't tied to your employer. So, if you change employers or you leave education, there's nothing to roll over. Finally, while you'll contribute on an after-tax basis, you'll pay no taxes upon withdrawal and retirement. Let me repeat that. You will pay no taxes upon withdrawal and retirement. So, we just think that every teacher should actually begin with opening a Roth IRA. I'll point out that a lot of people will say, well, the first thing you should do before you

will contribute to an IRA is get your company match from your employer. But the truth is, the vast majority of 403Bs do not offer a match, correct? Yeah. In the K-12, 403B world, yes. We've heard of maybe a handful of school districts, but they are the outliers. 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.