Motley Fool Hidden Gems Investing - Is The Stock Market In Bubble Territory?

Episode Date: July 16, 2025

Valuations are stretched, but is it a bubble. And we discuss the latest AI and energy news, ASML’s earnings, and a surprising report from Johnson & Johnson. (00:21) Travis Hoium, Lou Whiteman, and Rachel Warren discuss: - Is the market in a bubble? - Google’s $25 billion data center and energy deals - Earnings takeaways from ASML and J&J - Bold predictions this earnings season Companies discussed: Brookfield Asset Management (BAM), Brookfield Renewable Partners (BEP), Johnson & Johnson (JNJ), Alphabet (GOOG, GOOGL), ASML (ASML), Palantir (PLTR), Robinhood (HOOD), Cloudflare (NET) Host: Travis Hoium Guests: Lou Whiteman, Rachel Warren Engineers: Dan Boyd, Natasha Hall   Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

is a market bubble farming right under our noses motley fool money starts i'm travis hoy i'm joined by longtime fools lou the legend whiteman and from an undisclosed location somewhere in Europe, Rachel Warren. Today, we're going to get to ASML and Johnson & Johnson's earnings results, which came in overnight. Google's $25 billion energy deal. But first, are we in a market bubble? Lou, I remember Cloudflare trading for 100 times sales at the peak of the market in 2021. The stock then fell 80% in six months. Today, Palantir is trading for 110 times sales. The stock is over $150 per share. Robinhood, 25 times sales at $100 per share. It looks like a bubble. It feels a little like a bubble. Are we in a bubble?

Look, Travis, there's always a bubble somewhere, right? And yeah, valuations, they look stretched. My go-to stat here is the S&P 500 is currently trading at 25 times earnings. That's well above the 20-year average, about 16 times earnings. So, yeah, that's frothy. And I do think you need to keep that in mind. For example, I think Hidden Gems just sold down some of its position in Arista Networks based on high valuation. So, you keep that in mind. But here's the thing. Markets can remain at high valuations for a long time. So, I'm not running for the exits. I'm being selective. I'm looking for opportunities out there in areas like financial services and income stocks. So I'm keeping it in mind. I'm adjusting as we go, but I also want to stay in the market.

You know, I don't think I would say that we are in a stock market bubble, but I do think it's an important point to discuss. I mean, right, we're looking at valuations of a lot of tech companies right now in particular. I think it's easy to be concerned that there might be a bubble forming. We've heard a lot of analysts make comparisons to the dot-com boom, of course. There's a lot of excitement that we're seeing in the tech space in particular right now. This is being really driven by the AI revolution, whether it's data center companies, chip companies, software-based platforms like Palantir, as you mentioned, that are boosting their business with AI-driven services. This is where so much of the market seems to be focused. And it's also a time

where a lot of the modern pace of innovation is tracing back to right now. I mean, you look at a company like Robinhood. You've got the broader resurgence of interest in crypto that's benefited the platform. It's expansion into Europe, stock tokenization, crypto futures. Those are just a few catalysts there. So I will say, I think it creates a situation where many valuations are heightened, probably in some cases for more than a given company's intrinsic worth. But I don't think that that valuation dynamic is true across the board. I think you can look at other industries where valuations are much more reasonable, you know, find quality, accessible businesses. So for that reason, I don't think we're in a broad stock market bubble. But are valuations too high

in some cases? I think that's absolutely the case. I think it's more important than ever for investors to be discerning when evaluating the intrinsic worth of companies, making sure it's the right fit for their personal portfolio, thinking about where's your money going? What is the true monetizable business here? Does it have those really durable value-driven tailwinds for companies' growth? I think those are the questions that we have to ask ourselves as investors. Sounds like the final answer is we're probably in a bubble somewhere. We just don't know exactly where it is. I want to get to one of the companies that's involved in potentially inflating bubbles that is google and their latest ai news we'll do that after a quick break

speaking of and what better way than with a delicious pret organic coffee starting at just one dollar all day every day now until december 31st At participating A&W locations in Ontario. Potential bubbles, let's turn to artificial intelligence. And Google announced $25 billion in data center and energy deals in the PJM, which manages electricity across 13 straits from New Jersey to North Carolina, all the way over to Chicago. This comes on the heels of energy's biggest inflation numbers in quite a while. 5.8% increase in electricity prices over the past 12 months. That was reported just yesterday.

AI is an energy hog. We know that, Rachel, utilities have been a boring way to make money for decades, 1%, 2%, 3% growth. But does the recent change in artificial intelligence and the energy needs there, does that change anything? Does that change the way that you look at the utility space in any way? I mean, for me personally, I wouldn't say that this changes the trajectory of my personal investing interests in the energy space. I will say it's not a space I've personally gravitated towards. There are, you know, plenty of fellow fools who do. But if anything, as an Alphabet investor, this makes me more excited about the investments this company is making that I think can really help cement its continued leadership

and strides in the AI space. You know, in addition to that $25 billion data center and AI infrastructure investment. Google's also spending about $3 billion to modernize two hydropower plants in Pennsylvania. And that's designed to facilitate the power demand from AI and data centers in the area. You know, one thing to bear in mind, PGM is the biggest electric grid in the nation. Its coverage area includes the world's largest data center market that's located in Northern Virginia. And we're at a time where PGM and other providers are really struggling to keep up with rising electricity demand amidst the AI boom. You know, AI training, particularly for large language models and generative AI. It's incredibly energy intensive. A single generative AI query can

require almost 10 times more electricity than a traditional internet search. And data centers are already consuming a notable percentage of the nation's electricity. And unlike some other energy demands that can fluctuate, AI really requires continuous operation. That means you need a constant power supply. That really strains existing grid capacity. There was a meeting that just happened yesterday at Carnegie Mellon in Pittsburgh. We have, you know, the president, his cabinet, executives from a range of companies, including Alphabet were there. There was a report that the companies there, including, of course, Alphabet's Google, announced a combined total of $90 billion investments in data centers, energy, and power infrastructure. You know, from my

perspective, that's the cost of doing business for these major AI providers. But, you know, if you are interested in the energy space, I think it creates some nice tailwinds there. Yeah. Lou, of course, Rachel mentioned the hydroelectric plants. And of course, Brookfield Asset Management was involved. They are the company that's behind a lot of electricity generation, not only in the U.S., but around the world, a lot of renewable energy. Is the investing takeaway here as simple as AI is a tide that is lifting all of these utility boats, and maybe we're going to lose the consumer overboard? Or what are you taking away from this? So, no, my investment takeaway is not buy the utilities. I'm not there yet. But the

investment takeaway for me is, you said it, Travis, it's Brookfield. It's always Brookfield or something like that. Look, I think demand for energy, that trend is real. It's a long-term tailwind. But I don't want to invest in individual utilities. I don't like to pick winners among geographies or projects. My way to take advantage of this trend is to buy into a company making investments all over the sector, giving me broad exposure instead of just an company. Look at Brookfield Renewable Partners case. That's the actual entity that Google's partnering with here. Brookfield Renewable is going to bring on 8,000 megawatts of capacity in 2025 alone. Personally, I'm going to take my chances getting that broad exposure instead of

focusing on any one individual company and hoping that they kind of ride the wave as well. I think that's probably a smart way to look at it. And you get a nice dividend yield with a lot of those asset owners as well. Next up, we're going to talk about two of the big earnings reports of the day. We'll do that after this break. day every day now until december 31st you gotta try breakfast at a and w at participating a and w locations in ontario asml which makes critical equipment for making chips all the artificial intelligence chips the chips that's probably in your smartphone today this equipment costs as much as 400 million dollars for a single piece of equipment they reported earnings overnight

beat on the top and bottom line with 7.7 billion euros in revenue and 590 euros per share in earnings. But the stock is down 10% today because they were a little cautious about 2026, saying they couldn't confirm it was going to be a growth year. Lou, what are you taking away from this earnings report? So worth saying that, like you say, these are really, really expensive machines, even in the best of times. This is a company that's tough to judge quarter to quarter. You miss one delivery and it can throw off the quarter. So you're going to have lumpy. you throw in tariffs, trade wars, chip restrictions to China, and I understand the caution. But I'm going to note here, CFO Roger Dason attributed to this beat, this last quarter's

beat, to tariffs having a, quote, less negative impact than they anticipated. I think there's a real chance this trend can continue where the uncertainty is there, but it turns out not as bad as they thought because there's just so much demand out there. And if so, I think growth in 2026 can eventually be put back on the table. Whether it comes or not for long-term individual investors, the underlying growth story here, the need for more and more advanced chips and therefore the need for more of the machines that can make them, that's unchanged. I think Wall Street is overreacting today. I think this is still a great company with a great future up ahead. What's interesting about this, Abida, as you noted, Travis, ASML, they beat on both the top

and bottom line expectations. And this was for their fiscal second quarter. Now, they gave guidance for the current quarter that missed expectations. And they have warned that there might be the possibility of no growth in 2026. But it's not maybe quite as bad as it appears at first glance. So they forecast Q3 revenue of between 7.4 billion euros and 7.9 billion euros at the upper end of that tier. That was really just shy of market expectations of about 8.3 billion euros for Q3. But, you know, taking a broader, more holistic look here, there are a lot of companies in the semiconductor industry that are facing similar headwinds as ASML is right now. There's a lot of uncertainty that's been created by US tariff policy that remains

the case. It's worth noting management still expects their full year 2025 net sales to grow 15%. And they said that their AI customers fundamentals are still looking really strong. If anything, management emphasized the continued uncertainty that's driven by macro headwinds. And that's a dynamic that competitors are contending with too. They're preparing for growth in 2026. But the reality that they and other adjacent players are facing right now are many ways. It goes back to external factors that they can't control. In my opinion, you've still got a quality business here. I think investors might need to moderate expectations if macro headwinds shift in the short term.

But I think the company is well positioned to ride those out. Johnson & Johnson was the other big earnings report this morning. The stock's up 6% as we're recording. Rachel, this was another double beat. They said they don't need to do deals out of desperation despite a patent cliff. What were your takeaways from the report? Yeah, you know, it was really a fantastic quarter for the business. And as you noted, a beat on both the top and bottom lines.

You know, they reported $23.7 billion in revenue. That beat estimates of $22.8 billion adjusted earnings per share of $2.77. That was compared to analyst estimates of $2.70. And that came with raised guidance for the year as well, up 5.4% at the midpoint. You know, we had the chairman and CEO of the company say that their portfolio and pipeline is really positioning them for elevated growth in the second half of the year with game-changing approvals and submissions in key disease verticals, including oncology, psoriasis, surgery, and cardiovascular. And they're looking to extend that as the year progresses. You know, broken down by segment, their innovative medicine segment, which is essentially their pharmaceutical business, grew 4.5% year over year. Their medical device business saw sales climb more than 7%.

Those are fantastic figures for a company of this level of maturity. And this is a business that I will note has been acquisitive in recent years. And that goes back to everything from their acquisition of Abiomed several years ago, where they acquired the world's smallest heart pump from that acquisition. They recently closed the purchase of intracellular therapies that really solidified their neuroscience portfolio. And one important thing to note, and this was something that CFO Joe Woke addressed in a recent interview, they are facing patent pressures, particularly on some of their key older blockbuster drugs like Stelara. That's been a $10 billion plus drug annually in recent years. But management thinks that really the expected gap in revenue from the generic competition is not going to have a noticeable impact on the company and that they're really well positioned to ride that out. Broadly speaking, going back to these recent acquisitions and their continued internal development pipeline. I will also say that management noted a revision in the impact of tariffs to $200 million. That was versus the $400 million that they were previously projecting. Now, there's still a lot of uncertainty about drug tariffs that is lingering.

And something that their CFO said is we're still really waiting to see what the administration shares in that regard. And we're in an environment, of course, where there's a ton of uncertainty regarding tariffs and other cost pressures for businesses like this one. I will say, this is one of the most well-bolstered companies in the pharma industry from a cash perspective. They're well-positioned to handle any headwinds that might come. They have an extensive domestic manufacturing presence that they also are looking to expand. This is also a company that has been paying and raising their dividend every single year for over six decades. It's a great company, in my opinion. To end the show, I do want to get bold with some predictions here.

Now, we are long-term investors, so a one-day drop in a stock is maybe not that big a deal. It might even be an opportunity. So, ASML is one of these companies, Widemote, down after earnings, maybe an opportunity for those long-term investors. Now, I'm thinking about opportunities like Netflix in the quickster days, Meta's drop when it was getting fit in 2022. What are the stocks that you're looking for as potential buy-the-dip stocks as we go through earnings seasons, and maybe we have some short-term turbulence. Lou, let's start with you.

So the first name that comes to my mind is MercadoLibre, in part because, look, given the markets, given the South American exposure, the wide range of businesses, there does tend to be volatility. There does tend to be dips. And so I think there could be opportunities. And look, for all of the growth that this company has delivered, crazy to think about, it's what, maybe 1 20th the size of Amazon. It's a current position for me, and it's constantly on my radar. You know, one business I've really been looking at recently is Toast.

This has been a really intriguing company to follow, particularly for me over the last 12 to 18 months. They really continue to expand the cohort of clients that they're onboarding to their platform. They just booked Applebee's, which was their largest deal in company history. They added over 6,000 net new locations just in Q1 of 2025 alone.

And they reached an annual recurring run rate that grew 31% year over year to about 1.7 billion as of the end of March. It's a really, really sticky business. It resonates with a lot of small, medium-sized restaurant chains, but also some of these larger companies that are starting to see the value in Toast's platform. And they're looking outside the restaurant space too. Convenience stores, companies like Topgolf are more recent partners for them. I think there's a lot to like about this business. I'm also quite impressed by their more recent profitability. It's one that I'd be

curious to take a closer look at. They happen to go down in the market. Thank you to Lou and to Rachel for joining me today. As always, people on the program may have interests in the stocks that they talk about in 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 guidelines and is not approved by advertisers. Our sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check our show notes. For Lou Whiteman and Rachel Warren and the entire Motley Fool team, I'm Travis Hoyum. We'll see you tomorrow.