Motley Fool Hidden Gems Investing - Jensen Huang's AI Capex Pulse Check

Starting point is 00:00:00 John Quaston. NVIDIA's CEO just startled investors. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host today, John Quaston, and I'm joined by guests Jason Hall and Matt Frankel, all subbing in for the regulars today. But we want to go ahead and quickly get to the biggest news of the week, and that was NVIDIA, a more than $5 trillion company, reporting its financial results on Wednesday afternoon. And for me, this was as much as a macroeconomic pulse check of as much as anything. NVIDIA CEO Jensen Wang coming out and saying that CapEx spending for AI is expected to continue to go up. If you look at 2025, in the top five hyperscalers, so these are big businesses such as Google,

Starting point is 00:00:56 and Meta, these companies spending roughly $500 billion in CapEx in 2025. For this year, looking at around $800 billion, and some of these companies are starting to go free cash flow negative. And so you start to think maybe we're reaching a peak with AI CapEx. But Jensen Wang saying $1.3 trillion is what he expects to be spent next year just by the top five. That's a 60% year-over-year jump if we take these assumptions. Matt, you're kind of pointing out here that NVIDIA, if anyone has a pulse on what is happening, I mean, it's really kind of coordinating everything. Yeah. Jensen Huang, one of my favorite things about him as a CEO is he's not trying to deliver the best quarterly results. They are delivering the best quarterly results,

Starting point is 00:01:45 but that's not his primary focus. He really wants to shepherd the AI build-out. What I mean by that is, think of all, and we've talked on other shows about the circular deals and things like that going on in AI. NVIDIA is really at the center of it all. They're investing in all the frontier AI labs. They have financing partnerships with Apollo, BlackRock, Blackstone, Brookfield, Goldman, KKR, to raise over $500 billion of third-party capital to really just invest in all of the little bits and pieces of what's going on. So there is some circular financing, and I have an issue with how that's being reported as sales growth. If I pay Jason $100 to teach me something and he gives me the $100 to teach him something, did we each really make

Starting point is 00:02:36 $100? No. And according to Gap Accounting, that would be $200 in revenue by those combined entities, even though it was just $100 getting passed back and forth. And that's what we're seeing in the AI space right now. But at the same time, that does help both of us establish our business, do the research we need. And there is some tangible benefit to that. So NVIDIA is really leading all that and and it's a really interesting dynamic but they're it's not just about this quarter they're really driving that 1.3 trillion dollar build out all by them not all by themselves but they're they're helping to drive that i think it's important to note that even somebody like jensen wong probably doesn't really know exactly how this cycle is going to to play out they're

Starting point is 00:03:22 going to get information sooner they know what their sales rates are they know what the order looking like are coming in. And they know how quickly their partners like Taiwan Semi can actually do the manufacturing. But I think Wong is really leaning into the optimism and the numbers back it up, right? Even if there is a certain degree of hype. But the part of the story that may not be getting enough attention isn't that Alphabet and Meta recently and Oracle before that have flipped over to generating negative free cash. It's that they're doing it even as they're core businesses just continue to pump out gobs and gobs of positive operating cash. Here's a crazy number. Over the past four quarters, Meta, Alphabet, Amazon, Microsoft,

Starting point is 00:04:08 and Oracle, those are the top five hyperscalers, they've generated almost $700 billion in operating cash flow. So maybe with that context, that big CapEx number we're talking about isn't really as scary as it seems. And of course, the difference between the operating cash flow and the free cash flow. The operating cash flow is what the business is producing. And the free cash flow reflects what it is investing in infrastructure, what we're talking about right here. So that's really the delta that we're highlighting. But I just want to talk a little bit here. It seems like investors have kind of lowered expectations here because you look at a business of NVIDIA scale growing 100% year over year, trading at only 24 times its forward earnings.

Starting point is 00:04:53 Matt, what are investors a little bit pessimistic about here, perhaps? Well, it's not that they're pessimistic. It's at some point the numbers just get too big. It's the same reason why Warren Buffett said Berkshire Hathaway's next 50 years aren't going to be as good as its first 50 years. It's because the math just doesn't work for 20% annualized returns for that long from a $1 trillion base. And the same thing kind of applies here. Either growth, pricing power, or both will have to give at some point. 106% growth year over year in this latest quarter. They're projecting 70% growth next year. That was a big positive surprise. But 70% from 106 is still a deceleration, it's worth pointing out. The market is pricing

Starting point is 00:05:40 that in. It's not going to grow by 70% next year, then another 70% next year, and so on and so on. at some point it would exceed U.S. GDP within a few years at that rate. So it can't happen forever. And that's what the market's really pricing in. So it's really tough to evaluate NVIDIA on traditional metrics like forward PE ratios, because at some point it's going to have to hit a threshold. Well, let's turn a little bit now to another semiconductor company that, by the way, speaking of Jensen Wang, he's spoken very highly about this company called Marvell, ticker symbol MRVL. This is a roughly $200 billion company. Wong says it could be worth a trillion someday, but this stock reporting, and the big thing here is not that it reported 37% growth for the quarter,

Starting point is 00:06:26 even though it did. For next year, it's looking to grow. It raised its guidance from 45% growth to 50% growth, so an acceleration into the rest of this year and into next year. That would seem to corroborate a little bit here what Jensen Wang is saying, that CapEx spending is going to pick up even more. But the market doesn't seem to like this because Marvell stock is down a little bit today. Yeah, I've spent actually most of the early part of this week doing a deep dive into Marvell's business. And it's stunning how this seemingly niche company, and it is relatively niche, has just positioned itself for a massive, massive opportunity. Matt Murphy is the CEO. He's done an extraordinary job over the past decade of turning the company around and just pointing

Starting point is 00:07:11 it right at the sweet spot of both what it's really good at and making it indispensable for some of its most important customers, which kind of happen to be these hyperscalers, and maybe most importantly, either developing or acquiring really critical technology that can keep up with the insanely fast pace of data volume and speed growth in the data center. Now, let's zoom out here. If NVIDIA's server clusters are the brains or other CPUs and GPUs are the brains, Marvell's technology is like the central nervous system of the data center. That means it connects the brain to every part of the body, no matter how near or far from the brain that it is. Also, interconnects distributed sites together. So you have data centers that are hundreds of miles apart.

Starting point is 00:07:58 Their technology is important there. But as to the specifics of the opportunity, Last year, they did an investor day around AI. The short version of what they think is attainable is about a $220 billion market for accelerated compute by 2028. They think they can get 25% of that. That's a $55.4 billion revenue number. For context, this year, the company's saying they're probably going to do about $12 billion. I think they're going to do more than that, but let's just say they do that. We're talking about increasing revenue fourfold in about three years. Now, if it can maintain operating margins of 35%, I think they can probably do better than that, but let's just go with a baseline of 35%. What's the math look like? A trillion dollar

Starting point is 00:08:45 valuation would mean about 50 times operating income. Now that's rich, but if growth does keep accelerating from there, it's really not outlandish, especially the stock right now trades for more than double that same multiple. Jensen Huang did not give a timeframe when he thinks it's going to hit a trillion dollar valuation. That's one thing to definitely point out. I wanted to point out, we mentioned the circular deals just a minute ago. Marvell has one with Google, where they pledged to give Google warrants to buy up to $12 billion of the company's stock, making them one of the largest shareholders, but only if Google is spending money with them. For all of those

Starting point is 00:09:26 warrants to vest, Google has to spend $120 billion cumulatively through 2033. If that is the first of several deals, then $55 billion in revenue could just be a starting point, honestly. If they get deals like that with the other hyperscalers, they're cutting into Broadcom's chip business there. There could be a lot more. It's not an outlandish prediction. I don't know how long we're going to see these giant valuation multiples because in 2033, I have to imagine the AI build-out is going slower than it is now. Like I said, the numbers are just going to get too big. I have reservations when it comes to, we're going to have some margin compression in the overall industry between now and five, six years from now. But it's still a

Starting point is 00:10:18 pretty amazing business, as you said, for essentially a niche company to be making these deals. They're putting their money where their mouth is when it comes to that market opportunity. Well, with AI infrastructure spending continuing to go up by tens of billion dollars a year, even if it's a decelerating rate, you better believe we're going to be talking about it on Motley Fool Hidden Gems Investing. But when we come back, we're going to be talking about something else. It's going to be called the mythos moment in cybersecurity. This is Motley Fool Hidden Gems Investing. AI risk isn't always easy to see. Unapproved tools, agents with too much access. Unmanaged AI exposure isn't just a threat, it's untenable. But with the right

Starting point is 00:11:00 security partner, you can prioritize risk and take control. Get the context you need to take action and reduce your exposure. Take your AI risk from untenable to tenable. Tenable. Your exposure ends here. Learn more at tenable.com. Welcome back to Motley Fool Hidden Gems Investing. So Anthropic, this is one of the leading AI application companies for consumers and businesses. In April, it released something called the Mythos AI model. And the thing about this was it could quickly find and exploit vulnerabilities in software. It could exploit them faster than humans could respond. A few months later, actually, the U.S. government asked it to pause Mythos for a little while. This was a big

Starting point is 00:11:47 deal. It caused cybersecurity investors to panic, thinking, oh, no, the threats are getting much worse. But for CrowdStrikes, it was saying that Mythos was actually great for its business. and accordingly this week it reported numbers and and jason this uh this was actually a really great quarter for crowd strike yeah it was extraordinary and the thing is like the quarter was a good quarter beat expectations but it's really the guidance of of of the re-acceleration of growth in the business and it's another example too of a stock that is widely considered extremely overvalued can still go higher when the business reports great results that beat even those highest of expectations. As we're recording this, shares have given back. Some of those gains are down a

Starting point is 00:12:33 good bit late in the morning of the 28th, but CrowdStrike shares are still up like 10% for the week and they're up 81% for the year. The big driver is, again, those expectations for accelerating growth. The company's calling for annual recurring revenue, so that's ARR, to grow about 41% from where it was a year ago by the end of next quarter and then keep growing from there. This is a dominant business, keeps expanding its share of the market, and also signing its customers up for more and more tools. At last count, more than half of its customers used six or more of the almost three dozen modules that the company offers. Now, it does trade for around 140 times my estimates for what their full-year free cash flow is going to

Starting point is 00:13:19 be. But if growth keeps accelerating, I think free cash flow margin will explode higher, and it's a stock that could get a lot cheaper really quickly without the stock price falling just based on the operating leverage that they would get and their profits exploding. Yeah. CrowdStrike's earnings were a blowout, even in the context of all the beaten raises that we've seen from the industry this quarter. The big number that I focused on, net new annual recurring revenue, that growth rate was 51%, meaning that the new annual recurring revenue they added this quarter was 51% greater than what they added in this quarter last year. They've never done that before, even when they were in the really early stages of their growth. That's the highest net

Starting point is 00:14:04 new growth rate ever. But I'm going to push back on Jason a little bit, because if the 2020 to 2021 timeframe taught me anything, and Jason and I were very active in investing in that time, it's that valuation always matters at least a little bit. So based on CrowdStrike's own internal goals for their long-term growth rate they feel they can sustain. The stock's trading about seven times the sales it will produce in a decade from now. Revenue acceleration is impressive, but I still have a really tough time wrapping my head around this one valuation-wise. Yeah, there's no pushback or argument for me on that. It is extremely, extremely richly valued. As long as it keeps delivering, that's going to be the case. But we all learned with

Starting point is 00:14:47 the outage a couple of summers ago, one speed bump and a lot of value gets washed out. I want to circle back to this mythos moment because as Matt pointed out, this record net new annualized recurring revenue for CrowdStrike, but it doesn't seem to be a tailwind for all cybersecurity companies equally. So we got reports this week from SentinelOne, Okta, Rubrik, And specifically with Sentinel-1, you know, looking at 21% growth and only about 20% growth for the year, so slightly decelerating, especially compared to 22% growth last year. I guess as I zoom out, I'm just asking myself, why is this a tailwind for CrowdStrike, but Sentinel-1 doesn't seem to be seeing the same uplift here, Matt? Yeah. The winners like CrowdStrike, they're already profitable. They're already funding their AI build-out through their expanding free cash flow. SentinelOne, one of the things that

Starting point is 00:15:49 stood out to me is that they recently cut 8% of their workforce. I don't know if you remember that news. They specifically said they were going to get the cost savings from that to invest in their AI security. CrowdStrike's at a position of strength here compared to SentinelOne, first of all. CrowdStrike's newer products like Flex, Falcon Flex is helping them win bigger, longer-term deals than competitors. Their customers want better outcomes at lower cost and CrowdStrike's delivering that better. The ARR coming from Falcon Flex grew by 101% year-over-year in the latest quarter, talking about a blowout number. They have a position of strength. They had a first-mover advantage. They're an AI-native platform. They were part of the original Mythos

Starting point is 00:16:32 team that got early access. And they've done a great job of capitalizing on that. Jason, is there any reason to hope here beneath the surface that SentinelOne is actually doing a little bit better than it looks on the headline number? Yeah, a couple of things. The stock's up 42% this year. The business is growing very well. And the thing is that the context of comparing it to CrowdStrike, which you should because they're competitors, like direct competitors over the same customers makes it hard. It's a giant shadow CrowdStrike cast that net new ARR number that we're talking about from CrowdStrike. That is an incredible number. It's bigger than Sentinel one's entire business, right? Just the new business they're acquiring every quarter is

Starting point is 00:17:11 bigger than Sentinel one's entire business. So that, I mean, that should really contextualize it. But I think the thing that matters a lot is if you look at, you know, kind of peel back the the layers pop, pop open the hood for Sentinel one, where it's growing is really, really compelling. Uh, CEO founder, Tomer Weingarten sat down with me and fellow full 10 buyers about a year and a half ago. And he told us, he's like, look guys, AI is the most important, biggest threat to the enterprise and the biggest opportunity that we have in front of us by far. And you look at where they're growing non end point. So again, thinking about end point, that's like a core offering for their business and for CrowdStrike. Non-endpoint offerings now

Starting point is 00:17:52 make up more than half of SentinelOne's ARR. So even as CrowdStrike is dominating there, SentinelOne's growth is accelerating. Its AI security business grew by triple digits. Cloud and data are accelerating growth. So I've been saying for a while that I believe broadly there's going to be a lot of winners in cybersecurity. And I do think that just the space is big enough for companies like SentinelOne and to a lesser degree, Okta, in a different business because there's different needs to win share in this massive tailwind of opportunity. Yeah, when it comes to trends to pay attention to, I can think of few as important as cybersecurity. When we come back, Dick's Sporting Goods had its worst trading day in years.

Starting point is 00:18:33 You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. You know, I am a fan of obscure holidays, and today is National Cherry Turnover Day. Not just any turnover, so don't go get an apple turnover today. It is cherry turnover today. And I thought for the show, we could celebrate a little bit, you know, cherry red, like a down stock chart, turnover, kind of sounds like turn around. So let's talk about some stocks that are down and in need of a turnaround on National Cherry

Starting point is 00:19:41 Turnover Day. and I want to start here. I'm basically going to throw you a stock. You're going to make your case whether the company can turn it around or not. So let's start with PayPal. PayPal, this is a digital financial platform that allows people and businesses to send money, check out on websites, even behind the scenes in some cases. It owns Venmo. PayPal is down today after Stripe reportedly pulling its bid for the company. It's down for the year and it's down more than 80% from its all-time high way back in 2021. Matt, you're going to go first here. Is this a candidate for a turnaround? No. PayPal is not going to retake its 2021 high anytime soon.

Starting point is 00:20:27 But I can make the case that this is the strongest turnaround story of the three that you're going to mention here. So, I mean, the new CEO, Enrique Lórez, is putting in some cost reduction measures. He's focusing on the highest potential areas of the business like Venmo, like buy now, pay later. And it's starting to pay off. In the second quarter, EPS beat the estimate. The revenue rose 5% year over year, which honestly, given PayPal's last few years, is pretty strong. I mean, Venmo, pay with Venmo did really well. Buy now, pay later did really well. The long-term savings, they're targeting $1.5 billion eventually in annual run rate savings. are already at $400 million in that. Free cash flow is strong. They're buying back stock hand

Starting point is 00:21:12 over fist. They said the branded checkout product has stabilized, which was a big concern of investors. Even without the Stripe deal, a possibility now, I think this is the strongest turnaround case here. I think maybe you could almost say the turnaround is already happening. The numbers that Matt talked about, this is a business that has always generated tons and tons of cashflow. It's incredibly cash generative. I mean, it's a cash cow. I think really what's happened is investors have turned around their expectations of the business from a company that should be growing at much higher rates, taking share, expanding its margins. And there's a lot of us that have just been slapped in the face to the reality that

Starting point is 00:21:56 it is a grind. It is a tough, extremely, extremely competitive business with a lot of big players that will fight over their market share. I've talked about this before on the podcast. As much as I didn't like the way things went down with Enrique Lloris moving from the board chair to the CEO seat and the abrupt way that it happened with Alex Chris, who he replaced, the business did need maybe a CEO whose background was more about being just a price taker in a tough commodity-driven business where you can't really create huge moats. You just have to be a really disciplined operator, good blocking and tackling just the fundamentals of your business, and do smart things like when your share price is down, buy more shares. Take that extra free cash flow

Starting point is 00:22:48 that you generate and create value that way instead of trying to buy market share. And I do think that with the right expectations, investors can do perfectly fine in PayPal and they don't really have to turn the business around. They just have to let it be what it is. So a little bit of consensus here from Jason and Matt on the turnaround potential for PayPal. Let's move to another one that might be able to divide a little bit. So this is Applovin. Now Applovin is not as well known as PayPal. This is a mobile advertising platform primarily used for mobile gaming apps, but is expanding into other things. This is actually a huge company. I don't think people realize it's $112 billion market cap.

Starting point is 00:23:27 And that is after it's having a rough month down about 20% and a rough year down about 50%. So Jason, you're going to kick it off here with Applovin. Do you think that this is a turnaround candidate for Cherry Turnover Day? I think the core part of Applovin's business that really matters is the tailwinds. And it's a little bit of a different situation than PayPal. The PayPal, the growth opportunities for transactions is not super duper high growth. It's a gigantic industry. And if you can take share, your growth rates can be good.

Starting point is 00:24:00 But the key for Applovin is the tailwinds around digital advertisements and that entire ad market are very favorable. And more and more money continues to be spent there. So that's a market that is growing. If you can just continue to get good attach rates and grow your share of it and just maintain your share honestly, then you can grow well. I think the things that are affecting its business, there's a little bit of cyclicality, but it's also, again, highly competitive. You've got the walled gardens that are kind of dominating the space. Apple oven has some good relationships and is pretty well established, but they really just

Starting point is 00:24:44 need to continue to maintain share and get through the cycles. And I think as much as anything, it was a little bit of kind of the same story with, uh, with PayPal a few years ago, 2021, we're still coming through the pandemic. Everything was seemingly moving online. And it seemed that it was just going to be more and more of like PayPal was going to be just right in the middle of how we did everything. There was this idea that the explosive growth that we saw for Applovin was going to continue and the growth rates have been fine. But at some point when you're priced for perfection and your results aren't perfect, your stock prices, your stock is no longer going to be priced for perfection. So I think that's a lot of what's happened there.

Starting point is 00:25:25 See, I think Applovin is the weakest turnaround candidate of the three. I mean, Jason's right, but I agree with you, Matt. Let me say that. I agree with you. And it's also a highly controversial stock in a lot of ways. I mean, it's been the target of a lot of short attacks, a lot of short reports saying deceptive practices with putting ads on people's phones without, or putting apps on people's phones without asking them first, and just a lot of kind of stepping over the line. I think there's still some ongoing investigations. There is. And there's a lot of regulatory risk here. And I don't like investing in regulatory risk. I just don't. It's generally something I avoid. There's two things I avoid in

Starting point is 00:26:05 my portfolio. It's accounting irregularities and regulatory risk, and Applovin is definitely on the regulatory side of that. So it's a stock that you're not going to find in my portfolio anytime soon. Well, let's turn to another company that draws a little bit less scrutiny, and that is Sterling Infrastructure. This is a construction company that does a lot of heavy work on sites. Its boom right now is data centers and really just getting it ready for the utilities to come in and big customers such as Amazon and Meta. But this stock is actually up 60% for the year, but it's down 50% from its yearly highs. And so, Matt, is Sterling Infrastructure a chance for a turnaround? Sterling Infrastructure is one of many AI picks and shovels plays

Starting point is 00:26:51 that beat and raised for the quarter and then went down. That's also what makes NVIDIA and CrowdStrike earnings so exceptional. They were the exception to that rule. Their quarter was excellent. The revenue growth was 90% year-over-year, net income grew even faster. E-infrastructure, which is the segment that has to do with data centers, that almost tripled year-over-year revenue-wise. Their backlog more than doubled. I could go on and on and on. They raised their guidance. It really seems to be a case of multiple compression. The numbers, that was a great beat and raise, but previous quarters were even more kind of breathtaking. And I feel like the stock was priced for just knock your socks off results.

Starting point is 00:27:30 These were great results, but it wasn't that much higher than the market was already pricing in. You're seeing some multiple compression here. It was trading for about 37 times forward earnings going into this. There are capacity constraints that aren't going to get any easier when infrastructure spending jumps to $1.3 trillion next year from $800 billion. There are some capacity constraints and things like that. That's what's really weighing on the stock right now, is the uncertainty. I don't think there's anything to turn around here. I think the business is doing great. It's a question of whether the stock is going to turn around. It's really how long and how much further does the infrastructure build out,

Starting point is 00:28:12 continue to accelerate. Yeah. I think there are a lot of opportunities for the business to continue to get larger. Again, this is a company that pours concrete, lays asphalt, puts in sewers, sewage infrastructure, HVAC, literally from the ground up for data centers, high-end manufacturing for electronics, semiconductor factories. That's what they do. Obviously, there's the growth. But just plotting the line on the chart here, began the year, traded for about 30 times earnings for a construction company. At the peak, traded for almost 90 times earnings. And that's like a month or two ago. And even with this sell-off, it still trades for 35 times trailing earnings. It's a lot lower on a forward basis

Starting point is 00:29:04 because the growth rates are strong. But I think investors maybe just kind of realized that this is a very cyclical business. This is one of the first companies that's going to have customers canceling contracts and its backlog is going to start to shrink quickly when the demand does peak and there's no longer the need for new build for this infrastructure. But at the same time, there are other levers they can pull to kind of land that plane to a certain extent. They do a lot of foundation work for things like housing developments and commercial real estate where they come in and they do that initial infrastructure. It's not as good of a business. It's not as high margin of what they're doing right now, but they do have some diversification

Starting point is 00:29:49 in their business that should over time kind of help soften the risk. But the opportunity over the next five years is absolutely extraordinary. So it wouldn't surprise me to see the multiple start to move higher. The stock I think is certainly, even if the multiple doesn't move higher, is going to continue to move up just because of just the pure profit growth of the business. Well, let's transition from Cherry Turnover Day to Dick's Sporting Goods. It's a good lead in here. Dick's Sporting Goods down over 30% in a single day. It's its worst single day as a publicly traded company. This, of course, is a well-known sports apparel and sport equipment retailer around the country. It acquired Foot Locker not too long ago. And Matt, that's kind

Starting point is 00:30:33 of one of the things that is hurting here, isn't it? Yeah, that's kind of the thing that's hurting. Right now, the environment for athletic footwear, especially, and athletic apparel, has really taken a cyclical downturn in the past few months. Dick's actually said one thing that you never want to hear a company say on a quarterly call, the conditions deteriorated throughout the quarter. That means the end of the quarter was worse than the beginning. So, it's too early to say that the Foot Locker acquisition was a mistake, but it's definitely not too early to say that it's just not going well. That's the part that's

Starting point is 00:31:10 getting hit. Dick's Sporting Goods, their core business, they generally cater to the more upper-middle class, that type of consumer. Foot Locker is more the moderate to middle income and the lower end of the spectrum, I guess you would say. That's where it's really getting hit the most. They're having to discount products more. They're having to run more promotions. Management's making all the right moves. They closed 110 underperforming stores. They opened a few more that are more high potential. But it's like they acquired a cyclical business right before the cycle turned against them. So you really can't blame management too much for that. The Dick's business itself is doing pretty well. Jason, trading at just 12 times forward earnings

Starting point is 00:31:50 now after this huge, huge drop. Do you think that Dick's Sporting Goods could actually be a counterintuitive buying opportunity? Yeah, I think that maybe that's the case. Look, at its core, retailing, this is a low margin grind of a business. You win by building scale, you create operating leverage, and then you make money being either really good at turning your inventory over a lot or selling specialty goods at high margins. But even the ones that do those things the best, they're lucky if they can get profit margins that are high single digits. So anything that upsets the apple cart can just crush your profitability. That's happening in real-time at Dick's with the Foot Locker acquisition. If we just go back a few years ago,

Starting point is 00:32:33 Dick's was one of those companies getting the great results. Operating margins were in the low teens. Net margins were routinely above 8%. Again, that's really, really good for a retailer. Now, you look over the past four quarters, and those past four quarters, only about half of that were after it closed the acquisition of Foot Locker. Operating margin has fallen by 42%, and net margins have been cut in half. The Dick's business is doing fine. Matt talked about that. Strong comps, people are paying more, they're buying more goods, there's more transactions happening. Foot Locker is another story. Comps aren't just falling. They were terrible negative in both the North American market and the international locations, which was a big part

Starting point is 00:33:17 of the thesis, and management's now telling us, you mentioned the deteriorating conditions, they changed their guidance, things are not going to improve nearly as quickly as they first thought. Now, what happens next? I think management has to do a better job of setting expectations. The domestic market is just really mature in this industry, guys. The growth is going to basically be a little bit more than GDP growth, plus whatever market share they can take from other players. International growth is still on the table, but they've got a fixed footlocker, That means that they have to allocate more resources to fix Foot Locker than they anticipated. That's the knock-on effect of making a big acquisition and it not going as well as you

Starting point is 00:33:53 thought. My gut, I agree. It's a buying opportunity, I think. At its core, Dick's is just run by really good retailers. I think they're going to figure out the best practices that make both of their franchises shine. They have to run them separately for a long time, but they are going to figure out operationally what they can integrate to drive out costs and get better leverage out of their stores, supply chains, leverage as a buyer and things like that. I think they're going to figure those things out. And this could just be kind of a low point. When we come back, we're getting to stocks on our radar. You're listening to Motley Fool, Hidden Gems Investing.

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Starting point is 00:35:44 by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. We'd like to end this episode with stocks on our radar and we'll bring in Dan Boyd from behind the glass. But Jason, I'm going to let you go first here. What is your stock? So Dan, I want you just to imagine, if you will, that you could buy an asset that is almost

Starting point is 00:36:10 exclusively the domain of the ultra wealthy, is extremely limited in supply, and their values have consistently outpaced just about every other asset class for decades, including stocks. Now, I'm talking about a top tier professional sports team. In this case, this might be the thing that makes it hard for you to swallow. It's the Atlanta Braves holding. Ticker is B-A-T-R-A. That means you get to own the Atlanta Braves. You get to own their mixed-use development, their mixed-use real estate assets that are their part of it, that are kicking off tons of free cash flow. Let me make the case a little bit more for you here. The LA Lakers were just sold for $12.5 billion. The same owner of the Lakers owns the Dodgers. He bought the

Starting point is 00:36:58 Lakers a year-and-a-half ago for $10 billion. That's a pretty good return for a year-and-a-half of holding. Jeff Bezos, the Amazon founder, of course, is part of a group that just bought part of the famed English Premier League soccer club Liverpool, and they now own the option to fully acquire it from the same group that owns the Boston Red Sox, Fenway Sports Group. Padres, the San Diego Padres baseball team just sold for $4 billion. Today, you could buy the Atlanta Braves holdings for a market cap of about $3.5 billion. This is one of the top tier of 30 professional Major League Baseball teams in North America that you can buy at what looks like a pretty sizable discount to the market value for that sort of asset. Dan, a question about the

Starting point is 00:37:46 Atlanta Braves? This is a hard sell, gang. I am a Washington Nationals fan, and so I despise the barfs, as I call them, which of course is a plural for barf. So hard sell for me, Jason. So let's hear what Matt has to say. Yeah, other than that, I would have to show up in the owner's box in a Phillies jersey. I'm going to go with Forgent Power Solutions. I mentioned that the picks and shovels plays on data centers are really kind of beaten down now. Forgent is no exception. They make the, as it says, the power systems, the switchgear, the transformers, the transfer switches that every data center needs. $1.3 trillion in infrastructure spending next year alone is expected now. It's down 50% from the highs, even though revenue more than doubled

Starting point is 00:38:28 year over year. Their bookings quadrupled. They're booking 2.3 times the business that they're billing every quarter. The backlog grew by 157%. I can go on. The numbers are just fantastic. and unlike some of the more expensive picks and shovels places still trades for roughly 26 times uh ebitda that's not too expensive when you factor in that growth rate there are some really interesting opportunities here in the companies that are building out the data centers themselves and fortune is definitely at the top of my shopping list right now i mean it's amazing john that matt has brought something that can actually compete with the atlanta braves a team that I despise, once again, because I don't understand data center power at all. So I think

Starting point is 00:39:11 my hands are tied here, gang. I'm going to go with the Atlanta Braves. Whoa, a surprise ending. For Jason Hall and Matt Frankel, our production engineer, Dan Boyd, and the entire Motley Fool Hidden Gems investing team, I'm Jon Quast. Thank you so much for listening to our show today. We'll see you again next time. Thank you.

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