Motley Fool Hidden Gems Investing - Meta Has Been Busy

Starting point is 00:00:00 Meta is making even bigger AI bets. Today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors, Matt Frankel and John Quast. Today, we're going to dive into a couple mailbag questions. We got questions about GE Vernova. We got questions about REITs, which I think definitely had Matt excited to talk about today. But we want to start today with two relatively large announcements from meta platforms today, all of which related to AI. One of them was the launch of its MuseSpark 1.1 artificial intelligence model, kind of the next iteration of what they've been doing with AI models. And the second was it announced that its plans to

Starting point is 00:00:45 put its own AI chip into production is going to start in September with both Broadcom and Taiwan Semi as kind of the designers, manufacturers, helping them build out their own chip production capacities. Now, guys, these sound like really big moves. So help me wrap some context about what we're seeing here with these. Yeah, as far as the model goes from meta platforms, this is actually a pretty big upgrade in a couple of areas. You wouldn't normally be inclined to think so. I was tempted to overlook this just going from 1.0 to 1.1 here with MuseSpark. But in here that I think is significant, one is the context window. So they're going to provide a 1 million token context window. What this does is it allows an AI agent

Starting point is 00:01:35 to essentially work longer on a task without forgetting what it's doing. That's actually a problem with some models out there. You'll send an AI agent to work. It loses context. It forgets what it's doing it keeps working and keeps spending your money that's a problem so a 1 million token context window this is roughly four times as big as the 1.0 version of muse spark so that's a really significant upgrade the other big change here that i'm seeing here is this is a this is now being launched to people to use there's pricing to go with this and if you look at the pricing, it's more than 50% times cheaper than competitive products from Anthropic and Open AI. That's both for the input and the output. That is really significant when you think about

Starting point is 00:02:27 these two businesses because Anthropic and Open AI, they kind of need the products that they have out there. That's what they do. Meta has a whole other business paying the bills and it does this on the side. So it has the luxury of this aggressive pricing. And so that is something really significant to note with MuseSpark 1.1. So with the chips, I'm not sure if it's as significant as the model. So this is essentially what Google and Amazon do. These chips, as Tyler mentioned, they're designed with the help of Broadcom and manufactured by Taiwan Semi. This is the essential model that Apple uses to design its own iPhone chips. And the goal here is to really reduce the company's dependence on NVIDIA and AMD processors that are really expensive

Starting point is 00:03:12 as the company aims to build out its compute power and double it again next year. And really, the idea is that these chips are going to handle the easier side of AI tasks. They're still going to need the more powerful NVIDIA ones for that. Yeah, I want to put this in kind of context of everything we've seen from Meta recently, because this isn't what to me seems like the biggest major announcement or it's a couple in like what I would say is major announcements from Meta. It's been using a lot of, you know, creative financing to build data centers. To your point, you know, the amount that they're adding this year, doubling that next year. It's made some announcements with smart glasses. It recently announced a prediction market asset. And I know I'm missing a few deals and announcement there, but I think it kind of gets to the broader point. there's a lot of things going on here. And when I look at Meta and I see all of these things that it's doing, I am less impressed. I see an unfocused company that's throwing a lot of spaghetti at the

Starting point is 00:04:10 wall to kind of see what sticks. You know, the company seems to be all in with these new ideas that end up maybe not doing as much. And it all kind of reverts back to the basic advertising model that they've had for so long with Facebook, Instagram, what have you. Now, I've brought this up before, but the company really dodged a bullet, I would say, with all of that investment in data centers for its reality labs, virtual reality efforts, being able to basically pivot quickly to AI and be like, yeah, we don't have to write this down because now it's all AI stuff. So here's my kind of broader question, putting all that in context. Should investors be excited about these kind of new moves and things that they're doing? Because to me, I just see an undisciplined company

Starting point is 00:04:50 trying to look like something that it isn't? Well, yeah. I mean, throughout Meta's history, the company has proven that it's exceptionally good at doing one thing, and that's making money from its core advertising business. Like if you compare Facebook's average revenue per user to that of Pinterest or Snap, for example, it's not even in the same ballpark. But to your point, Tyler, any attempt that they've made, and they've made quite a few, to build out a second significant revenue stream hasn't really gone anywhere, like all the Metaverse spending you mentioned. As far as the chips are concerned, I'm not really sure what to make of it

Starting point is 00:05:22 from a potential standpoint. If on one hand, I mean, if it meaningfully reduces their spend on NVIDIA and AMD GPUs, it could be a positive in the sense that their CapEx is going to go a longer way when they're building out all their compute power. But on the other hand,

Starting point is 00:05:38 they're still going to have to buy a lot of NVIDIA and AMD chips. They actually signed the biggest AI deal in history to buy AMD chips for the hardest AI jobs. And in the near term, you know, focusing on building out their own chip production could actually increase the company's CapEx needs. So, I mean, in a nutshell, they're doing what Google and Amazon have already

Starting point is 00:05:57 been doing for years, building chips to handle the easier AI workloads and still relying on NVIDIA and AMD for the rest. This could be an efficiency win for the company, but I really don't see it as a major needle mover, even in terms of cost structure. If it pans out as expected, I'd actually see it as a bigger needle mover for Broadcom than I would for Meta. Yeah, I mean, if we say that Meta is just throwing spaghetti at the wall, then I say andiamo mangiare, let's eat, because this is actually going really well for them. I mean, you look at 2025, 20% growth in income from operations. We come into 2026, it's accelerated even more. We have a 30% jump in income from operations. And I know that we can say that the gains are coming from that core advertising business, and that's a fair point, but I don't know if it's so simple. I don't know if we can completely disassociate all that it's investing into AI and say, well, that's over here and the advertising

Starting point is 00:06:52 business is over there. I think that in reality, there's more overlap between the two than we can really parse out. I do believe that there are some gains happening as a result of what it's investing in the AI side of the market. So I think it's good investment. I think that, you know, you look at the growth speaks for itself. Growing at this scale, at this speed, it's doing something right, even if it's throwing spaghetti at the wall. And on top of that, I mean, you have a stock here that is cheaper than the overall market. It's just 22 times earnings and growing this fast. So I don't know. It's hard to find too much for me to complain about with Meta. I didn't have John speaking Italian on my bingo card for today.

Starting point is 00:07:35 Coming up next, we're going to get into listener questions. First one on GE Vernova. Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer.

Starting point is 00:08:02 And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today because we have your number. Hey, everyone, just a quick reminder. If you do want to get a question into us, have it answered by us on air, go ahead and email us at podcasts at fool.com. That's podcasts with an S at fool.com. Just remember, keep it foolish, keep it short, and don't ask for personalized advice so we don't get in trouble with the SEC.

Starting point is 00:08:30 Today's question comes from Stevens Cox, and it says, Hello, Fools. I was wondering if the team on the Hidden Gems Investing podcast could cover GE Vernova. I really love the company. I think it's an essential player to the future,

Starting point is 00:08:42 but it seems to be priced to perfection regardless. What does the team think? John, I'm going to let you start, and then we'll see where this goes, because I have some pretty deep thoughts here. Yeah, my thoughts probably not as deep. You know, right before it was spun out when GE kind of split up into different companies,

Starting point is 00:09:02 I was tasked with writing an article for fool.com on GE Vernova and diving down deep into that at the time, I really came away just impressed with this business. I liked this business. I was hesitant to invest only because it's not a space I typically follow and I was nervous I didn't hear other people talking about it. Just kind of doubted myself, but wow,

Starting point is 00:09:22 what a mistake to not invest. This has been an incredible stock since GE spun it out. I believe it's up over 700%. What I will point out here is that most of the gains recently have been valuation. And just take that for what it's worth. Essentially, the stock has, the business is doing one thing, the valuation is driving a lot of the stock gain. So let's just pretend for a moment here as we try to say, all right, here's where we are now. Let's assume no expansion or contraction in the valuation from here. What can this business do for shareholders? And you look at the business right now, I mean, that revenue growth in the most recent quarter, 16% growth for

Starting point is 00:10:04 a business of this size, maturity for the products that it offers with energy generation, solar, wind, turbines, many things. You look at that growth, that's really quite outstanding. And then you look at the backlog, even greater growth than the revenue. So that would point to ongoing gains in the revenue. I do think that you have a business here that might be able to produce 15% annual returns for the stock. You add in things such as the dividend, the buybacks, all these things, maybe a 15% when you just look at the business fundamentals itself. Now you take a step back and say, okay, but what about the valuation? I don't think that's going to be a tailwind from here on out, just looking at the valuation today, probably a little bit of

Starting point is 00:10:51 a headwind. How much of a headwind? That's what I personally don't know. Let me chime in before Tyler gives his deep thoughts here. So there's a solid argument to be made that Vernova is the best position power stock for the AI infrastructure buildout. And I mean, just look at its backlog. It's $163 billion backlog. It expects that to reach $200 billion by next year. The company's electrification segment, which deals with grid equipment, transformers, and other components, it booked more data center orders in the first quarter than it did in all of 2025. Their turbine production is essentially sold out for almost a decade into the future. So I'd push back on John a little bit that, yes, the valuation has outgrown the business,

Starting point is 00:11:34 but there's a lot, especially all the things that I just mentioned, that aren't really showing up in the numbers quite yet. So on the other hand, this is an expensive stock, especially if you consider it's, even if you consider that backlog, the growing order book, the bull case essentially assumes that the demand cycle we're seeing is going to last for years into the future. And the reality is there are physical constraints on their ability to fully capitalize on that demand. So my bottom line on Vernova is that the demand is clearly there to justify today's pricing. The company has more orders than it can physically build for many years, but that valuation only holds up if that demand holds up for like the next decade or so. And there isn't any significant

Starting point is 00:12:17 kind of breaks in that AI CapEx story anytime soon. Tyler, on to your deep thoughts. There was actually a reason I picked this one specifically. And the reason we did is because GE Vernova was actually a recent recommendation in the Hidden Gems service. And I wanted to get that out there i did even clear it with like marketing to say if we could say that uh on the free site but i wanted to get that out there and you know steven you seem to be like in tune with what we're thinking here and normally i am the valuation of the three of us i would probably be the most curmudgeoning with burnout valuation but i'm going to make the case to you guys that even when you look at this valuation today looking at the you know energy space in general this is

Starting point is 00:12:56 probably one of the companies actually worth paying up for. And let me get into why. You were talking about its backlog of equipment or orders that it has for new turbines, because it makes turbines for every type of power. It's natural gas turbines, hydroelectric turbines, coal turbines, nuclear power, anything that runs a turbine for electricity, GE makes it. And there's three companies in the world that make up two thirds of the market for this. It's them, it's Siemens and Mitsubishi. Here is the most interesting aspect of their business. They don't make a lot of money selling the actual turbine. It's like maybe high single digits, maybe 10% margin when they're lucky on these engines. It's not much. The actual money is made servicing aftermarket

Starting point is 00:13:51 parts and service for decades after the actual turbine is sold. And so when you have these really high periods of engine orders, it actually has some of the lowest margins in its business because its aftermarket parts and service business is nearly triple the margins that they get for equipment orders. So right now it's arguably at one of its lowest margin points in its period because as it builds out that fleet of turbines that it's going to be putting in every single piece of power equipment out there, those long-term orders of aftermarket sales, servicing, checking in on the things, maintenance and stuff like that, that's going to be much higher margin, much higher return business that lasts for decades after that thing is actually installed.

Starting point is 00:14:37 And so not only do we have like a decade runway of orders coming in, you have a decade of fleet build-out. Right now, there's about 400 gigawatts of GE Vernova turbines powering something in the world right now. And they're expecting over the next five to seven years to put 200 gigawatts of additional power out there. So they're almost adding 50% to their fleet. And that's going to give that long-term service sales aftermarket sort of business. And so when I look at GE Vrnova, of all the businesses out there that I want to pay up for, I want to pay up for this one because I have so much more visibility into the long-term aspects of the business relative to some of the other one-time sales that you might have with the infrastructure build out with

Starting point is 00:15:26 electrification. Well, I mean, Tyler, as I listened to you talk, the first thing I asked myself is, where were you when I needed you two years ago? But the second thing I ask is, okay, you're saying all this, but you don't own the stock today. So what would actually get you off the sidelines and into the buyer's arena? Well, one, Motley Fool trading restriction says that I can't buy it right now. So we'll start with that. But yeah, this has been a candidate for me for a little while. To your point about two years ago, it's kind of funny when they spun GE for Nova out, it actually looked like the problem child of the three companies. I think we talked about this with the Honeywell spinoffs a couple of days ago where it's like, oh, they

Starting point is 00:16:05 had all these bad servicing contracts with wind and all these other things. And everyone thought that GE Healthcare was going to be like the gem that threw off all this cash and was going to reward investors. And lo and behold, Vrnova has become the true champion here. Yeah, I don't own it. I probably should throw my hand up and say guilty as charged. But, you know, perhaps once the trading restrictions that we have now that I've talked about it, I can't trade for it or buy it for a few more days. But certainly something I'm going to be putting on my radar. It's come time soon. Coming up next, we're going to get another listener question going into the Real State Investment Trust. So we don't normally do two questions or listener questions in any given

Starting point is 00:16:54 show, but we had to do two this time because we actually got a question specifically for one of our guests on the podcast. And we had a question come in from Bruce Clark, who asked specifically for matt's opinions on something and here we go matt question about american tower amt is the ticker the question is is the debt manageable and will satellite technology erode the land-based tower business and yes just for some context for people who may not know american tower is a real estate investment trust that specializes in owning the towers that you know companies like verizon T-Mobile, AT&T, put all their communications equipment on. So basically, it's like the landlord for the telecommunications network. So with that slight introduction, and because we

Starting point is 00:17:43 need to feature Matt in this whole section, Matt, what do you got? Yeah, so well, first, American Tower, to add to your company description, their name's kind of misleading because they are not just American. They are literally all over the world. They have towers all over the place. And their chief rival, Crown Castle International, is only in America. So I've always argued they should swap names. But so Bruce is right that their debt is elevated. A debt to EBITDA ratio of 4.9 is on the high end for a REIT. They have 4x interest coverage, meaning that their earnings before interest and taxes are roughly four times what they're spending on interest on their debt. So that's comfortable, but not ideal. The company,

Starting point is 00:18:26 they've done a solid job of extending their debt maturities at favorable interest rates, but the debt pay down hasn't been as much of a priority as I feel it should have. I mean, for example, they just raised their dividend by 5%. They've been buying back stock, which is kind of rare for a REIT. And while I get it, the stock is cheap on paper, as I'll talk about in a minute, I feel like deleveraging would be a somewhat better use of their money. I mean, I'm not worried about the debt in the sense that it's any kind of real existential threat to the company. But I would love to see somewhat of a shift in capital allocation over the next couple of years. Yeah, it's hard for me to imagine that we would see much of a shift, though. I mean,

Starting point is 00:19:06 because a lot of those capital allocation priorities, they're kind of hard to move around too much. I mean, as a REIT, right, we pay out 90% of the taxable income. But then there's also kind of expectations from investors that, yeah, we are going to raise our dividend on a regular cadence and not change where we're putting that money. I was just kind of looking at this, American Tower paying over a billion in interest payments annually and roughly $3 billion in dividend payments annually. Wouldn't you say that that high debt load does impact the ability to raise the dividend? I know that there is some flexibility, but I don't know. At a 4% yield, that's good, but not necessarily great for a REIT.

Starting point is 00:19:49 wouldn't you say there are probably better options out there with lower leverage? Yeah, I would agree. And that's one of the reasons I don't own the stock directly. I have plenty of exposure through ETFs because it's one of the biggest REITs in the market. But yeah, I would say there are better options with lower leverage if you're just looking for a 4% yield from your investment with some upside. But you're right that the debt load, it kind of does constrain them on how much they can raise their dividend. There's a lot to unpack with the 90% of taxable income they have to pay out. That's for a whole nother show. But yeah, there are some better options if you want to lower levered REIT with a high dividend yield. I want to hit on the second

Starting point is 00:20:27 part of the question too, because I think it touches with a lot of what we've been talking about with AI and space and all that stuff, because there has been this new concept going out there. It's like, well, we're just going to put data centers in space and we're going to put satellite communications in space and we're going to render a lot of like land-based communication, land-based data center is kind of useless. And this really is American Tower's business. So to the second part, like, do you see those endeavors, you know, satellite communication disrupting land-based telecoms or data centers in space? Is that going to basically upend American Tower here or do they still have some legs? Yeah. So, I mean, the satellite direct to

Starting point is 00:21:11 cell ambitions. You know, we see companies like Starlink, like AST Space Mobile. It's a threat that's worth watching, but there are some physical constraints with what they're trying to do is essentially be an emergency backup. If you have your cell phone and you go into an area that doesn't have cell coverage, it would kind of kick over to the satellite. Just for example, the direct-to-cell satellites that exist today anyway are not very good at providing coverage when you're indoors. That's a big obstacle to overcome. So because of things like that, for at least the next few years, this is likely to be a compliment, not a replacement to these dense tower networks like American Tower operates. It's worth watching, but for the foreseeable

Starting point is 00:21:51 future, I'm not worried about it. The only thing that I'd add here is that everything that Matt said can be true, and yet there can still be a huge greenfield opportunity for the direct-to-sell satellite companies, simply because there are areas where an American tower or other cellular service land-based is not available. And you think about remote areas of the USA, that's one thing. But internationally, there's just not the infrastructure in many countries that we enjoy in this country or even in many developed Western countries. So there are plenty of places where you know, it's not a competing product. It's wide open to whoever can get the coverage there. And in many cases, the most obvious path would be a satellite communication. So the satellite

Starting point is 00:22:40 communication companies can grow substantially without even infringing on the existing land-based turf. Yeah. You know, I think I mentioned this when we were doing our show about the SpaceX S1 of when I lived in West Africa for a while, I tried to sign up for Starlink because the land-based options were relatively limited. And I don't think, and to this point, I don't think that it's going to disrupt a lot of the existing systems that American Tower has

Starting point is 00:23:11 because that's infrastructure there, it's pretty cheap. But the growth levers that the company has been pulling in international markets, it does have a very large presence in Africa. It could limit that if satellite communications now start to really drop in prices and make it comparable for places like that. So I'm guessing by everyone's assessments here, it's like it's a decent business. It pays an OK dividend, probably over leveraged with some, you know, long term threats that

Starting point is 00:23:36 maybe it's fine, but maybe not the best investment out there today. Fair assessment, guys? Yeah, I mean, there's a lot to like about American Tower right now. The core tower business is performing better than expected recently. I mean, in the first quarter, revenue was up 7%. Earnings were above expectations. The company owns the CoreSight data center business. So this is not just a tower REIT. They actually made one of the big data center acquisitions of the past few years. And that's growing at a double digit pace for obvious AI reasons. The stock trades at 15 times funds from operations, which is essentially the REIT version of earnings. So pretty cheap, 4% dividend yield, as we've talked about a minute

Starting point is 00:24:14 ago. So historically, that's very cheap for this company. I am not a shareholder and I probably won't be, but really for the same reason I don't own NVIDIA. It's because I have a ton of exposure through the S&P 500 index funds I own because it makes up like 7% or 8% of them. And it's the same thing with American Tower with the real estate index funds I own. So not going to be a shareholder myself, but there's a lot to like about the stock. Yeah, for me, American Tower isn't on my radar for a different reason. And that's that I usually don't go for REIT stocks and I normally don't go for anything commercial real estate. It's just not my thing, especially when I consider why would I potentially want to invest in American Tower, it would be for the dividend. At 4%, I can pick

Starting point is 00:24:55 a different stock that I understand better and like better. And that makes a lot more sense to me. And one in my portfolio now for its dividend would be Pepsi. I just think that Pepsi is a rock solid business. I don't think it's going anywhere, even with some current doubts, I guess, from the investor community. I think that its business is going to exist for my lifetime. And it pays a comparable dividend. So a business I understand better, like better, and paying the same dividend, for me, that makes more sense than investing in something I don't really know. So we'll go with a lukewarm, it's okay, but maybe take a look at Pipsi instead. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may

Starting point is 00:25:35 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 standards and is not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motley Fool team. For Matt, John, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Meta Has Been Busy

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