Motley Fool Hidden Gems Investing - Meta Slows Its Roll

Episode Date: April 25, 2024

At (00:21) David Meier and Deidre Woollard discuss IBM’s potential acquisition of HashiCorp and how it helps grow the business. And what was it about Meta’s earnings that gave the market pause? Companies discussed: IBM, HCP, META, NOW, CMG, ALGN Host: Deidre Woollard Guest: David Meier Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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very busy Earnings Thursday. David, how are you? Yes, I'm very busy. I'm well, but very busy. I think everybody at The Fool is just dealing with this flood of earnings. And it's not just the earnings, but there's a lot of excitement. And I want to talk to some of them. I want to talk about Meta. But first, I want to start with IBM because there were earnings, but also this big announcement that they're buying a HashiCorp for $6.4 billion. So, this is fascinating. Tell us a little bit about what HashiCorp is. So, HashiCorp is a software company that basically allows companies to make sure that their cloud offerings and their on-premise offering, otherwise known as a hybrid model, do in fact talk with each other, not only communicate with

each other, but that they maintain security between the two things. And it's a company that's been growing quickly. They have a nice technology. And yes, IBM has said, hey, we would like to have you in our hybrid cloud solution portfolio of products and services. Well, and it's interesting, too, because I'm sort of tracking this movement toward hybrid cloud, multi-cloud, you know, IBM said, Hey, we need to have this to grow. This is, this is great news for us. It lets us get into different markets market. I don't know if the market fully loved this. I mean, there's some other macro stuff going on that we can talk about, but what, what makes this deal important? So the cloud, the push to the cloud is still very strong.

And by push to the cloud, meaning, you know, companies are looking for others to basically to, rent or buy computing power from other companies that do it better. In essence, no one is going to fully put everything that they do, whether it's data collection, applications, not everything is going to go out to an external cloud. Some of it will be on-premise. Pretty much all companies have some form of a hybrid solution. It depends on if it's 50-50 or 90-10. It depends on what each company needs. But there's also, when you talk about multi-cloud, there's some security in saying, hey, I don't want all of my stuff with one cloud provider. So, you have multiple clouds as well as stuff on-premise. And that is a spot where IBM has been finding success recently. It helps people

set those things up, maintain them, and make sure that they scale with those company needs. And IBM believes that HashiCorp can help, not only can actually it help HashiCorp grow by giving it access to new customers from IBM's Rolodex. I don't know, do the kids out there even know what that is? Basically, it's the list of relationships that they have with potential customers. And then IBM gets incremental growth. So, that's the reason for it. they're a player. They, HashiCorp, are a player. And IBM has said, hey, we'd love to have you in

our fold to help bring this to our customers. Well, I did just sort of mention Rolodex, sort of that outdated thing. And I think IBM gets clunked into that, like, oh, it's IBM. Who cares about IBM anymore? And yet, you know, they were doing AI before a lot of other people were. I think they're trying to get more awareness into that space. You know, it's interesting to see their growth in software and consulting, less so in sort of the infrastructure, which was more of the bread and butter. So are people missing maybe that IBM is a player in AI? No, it's basically, I think it's a matter of categorization. So IBM, despite its past, you know, the innovation that it's brought to the computing industry in the past, is not the leader, the leading innovative

company for next-gen things. That's coming from other places. What IBM has decided to do is basically say, hey, as new technologies get developed, and sometimes those new technologies actually cause problems, those problems need solutions. We'll help companies use AI, we'll help companies use the cloud. We'll offer them ways to reorganize their business, to organizations, to be able to get more out of it. We'll make sure it works correctly. Because we have that know-how, people trust us. But they're not necessarily at the forefront of groundbreaking innovation. And quite frankly, that's probably fine. You want these groundbreaking innovations usually to come from smaller companies or even individuals who say, hey, I have a better way

of doing it. And those types of things are hard to get through the bureaucracy of a huge company like IBM. So, IBM basically plays a role. It's just not a leading forefront of technology role. And it's still a big one. They still generate over $60 billion worth of revenue. It may not be as growing as fast, but that is their role. We want to help people use these technologies as they get rolled out. And quite frankly, as their customers get ready, not every big customer that they serve is ready to use AI, is ready for all this stuff. It takes time for those bigger companies to plan and make changes to their business model. Yeah. And it sounds like that's a fine place to be for them. They've got plenty of cash to buy up the players that they need to.

Yeah. And quite frankly, IBM is good at this. Again, a lot of revenue. They generate lots of free cash flow that they distribute back to shareholders in terms of dividends and buybacks and things like that. It's just not going to be a fast grower. That's the limitation now. They have their spot in the market, and they're just going to keep doing that. Let's get into Meta. I think a lot of people are curious about this one. The market hasn't liked it. The revenue was up 27% year over year. That was a little down sequentially, and it was the guidance, I think, that the market really... That was the problem here, right? Definitely. Here's my take on this based on my experience in the technology realm

in my experience as an investor. But Meta stock has been on a phenomenal run since about November of 2022. That was when it troughed most recently. And during that time, as performance improved, financial performance improved, its multiples re-expanded. And that's where we are today. Anytime you have a tech stock, or any stock really, that sees these rich valuation multiples, if you don't quite meet expectations, it's going to cause volatility. It's going to cause sell-offs, even if it's small, even if you continue to do things in the right directions, or keep moving in the right direction. But yeah, Meta is trading at very rich multiples. and if you're not continuing to do better and better each time, at some point, the market is

going to say, whoa, I didn't expect that from you. That's some of the sell-off. It's not helping today that we got a weaker-than-expected GDP growth and higher-than-expected inflation from the macro front, which caused re-interest rates to rise, which is an important thing for lots of growth companies like Meta, your future cash flows are less valuable in a higher interest rate environment. Yeah, definitely. It's confusing, too. I think the market is trying to make sense of this because GDP is down, but yet consumers are spending. I think when there's not a clear signal, the market tends to react negatively. Yes. What's the old adage? Shoot first, ask questions later. Yeah, we're going to sell first, then we'll figure out what's going on

and if we want to get back in. This is one of the interesting things, interesting functions of the market, right? Is liquidity. You can get in and out of things. Yeah. Well, the other thing I think that was dragging it down was it was the earnings call because Mark Zuckerberg, he spent a lot of time talking about glasses and smart glasses, which people don't care about. And they also spent some time talking about reality labs and also about the spending too. So I think part of that is, is also what's dragging it down is that it, they didn't feel the rallying cry that maybe they were looking for. Uh, a hundred percent agree with what you're, you're with what you saw there and how you summarized it. Um, for let's call it the past four to five years, meta has

been spending a lot of money and rightly so like they've been making investments, not only in their own infrastructure, but in new products, within the metaverse itself, reality labs, all these things that it wants to do. It hasn't necessarily seen growth from those investments, incremental revenue growth. Ads still are the biggest driver of revenue that they have. Then you come out and say, oh, by the way, we're going to spend a lot more money than you thought, both in CapEx and expenditures on improving our AI capabilities across the platform. Oh, okay. Oh, great. More spending. That's kind of the glib way that you could summarize it. But I would say this, Mark Zuckerberg and company, they have to make these investments. They've always been a data

driven company. They've always been on the forefront of data analytics because, again, that's what drives their business. As these AI tools become more advanced, become more powerful, and Zuckerberg and company are also at the forefront of developing those tools themselves for their own use, they have to do this or they risk having revenue taken away from them. by somebody else who could potentially do it better. Plus, they have so much data, and that data trough is just continuing to increase exponentially. They need even more tools to make more sense of the gobs and gobs of data that they have. I would think that's short-sighted if you're actually selling because the company is making investments. I understand

and the rationale, like from what I said before, I would actually applaud that. Like, you know, why aren't you doing more? That might be a better question. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data,

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behind so many of the companies that, I mean, it seems like a large portion of the fortune 500 companies are using this platform now. You summed it up so well, uh, right there saying this is, this is a, a totally behind the scenes, important piece of a lot of companies, um, technology development. That's what it does. It helps companies organize their it infrastructure on many levels, not only from a task standpoint, but like, hey, the work that's being done, we can catalog it. We can help you figure out how to organize and manage it such that you can figure out, oh, I'm making a change here in this part of my technology stack. What are the implications down the road? It is so powerful and yet so underappreciated because

it's in the background, right? It's not necessarily at the forefront. But yeah, it's a pretty amazing company. And as you'll talk about in a little bit, Bill McDermott is a pretty amazing leader and entrepreneur. Yeah. Yeah, definitely. And so part of understanding this is that this is a company that was doing all these things before, and now it's kind of taking generative AI and AI in general, it's kind of like, it's, it feels like it's really, really running with the ball because, which I think is Bill McDermott always strikes me as a, as a football coach. But so thinking about that, I'm starting to wonder, and I was actually talking to Tim Byers about this earlier, is the idea that enterprise tech and consumer tech are, are maybe starting to separate

a little bit. Is there some saturation here or is there some business cycle concern? I don't think so. Again, the thing that's not dissimilar to IBM that we talked about earlier, ServiceNow helps companies manage their tech infrastructure, as well as their technology development plans. If they, ServiceNow, can have AI make people within those organizations more productive as they're performing their tasks, right? That could be a game changer because if you can make the simple tasks be performed by an AI, you can then perhaps take that resource and get more, we'll call it creativity or innovation or, hey, I have this new tool. here are other things that I can do with it. It perhaps frees them up into being even more

productive. That's the way I look at it. The more that ServiceNow can help people be as productive as possible, the stickier their products become because companies that use them are happier with the money that they're spending with them. When I hear productive, there's a little part of my head that goes, uh-oh, job loss. Is there some risk with this? Which actually would work against ServiceNow because they're a subscription platform. But is there a line between getting too productive almost? The answer, unfortunately, is yes, there is. And this is where it would be both incumbent on ServiceNow as well as the buyer of ServiceNow's products, is, again, via ServiceNow's products, how can I make those resources even better? And are there

different things that I can do with them in different spots of the management of the IT process. What I mean is, hey, I don't need this person necessarily generating a little bit of code that solves a small problem. I should be able to say, hey, that person can now start the AI program, which generates the code that solves a little problem, so that they can go and solve a bigger problem. The thing that pushes off the job loss part of this is if employees adopt it be creative with it and add more value with it, then it actually flips the script, right? Instead of being a potential job loss candidate, you've actually become more valuable. In the end, I think that's the direction everyone wants to go. The unfortunate reality is that doesn't

happen all the time. Well, this company has sort of been full steam ahead for a long time. You've got that hard-charging CEO. Is there anything that is maybe a sign of slowing growth or things that we need to worry about? I would say it's just sheer size. This is a very big company that's doing, quite frankly, very well. It continues to grow at greater than 20%, even given its size. There's nothing standing in the way, Because I think Bill McDermott, again, being a serial entrepreneur and a very successful one at it, actually does a good job of looking ahead and then working backwards to see in what direction should we be going or what new things should we be doing. So I'm not worried about ServiceNow from that standpoint. But it does get hard to manage, just continuing to get bigger and better every year.

But like you said, he's a good football coach. He knows how to strategize against different defenses, if you will. I have complete faith in his ability to figure out, to set the vision, and then go execute. I love a CEO like that. Well, as we wrap up, it's not just these three companies that were reported yesterday. There's so many. Oh my goodness. Yes. I can't listen to all the calls. But one of them that I wanted to touch on briefly that I was watching was Chipotle. I find this fascinating. We just can't get enough burritos. Even with raising prices, even with dealing with minimum wage in California, still had a traffic rise of over 5%. Same-store sales keep growing. That fascinates me. What companies' earnings surprised you or

or delighted you even? Real quick comment on Chipotle. It is amazing what that company continues to do in order to get... I talk about productivity. Its stores continue to get more and more productive. You can pay your people even better if they continue to make it more and more productive. They have a great product and great service, so no surprise there. One company that has caught my eye yesterday was Align Technology. They make the 3D-printed braces, Invisalign. They had good sales growth, a little better than expected. They said, hey, 2024, they're forecasting that it should be another good year of growth for them. The stock has been volatile since their earnings, and quite frankly, it's sold off pretty sharply

given the macro data that just came out. I was pleasantly surprised having followed the saga for quite a while now. I would encourage investors to take a look at what they're doing. I feel like today is a little bit of a buying opportunity day because regardless of the results, the market is being pulled down. I'm not a market timer or anything, but it's interesting. That's a good point because it's the macro data that's pretty much putting pressure on all stock prices. And so if there's a company out there that you believe continues to be high quality, has plenty of growth prospects ahead of it, yes, as long-term investors at The Motley Fool, right? These are times where we go, hey, this might be a time to grab a little or add a little

based on an outside market force as opposed to something wrong happening within a company. Yeah. Who doesn't like a good sale? Thank you for breaking it down with me, David. You're very welcome. Thanks for having me. 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 stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.