Motley Fool Hidden Gems Investing - Micron Revenue Smashes Expectations, but Wall Street Yawns

Starting point is 00:00:00 Wall Street has big expectations for memory chips now. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and John Quast. We've got quite a few subjects we're going to talk about. We're going to jump into taking the pulse of the autonomous vehicle landscape with a recent deal between Uber and Rivian. We're going to take a look at Alibaba's earnings and some ambitious AI targets they're putting forward. But first, we're going to jump into Micron's most recent earnings and some really big numbers that didn't seem to impress Wall Street that much. The company announced earnings after the close yesterday. And Matt, the numbers for the earnings

Starting point is 00:00:58 announcement itself, it's kind of hard for me to come up with a word to capture how much the company beat earnings expectations. So kind of put some numbers behind what we were seeing this most recent quarter. Yeah, well, in simple terms, companies like Micron can't produce memory fast enough to keep up with demand of this AI infrastructure development. Micron's CEO said that the company was only able to produce 50% to two-thirds of what its biggest customers wanted during the quarter. AI chips need a lot of memory, plain and simple. In the quarter, Micron's revenue nearly tripled year over year. You're right that the term blowout quarter doesn't even do that justice. The company's revenue was almost $24 billion and beat expectations by nearly

Starting point is 00:01:41 $4 billion. Earnings beat expectations by a similarly wide margin. Gross margin doubled to about 74% year over year. A gross margin doubling for a company this mature is pretty unheard of. The pricing power that it's getting due to the supply, demand, and balance is certainly a wonderful thing. The guidance was an even stronger beat. Analysts were looking for $24.3 billion in the current quarter, the one we're in now, and the company guided for $33.5 billion. That's almost a 50% margin. This might not be too much of a shock, and it doesn't look like it's that much of a shock to a lot of investors based on the stock price action. If you've been following some of the CapEx projections of the big tech players. But it's really tough to overstate

Starting point is 00:02:26 how strong the AI infrastructure investment surge is making Micron's business. You hinted at it a little bit here. John, I want to get to you. Even though the company reported earnings that were indeed impressive, the stock's down about 2.8% as we tape. And some of that may be broader market vibes. There's concerns about whether the Fed's going to increase interest rates in the near-term future. There's the conflict in the Middle East driving up oil prices. So there's vibes a little bit we could talk about here. But then it's also Micron's expectations, maybe. I mean, was there anything in the conference call or guidance that stuck out to you that may explain the market's kind of meh reaction? Was it the CapEx numbers that

Starting point is 00:03:10 Matt was insinuating? I don't know if it's that. Honestly, I wouldn't be surprised if Micron's stock is actually up by the time that this airs. It's already recovered quite a bit from its early morning low points. I think what we have here is a great quarter. Guidance was otherworldly. I mean, just to put some of the guidance in perspective, for the upcoming quarter, it expects to generate as much revenue as it has in every other year of its existence, minus last year. So its next quarter is going to be a good year by Micron standards. That's what we're looking at here. I think what we're going to see here is the analyst community is going to pause, it's going to take a deep breath, and then it's going to start revising its earnings

Starting point is 00:03:51 assumptions higher. And when that happens, I bet that Micron stock will actually retake some lost ground here. I think the important context is to remember it's still up more than 300% in the last year. So a little bit of a cool down after reporting earnings isn't a surprise at all. But here's the thing that is really very interesting for Micron and memory stocks generally. I know it's dangerous to say it's different this time. Memory has historically been prone to boom and bust cycles. Right now we're seeing a boom. Matt pointed out that it just simply can't make enough stuff. There are some things here that lead me to believe that it may be actually different this time with the memory market. AI may have changed this. So for example, Micron's management

Starting point is 00:04:36 pointed out that it used to have some long-term agreements in place with its customers, but now it's working on something different called strategic customer agreements. The difference here is that the strategic agreements have specific commitments tied over multiple years. This is giving Micron more visibility, more ability to predict its business into the future than it ever has. In fact, it just signed its first five-year deal. It's never done that before. When you look at past boom and bust cycles in the memory space, normally it's a three to four-year cycle. And now you have a five-year deal in place. This could be the first of many five-year deals. AI may have made memory more reliable as a category. There's part of me that says I want

Starting point is 00:05:19 to create like a swear jar, but instead it's the it's different this time jar, just to keep us in check when it comes to things like this. And after saying that, just thinking out loud here, its planned CapEx budget was pretty ambitious. These guidance numbers look pretty good. You're talking about strategic commitments, but yet I'm looking at this market reaction kind of meh. I'm wondering if a little bit of this is going back to the cyclicality of this industry. If analysts are looking at this and saying, you're overshooting future demand with this ambitious growth, is that the sentiment that the market's signaling here, or am I just getting caught up in a one-day market reaction?

Starting point is 00:05:58 I'm not sure if it's so much you're overshooting future demand as demand is going to eventually run out. There's this big surge in AI investment that's going to continue for a few more years. we see big companies putting hundreds of billions of dollars behind what they're doing. But Micron's boosting their construction spend by $10 billion over what they previously expected. They're currently building a $100 billion campus in New York. And to be fair, if it can only fill half of customer demand right now, and customer demand is expected to continue to rise for a few more years, there's the case that they'll be able to fill that square footage very easily,

Starting point is 00:06:33 and it'll be money well spent. But this does add a big element of risk. You don't want demand to run out and you have an empty $100 billion building eventually. So it does add an element of risk. And I think that could definitely be weighing on the stock, just like we've seen with some of the other big tech companies. Yeah. I think that Matt's point earlier about the gross margin doubling year over year, that doesn't happen usually in businesses and it's happening here, you look at the memory prices. The solid-state NAND memory, the prices there are up nearly 80% year-over-year. Basically, it's selling out what it has at great prices. It's not necessarily selling a ton more stuff. The stuff is just selling at much higher prices.

Starting point is 00:07:17 That is great for margins. That's great for shareholders. It is a bit of a risk if you do eventually build up more supply capacity and simply then match demand, you might have a margin hit, and that is something to watch. However, there are some things that can keep driving demand higher over the long term. We're going to talk about autonomous vehicles here in a moment, but just as one example, Micron Management pointing out that for level two autonomy. Your cars today basically need 16 gigs of DRAM. Level 4 is going to require 300 gigabytes. That's a 19 times increase in the memory necessities for a Level 4 vehicle. Multiply that by the number of vehicles on the road with Level 4 someday. Yeah, there is going to be a much higher

Starting point is 00:08:09 need for memory in the future. Getting more and more fascinated by the memory chip industry based on what we have seen historically. I mean, this is a company that's trading for 21 times earnings, even though it's up 300% over the past couple of days. Historically, this has been one of the more commoditized sides of the chip industry compared to CPUs or GPUs. It's been a boom or bust, and it's clearly having a moment in the sun right now. Again, we're kind of touching on this, but I really want to put a stamp on the idea. Is micron and memory chips, is this going to have lasting growth beyond AI infrastructure and perhaps a surge in autonomous vehicles, or are we just looking up at another up-and-down wave, and it just happens to be amplified this

Starting point is 00:08:54 time around? There's certainly no sign that demand is going to slow down anytime soon. I'll say that much. Now, as I kind of alluded to in the last section, I don't think AI infrastructure investment can just grow exponentially forever like it has been. And memory is a more vulnerable part of the industry to supply and demand dynamics than, like you said, CPUs and GPUs. I'm personally playing that side through my portfolio. AMD is what I consider my biggest AI investment. I'm playing that side of it. Just to throw out another name here, I would keep an eye on ASML. This is the company that makes the very expensive lithography machines that use ultraviolet light. Micron points out that next generation memory increasingly needs these EUV machines. And ASML is not quite

Starting point is 00:09:44 a monopoly, but it is a very strong player in this industry. And so, I don't know, if you look at Micron and others ramping up supply, it would stand to reason that ASML machines are going to be in strong demand as well. Coming up after the break, we're going to take a pulse of the autonomous vehicle landscape 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 and right now save up to twenty five hundred dollars during our massive labor day event hurry into your local sleep number store today, because we have your number. Infrastructure isn't the only major race related

Starting point is 00:10:37 to AI. Autonomous driving is being unlocked with AI capabilities, and we're seeing companies scramble to become major players in the industry. Depending on who you ask, right now, Uber Technologies is either an autonomous driving loser based on its current business model, or perhaps a hidden winner because of the platform that it's already built and the network effects that it could use to implement AI. Now, earlier today, the company announced a deal with electric vehicle maker Rivian to supply Uber with its newest R2 model vehicle. John, you read through the announcement, kind of getting a pulse of this. What are the details of the deal and what are your thoughts? Well, if everything goes according to plan, we could see 50,000 fully

Starting point is 00:11:23 autonomous Rivians on the Uber platform by 2031. Basically, there are 10,000 vehicles that are, maybe you could call that phase one of the plan. There's a $300 million investment here from Rivian and its fleet partners to purchase some Rivians, hopefully deployed in San Francisco and Miami by 2028. And then if things are going well, it can be expanded to 25 cities by 2031, and that's a $40,000 additional for $50,000 total. And you look at that, 2031, 50,000 vehicles, I think this is actually a far more realistic timeline of an autonomous taxi rollout than what we have seen in the past with some other players, specifically Elon Musk and Tesla. Musk has promised a million, I believe, a million fully autonomous Teslas on the road this year. And I

Starting point is 00:12:17 I think it's pretty clear that we're not going to be anywhere close to that by the end of this year. Uber and Rivian promising just 5% of what Tesla's promising, 5% of a million by 2031, so five years from now. That is probably more directionally correct when it comes to this big-scale rollout. I think that the reason that Rivian has made this deal, this is actually kind of a big deal. I think that Rivian needs the distribution, if you will. When you think about the future, let's say that the future of taxis is fully autonomous. I can see many people knowing the Tesla brand and going to the Tesla brand for a Tesla robo-taxi. It makes more sense to me for a Rivian to be on a third-party platform.

Starting point is 00:13:03 I think it's going to need that third-party platform to stimulate enough demand for its own vehicles. Also, it's important to point out here that the partnership is exclusive. So if you're a Lyft shareholder like I am, you're not going to see Rivians on Lyft. It is exclusively going to be on Uber. I think that that is worth talking about because if you're a third-party platform such as Uber or Lyft, you want to lock down the supply of autonomous vehicles on your platform. And so Uber is able to get one of the players here, and hopefully Lyft is going to be able to score some as well in the future.

Starting point is 00:13:38 Coming in from the other side, I can see why Rivian would be interested. And shares are up 4.2% as we're taping. It is trying to scale a production of this newer R2 vehicle, which is a lower-priced offering that they've had so far, and pledging a certain amount to Uber gives it some sales, you could call it a floor on sales that aren't necessarily at the whims of the consumer and the ups and downs of consumer trends and things like that. But specifically to Uber, as you said, it's an exclusive deal. It's $10,000 in a couple of years, $50,000 by 2031. Matt, as you're looking at this from Uber's strategy, what are you seeing here? I like what John just said, that Uber's

Starting point is 00:14:20 trying to control the supply of autonomous vehicles. What I mean by that is, this is an exclusive deal in the sense that you'll only find Rivians on Uber's platform. It's not exclusive the other way around. Uber actually has deals with several other manufacturers, including Lucid. They have a deal for 20,000 Lucid Gravity vehicles. That's Lucid's SUV that will be on Uber's platform. There's talk that they're going to expand that even further to Lucid's smaller vehicles when they come out. It's got a partnership with Stellantis, which is the parent company of Chrysler and Jeep and all that. It's a three-way deal between them and Uber and NVIDIA because they want to not only control the supply of the cars,

Starting point is 00:15:05 they want to control the whole tech stack, the software development, the hardware development, and really have a leg up when it comes to that. It feels like their strategy is to be a Tesla competitor rather than anything else. Rather than thinking about competing with Lyft or anything like that, they want to be the number one. John, you mentioned earlier Tesla, which is carving its own path with not a lot of partnerships, trying to do it all on its own and putting out some ambitious numbers. We have Alphabet with its Waymo. They have some services in a couple of cities now. They're expanding services. It's growing at a pretty decent cliff. And then we have another handful of private and public companies really looking to stake their

Starting point is 00:15:45 claim on this burgeoning industry. So as you both look at the industry in general, and whether it be Uber, Tesla, or whoever you see, what companies stand out to you today in particular as compelling investment opportunities? And to be fair, I'm not going to hold it against you if you're kind of sitting on the sidelines and seeing how it all shakes out. Well, I'm certainly biased here as a shareholder, but I do still like Lyft. I think the majority, let's just assume we go fully autonomous in the future with taxis. I think the majority of the autonomous taxis will live on these third-party platforms. Tesla maybe being one of the exceptions there. But as is, Lyft generates great cash flow. It has a very strong and growing user base. I think that it's going

Starting point is 00:16:32 to be able to get some autonomous partners that are going to supply their vehicles onto its platform in the future. And also, this is something that a lot of people don't realize, it has a business segment for managing autonomous fleets. And so it's ready to pivot that direction as needed. And so I think that we forget that even if you are an autonomous taxi, you're going to still need things maintained. You're going to need your tires pumped up to the right pressure, you're going to need the vehicle cleaned out and vacuumed. So there is a need for autonomous fleet management, and Lyft already has a business segment to address that. With robo-taxis, I'm still mostly on the sidelines. But to be fair, I'm a little biased

Starting point is 00:17:12 because I live in a rural area that doesn't even really have Uber yet. So I'm not a big consumer of the product. But I do invest in autonomous vehicles kind of indirectly. And autonomous vehicles, by the way, it's a much broader category than robo-taxis. It could mean just autonomous driving systems that you own. GM is one of my largest investments. AMD is a big investment of mine, and they have autonomous vehicle chips. Lucid is interesting to me. I think its product is generally superior to the competition. But as I've said before, a great product does not always make a great business. I really struggle to see a path to profitability, even with these robo-taxi deals. The economics of Lucid's business have been horrible since it

Starting point is 00:17:53 went public. And I need to see that change before I get really interested. It'll be interesting to see how these partnerships shake out, especially with these newer EV companies and whether or not they can actually deliver on it. Part of me even wonders too, like, is Uber going to be absolutely heartbroken if say, you know, Rivian isn't able to deliver these or Lucid or something like that. So just something to think about as we watch the autonomous vehicle market over the next several years. After the break, we're going to look at potential AI investment opportunities overseas and looking at Alibaba in particular. In Toronto, every arrival is a statement and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find

Starting point is 00:18:35 your rhythm across a seamless 33 inch display and an immersive 19 speaker AKG surround audio system. This city demands agility and Optic delivers with precision to make every drive extraordinary. mary let's take the cadillac find out more at cadillac canada.ca luxury sales claim based on s&p global mobility canadian new vehicle total registrations for calendar year 2025 for the cadillac definition of luxury much of the narrative in ai is steeped in a little bit of nationalism and international competition if you will you know it you know you hear the things in financial media or broader media outlets says the u.s needs needs to win the ai race but you know as investors there isn't anything necessarily stopping us from investing in overseas AI bets.

Starting point is 00:19:20 Which brings us to Alibaba. Shares are down about 6.7% as we taped today after the Chinese e-commerce giant reported earnings. Now, the earnings numbers are kind of blah, and I think that's been a story for a while now. But what stood out more than anything else was management's target was it wanted to boost cloud and AI revenue to $100 billion in five years. Now, we've seen some rather ambitious growth plans out there related to AI. We were just talking about Micron at the top. But most of that has been for building the infrastructure and a little bit less about monetizing the actual use of AI. So, a plan to monetize AI at $100 billion a year plant sales ambitious. Now, John, Matt, was there anything in the earnings conference call that

Starting point is 00:20:08 suggests it can get there? Well, I'd say it's ambitious for most companies of the world, but Alibaba is not most companies of the world. It is one of the rare, rare companies out there that does a whole lot of things at scale. I mean, you mentioned maybe the growth number top line headline wasn't so impressive. It does a lot of things. It has an e-commerce business that's kind of growing along at a middly pace, but the AI business, specifically the cloud business up over 30%. And so there's your growth engine right there. It is one of the few companies, not just in China, but in the world that really does it all when it comes to AI. So it has the data centers, it makes the chips, it trains the AI models, and it has consumer and enterprise

Starting point is 00:20:53 customers at scale. It has, it's almost like Amazon and Alphabet combined really in China. Its distribution is incredible. It's either Quen or it might be pronounced Chi-Wen. I'd ask my listeners to forgive me here. I'm not fluent in Chinese. I think it's Chi-Wen. This app has over 300 million users. That's one of the largest apps in the world, and most of us have never heard of it. It does have this incredible business, and it is leaning into AI very heavily. It's not so outrageous for a company such as Alibaba to say that it can get to $100 billion in five years? To answer your question, Tyler, I think within the earnings report, I see an uphill battle here. It's going to take a big capital outlay to get there. The near-term results,

Starting point is 00:21:43 they're going to continue to suffer. They don't have the rapid growth of some of the companies John just mentioned, Amazon and Alphabet. They don't have the rapid cloud growth and things like at. Revenue grew by just 2% year-over-year in the latest quarter. Their net income fell by two-thirds year-over-year. They're investing a lot of money. They're pledging over $50 billion in CapEx over the next three years, which might sound low compared to what some of these U.S. companies are putting out, but it's a lot of money for Alibaba. Things are going to have to go very well in order to achieve a decent ROI on that investment. Like I said, I see an uphill battle here. This is what makes it interesting, as you guys both framed it here. The trajectory of

Starting point is 00:22:23 Alibaba has sort of waxed and waned in years. Even though it has a lot of the qualities of some of the Mag7 companies, you mentioned Amazon, Alphabet kind of wrapped into one with even some other components as well, its financial results don't resemble anything that we've seen from the Mag7 in recent years. Ever since 2023, revenue growth has been in the single-digit range. and, you know, AI could be a catalyst. We'll see. But it does look like it would take quite a bit to turn this company around here. Now, certainly, Alibaba's stock is, you know, it's only trading at 17 times earnings. So, it suggests investors may not necessarily be buying this, you know, growth to $100 billion in AI and cloud yet. But my question to you is a little broader.

Starting point is 00:23:10 There are a lot of AI companies outside the United States looking to tackle this market, Alibaba being one of them, with its up-and-down financials, the possibility of maybe not being as strong as some of the Mag7 or other hyperscalers we're talking about. So, as investors yourselves, are you looking for opportunities where valuations could be cheaper, like in this international market of AI, LLM producers? We have Mistral AI in Europe, although they're not public yet, Alibaba being one of them. Are you looking at opportunities like this, or are you just draping yourself an American flag while you make AI investments these days? I'm pretty much staying domestic. That's

Starting point is 00:23:52 not to say I'm going to invest in the open AI IPO or anything like that. But there's a big asterisk on that. The stocks in my portfolio that I consider to be real AI plays, AMD, Amazon, Alphabet, they all have a pretty big international presence already. I'm investing in domestic companies, but they definitely have global opportunities. Yeah, I think that Alibaba is actually pretty exemplary of my thinking. It can look like a great investment opportunity, but there are things going on at a local level that I need to understand if I'm going to invest in it. And it can be found out. It can be discovered. What is going on in China? What is going on in many of these other international markets? I don't personally have the energy to,

Starting point is 00:24:38 and so that's why I'm not investing in many international companies. I have plenty in the USA to keep me busy when I'm trying to find things to invest in for the long-term. I know that that sounds naive. I know that I'm probably missing out on some great long-term opportunities. But personally, I like to stay about 90%, 95% invested in the USA. That is what I know. That is what I have. It takes all the time I have just to research what is right in front of me. That's what I stick with. Yeah, there's a good lesson there. I would say sticking to your knitting because there are loads of opportunities in every corner of the market, whether it be domestic, international, industries we don't understand. But trying to go to places that

Starting point is 00:25:24 we may not necessarily understand as investors could get us in trouble. Sometimes sticking to what you know can be rather helpful in building a successful investing strategy. As always, the 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. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest of The Motley Fool team. From Matt, John, and myself, thanks

Starting point is 00:26:00 for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Micron Revenue Smashes Expectations, but Wall Street Yawns

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