Motley Fool Hidden Gems Investing - Microsoft Shows the Mag7 What AI Investment Looks Like

Episode Date: July 30, 2026

Investors are taking a more scrutinous approach to all of the capital spending the Mag7 stocks are throwing at AI data centers. The one standout this quarter (so far) is Microsoft. Matt, Lou, and Tyler break down why investors loved Microsoft’s earnings while hating Meta’s, and whether Microsoft is the best Mag7 stock right now. Plus, an earnings lightning round and whether single stock or basket is the best approach. Have a question? Email us; [e-mail] Want to take the next step in your investing journey? Explore Motley Fool’s Epic for our portfolio-centered investing experience, premium research, tools, and guidance: fool.com/epic Tyler Crowe, Matt Frankel, and Lou Whiteman discuss: - Meta and Microsoft’s earnings reports. - The best MAg 7 stock to buy now -Hidden Gems earning highlights -Maibag: Buy single stocks or bet on several companies in the same industry? Companies discussed: META, MSFT, GOOG, NVDA, MA, V, EME, GRMN, LHX, HD, LOW, AMD, CAT, DE. Host: Tyler Crowe Guests: Matt Frankel, Lou Whiteman Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Two stocks diverge on an earnings day, 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 Fool contributors, Lou Whiteman and Matt Frankel. It is the depths of earnings season, so we're going to try to hit as many companies as we can in what we would call a relatively short show that we have here. We're also going to hit some earnings questions, And we want to start with earnings, especially with the two magnificent seven companies that happened to report after the close yesterday, and that's Microsoft and Meta. And guys, there was some pretty large divergence between what the market thought of those results.

As we're taping right now, shares of Meta are down about 8.8%, while Microsoft is up a whopping 15%. Now, last quarter and throughout the show, we have kind of discussed Meta's. what is all this spending for question quite a bit but what stands out to me kind of in the stark contrast of these two earnings reports is that microsoft is the first major ai capex spending company to announce earnings and see a positive earnings reaction in the quarter is this just like a one-time blip like yeah things look nice comparatively or is there some sort of through line here that shows microsoft is doing the right thing well others you know as we discussed

previously with Alphabet and here with Meta, that they're making riskier bets. So, yeah, I'm not at all surprised to see Microsoft spike like it is after earnings. I mean, it isn't the only major AI CapEx spender, like you said, to report solid earnings and accelerating growth in the right ways. I mean, Google or Alphabet reported that Google Cloud revenue was accelerating as well, and that stock fell right after earnings. Microsoft says your revenue accelerated to 43% growth in the first quarter, but it's also showing a clearly solid ROI on that CapEx you're mentioning without having to constantly increase these like eye-popping numbers. I mean, Microsoft actually trimmed, we haven't heard that word, trimmed its full-year

CapEx projection of a little bit in this quarter. I mean, now it's an accounting change mostly related to how long they assume the useful life of their AI data centers are, but it's still like a welcome reduction in a sea of companies that just seem to not be able to announce enough spending. Speaking of not being able to announce enough spending, Meta's story was kind of the opposite here. I mean, Meta missed estimates for profitability, kept its Q3 revenue guidance the same, and didn't do anything to reduce its CapEx forecast, which a lot of investors were kind of thinking they might. It isn't showing investors yet that their money is being well spent. Now, to be totally fair, we've said before on these shows that Meta is great at one thing,

social media advertising. That business is still growing very strong, but it's not what the bulk of their money is being spent on. And that's what's concerning people. Right. The whole AI trade is basically suffering right now due to one question. And Microsoft did a better job of answering the market's biggest question than anybody else has. It's really that simple. With meta. The spending is continuing. Guidance for revenue is, eh, but there is no answer to the question of when sales growth from all of the spending will emerge or how this all ends with a rosier future. Where is the pot of gold? Microsoft, meanwhile, reminded the market of what a diversified business looks like. They saw strong software results, strong Azure AI

expansion, real growth across the business. It isn't really about this quarter's business for any of these companies in the stock reaction. It's about the narrative about what the business will look like in two years due to all of this AI excitement. And Microsoft just presented a much better, clearer picture of the future and the market's rewarding it. So as we've been, we and other investors have been assessing the, we'll call it like the best of the cloud hyperscalers or the best investors in AI right now. Microsoft has never,

I haven't seen it really out in the lead much. I think last year, the big narrative was Google was winning the race, Apple was falling behind. And at some various point, one company was doing the best of the other. But if we were to look at Microsoft's stock, prior to today's jump,

basically before the market opened, its stock was more about the same as January of 2024. So it's been a up and down, but at the same time, hasn't really done much in terms of performance for investors. And some of that's with the concerns of CapEx. Some of it was that very question about ROI and stuff like that. But today, after this earnings report kind of showing that, you know, answering the question to your point, Lou, shares of Microsoft are trading about 25 times trailing earnings. Based on that, based on where the stock has gone and where it kind of has positioned itself in this AI race, it kind of begs the question to me, is Microsoft now like the best bargain stock among like the Mag7 companies out there? Yes. I mean, to me, Microsoft and Alphabet are the only two Mag7s that really interest me right now.

And Microsoft has a better multiple. So yeah, my answer is yes. Both of these companies are, again, don't want to sound like a broken record, but there's just a lot more ways to win with these guys than there are. Most of the Mag7 are just very, very good at one thing. Microsoft and Alphabet stand out to me as diversified bets. Yeah, I mean, I completely agree with what Lou just said, that Microsoft and Alphabet are the two most attractive in the Mag7.

I mean, if you're just looking at a purely PE basis, video looks kind of cheap, especially relative to that growth rate that it's posting. But I have more questions about the growth sustainability than I do with Microsoft. Like Lou said, they do one thing really, really, really well. Microsoft grew revenue by 18% year over year. It's not an eye-popping number like NVIDIA is producing.

And the most important part of the business, that AI cloud revenue, is accelerating. And like you said, the stock's trading for about 25 times earnings today. I would actually argue that Microsoft is also probably the most bulletproof business in the MagSavvy, even ahead of Alphabet, given that enterprise software moat that it has. There's no moonshot story that it's depending on, like robo-taxis, like chip pricing power staying at historically elevated levels or anything like that. It's just a solid business with a rare combination of a relatively low valuation and growth that's accelerating in

all the right ways. There's something else to be said about Microsoft and Google not exactly shelling out hundreds of billions of dollars to guarantee revenue for some of its clients. So, you know, maybe a little bit less of that. Hey, is this circular revenue thing going to be a problem or not with these two as well? So kind of a little bit of the story here looks a little bit more complete, a little bit more assured than some of the other things that happen to be going on at the other ones. Coming after the break, we're going to do a lightning round of earnings, mostly related to stocks that we consider in the Hidden Gems universe. Where some see heroes and others see egos, Bloomberg sees the era of billionaire athletes.

While others follow the noise, we follow the money. Learn more at Bloomberg.com. So when you hear the term hidden gem, you obviously probably think that we're talking about companies nobody's ever heard of or really obscure stocks, those things that are just kind of hiding in the markets. But we have a little bit more of an approach. Sometimes there are businesses that have hidden assets, hidden appreciation that can even be well-known companies. And in the terms of The Motley Fool, the hidden gems universe can span a lot of the member services that we have in terms of recommendation services and things like that. So I kind of call it like the extended universe of hidden gem stocks because there's a lot of services that apply these hidden gem principles. And what we're going to do now is do a quick lightning round of companies that have basically reported earnings in the past 24 hours or so that have shown some relatively large moves

or something that really excited us. So I asked you guys before the show here to pick two, and we're just going to go back and forth. Matt, the first one you picked was MasterCard, and shares are up 2.5% after earnings reports. Yeah, not exactly a hidden company, as you just mentioned, but it's a company that often gets overlooked as, say, a legacy financial, and it's really not. They're investing heavily in stablecoins, for example. They're owning the rails in that area of financial infrastructure.

The cross-border payments continue to grow. they just posted a pretty solid beat on both the top and bottom lines. Operating margin expanded by 150 basis points, and MasterCard and Visa are both very high margin businesses. A lot of people don't realize just how high the net margins on these companies are. The payment network revenue grew by 10% year over year, well ahead of inflation, so it's not just inflation-driven or anything like that. Cross-border activity was surprisingly strong, given that the Iran conflict continues to pressure that. So it was a very solid quarter, nothing terribly surprising. MasterCard is just an excellent long-term compounder,

has been for years. And this quarter was just really further proof of that. Lou, probably a hidden gem is more in the traditional sense, because I'm sure not as many listeners have heard this company as well. But shares of mCore, electrical mechanical contractor, very much associated with the AI infrastructure buildout, that stock's up 19% after reporting earnings this morning. Yeah. Glass half full or glass half empty here, Tyler, because yes, it's up almost 20%, but it's also just back to the same price it was trading in an early to mid-July. So pick your narrative here, right? The narrative going into earnings was picks and shovels AI trade was

under pressure. We have questions about data center spending. We have questions about how sustainable it is. And mCore, which as you say, is a construction company that is up 500% over the last few years, thanks to data center construction spending, was feeling the pressure. So coming to earnings today, they topped expectations. More importantly, they raised full year guidance. So the takeaway here, I think, is the sky is not falling, at least not yet. And so the stock is reacting by taking back what it had given up in the few weeks leading up to this. Good to see. I don't want to get too excited about up 20% given that it's just a round trip, but good to see kind of the pressure reversing post earnings. For all the fitness enthusiasts out there probably

may be wearing a Garmin watch. Shares are down 1.5% today, but they reported yesterday and shares were up 17%. And a move like that, we did want to at least highlight it because, hey, that's a big move. And I'm sure there's a lot of investors that are excited about that. Yeah. And it is a kind of a hidden company in a way. People who don't wear Garmin watches often think of this as just a company that used to make their navigation system for their car. But they've done a tremendous job with fitness smartwatches. Just the differentiation of that product line. Literally every outdoor hobby you might have, they make a different purpose-built smartwatch for.

They reported an absolute blowout quarter. Revenue and earnings were up 11% on revenue, 29% on earnings. Earnings came in 20% higher than expected. The operating margin improved by over four percentage points in the quarter. That fitness segment grew by 25%. That was the real highlight. But guidance was really what stood out to investors. I mean, management raised guidance significantly for both revenue and earnings in the third

quarter and not for the full year, rather, and not just to reflect those excellent second quarter numbers. So they're expecting higher earnings and higher revenue than the market thought they would for the rest of the year as well. And management flagged higher memory costs. We've talked about companies like Micron and just how big the memory bottleneck is as a headwind for the second half of the year. And in my opinion, that makes Garmin's expectations even more impressive. And coming, rounding out for the last one, we have L3 Harris, one of the, what should be in theory,

one of the biggest beneficiaries of rebuilding America's munitions after a round of wars in Iran and in Ukraine. But the stock didn't exactly reflect that with it down about 10 percent after earnings today, Lou. Right. Yeah. And look, this was down 10 percent after beating on the top and bottom line, raising its full year guidance and reporting a record high backlog of 42 billion dollars in future business. So why is the stock down? For one, they're delaying the plan spin off their missile solutions unit until 2027, basically due to choppy market conditions. They claim it's nothing to do with the company. It's just this isn't when they want to float an IPO. The market really likes that spinoff and so do I. So I think, you know, that's kind of hitting at the stock. And at the same time, they are continuing with the CapEx to boost missile production. They're going to spend now for that business, but they aren't going to get the payoff. I think that's good business, but it does hurt the near term. There's also a bit of margin pressure on the space side that tends to be choppy quarter to quarter. I see nothing that's worrisome. I think they are a big winner from space and munitions and a lot of the trends. but look, defense businesses tend to be choppy quarter to quarter. And we're certainly seeing that today. All right. So we've got four companies here, MasterCard, M-Core, L3 Harris,

and Garmin. All of them, I was just checking, all of them trade somewhere between 22 and 33 times earnings. So it's not like there's a huge disparity in terms of valuation from one or the other. Guys, if I had to put you on the spot right now, which of these four companies looks the most attractive to you? I'd have to go with Garmin here. I mean, it's impressive execution quarter after quarter recently. Yeah, I, look, I own L3Harris, so I'll do MasterCard, I guess, since I own L3Harris already.

I own it, but I think I'll go with the other one. That's a very loose answer. Well, just diversification. Fair enough. All right, coming after the break, we're going to hit the mailbag. Where some see heroes and others see egos, Bloomberg sees the era of billionaire athletes.

A fad to some, the future of money to others. We see crypto's trillion-dollar swings, the end of jobs, or the end of human struggle. We see the endless funds fueling the AI hype. While others follow the noise, we follow the money. Learn more at Bloomberg.com. at A&W. And what better way than with a delicious Pret organic coffee,

starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Hey, y'all. As always, a quick reminder, if you want to get an email into us and have it read on air go ahead and email us at podcast at fool.com that's podcast with an s at fool.com the email is also in the description if the three requests we always have is number one keep it foolish two keep it short and number three make sure that it's not personalized advice so we don't get into any trouble today's question comes from ben from sacramento and his question is hi fools as always appreciate your insight on the nature of the stock market how would you approach the idea of owning

two companies that operate in the same space and may even rival each other and the examples he give are Caterpillar and Deere, Home Depot and Lowe's, NVIDIA, AMD. Do you think it's best to call your shot on one company outperforming the other, or is it okay to own both, potentially mitigate the upside by doing so? Thanks. And I find this interesting because several years ago and several hosts ago, Matt, you, Jason Miller, put together a thing called the War on Cash Basket. And I think it was one of the more popular topics that we had on the podcast several years ago was building baskets of stocks based on kind of themes. And it's kind of the theory here is, is it better to build baskets of themed ideas or, you know, go as, as Ben says, shoot your shot on a single

company? Yeah. So for me, I don't know, it's going to kind of be a, a, a weird answer. Cause I don't have a rule here. Cause I don't think of investments in this way. Kind of, I'm not too worried about diversification of my stocks. I have a lot of index funds and that's my diversification. So when I buy stocks, I'm buying the best ideas. And if the best ideas are tied to some trend that's going to affect multiple companies, and that means I'm buying two companies that compete, I'm fine with that. But if it's, I like this one company because of what they're doing, I'm probably just going to be one company. For me, this is more about the opportunity you see than picking a winner in the category. I have zero issue with buying like a Lowe's or

Home Depot if I wanted to get into there or something like that. But I'm also not necessarily looking to just like, okay, I need big box retailers. And so I need to check this box by a couple. So it's just not the way I'm thinking of investing. Yeah. I mean, for me, the key question here is whether you're more confident in picking a winner or investing in a trend. Like Lou's talked about Rocket Lab on the show before. That's clearly a case of picking a winner rather than just buying a space ETF. But look at the war on cash basket that Tyler just mentioned. For those who weren't listening years ago, it included both Visa and MasterCard, which have both performed incredibly well, but it also included PayPal, which has not.

So the basket approach served investors well here because the trend was directionally correct, but not every company that was a leader then is still a leader. If the pie is growing, there's not necessarily a need to figure out who is going to get the bigger slice of the pie just to invest in the trend. But the listener's also right that you're trading away potentially some of your upside by trying to nail down a winner, but you're also helping to limit your downside risk if you're wrong. So it's not just an either or question in my mind of a basket or a single stock as well. There's a third option here. I mean, for example, you could own several different AI chip makers, but just to be a little overweight on the one that you feel the most

confident on. So it's not just an either or I'd really want to reframe it to, you know, create that third option of taking a basket approach, but, you know, doubling down on your on your highest conviction investments. Yeah, look, I'm going to give it as kind of the single stock is a very like an overconfident sort of way of doing it. And in the sense of like, it's basically saying, you know, the one that is going to benefit the most from a trend or the one company industry that's going to do better than the others, which maybe, but sometimes that doesn't always work out that way. There's a great, what I would say, misinterpreted Warren Buffett quote here. You know, he, he's gone on record saying diversification is ignorance insurance. I think

a lot of people think that means insurance from people who are ignorant when it more or less means insurance against things you just don't know out there. The unknowns out, you know, the CEO gets hit by a bus. Things that we just can't anticipate because of how life happens. And that's, when we think about it, when you start thinking about the inversion instead of trying to pick the best winner, sometimes you're also trying to mitigate the fact that you could be wrong. And in that sort of vein, sometimes picking a couple companies within a sector might make a little bit more sense unless, you know, in some cases there are one or two companies that are far ahead, well above the others. You can have like one great company in a relatively

kind of dismal industry. But for the most part, that's the whole point of buying diversified portfolios is the idea is not one company. You might get it right. You might get it wrong. And you want to be able to spread those bets out over several companies so directly you can be right over the long haul. As always, people on the program may have interest 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 a full

advertising disclosure, please check out our show notes. Thanks to our producer Dan Boyd and the rest of The Motley Fool team. For Lou, Matt, and myself, thanks for listening, and we'll chat again soon.