Motley Fool Hidden Gems Investing - Oracle Lays Off 30,000 and Nike Falls Flat Once Again

Starting point is 00:00:00 open ai is raising 122 billion dollars what comes next motley fool money starts now welcome to motley fool money i'm travis hoyam joined today by rachel warren and lou whiteman And guys, the big headline of the end of the day yesterday was that OpenAI has, I guess, officially now raised $122 billion. I don't think they have all the cash yet. But this is companies like Amazon, SoftBank. Microsoft is apparently back in the game investing in OpenAI. But Lou, I'm curious about a couple of things. This, I think, is the biggest, definitely the biggest raise in Silicon Valley.

Starting point is 00:00:50 maybe even the biggest raise ever for a company, single raise ever for a company. And they're not really close to being profitable. So does this bring an IPO closer? And then we also have this ARK, the ARK funds are investing. So now retail is coming in as well, kind of through a backdoor. So what are your thoughts on that? I know it's kind of a big question, but it just seems like they're setting up for this IPO, but yet they still are burning through tons and tons of cash. Yeah. And I think it's important to note that some of this is backwards looking. Some of this is just announcing the close of a round where they've announced some of these, or at least it's been reported if they haven't announced it before. So, yeah, a lot of this is just kind of what was

Starting point is 00:01:32 coming. Look at the IPO. Look, they say $2 billion or so in revenue per month. So, figured out on the valuation, about 35 times sales. Guys, I'll be honest, I've seen worse. That's so crazy, but that is true. Yeah. But look, theoretically, it's growing, so that's good. Huge caveats with this. Some of Amazon's money is tied to achieving artificial general intelligence. If and when that happens, we'll see. It feels like just lawyer bait. Doesn't it feel like that we're going to end up in court in two years battling over whether or not the AI is actually general intelligent or not? The interesting thing here, though, is trying to figure out what from here, Right. And OpenAI wants to go public. Shares already trade on secondary markets. Reportedly,

Starting point is 00:02:20 it is hard to find buyers for these shares right now. Anthropic is all the rage. I think that's a better gauge, if true. And again, I'm not on those. I don't know that. If true, that is a more interesting data point than basically a press release announcing all of the hard work they've done. But to be honest, opening, opening, I kind of needed the win, right? It's been a rough couple of weeks for them. Even if this is just them out here beating their chest saying we're still in this game, we're still in this, look at all this money we have. Don't be dismissive of us. Maybe that's what they need right now. Yeah. Rachel, what do you think when you, when you saw this, like Lou said, some of this, we kind of knew was coming and we knew they needed a bunch of cash

Starting point is 00:03:05 because their projections are just in insane amounts of cash burn over the next few years. But it does still seem notable that some of the biggest companies in the world are just throwing tons of money at them. Yeah. I mean, so this funding round values OpenAI at around $852 billion. So you put that in perspective, that's more than the market cap of most blue chip companies on the S&P 500. OpenAI hasn't even hit the public markets yet, obviously. And we have seen, of course, in the past, a bit of a gap between the private market evaluation and what a company looks like once they hit the public markets. As Lou mentioned, they're bringing in about $2 billion a month in revenue, but they're looking at a projected $14

Starting point is 00:03:43 billion loss in 2026. They've already said they're planning to burn through about $115 billion in cash over the next two years due to their investments in data centers and artificial general intelligence. So then you're thinking, okay, so how does an IPO make sense for investors? If you're an institutional investor, right, you're betting on the foundational layer of the entire AI economy. We've seen institutional investors essentially salivating to own a piece of the business. I'm curious about whether that appeal, how that's going to translate to a public listing. So, when you're looking at a valuation of this magnitude, a significant chunk of at least near-term future success is already priced in. And so, for the stock to really pop

Starting point is 00:04:25 post-IPO, OpenAI doesn't just have to succeed, it has to become one of the most valuable companies in history. What would be really interesting is when we see that S-1 filing, right? Really pulling back the curtain on their exact margin structures, their compute costs. I think if those disclosures show diminishing returns or even that open source rivals are eating some of their pricing power, that kind of growth at all costs narrative could sour quickly. So, those are some things I'm thinking about right now. Well, the IPO is fascinating because, I mean, you can game an IPO. This isn't news, right? And we're not talking about anything. But you can do, for example, one of the reasons SpaceX will achieve their $1.5 trillion or whatever is they are not

Starting point is 00:05:06 going to sell a lot of shares. So you can kind of set supply based on demand. OpenAI is a very different story. Arguably, even if they're a success from here, the buzz is gone. So there are going to be a lot of insiders who are looking for exits. Plus, you have a huge need for money. They're not really positioned to just sell a small sliver because they actually need to raise this money as soon as possible. It's a tough IPO to get right, I think. And yeah, I think that's the next move here if they get there. I wouldn't be surprised, actually, if you see an additional bridge round before then. I don't know if an IPO is looking likely in at least the next six months for them. That does seem like a challenge, Lou, that they are in this position. We've seen this

Starting point is 00:05:54 with companies just back in my history. I mean, I remember SunEdison was one of the hottest stocks on the market for a little while, but their entire business model was predicated on raising the next round, which was theoretically going to pay off. And that worked literally until it didn't. And OpenAI sort of seems to be in the same situation today, where if AGI, you keep moving the goalposts further and further out. AGI is this panacea of cash flow, but we're going to need a ton of cash to get there. If the market rejects that, and you go from being an $800 billion company like they are today, and let's say that IPO price is at $400 billion, still one of the biggest companies in the world, that's really problematic. The other thing that I wanted

Starting point is 00:06:37 to bring into this was, the companies funding them are some of the biggest companies in the world, and they're getting more and more stretched. I'm just looking at Amazon's free cash flow and balance sheet. So their free cash flow over the past 12 months, less than $8 billion. And that will be negative in 2026. And they have $66 billion worth of debt. You're getting a little bit different story. They're like Microsoft and Google. They have a little bit more cash flow. They don't have the same investments that they need to make in some of their non-data center businesses. But SoftBank is taking out debt to fund these kinds of rounds. It seems like the private markets are stretching to a point that we've probably never seen before.

Starting point is 00:07:23 Lou, is that at least a reasonable way to think about it? Because I know we talked on Friday about how would the market react if a company like Amazon said, you know what, we're going to spend less next year. Are we at the point where the market would react positively? That would be probably trouble for OpenAI. Yeah. We can talk about that later, too, when we get to some of our other stories, too. I think exactly what situation that some of these companies are in right now. You just made the case for why OpenAI, I'm going to be wrong, and OpenAI will go public, because I do think that there are less options from here on additional private funds. Look, I think the best time for OpenAI to have gone public was a year

Starting point is 00:08:03 ago and they didn't. And so now they're faced with this reality. I think there will be money there for them, but will it be at the levels they need versus some of these venture capitalists facing that maybe the redemption won't be at a profit from this round? That's going to make it really difficult for them to do private funding from here too. I think they're in a bind. And I think that's why you're seeing all this press and some pretty dramatic cutbacks. I think they're in a hey remember us moment yeah it'll be fascinating to watch because like you said anthropic is kind of the bell of the ball right now all right when we come back we're going to get to the other hot stock of the day that is nike which is plunging in trading you're listening to motley fool money

Starting point is 00:08:46 new from nespresso blend wellness into your coffee routine with the coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com welcome back to motley full money nike is down 14 as we're recording early on wednesday they reported kind of ho-hum quarterly report after the market closed yesterday. This isn't a company that's really been knocking it out of the park for a while now, but revenue was flat, constant currency

Starting point is 00:09:33 sales were actually down. Rachel, what did you see and what is the market just kind of rejecting today? Yeah, I think the market is somewhat losing patience with the grueling multi-year restoration of the business that CEO Elliot Hill is still spearheading. So this was their Q3 report. Revenue was a little over $11 billion. Earnings per share, $0.35. Both of those were actually a slight beat compared to what analysts were looking for. But I think what we're seeing in terms of the market's response, which I think is close to an eight-year low at this point, really reflects a lot of deep anxiety over their upcoming guidance. So they're projecting a 2% to 4% sales decline in this upcoming quarter. And that's also against the backdrop of a 20%

Starting point is 00:10:23 anticipated revenue drop in greater China, which has been a significant market for them. We're also seeing a time where management is intentionally pulling back inventory of some of their classic footwear franchises to try to clean up the marketplace. That's putting pressure on some of the numbers. There's also margin pressure from tariffs. That is still a notable factor for a business like Nike. So, there are some kind of pockets of resilience that maybe suggest a bit of a U-shaped recovery for the business. You know, the performance running category has been making strides, so to speak, North American wholesale business as well as Nike's really kind of re-embracing its former relationships with its retail partners. Management

Starting point is 00:11:01 is expecting positive gross margins by Q2 of their fiscal 2027. I think for now, though, we're really waiting to see, and I think this is the market's tepid response to their results showing that, how can Nike out-innovate rivals like On Holding and Ahoka while managing a lot of the trade costs and other headwinds they're facing as a business right now? And I think we still need a few more quarters to see how that's all going to shake out. Lou, the fascinating thing here is, I've analogized them to Under Armour, which is not a flattering analogy. But if you look at this, Nike's stock first passed the $45 stock price in 2014. So the stock has gone nowhere for 12 years. We're in a 74% drawdown as we're

Starting point is 00:11:45 recording. And still, shares are trading for 30 times earnings and 30 times forward estimates. So we're not in a, we talked about a couple of like Target before, where they kind of can't seem to do anything right. But then you look up and the stock trades for 10 or 11 times earnings. And you go, ah, you know, I may find some value in that if they can kind of turn things around. This has still got to be a huge turnaround for Nike, and it just doesn't seem like it's sticking. Yeah, we like to talk in terms of, you know, like, hot takes are our job, right? And we like to say things like, they're doomed, they're going to make it, they're a success. A lot of times, the truth is the boring middle.

Starting point is 00:12:21 Nike is fine as a company, and it's just not interesting as a stock. And both of these things are true. For all the gloom and doom, it's a profitable company generating $45 billion in annual sales, anemic growth, but growth. It's not going anywhere. There is a turnaround plan. I don't think it's going to be like the rocket ship from the 80s again, but there is signs that the turnaround plan is working. It's just not an attractive investment. And to your point on valuation, I don't know what it could be. We talk about they have to out-innovate on holdings, but the point is, is that Owen Holdings exists. It used to be that with your muscle and marketing,

Starting point is 00:13:01 Nike could just flood the market and dominate. That was before Instagram. That was before TikTok. One good influencer can get you in the game now, especially for kind of a niche or a sport. The world has changed in ways that don't benefit Nike. I'm not saying it can't continue on as a company. I'm not saying that it won't be the biggest seller of athletic shoe wear from here I think it could be. I still don't think it's going to get my attention as an investment. It is fascinating how this has changed those supply-demand dynamics. The interesting thing I saw in the report was that they're actually gaining share in wholesale. That was up nicely, mid-single digits. But their direct-to-consumer is down. So the strategy that they put in place

Starting point is 00:13:44 when the pandemic started and what you think these companies would like to be growing is that building that direct relationship to customers, just still not clicking. And to be fair, that is intentional because that is what they said that, okay, we overdid that. We have to get back in good graces with wholesale. So it is partially intentional. Whether or not it's a good long-term strategy, we'll see. Yeah. And still they've lost a lot of that shelf space to the companies like we've been talking about. Yeah. All right. When we come back, we're going to go back to artificial intelligence and Oracle's news. You're listening to Motley Fool Money. New from Nespresso, blend wellness into your coffee routine with the Coffee

Starting point is 00:14:20 plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com Welcome back to Motley Fool Money. Oracle is back in the news, this time for maybe not great reasons. 30,000 people have lost their jobs. I think all those notifications went out yesterday as we were recording. This has just been an absolutely crazy ride for Oracle. We went back and looked. Remember that announcement that seems like it was 10 years ago? They added $300 billion

Starting point is 00:15:06 worth of remaining performance obligations. A lot of that was coming from OpenAI. their stock popped on that news. Shares were up 30% in a day or two. They're now down 40% since before that announcement. So the market is kind of rejecting what their new strategy shift is, Rachel. And it seems fascinating that they're now saying, you know what, we're still going all in on AI and we're going to sacrifice the jobs that have kind of gotten us to be the company that we are today. Yeah, that's right. I mean, these reports of about 30,000 layoffs, it's kind of staggering. I mean, one number I saw, it's about 18% of their global workforce. They're very much caught up in a high-stakes AI arms race, if you will. They've committed

Starting point is 00:15:54 $50 billion in CapEx for fiscal 2026 to build out the data centers needed for clients like OpenAI and NVIDIA. They beat expectations on the top line in the recent quarter, but they're dealing with negative free cash flow. Now, these job cuts are expected to free anywhere between $8 billion to $10 billion in annual cash flow. So, that's very much a calculated move, I think, to perhaps satisfy Wall Street's mounting anxiety over their debt load, so to speak. I think it's also an interesting question. I mean, is Oracle fundamentally trying to change its business model from a high-margin software provider to a capital-intensive AI landlord? That's sort of what we're seeing. We saw Oracle's stock jump immediately following the layoff,

Starting point is 00:16:34 news. But as you noted, Travis, shares are still down significantly from recent highs. I think what we're seeing as well is they're essentially betting the house that AI cogeneration is going to allow the company to build more software with fewer people and justify that human cost as a necessary step to fund their $300 billion partnership with OpenAI and other partners. So they've proved they can cut costs, but now they have to prove that they can convert that AI backlog into actual profit before that debt service becomes unmanageable. Yeah, Lou, it seems like Larry Ellison is going big or going home with this bet on AI. Yeah. And isn't it funny how, look, I don't honestly know what's going on here. I think

Starting point is 00:17:11 six months ago, if you announced this because our AI is so great, the market might be cheering it. And again, there's still, now there's the skepticism. Look, all of these companies overhired during COVID. I do think some of this is just the smoke screen, using the smoke screen of AI to kind of right-size. But everything said here, they have a ton of capital commitments coming up. A lot of the revenue sources is open AI, a lot of that RPO. So, there is real questions about revenue. So, they do need to cut corners. Interesting thing, Travis, and we kind of hinted at this before open AI. I think right now, game theory would suggest that even if any of these hyperscalers are having second thoughts, their most rational move is to keep spending. And we

Starting point is 00:18:02 can deep dive on that if you want. But even if you think it's a mistake, you almost have to keep spending right now. And I wonder if that is true. We don't know that's true. Maybe they don't see it as a mistake. The whole premise might be false, but it could be a period of really weird kind of volatile decision-making, if that's the case, though, for these companies. So you're saying that, let's take Google as an example. Hey, if we overbuild, we would be better off overbuilding in artificial intelligence and data centers and GPUs and all that kind of stuff, rather than underbuilding and missing out on the opportunity. But then you look at a flip side, like Oracle, and they're building with debt. So it seems like the calculus is just very different.

Starting point is 00:18:47 And if they have to keep up with those other bigger hyperscalers, they just don't have the fallback. And that's what seems to be the challenge to me is that if Google spends all their cashflow for the next three years and then realizes it's not a great return on investment, they can just reverse course and they'll be fine. Microsoft will be fine. Amazon will be fine. I think that's part of it, but look, very simple. They have all said we are pursuing this because it is the future. If they all blink together, it would be fine. But if one of them blinks, even if everybody's seeing the same thing, and even if it's the rational move, I think the read will be ours isn't as good as everybody else's, or we have failed. And so I do think that just

Starting point is 00:19:33 the short-term decision-making matrix is to keep doubling down, even if you have doubt, until there are clear signs that your competitors are... If they could all get in a room, what would they actually talk about? Who knows? But I don't think that's going to happen. It just kind of sets up... There could be remarkably bad decisions made where 10 years from now, you look back and say, what were they thinking? I'm trying to get at maybe what they were thinking. Yeah. The other thing that we need to think about as investors is the market is starting to send those signals. And the market is... We talked about it on the Friday show. So management teams are going to have to start thinking about, hey, if we cut back,

Starting point is 00:20:14 is the market going to cheer? Because if you've got a crashing stock price, eventually somebody's going to lose their job and implement a different strategy. And they're going to look like a hero. So a lot of game theory, as you said, going on in Silicon Valley right now, be fascinated to follow over the next few years. 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 The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising

Starting point is 00:20:50 disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoem. Thanks for listening. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Oracle Lays Off 30,000 and Nike Falls Flat Once Again

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