Motley Fool Hidden Gems Investing - Rule Changes → Chip Charges

Episode Date: April 16, 2025

Nvidia built a chip to comply with American export rules. This week, those rules changed. Markets reacted dramatically, but chances are that the $2.5 trillion chipmaker can stand the hit. (00:21) Anthony Schiavone and Mary Long discuss Nvidia’s $5.5 billion charge and earnings from Prologis. Then, (12:31), Ricky Mulvey talks with Kevin Simzer, COO of Trend Micro, about AI’s impact on the cybersecurity space. Companies mentioned: NVDA, PLD, AOT Host: Mary Long Guests: Anthony Schiavone, Ricky Mulvey, Kevin Simzer Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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all ready to go from day one so you can hit the ground running. Bring it with SAP Grow. AI Cloud ERP for any size business. The rules keep changing, but you're still listening to Motley Fool Money. I'm Mary Long, joined today by Anthony Chavone, and it's a beautiful day in Denver, Colorado. How are things in your neck of the woods? Well, in Pennsylvania, it's a little bit colder.

Well, maybe not the Colorado, but cold and windy in Pennsylvania. You know, sometimes that's just how spring goes. Feeling a little cold and windy in the stock market perhaps as well. That's due in large part due to a warning that NVIDIA issued late yesterday. That warning being that the company will be taking a five and a half billion dollar charge. That comes after the U.S. said that NVIDIA will need to get a license in order to export a certain kind of AI chip. This chip is called the H20 processor, and it was built specifically to comply with American export rules, but those rules have now changed under the new administration. And top line, what's this mean for NVIDIA? Yeah, I think that's the question that the

market is trying to answer right now. And I think this added uncertainty is really the main reason why we're seeing NVIDIA shares down today. And I think the market has kind of taken a sell now and ask questions later approach with regards to this news. And I mean, this is a rapidly evolving situation and as i understand it the this export restriction can be reversed at any time so you know i'm not going to pretend to know exactly what this means for nvidia over the long term but you know if there is any company that can navigate a 5.5 billion dollar write-down it's probably the 2.5 trillion dollar company that's fueling the ai revolution and i believe they have more cash than debt on their balance sheet as well so i think they are in a good

position to navigate this for the long term. And we'll see what the future holds with regards to these restrictions. NVIDIA is likely in a good position to navigate this moving forward. But the thing about NVIDIA is that even if you don't own shares of that company directly, chances are you still probably feel it when this company is on the downswing. So the S&P, the Dow, the NASDAQ, they've all been brought down this morning, largely as a result of what's going on in the chip sector. We see other semiconductor companies being brought down on related news as well. Just zooming out, how are you feeling about the stock market on this Wednesday morning? Yeah, so I think how an investor feels about the stock market, I think it largely depends on their

time horizon. I think that depends how you feel about the market. So as somebody in their 20s like myself, I feel pretty good about the market right now because I can purchase assets at a lower price compared to just a few weeks ago. But for somebody approaching retirement age, you're likely not feeling too great right now. And it's not like the market is exactly cheap right now, at least compared to historical metrics. So it's possible the market falls further from here. We just don't know. But what we do know is that the market has historically generated a positive return in roughly 88% of five-year periods and 94% of 10-year periods. So that makes me pretty optimistic about the future, even though we're going through a pretty

rough patch right now, a volatile patch as well. For any company, when big news hits or when a stock dips into the red, of course, there's like this little devil on somebody's shoulder who can be whispering, is it time to sell? Is it time to sell? Is it time to sell? We talk a lot here at The Fool about only selling if you see what appears to be a genuine change to your original thesis. it's one thing to theorize about that but in actuality how do you spot a genuine thesis changing event yeah so i think you have to know why you own the stock in the first place so when you have new information come along you you're able to see that new information is in conflict with your original thesis and i think it's important to remember that there's

always going to be a completely valid reason to sell either to sell the market or to sell a stock But a lot of the time, that reason doesn't impact the two or three variables that drive long-term returns. So with that in mind, I like to be very slow to react to new information, especially in an environment like we're in today where policy can change overnight. So I think it's just important to react slow. And if I can make a plug for dividends for a second, the nice thing about dividends is you don't necessarily have to... If your conviction isn't as high on a specific stock,

you can just take that dividend, take it in cash, and reallocate it to a higher conviction idea. So that's the way I like to run my own portfolio. But in general, just know why you own a stock and be slow to react to new news. That's the way I like to spot thesis-changing events. You asked if you could make a plug for dividends. Of course, you can make a plug for dividends. And that gives us a perfect segue into the next story I want to hit with you, because if I'm talking to Anthony Chabon, I got to use the opportunity to talk about REITs. And one of your favorite REITs, Prologis, reported its first quarter earnings this morning. This, for those that don't know, is a logistics real estate company.

So they own, manage, and develop logistics facilities around the world. And they play a key role in helping get stuff get where it needs to go. So they play into e-commerce trends and just larger supply chains. Highlights from the quarter that I'll call out before kicking it to you, Ant. Total revenue up about 9% year over year for Prologis. They saw a 35% increase in new leases, though occupancy was down ever so slightly for the quarter, I think hovering around just under 95%. You've got core FFO per share that beat analyst estimates, and it increased by 14 cents compared

to a year ago. Okay, all that and perhaps other highlights as well. What are you, Anthony, paying attention to in this report? Yeah. So the operating fundamentals of this report were pretty much on par with what I think analysts expected. But what I was really interested in was the guidance. And I think that's going to be the big theme this earnings season. It's not just for Prologis or REITs, but just the market in general. And I think if a company reaffirms its guidance in this type of environment we're currently in, I think that's a pretty good sign. And if the markets can reward

companies for doing that. And that's exactly what we saw at Prologis. Their guidance pretty much didn't change at all, except they expect to deploy less capital into new development projects. And I think that's related to a lot of the uncertainty we're currently seeing. So, I mean, overall, just a pretty strong, solid report. Nothing too unexpected for Prologis. That guidance almost comes as surprising to me because, again, understanding that this is a player in the e-commerce and in this global supply chain, I would think that, okay, if we're in the midst of a trade war, that's got to affect a company like Prologis. Do you see the current policy and macro environment as affecting them perhaps more than they anticipate? Or no,

do you think that that guidance is pretty in line? Yeah, so I think a tariff uncertainty could definitely impact leasing over the short run. I think maybe we could see that impact second quarter results maybe but i think that's more of a short-term worry if you think about over the long term you think about new supply right it's gonna be harder to build these warehouses if you have tariffs coming in uh tariffs on on building supplies and that sort of thing interest rates have also ticked up a little bit last couple weeks that's gonna get harder to build new warehouses so that benefits existing warehouse owners like prologis and you know there's also if you look at Prologis' balance sheet, their debt-to-total market cap is something like 25%,

and their average interest rate is like 3%. So they have the financial power to navigate a lot of this uncertainty. And so I think that just separates them from some of the lower quality industrial players in an environment like this. I think it ultimately benefits them over the long run. It can make them more aggressive when it comes to acquisitions and things like that. In February, Prologis gave a heads up that its co-founder and CEO, Hamid Moghadam, would be retiring at the end of the year. Moghadam's been at the helm of Prologis for more than 40 years. We talk about how the uncertain macro environment might affect this company in the near term. A CEO change might affect the company as well. But before maybe

we get to what you would expect or hope for from whoever's coming in to replace Moghadam, What kind of, what lessons, wisdom, practices would you like to see a new leader take from this past CEO who's really leaving the company with, as you mentioned, strong balance sheet, strong business fundamentals, et cetera? Yeah. I mean, honestly, this leadership transition that they're currently in could not have gone any smoother so far. I mean, the new guy who's stepping in is Dan Letter and he's been with the company for a long time. And there's actually a really good piece in a Fortune magazine talking about sort of the leadership transition that's taking place. And one of the things that I found interesting was that Dan Letter and Habib Magadam's offices have been right next to each other for two years now.

So this has been in the works for a very long time. Habib Magadam, he's stepping at the end of the year. So there's a really long transition phase in here. And with Dan Letter stepping in, I just want to see Prologis continue to be the leader, not only in the industrial warehouse space, but just a leader in the REIT space. I mean, they're always, I believe, the first REIT to come out and issue guidance, report earnings every single quarter. So I think that's an important part.

They're always out there leading. They're always running the company in the right way, respecting their equity, respecting shareholders, respecting their tenants and their partners. So I would just like to see that continue. An interesting point on leading. Prologis used to be the world's largest REIT by market cap. And now it's second in line. Its crown has been snatched by American Tower, which now holds that distinction. Do you think that that distinction of world's largest REIT by market cap actually has weight to it? So for a REIT, bigger is usually better. But I'm not sure there's much of a difference between an $80 billion market cap

and a $100 billion market cap. So, I don't think the distinction really matters too much. The reason why bigger is usually better is that REITs can borrow more debt. They could borrow it at more advantageous terms. But I really don't think there's too much of a difference there besides bragging rights. Well, speaking of bragging rights, our Breakfast News newsletter asked readers, they closed out with this question. Breakfast News is a newsletter that goes out to subscribers. It's free every day, and it summarizes stock market and business news. And we close out with a question that we dub the Foolish Fun Question. So today's Foolish Fun Question highlighted this switch up between American Tower taking

Prologis' title as world's largest REIT by market cap and posed the question of whether or not readers think Prologis will eventually reclaim its status as world's largest REIT or if American Tower will continue to reign supreme. Ant, we'll close out by giving the crystal ball over to you. What do you think? Are you making any predictions on this one? Well, since there's no timeline on this, I'm going to go with Prologis because at the end of the day, they're essentially selling land, they're selling space, and they own a lot of the best locations. So eventually, I think their market cap will catch up. Here we go. Anthony Chavone, always a pleasure talking to you. Thanks for joining us this

morning on Motley Fool Money. Thanks for having me. 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. For all the excitement about artificial intelligence, there's also a lot to worry about. One of those worries? Enhanced cyber attacks.

Trend Micro is trying to get ahead of those threats. They're a cybersecurity company that's working with NVIDIA to build autonomous cybersecurity agents. Up next, Ricky Mulvey talks with Kevin Simser, Trend Micro's chief operating officer, about how AI is changing the fraud and security industries. Kevin, I want to start broad because your company sees a lot of cybersecurity threats for organizations all over the globe. What are just the biggest cybersecurity threats your customers are facing right now? Yeah, Ricky, we do have an interesting point of view here at Trend Micro because we've got a large number of our customers actually right across the globe. So we're a multibillion-dollar company, over 500,000 enterprise customers, of which the majority of them are outside the U.S. So it gives us quite a unique global perspective.

It's the ever-evolving threat landscape. We've been seeing it for a long time. Continues to be ransomware is the number one threat vector that we continue to see. All kinds of different techniques. Definitely the emergence of generative AI has made a lot of the email spear phishing attacks much, much more sophisticated. So email security, it might seem pretty boring and mundane, but actually that's a very big threat vector that we continue to see. Generative AI makes things more personal. You can think of it from a marketing context where people are able to, or advertisers are able to personalize messages given someone's demographic

and exactly who they are. Spear phishing is also a lot like that because you can personalize a message to get someone to click on a malware link. How much more advanced are these email threats now than they were maybe just like two or three years ago? Yeah, they're much more advanced. That's a given, you know, with all the technology that's out there. If you think about the business model of a threat actor, they have been also adopting a lot of the disruptive technology that's been coming out, right? They've adopted the cloud. They have software as a service. They pick up various techniques that are evolving through our own businesses as well. They are also adopting them. But their fundamental business model, they were okay with a high failure rate. They could throw a thousand emails or a thousand different attempts, and they only needed one to be successful.

Now, what it seems is they're getting much more sophisticated, much more polished, much more organized. That means that actually their success rate is becoming higher. You're not getting the emails with the spelling errors. It's very obvious that it's a spear phishing attack. Much, much more polished and complete. You mentioned ransomware is a big threat. how does the cloud migration affect that? Because I'm unfamiliar with this space. On the one hand, you could see now that data is stored everywhere, it would be significantly more difficult for a bad actor to lock down. The other side of that is more people are working from home. There's more entry points for someone to get in to lock down an organization's data and then demand millions

and millions of dollars to continue to run your business as normal. How are you seeing it from your perspective? Fundamentally, what has been changing is the attack surface of an organization has been ever expanding. It started with remote work. It evolved into public cloud. And now with AI, the attack surface is even bigger. But of course, as businesses, we want to encourage the use of these technologies. So as a cybersecurity professional, we feel it's our obligation to provide the platform that's needed in order to help businesses protect themselves against that broader attack surface. So data sovereignty is this idea that where your data lives determines what rules apply to it. There's an example on your site, an example in

the UAE. Organizations must obtain explicit consent from individuals before processing their personal data. Honestly, not a bad idea. Maybe we should be doing more of that. However, the way you're describing it is, since the U.S. has taken a more isolationist stance, you're seeing responses from large organizations to basically pull their data from the U.S. and move it closer to home. The good thing about this for the U.S. is the biggest technology companies tend to live here. But how are you seeing this play out? Is it companies are basically leaving U.S. data centers to go to their home country? You know this space better than me. How's it going down? Yeah, no. And I think you were touching on the key elements. At the end of

the day, businesses really do want to be adopting public cloud, but the hyperscalers don't exist. The big hyperscalers, the largest of the hyperscalers, they just don't have a point of presence in all 200 plus countries around the world. So they're starting to figure out, okay, well, maybe I need to move some of my data into my own private data centers. So we're seeing sort of a resurgence in and around this thing called the AI data center. You know, it's really pushed heavily by NVIDIA, and we're seeing some companies want to adopt their own physical AI data center so that their AI data is locally resident. But we're also seeing some of the public cloud hyperscalers like Google adopt a model where they can actually run a specific

point of presence in a country. They call it distributed public cloud infrastructure. So they will run it locally within a country for you. So there's lots of different options available for customers. But the point, the headline is that customers are thinking about it now. Customers outside the U.S. are definitely thinking about it. And NVIDIA talks a lot about sovereign AI and how basically every nation is a part of their national security defense needs to develop their own AI infrastructure. You said companies are thinking about moving their data. Cloud migrations are really difficult.

Thinking is one thing. Are you seeing them take action on it right now? Or do you think a lot of them are waiting for this uncertainty within the tariff situation to play out a little bit? I'm seeing some of the more progressive companies actually be out in front and they're actually making the decision now. So we're definitely doing deals specifically with data sovereignty in mind. We happen to have a platform which is a bit unique.

So here at Trend Micro, it's a bit unique in that we can run in a public cloud environment or we can run in an on-premise environment. So customers tend to be talking to us whenever they are actually choosing maybe to actually bring their cybersecurity data closer to home. And we talked about NVIDIA a little bit. You're also working with them to build AI agents. AI agents versus ChatGPT. When you go into ChatGPT, you have to press the button for ChatGPT to take action to give

you an answer. AI agents are allowed to take action on your behalf. How are AI agents changing cybersecurity? How is it different from just traditional endpoint security from a few years ago? Yeah, well, it's fundamentally different, and it's really expanding that attack surface even more. One of the things that people don't necessarily realize is when they are adopting AI, when a company is adopting AI, what it tends to do is it tends to break the access control silos that were built in an organization. For example, many companies have their HR data in one location. They had their CRM data, their customer data in one location. They

They had their finance data in one location. And now, as you bring that all together with AI, all of a sudden, some of those access control mechanisms no longer exist. So it's really important as you think about that type of a move to be thinking about the broader attack surface. If you think about over the last couple of years, generative AI was the big topic. year and next year it will be about agentic ai and building out those agents and seeing how the power of this autonomous these actions can be taken now i was at google next last week and they introduced

their framework called agent space and it's going to allow ai agents to communicate with other ai agents. So AI communicating with AI. So it's an exciting time with all of this disruptive technology. And we want to make sure as a cybersecurity company that we're putting the guardrails in place to help companies not get themselves in trouble. Well, I can also imagine that changes a lot of the spear phishing attacks we were talking about earlier, where if you have a bad actor AI agent trying to fish your other AI agent in your email inbox. That's a completely different attack surface than even today, it seems like. It does make it much more complicated. One of the decisions you made is that your AI model, your AI agent, Trend Cybertron,

I believe that's open source. It is. So I know your company does hackathons, that kind of thing. what's the reasoning to do that? It seems like that could also give bad actors an in to figure out how to hack your AI agent. We fundamentally do believe in an open source methodology. It's great to have everything published so you know exactly what's going on. But the big reason we did it is we wanted to be the first to offer up in NVIDIA's marketplace an LLM specifically trained for cybersecurity. We took all of our knowledge that we have and we packaged it up in this thing called Cybertron and we made it available. And our hope is that people will expand it because the power of this is if people start to contribute to it

and get it linked into as many AI agents as possible, then all of a sudden, really the power of it tends to grow. And that's what we're looking forward to seeing happen. One of the big storylines I've seen as well is with the rise of generative AI, that's changed the demands of software developers. And one of the fears for, I think, a lot of college graduates is that this is going to take the job of a lot of junior software developers. You're the chief operating officer of a large cybersecurity company. How are you seeing this trend play out? And how are you thinking about hiring software developers with the rise of generative AI? Yeah, for us, AI is not about cost reduction. It's about actually more exciting

productivity improvements so that we can actually drive more innovation and drive our top-line business. And when I talk to the CEO of Workday or the CEO of ServiceNow, they're thinking about it exactly the same way. It's not about reducing humans in tech. It's actually about expanding. So, we're still hiring engineers, even though a large percentage of our code is automatically generated by AI, but we're still hiring software engineers, and so too are others. And then as we wrap up, what are the biggest storylines or metrics you want Trend Micro's investors to follow for the next two, three, five years ahead? Yeah, we're really focused in on, we have a chairman who's the founder of the company.

we've been in business for 35 years and he subscribes to the philosophy of sustainable superior performance ssp and to him what that means is we've been around for 35 plus years we want to be around for another 35 plus years and in order to do that you need top line growth but you also need net margins to be created so you're going to see us continue to drive we have our road to 2027, which is our North Star business model. You're going to see us continue to drive top line performance, but also improve bottom line performance. Investors should be appreciative of the fact that you're actually generating those profits so that you can reinvest them back into the business. Kevin Simzer, Chief Operating Officer of Trend Micro. Appreciate your

time and your insight. And thanks for joining us on Motley Fool Money. Thank you. 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. For The Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.