Motley Fool Hidden Gems Investing - The Internet Is Changing Fast

Starting point is 00:00:00 The internet might be about to get weird. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast. Joining me today are guest longtime Fool contributors, Matt Frankel and Tyler Crowe. Me and Tyler are switching seats today. But today we're talking about some mining stocks as well as a $15 billion move from Intel. But first, I want to talk about this bit of news. Earnings season, always a busy time, and sometimes things get lost in the commotion. One of the things that I feel like got lost was when Cloudflare reported its second quarter earnings on August 6th. Now, this is a top 10 ranked stock in the Motley Fool Hidden Gems universe, but the report was great.

Starting point is 00:00:54 Investors responded fine, but buried in the earnings commentary on the call, co-founder and CEO Matthew Prince was talking about AI agentic traffic on the Internet, saying that for the first time, AI agents surpassed human activity on its network in May. And the company had projected this to happen already, but it's happening faster than its timeline. And then they went on to say that they actually expect AI agent traffic on the web to be 1000 times bigger than human traffic within the next five years. And growth is something that is so important to investing. It's something that caught my eye when I saw this statement. But Matt and Tyler, I want to get your reactions just first here. What did you think about this statement from Matthew Prince? On one hand, I understand the logic, even though I think the 1000X figure might be a little bit too ambitious. The agentic AI traffic, it increased by about 18X over the past 12 months.

Starting point is 00:01:58 And a thousand times in five years would mean roughly quadrupling every year for the next five years. so that would actually be a deceleration from what we've seen there's also the case to be made that human internet traffic has a natural ceiling we can only look up so much stuff we can only you know perform so many tasks at a time there's a reason that human driven internet traffic has only grown at a low single digit rate for about the past decade agents don't have this natural ceiling it only depends on the cost of doing the work and how many tasks we give them to do obviously there's no limit to the ladder there. Costs are falling and usage is rising a thousand X in five years. As I mentioned, it could be a stretch, but the costs are certainly heading in

Starting point is 00:02:39 the right direction. The token costs, they've dropped by an order of magnitude over the past two years. And we've seen like roughly a hundred X increase in usage. So if that pattern of decreasing costs continues, agentic AI usage could soar. I don't know about a thousand X, but a lot higher. I want to kind of compare this to that. If you double a penny every day for a month, we have like $5.6 million. I mean, yes, the math says it works out that way. And doubling early numbers like we've seen recently makes sense. But eventually that pace does become somewhat unsustainable. We see this investing all the time, the S curve of investing. Things accelerate and then they eventually decelerate. We see it with companies, revenue trajectories

Starting point is 00:03:19 all the time. Look, just because agentic web traffic is happening behind the scenes doesn't mean it's without cost. And yes, costs are declining, but there is cost to it. And there will be some inflection point where the compute costs for all this agentic web traffic throttles growth.

Starting point is 00:03:36 Someone somewhere looking at their AI cost spending will need to see an ROI on this. And, you know, for all this bot traffic, that's what they're doing. Eventually, they're going to have to see a return. If they're not seeing it, they're not going to be spending on it

Starting point is 00:03:49 because otherwise, what's the point? Well, it sounds like both of you then are a little bit skeptical on the 1000X number. And that's fair. If you believe that Cloudflare is blowing some smoke here, feel free to say so. But I do want to imagine here, I do want to project, I want to look into the future.

Starting point is 00:04:06 Let's say by 2030, if at least this is directionally right, that the share of agentic AI traffic is going to continue to increase at a large rate compared to the human traffic, will the internet look different? in five years? And what changes would happen? What would be different from our perspective? What would it look like? Like I said, I'm not totally sold on the thousand X figure or that it's going to be anything close to that. But let's just assume for a minute that that proves to be

Starting point is 00:04:36 accurate. The main thing that I see that would be very different is how money is made on the internet. In Prince's comments, he correctly says that the general business model of the internet has been defined by advertising for almost three decades. And this could change. I mean, if 0.01% of your views are going to be human, then why would you advertise as if humans were going to be looking at your page? So I'm not exactly sure what that might look like, but advertisers would need to figure out new ways to reach customers in an agentic world, maybe reach them through agents. And the ways that publishers sell ad space based on impressions might not work well anymore if only one or two out of every 10,000 impressions is made to a human

Starting point is 00:05:17 being. I mean, when you think about how much of the internet is built around this whole concept of advertising and being open in that way, I mean, that is actually a really profound change that would possibly be occurring there, Matt. So I appreciate you bringing that up. But Tyler, I want you to weigh in here as well. I'm probably going to sound like a curmudgeon throughout most of this segment, but I am taking the under on this 1000x AI agent traffic. I mean, this really does sort of sound like Prince is talking his book because like obviously Cloudflare would benefit immensely from exponential web traffic growth. It's not just what he's saying, but why he might be saying it. This, you know, a little bit of the incentives

Starting point is 00:05:58 matter in these sort of statements. In terms of changing the internet, like we've already seen this happen with like mobile friendly web pages in the explosion of search engine optimization for the past seven to 10 years. We have that hamburger-looking drop-down menu. That's because we wanted mobile-friendly design. For search engine optimization, webpages are written for two audiences. You have the human, and then you have the Google's search engine algorithm. I mean, if you've ever wondered why a single online recipe page became a 10,000-word novella, they're witnessing SEO nuclear arms race in full effect. Pieces are scored better with keywords and phrases without much penalty for length. You get to this point and Herman Melville will almost

Starting point is 00:06:40 be like, eh, might want to cut that down a little bit. So projecting this agentic web search in assuming princes, I don't know, just directionally correct with what he's saying here, we're going to get AI agent optimized web pages. If I'm building a site where I know so little of my traffic is human, why would I even build it for humans? That's such a good comparison on the shift that we made to mobile web. And that, of course, created lots of opportunities in the market. There were profound changes that happened to the internet and there were companies that made money and investors who won. And I think that's really what our listeners care about most here as we consider how the internet might be changing and the changes that we're already seeing. And so

Starting point is 00:07:21 I want to leave this final question here for both of you. What opportunities might be created from a change in how the internet, if we are going to start building a web that is focused towards these agents, what might that create in far as investing opportunities? If overall internet traffic is about to 1000x, I'm most bullish on the companies that make the infrastructure work. Like I'm talking about the companies that provide the power infrastructure data centers need. The cooling systems, which is becoming an increasing problem as they get more complex and dense. The heat island thing is a real problem. Other things that will likely surge in demand if that thousand X prediction is correct. But I would caution that even if

Starting point is 00:08:04 we're directionally correct about this opportunity, you know, agentic AI really taking over internet traffic, the valuation of all these stocks still matters. I mean, some of my favorite AI infrastructure companies are trading for pretty high multiples right now, especially for a value investor like me. As an example, everybody was a hundred percent correct that the internet was going to revolutionize the world in 1999. It took Cisco 17 years to come back to its previous high after the bubble burst. GE, Vernova, Quanta Services, those are two companies that come to mind that I would love to own, but I'd probably wait for a more attractive valuation before you'll actually

Starting point is 00:08:42 find them in my portfolio. How about you, Tyler? John, I apologize in advance because I'm going to commit one of the worst sins in media. I'm going to say I'm not really sure yet. I know it's happening. I'm still trying to wrap my head around the mechanics of it. I mean, yes, it does support the AI infrastructure build-out narrative, but isn't that already kind of baked into AI's potential and the current compute demand projections that we

Starting point is 00:09:06 have out there? I mean, maybe this is just an added data point that the AI infrastructure build-out has that extra leg to stand on. And, you know, maybe we don't have to worry as much about like, oh, this is all super inflated because now we're starting to see some tangible things. But to that ad revenue business that you were talking about, I'm thinking almost on a theoretical basis because we've seen companies like the Trade Desk get absolutely hammered because of walled gardens and the way that the advertising business has shifted. And this would seem to make it a lot worse. But there is going to be an opportunity for somebody like that who can discern between a human and a clanker, who's bringing your web traffic to your website. And if you can deliver ads for the right person, or if there is some sort of way to influence AI agents with not necessarily the advertising that we think of today, but some sort of way to influence the way that AI agents make executive decisions based on what is presented, there is probably some opportunities there as well. again, this is like, to me, it's a little theoretical. I haven't really seen the effective

Starting point is 00:10:08 business plan that executes this well, but again, why I'm struggling with this and why I'm saying I need to see more of what's out in the market available. Well, Tyler, I'll go ahead and forgive you because I think that humility is one of the most important traits an investor can have in saying, I don't know yet is intellectually honest. So I'll allow it. Well, look, man, I said that on CNBC once like 12 years ago, and I haven't been invited back since. So I'm pretty sure you're not supposed to do it. Well, we'll invite you back on this podcast. But that's it for this segment. After the break, we're going to dig into some mining stocks. You're listening to Motley Fool Hidden Gems Investing.

Starting point is 00:11:04 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 Nespresso.com. Welcome back to Motley Fool Hidden Gems Investing. So the Trump administration over the weekend making some big announcements regarding mining. And there are some mining stocks that are up today. I want to talk about this for a moment.

Starting point is 00:11:32 There is, of course, a geopolitical angle here. The USA gets a lot of its minerals from China. Of course, it would like to be less reliant on that. And one of the things that appears to be holding our country back is the workforce. And so according to some reports, China graduates over 3,000 mining engineers annually. And compared to the U.S., the USA is far fewer at only about 170, fewer than 170 annually. And one of the interesting things here is that it's projected that perhaps half of the mining workforce, the educated mining workforce, is going to be retiring within the next three years. So labor seems to be an issue. The Trump administration committing $100 million to education. Just want to get y'all's reactions here to that. So we're going to switch roles. I feel like I'm going to be the curmudgeon in this section.

Starting point is 00:12:25 The problem here isn't just tuition. It's that mining is a highly cyclical industry. Jobs can be in very remote areas where nobody in the U.S. lives. And there have been stretches where it was impossible for new grads to find a job in the industry. Like, I want to say the whole 2015 to 2020 era was really difficult for the mining industry. This is why there were about 1,500 people enrolled in mining engineering programs in 2015, and now there are fewer than 600.

Starting point is 00:12:52 It's not that interest in high-paying jobs has evaporated. It's the industry's showed people that this is not as stable as you might think. Plus, when you say that half of mining engineers are set to retire within three years, it takes four years at least. Let's be realistic. Most people take closer to five to get through college these days. It takes four years to get a mining degree. So I'm not sure that timing really works as much as the Trump administration wants to say here. So I understand the national security angle.

Starting point is 00:13:19 Same thing we've gone through with the chip makers. But I'm not sure this will do enough to attract thousands of new students. Tyler, bring us home with some optimism here. Well, I mean, someone who spent eight years in college, that five years is a nice term. All I'll say is on the remote stuff too, though, I've spent the last seven years outside of the United States for my wife's work. And I'll say that working remote places certainly has its perks. You know, I can't be said that I'm not a wife guy because I'm definitely thanking her for

Starting point is 00:13:45 doing that. Also, I'm being a little tongue in cheek here, but the threat of AI jobs apocalypse certainly helps making the case for this kind of work, right? Be a professional that might get your job eaten by AI, or I don't know, go work in Alaska for a little while. We'll see if this has a tangible impact on employment and mining activity in the United States. I'm a little dubious. Mining is like the AI in the sense that no one wants to live next to a data center or tungsten mine. Let me give one example.

Starting point is 00:14:12 I grew up in New Hampshire, neighboring state of Maine. Maine has one of the largest lithium deposits in North America, but state laws make it effectively impossible to build a mine to actually extract it. Whether that changes, we don't know. It could, but I kind of have my doubts because there's a lot of NIMBY that's involved with mining as well. There is a lot of things that need to happen for an American mining renaissance that doesn't seem to be in what these sort of deals that we've been seeing happening. It's going to take a lot more than just money and some new engineers. This isn't a topic I don't think I would normally highlight here for the podcast, but we did have Tyler subbing in today. And Tyler, of course, is kind of our resident expert when it comes to mining. And I think that's important because I don't think many of us really understand the business of mining, the economics of mining. I think a lot of us, such as myself, just see a $3 billion investment from the U.S. government and say, that must be bullish for the mining

Starting point is 00:15:12 stocks. But Tyler, I want you to just kind of temper us a little bit. Explain to us what we should be thinking. Sure. So I'm going to, again, put on my cranky pants. And look, part of the announcement that we saw that was this $3 billion investment from the government, some to education, some to stuff. $1.4 billion of it is going to a startup that actually isn't in mining. It was $3 billion of that. $1.4 billion is a Department of Energy loan for a startup lithium-ion battery company. It's not public, and it makes silicon anodes for batteries. Now, if you squint really hard, you might be able to make the case for increased mining, but that's for quartz and silica, which isn't exactly what we're talking about here with rare earth minerals and these

Starting point is 00:15:54 super hard to extract things. Silica and quartz are relatively easy. My word of caution, I sat on the editor desk of Energy and Materials for Fool.com for a while. The one thing I guarantee we will see from this is a bunch of hopes and prayers mining companies go public they will claim to have the largest reserve of xyz mineral and their investor decks will be stuffed with projected material demand and cost curves and all the stuff to get investors excited but there won't be little in terms of what they will do as a business in profitability more often than not they are siren songs and the chances of finding that one that actually becomes a revenue generating profit-generating NFC is the same odds as a lottery ticket. And honestly, the returns on

Starting point is 00:16:38 those aren't as good as lottery tickets. I think, honestly, better to just strap yourself to the mast and just sail past as best as you can. If it does end up making it as a viable mining company, it will hit some lull in the mining cycle because it's a cyclical industry. And maybe then it'll be a worthwhile investment. But investing in a bunch of startup mining companies that are just on hopes in prayers, eh, I think you have better ways to spend the money. Well, I will definitely take advice from somebody who has spent a lot of time thinking about this, whereas I have not. Coming up after the break, Intel is raising some cash. You're listening to Motley Fool Hidden Gems Investing.

Starting point is 00:17:29 Welcome back to Motley Fool Hidden Gems Investing. We do want to make you a part of the conversation. So if you have a stock or an investing topic that you would like to ask any of our analysts and panel members on any single episode of this show, feel free to email us at podcastatfool.com. We ask that you keep your questions somewhat short so we can read them on air, keep them foolish.

Starting point is 00:18:10 Remember, we can't give personalized investing advice, more general, but if you want to bring in a question, email that to us at podcastatfool.com, podcastatfool.com. And actually our mailbag was a little thin today, so we're skipping over that, going with a third topic here. We saw today that Intel announcing it is going to be raising some cash. The stock is down a little bit today on this news, but it is going to be selling some equity to raise $15 billion.

Starting point is 00:18:38 The jargon in the announcement says CapEx, general working capital. But there is a why now section in which Intel said progress in emerging areas, including physical AI. So this would be kind of like robots or something that is using AI in the physical world. Physical AI purpose-built silicone, so their own custom stuff. Advanced packaging and external wafers represent significant growth opportunities for Intel. Matt, is this a move that you like from Intel, raising cash? My short answer is that I am a big fan of this move, and I'm generally a fan of issuing equity from most companies when a stock is what I would call expensive. Throughout

Starting point is 00:19:15 its history, Tesla has done this arguably better than anyone. I've said many times that their valuation is one of their biggest assets, the ability to raise a lot of capital without a lot of dilution. There are some companies that literally survived the last bear market specifically because they raised capital when their stocks got bubbly in 2021. Think of Lemonade as one company that I follow. They did a really smart capital raise right around the peak and it's why they have a billion dollars on their balance sheet today. In Intel's case specifically, that $15 billion raise sounds like a lot of money and it is. I would love to have $15 billion, but it represents less than 3% dilution at the current market value of the company and it prevents

Starting point is 00:19:53 stem from taking on additional debt to capture some of those opportunities. And speaking of those opportunities, you mentioned they specifically cited progress in several areas, especially in my mind, external wafers is the biggest one there. That implies that the third-party foundry business is coming along quicker than even they thought. And that's been a major part of the investment thesis, right? I mean, Intel's growth over the past year in terms of revenue doesn't justify its 5X stock price. It's that third-party foundry business. And that's really what seems to be ramping up here that they need money for. It's kind of the inverse situation of watching a CFO buy back shares at ridiculously high valuations. Behavior like that makes me want to gather up a

Starting point is 00:20:34 posse with torches and pitchforks. Look, if you're going to dilute shareholders, which is never really like objectively a good thing, but if you're going to do it, might as well do it from a position of strength, then wait until you're desperate for cash. Intel's stock up is up 395% in the past year. It's raised its CapEx plan to $20 billion for this year alone, And for 2027, they're saying it's going to be significantly higher. This was just on its conference call a couple days ago. That is way more than what it's bringing in operating cash right now. So better to do it now than wait and potentially have the market turn on you and have to issue more shares for the same effect. Yeah, I mean, Intel's valuation certainly plays a part here. I was looking at the 10-year average for its price-to-sales valuation, and it's traded at an average of three times its sales over the last 10 years. Right now, trading at eight times its sales, and so that's more than double what its long-term average is, and that's after it's already come down some. So definitely a higher valuation than what we're used to. Definitely selling some equity at those higher levels to fund its capital expenditures that it has planned. But one of the interesting things here that I thought of when I saw this was that actually the S&P 500, the dividend yield for it right now, according to some reports, hitting an all time low of 1.04 percent. And so in dividend yield, if it's low, that's kind of indicating a high stock price or a high valuation for the stock price.

Starting point is 00:22:00 It's not perfectly that way, but it does suggest that. And so I'm wondering if these S&P 500, there is one indication here saying, yeah, we are actually very highly valued as a market. Do you think that we're going to see some more dilution, not just from Intel, but from other companies if it's generally a very hot market right now? I mean, I would argue that we've already seen that. I mean, Alphabet recently raised $45 billion in equity. Berkshire Hathaway took $10 billion of that. Overall, U.S. equity raises were 67% higher in the first half of 2026 than the same period last year.

Starting point is 00:22:35 And that doesn't even include the record-breaking IPO market that we've seen, led by SpaceX, but there have been others. To answer your question a little more directly, yes, I expect more, but not just because of opportunistic valuations. It's also a need-based capital raising time. The rapid build-out of that AI infrastructure, it's created a need for many companies to raise billions and billions of dollars. Some will be raised in the form of debt, which we've seen with some of the big tech companies already. But I do foresee a lot of equity raises. Convertible bond offerings tend to become really popular in times like these, and we've already seen a bunch of those. And I see a lot of this kind of thing in the second half of the year. nothing sounds worse to me than convertible bond offering that since didn't as never ends up uh working out well for anybody look like you said it's not just alphabet and it's not just equity

Starting point is 00:23:24 we're seeing debt we're seeing equity we're seeing a bunch of off balance sheet financing a lot of like these you know we guarantee the lease sort of things that nvidia and meta and sorting to do it's hard to see a path where companies don't have to go to the financial market repeatedly over the next several years if they stick to their current spending plans. Everyone's talking about more, more, more, more, more. Their current cash flows aren't supporting it. And it's hard to see how they're going to, even with future growth in operating cash flow, their spending plans are almost inevitably going to outpace it based on what they're saying. I think the only reason that that would change is if the market cries uncle in some way or other. I give you an example.

Starting point is 00:24:04 Oracle's credit rating was just downgraded from the lowest investment credit grade rating you can get now does its spending plans change if it does finally get downgraded to junk status probably because that's when we start to look at cost of capital getting much much higher and that's where you have to start thinking twice because then all of a sudden these theoretical rois really have to start making more sense so as long as we see the current trajectory as long as valuations are high and everyone's hunky-dory about all this yeah we're going to see it for a while. But if we see some sort of altering event, like a credit downgrade or something like that, that is going to make somebody blink. And that's when we're going

Starting point is 00:24:45 to see an alteration in its spending plans. Well, we're definitely going to keep an eye on somebody blinking. And when they do, we'll bring that to this podcast. That's all the time that we have for today. 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.

Starting point is 00:25:13 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, Christy Waterworth, and the rest of the Motley Fool team. For Matt, Tyler, and myself, thank you so much for listening to our show today,

Starting point is 00:25:30 and we will see you again next time. you

Motley Fool Hidden Gems Investing - The Internet Is Changing Fast

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