Motley Fool Hidden Gems Investing - Why is Berkshire Hathaway Hoarding Cash?

Episode Date: April 24, 2025

Warren Buffett’s conglomerate has more cash on the books than any company in history. (00:21) Matt Argersinger and Ricky Mulvey discuss: - What home sales data says about the economy. - A traffic slowdown at Chipotle, and the restaurant chain’s strong unit economics. - The reasons why Warren Buffett could be sitting on record cash. Then, (17:06) Mary Long and Asit Sharma continue their conversation about AMD, and discuss the impact of tariffs and export controls on the chip designer. Companies discussed: DHI, CMG, BRK.A, BRK.B, AMD Host: Ricky Mulvey Guests: Matt Argersinger, Mary Long, Asit Sharma Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Ricky Mulvey joined today by Matt Argersinger Matt thanks for being here hey great to be here Ricky good to have you on a day where we're getting some home sales data And as I was looking through the headlines this morning, I got three headlines that all of which seem to be telling different stories. From CNBC, home sales last month dropped to their slowest March pace since 2009. From Bloomberg, U.S. new home sales top all estimates on surge in the South. And from the Wall Street Journal, home sales in March fell about 6%, biggest drop since 2022. Which one are you buying here? I'm going to buy the CNBC headline only because I love data points that go back way long in time. And the fact that we're at the slowest sales pace

since 2009. I mean, remember from a moment where we were in 2009. Oh, that's right. In the midst of a global financial crisis caused in part by a housing crash. So if you're telling me that we're at the slowest pace of home sales since that period of time, that's going to get my attention. So I'm definitely buying the CNBC version of this story. And also pointing out that it's the March one. So we're only doing every March from this year. So there's a little bit of trickiness within the way they're positioning this. I want to dig into this Wall Street Journal commentary though, which is that so far this spring, supply is increasing faster than demand. The inventory of homes for sale is rising because some sellers who have been waiting

for mortgage rates to fall have decided that they can't keep waiting end quote uh this is a big difference i'm thinking about during the pandemic being in a neighborhood in cincinnati while i'm watching streams of people trying to look at one existing home and offers are getting taken off the marketplace instantly this seems you know this is one data point matt but is this an inflection point is this one data point what are you seeing here no i i hate to say it but i think it's one data point. So, yes, inventories were up 20% year over year. Probably a good sign. But remember, this data largely reflects contracts that were signed in January and February before we had all these tariff developments. So, people then were probably a lot more certain and less worried about

the economy than they are today. So, I think, sadly, the data could actually inflect downward, Ricky, because you have to remember the situation where we still have millions of homeowners were locked into long-term fixed mortgage rates under 5%, under 4%, and in many cases, under 3%. And if mortgage rates are still above 6.5% right now, which they are, I still think the vast majority of sellers are willing to wait longer, especially now if they feel even more uncertain about the economy. So I feel like, yes, we've got this rise in inventory data for March, but I don't think it sticks. I think we're probably still in a situation where less inventories come of the market and sellers are still sort of in this frozen mode. Maybe two very different markets

for existing homes and also new homes. On this coming Monday's show, I'm going to dive into some specific home builders with Anthony Chavone. But for now, there's a pretty odd disconnect going on with this, where the data for March is showing that purchases of new single-family homes rose 7.4%. And you mentioned home sellers being hesitant to leave. Home construction is still happening. You look at a company like D.R. Horton. This is the country's largest home builder. And they recently reported, they're telling a very different story. In their latest earnings call, sales dipped. The company's lowering sales guidance. There's a lot of questions for these home builders, specifically around tariffs, as you mentioned. Also, worth mentioning, a lot of

the people that are involved in new home construction, Matt, are immigrants. And that's going to be a challenge for these home builders. So, you know, on the one side of this specific data point, you see a macro trend, way more purchases of new single family homes. And yet the country's largest home builder is saying we're selling fewer homes and we expect that trend to continue. Makes sense of that. What's going on? Right. It does feel paradoxical in a way. But you have to remember, the new home sales side of the housing market pie, so to speak, is very small. But it's important. And I think the fact that homebuilders, for the most part, have kept building throughout this whole period and have kept selling homes is important.

When I see the new home sales data, what I think it tells me is more about the demand side of the equation, which we know to be strong. We've got the biggest generation of first-time homebuyers in history. Ricky, I think that's you. Millennials who are desperately, in a lot of cases trying to buy homes. And they just can't because there's really no inventory despite the small rise that we saw in March. I think that generation, by the way, like previous generations, is largely unfazed by mortgage rates. I think they understand the situation they're in. They just want a home. They're getting a job. They're moving to someplace. They'd love to be able to buy a home and not rent a home. But I think on the homebuilder side, so to take D.R. Horton's side,

you're pushing discounts to move inventory right now. You know mortgage rates are expensive. financing is hard to get. To get deals done, you have to do discounts, which hurts your sales. At the same time, you mentioned you've got higher labor costs, you've got higher input costs. You now have a lot of uncertainty about the economy and what these tariffs are going to do to your business. You're putting less shovels into the ground. You're probably pushing off new development, holding that land a little bit longer than you want to. I wouldn't say this number is a blip. I think it's important that new home sales are up for the month, but I don't think it's telling the whole story about the demand and supply problem

that we still have. And I tend to buy what DR Horton is saying. New home sales are probably going to be heading in the wrong direction for the time being. Yeah. So I'm out in Denver in the rental market, still significantly different than buying a home out here right now. So I'll be staying in the rental market for maybe a year or two, Matt. All right, let's move on to Chipotle earnings. They reported yesterday after the bell. Matt, the big story is the comp sales decline Comparable sales for Chipotle dropping about half a percent. This is the first drop since COVID. And also coming off a heater, a 5-ish percent rise from last quarter.

CEO Scott Boatwright, very quick to mention that this could be a weather problem and a macro problem. You never love seeing a CEO immediately going after the weather in the first few sentences of a call. But that's what they're going for. Are you agreeing with what they're selling here? You know, I will buy the macro story there, Ricky. I don't know about the weather angle. I don't know about you. I still buy burritos, even if it's raining or cold out. But yeah, the macro story is something. I mean, if you look at what Chipotle did last year, mid to high single-digit comps every quarter, they did over 7% in comps for all of 2024.

for. So, the negative comp this quarter was definitely a shocker, especially because Chipotle had been really holding its own. I mean, if you look at other restaurant brands, including Starbucks, which I think serves a similar demographic, I mean, they were already seeing comps fall off the table by last summer, where Chipotle really held its own. But I think it's this slowly leaking economy that we're seeing. It's lower consumer spending, it's lower consumer confidence. And I think that's finally catching up even with the Chipotles of the world. And look, I think it's actually going to get a little worse going forward. I think management said they expect things to improve by the second half. They expect comps to be positive overall

for the year. But you have to remember what they did last year. Look at comps Q2 of last year, up 11.2%. That just shows you how tough the comparisons are going to get going forward this year. And especially now that there's this, quote, elevated level of uncertainty, end quote, among its customers, which they said bled into April. So I expect July's results when we get them will be pretty challenging. I think if you're a Chipotle shareholder, you certainly have to anticipate that growth this year is going to be a lot slower than it was last year. A lot of the growth is really just going to come from, on the revenue side, is just going to come from new store openings. It's not going to really come from the comp side. And if you look at Chipotle's stock

price. Yes, it's down roughly 30% from its all-time high. That's a big drop. I'm a shareholder. That hasn't felt good, but it still trades at a very rich valuation. And this year's results certainly aren't going to support that any longer. Hopefully, this is a situation where 2026 is the year when things really turn around. I want to start seeing management credit the weather when things are going well for them. Weather's only a problem. It's only a headwind. You never hear a CEO saying, you know, it was really nice out this spring and we saw more people coming in. Yes. Few other parts of the business results. And I think it is worth mentioning why this stock trades at such a rich premium is that even with this decline

in incomparable sales, these are incredibly profitable businesses. So later in the call, they're mentioning that the year two cash on cash returns for a new restaurant. So a restaurant that's been open a little bit is 60%. For older restaurants, it's 80%. You follow the commercial real estate market, I mean, that is blowing the socks off any sort of office building, retail establishment. These are still incredibly strong businesses. Sales still growing 6% to about $3 billion. And they're still opening new restaurants, 57 new restaurants open in the quarter. What else in the business results stood out to you? No, that was certainly it. Those returns, cash on cash returns for store openings, it's incredible. And it's why I believe the story

when management says, we can ultimately have 7,000 stores. I mean, of course you're going to open that many stores if they can be this profitable. And yeah, having observed real estate, other retail businesses, I mean, they're hoping for cash on cash returns in the high single digits, maybe low double digits if they can get it. 60% in year two, that's extraordinary. There's a Wall Street Journal column earlier this month that had the unfortunate title of your new lunch habit is hurting the economy. There's a few key points here that I think relate to Chipotle. One of which is that the number of lunches bought outside the home were lower in 2024 than in 2020 in the height of the pandemic. And also going out to lunch right now is

just stupid expensive. Hybrid office workers spending about $21 on lunch in 2024. That was up from 16 bucks in 2023. That research coming from a video conferencing company called Owl Labs. Shout out to them for finding out the cost of lunch. I still think there's a version where Chipotle wins in this environment where people are tightening their spending, but I still want to go out to eat. And if I go to Chipotle, I can get a steak bowl for about $11.50. I'm not getting the 20% tip screen. There's some headwinds here, but this is still really affordable compared to a lot of their competitors, Matt. It is. I mean, I think of Chipotle as high quality food at a reasonable price. And I think that works no matter kind of what happens

the economy. But I have to say, Ricky, lunch is stupid expensive. If I could share one anecdote, I just recently helped my wife and son move up to New York City. They're spending the spring and summer there. And we rented an apartment and I was helping them move in. And of course, when you're moving in, people get hungry, you don't have any food, you haven't been in the grocery store. So I made the mistake of ordering from Uber Eats, three sandwiches from a local deli, $55 for the sandwiches, Uber Eats fees, plus tip, I was close to $80 for lunch for three people. Ouch. What are you putting in those sandwiches? I mean, they were good sandwiches. One was a meatball. One was a Turkey. I think the other one was roast beef. I mean, they were good.

$80 good. I'm not so sure. Yeah. We're, we're seeing a similar thing in Denver. And what I've noticed is sometimes the mains are still all right, but now it's like a bag of chips is three bucks. And then we're adding on more of the toast tipping environment. It makes it very unaffordable very quickly. Let's move on to this Berkshire story. A lot of wall street journal today. I promise I read other news outlets. This is a column from Spencer Jacob, which I thought was good. And it was actually said to us from a listener named Chris pointing out that the annual Berkshire meeting is coming in less than two weeks. And there's a question for shareholders, which is what is uncle Warren going to do with all that cash right now? Berkshire Hathaway

is sitting on more cash than any company ever in history, including Berkshire Hathaway. it's about 318 billion dollars this is how he got there he's collecting a lot of the cash dividends that the businesses send him and also he sold about 80 billion dollars worth of apple stock back in 2024 to be clear berkshire still has about 174 billion dollars worth of apple stock so not a complete sale but trimming some of the winners i think the first thing people may be wondering, is this a macro signal? Is Warren Buffett battening down the hatches to buy up a bunch of stuff if the market turns south? Are you taking this cash pile as a macro signal? I've tried to reason my way through this a few different ways. Warren is 94 years old.

Is this just him being very conservative with the time he has left? No, right? First of all, he's always invested with a long-term mindset. He did that through his 70s, 80s, when most of us would be, at that point in our lives, 100% in bonds or treasuries. So he was still taking risks with equities. So I don't think that's the answer. I think he's probably investing like he's going to live another 20 years. But relatedly, could it be succession planning? After all, we've known since about 2021 that Greg Abel is going to be taking Buffett's place. Is he just setting up Abel with a lot of cash, kind of a clean slate when it comes to allocating Burscher's capital? No, I don't think that could be the answer either. I mean, I think if Buffett saw a compelling investment or acquisition

opportunity, he'd make it probably regardless of what Abel or anyone thinks. He's certainly proven that over time. Is it because he's lost faith in the direction of the country and therefore the U.S. economy and maybe therefore U.S. corporate profits? No. I mean, Buffett is the ultimate optimist. We know this when it comes to the future of the U.S. and that's regardless of who may currently be in the White House. So I can't help but conclude, Ricky, that I think this is actually macro signaling. I mean, forget the investments for a moment. Berkshire, the corporation, has $200 billion in net cash. So, take all the cash, take out all the debt, and it still has over $200 billion. That's up from $35 billion a year ago. And if you go back two years ago,

a little over two years ago, they actually had net debt of about $7 billion. So, in a little over two years, they've gone from a net debt position to over $200 billion in net cash. I do think Buffett is making a market call here. And you remember, one of his favorite market valuation tools is the market cap to GDP ratio. It's often called the Buffett indicator for good reason, but it's the total market capitalization of a country stock, U.S., relative to its gross domestic product. And he said in the past, when that ratio is above 100%, the market is kind of overvalued. When it's below 100%, that might suggest undervaluation. So, depending on what source you use and how you calculate the U.S. total market cap of stocks here, that ratio was

over 200% coming into the year. That was at or near a record high. It's actually higher than it was in the peak of the dot-com boom. I'm finally here. I think the evidence is undeniable that Buffett thinks or thought that valuations were expensive, and he was preparing Berkshire Hathaway for just that. It's not that he can only shoot with an elephant gun, and when you have that much cash are only options to take companies private or, you know, you're looking at Coca-Cola or American Express. You don't think it's that? No, no, no. I would say it's him being patient. I think he does see a lot of clouds on the horizon. And I think there's probably storms ahead, not just for U.S. stocks, but I think for the U.S. economy. I think Buffett believes that.

And you mentioned the elephant gun, right? So he wants to make $50, $60, $70 billion blasts with Berkshire's capital. And the only way he's going to be able to do that is if there are big dislocations in the market. And I do think he thinks or expects there might be in the near future. And that's why he's got all the cash. We'll keep watching. We'll see what happens at the annual Berkshire meeting in less than two weeks. Matt Argersinger, thanks for being here. Appreciate your time and your insight. Thanks, Ricky. All right. Up next, Mary Long and Asit Sharma continue their conversation about AMD and how macroeconomic forces are impacting the chipmaker.

Asit, a big ongoing news story that's kind of like a subsection of the terror story has been how changing export rules have affected semiconductor stocks, in particular how they've affected NVIDIA and AMD. So, last week, U.S. government changed its export rules for certain chips last week, particularly those that are going to China. This was big news for NVIDIA, which warned of a $5.5 billion write-off as a result of that rule change. AMD was hit by those changes, too. We on the show have already kind of talked about the impact of that $5.5 billion write-off on NVIDIA. But while I have you, I want to focus on what that might mean for AMD. So, this company is racing for closer to an $800 million impact as a result of these rule changes.

Help us understand this a bit better. These rule changes impact AMD's MI308 chip. Numbers, letters, you and I talk a lot about names. What does that chip actually do? How is it different from AMD's other chip offerings? It's MI400 offerings, for example. Yeah. The MI308 chips are, as you suggest, basically pared-down versions of AMD's latest GPU series accelerators that go in data centers. They're purpose-made for this market. The interesting thing, Mary, is that 2025 was supposed to be the launch year for these. They have been in prototype and the R&D phase. We didn't see a lot of sales to China in GPUs from AMD last year. This was going to be the beginning of a pretty nice opportunity.

If we can translate that $800 million that the company has signaled it's going to take us right down on inventory and work in process and translate that to revenue, probably it means about $1 billion to $2 billion in revenue each year. Now, as a function of $31 billion in estimated revenue for 2025, that's not a huge chunk. Let's say it's going to land somewhere between 4% and 6% of total revenue this year. But it's really about the forward opportunity. What the U.S. is doing, in essence, and this is not just on the Trump administration, this started with the Biden administration, but the U.S. is increasingly putting up barriers for its greatest companies that develop AI technology like NVIDIA, like AMD, making it

harder for them to play in what, in essence, is the world's fastest-growing market or market of most demand for these chips. The companies have been working around export controls for some time. They already understand they can't sell their most capable accelerators into China. But here we have a situation where, look, even the pared-down versions aren't going to be able to gain the required export licenses. Hence, AMD and Nvidia are getting shut out of a market even on the lower end. Where exactly in the production process were these MI308 chips? Were they designed but not yet built? Were they built and there's already orders for them? Is there a stockpile of these designed, manufactured chips that

AMD thought it was going to be able to deliver to China that now is just going to sit there, or they're going to have to find another market for? Or is this more theoretical revenue that they were planning on that they have to find another way to generate? Well, I think your question beautifully illustrates what we read in the very brief description, the 8K filing that AMD released, which is to say, they're sort of hinting that it's inventory, it's prototypes, it's some capitalized R&D, and it's some product that was ready to change hands. So, it's really a mix of everything. But we do know from that press release that some of it was inventory. This was stuff that was already developed, probably waiting to be shipped.

But the total cost of all this, including some of the prototyping and investment, is about $800 million. Not a huge hit for AMD when all is said and done. But really, again, to come back to this point, it is taking some future opportunity off the books. How much does that subtraction of future opportunity change or impact your overarching thesis for AMD? Do you view this as materially impactful to the company? the stock market certainly reacted. Upon hearing this news, the stock market reacted like, hey, this is a big deal, to both what it meant for Nvidia and AMD. How does Asit Sharma react to that news? Yeah, same way as the market, Mary.

You sort of re-rate the multiple on the company to adjust for that lost opportunity. But again, you mentioned the company has good business in China. Last year, it was about 25% of revenue that AMD derived from China, $6.23 billion. Most of this was in server chips, chips that found their way into desktop computers, gaming computers. There is a whole ecosystem of chips that are below the radar of U.S. regulators that AMD is selling in China. Those really aren't going to be impacted. The impact on my thesis isn't material. I have the same view of this as I have of Nvidia, is that the demand for generative AI technology and the ability to just serve up inference and also train new models is going to be huge for a long time,

even as we see innovations come out of China. And they will, because we are forcing China to innovate. These two companies will still have a lot of space, a lot of white space to play in, so they'll make it up elsewhere over time. Near-term, though, there is, of course, that little bit of re-rating on the stock. It was down, I think, 5% or 6% on the news the day that they had their press release. There's another branch of this that I want to touch on. It plays less to the changing export rules story, but more to the geopolitical situation, trade war situation more broadly. CEO of AMD, Lisa Su, announced that the company will be producing key processor units in the United States for the first time. Historically, AMD has relied on manufacturers

like Taiwan Semiconductor to build its chips. And historically, TSMC's manufacturing has taken place in, you guessed it, Taiwan. Now, though, TSMC has a new production facility in Arizona in the U.S., and so more manufacturing will be able to take place stateside. The timing of this announcement, it was pretty recent, the timing of it makes it very easy to assume that, oh, this movement, this change, this is the result of President Trump's trade war and the recent push for American manufacturing. But in actuality, these plans have been in place for a long time. Let's put the tariff situation aside for a moment. Big hypothetical, but let's just do that for the sake of conversation. What does making its chips in America mean for AMD

on a cost basis? Again, putting the larger, ever-changing tariff situation aside for the moment. I think it's a net positive on a cost basis. You would say, glancing at this proposition, how could it cost AMD less to have chips manufactured in the U.S. versus Taiwan, even though those chips have to be shipped over, assembled in different components and pieces? Well, the answer is, there's some opportunity cost here that plays into AMD's calculations. What if supply chains get disruptive? What if there's an earthquake in Taiwan, which is a key risk that's always been there with TSMC? What if China invades Taiwan? That's always been a key risk. For AMD, on a long-term basis for its supply, when it extrapolates costs

of the chips themselves to its operating margin, which you and I have been talking about, it makes sense to start having some of those chips made here. And I think this is a big win for TSMC, because TSMC for a long time itself didn't believe that it could be able to manufacture chips outside of Taiwan, because they have such a specialized engineering workforce there. And the Taiwanese, the engineers there, work incredible hours relative not just to the United States, but other parts of Asia. These are specialized engineers who work very hard. It's extremely complex to make this advanced chip packaging. But TSMC has surprised itself. It's branched out into South Korea, it's branched out into Japan, it's branched out into Germany,

it's branched out into Arizona, of all places. They are looking to have smaller and smaller node processes out of that Arizona facility, which is a boon for TSMC, but it's also a boon for AMD, because then that cost proposition doesn't look so bad. If it's a little more expensive to make it here in the U.S., well, you'll take that trade if you're AMD. And look, in a tariffs world, it makes even more sense. So, I think Lisa Su is feeling pretty good about those commitments and the decision to try to bring some of that manufacturing here and participate with TSMC. And as a shareholder, I'm all for it. We'll leave it there because shocker asset, I believe you and I are out of time, but always a pleasure. Thanks so much for

shining a light on this company and how it exists in the ever-changing geopolitical landscape. Thanks a lot for having me, Mary. Always happy to talk AMD. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't Buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.