Motley Fool Money - Chip Stocks and Bank Earnings Extravaganza

Starting point is 00:00:00 Earning season has kicked off, and we have updates from the biggest names in banking and semiconductors to digest. This is Motley Fool Money. Welcome to Motley Fool Money with the Hidden Jim's team. I'm Jason Hall filling in for Tyler Crotter Day, and I'm joined by Fool contributors that you guys hear a lot from here, John Quost, Matt Frankel. Before we get into the show, though, guys, something important I'm going to need to talk about. If you've been feeling uneasy about your portfolio lately, let's be honest.

Starting point is 00:00:40 Who hasn't? Our CEO, Tom Gardner, went live earlier today with something he's been building for months to address exactly that. If you haven't seen it yet, go to epicportfolio.fool.com. If you're already an epic member, check your account. You might already have access. Again, that website, it's epicportfolio.fool.com. Let's get into it here.

Starting point is 00:01:01 We've already talked about Goldman Sachs earlier this week. Matt, you're back from a Motley Fool event, and you're one of our bank experts here. You've owned Bank of America longer than any other bank in your portfolio. It's also become the largest bank holding that you have. How was the quarter? They had a pretty excellent quarter. They beat estimates on both the top and bottom lines and pretty much everywhere else throughout their business. Their earnings were up 17 percent year every year.

Starting point is 00:01:28 That interest income beat expectations, trading revenue, investment banking fees, asset management fees, they were all better than expectations, all increased. Equity's trading was really strong, grew 30% year over year. It's not surprising, given how volatile the market's been. People trade more when the market's volatile. Investment banking fees grew 21%. We hear about the upcoming wave of IPOs. A lot of them have hired investment banks. So that's not too surprising. Net interest income was up by 9%. All the profitability metrics, return on equity, things like that, showed great improvement. The only spot where they missed expectations was fixed income trading, but interest rates were pretty stable and predictable. And that's relatively minor, considering that the bank

Starting point is 00:02:11 outperformed its expectations virtually everywhere else. And we saw Goldman Sachs reported the same thing in FICC. So that seems more of an industry trend and not a bank-specific trend. Right. So I think it was kind of expected going into it because Bank of America was, I think, the number three or four bank to report. I mean, the best news might be that consumers seem to be holding up well, not even a company-specific thing. The bank's provision for credit losses was about 200 million less than expected. Brian Moynihan, the CEO, he said that credit quality is good and improving, and the numbers back that up, the bank's net charge-off ratio. It improved six basis points here every year to 0.48%. Now, Matt, Jason and I were on the show earlier this week, and we were

Starting point is 00:02:53 looking at Goldman Sachs. And we saw that Goldman Sachs actually increased credit loss reserves. And so, is this different from that, or can you just explain it for those of us who don't follow the banking industry as closely as you do? Yeah, so the reserves are kind of the total amount they're holding in the tank for anticipating loans to default. The provision is really what they're putting aside this quarter. It is the same essential concept. They're setting money aside to, so if consumers default, it's not like it's coming out of their pocket. This is a pool of money that's already there. So it's something that every bank has, and it's really kind of an indicator of where they see the consumer weakness or strength.

Starting point is 00:03:33 Matt, we also heard from Schwab, which is a bank, but it's probably better known to most non-Shawb bank customers as a brokerage and investing services provider. Specifically, the brokerage services, how did that business do? Yeah, well, just like I mentioned with Bank of America, trading activity was very elevated, not surprising. The market was down a lot in the first quarter, especially after the Iran conflict started. So we saw average trading volume up 34% year-over-year-over-year on a daily basis. That was a new company record.

Starting point is 00:04:04 Revenue was also an all-time high for Schwab up 16% year-per-year. But it was actually lower than experts thought it would be, and that's why we're seeing the stock under pressure after earnings. But overall, Schwab seems to be doing pretty well. They added 1.3 million new brokerage accounts in the quarter. So Schwab is a growing business. $140 billion of net new assets. Their total client assets are up 19% of.

Starting point is 00:04:26 year-over-year, and that's not all due to stock market performance. I can tell you that. Plus, Schwab announced a new crypto trading feature today that will bring retail investors the ability to trade crypto on its platform. Matt, if we go back a few years ago, investors were really worried about Schwab's balance sheet. Interest rates were skyrocketing, created fears that Schwab's bank was going to follow Silicon Valley Bank in First Republic in failing. We just saw the stock reached new all-time highs late last year. The business and the business and the the balance sheet seem to be on very solid footing. But if we look at multiples, both on earnings multiple and book value multiples, it's still well below where we've seen it in prior peaks.

Starting point is 00:05:07 Do you think there's room for further multiple expansion? Or should investors really be focused on earnings growth as the main driver for future returns? On one hand, Schwab seems to think that its own stock is cheap. They spent $2.4 billion on buybacks in the quarter. That's about 1.5% of their shares in one quarter, which is a pretty aggressive face. But on the other hand, it's not a cheap bank stock. It trades for about 20 times earnings, which is a lot higher than Bank of America, Goldman Sachs, or any of the other ones that have reported, in a somewhat uncertain economic environment. It might sound odd, but if the market volatility calms down, let's say the Iran war ends and things like that, and the market just kind

Starting point is 00:05:43 of calmly makes new highs, as I would put it, like it was doing at the end of last year, it could actually be a negative catalyst. We'd see lower trading volume and things like that. But the real thing that investors should know going forward is that Schwab's earnings, even more so than other banks, can be kind of lumpy because they really depend on not only interest rates, but trading volume with the market's doing and things like that. So investors should keep the lumpiness in mind. Yeah, there's a little bit of a compounded effect here when you're a brokerage and also a bank, which are both very cyclical kind of lumpy businesses.

Starting point is 00:06:13 Matt, thanks for the insight there. After the break, we're going to dig into earnings from two of the biggest names in semiconductors, which right now that also means AI. You're listening to Motley Fool Money. Welcome back to Motley Fool Money with the Hidden Jim's team. AI continues to be the driving force behind the stock market broadly. We just got Q1 results from two of the biggest names in chip manufacturing with ASML reported yesterday. That was the 15th. Taiwan Semi, TSM in shorthand, reported this morning. John, let's bring you into the conversation here. Yeah. And for this conversation, can I just frame it this way? I think we should zoom out for our listeners just to make sure that everyone is up to speed on what's going on behind the scenes. And so

Starting point is 00:06:56 many of us are using chatbots these day. Jason, I don't know if you have a preference. You got many to choose from there. I'm a Gemini guy myself. Okay. Let's say that you go to Gemini and I're looking to brainstorm activities for your kids. I know you got a couple kids and sometimes we don't know what to do with them. Right. So you ask Gemini, hey, what are some things that I can do with my kids today? It's a sunny day. Whatever. It spits out some ideas for you. That's simple for you. Yeah. Right?

Starting point is 00:07:23 You just put in a couple of inputs, but computationally, that's actually pretty hard. And it's not just any computer that does that. You need something kind of powerful, and that's why Nvidia's GPUs are really the preference in the industry to make all this happen behind the scenes. There's a data center somewhere that's got a lot of these GPUs in them to make that happen. Here's the thing. Invidia doesn't make its GPUs. It comes up with the designs, yes, but it outsources the manufacturing. and one of the companies that is doing the work for NVIDIA is Taiwan Semiconductor.

Starting point is 00:07:57 The company decided that this was going to be its thing. It wasn't going to design anything. Taiwan Semi just makes the stuff for its customers, that its customers design. And what's interesting about Taiwan Semiconductor, though, you take that a step further. It doesn't make the machines that make the chips. It needs many other companies manufacturing equipment, including equipment from ASML. this is a company that makes extreme ultraviolet lithography machines, and really modern computing isn't possible without ASML behind the scenes, making it happen.

Starting point is 00:08:31 It's machines currently work down to the two nanometer. I don't have nanometers on my tape measure, so let me just put this in perspective for us. That's how much, two nanometers, that's how much your fingernail grows in two seconds. That's how small we're talking about here. It's going to go down to 1.4 nanometer within the next few years. This is incredible technology, and it is making everything happen in AI.

Starting point is 00:08:57 It's worth clarifying, John, that this, I know you mentioned Nvidia that they don't make their own chips and they rely on these two companies, but it's not just Nvidia. It's really, it's tough to overstate how embedded these companies are in the entire semiconductor industry and how dominant they are, especially ASML with its technology is unmatched. So these are the great picks and shovels plays, and they don't care if Nvidia wins or AMD wins or whoever wins, if there's a winner, they're going to make money. So they want the whole industry. The rising tide will lift their ship. Yeah, and I think that's really good for many investors to say, hey, I'm not going to pick the winner in the front. I know that no matter what, the picks and shovels behind the scenes

Starting point is 00:09:36 are going to make some money. Yeah, I think the other part of this is so important, too, is as much as we focus on the bleeding edge and the leading edge, which are massively important, these are also the workhorse businesses in the industry, too. ASML's machines that they made 20 years ago, more than 90% of those continue to operate in like memory manufacturing facilities and things like that. TSM makes chips for pretty much every consumer device you can think about. So they're so important. John, let's go ahead and make the transition here, though. Talk about the quarter. How did they do? Let's start with ASML. Yeah. So for ASML, it sold 79 lithography machines. That's it. Just 79.

Starting point is 00:10:14 It doesn't make sense when you think about the numbers that this business generates. Well, and that's the thing. That translates to just over $10 billion in revenue for the quarter. So 79 machines. This was actually just a little bit more than what investors were expecting on the top line. But I think that investors need to be careful not to read too much into a slight beat or a slight miss any quarter for ASML because these machines are so expensive. The difference between a beat and a miss on expectations could be a single machine. And that could just be a timing issue. Sometimes it just doesn't ship on time for a variety of reasons. So just need to be careful there. I think the high-level takeaway, though, for ASML's report is that demand is strong. Margins,

Starting point is 00:10:58 gross margin, operating margin, very well within the normal range for both of those. So ASML isn't necessarily seeing an incredible margin expansion like some other semiconductor companies are, but overall demand is strong. I wanted to kind of follow up on that. You mentioned the machines, which that's the big driver for revenue. But a significant portion of their revenue comes from what it calls installed-based management sales. It's a fancy way of saying the professional services ASNL provides to support the machines that they sell to their customers, which obviously you're buying a machine that do the math, $10 billion divided by 79 machines. They're going to need some maintenance. How do you see that? It grew 17%, but the system's revenue fell sequentially.

Starting point is 00:11:42 And I think that's important to note that it was sequential. So system sales from the fourth quarter down to the first quarter, yes, there was a drop, but up year over year. It's not unusual to see a steep drop off from the fourth quarter to the first quarter. In fact, that's what happened last year, too. The long-term trajectory is still up for the system sales. And of course, that translates to an ever-growing maintenance revenue stream. Yeah, and if we look at that, both on a sequential basis and a quarterly basis, one of the things that stands out to me is that that services-based revenue in both cases is growing faster than system sales.

Starting point is 00:12:22 And that indicates that customers are really leveraging ASML machines in their manufacturing operations, particularly as the machines become more advanced. John, let's go ahead and shift back over to TSMC. How was the quarter there? I think that Taiwan Semiconductor was a bit more exciting than ASML. The company beat expectations. That goes without saying 35% growth in local currency. But what was so interesting here is that it is, in contrast to ASML, it is seeing this margin expansion. So gross margin at 66%, operating margin at 58%, net profit margin at 51%. Those are all record highs, indicating that demand is far beyond Taiwan Semiconductor.

Starting point is 00:13:05 capabilities. High performance computing is what is driving the numbers here. So that's AI. It's just an incredibly strong quarter for Taiwan Semiconductor yet again. Yeah, so clearly AI investment has been massive lately, and that's the driving force behind their results behind, and VDivis results behind all these companies. I have a tough time wrapping my head around all these several hundred billion dollar figures that companies are spending on data centers and AI infrastructure. Do you see these growth rates like the one Taiwan semi-reported as being sustainable? Or do you think, are you a little skeptical, too, that there's going to be trillions of dollars in annual spending for years and years to come?

Starting point is 00:13:46 That is the question, isn't it, Matt? And I think that just takes us right into the bottom line from these two reports that we're looking at here. Different companies, but interrelated. And I think what we can say, if we're combining the two things, is that there are some leading indicators in these reports that we just looked at when it comes to the AI infrastructure spend that you're just referencing there. So for ASML, what is a leading indicator there? The orders. And right now, orders are very strong, particularly from computing memory companies. Some of them are using some older machines and now they're trying to update their memory offerings to make them more AI compatible. So they're trying their hardest to get their hands on

Starting point is 00:14:30 ASML machines. That's a good sign. Then when you look at Taiwan Semiconductor, their capital expenditures just jumped 10% from the previous year. This company can't keep up right now. And you look at the margins, right? And that seems to be the record profit margins seem to indicate a cyclical top. And we know that the semiconductor industry is cyclical. But then you look at the capital expenditure spending. This company knows the industry very well. It would not be increasing its CAP-X by 10% if it thought that it was right at the cyclical top. It's telling us that it's still investing so that it can meet demand. That is a long-term driver for these businesses.

Starting point is 00:15:15 And so I think these two reports are telling us, yes, the semiconductor industry is cyclical, but this is a cycle unlike anything we've ever seen before, and it can continue to go on for some time now. Maybe on top of the cycle, but certainly later in the cycle than we have been. The big question, of course, how long is it going to play out? John, thanks again for bringing us some insights there. After the break, we're going to talk about the companies that we are most looking forward to hearing from this earning season. More importantly, why?

Starting point is 00:15:46 You're listening to Motley Fool Money. Welcome back to Motley Full Money with the Hidden Jim's team. A quick note before we dive into the three stocks that we're really interested in hearing from this quarter, we love it when we get to make you. you are listening or part of the conversation. If you have a stock or investing question for John, for Matt, me, anyone else you've heard on the show, you can now email us at Podcasts at Fool.com. We love to have mailback segments whenever possible, so send your questions, but remember, keep them foolish. That email again is Podcasts at Fool.com. That's Podcasts with an S on the end

Starting point is 00:16:19 at fool.com. All right, guys, we are just at the start of earning season. This is really the first full, big week. And on one hand, it's important to remember, this is a 90-ish-day snapshot of businesses that we often intend to own for decades. And while we should always keep that perspective, it doesn't mean we can't be excited or look forward to hearing from our favorite companies. John, I want you to get us started here. What's a company that's set to report that you are most looking forward to hear from and why? Yeah, I'm probably looking forward to lift the most here. That is ticker symbol, L-Y-F-T, and I'm looking forward to it probably for selfish reasons because this is a large holding of mine. I'm grateful that my position is actually

Starting point is 00:16:59 in the money. It's making money right now, but it's down 40% from its 52-week highs. And right now, it trades at just five times its trailing free cash flow in investing lingo. That is cheap. Look, everyone says that self-driving taxis are going to be the end of this business. I don't buy that. And right now, in the meantime, Lyft continues to put up record adoption. numbers, record revenue, record profits. The company's scheduled to report in about three weeks. I'm really hoping that it just reports blowout numbers. I hope that management repurchased a ton of shares down here at these cheap prices. And I hope that that combination finally makes investors give it at least a little bit of credit here. I mean, I would say that

Starting point is 00:17:50 15 times its free cash flow is still an extremely reasonable valuation for something that's growing by double digits and posting record adoption numbers. So, I mean, trading is just five times free cash flow. I'm just waiting for Lyft to blow it out of the water. So I'm of the opinion that self-driving cars are going to be a net positive for companies like Lyft and Uber. They'll allow them to serve their customers more effectively. We're already seeing partnerships form between the makers of self-driving cars and these rideshare companies. So I don't buy it either. You know, I don't follow Lyft as closely as I do Uber, but when Dara made the decision to get

Starting point is 00:18:22 rid of the self-driving initiative internally and focus on building the platform, that was a big signal to me that management was focused on the right place. And I think Lyfts doing the same thing. The value of those platforms is going to be really, really important, just like Matt was saying. Okay, Matt, you're up next year. Yeah, the one I'm most looking forward to is PayPal and hear me out here because I know it's down quite a bit. And it's no surprise. Last quarter, they surprisingly fired their CEO and growth has been unimpressive recently. But there are a lot of of initiatives going on behind the scenes. The only thing that really changed is the person at the top. Everything else PayPal was doing, they're still doing. So I want to see if some of these are going

Starting point is 00:19:01 to start being reflected in the numbers. They recently started ramping up their ad platform in mid-2020, for example. They became the first payment wallet integrated into chat GPT. They have a new partnership with Google. I can name a dozen things. But I want to see if some of these are going to start showing up in the revenue numbers. Yeah, I mean, the one thing that PayPal still has going for it, even though there is uncertainty with the CEO, I'm not a huge fan of them doing that, making the change there, but it does still have some incredible assets, one of which would be Venmo, right? It's still extremely popular.

Starting point is 00:19:34 And the other would be Braintree, what powers a lot of checkouts behind the scenes without the PayPal logo on it. I think those are some pretty good assets, and PayPal still has that going for it. I've said this to Motley Fool members before on the member live stream, but I'll say it. here for folks that just listen to the podcast. As much as I didn't love the way it went down with the prior CEO who I thought was doing an okay job, getting replaced by the chairman of the board, like basically overnight, I can't help but think having somebody that comes from like a price taker commodity cyclical business of like personal computers at HP. Maybe that makes sense

Starting point is 00:20:11 as the person that's overseeing that brain tree business, right? It is really, it's a price taker business and it's so important to be efficient with unit economics. So I've kind of come around that maybe this is the right CEO. I own a little bit, and I'm giving him time to kind of prove out the strategy that they're bringing as well. Guys, I'm going to play here too. I've got a stock that I'm really following closely, and this is a relatively new addition in my portfolio, but a company I have a lot of high hopes for, and that's Toast, ticker T-O-S-T, reports in early May. There's a couple reasons I'm looking forward to hear its results. And also, also really hearing from management. To start, guys, we know about SaaSpocalypse, right?

Starting point is 00:20:50 So many companies, the idea that AI-powered coding is going to drive big disruption for software as a service business. The second, we're lapping the Applebee's deal. It did that last Q1, the beginning of 2025. It was the biggest deal in the company's history, and it drove a ton of growth last year. Now, the company doesn't give written revenue guidance. It offers adjusted EBITDA and gross profit, but both our expectations. expected, if you look at the company's guidance, to grow at a little bit lower rate this year, that makes sense. But what I want to see is if the narrative continues to support strong growth, or if the goalposts are moving at all here. And maybe most importantly,

Starting point is 00:21:30 whether any of that supports the AI disruption narrative or not. Yeah, I absolutely love this business, Jason. I wish that we could stop talking about it so that I could actually add it to my own portfolio. It's probably in the top five on my watch list, has been for a while. Really great business for the reasons you've point out. Yeah, I had a stint in the restaurant business a long time ago, and I can tell you just how embedded their platform is and the switching costs and how many vendors restaurants used to have, and now they can just have toast that replaces like 20 different things. So I do love this business, and I don't think it's going anywhere. Okay, fools, as always, people on the program may

Starting point is 00:22:06 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 is not approved by advertisers. 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 Dan Boyd and the rest of the Motley Fool team. For John, Matt, myself, thanks for listening. We'll chat again soon.

Motley Fool Money - Chip Stocks and Bank Earnings Extravaganza

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