Motley Fool Money - ETFs are for the Memes (again)

Starting point is 00:00:00 Looks like meme stocks are back on the menu, boys. This is Motley Full Money. Welcome to Motley Full Money. I'm Tyler Crow, joined by longtime full contributors, John Quast and Matt Frankel. Today's Thursday, October 9th. And we got a great show today. We're going to talk about meme stocks because there was recent news about a new ETF that's trying to capture the zeitgeist of meme stock investing yet again.

Starting point is 00:00:41 Of course, we'll do stocks on our radar like we do every Thursday here. But before we begin, we actually want to start with today's news from a company you don't hear much about the news because they're a great company that tends to stay out of the limelight. And that's Ferrari. Shares of Ferrari are down about 14.8% as we are taping this after the company announced changing to its electric vehicle strategy and financial guidance that was lower than expected. The company now projects its electric vehicles out to 2030 will be 20% of. of its total lineup versus the original plan of 40% of the lineup. Also, 2030 projections

Starting point is 00:01:20 for its financial performance. It's adjusting down its operating profit from 3.2 billion euros to 2.75. And just for reference, over the past 12 months, just an operating profit was $2.1 billion. So pretty modest growth here. Now, Ferrari is a luxury brand stock. I would say masquerading is an automotive stock. And its shares have traded at a premium to the automotive industry for pretty ever since going public, probably with Tesla being the one exception. That premiums because Ferrari is much more of a consistent performer because of luxury. So with this lower projection, I'm going to toss it to both of you guys, is the stock really worth the rich market premium that it still has? Probably not. I would say that if you compare it to like a GM,

Starting point is 00:02:06 for example, which is trading it like six times earnings, and this is trading it something like 40 times earnings. Yes, there's consistency. Yes, it's a premium brand. Is it worth eight times the valuation of the average legacy auto manufacturer, if you will? Not really. I don't think that the electric vehicle news is anything really material. They're just the latest in a long line of companies, including some of the leaders like GM that have reduced their EV targets. So I wasn't surprised at that. It's really the profit projections. A city analyst said that this falls below their low growth case. So it's not surprising that the market's reacting like this. But keep in mind, not only has Ferrari historically traded at a premium, Ferrari is still up by 645% over the past 10 years.

Starting point is 00:03:00 It has been an excellent performer for investors. And one of the big reasons is it was a big winner of the pandemic era luxury surge is what I call it. A lot of people spent money on different luxuries during the pandemic because there was a lot of stimulus. You couldn't go out and spend money. I bought a house in Orlando, for example. A lot of people bought Ferraris. You saw their sales surge during that era, and it really hadn't cooled off, and we're just starting to see like the, it's like a delayed post-pandemic cool off. So I'm not that worried, but it does still look like an expensive stock. Yeah, I agree with Matt here. I don't think it's quite worth what the market says it is, even still after the pullback. And that's nothing against Ferrari,

Starting point is 00:03:40 and that's nothing against people who really like this business. I think there is a lot to like with Ferrari's business. But any stock at the wrong price can be a bad investment. And I think we can just zoom out and think a little bit about how is shareholder value created. And I think that one of the main ways that often happens is with business growth. But then you look at Ferrari and it's only expecting a 5% compound annual growth rate through 2030. That's not a huge growth rate there. Profit margin expansion is another way that shareholder values created. It is expecting some Ferrari, but not a ton necessarily going from a 39% adjusted EBITDA margin to a 40% one. And then you think about capital return to shareholders. Now, Ferrari expects to return 7 billion euros to shareholders

Starting point is 00:04:29 cumulatively by 2030, that's around 10% of its current market cap. But of course, that's spread out over the next several years. So that's not a ton on a per annual basis. So, yeah, it's not enough juice to justify the current valuation, in my opinion. I want to kind of dig a little bit more into something you were alluding to, Matt, with kind of the luxury pull forward a little bit here. Because this is the part of the puzzle I've been trying to figure out when it comes to Ferrari. and we could kind of, this could go out to a little bit more.

Starting point is 00:05:00 Is this really a Ferrari problem or a consumer spending problem? Like, I'll ask you guys both, but here's what I'm thinking. On the one hand, Ferrari said it's cutting its EV lineup because it's a pretty clear sign that its projected lineup out to 2030 wasn't really reverberating with its clientele. And so it's going back to that traditional conventional engine and that distinct Ferrari sound you hear. and that's what the ultra-wealthy want to pony up for when it's this type of business. Getting back to that makes sense, but it was pretty clear that they might have missed with this EV push with kind of it still being an uncertain product on the market.

Starting point is 00:05:39 But at the same time, if you look at a lot of other luxury brands out there, LVMH, so Louis Vuitton, Moe Hennessy, Hermes, I call Restoration Hardware. It's not quite that level of luxury, but similar sort of sentiment. None of them are really doing too hot over the past couple of years. And so part of me is wondering, like, is this really a Ferrari story or a people pulling back on luxury discretionary goods? I don't think it's necessarily the latter. I don't think it's necessarily a pullback broadly in consumer spending. You look at Ferrari specifically, it always has more demand than it intends to supply.

Starting point is 00:06:22 It always intends to make less cars than what the market wants. That's just how the business works. And so you're looking at, for example, Ferrari's growth rate over the next five years, you're looking at what they're projecting. I think that investors simply just wanted a little bit more. And it's hard to know how big is its potential customer base. You know, there's some data points out there. You look at the world's billionaire list.

Starting point is 00:06:46 It increased by 8% in 2024, and Ferrari is only expecting 5% annual growth from here. So maybe you would expect it to go up at least by the amount of billionaires that are going up in the world. I don't know. I don't think that it's a broad thing that we're looking at here, not necessarily a data point for that. I think that you're just looking at Ferrari's results in Ferrari saying, we don't think that we're going to have as much demand in 2030 as what some investors might have hoped. For one thing, it's not just billionaires who buy Ferraris. There are at least three that I know of in my neighborhood, and they ain't billionaires.

Starting point is 00:07:19 It's people who just have a taste for luxury for the most part. To Tyler's point, the EV cut is pretty dramatic, but Ferrari is kind of, as you mentioned, really good at not building cars that its customers don't want. I can't remember any duds that Ferrari ever released, at least in the past 20, 30 years. We are seeing people cut back on luxuries, which is, you know, it's common not only if consumer sentiment's kind of low, which it is right now, but it's also a function of the the interest rate environment. Even if I wanted a Ferrari right now, I wouldn't be willing to pay 10% interest to get one. I guarantee you a lot of people who have Ferrari's financed them. Not

Starting point is 00:07:59 everyone's a billionaire who pays cash, was kind of my point with what I said earlier. But they do a great job like John said of keeping demand just ahead of supply. For that reason, I mean, they tend to hold up better than most automakers. They don't oversupply their dealers. They don't put out cars that aren't, that don't have long wait lists when they come out. And the last point I'd make is that for Ferraris, compared to most other cars, the used Ferrari market is very strong right now. So maybe a lot of customers, they're just not buying new ones. They're going to the used market where they can get a little more for their money. So, Ferrari has so many different dynamics than the average car company. I once saw a used Ferrari for $19,000 in a used car lot,

Starting point is 00:08:42 but I'm pretty sure it had a Honda Civic engine in it. So I don't know if that would still count as a Ferrari. Thanks for that, guys. Coming up next, we're talking about meme stocks. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sport, personality with elegance to deliver a truly instinctive drive. Inside you'll find true modern luxury

Starting point is 00:09:22 with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response two fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers at rangerover.com. Back in 2021, Roundhill investments really captured the investing zeitgeist with a meme stock ETF. Spacks were booming. The Wall Street Betts Reddit page was sending stocks up double digits in a matter of minutes. And there was a sense of euphoria around how the pandemic was going to turn all of our lives

Starting point is 00:10:03 digitals and everything was different. By 2023, this ETF under the ticker M-E-M-E, meme actually closed up shop because a lot of those companies didn't quite make it. But, you know, to use social media parlance from, it's so over, we're so back, we are so back because Roundhill announced yesterday that it is relaunching the meme stock ETF with a whole new set of holdings. Now, I wish we had video for this podcast because I would like to take that iconic lineup from the usual suspects and just put the tickers over their faces. If we look at the Roundhill meme ETF, under the same ticker again, M-E-M-E, it was like that last period during 21, 2021, 2022, it was certainly the top in terms of market euphoria in a particular set of companies.

Starting point is 00:10:54 So what camp are you in when we look at this new iteration of the meme stock ETF? Do you think this is an old song and dance, and it's probably going to have the same results, or is this perhaps going to a different rhythm? I think that people hear things like last time it was close to the top and then there was a market crash. If I've learned anything over my years as an investor, I can't predict when a market crash is about to happen. I can't predict when a market is about to bottom out and a bull run is about to start. I think that the launch of the mean ETF, it's not necessarily a predictor, a precursor of, oh, man, the stock market's about to crash. I would say it is indicative of what you said, Tyler, a lot of euphoria in the market.

Starting point is 00:11:42 And there's perhaps a lot of stocks that have gone up by an astronomical amount relative to the business results. I think it's good, though, to keep in mind. This isn't necessarily predicting that the stock market is reaching atop and it's about to fall. I think that this is why a lot of fools, Capital F fools, use the always-be-investing framework. We can't time the best entry, the best exits in our stocks based on. market conditions. There is normally something that we can find right now that's attractive that we can buy and hold for the long term. Yeah, I think this is kind of the same old in the sense that you're going to have a few meme stocks that win long term, a few, which we saw in 2021.

Starting point is 00:12:23 I mean, Robin Hood was considered a meme stock back then, and its investors have done very, very well, but most will cool off and kind of exactly what happened to most meme stocks in 2021. I almost view this ETF as being riskier than buying individual meme stocks or trying to find the ones that are actually going to be decent businesses and work out well, like the Robinhoods of the world. Because you're buying a basket of stocks, and you know, like, 80 to 90 percent of them are not going to work out well. So you might as well just take a chance and buy the ones that you think are going to be

Starting point is 00:12:57 the winners. Like John said, I can't call a top here or anything like that. If anything, I think we're a little bit away from a top. because the people who launched this ETF, they already had the framework in place. They already knew what to look for. It's less reactionary than the first time around. Less, not completely unreactionary. This is kind of, I'm not investing in it, but I don't know what you guys are going to do.

Starting point is 00:13:19 On the reactionary thing, and that's actually where I kind of landed when I looked at this, and I find myself this is a looking backwards sort of ETF. When I think of like meme stock ETF, it's like trying to identify the next big mean stocks that you can really benefit from their run-up. I would think that a company that wants to put out a product like this, this particular ETF that Roundhill is done, I thought they would be trying to do that instead of trying to, I guess you could say, ride the coattails of all these companies that are in the portfolio that have already had jaw-dropping their turns. We have companies in here that are up 400% over the past year. That's a lot. I'm just

Starting point is 00:14:01 wondering if it's just trying to catch the last bit of fumes rather than being a forward-looking, trying to identify the next big thing. So with that, I do have a little challenge for us, because as you've got Matt, there's probably a couple of them in here that over the long term are going to work out. So before the show, I sent you a list of the entire M-E-M-E-E-T-F holdings. So let's set aside valuation and market hype and all the stuff, and let's just look at the core businesses themselves. Of that list, I told you to pick one. and make the best business case for them. So, John, let's start with you. I'm glad that you let me pick first, Tyler, because I couldn't make a business case for all of the stocks in the

Starting point is 00:14:41 ETF. But Soundhound AI, ticker symbol, S-O-U-N, I can make a business case here. This is a 3.4% allocation in the ETF. And I think there is a real business here. It's a first mover when it comes to AI speech slash conversation. It's used by many of the top auto companies for its tech. for voice controls in the car. Many top restaurants use it for ordering at the drive-thru, for example. The thing is, it has nearly 200 patents, which does give it something from a competitive standpoint. And it's also growing like crazy. It expects to generate at least $160 million in revenue this year. That would be up roughly 100% from what it generated last year. So, look, the stock valuation is something that I question. There are ongoing losses here.

Starting point is 00:15:32 That's an issue, but there is a real business here. So I was actually kind of narrowing it down to the two on the list that to me are not real businesses yet. And that's QuantumScape and Oklo. And I went with Oklo. There are a pre-revenue nuclear reactor company. They're building small-scale nuclear reactors. Generally, the thesis here is that the latest tech trend, specifically AI are going to have a lot of power demand that really wasn't accounted for. And even like the future power forecast from like 10 years ago, AI power demand wasn't included. No one wants to build the old, like 30 sources of power. And the newer renewable sources of power like solar and wind may not be able to meet all the demand by itself. So nuclear is a very, very natural

Starting point is 00:16:17 option. The problem is, you know, it takes forever and a lot of, you know, there's a lot behind the scenes that goes on with building big nuclear plants. They're trying to build kind of smaller nuclear plants to be kind of more local to where these data centers and things like that are. They're building a prototype right now. It's called a small modular reactor. The first revenue is a couple years away. The first profit isn't expected until 2030. They might not even have enough revenue on their balance sheet to get there. They have a little over half a billion dollars in the bank. It's estimated they're going to need like a billion to a billion and a half over the next five years in just cash burn. But if, I mean, at the current valuation, they'll have no problem raising

Starting point is 00:16:58 that. It's about a $20 billion market cap. And this is really a lookout to 2050 stock. It's not about what it's going to do in 2030 when it's generating its first dollar of profit. It's a lookout to 2050 stock where if they could figure out how to make these small reactors viable and profitable, there's a massive opportunity here with the ever-expanding power needs of AI. So that's one that I think could turn into a really interesting business. I think the $20 billion market cap, kind of, as you said, for all of these, the valuation is a little bit stretched to put up mildly. It's up to more than 10x in the past year.

Starting point is 00:17:38 That's one that I think will be really, really interesting to watch, just because I really like the technology and I think it does have real potential. The one that I actually found the most interesting, at least from a business perspective, and kind of that similar vein on the power, power growth, demand for electrons, I guess, if you will, especially with AI and everything that we've been talking about over the past couple of shows. I wouldn't bloom energy to a hydrogen fuel cell manufacturer, kind of that same idea. Fuel cells are going to be part of the backup, spare power, not quite base load, a little bit of like a similar vein of an electric battery in terms of storage and on-demand power for data centers.

Starting point is 00:18:23 Because when it comes to data centers, you need 100% uptime. And there's a lot of going on in the background to make that happen. And Bloom Energy just happens to be one of the ones that can effectively deploy things relatively quickly, which is actually getting harder and harder when it comes to building out these facilities. And the best part about it is, over the past 12 months, it's actually profitable on a gap basis. So, it's actually earning earnings per share. So I think of all these it is the most profitable, at least compared to what else is on the list. So, yeah, valuation is

Starting point is 00:18:56 way out of hand here with the meme stock rally carrying it. But this is a real business, and it's actually growing at a pretty good way. After the break, we're going to wrap up with stocks on a radar that a little less meamy and a little bit more business. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly what I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin. They work directly with safe ethical factories and cut out the middlemen so you aren't paying for brand

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Starting point is 00:20:17 slash Motley. It was our Thursday tradition. We're going to be doing stocks on our radar. I know we just talked about meme stocks, but we're going to try to get a little bit more down into the business, the things that probably stick to our knitting, I guess, if you will. So, Matt, why don't we start with you? And then we'll go around the whore. Yeah. So the stock that's on my radar right now is Target. I had, I mentioned this one a while ago right after it reported earnings and the stock went down. It's gone down even a little bit more. Its yield is about 5.1% right now, close to its highest ever.

Starting point is 00:20:44 Trades for about 10.5 times earnings. I mean, it's not for a good reason. Consumers have kind of shifted away from Target, which is a little bit more of an upscale big box retailer toward Walmart, which is common when consumer sentiment is low, and it just favors discount retailers. They have new leadership now. They're making the necessary moves to get back on track. Target has a very strong history of navigating difficult environments for the business. Including the pandemic, nobody did Omni Channel better than Target in the beginning in the earlier days of the pandemic.

Starting point is 00:21:18 Just to name one example, in the financial crisis, they did a great job of doing exactly what they need to do now and getting people to go to Target more than Walmart. It's a dividend king over 50 years of consecutive dividend increases. I do not think Target is Kmart 2.0. I think this company stills a very bright future, and it's a really good buying opportunity. I went with First Solar, and this is going to sound a little unconventional, considering the current environment and the ending of tax credits for renewable energy and things like that. But here is why I think this is going to be more important than people think.

Starting point is 00:21:57 Again, going back to that, AI needs electrons sort of thesis. If you look out, there are a couple things that are fast to deploy. We've been talking about nuclear, but that's like, five, six, seven years away. We talk about same thing. Even if you were to talk about putting on a new coal plant, that's, again, five, six years. The only, really the two things that can deploy quickly in terms of putting electrons into AI or onto the grid, it's natural gas and it's solar. And those are the right now the quickest to deploy. And because of that and the voracious demand that we are seeing for power these days, I think what's going to happen is AI companies that are trying to build all their own power packs, whether it be with natural gas or solar or whatever,

Starting point is 00:22:43 you know, to be behind the meter and not rely on the grid, I think they're going to have to go with solar and have to go with nuclear, and sorry, natural gas for the next five years, because they're just going to be what is available. For solar is when it comes to utility scale solar in the United States, it's the biggest player. And it has focused almost entirely in the North American market. It just brought two major manufacturing lines online in the past, I think, 12 to 18, or past 12 or 18 months. The details on the numbers are a little off. But if there's somebody that's going to deliver power to these AI data centers, I think First Solar is going to be a big winner.

Starting point is 00:23:23 And even without tax subsidies, because these companies are going to have to pay up to make this happen. And I think that could really work well in First Solar's case. John, what do you got? Yeah, thanks, Tyler. For my radar stock today, I have Floor and Decor, ticker symbol F&D. I've highlighted this before as my radar stock, but I recently added to my position. So this is the money where my mouth is stock, and so I wanted to highlight it again. Floor and Decor is a home improvement retailer with a focus on flooring.

Starting point is 00:23:54 And one of the things that I do like about this company is its management team, specifically CEO Tom Taylor. He was previously at Home Depot, and so he's been around a successful home. improvement business before. He knows what it takes, and he particularly knows what it takes to win with pro customers. And I think Flor and Decor is doing an increasingly good job at winning over pro business. The primary strategy of growth here is opening new stores. Theoretically, they could essentially double in size in coming years just from the new store buildouts. Profits right now aren't as good as they've been in the past, but I'm optimistic that eventually home remodeling that spending industry will pick up and that will provide a boom once again for floor and decor's profit

Starting point is 00:24:40 margins. Right now, it trades at just 1.6 times at sales. That is far cheaper than the Home Depot stock. That's the same valuation as lows, but I think floor and decor has the most long-term upside and especially at that valuation, I like it. Matt, John, thanks for sharing your thoughts. As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for our guests, 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 Dan Boyd for

Starting point is 00:25:19 keeping us on schedule. For Matt, John, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Money - ETFs are for the Memes (again)

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