Motley Fool Money - Exciting (But Crowded) Opportunities

Starting point is 00:00:00 Is it just us or is it getting a little crowded in here? This is Motley Full Money. Welcome to Motley Full Money with the Hidden Gems team. I'm Tyler Crow and today I'm joined by longtime Fool contributors, Matt Frankel and Lou Whiteman. Earnings are still trickling in at a much slower pace where they're still on their way, but not a whole lot going on this week in that regard. And much of the headlines out there today are about the conflict in the Middle East. But the Monday crew touched on that on yesterday's show.

Starting point is 00:00:44 So we're going to do a little bit of a theme today that we're calling, hey, this space got pretty crowded awfully fast. And the theme is basically industries that used to be devoid of competition that are now all of a sudden a hotbed of startups and IPOs and investing opportunities that clearly a lot of investors are interested in today. Now, this isn't a new phenomenon. We often go through periods where a new technology captures the hearts and minds of the market, and we see a rush of new companies into. that space. One that comes to mind for me as an investor and somebody who's been writing about the markets for a while was there was this period of the early 2010s where we thought natural gas was going to displace diesel engines in semi-trucks and trailers for transportation of goods because diesel was so expensive, natural gas was so cheap because of the shale revolution,

Starting point is 00:01:34 and that just kind of sputtered out over time. Guys, are there any other phenomenon like that come to mind for you guys? 3D printing just a couple of years ago, maybe quantum computing now. The Bitcoin miners, yeah, I mean, that's a weird one, but yeah, lots of times this happens. I'm going to go in a little bit of a different direction. I'll say ETFs. There are more ETFs now than there are individual stocks in the market, especially when it comes to these leveraged ETFs, these single-stock ETFs that you can get two times exposure to them.

Starting point is 00:02:04 That's really blown up, and it's something that, you know, how do you choose ETFs at this point? There's a lot to unpack there. Yeah, it's much like more mutual funds than 1890s than there were individual stocks. ducts as well. One place in particular, and this is kind of where the concept of this idea came, was one industry in particular is space or investing in space. It's a place where we've seen things get crowded kind of fast. If we wind the clock back like 10 years ago, there were basically two companies doing rocket launches. There was United Launch Alliance, which is a joint venture between Boeing and Lockheed Martin. And in Europe, there was Ariens Space, which is part of

Starting point is 00:02:41 like Airbus and Safraum and a bunch of other European companies. And then there was this plucky startup. It was called SpaceX, and they were looking to break into the industry by, like, drastically reducing the cost of putting stuff into space. And 10 years into the future now, we're seeing a new space race. But instead of the U.S. versus the USSR, it's companies buying to build cheap rockets, put a bunch of satellites into low Earth orbit, and space stations, potentially, to replace the international space station.

Starting point is 00:03:10 And just this week, this is part of the reason we're talking about it. There was a private company called Sierra Space, and it just didn't. a funding round that would value it $8 billion, which is on par with a lot of the publicly traded company valuations we're seeing today. So, guys, as space becomes a more crowded industry with lots of players, how are you viewing the opportunities? Are there particular parts of the space business that look more attractive than others? Or is this really like a company-by-company basis where you really have to turn over stones?

Starting point is 00:03:38 Well, yes, it is a company-by-company basis. There's a lot of potential here. depending on the source that you're looking at, the space economy worldwide is set to roughly triple to about $2 trillion in size by 2035. And there are a lot of different types of companies that will stand to benefit. For me, I'm looking at companies like defense stocks and other stocks that are going to benefit with the space revolution without completely focusing on it. Moog is one company in particular that comes to mind.

Starting point is 00:04:06 Ticker symbol is m.g.a. It's a leader in precision motion systems that have a lot of potential applications, but it also produces the flight controls for some of the most widely used aircrafts for both military and commercial use. So, you know, companies like that that really are going to be fine regardless of whether or not they actually benefit from the space race, but have a lot of opportunities for space applications as well. Yeah, so there's definitely a huge opportunity, but the capacity being thrown at it is, wow, right? Tyler, to your point. And what that tells me, there are going to be winners and losers. Not everyone is going to win here. Generally speaking, I think there's room for more Lyft specialists, even though we have seen

Starting point is 00:04:48 so many companies that just want to light rockets. The logjam is the pads, the actual locations to launch from. We just, if all of this, if what Matt's talking about, if this trillion-dollar economy is going to emerge, we've got to get a lot of things into space. We need more launch sites, we need more rockets. So, even though we've seen a ton of startups here, demand will grow. We do need that capacity that they bring online. On the other hand, though, there are some areas where I do think that there are too many players for the market. Two of the most popular ones, Scare Me, Communications and Imaging. In communications, we have legacy players like SES. We have a lot of newcomers, Starlink, Amazon Leo, a whole range of others doing other things.

Starting point is 00:05:37 There's also the national security stuff there, too, but there's a lot of money, a lot of satellites chasing what is still a pretty limited opportunity. I don't think all of those are going to make it. In imaging, there are some pretty good established companies that can do high-resolution imaging. There is a need for the product, but I don't think that product needs to be refreshed as often as their business models would like them to. I don't think the recurring revenue is going to be what they hope. The economics of the business, I think they're going to be a little chance. There's a need there. There's definitely kind of one company doing this. But is there enough volume demand for high resolution images? I don't know if there's enough to sustain all

Starting point is 00:06:20 these companies. It's interesting. I think there's going to be a lot of parts of the supply chain or part of the value chain of space that's going to have very different economics than what we're seeing today. And then obviously space investing is going to attract a particular type of investor, perhaps the more cavalier, maybe a little more risk on, you know, somebody that's not afraid of backing a company where the track record and profitability isn't quite there yet. So for both of you, absent profits, what are some of the things that you're looking for in the spaces you find most interesting that are going to be signs of success for companies

Starting point is 00:06:55 in this industry? Yeah, so it's literally rocket science, right? So, I mean, it's hard. And so many of these, especially because of the SPAC boom, these companies came public very early. And a lot of them I've described them as science projects funded by equity investors. I think you have to take a good look at two things here. A, will the science project work? Because that is a huge if for some of these.

Starting point is 00:07:19 There's some really creative, amazing things that are being attempted. There is the question of, we are using equity money to fund this R&D to find out if this works. That's where people get excited when it works. Too often, the mistakes that are made is in that second question, which is, can you turn this into a viable, sustainable business? There are a lot of things that we can prove in the lab or prove that will work, but to turn that into a business that has a big enough audience that you can build a revenue base to support your research in a long term, that's really, really hard to do. A lot of these total addressable markets look better in the PowerPoint than

Starting point is 00:08:00 they do in the real world. So that's the filter I'm trying to use it. Really think through, like, even if this works out as planned, what is the actual market here? Who's going to spend money on this? And is it sustainable long term? Yeah, I don't have too much to add to what Lou just said. I look for companies with a lot of financial flexibility. That's one thing, because some space startups have a lot more than others, especially those that don't have profits. You know, you want several years of runway and some unique advantages in their product, ramp and relationships with all the contracts and, you know, just government deals that they're getting with predictable revenue streams and things like that. That'll lead the growth. And that's

Starting point is 00:08:40 what I'm looking for. With this idea of crowded spaces, this is going to be the ending question for both of our segments today. On a scale of 1 to 10, where one means there is room for a lot more winners in this space. And 10 means we're going to see massive consolidation before anyone even makes any money here. How crowded is the space industry today? So, overall, it's probably hired in this, but I'm going to go with a five simply because if you really look at it, there are some areas that are desperate for investment. There are some areas where there's just too crowded. All in, I do think there's consolidation, but I do think there's plenty of wiggle room. So I went right down the middle of five.

Starting point is 00:09:20 Yeah, I said eight. I think there are a lot of space startups that are not going to make money. and that's why I'd advise a little bit more caution when it comes to how crowded this isn't to be very selective before investing in space companies. After the break, we're going to go from outer space to breaking down at the smallest level with uranium atoms. In a world full of noise, long-term thinking stands out. On the Capital Ideas podcast, Capital Group Leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90s. years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc. So of all of the industries that are getting more crowded these days, this is the one that confounds me more than others. It's nuclear power. The Fukushima Daiichi disaster in 2011 looked like

Starting point is 00:10:12 it was going to be the breaking point for nuclear power. New construction of plants was already low, and then we saw rapid shutdowns in Japan, and there was accelerated retirements across Europe and the U.S. to a lesser degree. And again, we, We hit the fast forward button to the past 12 months, and I can't ever remember fielding so many questions or opinions on uranium miners and companies looking to bring about a nuclear renaissance with novel technologies, like small nuclear reactors. Companies like New Scale Power and Oclo are getting loads of attention these days. But there are lots of other private companies and smaller entities in larger corporations

Starting point is 00:10:53 that are looking to get a slice of this nuclear pie as well. And one of the other stories that was a flashpoint for this today was there was a French company that was a small modular reactor, and they're getting a fresh round of funding that values them at a quarter billion dollars for what is essentially, as Lou put in our previous segment, a science project. I'm a little puzzled by all the interests in nuclear power companies these days. But I want to get each of your takes. Is all this bluster and just kind of hot,

Starting point is 00:11:23 hype for growth of power in general. Are we going to really see this talk and this nuclear renaissance that's been kind of chattered about for a while, actual turn into facilities, construction, like a real tangible push towards nuclear power? Yeah, I mean, I'm not really puzzled by it. There's a big need for power right now, and it's only going to grow, and it has to come from somewhere. I know you said the solar and wind, and we've had this discussion several times, are likely to be more of the near-term solution. I agree, they're easier to ramp up and things like that. But it's not going to be the only solution, especially if AI infrastructure demand keeps growing

Starting point is 00:12:00 as we keep seeing in all the headlines. To be clear, I'm not going to go run out and invest in a bunch of nuclear startups. It's not in my wheelhouse, but it's a big opportunity for sure. About 5% of US power generation currently is consumed by data centers. Most experts expect that to more than double to about 12% by 2028, so pretty 3%. soon and to continue to grow from there. There's really a need for sustainable round-the-clock power for data centers. While wind and solar, they have a lot of potential, and there are things like battery storage systems to store the energy that they generate. There's a lot to like

Starting point is 00:12:37 about nuclear. In practice, utility scale solar only runs for about six hours per day on average. Nuclear power hits reliable. It's energy dense. And not only that, there's a lot of bipartisan and support to develop these technologies, like you mentioned. There's also a lot of big commitments from the big tech companies who are going to need this power. So, like I said, I'm not really surprised by the hype that we're seeing. Yeah, I think the attention makes sense. The need is real. And I do think that if they can get nuclear right, it will stomp all over some of these renewables. So, I mean, I do think the opportunity is there. The hard thing here, though, is the payback for investors. Nuclear is hard. Nuclear is expensive. I think, I'm a little hyperbole here, Tyler,

Starting point is 00:13:20 but every project in history, it seems, has taken longer and cost more than expected. I am skeptical about SMRs and all of this until they actually get there. And you see what it costs and what it looks like. If anything, scale used to be your friend, a nuclear, to bring the cost down. I don't know if these problems will ever get solved. And I, look, if anyone gets a right, There's a ton of money to be made, but I am skeptical enough about just how hard of a problem this is to solve that I am very content as an investor to sit this out until even like the fifth, six inning. I'll get on it and eventually if it actually works, but I think there is a lot to prove here before it's really investable for me. One of the things that isn't quite discussed

Starting point is 00:14:06 as much is, you know, we mentioned New Scale and Acklo, and there's a couple other publicly traded one. But in addition, there is, as far as I know, there's at least seven to eight more private companies or companies like GE with their, I think it's actually now GE for Nova. You have Rolls-Royce, companies that are massive conglomerates that are also kind of have SMRs down like in the lab. They're working on them as well. And this is where I struggle a little bit with this whole thing is what's the upside? And a little bit to lose point here, generating power isn't necessarily a high return endeavor. Most of the industry, at least in the United States, is regulated where there are fixed rates of return if you're working with state regulated utilities. And we've all seen the

Starting point is 00:14:50 forecast for AI power demand, as you alluded to, Matt, and there's going to have to be power generative assets to put electrons in the system. But is lots of growth at relatively low margins and relatively low rates of return, maybe 10, maybe 15 years from now? Really an appealing proposition, or am I, you know, underselling the opportunity here? I think, especially for the small modulars, the SMR is to work, I think that the game plan is to kind of bypass the grid and bypass the regulated utility side, offer this on a case-by-case basis to data centers, big users,

Starting point is 00:15:29 and kind of get by. Look, and again, if they work, I think there will be demand, and I think there will be some pricing power if you can deliver it, because I know there's a lot of competition here. I have a hard time imagining anybody figuring it out. I am not ready to say that just across the board, there will be a dozen different competitors here. It's just a really hard problem. Look, a lot has to go right in that scenario. And I think your point is well made, but I think there's at least a story for investors to tell themselves of how this works out as a really

Starting point is 00:16:01 profitable enterprise. There are a few different categories here. As Lou mentioned, you know, bypassing the grid is one opportunity that could potentially lead to higher margins. There are some of these nuclear startups that are going to build plants and then sell them to third parties. And that's like just investing in an infrastructure investment like Brookfield or Brookfield infrastructure or things like that. So there's a lot of different ways you can go. And that's a really broad question. I don't think you're underselling the opportunity, but it's really worth kind of paying attention to how each of these are planning on making money in two, three, five, ten years once they really ramp up their scale.

Starting point is 00:16:37 Same question as we had for space on a scale one to ten. How crowded is the nuclear industry to stay? So this one I'll go all the way to an eight because I just, again, I have a hard time believing that anyone really figures us out. And for a bunch of them to figure it out, wow, if it happens. But I'll believe it when I see it. Yeah, we're on the same page. I gave it an eight.

Starting point is 00:17:00 Even more so than space, there's a lot more. revenue nuclear startups that are dominating the headlines. And, you know, like, they're not all going to make money. And those that do, they could, you know, they could run out of money before they start making money. And there's, there's a lot that we're going to see about that. So yeah, I'd say about an eight. After the break, we're going to do, instead of stocks on our radar, we're going to do stories on our radar. 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 one I love quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense.

Starting point is 00:17:35 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 off the middlemen, so you aren't paying for brand markups or fancy stores, just quality clothing. Everything they make is built to hold up season after season and is consistently rated 4.5 to 5 stars by thousands of real people like me who wear their clothes every day. The Quince, Mongolian Kashmir Cajmere Cureneck sweater may be the most comfortable one that I own. It's light, soft, and it was a lot more affordable than you'd think quality cashmere would be. Stop waiting to build a wardrobe you actually want.

Starting point is 00:18:10 Right now, go to quince.com slash motley for free shipping and 365-day returns. That's a full year to wear it and love it, and you will. Now available in Canada, too. Don't keep settling for clothes that don't last. Go to QINCE.com slash motley for free shipping and 365-day returns. Quince.com slash matures. Molly. As we finish up our last segment here, we're going to go around the horn and discuss

Starting point is 00:18:31 an investing story that you're following right now. So, Matt, why don't you go first? Yeah, there's been a lot of talk about IPOs this year that are really highly anticipated. We've all heard about SpaceX and Open AI and things like that. But Bill Ackman had to grab some attention, and I'm bringing him up just because Tyler's probably tired of hearing me talking about what Ackman's doing with Howard Hughes and his various endeavors. But he just announced that his new Persian Square vehicle, which he tried to take public in 2024, but ended up pulling the plug on it. He's giving it another try. This is the closed-end fund. He aims to raise $5 to $10 billion for it. And he's going to sweeten the deal by giving everyone who participates

Starting point is 00:19:08 in the IPO 20 shares of the Persian Square hedge fund that already exists for every 100 shares they buy. He doesn't do anything easy. Everything's a very complicated deal. It's a closed-end fund. I'm interested to watch how it goes, and if he actually can pull the trigger on this and actually get enough interest to raise $5 to $10 billion. dollars. Should Howard Hughes investors be worried about this? The Howard Hughes stake is owned by the Perching Square hedge fund that already exists. This is a closed-end fund that's designed to essentially essentially do what he's doing with Howard Hughes and buy insurance companies and other businesses. Yeah, that's what I mean. If he's like, I mean, way to take your eyes off the prize over at

Starting point is 00:19:47 Howard Hughes, I don't know. It just seems like he's throwing spaghetti at the wall. That's fair. Yeah, I had the exact same thought as Lou. It's kind of hard to turn Howard Hughes into the next Berkshire Hathaway when you're raising money at somewhere else to do the same thing. For my story, there's lots of headlines right now about the boogeyman that is private capital, whether it be something about seeing a couple private capital investments default on loans. We're also seeing high rates of redemptions at private capital funds and some of the big players in this, the Blackstones, the KKRs, Blue Owl Capital, places. like this, just stories abound of, oh, this could be bad. This could be bad, this could be bad, but I'm struggling to figure out if this is the thing today or if it's just more private capital bookie man stories, because I feel like we've been listening to the watch out for the private capital markets storyline for the past like two to three years now. Once interest rates started to climb, there was all this concern because, oh, it's all floating rate debt and all their,

Starting point is 00:20:49 you know, portfolio companies are going to get in real trouble here. And yet we're now in 20, 26 and things still seem to be chugging along ever so slowly. So one of the things I do want to follow in the next, you know, a couple months or so is, is all this media chatter just a great way to put some headlines of watch out for the private capital and get the clicks and headlines, or if there really is something behind all of these stories lately? That's a great one, because perception is everything here too, right? Even if everything's fine, if enough people decide it isn't fine and there's a run, it may not matter, right? I'll be. I'll I'll throw one more in here. You know, it's, guys, it should be the best of times. It's the best

Starting point is 00:21:27 of times and worst of times for this young fledgling, evotal industry. The battery-powered helicopter airplane hybrids that promise to zoom over rush hour and save us from traffic. Best of times, as in the planes will be flying in the months to come. The White House just approved a pilot program to begin service and select U.S. cities. But it's the worst of times because all the key companies are acting like middle schoolers on the playground. They're suing each other. They're yelling each other. Last year, Jobi Aviation sued Archer claiming corporate espionage. Today, Archer is suing Jobi, accusing Jobi of deceiving regulators and hiding ties to China. It's just like, it feels like middle school. The obvious question for me here as an investor is, why can't they just focus on the

Starting point is 00:22:14 opportunity? And my fear is that they're kind of admitting that the total address will market that they've been talking about isn't as big as some have hoped, and that snuffing out a competitor or at least downgrading a competitor might be as important as the land grab in establishing your business. If so, then a lot of people might be in for kind of an unwelcome surprise in terms of the potential for these businesses. I hope I'm wrong here, but it's just a weird time for the fighting when they actually or should be ready to get airborne. Unfortunately, that's all the time we have today. Matt, Lou, thanks for sharing your thoughts.

Starting point is 00:22:54 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 it's not approved by advertisers. Advertisans 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.

Starting point is 00:23:18 For Matt, Lou and myself, thanks for listening and we'll chat again soon.

Motley Fool Money - Exciting (But Crowded) Opportunities

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.