Motley Fool Money - Meet The New Kids

Episode Date: March 18, 2024

Deckers Outdoor and Super Micro Computer enter the S&P 500. (00:21) Jason Moser and Deidre Woollard discuss: - What it means to join the S&P 500. - The brands driving Deckers Outdoor’s growth. - Why an EV blunder may have cost Hertz’s CEO his job. (16:06) Daniel Newman, CEO of the Futurum Group, explains what to watch for when it comes to the Magnificent Seven. Companies discussed: DECK, CROX, NVDA, SMCI, HTZ, TSLA Host: Deidre Woollard Guests: Jason Moser, Daniel Newman Producer: Ricky Mulvey Engineers: Chace Przylepa, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Choose servers in the S&P 500. Motley Full Money starts now. Welcome to Motley Full Money. I'm Deidre Wollard here with Motleyful analyst Jason Moser on this sunny Monday. Jason, how are you doing today? Doing great. How about you? Doing fantastic.

And we've got two new entrants to the S&P 500 today. We've got a super microcomputer, which is a maker of high efficiency servers. I want to start there. We've talked a lot about this one on the show in previous episodes. because its run-up in the market has been incredible. So thinking about a company like this with this incredible run, it's joining the S&P 500. I'm assuming that, that, you know, is an impact for companies

or investors that are investing in the index and things like that. What else does it mean? Yeah, I mean, it definitely means that any, any, you know, funds, any, any ETFs or whatnot that are tracking the S&P or that use the S&P as any sort of feeder to, to how they invest. They're going to be rebalancing in order to accommodate for the fact that these companies like Super Micro have entered the S&P. So, I mean, in the near term, you can see some volatility. You can see some buying on that end that would push that stock up. I think longer term, you know, there's a reputational sort of dynamic there. I mean, it's not much, but I mean,

it's kind of like, hey, listen, you're at the cool kids table now, right? I mean, I think a lot of people would agree that it's a good thing to be. a part of the S&P 500. It's a benchmark that many investors use to measure how they're performing. And so I think from that perspective, you've got to feel really good about being there. I mean, it's one of those things that can result in some near-term volatility, perhaps some near-term buying, which would push that share price up. It's not something that really speaks to the longer-term fundamentals of the business, but it's an indicator that they're doing something right. So it's a good thing. Yeah, yeah, absolutely. And the other company that is

joining the S&P 500 today. Not necessarily a household name, Decker's Outdoors. You're probably, a lot of people might be wondering, like, what is that? Well, it's actually the company driven by two powerful brands, which is Hoka and Oggs, among some other brands. They're not super micro territory, but their performance, they're up about almost 500% in the past five years, not too shabby. And they had earnings last month, record sales for the Hoka brand. But the thing is I'm thinking about is sneakers. I've got sneakers on my mind because Nike's reporting later this week. And it just seems to me like the sneaker business is so much harder than it used to be. As we look at Decker's outdoors and we see this competition, you know, you had all birds doing well. Now not so well.

You've got on holding. How do we think about, how do you think about the sneaker business these days? Well, I mean, you said it. I think you feel like it's gotten a lot more competitive. I really, it sure feels like it to me too. I mean, you look at the space from, from you take a step back and look at the larger space. I mean, it does look. I mean, Nike is still the king of the hill, right? I mean, when we talk about shoes, it's really difficult to not put Nike at the top of the conversation. There is a ton of competition entering the fray now with all sorts of lifestyles and whatnot.

And it's not just straight sneakers anymore, right? And I've always wondered about with Decker's. I mean, Decker's outdoors to me makes, when I hear that, I think, oh, that must be a competitor to Treks. Right? They're the company that they want to build my deck for me. But no. And that's really interesting because you look at what Decker, the success of Decker's has really, a lot of it can be attributed to the success of Ugs. I mean, it's not just Ugg.

Don't get me wrong. I mean, the company itself. It's mostly Ugs, though, at this point. It is a lot. I mean, there's no question about it. And I think that's the brand that most people are familiar with, which kind of leads you to wonder if they wouldn't be better served to maybe even. rename or rebrand the company in that regard. But I don't know. I digress. I mean, the numbers still tell a very, very good tell for the company. They've grown revenue at a 15.2% compound annual

rate with the last five years, with earnings up better than 26%. Like you mentioned, the stock is up better than 500% of the last five years. And the other thing is, when you look at this greater market, they're still a very small part of the overall market. I mean, market share around 4.25% today in the shoe market, but it is slowly and steadily increasing. And I think a lot of that can be attributed just to that brand equity. And a lot of that really revolves around the other brand. Well, it's interesting because the Hoka brand has sort of become more like a fashion sneaker, like a lot of the celebrities wear it, and yet it's not really tied to athletics.

I mean, it is in the runners love it, but it's sort of not quite the same as Nike, which I think makes it interesting. But the Ugs part, you know, to me, ugs are, maybe they're like crocs. They're this, they're not the most attractive shoes, but people, man, people love them. They go in and out of fashion. I mean, they were fashionable in like the, like, early odds,

and then, you know, and then people stopped wearing them now. They're wearing them again. And, you know, there's so many Ugg knockoffs, but you've really got a distinctive brand here. So I was thinking about, you know, where is this going to go? And one of the things I talked about in the most recent earnings is international.

The other thing I think about with them is they are getting, they are growing the men's category. I mean, the forecast is is pretty rosy here. What does, what does Decker and really, and Uggs need to do to keep growing? Well, I mean, I think you've keyed in on something there. And you mentioned the word fashion. And, you know, when we talk about companies like this, I mean, fashion is a difficult nut to crack in, in regard to investing. It's very fleeting. And there are some companies where the brand, sort of.

of transcends the fashion and there are other companies where maybe that in the case. I think in this case, I think that maybe Ugg, and I think that maybe Ugg, to a degree at least, does transcend fashion. I mean, you said it. I mean, they're maybe not the best looking shoes. I don't know. I'm not an Ugg owner, but I find them all over my house. So I'm not going to sit there and say that they're not good looking shoes.

I mean, my daughters and my wife love them. They're unique. I will say that, right? You see some really interesting designs and models. They are functional. Sometimes they look like they look like they're a little bit difficult to wear. But maybe that's a part of their charm. I mean, when you look at the actual numbers that UG is chalking up, it's clearly they're

doing something, right? I mean, UG revenue, this most recent quarter, total UG revenue was up 15%. They just achieved their first ever $1 billion quarter for the UG brand. And as you mentioned, it is a global brand, right? And the other neat thing is that this growth is all really being driven by direct consumer. And so that does play out on the margin side for investors in a good way. That DTC business, the direct-to-consumer business, is up 20% for the quarter, now represent 62% of total brand revenue.

That's up from 60% a year ago. And they're able to maintain pricing as well. So it's not like they're having to resort to sales and discounts in order to move this product. It's just become a global brand that folks like, right? And there is such a thing as brand equity. And brand equity is really difficult to quantify, but you kind of know it when you see it. And it can have a great impact on a business for sure. Yeah, yeah, the international stuff is interesting to me.

They had like an opening in Shanghai. And I'm comparing this one to Crox a bit because Crox had, You know, they did that hey dude acquisition. It didn't work out for them as well. I think Decker's is a little more well positioned because, I mean, they've got the two main brands. They've got some other brands, including Tivas, which still great sandals. I don't think anyone wears them as much as they used to, though. But they've got a CEO transition coming later this year.

Their current CEO, Stefano Karate, he's going to take over in August. What do you think here? Is it mostly just steady hands on the wheel and keep going? Is there anything if you were taking over that you would be? do acquisitions or anything like that? Well, first, I'm glad you brought up Tevis. That took me back to my younger days. Well, you still love them.

I remember. That speaks a little bit to fashion being fleeting, right? Yeah, I remember wearing Teivas going through like, you know, high school and college. And nowadays, I mean, I don't remember the last time I bought Tevas. So, yeah, it is a reminder that these things can leave as quickly as they arrive. Yeah, I think in regard to the CEO transition, going back to what we've seen this business do up at this point. It's obviously done very well over the last several years. To me, you know, you look at a new CEO coming in with a business performing the way it is, and consumers clearly

love your product. Your business is killing it by virtually every metric. Dude, just keep the ball rolling, right? Don't go in there and try to shape something around this new identity or try to make this company your own or take it in a different direction because you are now heading heading the charge, really take advantage of this great situation that you've been given, certainly in the near term. It doesn't mean dismiss thinking about where this business needs to go longer term and things that you may need to do to ensure longer term and sustainable success. But take advantage of this great situation you've been given. Keep that ball rolling. And listen, a lot of the hard work has been done, right? I mean, get in there, let this thing keep going. And, and,

and give yourself the time to go ahead and start thinking about longer-term strategy and how you might want to expand this brand and ultimately how you feel like the strategy this business needs to move forward. Because I mean, you see some of these businesses where they feel like, okay, we need to start acquiring new brands and become kind of this sort of Etsy house of brands or have this sort of umbrella brand. I don't know that that necessarily is something they need to do right now in the near term. It may be something they need to consider in the longer hall. But for right now, hey, man, just keep that ball rolling. Yeah, yeah, I think with the growth that they're seeing, that steady as she goes is the right, is the right strategy.

But I want to talk about another company where I think steady as she goes is maybe not the right strategy. On Friday, there was an announcement that Hertz's CEO, Steven Scher, he's stepping down after about two years on the job. It was not a great quarter for them. That was, they reported in February. The headlines are all about how this has to do with Hertz's movement. into EVs and then they announced that they're selling about a third of the fleet, about 20,000 cars. I mean, maybe that's some of the reason here. Do you think they move too fast into that new sector?

I absolutely think they did. I mean, it was always a bit of a curious decision to me. I'm not one. I don't rent a ton of cars, but I do rent cars on a fairly regular basis. Just going down, I go down and go see my mom and dad down in South Georgia a couple times a year. And the easiest way for me to get there is I fly into Atlanta and then I rent a car at the airport and I drive, you know, three hours out to their house. And it always struck me that throwing so much behind this EV movement was a little bit odd. And like last couple of times I went to go rent a car, they were really pushing me to rent an EV in particular, a Tesla.

Now, I don't own a Tesla, but I knew that I was like, listen, I got to drive three and a half. hours. I don't know where charging stations are. And furthermore, I'm not familiar with EVs. I will pay you more to not give me an EV. And I think that when you look at the numbers, right, I mean, overwhelmingly, the share of cars that are on the road today are not EVs. Now, that will change in time. I mean, it's going to be a gradual shift. But I think the key word of there is gradual. It's going to take a while. And most folks are just not conditioned to use EVs. They don't know the EV experience. And renting a car is not where you want to start learning, right? I mean, you just want to get your car and you want to get to where you're trying to go.

And that was just a really, really big bet on the part of Hertz leadership at that point. That to me, it just seemed like a really bold step. That's probably one where you might want to dip a toe in the water as really, as opposed to going all in. And it felt like they went all in there, and it didn't really pay off. So we've talked about fast zoomers. super micro we've got kind of a steady cruiser in decker's outdoor we've got a company in need of a boost in hertz i want to wrap up just by talking about another rocket ship company in video we talk about in video a lot but today uh they've got their AI conference um on friday i talked to an AI expert and we're going to play that in the second half of the show but i didn't ask him about this developer

conference doesn't this feel to you like it's the new apple conference in terms of everybody waiting to hear what's going to be announced we're looking probably for partnerships, new chips. The excitement here, it really does feel like the old days of Apple to me. What do you think? I agree with that. To me, it's far more exciting. I have been not, let's just, I'm going to be polite. I've not been bullish on Apple's conferences over the last several years. I find them, I find them just a waste of time and money, to be honest with you. I mean, not to say Apple's not a great business, right? I mean, listen, I love my iPhone, but, you know, I mean, I don't know that you can look at Apple as really sort of the company that has led the way on the innovation front over the last several

years. I think Nvidia, it's at the top of the conversation for a lot of reasons. I mean, for me, I'm going to be fascinated to hear more from Jensen Huang about the data center opportunity because that really is so much of Nvidia's business. Something I was reading recently, he was talking about the fact there's this, you know, we have about a trillion dollars worth of installed base of data centers over the course of the next four or five years, we're talking about that opportunity doubling. And I mean, we're talking about trillions of dollars here. I mean, that to me is just one of the opportunities that people should be keeping an eye on. And I really, I can't, I can't really state this enough. I mean, I look beyond Nvidia even, right? I mean, look at this data

data center opportunity, look at the other companies that will be able to take advantage of the companies that will be able, or companies that will be an important part of that buildout. I mean, this is going to be impacting companies from Amazon and Google to Invidia and Microsoft and all sorts of smaller companies that are in that value chain. So I think it's just a really exciting time in regard to the opportunities that AI is bringing. And clearly, Nvidia is the company, I think, leading that charge. but there are going to be so many other businesses that really benefit just from figuring out ways to utilize to incorporate AI into their businesses.

And so for me, that's just, it's a very exciting time to be an investment for sure. Yeah, absolutely. I'm sure we'll be talking about it on tomorrow's show. Thank you for your time today, Jason. Yeah, thank you. If you're early in your career and looking for insight, inspiration, and honest advice, listen to the Capital Ideas podcast, hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last, and what it means to lead with purpose.

The Capital Ideas podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. Could there be a TikTok ban, who regulations reigning in China's AI ambitions really work? I talked about these subjects and more with Daniel Newman, CEO of the Futurum Group, a tech analyst media and research firm. Talk first about sort of the scrutiny that we're seeing on AI, on technology, what can and can't be sold to China. What are you seeing and what does it mean for some of our magnificent seven like Nvidia? Well, it definitely means different things for different companies. And it's worthwhile to point out for Nvidia, given the fact that a huge amount of AI is going to be consumed and AI chips are going to be consumed in the China market. Now, of course,

you've got this sort of arms race that's going on worldwide right now. And with the West, in the East, sort of at odds, and more specifically with China and everyone else at odds in many ways. You know, you've got technologies like EUV from ASML that's being limited in terms of its availability to China, which has basically put them at a big disadvantage to make leading edge or like kind of the most advanced AI chips. And so all the companies, including InVIDIA, but AMD and others, are looking at making these sort of tuned down AI chips that can and will pass these chip control inspections or these chip controls that have been created by the Biden administration. The bottom line is the demarcation is they're very well understood what needs to be done,

but this line that's been created is the difference between the most advanced chips that can be used for national security use cases, for building economic advantages, for winning in certain businesses markets. And a third, and in some cases more than a third of the market, just got cut off. So the long and short of it is, is that, near-term, Nvidia has so much demand, same with AMD, that I don't actually think

this China thing's that big of a deal in the near-term because there's so much outsized demand in the U.S. around the world. Hypersalers are trying to load up and build this AI capacity. But eventually, when you're seeing growth rates

like Nvidia's had over the past four quarters where you've got these mega growth rates, where does that growth continue to come from when you've cut off one of the world's largest economies from buying the products that you're selling at the highest. margin with the most demand. And so I don't see this getting better. I wanted to ask you about something that came up, the European Parliament, they recently approved the World's First AI Act.

So, you know, they're ahead of us now. I mean, we've been doing our own thinking and interviewing and all sorts of things about that. What do you think is the impact of this AI Act? And is it going to lead to the U.S. finally putting something substantive together? I think there's a pretty substantial disconnect there between U.S. and Europe when it comes to technological and policy around advancements in technology. We've seen it with social media. We've seen it with privacy. We're going to see it now with AI. And this is a little bit of the sort of social order of Europe versus the more capitalistic tendencies of the United States, that there's this kind of heavyweight debate. I mean, right now we're seeing scrutiny around some of the different large language models

how they're able to, you know, tabulate and generate historically accurate content. We saw it with, you know, recently Adobe was called, you know, Google, a Gemini was called. And you also have all kinds of rights, you know, the New York Times lawsuit. You've got open AI fighting with crock about the openness and transparency. You know, Europe, I feel, has been very focused over the last many decades about being very quick to act, quick to legislate, quick to set restrictions. They're also very focused with limited innovation in the region. Comparatively, Europe has significantly less high-tech, high-value companies coming out of the region.

And so it's also a different revenue stream. You've looked at the assessment of the number of major billion-plus dollar, you know, competitive rulings against companies like Google, Facebook, at the time, Meta, Microsoft, Qualcomm. You know, it's been very focused over in Europe in creating rules to tax. You know, I call it a tax. You can call it something else. But it's, you know, various, like, privacy and GDPR. You know, AI is going to be similar. I mean, look, there's so many unknowns right now as it pertains to licensing and property rights, you know, who owns the content. What's it trained on? I don't know if you saw the interview with the CTO of SORA the other day. And, you know,

they asked her a question about what did you train SORA on? Sores the video, you know, the video generator that's coming out of Open AI. Yeah. And she said, we trained it on publicly available data. And then the follow-up question, I think was Joanna Stern and did the interview. And it was a really great question. She goes, what data was that? Was it YouTube data? And the CTO, she froze. She completely froze to talk about what data they trained the model on. And so we've got this world right now where everybody's kind of up against how transparent do we need to be, how open do we need to be. Elon Musk and Sam Altman are having wars on, you know, and social across Twitter about this. But right now, there's so much we don't even know about AI. So you're trying to

restrictions, and you're trying to make decisions based on safety and well-being and economic prosperity and corporate enablements with AI. And at the same time, with such limited insights, I often wonder if Europe's preference is more about making sure they have rules in place so they can later tax companies to break the rules. In the U.S., on the other hand, is almost frozen. They don't know how to act because we're so dependent on these companies to drive innovation and drive capital market and market growth. And so we end up with these two ends of the spectrum. U.S. to date still barely regulates privacy.

And on the other hand, you know, Europe has dozens of major fines that have come down on companies for breaking privacy rolls. I see a similar situation with AI. So Biden puts something out, but what is the executive order and what happens if you don't follow it? And how do we even measure that? How do we, you know, because the companies that have the people that would know how to measure it, they're not the people working in the government.

Well, we've talked a lot about some of the Magnificent 7, but we've also brought up a lot of companies that kind of aren't in there. So I'm wondering, as an investor, what are you looking at what companies are you looking mostly at the Magnificent 7? Are you finding other things that are interesting, like AMD, for example, in trying to catch up within video. What are you watching? Yeah, I mean, look, there's a few different things that are going on that are really important to pay attention to. I think one is there's going to be a shift in this GPU trend. This GPU, this Nvidia, you know, Invita has 99% of the GPU market. There is a global contingent of companies that are kind of coming together right now to fight

the strength. Now, everyone's a partner with Nvidia, and Jensen's been the most popular CEO at every technology event around the planet during the year of 2023, 24. Having said that, you know, AWS is building custom silicon for training in inference. Microsoft announced their own. AmD and Lisa Sue are building very advanced GPUs, has a multi-billion dollar pipeline for this, and a growing demand and software abstractions that are gaining popularity. This isn't to say, by the way, that Nvidia isn't going to continue to have some great growth. But I do think from a market share standpoint, they're going to see margin contraction because you're going to see more competitive products coming out. You're going to see revenue growth rates on an annualized basis. Remember

the Zoom boom during the pandemic? Everybody's Zoom grew this crazy. amount. Well, after growing 200 and 300% quarter to, you know, year over year over year over year for four or five quarters, eventually you're going to start to see the growth over those quarters start to normalize and people are going to be like, oh wait, they only grew 50%. Well, they grew 50% over 300%. So that's a definite trend line that I am paying attention to. I'm also watching really closely this AI moving out to the edge. So I'm paying a lot of attention. We do have a mega trend this year with AI PCs. You're seeing like this kind of next generation device profile. It's a little early on the wearables. I know everyone's excited about the Vision Pro. I think Apple's biggest opportunity right

now is in generative AI and actually having a story there. The Vision Pro is really still very niche to me. I still think like not everybody wants to wear a 20 pound lug on their head all day long. But I do think these new next generation format PCs with AI built in. And by the way, the AI being local, the data being local and protected, things like your calendar, things like your work data, things like the stuff that's in your email that's personal to you. Not everything needs to go to the cloud. And so I like companies there that are focused on the edge. And I've been paying a lot of attention to Qualcomm.

They've got an interesting entry point into the AIPC. They've got a really competitive product now with Intel and AMD there. But they're also building interesting technology for edge AI, just for everything from IOT. to automotive. So they've been a company I've followed really closely, and I've been very interested in watching their continued development. Other companies, you know, just a couple others I'll mention is like companies like Service Now, you'll hear me talk a lot about them. You know, anybody that can create workflows that can automate work processes, that can create productivity and streamline efficiencies, societally, Deirdre, I'm excited about humans being able to maximize our potential.

That's the really positive spin I'll put on the workforce, is that we don't sit in our office data all day, just smashing data into forms all day long. The technology can help us do better than that. Companies that can automate these processes that can take a lot of software debt, a lot of these old legacy ERPs and CRMs, they're, they're, they're, they're clugi. They have too many steps, too many people involved. You just got, I saw this great meme that talks about, like you got like 35 people just moving little bits of data around from system to system all day long. Any technology that can help with that. So I'm bullish on technology like service now to build workflow and automation. I do think another company that's really interesting on that side is

going to be Salesforce. I do think the generative capabilities of like automating a meeting and then being able to generate a proposal and a sales opportunity and actually streamline things that used to take seven or eight people down to a couple clicks of a button. These are the exciting productivity opportunities that I'm watching. So of course at the silicon end to the software end, there's a lot there, but there's a couple for you. Fantastic. Thank you so much for your time today. Thank you for having me. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Dieter Wollard. Thanks for listening. We'll see you tomorrow.