Motley Fool Money - Open Checks, Corked Bottles

Episode Date: October 3, 2024

OpenAI is projected to lose $5 billion this year. And, yet: it just keeps raising money. (00:21) Jim Gillies and Mary Long discuss: OpenAI’s $157 billion valuation The port strike’s potentially positive impact on two auto parts makers Changing tastes in the beverage market (16:33) Asit Shama and Ricky Mulvey test out a new rating system on Costco stock. Vote for Motley Fool Money as Signal’s Best Money and Finance Podcast: https://vote.signalaward.com/PublicVoting#/2024/shows/general/money-finance Companies discussed: ALV, GTX, STZ, COST, BJ, WMT Host: Mary Long Guests: Jim Gillies, Asit Sharma, Ricky Mulvey Engineer: Rick Engdahl, Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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Open AI sees some open check folks. You're listening to Motleyful Money. I'm Mary Long, joined today by the illustrious Jim Gillies. Jim, thanks for being here. You ever been called that before? That is absolutely the first time I've ever been called illustrious, and I'm not sure what to do with it. Thanks for joining us on the show.

You are a valuation guy. I think it's fair to say. So figured we'd open up with some valuation news, Open AI, which listeners might know that name. It's the company behind ChatGPT, among other things. They got a new valuation. And that valuation comes out to 157 billion big ones. That is comparable to the likes of Goldman Sachs, Uber, AT&T.

It's also up from the $30 billion valuation it had about a year ago. Jim, I'll open the floodgates. What do you think of that number? I was going to say, why are you doing this to me? I think the number is absurd. I think the number is unjustifiable. I didn't say wrong. It may very well be wrong.

It may be right. But the thing is, I am from, and the reason why I'm a little am used out of the gate is, I am one of a, I think, a fairly slowly dying breed. And that is, I believe the company is worth some of its future cash flows discounted back at an appropriate discount rate. Very boring. Here's the thing. I have no idea what ChatGPT, OpenAI's future cash flows will be.

Neither does anyone else. I have no idea the timing of them, the scale of them, the size of them, the dilution that's going to come. Neither does anyone else. I have no idea what the appropriate discount rate is here. We can make an estimate, but it's going to be precisely wrong. It might be roughly wrong. It might be roughly right. this is this is clearly the big story of of the world you know really at this point you know from a

technology development standpoint I don't want to go to politics or anything but you know like AI is it's transformational we're just not sure how transformational it will be and my my history as an investor we were we were talked before the show we were talking a little bit about David Gardner and David Gardner's style, which, and I've many times said, David Gardner is one of the best investors I've ever met. I've met Warren Buffett several times. But David's style is something that often I struggle with because I'm not a, I'm not a venture capitalist thinker, whereas I think he is. And so, you know, and he, I would assume David would say, you know, Jim's a cash flow thinker. I'm not a cashful thinker.

So I am seeing the world. David has that ability to kind of, you know, see where the world is going, you know, at least better than I can. And so I think it's important to investor know thyself and follow along with what you are comfortable doing. And all of that is a nice way to circle around and go like, I would have, if this was public, I know they're talking about going public at some point. I have no idea how you are applying this magical number to the valuation.

We know that there's no cash generation going on here. We have no idea where the cash is going to come, when it's going to come. This is a, this goes into, as Buffett likes to say, this goes into the too hard pile for me. It doesn't go into the too hard pile for the rule breaker types, David Gardner types. That's great. But I would just walk away from this one because it doesn't mesh with my style as an investor. big news story circulating in business circles this week is about the port strike that's happening.

And we had an email from a listener hit our inboxes earlier this morning. This listener, Andy, did not know that I'd be chatting with you, but as luck would have it, he specifically asked for you in this email. So Andy writes in, Andy here, long-time listener and member of both Motley Fool Stock Advisor and Rule Breakers and also recently subbed to Motley Full Canadian Services. I've got a question about the port strike that's closed down ports on the U.S., east coast, and along the Gulf. Specifically, I'm thinking of companies headquartered in Europe, which make auto parts like AutoLiv, ticker ALV, or Garrett Motion, ticker GTX. The illustrious Jim Gillies has spoken about these companies over the past year.

And so I wonder if you might ask him, how much does he think the port strike will impact those companies, at least in the short term, and also whether the strike may create a buying opportunity. Well, I don't like thinking short term. But, you know, and Andy, you know, thank you, thank you for subscribing to the Canadian services, which is why I'm answering the question. Yeah. So Autolive is in 25 countries, including Canada. There's a plant down near Windsor, Ontario, which is where a lot of auto manufacturing is down near Windsor. Detroit crosses that border. they have worldwide facilities. The same goes for Garrett Motion.

They've got worldwide facilities. Garrett's got manufacturing ops in both California and Asia. Anything coming in from Asia is going to come in via the West Coast, not the East Coast. You know, as well, automakers are notorious for their just-in-time manufacturing techniques. So most likely if something's being, you know, a car is being assembled in North Carolina or Michigan or Southern Ontario. A lot of the parts are going into it are probably not all. And I'm not going to specifically say, oh, yeah,

AutoLiv makes everything in Windsor for things being assembled in Detroit because I don't know that. But I would imagine that there is significant just in time issues in the manufacturing setup that will alleviate some of this. Now, that said, I don't want to minimize the potential impact of the strike. I think the strike could ultimately be very damaging. There's some footage floating around of the union lead, which is interesting. He is, I think we'll just say confrontational and aggressive, and I'll leave it at that. I mean, if you're a union member, I suppose that's what you want in your leader, but it doesn't look good.

But I would warn against letting headlines define your investment choices unless, unless, as Andy has said here, this might be a short-term opportunity. Because I think what Andy is not saying, but what I will say is, strikes end. Like strikes end. And so if this does give you opportunity, and headline risk, or what we call this, headline risk gives you opportunities quite often. I mean, I could talk about the wisdom of recommending an aircraft lessor during a

pandemic, for example, which I did, right, when all planes were shut down, international travel shut down. And the thesis can essentially be summarized as pandemics end. I don't know when, probably be a Tuesday, but they end. And when they end, we'll probably still take planes. And, you know, the world's largest aircraft, lausore, that would be air cap, by the way, the world's largest aircraft lasor will probably have pretty robust demand when it happens. Less front and center than Open AIs, new valuation, and the Port Strike. Constellation Brands reported this morning, this is the company behind Corona, Modelo, Svedka vodka, Robert Mundavi wine. Some of the top line news from their earnings report overall sales rose.

That's mostly due to their beer business. They saw a lot of weakness in the Wine and Spirits business. They're also writing off a $2.25 billion impairment loss for that Wine and Spirits business. First up, Jim, what's eating Constellation's wine business? I feel that I'm here under false pretenses because I thought we were going to talk about Constellation software, which I hold is the best company in Canada. But no, it's Constellation brands. Okay. I know.

Yeah, sad trombone for me. Slightly less exciting. Yeah. Look, maybe it's just a mature industry. Maybe a system mature business. You know, I've promised this is going to go somewhere. I've been to New Zealand. I've toured around New Zealand and all the wineries.

You know, the one I could not have cared less about, Kim Crawford wine. Why? Because it's big industrial wine made by, you guessed at, Constellation Brands. So, you know, I think, you know, this is all just going to be kind of riffing here. But, you know, maybe people beset with choice are choosing elsewhere. You know, I can tell you in this house, we don't drink a lot of wine, consumption. And it's been going down just because I think we find as we get older, we just don't appreciate it that much. Or, you know, I don't want to drop an extra $20 on a $20.

Someone out there just said $20 gillies, that's a terrible bottle of wine, you know, going to spend up. You know, we probably drink half or less of what we drank a decade ago. I like to think I appreciate good wine. Somalié professional might call what I like swill, but that's fine. And so, but like, you know, we go to wineries. You know, we'll go to Niagara, which is fairly close. We'll go out to British Columbia when we're there. We'll go to wineries.

I've been to wineries in Virginia, you know. I've been to wineries in California. And through the magic of the internet, I can order what I like if it's a winery I went to in Napa. It was a smaller winery. It's not a big giant corporate winery. So maybe one thing is people just don't like mass production wines anymore. Another thing, and this might be fairly Canada-focused,

but I know it's happening a lot more in your fine country, is you may have heard that cannabis was legalized in Canada, across Canada in 2018. And one of the things that's happened as a result of that is there's a lot of cannabis-based beverages, like for people who I guess who don't want to smoke or whatever, which strikes me as an intelligent choice. And so for people who are using wine just to kind of relax and kind of laugh with friends or just kind of take the edge off, maybe they're not drinking wine anymore.

Maybe, you know, things have migrated to cannabis beverage versus, you know, and wine has become a beverage that you drink, you know, that you drink with your seared duck breast or rare flank state kind of thing. It's become more of a, because I'm, I don't know anybody. I've not been to, I've not been to a lot of dinner parties since the pandemic, but I'd be pretty surprised if someone served me a cannabis beverage when I went to a dinner party. And then, and then you've also got that, you know, look, we know, we know with the data saying that younger people are drinking less. You know, those just coming into their, you know, coming out of their slothful teenage years and into their, into their, you know, early 20s and legal drinking age, they're drinking less and they're opting away from wine. I can tell you, I had a, we had a thing in my house about two years ago with my son, who has just turned 20, but drinking age here is 19. And there was a medical family situation. And I had to call my son. He was at university at the time. And I said, I might need to come get you. It was a Friday night. No drinking.

Okay. I have fun, but I might have to come get you because something could go wrong tonight. And so I would appreciate you. And my son, first off, he said, well, dad, I'm actually at my friend's house. and the friend that he has is Muslim, so there's no alcohol in the house anyway. And then my son is also a bodybuilder. And then I got a five-minute pseudo-liction on how alcohol consumption is really detrimental for bodybuilders. I'm like, dude, I appreciate all that.

Family medical emergency, okay? I don't need that now. Stand by. And hopefully I don't have to come get you. But it's, you know, like kids. And I see his friends. I see my daughter's friends. And it's like, I think they're kind of, you know, I think they're being more responsible than I was.

How about I leave it at that? Okay, so we talk about shifting consumer taste. We mentioned cannabis beverages. This is a consumer brand's business. Again, consumer tastes change over time. Is the diversification of Constellations portfolio, which is a big portfolio? Is that diversification a strength or a weakness here? Because the more things you offer, chances are that some are not going to perform.

well. Well, yeah, and the more things you offer, you kind of dilute, like, you know, you want to find the one thing you're really great at or the two or three things you're really great at. And I often find that when you offer so many choices, none of them will really move the needle. And some will be a disappointment this quarter and some will be a disappointment next quarter. The other thing is, too, and I was an investor for a brief period of time in Molson Coors. Spoiler didn't go terribly well. But competitors. and we know that Anheuser, Bush, InBev, SAB, Miller, whatever the hell they're calling themselves nowadays. Like, this tends to be a scale business. And there's all these companies, Constellation, Anheuser, Bush, Mbev, Moleson Coors, they are just constantly shoving money at new CAPEX and acquisitions. And maybe the industry is just largely topped out because none of them have been. None of them have been good, strong investments. Again, did I mention my Molson Coors foray?

Did not go terribly well? It's just, you know, they are, they're old brands, but like there's no one, I mean, really, no one's going to challenge InBeb on scale. I mean, maybe Heinegan can go and buy consolation and Coors, but, you know, that might bring them within spitting distance, but then it's, it's just not, it's not a high growth industry. And so it doesn't really matter to me how many brands. brands you've got. And I think most of these companies where they did try to maybe make a foray into the cannabis area, I think most of them lost their hats on that one. So, you know, maybe that's where

you should be going. But then again, you know, I would say, well, it's called weed for a reason and it's, you know, it's a commodity product. So I think the best thing to do in this space is to say, you know what, I'm going to kind of avoid individual stock risk in this area. And I think what I'm going to do is if there's some exposure in an S&P 500 index fund, I'm going to say, you know what, I've got exposure and I'm happy with that level of exposure. Jim Gillies, thanks for joining us today on Motley Full Money. Always a pleasure to have you, even though I don't feel like, I feel like we were pretty bearish throughout the entirety of today's. I didn't, I don't think so. I don't want to be bearish. I think AutoLive and Garrett will be fine. How's that? And I own both.

And I own both. And I kind of set you up for for that a little bit because we, We do have Ricky and Osset talking about Costco in this segment after us, and that is something you are certainly not bearish on, and I didn't even give you the opportunity to talk about it. So I apologize to you. Perfectly fine, and I don't own enough Costco. Before we get to the next segment, a humble request. Motleyful Money is a finalist for Signal's Best Money and Finance podcast.

We're up against some really great shows from Barron's, the Financial Times, and Bloomberg. The winner, though, is determined by your vote. So if you enjoy this show, all of us here at... Motley Full Money would really appreciate you taking a moment to cast your vote for us. I'll drop a link in today's show notes so that you can do that if you're so inclined. Heads up, you'll need to enter your email to verify that you're a real person, not a robot. Thanks for helping us out. As always, we appreciate you listening. Already, up next, Costco gets a lot of love, not just from Jim Gillies, but from many investors.

But it also comes at a pretty price. Asset Sharma and Ricky Mulvey test out a new rating system on Costco's valuation. We've heard the booms. We've heard the dooms around the Costco food court, the chicken bake, the double chunk chocolate cookie, Asset. We're not food reviewers, though, so we're going to look at the stock. But before we do so, the most important question of this segment. Are you a Costco guy? Do you get it? Ricky, what's a Costco guy? I guess I get it. I used to shop at Costco when our kids were younger and the bulk purchases made a lot of sense for us. We have sort of the duality of Costco right now because the food court is so inexpensive. Hot dog combo, $1.50. We walk out of Costco thinking about the great deals we got, three pounds of coffee for like $15. When we look at the stock, though, it's a different story.

It's at one of the most expensive multiples it's ever been. Trades around 55 times free cash flow, 31 times enterprise value to forward EBITA, so the value of its debt and equity compared to its forward earnings. Both of these are high historically, and then when you compare it to its peers, Kroger, for example, is less than half of that valuation for its free cash flow, as opposed to the 31x earnings multiple, it's at a 6x. Why does Costco get such a premium as opposed to these other grocery stores. Yeah, you know, Ricky, listening to you, I was just thinking, it doesn't matter what batter you dip this thing into, you put it in the oven, it's double chunk all the way right

now. It's just going to be expensive under any valuation measure when you pull that out of the analysis oven. So, okay, this is a little mysterious because if you compare Costco to traditional large-scale retailers, grocers, let's say, it looks very expensive. Okay, so it should be, right? It's got the membership that has renewal rates above 90%. They've gone on this big cost optimization drive, which has really helped them increase margins.

They're the beneficiary of lower input costs going forward as inflation eases. They have shifted some business to high ticket items, big appliances which carry better margin and just bigger absolute dollars for the company as they built out more logistics and distribution. They've got the balance sheet for global expansion. So, when you put all this together, you start thinking, yeah, I mean, it should be more expensive than some of these traditional grocers. But then look at a company like BJ's wholesale club, which has, okay, not all of those

advantages, but has been undergoing some of the same transitions and has mirrored the stock price over the last five years. BJ's trades at a fraction of what Costco trades at under the same multiples. And I think the reason is the stability of the cash flows is something that the market is looking at as sort of a forever proposition. They love the way the company allocates its capital between all this expansion and then special dividends that come up every few years and its ability to keep those loyal members and raise prices on them every few years. Still, it just seems historically expensive right now. The market is looking past a lot of potential near-term issues to say,

we're going to hold the stock. We're actually going to act like foolish investors maybe. Still, I would say if you don't own Costco, you could nibble. It's just pricey here. So what are the near-term issues that you're thinking about? Well, number one is the volatility of those same input prices. The market expects that deflation is, or at least a deceleration of inflation, which the Fed is seeing also, is going to benefit companies like Costco, which have become more efficient as prices were rising. So on the back end, when things get a little cheaper, the inferences that these companies will keep some of that margin to themselves. But look, we have potentially a port strike coming up. So you can't hang your

hat on some near-term tailwinds. That's just one of them. And I think the other is that we don't know yet if we'll really come out of this current economic environment with a soft landing. It always feels like it. You know, we had a shift in interest rate posture by the Fed. Inflation has been easing a bit, but that's not to say that we won't fall into a mild recession. A mild recession might make people think a little bit differently about that 55X Ford multiple on earnings per share. But at the end of the day, I think so many institutional buyers and retail buyers are saying, this is a quality company. We don't mind overpaying a little bit just now. And Costco historically, actually, as you pointed out, maybe doesn't trade this

high, but it's always expensive. So there could be some relative biting the bullet here for people who want to be in on this company. We're talking more about Ronta at the full. And let us not do a full relitigation on what this measures. We did a segment on it a while back. But basically, it's a measure of how efficient a company is, a generating income on the hard assets that it has. And when you look at Costco, it's got about $11 billion in cash, it's got a lot of land in stores, it's got about $17 billion in inventory, all of those warehouse goods moving through its supply chain on the way to the large boxes at the end of checkout. But when you look at Costco's round to how efficient it is, it's at 26%. And that's actually slightly below Kroger and Walmart. And with the

premium we just talked about that in Costco investors are willing to pay for the stock, I'm surprised it's not significantly higher than these other grocers, which have more items that they're selling, that don't have that wonderful membership loyalty program, which completely cuts out on things like shoplifting at their store. What say you? What's going on here with Costco's efficiency? It's generating income. Well, I think that all three that you mentioned are pretty efficient for being primarily grocers. What it might be going on here is a bit of investment. When you invest in your capital base and make it bigger, that lowers your return on invested capital. If you're a company like these grocers, which doesn't have a lot of tangible assets on your books,

your Ronta is anyway going to be closer to your return on invested capital. So actually, Ronta might not be the most efficient metric to use here. But since not any of these three companies really has, let's say, a huge goodwill component on their books or a lot of amortization for intangibles, let's compare these apples to apples. What is going on here is that expansion of the base of warehouses with Costco. So take Kroger, for example. Kroger has 60% of Costco sales, but they have almost tripled the amount of leased assets on their books. What that means is, that Costco is buying land, building stores. That's a bigger base. So, the bigger the base, the less return penny for penny on your income that you bring home. And that's actually what you want

to see if you are an investor in Costco. You want to say, look, take that cash, buy some more land, buy some more buildings, build some more buildings. If you look at their latest supplemental presentation for this previous quarter just ended, they have a nice picture of their Nanjing China warehouse, it's humongous. And they have one that's in Changna, Korea. I hope I pronounce that correctly, also humongous. So as a shareholder, you want that asset base to be big and get bigger because this is a company that's got to scale up. It's so big and so mature, Ricky, the only way to keep delivering those returns aside from the cost optimization and new SKUs, new things that you and I can buy is that global expansion. So the thing that's

pressuring it a little bit is that it owns a lot of its real estate, that it has a lot of assets. And, you know, Asset, maybe one of these days, we can do retailers with surprising Routes. Hey, how about Dillard's at 42%. That's a separate topic. That is surprising. As we focus on Costco's valuation, you know, one thing that the Costco guys, because really what they've done is provided gifts for us is social media users. They fundamentally changed my life philosophy. And I now sort stocks, my relationships, TV shows, things I watch either into boom, five booms.

That's boom, boom, boom, boom, boom, or doom. Boom, five booms or doom. Where are you at on Costco's valuation as a stock? Boom. Boom in the sense of that is surprising. But, you know, not worth five booms, which is I'll keep buying it. I don't care what the price is. you have to be rational a bit.

And then as we look at Costco's recent decisions, I'm going to let you be the manager, the CEO. You're giving feedback, and the only way you're giving feedback is boom, five booms, or doom. There's three of them. One, they've recently raised their annual membership fees by $5 to $10.

Boom, five booms or doom. How about a wan boom? It's a sad boom you offered. You were like, a Juan boom. A one boom, it's not a doom. Costco raises its membership fees only every six to seven years. I actually expected a little more than these marginal improvements, but it speaks to the power of the model.

Actually, this was applauded in a lot of circles because they're doing right by members and not jacking up the price so much that people want to shop at other places. All right, throw the next one at me. You mentioned the high ticket items earlier. Gold bullion. Now Costco is a dealer in gold bullion. if you look at the jewelry cases the next time you're at Costco, you're going to find these one-ounce bars of gold that are being sold at cost. Boom, five booms, or doom? Boom. Boom. Boom. Boom. Boom.

Boom. Boom, Ricky. Full five. Five booms on this idea. I love this idea. The reason I love it so much is that it is so unexpected if you don't follow Costco. What is Costco doing selling gold bullion, their membership really took that offer in. And you see what Costco is doing here is perhaps sewing the seeds of something they can do over and over again with surprising items. When you can harness the purchasing power outside of membership, outside of regular visits to the store, outside of e-commerce to stuff that people, almost virally your members want to have, that is very powerful to your business model. It may seem silly, but it's signaling. something that is, I think, quite valuable to Costco in the years to come. I was surprised by that.

It's a five boom to me. And as we wrap up, let's take a look at the latest Costco earnings call. We got some news from them. Comp sales up 6%. That's pretty good for a grocery store. We're also seeing that pricing power is Costco boneless chicken tenders. They actually lowered the price by 13% and saw a 21% lift in the volume sold. And also, Costco's app getting bigger with 3.5 million app downloads just in the quarter. Anything meaningful here for the business of Costco. We've talked about the valuation. Anything meaningful for the business is Costco keeps chugging along. I think all three are relevant. I mean, comp sales, that combination of good volume, traffic trends, being able to have the merchandise people want, that's so important. The more mature

a company gets, typically the more those comp sales will trend towards one to two percent or around the cadence of long-term inflation, which forget about recent inflation, has been two to three percent over time. So for a company this big, whenever you can have comp sales above the 5 percent level, you're doing really well. The idea that Costco's buyers and the people who shape its inventory are sort of like those at T.J. Max, which are the best and brainiest in the business is something I think that's not as appreciated out in the investing world. Being able to have the inventory on hand, know what people are really going to buy, and then sort of drop the price and sell in volume is pretty nice. I think those Apple downloads are also meaningful for Costco,

although it's so big, it's not like an immediate needle mover, but still it's quite good. That's a very, very decent number. So I will count you as impressed with the business, but maybe a little concerned about the valuation. I will wrap this up with an oom. One half of a boom as we split the difference. Asa Charma, thanks for being here. Appreciate your time and your insight. Thanks a lot, Ricky. Always fun to be here. 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 Mary Long. Thanks for listening. We'll see you tomorrow.