2 days Ago By [email protected] (Motley Fool Staff)
In this podcast, Motley Fool analysts David Meier and Asit Sharma and host Ricky Mulvey discuss: OpenAI's $50 billion valuation jump in one week. A space SPAC that's grown more than 10x since April. One of Warren Buffett's top lieutenants selling $140 million of Berkshire Hathaway stock.
Meta 's turnaround story and what it means for investors today. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center . To get started investing, check out our beginner's guide to investing in stocks .
A full transcript follows the video. This video was recorded on Sept. 12, 2024.
Ricky Mulvey: Get ready for an easier money era. You're listening to Motley Fool Much, to cut I'm Ricky Mulvey. Joined today by David Meier.
David thanks for being here. David Meier: Thanks for having me. It's good to be here.
Ricky Mulvey: I've got the glo sticks. You've got balloons. We'll have chocolate ice cream cones.
Welcome to the Easy Money party. Are you ready to get started? David Meier: Absolutely. I love Easy Money.
Ricky Mulvey: We got a rate cut this week from the European Central Bank. The Fed is widely expected to cut interest rates at their meeting next week. This is the second cut for the ECB.
The central bank also ticked down its growth forecast over across the Atlantic, I said it a little tongue in cheek but this is a sign that money is getting easier, growth is slowing down. What should investors make of it? Should they celebrate? David Meier: Yes, I think they should celebrate a little bit. What's happening is it's definitely marking a change in monetary policy.
For the longest time, rates have been higher money has been tighter to use the other side of the language. But the thing is, right now, well we're going to see how many cuts are actually made, and we're going to see how quickly the various central banks make them across the world. But I think this is a good thing.
Ricky Mulvey: With lower interest rates presumably comes a more risk on environment. Does this change how you think about investing in some of those riskier speculative plays? David Meier: Not entirely. The reason is that some companies stay risky no matter what the interest rate is, and that's because their business model comes with risk.
Whatever they're trying to do as a business maybe it's more difficult. Maybe it's a science project and it's going to take more time and therefore has more risk with it. Other companies lower rates can actually cause sales to pick let me give you a quick example from the productivity software space that I follow quite closely.
Lots and lots of small and medium-sized businesses actually postponed their software investments while rates were rising during the COVID period when the Fed was fighting inflation. Now with access to cheaper capital or at least the promise of cheaper capital on the way I would say many of those are going to start looking at those investments again. From that standpoint software companies that were struggling with their small and medium-sized businesses as customers may actually see a little bump.
Again it depends on the perspective but typically lower rates tend to help most companies and many investors. Ricky Mulvey: After this recording I'm going to be looking through my full account to see what some of those software companies are David. You got us to a good place which is that we are at an interesting point in the business cycle.
I have three quick stories. You're going to tell me if you think they're meaningful or not meaningful, are they real indicators of where we are in the business cycle? David Meier: Sure thing. Ricky Mulvey: Quick hit, number 1.
Open AI just up its fund raising round. This week, OpenAI is looking to raise 6.5 billion dollar at evaluation of 150 billion.
This is a tricky company that acts as a for profit and nonprofit. There's a 5o1c3 part of it, I've had a lot of trouble raising money for it, standing outside of grocery stores. That's a different story, David but just last week, OpenAI was doing a fund raising round at $100 billion.
The math on this is that the valuation changed by $50 billion over just one week. David, what's happening here? David Meier: Obviously technology is changing much faster than we realize. Little tongue in cheek there but in a bit of seriousness, I think two things are happening.
First, we're getting a clear signal that OpenAI still needs lots of capital to fund all the amazing things that it wants to do. That's a good thing but right now we're also learning that it's not able to do that without outside capital just yet. We can can debate about valuations, 100-150.
Those are big. The other thing that we can say is based on those valuations it is absolutely the right thing for management to be raising as much capital as possible right now. Look if investors are willing to pay that much because of the opportunities they see? Absolutely do it so, 100 billion 1 week, 150 next week, 200 billion the following week.
You got to get in early, so to speak. Ricky Mulvey: I struggle to think about that amount of money. One way I do that, David.
That is a full Kroger , the entire market cap of one of the largest grocery store chains in the United States, Kroger, and all of their future earnings, all of that future cash flow has been absorbed in one single week by this valuation change. Is this what a hype cycle looks like? David Meier: I actually think that's a great analogy. Look I probably pretty safely say that we have not hit the peak of expectations.
If you're following along at home, that's the first part of the hype cycle curve. However valuations like this probably show we're moving well away from the technology trigger phase and closer to the peak. These are pretty high given where we think Open AI's revenue is and how fast it's growing.
Ricky Mulvey: I want to spend a second because the technology is truly unbelievable. We're talking about a demo earlier before the recording, something called Strawberry which in the next release of ChatGPT, basically is going to allow people to program their own small video games with just prompts. You don't have to know how to code anything, and you can pretty much make your own late 1990s style video game.
This goes to a point that you were saying which is that the leaps and bounds are really for programmers right now too. David Meier: I completely agree. What the technology is really promising is productivity, helping people when doing whatever work they want to become more productive and things that I keep reading that we talked about are programmers.
Those deeply involved in technology development are seeing huge productivity benefits. What that can spur then is actual creativity. Getting back to the valuations we actually don't really have a good way to value these types of companies right now because the future is very bright and we don't necessarily know what direction it's going to go.
We just directionally, it's going to get better. Ricky Mulvey: They're saying they are going to do is build a highly autonomous system that outperforms humans at most economically valuable work. If they're real about that, you know, $50 billion might not be so unreasonable.
David Meier: No, it might not. Ricky Mulvey: Let's go to the next story. Next one, SPACs are back.
Excitement over SPACs are back special purpose acquisition companies, where you can really focus on the future. This is specifically going on in the space industry. There's a company called AST SpaceMobile .
They launched five satellites this morning on the back of SpaceX rockets. Yes, SpaceX carried a competitor as AST has investments from Verizon and AT&T , essentially with the goal of eliminating dead zones for cellphone Internet. They're going to do a broader cellphone coverage with these satellites.
There's a lot of investor excitement. The stock story is that shares for this company were trading at $2 in April. Now they're at $12 we're in another SPAC cycle.
Many of our listeners have heard a little bit of this story before. Is this song different? David Meier: The answer to that is yes, and I would even say very much so. If we go back in time, the first part of the SPAC cycle was about raising money and buying companies.
Literally, that was it. If you wanted to raise some money via a SPAC and absorb a company there was a time when that was extremely popular. Unfortunately, that first part of the phase ended badly for many of the companies who have seen their stock prices fall dramatically from all-time highs.
Now fast forward to today, to let's say the beginning of 2024 we are seeing some of those companies that came to the public markets through the SPAC process, building businesses, producing results. They're getting a second look from the stock market. If we take AST Space mobile, investors have cheered the launch of its satellites into space as well it should, because those are the things that AST is going to use to generate revenue.
They're going to go out, capture demand, turn that into revenue, hopefully, turn that into profits. Ricky Mulvey: The thing that makes my hair stand up just a little bit. Number 1, anytime I'm looking at a parabolic curve, I have some questions.
Something a little odd to me right now, is this company's market cap? Is it about two times that of Rocket Lab , which is sending a whole lot of things into space. Is that odd to you? David Meier: Yes and no. We'll start with the no first.
No, Rocket Lab is mainly a launch company, much more so than a satellite company. It gets paid to put satellites into space and it also gets paid to provide some components for people who build satellites but if we take a market perspective here. The market sees what Rocket Lab is doing and has valued it accordingly.
It's revenue growth is a little more known right now than ASTs. But going back to your question. Is this a little odd? Yes, because AST is essentially still a pre-revenue company.
Think about that for a moment. It has not really generated any revenue based on the business model that it wants to have. That said.
The market is definitely seeing great things happening on ASTs top line and has discounted them to today's valuation. I think the parting shot that I would like to leave listeners with here is always remember. Markets are part fundamentals and part psychology, and the ratio between the two can change depending on the circumstances.
Ricky Mulvey: Let's do the third quick hit. I don't know how quick we're being, but we've had a good conversation I hope. Berkshire Hathaway's, Vice Chair of Insurance.
This is one of Warren Buffett's top lieutenants. Ajit Jane sold more than half of his stock in the company, I know insiders sell for a lot of reasons. This is $140 million worth.
That is some walking around money. One thing before I ask you this question too, is Berkshire does not give out stock based compensations. Also this is the insurance guy at Berkshire Hathaway.
I assume he's pretty good at assessing risk as he cashes out $140 million. Are you less pessimistic than me? David Meier: I think so. Let's think about this simply.
It's nearly impossible to say, as none of us know what his personal financial situation is, why he truly sold. But we have to remember, Ajit Jane he's older, maybe he wants to retire soon. Perhaps he's doing some estate planning for his extended family.
As you alluded to in the beginning, there's plenty of speculation out there about why someone sells but I would bet that the simplest explanation is about planning is much more likely than something like my goodness something's wrong with Buffett, or my goodness Berkshire is getting ready to collapse. I can safely say that Berkshire is not getting ready to collapse, I think he's just looking to do, he's at a stage in his life where he probably needs to make some plans for his extended family. Ricky Mulvey: Maybe I came in a little too hot there, David.
Not that Berkshire is ready to collapse, but rather many observers are taking this as a sign. Berkshire just hit the $1 trillion market cap mark. Maybe it's fully valued, and maybe one of the insiders is seeing it that way.
David Meier: That's very possible, because if you think about the Berkshire business model of how it generates capital, generating more value with $1 trillion market CAP becomes an enormous task that said, Buffett and company have cleared many psychological hurdles like that on the way up, 1 billion, 10 billion, 100 billion. I wouldn't put it past them to figure out what to do with that war chest of capital that they have going forward. Ricky Mulvey: For the transcript I'm not a Berkshire bear.
Let's put it all together. These stories with some mindset advice. What's your advice to newer stock investors listening to the show who are entering their first cutting cycle? David Meier: My goodness.
This is actually a phenomenal question, especially given the context of where we are. Let me see if I can give at least an adequate answer based on all the gray hairs that I have my 20 plus years of experience in the market. First, rates are one part of the equation when assessing the value of a company.
New investors should not be overly focused on rates, even though that's going to be a dominant headline in the new cycle right now because rates are likely changing and going down. The second thing is always remember we're investing in a business. Analyze the business first.
What does it do? How does it make money? What advantages does it have? What advantages does it not have? Who's leading the business? Those questions should be first on your list of things to do because those answers will shape your valuation analysis way more than interest rates will. Then third, I think it's helpful to understand the historical impact of interest rates. A great book that I've read called the Price of Time by Ed Chancellor looks at the history of interest rate movements and provides some incredible context about what can and what has and has not happened as a result.
But most recently, the Federal Reserve let's say over the past 20 years going back to the great financial crisis. The Federal Reserve has cut rates in response to something bad happening in the economy, I don't think that's what's happening right now. Investors should continue to pay attention to the macro environment going forward, even with falling rates, there's likely to be bumps along the way.
That's what happens with economies and stock markets. That's why at the Motley Fool, we focus so much time and attention on investing in quality companies because they're the ones that make it easier to deal with all that volatility along the way. Ricky Mulvey: It's a great place to in it.
David Meier. Thanks for your time and your insight. Appreciate you being here.
David Meier: I really appreciate it too. Thank you. Advertisement: Ricky Mulvey: Fall is already here, so fuel up for busier days with Factor's, no prep, no mess meals.
Meet your wellness goals thanks to their menu of chef crafted meals with options like calorie Smart, protein plus, and Kito. They sent me a box, and I was a big fan of the shredded chicken taco bowl with roasted corn salsa and cilantro lime sour cream. It was perfect for a Tuesday night where I wanted something healthy, but I also didn't want to cook or go out to eat.
Factor's fresh, never frozen meals, or dietitian approved and ready to eat in just 2 minutes. No matter how busy you are, you'll always have time to enjoy nutritious great tasting meals. With 35 different meals and more than 60 add ons to choose from every week, you'll always have new flavors to explore.
Head to factormeals.com slash Fool Pod 50 and use code Fool Pod 50 to get 50% off your first box plus 20% off your next month. That's code Fool Pod 50 at factormeals.
com/ Fool Pod 50 to get 50% off your first box plus 20% off your next month while your subscription is active. Ricky Mulvey: In November of 2022, Meta stock traded at about 90 bucks a share. Now it's above 500.
Up next, my colleague, Asit Sharma and I take a look at the turnaround story over at Meta, and it's lessons for investors. Asit, now we've been doing this show for a few years as a daily show. We can finally look back on a full turnaround story, and that's Meta.
To set the table, I want to be clear. I've been burned on a few turnaround ideas as an investor, and I'm looking specifically at Big Lots right now, which recently went bankrupt. I even made some mistakes on the Meta turnaround investment that we'll get into, but I wanted to talk with you because you're good at looking at narratives, and I want to look at how the narrative shifted in just a couple of years around one of the most powerful tech companies.
Before we get to 2024, let's go back to late 2022. The introduction is that Meta is one year into its rebrand. It's no longer Facebook.
It's all in on the Metaverse, and at this point in the company's life cycle, it's a value stock. It's very mature. It's at 10 times forward earnings.
Today, it's above 20. Mark Zuckerberg is very excited to discuss the Metaverse, and investors are very dour about this company's future prospects. Why the rain clouds? Why the doom around Meta as we get in the time machine back to 2022? Asit Sharma: Well, we're going to hop back for two seconds to 2024 to the future.
Who's spending the majority of their time in the metaverse? You can see why there was a bunch of skepticism around Zuckerberg's vision. Meta was burning a bunch of cash to fulfill this vision, which at the time, and still seems like the whimsical fancy of a very powerful CEO with a huge balance sheet who wants to build it so people will come. There was skepticism around the core business.
That's always been very strong for Facebook, but when we look back a couple of years ago Facebook was such a mature property for the company. They were just getting into what would become a little more important for them, which is this whole monetization of ad revenue around video. Instagram Reels was a thing then, but smaller than it is today.
Competition was just eating Meta's lunch, wherever it tried to poke outside of its core business. Always strong in advertising revenue. I look today, again, flipping to the present day.
That's still where Meta makes all its money is in advertising. When we think of narrative, yes, it seemed like we were in the third chapter of a not so interesting five chapter story here. Who wanted to participate? I can see why that price to earnings ratio, ford price to earnings ratio was so low at that point in time.
Ricky Mulvey: It's always been trying data, but getting a little bit outside of the core things of the continuous scroll in keeping you on the platform. Since then, Zuckerberg got into Brazilian Jujitsu. He's been looking a little stronger, a little slicker.
He's been speaking a little bit better on earnings calls. In that meantime, in the past two years, did the business Meta really change? Did the focus really change? Is this a narrative change, or is it both? Asit Sharma: I think it's both. One thing that we have to understand about this company is that it is going to operate at scale.
As long as it can continue to add users and further monetize those users, it can do a lot of things wrong. It can spend billions of dollars on a mini company called Reality Labs, which to this day, accounts for a tiny fraction of total revenue and still be successful. It can pop back from a gross margin, which has historically been very high, started to sag a little bit, pop up again over 81% and take home a lot of money and institute a dividend.
There's so much in this story that depends on the company just tacking on numbers of users, engagement numbers. I'm going to give you a stat, Ricky. When I was at Peak pessimism on Meta, this is the first quarter of 2022.
Family, daily active people, yes, DAP, their favorite metric and famous metric was 2.87 billion on average in March of 2022. You see that's a lot of people.
That can lead to a lot of engagement. Today, DAP is 3.27 billion on average for June 2024.
Just this expansion of this one metric, this inexorable adding on of family daily active people. Starting to pinpoint that maybe we can again, return to younger users at Facebook and add some of those, which surprisingly they've been doing. We can keep growing Instagram, and we can grow this property called WhatsApp, has been very powerful for the results of Meta.
It has enabled tremendous capital expenditure investment into AI, which is the thing we haven't mentioned yet, but I think we got to talk about it. Ricky Mulvey: I think AI is almost something that happened to Meta, and they knew how to be in the right place at the right time in the April earnings call, Zuck said, "One strategy dynamic that I've been reflecting on is that an increasing amount of our Reality Labs work is going toward serving our AI efforts." Asit, that's a very strong signal to the street of, hey, can you forget about the Metaverse thing for a second? Don't worry.
I know that AI is the future. Also, hey, there's a real application, which is that if you're an advertiser, you can run a bunch of AB tests and you can use our AI systems to sell your ads a little bit better. They've also got an open source chatbot that a lot of computer programmers are contributing to.
Then the other thing that Meta did not just had something happen to them, is that they instituted a dividend. Maybe we are a mature company, but we also are a little bit more mature. We're going to give some of that capital back to you, and also to our CEO and founder Mark Zuckerberg.
Asit. Asit Sharma: Look, Microsoft did this as well and kept growing. Microsoft instituted a dividend and showed that they could constructively invest their capital.
But I want to go back to this point you made, which is an astute point, Ricky. Being in the right place at the right time is all important in life and in business. Sometimes being prepared is even more important.
Going back again to 2022, so an executive at Facebook, his name is David Wyner, was talking about how Meta was going to increase its CAP X intensity. Meaning thereby, we're not going to stop buying tons of server space, buying GPUs, and building out capacity because one day, we think it's going to be so important to have a bunch of Cloud capacity and the ability to really generate a lot of stuff out of AI because we're going to all be in this metaverse. We got to spend the billions today.
Now, that capacity came in pretty handy. All of the machine learning that Meta was focusing on the Metaverse came in handy as they themselves became data scientists, and like Microsoft, entered this world of building large language models. Of course, they have their famous own open source model, Llama 3.
Everything that they were doing for the metaverse came together with a great application for generative AI. As you're pointing out, now they have so many ways that they can increase their monetization by using some of their own expertise in generative AI, by using all that capacity they built up. Sometimes, I don't want to sound pejorative here, but sometimes you get lucky, but let's give it to Zuckerberg and crew.
They were prepared, whether it was happenstance or not, or they saw the day where generative AI could really hit a gear with consumers and business use cases, that remains to be seen, but they certainly were prepared. Ricky Mulvey: Maybe they got a little lucky, and maybe that happens with stock investing, sometimes as much as he like to think you're good, sometimes you get a little lucky. Let's go to a parallel universe.
Maybe one where Elvis is still alive. The United States looks a little different. In this version, Meta is a languishing giant.
It's a has-been, Asit. It's the former great showing off his state championship ring at a dimly lit bar while no one listens to his stories. What happens in this version of Meta, when stocks fall, that doesn't mean they're going to bounce back up? Asit Sharma: There's a time late in the summer when you've heard your uncle's stories about his high school football glory a million times, but still it's just the twilight is setting in and everyone's in just this nice mood.
Suddenly you want to hear that story again. Don't count out that part of the business. They can still be a mature business that investors will periodically come around to and appreciate as you point out, that the dividend could play a role in that, but I'd like to focus on this Elvis metaphor.
We all know Elvis had so many comebacks. The greatest of his comebacks was his Aloha from Hawaii concert. This was the first satellite concert beamed around the world.
He came on stage with a full orchestra and a little side soul band, and they were in perfect sync, and he nailed it. This goes to show you this innate talent that some performers have, this innate talent that some businesses have, they can make for a lot of comeback. Even if we see Meta now start to normalize a bit, because again, how big can it actually grow? I name some insane numbers for active users only eight billion of us on the planet.
This vision that you're painting, Ricky, I think it could still be beneficial to investors, either from the point of view where you've got a very solid company. It's got stable cash flows. It's not going to keep you up at night.
You should have it in your portfolio, or the sort of Microsoft story where you have all the balance sheet power, you've got great tech, you've been executing, and maybe you've got a few second acts left in you. I could see it going either way. Ricky Mulvey: I mentioned that I made a mistake with this turnaround story as well, and I think I'm OK being public about it, which is I sold some of my shares on the way up.
As Meta kept rising and rising, I told myself that this could turn back around at any moment. The streets going to remember the Metaverse. I didn't like how much of my portion of my portfolio was invested in Meta.
I was getting ticky tacky with it, Asit. I would have been significantly better off if I just didn't touch it, if I closed my Schwab screen and went outside. That was my personal lesson from this turnaround story, which is, it really applies to that Motley Fool fundamental of when you buy a stock, hold it for 3-5 years to let the story completely play out.
I didn't do that, and I lost some money, but now I still own some Meta shares, and they've done all right. I'll zoom out on a narrative perspective with you. What are some broader themes that can be applied to the next turnaround story that investors are looking for as we look back on Metas? Asit Sharma: Going back to this one point that you made.
This is really important before I answer your question, Ricky, for all investors, when you have a position that's just become an uncomfortable part of your portfolio. Sometimes it's not the best investing sense, but if you need to just for the personal sense of, like, I don't have to worry about this anymore, I see it recovering. I'm going to trim some shares, that's OK.
I'm going to applaud you for that because I know you personally you have your fingers in a lot of pies. You're an interesting guy. You're not just a fellow colleague, but you've got a life.
Good for you if you had to make that decision. I don't think that's necessarily a bad decision. If it were a smaller part of your portfolio, the takeaway is, yeah, leave it alone.
Let it do its thing. I've been there myself, and on Meta in general, like earnings I take, because I was very publicly, I think early 2022, pessimistic about this company. I want to own that.
Now, to the other side of the leisure, I didn't see generative AI coming, any effect that that could have on the business. But I did underestimate just the ability of a scale company to keep doing its thing and growing, even though that growth was slowing. We can apply this to turnaround situations.
When you see a company hitting its groove in a turnaround situation, getting back to what it did well before it had a fall from grace, that may be the time to let it keep just turning out those business results and building back up its resources. We should all be patient in those situations. Don't try to sell yourself if if that's not happening, that well, maybe one of these days.
Who knows? But when you see those results start to happen real time, maybe that's the time to just take a step back, read some past earnings and just be patient. Ricky Mulvey: I want to close out with one of the things that bothers me on investor social media is that people really like posting their wins, and they're very not as quick to mention their losses. One of the things I appreciate about you and a lot of the other analysts we have at the Fool, this is getting sappy.
I don't like how sappy it's getting, so we're going to stop at a moment, Asit. Asit Sharma: We'll take the violin drinks out in post Pction. Dan Boyd, will make sure that we mute those violin drinks.
But go ahead, my friend. Ricky Mulvey: You're very open about mistakes because there's an understanding, which is that if you have misses, that will be made up for by the wins by the big winners. You mentioned you miss Meta.
But have there been any turnaround stories that have worked out for you as an investor? What did you learn from them as we close out the segment? Asit Sharma: Sure. I've had large and small ones. One of my favorite stories is fairly recent, and that's picking up lens and felt like pennies on the dollar during the peak of the pandemic.
That wasn't any kind of rocket science. It wasn't that I understood retail better than anyone else. It wasn't that I had a lot of financial expertise.
It's if I looked at the financial statements, and I was like, they're still making money. I know they're closing some locations. They disassociate themselves from Sears, but I don't think this brand is really going anywhere, and there's so much pessimism around it.
I'll pick up some, and that was a very nice multi bagger for me. Then one that maybe is in the realm of Meta was I purchased Microsoft at not peak pessimism, but in a pessimistic day and age when Satya Nadella had just taken over and got a multi bag out of that through patience, just thinking that this guy sort of had at least more vision than Steve Ballmer. I hope Steve Ballmer is not listening, but on that, again, not rocket science.
These are fun ones. When you think that a story can work out, and you see a company's not in dire trouble, it's not about to go out of business. Then put a little money into the idea and just watch it like as you would a plant growing, and that was a fun plant for me.
Ricky Mulvey: That's Sharma. Thanks for being here. Appreciate your time and your insight.
Asit Sharma: Thanks for having me with you. Ricky Mulvey: Something Dylan, Mary and I really enjoy hearing is where and how you listen to the show, whether it's your drive to work on a run or doing chores. It is something that makes the job rewarding.
If you found value in the show, one place to let us know is on Apple Podcasts under a review. It's the front porch of this show, and we really appreciate it when you leave a five star review, and let us know where and how you listen. 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 yourself anything based solely on what you hear.
I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
.
