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In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Travis Hoium and Jason Hall and Motley Fool analyst Asit Sharma discuss:
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Travis Hoium: Is the market turning on AI? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Jason Hall and Asit Sharma. Guys, we've got to start with what is going on in the world of AI and investing. We're recording this a little bit early on Thursday, but we do have earnings from Alphabet to talk about. Microsoft reported a little bit less of a negative reaction from Microsoft. But Asit, the reaction to Alphabet's report is crazy. Stocks down 13%. They reported 100% growth in their Cloud business. Nobody seems to be talking about that because search seems to be on everybody's mind. But I wanted to start big picture because you follow this AI trade very closely. What are we learning about what the market is looking for right now because it seems very different from where we were just six or 12 months ago?
Asit Sharma: I think the market is looking for some reassurance, Travis. We have a situation where a year ago, most investors, when they thought about this capex build-out, were concerned with how depreciation expense might show up on income statements, meaning thereby you're building all these big data centers, you're putting in GPUs. Those have an economic cost associated with them. What's going to happen in the future? Will you be as profitable? Fast forward today, and there's a lens that everyone is filtering this trade through, which is, hey, this stuff costs money. It was coming out of your cash flow and some equity raises. Now, increasingly, you big players are turning to the debt markets, and there's such a lag between the time you first sign your promissory notes and the time that a data center is ready to go into full production mode that creditors, the lenders are thinking through, who can pay for this the whole way through if things get delayed? Who can bridge? We want to lend money, not just so these guys can build, but they also will be capable of bridging until they can pay us back. That increasingly is a narrower set of businesses.
Looking at this, the market wants to be reassured by Alphabet that, hey, your earnings, they look fine. We get that cloud growth is great, but overall the earnings could have been better. In fact, they disappointed us a bit. What does that mean about your capacity to repay later on? You would think, I mean, that's crazy. It's Alphabet. Why do you even worry about this company's ability to repay anything? I think Jason has some thoughts on that. But then look at Microsoft. The market wants some reassurance from Microsoft. Their Cloud growth rate is a stunning 48%. Now that is half the growth rate of Google Cloud's business. But the market's happy because Microsoft isn't getting overextended. They're paying with stuff mostly out of free cash flow. Oracle, this week on their investor day said, look, guys, we're going to actually put a little bit of stop to all this crazy borrowing and we're going to turn free cash flow positive in a big way sooner than you all expect, we promise. Investors were very happy with that, they felt reassured.
Travis Hoium: Jason, it wasn't all that long ago that Microsoft was the company that wasn't spending fast enough. I think they paused their capex spending for what seemed like two weeks and the market was really unpleased with the fact that they weren't spending as much as they possibly could on this AI build-out. Now it does seem like we've gotten to a point where not only do investors in the debt markets also brought that up, debt markets have gone crazy with the yields that are now on CoreWeave debt and some of these neoclouds, companies like that, but also the big players, even Alphabet has $265 billion worth of cash on the balance sheet as the last quarter. They don't need to raise cash. Their debt is not really a problem, but the market is saying, hey, wait a second. You're now negative free cash flow. We don't really like that. Whereas Microsoft is positive free cash flow.
It reminds me a little bit of Apple the last couple of years. They get a pass because it's like, you know what? We're just going to sit out this crazy investment cycle. We'll just keep collecting money from people buying iPhones every year. We're going to have a great business and that stability was the selling point that investors were buying. Now investors seem to be going, hey, forget about that growth. Where's the stability?
Jason Hall: Well, look, Apple's never been the first mover as much as it might seem like they are. They let others prove out the market and spend the risky money, and then they perfect it. They've done that with products. We've seen that. Their business model is a little bit different. The thing with Microsoft, what they've done is they've refined their approach. Free cash flow was roughly double analyst estimates. For Microsoft this quarter, and that was a big positive, hey, we're still spending money, but we're generating it. We're starting to see cash flows like Asit was talking about ramp up as we're bringing assets online at the same time.
You look over at Alphabet, I think there's a couple of things that are happening at the same time. There's a ton of focus on the ad business. The estimates are that operating income from the ad business, the part they don't disclose pure ad, but analysts can figure it out and they estimate that it was about $1 billion short of what the consensus expectation was. The flip side though, is that Google Cloud and that part of the business, like you said, where revenues doubled. That's much smaller than Azure, which partially explains the growth rate. Operating income there grew by about $1 billion. To me, there's a little bit of reassurance because of the big players in advertising, this is the one. Google is the one that's most exposed, the most at risk of disruption, and it's clear that Alphabet's management is not afraid to disrupt that ad business. Market doesn't love that it seems to be happening at a faster rate.
A couple of things are happening. I think the market's ignoring. Last I checked YouTube's a pretty awesome business and relatively AI resistant in terms of the ad business being disrupted in the same way that Google searches. But it's coming at a big cost this last quarter, even with all that cash, took on another $29 billion in debt, issued about $12 billion in new stock. They've got another 28 billion the board's already approved that they can issue. They probably will. Both of those numbers are probably going to continue to grow. But I think the market was just surprised that the ad revenue part of the business is getting hit. It's still growing not delivering in the way that analysts were expecting, and that's created some worry that I think is probably unfounded.
Travis Hoium: Asit, when you look at a company like Alphabet, we have been getting this disruption story. I remember the interview with Sam Altman a couple of years ago when he was talking about disrupting search. I think Satya Nadella talked about making Google dance. They're dancing, and they're disrupting themselves as an investor, and as a long-term investor. I think that's what we want. What's going to be Tim Balloo Links forever. What is it going to be AI mode, AI whatever these things are called? Seems like people are using that more and more. The numbers are a little bit mushy because they pull a lot of different things together, but people are using Google's products more and more. But they're not monetizing quite as well. But we've seen this before. We saw this with Instagram and reels. We're going to video. We got to get to video and move from pictures towards video. Guess what? That hurts your bottom line. Short-term, but long-term, the pie is bigger. Is it possible that the market is just looking at this as a short-term problem that isn't actually a long-term problem? Or is this actually a long-term problem? This is the canary in the coal mine.
Asit Sharma: It's not a long-term problem. The market looks at Alphabet like it's a toy boat in a bathtub. But really, what this business is is a battleship out in the ocean, and you cannot turn a battleship in three minutes. You have to be able to look far ahead and interpret various signals from land and shore from space these days. They're really good at that. I think Alphabet understands that the way their business is set up, they can't just be this total stack provider the way that Microsoft is. Microsoft has a bunch of servers that are CPU-based. They're going to play very well in this agentic space. It turns out agents. As Jason and I were chatting about a few weeks ago, they take up a lot of CPU usage. That's great. Plays into Microsoft's hands.
But the way Alphabet is structured, they almost have to innovate at that frontier model level, and that serves them really well. They've grown the ad business. The ad business is still healthy. The metrics are fine. It's just that monetization has trailed off just a bit. But if you're steering that battleship, you like that trade-off. You know that search isn't going to last forever. You see where the winds are blowing. What do you do? You invest in the technology that's going to be next generation. I think Alphabet's done an absolute bang-up job of putting out models that are competitive with anything that Anthropic and OpenAI and Meta can produce.
Travis Hoium: Jason, when you look at a drop in of 13% of Google stock, Alphabet stock, you look at this as a potential buying opportunity or is this more of a sign that maybe the market is pulling back on this battleship turning around?
Jason Hall: I tend to take a little bit of the David Gardner train of school of thought when it comes to the market. The market is usually right when it does things like this. I think it's revaluing the company for reasons that we should consider. Also, we have to take a more holistic view about outside of the myopic, double-digit, nearly lootins percentage drop today. What does it represent in terms of valuation for the business? When I step back from that, think about the trajectory, all of the things As was talking about turning the battleship, being willing to disrupt yourself, the strength of the things that are going to be more important 10 years from now, all of that thing. I do think that this is probably a good time to be buying within the caveat that this is still a gigantic company, and investors that have a lot of index funds do need to be mindful of not creating too much exposure by buying shares if you already are heavily exposed to index funds.
Travis Hoium: When we come back, we're going to get to what's going on with Anthropic in their latest filing. You're listening to Motley Fool Hidden Gems Investing.
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Travis Hoium: Welcome back to Motley Fool Hidden Gems Investing. Anthropic dropped their S1. This is the filing that you have to put out to investors before you actually go public. It's the information that you need to know about a business. It describes everything about a business. What are your financials? Asit, I'm sure you read the entire several hundred pages. But when you looked at that filing, what was there and also what wasn't there? What stuck out to you, especially in relation to how it's going to impact some of the public companies that are out there today?
Jason Moser: I'm going to guess that Asit probably used Claude to read it for him.
Travis Hoium: What was it, Claude, or was it ChatGPT? Was it Gemini?
Asit Sharma: To get an objective opinion. Don't feed it into Claude. No, I'll say really quickly. I used to pride myself on reading S1's cover to cover, and I still read certain portions of them all by myself and form my own opinions. But look, this thing was 400 pages, and it was so great to be able to use large language models to parse some of this stuff. Jason and I had a show. We hopped on. I was able to sound reasonably informed. I'm more informed now. I've had more time. Let me jump right in. One of the things that's very important to so many of these model makers and other companies relying on AI inference for their bread and butter is, like, will you guys be able to turn a profit over the long term?
Turns out one of the biggest costs that Anthropic is going to have going on or training costs. Travis, you pointed this out before the show: about two-thirds of compute spending for Anthropic goes to training. Is this a good payoff or not? I think it is. I think in the former period before we got to today, where there are several frontier model builders, there was so much money that was spent on pre-training, getting the model ready to go prime time, and then we used it. Now Anthropic has shifted a lot of its resources in training to post-training. Once that model is solidified, they specify use cases; coding is a great example. Anthropic in particular hit the enterprise market very early with all these specialized use cases. I think that's a great place for them to play in their S1; they talk about how much of post-training now is agentic, because that's honestly where the world is going. That's where the money will be in the future. I think it's a fruitful spend to them. Your question when we were chatting before the show, Travis, was, is this a treadmill for them? Will they always be on it?
Asit Sharma: I think they will. Let me say that Dario Amada, the CEO of Anthropic, probably sees this more as a closed-loop type of virtuous cycle. But hey, what is a treadmill? It's also a closed loop.
Travis Hoium: Yeah, Jason, there's so many things. It seemed like one of those documents, whether you're an AI bull and you think that this is going to disrupt everything. There was something for you. If you're an AI bear and you think this is just lighting money on fire, there was something for you. What stuck out to you in the numbers that we know so far? Because it does seem like this is one of the fastest-growing companies at this scale that we have ever seen. That alone is incredibly impressive.
Jason Moser: Yeah, but it's starting to decelerate. I think if you consider those two things together with 43% revenue growth in the most recent quarter and starting to slow, I don't think that's a big deal yet because the numbers went from a year ago; they were really impressive, but they weren't really huge. The holy cow, really quickly. Most bullish estimates are more than $100 billion in revenue over the next 12-month period. That's awesome. What that means for the company is that the raw dollars coming in, they're going to be big enough to cover a lot of expenses and, of course, those gigantic capital costs. Those capital costs, Travis, there's risk and opportunity. The numbers between $5-$575 billion or the round-number estimates. Probably 100 billion of that is commitments the company can get out of with little to no penalty.
Travis Hoium: Most of that with SpaceX.
Jason Moser: Right. We're still talking $400, $450 billion in committed, locked-in, take-or-pay future cash flows. Now, the big three Cloud providers, they're going to get chunk of that. But then there's Broadcom and Google. I think it's like $122 billion deal that about half of that was backstopped by those two companies. That's for hardware. Despite the recent speed bumps, I think the evidence is still really strong. They're going to need that compute; they're going to need the hardware to do it.
Travis Hoium: I'll say, when you think about these, these numbers are just astronomically large, and Jason mentioned a couple of them, but this is a lot of these contracts are with the companies that we have already talked about today Alphabet, Amazon, Microsoft. You can go down the curve then. Who are they buying equipment from, whether that's memory or chips or cooling equipment. There are huge pieces of the market that are tied to sort of the tip of the iceberg; the peak of the Pyramid is Anthropic, or it's OpenAI. Is that something that we should be worried about? Because it seems like the market, when this S1 came out, there was a little bit of worry there, going, oh, man, if that growth rate is slowing and you have $5,600 billion worth of commitments, Dario Amada said in an interview earlier this year, If I project $1 trillion in revenue and we only hit $800 billion in revenue, we're going to go bankrupt. The numbers are getting so big that it's a huge impact on the market.
Asit Sharma: We have to be skeptical every quarter as investors. Now I think we have to look case by case as you go down the supply chain, see how fiscally solid each company you're investing in is. We should be wary of just how high-stakes this whole trade is. But the flip side is, it's also the future. It's also something, in a weird way, to celebrate that we have so many capable companies of different stripes, from the big hyperscalers to the Photonics providers to the optical fiber optic cable providers, and so on and so on. I think that if we recognize how special this whole ecosystem is that's been developed across the globe, primarily we see it here in the U.S., and that is driving the rest of the spend worldwide.
But across the globe, I think that's something for investors to recognize there's going to be opportunity, even if we have these periodic retracements, or many puncturings of what probably at the edge has to be a bubble. We can all agree there. There's some bubblyness, some frothiness to this. Being able, as an investor, to keep some cash on the sidelines to buy the companies you believe in and you understand are solid as those retracements come and participate in this coming together of so many different pieces of technology that have been developed since the 1950s post-war, it's pretty incredible in that sense, but, yeah, start with skepticism, especially on the individual company level.
Travis Hoium: Jason, how do you think about that opportunity versus skepticism?
Jason Moser: The biggest risk is commoditization for these frontier AI companies. Experts are saying that token prices are going to keep rising. Name a single technology ever that hasn't been deflationary. It's eventually going to be the same time. The supply side has been the key. Eventually, supply is going to outstrip demand. These companies, they need commoditization to happen slower than scale coming online.
Travis Hoium: When we come back, we're going to talk about some potential acquisitions. You're listening to Motley Fool Hidden Gems Investing.
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Travis Hoium: Welcome back to Motley Fool Hidden Gems Investing. In this segment. We like to have a little bit of fun with investing in stocks. I want to know who says no. I'm going to give you a company and a potential acquisition for them, Jason and Asit. I want to know who says no to this deal. Asit, let's start with this. Disney has invested in Epic Games at least once, maybe a couple of times; they own about 9% of the company. But gaming has always been one of those things that they want to get into. If they actually want to make a big deal, they offer, let's say, a good price, $20 billion. Sounds like the company is going on secondary markets for 12-14 billion. Let's say they offer $20 billion for Epic. Who says no?
Asit Sharma: I think shareholders of both companies say no, and Epic Games being private, that's a few people probably could sit around a coffee table.
Travis Hoium: Yeah, just a small table where they're making that decision.
Asit Sharma: I'd say no. It doesn't make sense for either company. Although it's fun to contemplate from Epic Games' side, I think just focusing on licensing for their Unreal Engine, working on the Fortnite franchise is a day job in and of itself. I think the same for Disney, shareholders of Disney want to see them come decisively down on what they're going to be when they grow up. Personally, I feel that there's some missed opportunity for long-term investment, further capex into the experiences side of the business. This streaming business is difficult. It's not easy, and maybe the glory days are behind Netflix, but Disney isn't necessarily in a position to capitalize.
Everyone is suffering from folks pulling back on subscriptions and just having fatigue. I'm not sure that live events for any of the streaming companies is quite the answer, either, or even sports licensing. I think both companies have their work cut out for them. But which group would probably be more upset? I think Epic, like, Epic fans and employees would just be incredulous to hear of such a proposed merger. I think Disney's shareholders as well would be like, don't give us I mean, you have a succession. Is another topic. Don't give us one more topic that we have to wring our hands over.
Travis Hoium: Jason, I want to make the argument for this from the Epic side, because I think if you look at, like, when the Activision Blizzard acquisition happened from Microsoft, these companies were extremely valuable. Who doesn't want to own a video game platform? You look at today what EA is worth, what Activision Blizzard is probably worth under Microsoft, which is definitely not the $69 billion they paid for it. The valuation of Epic is nowhere near what it was. Gaming has only gotten more difficult. I don't know. If you ever want to exit, you're right. Asit's right. If you never want to sell this business, then even an offer from Disney isn't going to change anything. But if you do ever want to sell the business, Disney seems like a good buyer.
Asit Sharma: Well, Tim Sweeney and Mark Rines, the CFO. Between the two of them, they own close to half of the business. That means all you've got to do is go to the folks at Tencent and make sure that there's something that Disney agrees to do that is going to be amenable to Tencent, which owns close to 30% of the business, and this is a done deal. You've got well enough. Even without getting Tinson on board, between Disney and Sweeney and Ryan, you've got well over half of the voting control of the business that you can do it. But it's just going to come down to Sweeney reaching the decision that he's ready to move on or ready to let this company be part of something bigger.
Travis Hoium: It's fun to talk about because the video game business has always been something that Disney has not been able to get right. This could be a way to do that, but it would probably be pretty expensive, too. Let's talk about a deal that maybe is a little bit more realistic. McDonald's buying Chipotle, Jason. Who says no?
Jason Moser: You're going back in time here because.
Travis Hoium: You got to tell the history if people don't know the history.
Jason Moser: McDonald's was one of the seed investors in Chipotle before it became a public company. Then, after it went public, it very quickly exited its position, which was a massive financial mistake in the long term, with Chipotle being such a huge winner. Who says no? I think it has to be Chipotle's shareholders. Writ large, you don't have any concentrated large investors anymore in the business. Even when the two co-founders were still involved in running the business, very small financial stakes in the business. You would have to have some an activist investor get involved. Honestly, they'd be more likely to push for something like this than to pull away from it.
Travis Hoium: Yeah, Asit, McDonald's once owned about 90% of Chipotle. It's just crazy to think; I always think these companies that own a big stake in another company that's smaller and more disruptive just don't ever sell it. It almost never works out well for shareholders. Then too, I wonder what would have happened though if Chipotle hadn't broken away? Because sometimes when you report to that parent, you have crucial decisions and they come down on the corporate side of things which stunts your growth.
Asit Sharma: They probably get their Coca-Cola for a little bit cheaper.
Travis Hoium: Exactly. This is where I actually was going. I think who says no to this one is both the chief operating officers of these respective companies. The reason is [OVERLAPPING]
Asit Sharma: They're very different.
Travis Hoium: They're so different. The supply chains have become so different. Chipotle went its own way, focused on sustainability, working with smaller suppliers. Now they've grown to some window dressing there in this day and age. But still, it's a totally different supply chain except for the fountain drinks than McDonald's has had for decades and decades, which is a lot about mass agriculture, leaning on your suppliers. I need a few more cents out of those potatoes and they control the destinies of so many potato farms by the way. It doesn't have a clear way to wreak good operating margin out of a combination, except for Chipotle, look at how deep McDonald's pockets are.
There are some scale and distribution synergies they can get out of it, but it's more of a headache. The business models have just become so different. Ironically, this is where Jason was also going, when Chipotle started, they learned all their processes from McDonald's. What we see in Chipotle's is McDonald's. That's exactly what you see when you walk in there. It's just that it's closer to you. There's glass that separates you from the ingredients.
Jason Hall: I think the biggest reason why this wouldn't work is that we talked about the operating model. Chipotle is entirely corporate-owned. There are no franchisees. McDonald's has optimized its business for other people to own and operate the franchise, pay those fees. In a lot of case, McDonald's actually owns a real estate, too. They get paid different, two of the most steady reliable ways to get paid, and you're letting all of the capital risk and the operating risk fall on the shoulders of the local owners. Chipotle's completely flipped.
Asit Sharma: If Chipotle could become as consistent as McDonald's is with what I actually get versus what I order, that would be it'll be worth it for me as a customer.
Jason Hall: Go back to the roots.
Travis Hoium: Exactly. Asit, Nvidia buys CoreWeave. I think you could argue that this maybe is going to happen anyways. But if it doesn't, who says no?
Asit Sharma: I went with chief operating officers. I'm going to go with Colette Kress, the CFO of Nvidia, to tap Jensen Huang on the shoulder and say, come on, what are we doing here, man? We seeded CoreWeave. We own a chunk so that companies could use our technology and it's a way for us to spread the Nvidia gospel for people to have access to Nvidia GPUs. We don't want to own this puppy necessarily. Now, looking at the market caps of these respective companies, if Nvidia represents $1 or 100 cents, then CoreWeave represents one penny and slice 30% off of that. Maybe just cut it from the corner.
Travis Hoium: Do you even need to take that to the CFO?
Asit Sharma: [LAUGHTER] I don't know. You could. But look at the cash flow, too, Nvidia could pay for this out of less than a fifth of its cash flow next year, free cash flow. This is a $35 billion market cap company. That's what CoreWeave is today. It's not so tiny anymore. But I think in this instance, you want to spread your gospel. You don't want to own the gospel, because your own business engine is so capital-light and it's so effective. Don't bog it down. But I could be wrong. Jason.
Jason Hall: I think your biggest customers probably also tell you don't do it because even though it is a tiny deal, you're starting to signal.
Travis Hoium: The biggest customers are making their own chips, though. We're talking about [OVERLAPPING] Alphabet and Microsoft and Amazon and all these. They're trying to break away from Nvidia.
Jason Hall: But you're giving them more reason to accelerate that breakaway by deciding that you're willing to compete against them. I think that that's the risk you take. This would be Taiwan Semiconductor making the decision. You know what? We're just going to start making smartphones. It's just this one. It's a specialized thing. But just this one, and Apple's going to be like, bro, you really think that's the smart thing to do?
Travis Hoium: The flip side would be Google making the Pixel phone. They make the operating system. Samsung is still happy to use it. Let's go to a product that I know we've debated off the air with producer Dan Boyd. Adobe buys Canva, Jason. Which one of these do you use and who says no in this deal?
Jason Hall: I use both. Here's the interesting thing about it, Canva is the one that I've used by far the most for the past several years as a creator, as a YouTube, I have a YouTube channel and use it for thumbnails and a lot of things like that. Honestly, it's been disrupted by Gemini from that perspective because of single quick use tools. In this case, I think this is a deal that Adobe wants to do every day of the week and twice on Sunday, but Canvas still privately held. The two co-founders who are married running the company, this is their life. I think that they say no unless it is a gigantic check, and they also get a blank check to do a lot of things inside Adobe that would be disruptive, but based on the vision they see for the future of creative arts.
Travis Hoium: Asit, maybe they get a big check, and has Adobe named a new CEO? Maybe they become the co-CEOs of Adobe. There you go. Win for everybody.
Asit Sharma: Maybe I'll be brief here. I think the government may say no, because look at the trouble they gave Adobe over Figma.
Travis Hoium: That was a different administration or at least part of it was a different administration. Maybe the government.
Asit Sharma: That's a great point. The regulatory environment was a bit more strict under the Biden administration, a little bit more loosey-goosey under the Trump administration. Maybe the government looks askance and lets this go through. I would think Canva employees and also Canva users would not want this to happen because it'll squelch Canva's ability to innovate. As Jason points out, they already have stiff competition. All of this stuff is merging together, though. While we mention Figma in the same breath as Adobe and Canva, I think the growing usage of third-party AI tools — yes, you can't get the whole extensive range and surety of Adobe's Creative Suite out of One-Off Tools. You can do a lot these days. My personal go-to is my wife. She's a power Canva user. I can't use that thing to save my life, so I'm exposing a little bit about one area of my technology usage, which is very subpar. But I think if my wife were here, I'll ask her tonight over dinner. Like, would you want Adobe to buy Canva? I'm pretty sure what the answer would be.
Travis Hoium: By the way, Figma still worth about half of what Adobe was going to buy them for. It was interesting how these valuations turn out. Quickly, Asit I want to start with you. Berkshire buys Costco. Who says no?
Asit Sharma: This is going to be Charlie Munger's heirs, his descendants, all just making a PR firestorm. Wait a minute. Dad spent so much of his life trying to persuade Warren Buffett to buy Costco, buy more of Costco, and famously Warren Buffett passed and missed out on what would have been probably one of his most sterling investments. I think Charlie Munger's heirs are going to have an issue with that. Other than that, I think it's not a bad deal to make. It's a scale deal. Berkshire has such trouble moving the needle these days. We've heard about some really interesting purchases they've made under the new regime, but I question, whether any of that can really produce the returns. On the other hand, Berkshire is exciting again. Share price is up. It looks like an active company. Maybe deal making is something that will keep pulling investors in. There is some sense that Warren had become a little bit stale in his desire to make deals. I like this idea. Jason, what do you think?
Jason Hall: Absolutely not. Tony James is not letting this happen, chairman of Costco. He has been chairman for almost 10 years, has been on the board since the '80s. If there's any one thing that Costco that is so magical, it's their operating bill. They're just such an exceptional operator. They know their business, they know their customers. The problem is if you look at Berkshire, after they buy businesses, they become bad operators. The margins get worse.
Jason Hall: All of that cash flow ends up sitting on the Berkshire balance sheet. I would love it if Greg Abel took that $370 billion in cash and took 100 billion of it and sent it back to the operating companies and said, guys, you can modernize, improve, fix things. Let's get our profile work.
Travis Hoium: Has an AI person you talk to and you go through the drive through now, they only make mistakes 30% of the time.
Jason Hall: It's an improvement. I know this is heresy, but Costco would be ruined if Berkshire owns it. It'd be like Dairy Queen.
Travis Hoium: I think this would be a fascinating merger, but I think you're right. None of these deals are probably going to happen. Adobe buying Canva, I think, maybe is the most likely out of the ones that we talk about. But there's also a lot of synergy between these companies, and if deal making does come back this year, next year, the year after, I think we're going to see some surprising deals.
Jason Hall: I'm going to paraphrase, Charlie, one more thing. Hey, Berkshire, just buy the damn stock.
Travis Hoium: Probably a good move, too.
Asit Sharma: One last thing on Berkshire, though. The flip side of it is they let operators be operators. Maybe they don't invest as much as they should or give more clear line on how they should allocate their capital. But I like that they leave businesses to a large extent alone once they buy them. But they don't leave them enough money.
Travis Hoium: When we come back, we're going to get to the stock center radar. You're listening to Motley Fool Hidden Gems Investing.
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Travis Hoium: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have more recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes.
I'd like to end the show with stocks on our radar and thoughts from Dan behind the glass. Asit, what do you got for us this week?
Asit Sharma: I'm looking at a company called Ciena, Travis, symbol is CIEN. This is a business that is an optical networking specialist that means that they make stuff for data centers. They use light to sling information around data centers. It's got this portfolio of network routers and switchers. Boring stuff, but it also has a family of products that blast information via light across extreme distances. Think transferring data from one data center to another or one country to another or one continent to another. This is going to play well in future where quantum networking also becomes important. I think this company has a long runway. It's both up 54% year to date, and it's 65% off its all time highs. It's had a very volatile year trading now at a reasonable 36 times forward earnings. What I love about this company, it's got a solid operating margin and earnings are expected to triple over the next three years Ciena Optical networking specialist.
Travis Hoium: Dan, what do you think about optical network?
Dan Boyd: When are we going to change picks and shovels to servers and racks at this point? You know what I mean? Also, just as a interesting thing, listeners, go check out the stock chart for Ciena. It is one of the strangest looking stock charts I've ever seen with a huge peak in the year 2000 and coming back up in recent years.
Travis Hoium: Jason, what do you got for us on your reader?
Jason Hall: Marvell, ticker MRVL directionally, it's rhymes with what Asit was just talking about there with Ciena. The difference is that this is more of a semiconductor company, but they do ASIC a lot of custom silicon and the big hyperscalers pretty much only work with Marvel and Broadcom to design this and use this custom silicon. But the key is that their business is focused on that moving of data and connectivity. They're absolutely a top dog and first mover in this space. They threw us a huge curveball with the announcement nouns rumored acquisition of Lumentum, which would be a gigantic bite, but it would further vertically integrate and integrate some core technologies for what is like the de facto way that data centers are going to be connected, just really aligning the core technology that is really what's going to drive the future of AI, removing the bottlenecks, driving down energy costs. That Lumentum deal, the market hates it. It's down by low percent today on this deal. I think it's a smart deal. As much as the stock has run higher over the long term, trades for roughly 60 times earnings and like $10 billion in trailing revenue for the core business, there is a ton of room to continue growing this business.
Travis Hoium: Dan, optical networking or the stuff that goes into making chips. What do you think?
Dan Boyd: Every time I hear about this company, I think it's about, you know, superheroes and big movies. I like both of them, but I think we're going to go to the more local Hanover, Maryland, company, Ciena, this time around.
Travis Hoium: Congratulations to Asit. That's all the time we have for today. We'll see you here tomorrow.
Asit Sharma, CPA has positions in Adobe, Amazon, Broadcom, Ciena, Coca-Cola, Costco Wholesale, Marvell Technology, McDonald's, Microsoft, Netflix, Nvidia, Oracle, and Walt Disney. Jason Hall has positions in Berkshire Hathaway, Chipotle Mexican Grill, Nvidia, Taiwan Semiconductor Manufacturing, and Walt Disney. Travis Hoium has positions in Alphabet, Berkshire Hathaway, and Walt Disney. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, Apple, Berkshire Hathaway, Broadcom, Chipotle Mexican Grill, Ciena, Costco Wholesale, Figma, Lumentum, Marvell Technology, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Taiwan Semiconductor Manufacturing, Tencent, and Walt Disney. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's, long January 2028 $330 calls on Adobe, short December 2026 $38 calls on Chipotle Mexican Grill, short January 2028 $340 calls on Adobe, and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.
Is Wall Street Turning on AI? was originally published by The Motley Fool
