Chapter 1: What is the main topic discussed in this episode?
We've got earnings galore on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors John Quast and Matt Frankel. We're going to do a whole bunch of earnings reactions today because it's been a busy week related to earnings. And of course, we're going to hit our mailbag at the end of the show.
First, as we're going to start, we're going to talk about basically semiconductor earnings because it has been one of the big talking points of the week. Arm Holdings and Advanced Micro Devices, AMD, both reported within the past couple of days. And after both earnings, we saw shares explode as they blasted past earnings expectations, 15%, 20% moves in the day.
We're going to start with Arm Holdings today because shares are quickly retreating after the company mentioned on its call after hours, that mobile growth was, well, not really growth, and that rising costs were going to impact commodity mobile device sales. John, Matt, you two played rock, paper, scissors to cover the two. John, you happened to pick Arm Holdings as a result.
What did you see in the earnings release and the conference call? And was today's reaction to this, hey, maybe mobile growth isn't great, was that like an appropriate response, do you think, to what you saw?
Well, Tyler, I think the market reaction is appropriate, but not for the reason that you mentioned here. And so I just want to frame this. It is important that you mention the mobile aspect of the business, because if we zoom way out, I don't want to take for granted that all of our listeners know what Arm Holdings is. This is a company that really rose in prominence due to mobile devices.
Its chips are more energy efficient than other chips on the market. And that's a really big deal when you're looking at battery life in a mobile device. So it was able to rise. It does not make its own chips. Historically, it licenses these products to the manufacturers of the mobile devices. But if you look at what we have right now in AI, we have a bottleneck.
You've heard about many bottlenecks.
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Chapter 2: What are the recent earnings results from ARM Holdings and AMD?
The big one is electricity. Power is scarce, and this is driving AI companies to try to find more energy efficient solutions. And so ARM makes CPUs, and it claims they're two times more efficient than conventional x86 infrastructure or architecture. And that's the kind that Intel makes, for example.
And so ARM is claiming that they can save AI companies 10 billion per gigawatts in capital expenditures in a data center. So that's a really big deal. And I think the big news here lately with ARM has been it's not going to just license the technology anymore. It's going to make its own chips. It's going to actually be a chip maker. And it's kind of a no brainer.
According to the company, it can make 10 times the gross profit per chip than just licensing it. So, I mean, that's a huge thing. And if you look, management says here in the most recent quarter, it already has $2 billion worth of demand over the next two years for its custom or for its in-house chips. So that's a really big adoption curve. That's really good. But what is the hang up here?
The hang up here is that if you look out to fiscal 2031, which mostly overlaps with calendar 2030, so just four years away from now, It's saying that, look, by then we'll have $25 billion maybe in trailing 12-month revenue. Maybe we'll have $9 in adjusted earnings per share.
You look at where the market cap was before earnings, and it's gone up a lot, mostly due to competitors' earnings results already. It was trading at an over $250 billion market cap. Projecting maybe $25 billion in annual revenue in four years. That's over 10 times its four-year forward sales.
And you look at earnings, it's trading at somewhere in the ballpark of 23 times earnings on an adjusted basis four years out into the future. That's a really pricey valuation for a company that a lot of exciting things are happening. And I do believe that its products are going to be more and more needed for AI data centers, but it just got way out in front of its skates here.
To say that high valuations, that seems to be par for the course for just about anything that's tangentially related to AI infrastructure or semiconductors, whatever. And in that vein, we have another relatively highly valued company here with AMD, whose shares jumped as much as 20% yesterday after earnings release.
Now, Matt, I didn't get a chance as much to look over the details, but I bet it had to do with AI spend. I mean, prove me wrong.
Yeah, and it's not just the 20% gain yesterday. AMD has tripled over the past year. And yes, it has to do with AI spend. That's really the lazy explanation for it, though. So I'm going to go a little bit into depth with that. So revenue, of course, grew significantly faster than analysts thought. And the big driver was, as you say, the 57% growth in that data center segment, which is AI spend.
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Chapter 3: Why is ARM Holdings entering the chip manufacturing business?
is the strong CPU business that AMD has. That's a big differentiator from Nvidia. AMD is a distant second to Nvidia on the GPU side of the business, which is to this point has been generally synonymous with data center chips. But AMD is a CPU leader, and this is becoming an increasingly important part of AI compute power, especially in the agentic age that we're approaching.
So although the data center segment is the main story here, it's also important to note that the client segment, which includes the chips that AMD puts in PCs and laptops and things like that, That grew rapidly and indicated that the AMD Ryzen processors continue to take market share from Intel.
So that just kind of underscores the strength of their CPU business and why the market might be so optimistic on them right now. There's a lot to look forward to with AMD later this year. They're going to start shipping their Helios full rack system for AI data centers. That's a direct competitor with products NVIDIA offers and charges about $3 million a piece for.
And OpenAI and Meta have already placed large orders. Meta in particular is an especially interesting deal because it's literally one of the single largest AI infrastructure deals that has ever been announced so far. So there's a lot to like. It's tripled over the past year, but it's for a reason.
I want to kind of expand on what John was talking about with Arm getting into building their own chips now. Because we're seeing more and more companies wanting to do this. Alphabet said they want to do it. I think Meta's even mentioned it. Tesla has floated the idea of the TeraFab. It all sounds ambitious, and I understand why.
But one of the things I think about with the semiconductor industry is that, yes, building fabs is nice and new. It definitely increased production. But also, there are bottlenecks behind the bottlenecks, right? You have companies like ASML, Lamb Research, as well as KLA Corporation. These companies that we think of like...
the bottleneck, it's like, oh, Taiwan Semi or Intel, they're like the only game in town in terms of chip manufacturing. Well, ASML is the only game in town when it is the equipment to make the chip factories. And I'm very curious when I hear these companies saying, we're going to do this, that they're all going to have to put in orders with these chip manufacturing equipment companies.
And I do wonder to Arm's ambitious goals, How long are they going to have to wait in line for this equipment? How long is it going to take to build out? We've been talking about cost inflation and things like that.
And I bring this up specifically because I've been thinking about this a lot lately, that as much as this is an explosive growth and we have, you know, AI infrastructure basically finding any chip that they can find, whether it's, you know, reused crypto mining or whatever. It seems like whatever spare parts or compute power we can get their hands on, they're going to use it.
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Chapter 4: What are the challenges in expanding semiconductor manufacturing capacity?
And that's really, you know, because right now supply and demand are clearly not in equilibrium, right? I mean, there's far more demand than there is supply in the chip making industry. That's why we're seeing companies like Micron, you know, the memory companies, you know, they literally can't build their products fast enough. Same with NVIDIA and AMD.
You know, NVIDIA used the word sold out in its latest earnings report several times to talk about products. So, For now, yes, there is a backlog on the ASML, the equipment that the chip makers are using to make their products. But right now, it's working out in the favor of AMD and NVIDIA. With ARM, and I'm curious to get John's thoughts here, it's a little bit of a different animal.
Can they scale quickly enough while the demand is still on the rise, while they still have the ability to turn this into a significant revenue stream? And I don't know the answer to that.
Yeah, I think that's the key, Matt. If these companies could snap their fingers today and increase the production to meet the current demand, then I think that it would be a higher risk of overcapacity
But because these things do take multiple years and because there are bottlenecks even to them increasing their production capabilities, and you mentioned ASML, I think that's a good point right there. That is going to mitigate some of that risk because they can't increase the capacity as much as they would like to right now. So it's multiple years out into the future to bring the supply up.
And I guess it really depends on where you fall personally on the growth curve of the ongoing AI revolution. Does the demand continue to increase from here for these products and services?
if so then the supply is still going to tend to lag behind for multiple years but if demand is plateauing already while supply is ramping yes that is the higher risk right there i'm personally in the camp that i i think that the uh demand for the products are going to continue to rise at least with the supply so i don't see the big risk as much cyclicality risk as i've seen in the past
Yeah, and just wrapping it up here, I think I'm more or less in line with you guys, but I reserve the right on some curveball of algorithmic efficiency where power and compute use goes way down relative to what we're seeing out of Anthropic, OpenAI, and the big power users today. Maybe they start seeing some sort of deep seek-esque drop in compute power per token or however we want to measure it.
So, yes, I think it's there, but I think we should all be ready for those curves that could happen. I mean, we've seen it in numerous other industries before. After the break, Matt and John are going to walk me through what I don't understand in DoorDash's earnings.
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