Chapter 1: What is the main topic discussed in this episode?
Transmedics has built up their organ care system. They have one of the great CEOs in the US. It's been a wonderful stock for us. I think our cost basis on some of our shares are down around 15 to 20, and the stock is at about 145 today. But I think it's got another 3X over the next six to seven years for Transmedic shareholders as it continues to expand.
That was Motley Fool co-founder and CEO Tom Gardner talking about Transmedics, one of his favorite stocks for the next five years. I'm Motley Fool producer Matt Greer. Now, Motley Fool chief investment officer Andy Cross recently sat down with Tom for our Stock Advisor podcast. They talked about the current stock market.
Tom shared two of his go-to market indicators and six of his favorite stock ideas. Andy kicked things off by asking Tom about AI.
How do you think about trying to determine those AI contenders from the AI pretenders when you're looking at it as an analyst and as an investor in companies you might be studying and thinking about investing in?
Well, one of the things to look at is cultural change. and to just read about the companies. Again, depends how many companies you have in your portfolio and whether you think you'd have pattern recognition on understanding the decisions they're making. But you basically want dramatic action culturally at companies now because the winners are going to be AI native companies like the winners.
were going to be and did become internet native companies. It wasn't like Google was actually a physical bookstore. Google wasn't a bunch of physical space universities and it was gonna try and create online learning. It was just, we're just using the internet for our whole business. We wouldn't even think twice. This is what people are not quite understanding.
But of course, I don't want to say that too much because it's becoming more and more real and we're seeing transformations in company cultures. But I don't think what people fully realize is that companies with 2,800 employees may be able to be replaced by companies with 108 employees. In order for a...
existing technology business to get there, I mean, how do you get from having 2,800 employees, let's just say down to 400 employees, who are all AI native, all advanced AI coders, totally bought in, not even questioning, not even like, oh, I use AI and it came back and it gave me the wrong computation, gave me the wrong answers, like, okay, good, you're supposed to go back and keep working.
so that it gets it right for you. You're using a tool, you're trying to shape that tool to work for you. You don't just give up after you put a one line prompt and it doesn't give you the right response. So I think what we want to see in companies is that they are bringing in teams of people who have expertise with advanced new technologies and that they're letting them lead.
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Chapter 2: What are the two go-to market indicators mentioned by Tom Gardner?
Like they're literally, their commercial value collapsed. Some of them were bought for a dollar a share or their stock went down 95%. So when you say which ones are gonna be real, which ones aren't, I think you have to get proof that they are AI native. And the clearest way will be that they're born in this era and come public with that. But-
Anyone who's in denial or any cultural challenge, it has been interesting to follow Duolingo because some of the leaders in Duolingo said something a year ago about how we're going to use AI. And there was a cultural issue about that. Like, what do you mean we're going to use AI?
Chapter 3: How can investors differentiate between AI contenders and pretenders?
But the problem is, I think those points that were made, if you go back and look at them, they were accurate. And the question is, can these companies act with respect for all the people that work there, but with a deep understanding that if we don't change like right now, we're going to lose relevance and we'll despair. There won't be any jobs left. So it's hard to face this.
And we've actually never faced this. anything quite like this. We can say the internet, it's an obvious illustration, but this technology is moving a lot faster and the implications are more profound, scarier, and more exciting than the internet. So I think you just need to know, you need to be looking for companies that are fully all in. They're not in transition mode.
They're creating everything through AI in their workplace.
Yeah, and having founders like Toby who own meaningful stakes and are all in like that and very vocal about it is a good indication of that exactly, Tom.
That's such a great point, Andy, because I can't remember which founder CEO said, I feel sorry for all CEOs in the public markets that aren't a founder because they have to work slowly through a procedure with their board. As the founder, spiritual leader, and largest individual stakeholder, I can walk into the board and say, I have to make this change now and it has to go quickly.
I'm going to make the case, but we're not going through a bunch of bureaucratic checklists here. We have to move.
Yeah, a lot of sweat equity, real equity and sweat equity into those kinds of decisions.
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You remain cautious and moderate with your investing stance, but the AI powered indicator that you use in hidden gems actually turned more positive about the markets. Why and has it impacted your thinking? Maybe define what that tool is and how it's impacted your thinking.
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Chapter 4: What stock ideas does Tom Gardner recommend for the next five years?
But the market view tool is using floods of data sources. And it's not just following cash in and out of the market. It's following cash flow projections across all U.S. equities, multiples, historical multiples, interest rates. unemployment, it's bringing in a lot of data points and our formula calculates and we can update that more frequently, but we update it once a month.
Chapter 5: What are the implications of AI on company culture and employment?
And that is basically saying more like 10 and a half to 11% a year. And the reason that that tool is advancing that I think my conclusion is that there are two reasons. One, margins are gonna improve.
If there are companies that have 2,500 employees and that can be done with 250, either a new company's gonna come along and do that or a large company is gonna gradually or suddenly, depending on their cultural approach, reduce their workforce costs and be able to create a lot more.
Vinod Khosla of Khosla Ventures said recently that the marker for Silicon Valley companies is $1 million in revenue per employee, $1 million in revenue per employee. That's what tech companies have been targeting as they've gotten funding and gone public, $1 million in revenue per employee. And he said with AI, the new target is $5 to $10 million in revenue per employee.
And that either means that everyone who is in a workplace is going to become five to 10 times more productive using the tools right away, or that company's gonna reduce its employment by 80%.
The answer is it'll be somewhere in the middle, and those puts and takes across who's willing to use the tools and become a 10X producer and who's not, and therefore is gonna get a performance exit or an exit offer and will exit that workplace, there's gonna be operating and gross operating and net and cash flow margin improvements
that those will translate to higher valuations companies will be a lot more profitable because of that and the second factor is that the margin improvements will come in technology companies that are many of the leaders of the s p 500 so you'll see continued outsized gains by large tech which is already making up a bulk of total market cap in the u.s
And those margin gains will translate to higher valuations, and you'll end up with closer to 10.5% per year. So anyway, predictions would be somewhere between 8.5% and 10.5%. And on the one hand, that's not that big a deal. That's not a big gap. On the other hand, it is about... a 30% swing either way per year.
And so if it's gonna be closer to 8.5%, we're gonna see more volatility, we're gonna see some bigger losers, and we're gonna not get as many big winners. And if it's closer to 11% a year, well, we're gonna be in a an exciting market where there are some big winners, particularly in new technologies. There'll be a lot of IPOs as well. So I guess I'm somewhere in the middle overall.
That might sound boring or wishy-washy, but I'm still pretty firmly in the moderate camp, leaning more towards adding cautious investments alongside my moderate recs than aggressive investments alongside. But I still want to have a good mix of all.
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Chapter 6: What lessons from the dot-com bubble are relevant today?
Investing is one of them. So I think we're gonna see sections get hurt. The third thing I think that we'll hit is we'll have problems with consumer discretionary companies because of wage deflation. I think if you're a company and you have 2000 employees and you can do it with 250 employees, it means that there's, it's not just the people who lose their jobs.
It's like, there's not going to be a lot of pay hikes going on. There's, there's a rewriting of employment right now. And it's a huge transition. And I think it could be five years before we start re re settling with new organizations. I think we're gonna need tons of new companies to be created, a lot of entrepreneurship. I think we could run into real employment issues.
I know I'm not alone in that, but that would mean people will not be spending as much. So we'll have a deflationary period as people are fearful and saving their money wherever they can. Okay, third market collapse to me is cybersecurity. You know, you have foreign countries that don't like our stock market.
They don't like how prosperous our stock market is and how much wealth it creates in the U.S. Obviously, we can not go into a geopolitical debate, but we're not making a lot of friends right now out there. And I think that one of the major forms of warfare, of course, the next rest of our lives is cyber.
And therefore, people who don't like the US wanting to hurt our financial system is a risk, definitely. And then I think the final one is just watching industry by industry. Again, it's kind of like the earlier one, so I may be repeating myself, but it's who are the AI leaders? You really want to invest in the AI leader by industry.
I mean, obviously there are many other factors in just that, but you want to start leaning that direction. Who is making the technological upgrades they're uncomfortable to make because it replaces jobs, it changes workflows. I think Vinod Khosla, to quote him again, said something like, you know, 90% of AI projects internally that aren't working are being sabotaged internally.
because it's only natural. If you feel like that's going to take away your role, your income, you're going to half participate or maybe drag your feet or maybe even try and block it. So technological change like this is very uncomfortable, but we have to find the companies that are willing to make those difficult changes.
And as you mentioned, one place to keep our eyes open to are founder run companies or companies where they have high inside ownership and they have enough success that they can have clear process for decision making to move quickly.
When Johann Rall received the letter on Christmas Day, 1776, he put it away to read later. Maybe he thought it was a season's greeting and wanted to save it for the fireside, but what it actually was was a warning delivered to the Hessian colonel, letting him know that General George Washington was crossing the Delaware and would soon attack his forces.
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