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Chapter 1: What were Oracle's earnings results and capital spending plans?
Diving deep into the AI supply chain today 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 Fool contributors, Jon Quast and Matt Frankel. So we wanted to start the discussion today about AI spending, basically, and some of the kind of nooks and crannies that a lot of that is falling into.
And to do that, we want to start with the big news event of the day, and that was Oracle's earnings. They reported earnings earlier today and the stock is down Pre-market was down about 11% right around the time that we are taping. And the numbers were pretty good, at least from a quarterly earnings perspective.
But I think the biggest reason we saw this massive decline in the shares was because CapEx spending is going way, way up. They spent much more than they had expected. They were expecting $50 billion for this entire fiscal 2026, but they ended up spending $55 billion. And their plan for 2027 was to add more to that and do about $70 billion in capital spending.
Now, there's a lot of reasons for that. The remaining performance obligations, basically, however hyperscalers are spending has gone way up. And we'll get into that. So, guys, one of the things I think about with Oracle compared to like the other hyperscalers is this is not like their bread and butter business. This is something they've been really getting into.
Seeing these kind of large, large numbers, is this like a risky approach? Is this like the way Oracle should be attacking this?
You're right that the earnings report was very strong, but the earnings are not the full story. If they were, the stock would probably be up today. Both revenue and earnings grew by 20% or more. They beat expectations. Cloud revenue grew by 47%. The RPO number that you mentioned
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Chapter 2: How are Oracle's spending plans related to AI IPOs?
It is simultaneously the company's biggest risk factor and the biggest bull case, really. I mean, having a $638 billion backlog would be a dream of most companies. But when it's all tied to one customer, it does seem to be diversifying a little bit. It's now estimated that, quote, over 50%
of that backlog comes from open ai as opposed to virtually all of it not that long ago uh the number that you just mentioned it increased 85 billion dollars sequentially and so that's not open ai deals uh prepaid ai contracts it's worth mentioning now total 75 billion of that So that kind of helps the need to raise capital, but there's still a pretty big gap there.
So having said all that, the company does have a massive CapEx need. $56 billion in fiscal 2026, that's up from 21 billion a year ago. Negative free cash flow for the first time in a long time and probably for the foreseeable future, if we're being honest. It could certainly pay off if OpenAI and the others can afford to pay for all of their committed spending.
But it's still a risk factor in the near term. Almost $130 billion in debt, and that's growing fast. And anytime you're adding debt quickly, you're adding risk.
To your point, Matt, there's really no other way to do this, to be fair. When the space is moving as fast as it is and you've got to spend a ton of money to build something that's very expensive up front, of course you're going to take on a lot of debt and you're going to take it on very quickly. So
I want to be fair to Oracle on the one hand, and also I want to acknowledge that it is a long game that the company is playing. This is, to the RPO number specifically, okay, $638 billion, yes, but over half of that is more than three years out. So it's not expecting this money anytime soon. Now, that's a little bit risky for sure.
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Chapter 3: What are the bottlenecks in AI infrastructure buildout?
Do I think that AI data centers are going to still be a big thing in three years? Yes. Do I think that all of that money is necessarily in the bag right now for Oracle? No, not necessarily. That said, I mean, OpenAI, much of what it is doing is the Stargate initiative. And there's a lot of companies involved in that. Also, the White House is supportive.
So it's risky, but I wouldn't say that it's... you know, humpty dumpty risky.
To your point with the idea of it being risky or not or something like that, one of the things that is, it does seem like these companies are really dependent on, Matt, you said it was over 50% of it is an open AI. I'm assuming a lot of it is anthropic. We've seen anthropics, open AIs, these other AI companies in the world, they have been signing some very large checks
related to spending on compute and stuff like that. Part of the reason when we discussed the S1 for SpaceX, I think it was last week or a couple weeks ago, we were talking about Anthropic doing, I think it was $1.2 billion per month in basically renting compute from SpaceX. And a lot of what we're seeing here with these RPOs are similar deals.
These are big, big numbers and a lot of money that they have to even cough up kind of upfront And that kind of gets me to like one of the things we I've also seen OpenAI just confidentially submitted their S1. So they're also planning on going public relatively soon. Anthropic already did it. We're expecting that S1.
When we see these numbers coming out from from Oracle, I'm starting to wonder, do you think that the reason these companies are going public right now is because the bills are starting to come due for some of these very large bills?
Yeah. And I mean, don't be fooled just because they recently both did funding rounds. Anthropic very recently raised $65 billion. It's really rare for a company to have a big, you know, serious effort or whatever it was for this and then do an IPO almost immediately afterwards. And it's because they know they'll burn through this capital very quickly and are going to need more.
I mean, fortunately for them, investors seem very happy to open their wallets right now and give them whatever they need. We're seeing this with demand for the SpaceX IPO. It's just a question of whether that's sustainable. In a year from now, if they wanted to do a big offering, would they still be able to do that? No. So they're rushing while it's a hot IPO market.
So the rush to IPO, especially if the market gives them trillion-dollar valuations, which is expected, is driven by their massive capital needs. After all, it's really a lot easier to sell an IPO to investors than it is a follow-on offering, as Oracle has found out.
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Chapter 4: Why do European stocks trade at a discount to American ones?
And what are some of the opportunities? Because I know that when people are listening to this podcast, it is obviously investing, it's stock picking. Where are you seeing some bottlenecks, unique industry perspectives, and perhaps some companies? John, when you pitched this to me, you said chip production and kind of like the real deep cut parts of the industry.
Yeah, I'm looking definitely at the fact that chip production is increasingly a national security issue. And there's a big push to bring all that production domestically, not to mention that there are more chips needed just in a general sense. And so we're seeing all of these companies projecting, hey, we're going to build this. We're going to increase this production, that production.
Talk about Tesla's TeraFab. We can mock it a little bit, but they're saying, because they're saying they want it to be the biggest facility on earth, essentially. But is it going to be probably a big facility? Yeah, I'd say so. Is it going to pump out a lot of chips? Yeah, definitely.
And so what is interesting to me about that is, perhaps the margins for the chip makers could go down, but I think that it creates an opportunity. It is creating an opportunity for a company such as PDF Solutions, and that's ticker P-D-F-S. This is not PDF from Adobe, the portable document file. This is process diagnostic framework. And so this company, essentially what it does
is it is looking for defects on the chips. And then as it detects them, coming up with a way that we can now fix the process so that we don't produce a ton of chips that have the same defect. The value proposition here for the chip makers is as these
chips become more complex more expensive to make now it makes more and more sense to have a company like pdf solutions coming in and finding the the flaws and so that the processes can be fixed as they go and so this is creating incredible business opportunity for PDF Solutions. Revenue has more than doubled over the last five years.
One of the things I like about it here is that this isn't a recent all of a sudden skyrocket. This is more of a steady line up and to the right for this company. The margin profile is improving as it scales. And so you look at it, yeah, 40 times forward earnings, that looks expensive. But at the same time, I believe its opportunity is only getting bigger.
And I believe that its margin inflection is just now starting. So maybe not as expensive as it seems at first glance.
I want to ask a question about this because I think there's actually this interesting little fiefdom in like the semiconductor industry where, you know, I think of like the suppliers, you know, ASML Holdings. People have heard of this.
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Chapter 5: What are the implications of Oracle's capital expenditures?
This is the one that makes those lithographic machines. They basically have a monopoly on it. And there's other like random processes within the chip making process like that, you know, So there's either one company that makes 80 percent of them or there's two companies and they're always fighting like 40, 60 percent. I think of like KLA Corp and Lamb Research.
When for PDF solutions, are they a dominant market player in their respective field or is this kind of one of the more fragmented parts of that industry?
I would say that there are more dominant players in PDF solutions. And there's a lot of sometimes overlap between companies. One company might have a broader portfolio. One might have. So, I mean, not always are they directly competing on all aspects with its competitors, sometimes just in one area. And so there are many companies out there doing.
I don't know if many is the right word, but there are multiple companies. out there. And so I'm not necessarily saying PDF Solutions is a screaming buy, definitely one in this area.
I would say this area is one that is definitely a fertile hunting ground for potential opportunities because you look at the chip makers, maybe the margins do pull back at that level, but it makes sense that more and more this kind of a company is gonna be in hot demand. And so that's where I'm looking for opportunities.
Matt, you really kind of whetted my appetite because the pitch that you had said it was energy. And then I kind of saw a little bit of your notes. I was like, well, this is a very interesting take on energy. So what do you got?
Yeah. So, I mean, John's absolutely right that the chip making is a big constraint when it comes to building out AI infrastructure. I mean, that's why Micron hit a trillion dollar market cap recently, which was not on my bingo card for 2026. But all the chips in the world, it doesn't matter if you can't power them. So I'm closely watching the energy bottleneck.
Data center projects are being delayed left and right, and power constraints are the main reason for that. It's not likely to become any less of a problem in 2027 and beyond. Companies getting ahead of it and actively working to solve the power problem could be in a great position.
But having said that, a lot of energy sector companies, as you know, are very richly valued or are speculative in nature. I'm thinking the small nuclear startups, for example. One company that is kind of a hidden player in this is Prologis. It's not a hidden company. Prologis is ticker symbol PLD. They're the largest real estate owner in, I think, the world.
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Chapter 6: How is chip production affecting AI infrastructure?
Google or Alphabet says we're going to do 25 more just because stuff costs more, not because we're building more. You see things like this, these infrastructure bottlenecks, these kind of, you know...
constraint companies these ones that basically hold the keys to the kingdom here are going to be increasingly important probably going to be able to exert an immense amount of pricing power so maybe this will be a nice little recurring segment that we do as we you know think about this going forward coming up next we're gonna hit the nail back Everyone, just a quick reminder.
If you want to get your questions in and have us answer them on air, email us at podcasts at fool.com. That's podcasts with an S at fool.com. All three rules as always, keep it foolish, keep it short enough I can read on air, and don't try to avoid anything that involves personalized advice. We have to try to keep things relatively generic.
So this first one comes in from Neil, which based on the question, I think he's based in Europe. So Here was the question. I was fascinated by your episode about European stocks and was baffled as to the huge difference in valuations on the NASDAQ and New York Stock Exchange, basically all the American exchanges, compared to other similar components in the UK and Europe.
There was a very long list of companies he was giving examples to, but I want to kind of condense down to a couple of the big ones here. It's like, for example, Danish wind farm engineer Vestas Windsymper. It's one of the largest in the world. I think it's basically a duopoly with M and GE Vernova.
And Danish semiconductor manufacturer supplier, which is ASMA Holding, which mentioned it earlier, excuse me, Dutch, not Danish. Again, this is a problem that we have for a European company. Stocks barely know where the countries are. His argument is basically they would be worth a lot more if they were, you know, given standing in the American market. ASML, maybe. It does have an ADR.
It does trade for 50 times earnings. Well, I might pump the brakes on that one. But the rest of the question is, is this a case of American companies getting more news coverage in the States, stock trading platforms being not offering company or foreign-based stocks? Like, why such the large discrepancy? And this is something that's been going on for... A long time.
Basically, the last time that international stocks outperformed American stocks was during the dot-com crash all the way to about 2007. Kind of that slight recession that we had in the 2003-2004 period was the last time we saw actual international outperformance. So what is the big discrepancy do you guys see today?
First of all, it's not just Europe. Foreign stocks in general trade for a significant discount to U.S. companies as a whole. Just as an example, most listeners know that I'm the dividend stock guy in a lot of ways. The big part of my strategy, the average international large cap dividend stock right now trades for 14 times earnings and 1.7 times book value. For the average U.S.
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Chapter 7: What role does energy play in AI infrastructure challenges?
So this isn't something that I normally play in. I will say that as the 80s kid in me who grew up with Ninja Turtles, Japan has always been interesting to me. And so there are some Japanese companies that actually have crossed my radar. This isn't necessarily anything that I've followed for a long time, but they've crossed my radar recently. that I find very intriguing.
And the first one that I would put here is the company NITO Boseki or NITOBO. This is a company that makes pretty much all of the world's tea glass. And this is a substrate in making AI chips. There are some other companies that are starting to get into the game here because it is such in high demand and there is so little of it compared to how much demand there is.
So we'll see what that does to the economics. But so far, it's really interesting to Topo and how it's locked up customers for multiple years and how it is the one company making this material. The other thing that has crossed my radar more recently is a company called Ajinomoto. It is... Makes this film, it's a buildup film, ABF, Ajinomoto buildup film.
Essentially, this is some insulating material that goes on GPUs and CPUs. And personally, I'm of the opinion that CPU demand is going to be very strong over the next several years due to agentic AI. I think that, well, I am starting to position my portfolio accordingly. So I think that does create a situation where Ajinomoto's Material is going to be in higher demand.
Now, there are companies looking to diversify away from that, use other materials. And so that is a key risk here. But these are two companies that have crossed my radar. I'm going to refrain from giving. They do have OTC, over-the-counter ticker symbols. They're very thinly traded. So I'm going to refrain from giving those here. But listen on the Japanese exchange.
It's a nice job, too, tying in together the bottlenecks and supply chain constraints that we have with AI build-out, because those two clearly fall into that realm. I'll give mine really quick, and then Matt will finish with you. I want to mention Exor NV. This is a portfolio company. It's basically the wealth of the Agnelli family. They're a very powerful, rich family in Italy.
They own a portfolio. It's basically like they own Stellantis, Ferrari, CNH Industrial. They're a significant investor in Philips, the healthcare company. Several wholly owned subsidiaries, like it owns the Economist newspaper, for example. And it's a slightly strange company because of the way it reports earnings, because it's a holding company of a lot of publicly traded companies.
I don't know. I feel like we've mentioned a couple of large companies that own publicly traded stocks before. The fascinating thing to me is this company trades for about 0.4 times book value. So trading for a significant value for its underlying portfolio. Trades on the Amsterdam Exchange, but in the U.S. it does trade over the counter as EXXRF.
And there's enough trading that I don't feel like we're going to move the market here. So I thought I would mention that one. Matt, what do you got?
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Chapter 8: What hidden opportunities exist in the AI supply chain?
Of all the times that international stocks have outperformed U.S. stocks, it tends to be at times when it's either one, really high inflation or coming down from a major asset bubble. I'm not making any predictions. I'm just throwing those two kind of factoids out there for everyone to consider.
As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.
To see our full advertising disclosure, check out our show notes. Thanks for producer Dan Boyd and the rest of the Molecule team, John, Matt, myself. Thanks for listening and we'll chat again soon.