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Chapter 1: What is the main topic discussed in this episode?
57% of the MAG7's earnings today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. New name, same great investing podcast. I'm Tyler Crowe, and today I'm joined by longtime Fool contributor, John Quast. And we have a special guest today, Motley Fool CEO, Tom Gardner. Tom, thank you for joining us today. Pleasure to be here.
I want to put you on the spot, because we just did the name change to Motley Fool Hidden Gems Investing. Give me the quick elevator pitch with the name change.
Well, the spirit of our podcast of The Motley Fool, our Hidden Gems Investing podcast, and our Rule Breaker Investing podcast is to present our two primary approaches to long-term investing. In the case of Rule Breakers, it's to look for innovative breakthrough businesses.
And in the case of Hidden Gems, it's to really look at the ownership, leadership, and the financial management of companies on a growth path. Both styles are very similar. but in that they both share a passion for holding stocks for the very long-term, being investors in the stock market throughout our entire lives.
But we have two different wrinkles on how to look at companies, and we love having those two different brands in The Motley Fool, and they're expressed here in podcast form.
Great that we get to do this on this podcast. For today, on the docket, we're going to pull a question out of the mailbag that we're getting lots of responses for. We're going to do what we're calling Tom's mystery box topic, because he's the guest of the honor today. But first, we're going to start with the Magnificent Seven earnings, or specifically, four out of the seven.
Within the past 24 hours, or at least since we posted our last show, we've had Alphabet, Amazon, Microsoft, and Meta all post results. It's remarkable how the market seems to be playing this one of these things is not like the other right now. Go up and down the press releases for all four of these companies and you more or less see the same thing.
Massive top and bottom line beats of analysts to the point where Maybe Wall Street analysts are bad at their jobs. You've got cloud revenue for all of these companies growing 20% to 30%. All are raising capital spending plans for 2026. Maybe not for the reason people were hoping, but big raises nonetheless. Yet, the market reactions, we have Alphabet up 6%, Amazon's about down 1%,
Microsoft down 4%, and Meta down a whopping 10% as we're recording. John, I'm going to go to you first. As far as what you saw, these similar reactions across the board, what were some of the big themes across all four that you saw?
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Chapter 2: What are the earnings insights from the Magnificent 7 companies?
All these companies raised their CapEx spending for the year, but It wasn't because they're like, we need to build more. A lot of what they were saying they're raising it for was the prices of things are going way up. John, you mentioned in some of our show notes beforehand, memory costs are going way up.
But it's all the downstream effects that we're seeing, even down to the electricians that are doing the installations and stuff like that. So, I want to pose this to both of you. I'll start with Tom, and then we'll go to John.
When you see these massive raises in capital spending, do you see that as risks for the big spenders or opportunities as investors in those downstream companies that are building out the AI infrastructure?
I do start by seeing incredible opportunities downstream. We're seeing the AI infrastructure build out. As you mentioned, the costs of memory are rising. Companies like Micron, what an amazing stock it's been. This is a company that has been through incredible cycles in its history. It's now looking at a valuation in the hundreds of billions of dollars at Micron.
So I really like to look downstream. There is a part of me that wonders when we're going to get some government intervention on the Mag7, because these are truly... It's one of the largest monopolies. They're competing with each other. They're also drawing a lot of free data from the general public.
And I think there are going to be pressures coming to bear on some of the Mag7 companies from a regulatory standpoint. Maybe not in the immediate future, but it's got to be coming. But downstream in this CapEx spend, you have you have construction companies, you've got HVAC, cooling, you have just tremendous opportunities in subcategories like photonics.
These spends are going to have a dramatic impact downstream on companies that Maybe they were somewhat flatline businesses and now the electrification boom is turning them into high growth margin rising companies with rising returns on invested capital. So I'm continuing to look downstream for investments.
But I'd say out of the group that we've talked about so far, certainly I'm most interested in Google coming out of these earnings.
One of the interesting things here for me, Tyler, is, yes, Amazon said, quote, memory has skyrocketed. Meta pointed out that when it increased its guidance for capital expenditures, the majority of that is due to higher component pricing, particularly memory. Microsoft said that $25 billion was added to its capex, and a lot of that has to do with memory as well.
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Chapter 3: How is AI infrastructure spending influencing the market?
Hopefully, we can start to whittle those down as our earnings season starts to wind down as well. But if you do have a question for us, please email us at podcasts at fool.com. That email is podcasts at fool.com. Two requests when asking any questions. Number one, keep it foolish. And two, Keep it short enough that we can read it on air. Today's question comes from Tay Morgello.
It seemed very relevant considering our discussion about the Mag7 earnings earlier today. Here's the question. Hi, Fools. Google, Microsoft, Meta, Apple, Tesla, and others have all made announcements over the last year about how they're creating their own chips so they can lose reliance on NVIDIA.
Part of both the thesis for NVIDIA includes their outstanding margin because their chips are in such high demand. If all the bigger companies are going to be creating their own chips, is this an existential threat to NVIDIA over the long term? Thanks so much. I'm going to toss it to John first, and then Tom, you get to have the concluding thoughts here.
It's the classic question regarding supply and demand. Let's look at NVIDIA's net profit margin. Net profit margin. It's at nearly 56% right now. That is absolutely world-class. If we rewind the clock five years ago, the profit margin now is about double what it was five years ago, and it was good five years ago. The question here from Tay is valid.
There's extremely high demand for NVIDIA's products, and that is leading to historically world-class good profit margins. That's supply and demand at work. And his question is basically, is this custom silicon coming in from these other tech giants, is that going to bring balance to the market? Is supply now going to meet demand? And if it evens out, that would be bad for Nvidia's profit margins.
And to that question, I would say it's complicated. So on one hand, it is logical to assume that if there are more custom silicon things coming in, that that is going to increase the supply and it's going to then come into parity with demand. But there's a lot happening right now with AI that is continuing to boost that demand. And it's really hard to predict just how high it's going to boost it.
But if you look at what is happening in the realm of agentic AI, when we talked about meta, we talked about Google, and we talked about Alphabet and Amazon. Here's how many times they mentioned agent on the conference call. For Microsoft, 38. Meta, 33 times. Alphabet, 36. And Amazon, 45. This is a huge thing, and it is actually accelerating the use of AI tokens.
For example, here's one of the things that Amazon said. Amazon Bedrock, so this is one of its AI models, it processed more tokens in the first quarter than in all prior years combined. That's how much the demand for AI compute is accelerating. On the one hand, there are more things coming into the market.
On the other hand, the market is growing so fast that it's possible that this imbalance between supply and demand remains, even with the newer entrants into the market. Moreover, it's not necessarily you unplug an NVIDIA GPU and just plug something else in. It's not that simple. There's a software component that goes with this. NVIDIA's CUDA software is very important.
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