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Chapter 1: Is AI the new villain in the tech industry?
Is AI the new villain on Main Street? Motley Fool Hidden Gems investing starts now. Welcome to Motley Fool Hit and Gems Investing. I'm Travis Hoyum, joined today by Lou Whiteman and John Quast. And guys, the big story of the week, I think we got to start with Apple. They've raised prices and this is partly an Apple story, Lou. You know, I'm looking for a new computer.
I'd love to get one of those Mac studios when they get the new processor. It's supposed to come out in the next few months. But the prices just went up and they went up a significant amount. What in the world is going on?
Yeah, Tim Cook got that job because he was the supply chain guru, and he says he's never seen anything like this in 40 years. The problem is memory costs, and that's all about AI. As Travis said, Apple just announced a huge across the board price hike. Memory is the culprit here.
Chapter 2: Why have memory prices increased for Apple products?
We know data centers need Nvidia chips, but they also need a lot of other things, including memory. And they are devouring the supply of the world's new memory. Simple laws of supply and demand are kicking in and it's raising prices for everyone.
The reality here is even worse because AI wants a special kind of memory and companies like Micron are racing to make that and not the memory for phones just because it's higher margin. But that's the idea. There is just suddenly a ton of demand and demand from rich pockets and it is affecting prices in a big way.
Yeah, John, this seems like one of those things where AI doesn't necessarily spill over onto Main Street. You know, when I take my kids to sports, AI is not something that generally comes up. But now it's starting to spill into things that we spend money on. When you go to buy the next generation iPhone, if that's the phone you use, or lose Pixel, you... are gonna see higher prices.
And that's something where it almost seems like Silicon Valley in general, because it's Silicon Valley driving all of this demand for AI stuff, is gonna make themselves the villain. We're already having enough trouble building data centers. Now people are gonna be mad about smartphone prices.
To quote the Mad Titan Thanos here, dread it, run from it, destiny arrives all the same.
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Chapter 3: What factors contribute to the rising costs of memory?
Yeah, I mean, last I checked, these companies aren't really asking my opinion on the changes that they're making to their products or their pricing. I'm still protesting the... getting away with the headphone jack. I still want the headphone jack in my phone, and they didn't ask me about taking that away.
No, the thing is, I mean, yeah, the prices are going up, and as you mentioned, I mean, Travis, you're talking about the new Mac Studio coming out, but the big thing here is that these prices are going up on existing products. They're not going up on the next generation. You mean the Apple TV? Yeah, this is the stuff that's out now. The prices just got hiked. So that is very interesting.
It is possible that consumers are going to be very confused about this, but I don't know what consumers can do about this. They vote with their dollars, but there's not another candidate on the ballot here. The prices are going up across the board because memory itself is going up, and that's not an Apple problem, and there's really not much that Apple can do about it.
Yeah, Lou, this does seem like it isn't an Apple problem, and I sort of... I think that Tim Cook and team, you're right, maybe they could have seen this ahead of time, but also memory is a commodity, always has been a commodity. Commodities do go through these boom and bust cycles. This reminds me a little bit of rare earths.
You might remember that from about a decade ago when rare earth prices went crazy and we thought, you know what, we're not going to be able to make EVs anymore. So this will come back down, but it does seem like this is a PR problem in general for the tech industry. If they're saying, you know what,
you got to pay more for phones because we got to build this AI stuff that's going to steal your job anyways.
Yeah, I don't know how easily that translates to Main Street. I don't really think it does. So I don't know if AI has a PR problem here, but increasingly AI has a political problem. And I do think that sentiment around stuff like iPhones going up is a great talking point for politicians in what could be a nasty situation November for AI. So I do think that this is worth watching.
I don't I don't think the consumer is going to say my iPhone went up. You know, maybe they will. I mean, I think the energy cost thing is, too, is sort of resonated.
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Chapter 4: How does Silicon Valley impact consumer prices?
Does that just you know, so so there is like a vibe here. But I do I think where I worry about this or where I'm really watching this is that It may not be enough to stop AI, but I think we are seeing more and more friction to the rollout at a time when they desperately are scrambling to go as quick as possible.
I mean, look, some of them, and we won't name names, have just ignored the EPA and things like that. So I guess maybe the political problem isn't as big a deal as we want. But it does feel like that if you are modeling AI hyperscale of growth,
you have to increasingly assume it's not going to be as quick and as easy as their projections because there are just more and more vibes going against them.
John, I wanna stick on this consumer side. Do you think that the companies that have consumer-facing products, Apple's gonna be the biggest one out there, but we could talk about other companies that are making phones, we could talk about Nintendo and the price of the Nintendo Switch 2, which wouldn't be surprised if that is another one of these products that gets a price increase.
Do you think that that is going to impact how much consumers are willing to spend? Is there going to be sticker shock or is this just going to be kind of like the inflation we've seen over the past few years where, you know what, it's this is what happens. Prices go up a little bit. I'm not going to necessarily change my spending habits just because I got to spend a little more on my phone.
It's such a central piece of my life.
Yeah, I mean, to go back to what I said earlier, I don't think that consumers have much option here. Well, they could just not buy the next phone, extend those lives even further. Based on what I know about the American consumer, that isn't going to happen. They will find a way to continue to spend money. Even as you think about it now, do we really need a new iPhone every year? Not necessarily.
I've had the same one for several years now, but it still happens all the same because people do want that new latest version. So I do think that that continues to happen. So I do think that, yeah, I mean, that is the point to watch, though. And I think that's why Apple went down. We've been waiting for years for this replacement super cycle.
This is just another reason to think that that's not right around the corner. It would be ironic if it offsets all of the good work they've done with Siri to implement AI there, which was supposed to spark the refresh cycle. But yeah, no, I think the answer is, is that do you really need a new iPhone this year?
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Chapter 5: What is the difference between disruptive and sustaining innovation?
And to me, that's a big issue for Micron from here. John, where are you seeing opportunities and threats? Well, I mean, I'll push back a little bit. I'll take the other side of what Lou just said, but still acknowledging his point that I think there is fragility in some of these hot parts of the stock market. But at the same time, I mean, just look at what's happening here.
So just one data point on memory, 128 gig DDR5 memory. This is one of the products that is out there. The average price right now, $2,900. It was about $800 a year ago. So that incremental $2,100 is essentially pure profit for a company such as Micron that makes us that it's not costing it necessarily more to make, but it is getting a lot more when it sells it.
So that just drops down to the bottom line. You look at what Micron has just put up. So NVIDIA, for example, it crossed a trillion dollar market cap when it had about 10 billion in trailing 12 month net income. Micron just passed the trillion dollar mark. And it has $50 billion in trailing 12-month income. So five times more and just crossed the same market cap milestone.
So I think there's an argument that you can make that Micron is undervalued today. And to Lou's point, it matters how long the imbalance lasts. If it is another three, four years of imbalance, then Micron actually could be a good buy here. If the imbalance is about to be solved in the next six months or something like that, then yeah, there is a fragile stock here with Micron.
When we come back, we're going to talk about that imbalance and who says enough first. You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems. Investing as memory costs rise, hyperscaler spending is going to go up. They're going to get less for that spending.
My question, and this is something I've been thinking about a lot as an investor, is who says enough? Okay, we can't spend more money. We're not getting the ROI that we need. You've got so many players involved. There's the hyperscalers. There's the consumer companies that we've talked about, like Apple. There's the companies that haven't gone public yet, like Anthropic and OpenAI. So
John, who is it that is going to bring some maybe rationality or maybe it's, you know, we haven't gotten to that point where rationality is even in the picture yet. But who is going to say, you know what, a 6x increase in prices for memory or whatever component you want? That's just too much. We can't do that.
Well, when it comes to CapEx among the hyperscalers, I don't think that any of them voluntarily say enough. I think that they've internalized a narrative, whether the narrative is true or false, they've internalized it all the same. And the narrative is that they're playing a game of musical chairs and they have to sit their butt in the chair before the music stops.
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Chapter 6: Which stocks are currently on the radar for investors?
Otherwise, they don't have a chair in the next round. And that chair is spending on AI. They have to spend on AI or be left behind.
Does that mean that ROI doesn't matter? This is, I think, the thing that's so confusing because all these companies have had such strong return on investment, return on assets, whichever metric you want to use. Are you saying that's just like out the window in the boardroom these days?
I think to a degree, yes, because I think that if you believe that narrative, you've also believed the narrative that you no longer have a competitive advantage that is sustainable because the AI models from the other companies are going to allow them to catch up in record time. So you have to keep spending to stay where you are in the pack.
Yeah, I think there's a some-cause fallacy at work here. You know, the hyperscalers have said AI is the future. And with enough time, we will get a return on investment. If they now pull the Band-Aid and say, nope, nevermind. That's a huge, huge issue. That's a bigger issue.
I think the motivation is even if they're wondering that, seeing that, to not say that right now, especially not to say that alone. But honestly, Travis, I want to push back at the premise, too. To me, the interesting question right now is why would a hyperscaler say enough is enough? You know, yes, there's a psychological aspect, but I kind of think. It's working.
It's not, you know, look, and I don't know about the ROI yet, and I'm worried about that. AI, whatever it is, it's not the imaginary friend on your shoulder from a few years ago. But there is real productivity happening, real revenue happening in the tens of billions. So I don't know if there is enough evidence here to say, yeah, we need to run away from this instead of lean in.
And again, to change behavior, you're going to have to see real evidence that there is enough at least out there to give hope that I don't think anybody I'd be really surprised if any of the hyperscalers just say, all right, never mind enough.
Well, let's talk through we have second quarter earnings are going to be coming up. That earnings season starts probably in about a week and a half or two weeks. But. We talked a little bit before we started recording about some of the things that we're potentially looking for in those quarterly results.
And so Lou, I think you're right that a lot of these companies are just gonna keep spending as much as they possibly can to try to win this game. But also we've heard a lot from companies who are the end customers of those hyperscalers or of those model companies saying, you know what? We need to see an ROI. If we're gonna spend $100 million on tokens,
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Chapter 7: What challenges do companies face in AI spending?
I don't think anyone wants to shock the market, but I'd be really curious if just they start telegraphing something like, look, obviously we're going to only spend as the market dictates. We're not going to be stupid and spend the money if we don't see it, which at least is a hedge to prepare for if they want later in the year or early in 2027, if they want to pull back and not shock the market.
But I genuinely think it's going to be all, you I think it's going to be a rah-rah cheerleading AI earnings season, and we'll see how the market reacts. I think there's a little bit of a difference between needing to see an ROI and just needing to make sure that you're keeping your costs under control.
And what I mean by that is some of these companies did budget $100 million for AI, and oops, now we got the bill and we spent $300 million, right? So it's not so much that the ROI is is lacking, but it's that we're spending way more than what we anticipated to spend and we can't be doing that.
And so we've already seen companies such as Accenture and Uber saying, hey, we're going to have to start limiting what's happening here. Even Microsoft saying, OK, we're going to need to cut back on Anthropix Claude here because our expenses are just running away from us faster than we can. We can keep up with it.
And this is why I've been pounding the table on local AI, because some of these token costs are hard to project for the CFOs. And so with local AI on my own hardware, I can download a free model, such as something from China's DeepSeek. I can handle bulk operations in AI on my own hardware for free, and then I can finish it off with a frontier model from Cloud or OpenAI.
So I think that that is going to be a trend that we see. And it's because these companies do want to use AI, but they want to be able to predict their costs.
John, do you think that is going to be the theme for this quarter? Not necessarily saying, you know what, we're going to pull back CapEx.
We're probably not going to get those numbers until third quarter, maybe even the fourth quarter, but more the customers of these big companies going, you know what, I got to show that my costs aren't out of control because if I got operating margins that are declining because we're using so many tokens, then shareholders aren't going to be happy.
Yeah, precisely. I think the hyperscalers are going to continue to spend on CapEx. I think that the people using these services, that's more of a margin issue and they're going to cost of operations and they're going to say, hey, we've got to be able to have some predictability. And so, yeah, we're going to change how we're doing things.
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Chapter 8: How are new technologies shaping the future of investing?
That's really hard for me. I think I will still take the incumbents here because I'll be honest, I'm still worried that the models themselves kind of get commoditized. And I don't know where that huge profits come from. But look, even if that happens and even if they can't like put layers on it, that makes them super profitable on the model side.
This feels like a race to the bottom for both, because I do think it takes some of the margin out of the incumbents as well, even if they can implement AI into it. So I don't know, honestly, how deeply I want to go in here either.
So this is like an all losers innovation?
Well, yeah, I mean, I think the winners here are the customers because I think the customers will get better products for a lower price, which is, hey, AI efficiency. That's where we're going in. So, you know, it's funny. The core thesis sort of works here that AI makes businesses more efficient. I'm just not sure who profits from that other than the end user. This is so hard.
I will say that there are some AI innovations that are very interestingly disruptive. And one of the ones I was just recently looking at was in the insurance industry. You know, you have most of the time that's a human interaction. You have independent agents out there who can kind of shop around coverage for you from from hundreds of different providers.
That's a very menial task for a human agent, but there are companies now being built onto these frontier models that are able now to shop around that coverage more efficiently and faster. And those insurance companies are actually growing pretty fast. So it depends on the model. What are exactly we disrupting? I think that there are good use cases for AI.
But then there are other companies, I think such as a ServiceNow. I think that a lot of the companies that use ServiceNow's products in HR and elsewhere in the organization, that is a little bit, once it's in the system, it's hard to switch off of that. Not impossible, but it's pretty embedded. And then if you can layer on AI on top of that, which they are, Everyone's talking about agents now.
ServiceNow is saying, hey, we'll make agents for you. I think that that is an easier sell to these companies that are maybe not so tech focused. I can just use agents from ServiceNow and not have to figure this out on my own.
Yeah, we always forget with software too, a traditional way of making software is you build it once and then you distribute it a million times. If you're trying to vibe code something, that means you're building it a million times and distributing it maybe once or twice or 10 times. So the economics doesn't necessarily work, but we'll see how this one plays out. I want to...
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