3 Big Tech Companies Drive Market Highs

If you own an S&P 500 index fund, then about 20% of your investment there is in Microsoft, Nvidia, and Apple. Read More...

If you own an S&P 500 index fund, then about 20% of your investment there is in Microsoft, Nvidia, and Apple.

In this podcast, Motley Fool analyst Asit Sharma and host Ricky Mulvey discuss why big tech is driving the market, earnings from Lululemon, and mindset advice for new investors.

Plus, Motley Fool host Mary Long interviews Tom Steyer, author of Cheaper, Faster, Better: How We’ll Win the Climate War about advancements in green tech.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 6, 2024.

Ricky Mulvey: Yet another all-time high. You’re listening to Motley Fool Money. I’m Ricky Mulvey. Joined today by Asit Sharma. Asit, good day to you, sir.

Asit Sharma: Ricky Mulvey, good day to you, sir.

Ricky Mulvey: I am starting this show from a place of small of anxiety, honestly and that is because maybe it’s a bad thing. When the stocks go up, I get a little more anxious and yesterday, the S&P 500 hit another all-time high. This is a long story, but tech giants have been driving the market. Folks are feeling pretty flush right now. If you own an S&P index fund though, 20% of your holdings are in just three companies Nvidia, Apple, and Microsoft. Asit that is a lot of savings tied up in just three firms.

Asit Sharma: What if you’re not paying attention to the markets, you’re feeling flush, as you point out, and you happen to look at your holdings and make the realization that Ricky just pointed out everyone. There’s a bigger part of your wealth that might be tied up in just a few companies than you might be comfortable with.

Ricky Mulvey: The big move, as we look at the rankings of the largest companies is that Nvidia has now surpassed Apple as the second most valuable company in the world. I’m going to give you a take from Twitter that I thought was pretty good, and I’m going to bounce it off you. It’s from Sam Lessin. He’s a former VP of product at [Meta‘s] Facebook. He’s now a partner at a venture fund called Slow Ventures. He posted this on X. “The idea that Nvidia is now more valuable than Apple means that something is dramatically mispriced. Either Apple’s 400 billion in revenue and 125 billion in EBITDA is way too cheap or Nvidia 60 billion in revenue and 30 billion in EBITDA is too expensive.” I know we factor growth into the equation, but do you think this cat has a point?

Asit Sharma: I admire Sam Lessin, but I have to say I disagree with this. Why does something have to be dramatically mispriced if we compare two companies of similar nominal value? Let’s just look at these numbers, Ricky. You said Apple has $400 billion in revenue and $125 in EBITDA. Let’s just round numbers. Let’s say they’ve got a quarter of their revenue that’s turning into earnings before income taxes, depreciation amortization. Nvidia, you mentioned, or Sam says, has 60 billion in revenue and $30 billion in EBITDA. It’s sitting at a 50% profit margin, almost twice of the profit margin that Apple’s generating. I think that might be worth a higher multiple.

Ricky Mulvey: It’s that investors are paying for growth right now. All of that growth seems to be concentrated on Nvidia. I think, basically, if you’re a tech company and you’re not Nvidia and you’re growing just a little bit. Look at sales force. Investors are taking their money over to Nvidia, thinking, hey, I want the thing that’s growing. I want the company that’s now one of the largest companies by market cap in the world, and these other companies, I’m not saying they are, I’m saying they may be getting maybe unfairly punished from that trade off.

Asit Sharma: We’re seeing that the most immediate benefits of all this generative AI fervor accrues to Nvidia because they sell really the first part of the rest of the equation. You need the GPUs to talk to Chat GPT and other LLM. They have this clear through line to revenue growth and profit growth. It makes it difficult for companies that are also investing in the same stuff, but on the front end, they may take a few years to see some impact and maybe not as big. It’s such a great question that you asked, Ricky because what then is the alternative? There are only a few companies that have this through line, and none as much as Nvidia. I think it’s a legit question. Would you move your money out of something that is a pretty solid proposition into another proposition where the visibility into profits and revenue is sure. But it may feel like it’s getting a bit pricey here, not withstanding my earlier argument. Just watching a company go, 5x on you, maybe one that you weren’t even paying attention to or 4x or 3x, wherever you might have purchased Nvidia is hard. That’s hard on a human level for us to take as investors.

Ricky Mulvey: What’s your mindset advice then to someone who’s seeing these all time highs in the stock market? They’re seeing folks around them make money. They’re becoming more interested in stock investing right now as we sit in June of 2024. What’s your mindset advice to them as they approach the market? Maybe for the first time?

Asit Sharma: I think my best advice is the same as it’s always been. You don’t have to rush in. Now, FOMO is really hard. Fear of missing out. We see this, the meme stocks are the biggest signal in this game. But really quality companies like Nvidia also cause investors to have FOMO. But rushing in rarely leads to the best results. Take your time. You can alleviate some of that FOMO pressure by buying in small bits. Use a little bit of your money to get into the market. You can dollar-cost average in over time into companies you like. That’ll help you buy them on the way down because they’re going to come down as well. Everything that goes up in the stock market also comes down before it goes back up. I think just learning that it’s about the businesses and not really about the market pricing in the immediate term, like what’s happening on your screen today. It’s really about that long term, is a way to have those emotions not creep up on you and just consume you.

Ricky Mulvey: Now for the folks in the back of the room. Those who aren’t new to the stock market. They’ve been here for a few years. This isn’t their first rodeo. I keep thinking about how things have changed so dramatically since mid 2022. Remember Meta was trading below a market multiple then. It was left for dead as it was spending too much money on virtual reality, just one example. How have if at all, the opportunities that you look at during your day job at the Motley Fool changed since mid 2022?

Asit Sharma: Ricky, a lot of it is centered on AI and what that means, not just for the companies involved in the ecosystem, but for all companies in the future. I think the opportunities are about to reset to what they look like around that time. In other words, companies that have solid business models that you like, they don’t have to be tech companies. I like companies that make things. I’ve never really shied away from those. It’s just that the tech represented such a visible opportunity once generative AI exploded. I think those will come back into fashion. Now is the time to be looking at consumer friendly companies. There are businesses out there like Cava, for example, which are doing quite well, almost look like tech companies, if you look at their stock chart. This is a time to really examine in various sectors that people have an interest in what has been overlooked. That’s part of the opportunity landscape. Nvidia, if it’s sucking up so much investor capital and similar stocks in that ecosystem, ASML, TSMC, etc. We all know these names. If that’s sucking up capital now, it means that there are other companies, mid caps, small caps, companies outside of AI that aren’t getting that love, and that’s usually a good time to buy those companies. My attention is starting to shift a little bit, still keeping so much attention on these tech stocks, but it’s shifting to other sectors of the market.

Ricky Mulvey: Let’s talk about a company that makes things. That is Lululemon, which reported after the bell yesterday. For the first part of the year, investors have really soured on this company. The stocks down about 40% on the year. This is at a time where the S&P retail index has risen a bit. We can talk about the numbers, but I think I want to first talk about the story. How has the story changed lately over at the leggings, clothing manufacturer, Lululemon?

Asit Sharma: There’s a lot to unpack here, Ricky. Lululemon had a great quarter, really reassured investors who were feeling iffy after that first report this year. What’s changed is that for a long time, Lululemon’s brand Love was riding shotgun with consumers disposable income. Somewhere along the way, people in the passenger seat said, I think I want to get off here at the stop light. Meaning thereby that although the brand has really great strength among its loyal advocates, there came a point where people had enough of the fabric and clothing in their closets. Those started to peal away a bit here in the most important market, which is North America. Now Lululemon is doing gangbuster business in its overseas portion, places like China where its growth rates are hitting 50%, but the bulk of the business is still here in North America. That slowed down too. One other part of this story, I think, where it’s shifted a bit is the focus on being this really great technical athleisure wear producer of yoga pants into these alternate categories. Like men’s running shoes, men’s casual shoes, that’s really not the core business of Lululemon. One part of me says, they could really extend it to these other markets and do well with that. The other part of me worries about getting distracted from that main part of the business. Lululemon has done really well because of that brand strength and paying attention to its core customers core products. The narrative is shifting a bit. It doesn’t mean it’s not a great company still for the long term. I still think it’s a well run business with a lot of opportunity. I feel like that near term picture is murky, and I don’t think this one quarter totally changes the risk picture associated with Lululemon.

Ricky Mulvey: Remember the mirror. Who could forget the play Interconnected Fitness? Now you’re worrying about shoes and other pieces of apparel when they had a virtual reality mirror going on for a little bit.

Asit Sharma: Ricky, and those weren’t small potatoes either. I think it was, like, a 400 million, $500 million acquisition that they had to eventually write off.

Ricky Mulvey: You got to spend money to make money.

Asit Sharma: True.

Ricky Mulvey: Were there any big takeaways or any ways that you think the story for Lululemon changed this quarter?

Asit Sharma: I think one of the big takeaways is management has been talking about unaided brand awareness. While those who maybe know someone who has Lululemon clothing or accessories probably feels like everyone must know about it. That’s not really not the case, especially overseas. I think the pickup in China that we saw this quarter really gets to the heart of this notion that as Lululemon expands its brand, it’s going to have really swift consumer uptake around the world. Again, it clouds the risk picture a bit, this growth, especially in a concentrated market. We’ve talked about this before. China is a place full of geopolitical risk, and it has a middle class population that sometimes gets very angry at western brands and decides for some period to go local. Pushing this brand awareness is not the easiest thing to do in the world, because sometimes it’s going to mean rapid uptake in places where long term that picture could be riskier. I think that shifted for me looking at that, but I still think the basic algorithm of this company that is building more stores, increasing the direct to consumer business is pretty strong and don’t underestimate brand strength. I know I’ve been talking down what brand can do for a company, but that is something that has traditionally led to double digit growth for Lululemon. I think they probably can hit that low double digit growth again. There’s guiding for that this year, and over the long term probably can still get to it.

Ricky Mulvey: The growth story is international. That’s where the net revenue increased by 40%. To your point about risks. This was one thing I was a little shaky about was CFO, Meghan Frank on China saying, quote, we’re really still early in our growth journey there and no concerns at this point in time, end quote. You just laid out some serious concerns maybe that they should be watching.

Asit Sharma: Note that she says at this point in time. I think that’s a very good CFO speak. It really gives you the other side of the picture. But this goes back to the engine of Lululemon. They’re having to go to China and other places because here in North America, some of that enthusiasm has dialed down a bit. Now I explained earlier why that is. Maybe it can rekindle, but let me just give you one example, Ricky. This quarter, management talked about not maximizing the business in the US, because they missed out on several opportunities, including, “our color palette” and our core assortment, particularly in leggings. That was too narrow. This is a company that a few years ago simply had the problem of getting its merchandise into consumer’s hands. When you get to the point where you’re talking about missing opportunities because something was too narrow, or you missed the color palette. That shows a maturing business, not a business that’s in like revving up growth stage. What they’re pointing out here is they almost need to be in places where the risk is there. Even though China is a risky proposition, it isn’t happening here in North America the way it used to. They’re going to take that risk. They’re going to make that investment, but investors are going to have to balance the two as they watch valuation, and where to get out of this company.

Ricky Mulvey: Speaking of a mature business, Lululemon built up over the year another billion in cash on the balance sheet, also allocating another billion toward stock buybacks. Let’s talk about the valuation because Lululemon for a long time had been a premium company at a premium valuation. Right now, the forward earnings multiple is pretty darn close to that of the S&P. Do you think that’s deserved? As a holder, I’m hoping you pick the other answer. Do you think it’s a buying opportunity as it faces these murkier outlooks?

Asit Sharma: I think it’s deserved for now. That may give you reason to feel more comfortable, Ricky. Right now, I don’t see the immediate growth catalysts or strategy that will definitely push this stock forward in the next 12 months. Having said that, does Lululemon deserve to trade long term, where the S&P 500 trades, and actually approaching where Nike trades right now? A much smaller company, a much more fierce fighter in the marketplace, even more brand zealots in one sense than Nike has. I was talking to two of our interns yesterday in a coffee chat, Ricky, who surprised me by reiterating how strong that Nike swoosh is even to their generation in the early 20s. Don’t underestimate Nike. I think the long-term holder in you has the right read on this, that near term is challenge. Long term, as I was saying before, can they hit that very consistent, low double-digit growth? They’re still young. Still have that unaided brand awareness, a whole world, not just China to expand into.

Ricky Mulvey: Thanks for breaking it down. Appreciate your time and your insight. Thanks, Asit.

Asit Sharma: Thanks, my friend. It’s a lot of fun.

Ricky Mulvey: Today’s show is sponsored by public.com. That’s where you can earn a 5.1% APY with a high-yield cash account. While we can’t say for certain it’s the highest interest rate there is, we can say this. It’s a higher rate than SoFi, a higher rate than Marcus, a higher rate than wealth front, a higher rate than betterment, frankly, a higher rate than Capital 1. A higher rate than Ally, a higher rate than Barclays, a way higher rate than Bank of America and Chase. A higher rate than City, Wells Fargo, Discover, and it’s a higher rate than American Express, too. If you want to get started earning 5.1% APY on your cash, check out public.com. We can’t say it’s the highest interest rate for your cash, but it’s up there. This is a paid endorsement for public investing, 5.1% APY as of March 26, 2024, and is subject to change. Full disclosures and terms and conditions can be found in the podcast description, US Members only. Up next, my colleague Mary Long interviews Tom Steyer, climate investor, and author of a new book called Cheaper Faster Better. How we’ll win the climate war. They talk about green tech in one area in this space that investors may want to watch.

Mary Long: Tom, your book is an overview of a lot of really exciting developments in the clean energy space. You yourself are co founder of Galvanized Climate Solutions, an investment firm that’s focused on companies that are hoping to lead this transition to clean energy. Let’s start really broad. What developments in this space, what technologies are you most excited about right now?

Tom Steyer: Mary, when you think about the energy transition, when you think about decarbonization, people break it down into six basic areas. One is electricity. One is transportation, manufacturing, the built environment, agriculture, that’s five and then the sixth is sequestration, the need to suck CO_2 out of the air and stick it underground for the foreseeable future. In every one of those, there are really exciting technologies. The cliche in the climate response world is there’s no silver bullet. It’s about silver buckshot. For instance, in electricity, you would think about, there’s a lot of different ways to generate electricity, and we can talk about enhanced geotherrmal.

We can talk about nuclear fusion. But one of the things that I think is really neat is there’s a company called Veer, which is increasing the ability of transmission lines to handle up to five times as much electricity. It’s great to build projects to generate electricity, but if you can’t get them on the grid, you can’t deliver electricity to people and to businesses, ad so that’s a huge bottleneck in lots of the world. If we can use those transmission lines, we don’t have to build new transmission lines. We can build the existing envelope and carry five times as much electricity. That’s a technology that is a real change agent. That’s the technology, to me, that deals with the real world, namely bottle necks of permitting and access and comes up with a new way of thinking about it, that absolutely makes the world better.

Mary Long: The premise of electrification is super exciting, but as you point out in this book, it’s not a fix all solution. Because even if you lean into electrification, the question then becomes, how do you create electricity in a way that doesn’t rely on fossil fuel generated heat? How do we do that?

Tom Steyer: Just so you know, and so your listeners know, in 2023 of the new electricity generation in the world, 86% of it was renewable. Actually, what’s going on is renewable energy is winning because it’s cheaper. The name of my book, cheaper, faster, better. That’s how we’re going to win. Well, it’s winning 86% of the time. The issue is, how fast are we going to retire the dirty old fossil fuel plants.

It’s not just a question of what we build new, it’s also a question of, what do we do with the old stuff because we can’t keep emitting at the same pace that we’ve been emitting and expect the world to get better. This is a cumulative problem. We have to reduce our emissions. The UN goal was to reduce them by 40% by 2030. We really have to cut down on the amount of fossil fuels that we’re burning. I’ll give you some examples of things. One of the things that I’m very excited about is enhanced geothermal. Geothermal is basically taking that hot water and steam from under the earth and using it for electricity. It’s clean. Traditionally, people have thought about it as stuff that’s very close to the surface, and it’s a very small part of the energy pie chart in terms of energy generation. You think about something like old faithful, in Yellowstone Park where there’s steam coming out of the ground all the time. That’s the kind of geothermal, very close to the surface that’s traditionally been done.

The funny thing is that now using oil field technology, literally oil field rigs, oil field workers, they’re going thousands of feet deep to find that clean energy, and by the way, it’s baseload energy. It’s not one of the reasons we can’t go 100% wind and solar right now is they’re considered “intermittent”. Sometimes the sun doesn’t shine. Sometimes it’s night, as you may have noticed. Sometimes the wind doesn’t blow. When that happens, are we supposed to shut off our refrigerators or the hospital supposed to go down? How do we actually have base load that’s available 24/7 365? Enhanced geo thermal is base load. Do you know what else would make that happen? Longer duration batteries. Battery storage, we’re seeing batteries have come down 80% in price in the last decade, but we’re seeing revolutions in batteries continued price reductions, but more than that, revolutions in terms of how long they’ll hold a charge. Because if they hold a charge long enough, that makes wind and solar no longer intermittent, but base load fuels. Those are the changes in electricity that may not be exactly what people are expecting, but that are actually making a difference and changing the path to clean energy.

Mary Long: A key argument of your book is that clean energy technologies and solutions offer a cheaper, better, faster alternative to what we’re currently using. As a public markets investor, that makes my ears perk up. I think, there’s got to be so much opportunity in that space. What’s tricky is that a lot of this technology is really technical. What advice do you have for public market investors who are excited about this space, who want to invest in it, but don’t really know where to begin if they want to wrap their heads around something as admittedly complex as green hydrogen, perhaps?

Tom Steyer: In all of these areas, just as in all early stages, like the early stages of the Internet Revolution starting when public companies really sprung up around 1996. There are going to be all ideas and all kinds of companies, and not all of them are going to work. If you go back to 1996 and think about it, people first started talking about it as this thing, which was extremely interesting, extremely exciting, was going to have real legs, and then we had the tech wreck at the beginning of the 2000s. Everyone was like, this is a disaster. The tech stocks were down, I don’t know, 80 or 90%. This was all a mistake. This is terrible, and what came out of that the biggest companies in the world. In fact, it’s absolutely true, when you’re looking at new technologies, you’re never sure which of them are going to work, but you’re also not sure which are the ones that you’re going to scale in a huge way. I’ll give you an example, one of the 8% of emissions in this world come from cement and concrete. We’re building, the world is getting built, not so much in the United States, but lots of the world has tons of building.

Eight percent of emissions are cement and concrete, and we’ve really hard to we’re not going to stop making cement and concrete. But there’s a company in Germany, which is using sensors and machine learning AI to basically control the soup that is really cement and to basically make it much more specific, not make it worse, but make it to make it identical every time. The company’s called ALCMY. It’s a private company. But as an example, here’s a company which you make a much more specific soup. It can reduce emissions by up to 50%, but more than that is a really fast payback. It saves the user a ton of money, so that when you think about it, if you’re in the cement business, if your competitors are using it and saving a ton of money, they can underbid you for every project. I like to say, it’s not a nice to have business, it’s a have to have business. It’s a must have. At the same time, it’s getting done from a climate standpoint. Reducing up to half the emissions of a very important sector while saving the user a ton of money. That is why we call it cheaper, faster, better.

You’re winning in the marketplace just on the marketplaces terms at the same time that you’re having a dramatic impact. Those are the businesses that can really scale. That’s a huge business. But as in all technology businesses, before they establish real dominance, you’re sitting there the whole time, watching them come and go. There are people out there who are doubting whether EVs are really catching hold, looking at on the basis of the first quarter in the United States of America. But if you look around the world, EVs are growing really fast. The biggest car market in the world is China, not the US. Thirty percent of Chinese car sales last year were EVs. They have an $11,000 EP. That’s a disruptive technology.

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what you hear. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.

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