Oracle and the AI Growth

On this podcast, Motley Idiot analyst Tim Beyers and host Ricky Mulvey break down outcomes from Oracle and why Microsoft is specializing in start-ups for the following leg of its AI technique.

Plus, Motley Idiot analyst Anthony Schiavone and host Mary Lengthy have a look at Hershey‘s near-term headwinds and the long-term alternative for traders.

To catch full episodes of all The Motley Idiot’s free podcasts, try our podcast middle. To get began investing, try our quick-start information to investing in shares. A full transcript follows the video.

This video was recorded on June 13 2024.

Ricky Mulvey: It is the Cloud behind the Cloud. You are listening to Motley Idiot Cash. I am Ricky Mulvey, joined at present by Tim Beyers. Tim, we have been speaking earlier, and I’ve to say, you sound loads much less caffeinated once I’m speaking to you on Zoom versus once I’m listening to you at 1.5 velocity on Motley Idiot Dwell, however I recognize you being right here. Thanks for being right here.

Tim Beyers: Thanks, Ricky. Good to be right here. I nonetheless have caffeine. I am able to go.

Ricky Mulvey: Okay.

Tim Beyers: Let’s go.

Ricky Mulvey: Let’s go. Let’s begin with Oracle, as a result of the software program large reported earlier this week. Buyers preferred the outcomes. Inventory’s up about 13% on it. That is fairly good for one thing like a 300 billion-dollar firm. I’ll give a number of the highlights after which see what stood out to you. There appears to be lots of new enterprise coming Oracle’s manner with the remaining efficiency obligation, which is how a lot cash is left in these contracts, up 44% to virtually 100 billion. They bought 30 new AI contracts for over 12 billion signed simply this quarter. We even have Larry Ellison touting offers with NVIDIA, Microsoft, Google, xAI, who’re all utilizing Oracle Cloud providers and knowledge facilities. Something from this quarter from Oracle actually stand out to you?

Tim Beyers: Nicely, it is a good quarter general. Let’s give credit score the place credit score is due right here. The Cloud providers and license enterprise was up 12% on a pure foundation, 11% by way of fixed foreign money, general income up 6%. This can be a huge firm, so 6% for an enormous firm that generates basically 53 billion {dollars} in a given 12 months. Six % is rather a lot, however it’s notable that Oracle actually depends upon that Cloud enterprise, that AI enterprise doing what it is doing presently. There’s something nice about the way in which that Oracle has structured this. The thought right here, Ricky, you stated the Cloud behind the Cloud, and I feel that is a reasonably good description right here, as a result of what’s taking place is that Oracle is promoting some {hardware}, and it sells its Cloud providers. It interconnects them into the opposite Clouds. If you end up, say, working inside, for instance, Microsoft Azure, it’s possible you’ll be touching some Oracle tools, you is perhaps touching some Oracle providers, you is perhaps touching the Oracle databases as a result of there may be Oracle stuff. I am not making an attempt to make anyone hungry right here, Ricky, however if you happen to may consider it because the OREO cookie, Microsoft, they have the chocolate wafers, and then you definitely’ve bought some stuffing inside that’s product of some thriller stuff, and contained in the thriller stuff is a few Oracle stuff. How’s that?

Ricky Mulvey: I am nonetheless a little bit misplaced on the OREO’s to Cloud knowledge providers supplier, however a technique I’ve heard this defined, and it is smart, is Oracle has one thing referred to as distant direct reminiscence entry. What this enables computer systems to do is actually get the info from one laptop of one other with out basically involving the working techniques of both. In the event you’re utilizing an enormous database that you simply want for an AI system, it will make lots of sense to make use of an Oracle Cloud resolution.

Tim Beyers: However all of that’s dependent, after all, on it being arrange contained in the setting, such that you may entry it by means of that distant knowledge scheme. Now, to be truthful, I am not completely conversant in precisely how Oracle units this up. What I do know is that, by advantage of those interconnect agreements, and by advantage of basically Microsoft, Google, and others reselling Oracle by advantage of placing Oracle inside their environments, that is an excellent place for Oracle to be in as a result of it signifies that as these Clouds increase capability for doing issues like serving AI workloads. That is simply extra good enterprise for Oracle. It is one other nice channel for them, in order that they do have one thing to crow about right here. It is completely different than them simply promoting their Cloud independently and making an attempt to compete with the others. It’s kind of of Judo, and albeit, it’s kind of of sensible Judo. I give them credit score for that. On the similar time, it is a firm that is not rising in a short time however is issuing a complete boatload of fairness. They’re issuing fairness, Ricky, as if they’re a development firm, and they’re verifiably not. I discover that fascinating that no one talks about that.

Ricky Mulvey: Only for the listener to remember, it is a take that Tim has been itching to provide, which is the stock-based compensation popping out of Oracle. Oracle spent about 4 billion on stock-based comp for the 12 months. The corporate made 53 billion in income in a little bit below 19 billion in money from operations. We’ll concentrate on that 4 billion in stock-based comp and about 19 billion in money from operations. Let’s arrange the panorama first. How does this stack as much as the opponents? Why is that this drawing your consideration now, Tim?

Tim Beyers: Nicely, it is similar to Salesforce. I suppose I should not actually be bothered by that, Ricky, however I feel it is attention-grabbing that the way in which that Oracle points fairness, and on the fee that they problem it, is sort of a development firm, is a little bit bit like Salesforce, besides that it is going greater. They’re issuing extra of it, and Salesforce is issuing much less. Now, on the premise of a ratio, for example as a share of income, like 7.5% of Oracle’s income issued as fairness, stock-based compensation, Salesforce, it is about 8%. Salesforce continues to be greater, however I feel we have a tendency to think about Oracle as a mature, established, settled firm that is within the Microsoft realm. Not by advantage of its stock-based compensation; it is not. It is nonetheless issuing an enormous quantity of fairness. What that tells me, Ricky, is that the price of Oracle, the fee to basically develop its alternative, is admittedly excessive. They need to pay some severe premiums to folks as a way to get them within the door and do the work that creates this place, and to be truthful, it is a pretty enviable place, however I simply discover it startling that the prices are that top. One of many issues that makes them completely different is that they have about seven billion {dollars} in simply actually hard-core capital expenditures. They’re constructing tools, they’re constructing knowledge facilities, they’re investing in lots of arduous items, and that makes them completely different from an organization like Salesforce. Nevertheless it’s an organization that is far older than a peer like Salesforce, as a result of they’re born within the Seventies. I’d put it this fashion. It is just like the older gentleman having a midlife disaster and is spending like that midlife disaster is in full swing. That’s fascinating to me as a result of we’re not behaving like Oracle is that firm, however they’re, Ricky, they’re.

Ricky Mulvey: In the event you have a look at the inventory chart for Oracle and the chart for stock-based compensation, they appear to be transferring in tandem, which is nearly on a logarithmic curve up into the precise. So long as the performances are matching one another, does not that make it extra forgivable?

Tim Beyers: Actually.

Ricky Mulvey: Oracle did not simply begin issuing stock-based compensation. This isn’t an ending story for the corporate.

Tim Beyers: They have been doing this for some time. Sure, there may be an finish, justifies the means argument right here, which sounds horrible that I simply tried to decrease your argument there. I am not making an attempt to try this.

Ricky Mulvey: Diminish.

Tim Beyers: No, I am not making an attempt to try this as a result of I feel you might be right. In case you are incomes above, if the boat anchor of that fairness is overcome by inventory returns for frequent shareholders, by all means, do what you bought to do. That’s the argument for Salesforce for all these years, that they have been doing it at an elevated degree as nicely. Sure, there may be that argument, however I simply discover it attention-grabbing. We must always know what Oracle is. It’s a firm that is going to maintain having to pay out lots of fairness to workers to make this dream of being the Cloud behind the Cloud actual for the foreseeable future. I feel they’re in a fairly good place as a result of their {hardware} is sort of good. Their Exadata {hardware} is sort of good. I feel they do lots of work by way of hardware-accelerated databases, and their database expertise is sweet. Additionally they have lots of database product that you simply’re not going to discover a database engineer that’s going to let you know that Oracle is horrible. They’ll say it’s the usual, and they’re right. Having stated that, although, the expansion charges aren’t large. They need to pay some huge cash to get these development charges, and they’re within the enterprise of making an attempt to show over {dollars} wherever they’ll discover them. For instance, they’re going to return to going after, Ricky. They’ll go after firms that use Java as a result of Oracle owns the Java license, and so you may consider that because the enterprise tech equal of, hey, you might be sharing your dad and mom Netflix password. You’ll want to pay us. It is a little bit bit like that. Oracle’s actually good at extracting cash. When your small business is constructed partially on producing some worth however an arguably greater half or simply as huge half on extracting cash from clients, it makes it dicey. I’m pretty biased right here, and I’ll admit that as a result of I’ve witnessed the Oracle extraction machine firsthand for years and I’ve the scars. I am in all probability a little bit biased there, Ricky.

Ricky Mulvey: Nicely, I recognize the vulnerability, sharing the scars of Oracle [laughs] with the present. I need to keep on the Cloud, however transfer to this Microsoft story. There’s an article within the Wall Avenue Journal. It is titled: Microsoft’s Nadella is Constructing an AI Empire. OpenAI was simply step one. It is by Tom Downey and Berber Jin. I’d advocate studying it. It is a good story. However there is a line in right here that stands out to me as a result of it is part of Microsoft’s AI ambitions that we have not talked loads about, and it’s this, “Certainly one of Nadella’s prime priorities at present is rebranding the Azure Cloud is the go-to place for start-ups”. Why is that this such a precedence, you suppose at Microsoft? What are they responding to?

Tim Beyers: I feel they’re responding to VCs who’re writing actually huge checks, saying, look, we wish you to go for it; we wish you to undertake AI into your small business. We would like you to be constructing AI-enabled functions. For the love of God, do not you dare go purchase NVIDIA GPUs. Go lease from Microsoft, go lease from AWS, go lease from GCP. That is eerily reminiscent, Ricky, I’d say, of 2010, when VCs have been saying, the Cloud is wonderful. We would like you to construct SAS functions. Go do it. For the love of God, you higher not use a dime of our cash to purchase servers and storage tools. Go take a bank card, swipe it, and get AWS, and begin constructing now. We do not need you spending a dime on infrastructure. It appears like that. And for that chance, that is nice for Microsoft as a result of they’ve all the NVIDIA GPUs. They might say, StartupX, come to us, pay us a little bit bit of cash, we gives you entry by way of your Azure setting to NVIDIA GPUs, your virtualized NVIDIA GPUs, to run your AI-backed functions. They’re the provider of the AI horsepower by means of that Azure setting, and so the start-ups haven’t got to hold the burden of making an attempt to supply NVIDIA GPUs, which, as everyone knows proper now, we have seen the numbers, ermagerd income for NVIDIA. They’re wonderful. It is simply arduous to get NVIDIA GPUs. I feel there’s an actual race to be the provider of entry to GPU compute energy, and Microsoft desires to be the winner right here.

Ricky Mulvey: Do you suppose that might dampen the demand for these NVIDIA GPUs if there turns into extra of a, you possibly can lease it from Microsoft? You do not have to exit and purchase this stuff.

Tim Beyers: Not within the quick time period. There’s nonetheless a lot demand, there’s nonetheless a lot backlog, plus I nonetheless suppose NVIDIA has the software program benefit. You continue to want that low-level software program referred to as Kuta as a way to make GPUs do their GPU methods. So long as that is true and NVIDIA is the popular supplier right here, there may be another ecosystem the place you have bought AMD ROCm or some open supply model of Kuta that does most issues that Kuta does. There’s nonetheless going to be an enormous quantity of demand for NVIDIA, however over time, give it 18 months, 36 months, I feel there can be a buildout of alternate options such that you’ll discover firms that say, wait, I haven’t got to pay an NVIDIA tax. Sure, give me that. I’ll strive it.

Ricky Mulvey: Then there’s one other firm that I feel could possibly be impacted by this, and that is DigitalOcean. Loads of the promise of DigitalOcean’s Cloud providers is, we will discover small clients, and then you definitely’re not going to pay that a lot, however you possibly can develop in scale with DigitalOcean, after which we’ll earn more money once you’re a bigger firm, and also you want extra Cloud providers as a result of we’re so a lot better at treating smaller clients than these giant firms like Microsoft. Now evidently Microsoft is saying, no, we’re going to spend so much of consideration on these small clients. What does this initiative imply for DigitalOcean?

Tim Beyers: I feel it signifies that it’ll be loads more durable to win smaller AI workloads, which I feel DigitalOcean was actually hoping they have been going to get their arms on. They might nonetheless. DigitalOcean nonetheless is the gold normal for documentation to assist builders do their work higher. AWS has the whole lot, however serving to you get the precise software for the precise job, isn’t their energy, and I am being well mannered there intentionally, and I am undecided that it is Microsoft’s energy, both, and I am undecided it is Google energy. What they need is quantity of workloads. Are they going to be as high-touch as, say, DigitalOcean? Most likely not. However is that this going to take some enterprise that DigitalOcean was perhaps banking on? I would not be shocked if it occurred, Ricky. The subsequent quarter that we see for DigitalOcean goes to be attention-grabbing. I would be paying specific consideration to the outlook once they report subsequent.

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I bear in mind the invention of candy chocolate. I at all times hated it, however others appear to take pleasure in it, and that is what this firm is promoting. Mary Lengthy and Motley Idiot analyst Anthony Schiavone check out Hershey’s enterprise and its present headwinds.

Mary Lengthy: After I see the title Hershey, most listeners are in all probability going to be conversant in the corporate’s sweet enterprise, however there are ambitions past sweet that this firm has. CEO Michele Buck has ambitions to show the corporate right into a snacking powerhouse. They already personal manufacturers that I used to be a minimum of conversant in: Dot’s Pretzels, PIRATE’S BOOTY, and SKINNYPOP. I do know that you are a fan of Hershey as an organization, particularly as a dividend investor. What’s it that you simply love about this firm?

Anthony Schiavone: Nicely, I feel there’s loads to like in regards to the Hershey Firm. I feel the very first thing is resiliency. In the event you return to the corporate’s founding in 1894, 130 years in the past, by Milton Hershey, this firm’s survived wars, depressions, competitors, pandemics. It is nonetheless that market chief at present. An enormous motive for that’s, such as you talked about, a number of the robust manufacturers that it has as eternal manufacturers. Immediately, they personal greater than 100 manufacturers, together with Hershey, clearly. REESE’S, KISSES, ICE BREAKERS, the upcoming snacking portfolio, so many well-known manufacturers. That model fairness, which has been constructed up actually of the previous centuries, is a key benefit for Hershey. I feel one of many the explanation why the corporate generates such excessive returns on capital. Lastly, and possibly most significantly, the administration workforce treats shareholder capital prefer it’s their very own. I am positive we’ll get into capital allocation later, however as a shareholder of Hershey myself, that is one factor I actually love about this firm.

Mary Lengthy: All these manufacturers that you simply talked about are actually huge names within the US, however one thing that the corporate is trying more and more towards is worldwide enlargement. When the CEO, once more, Michele Buck, when she stepped into the helm at Hershey in 2017, this worldwide section was shedding cash, and since then, it began to generate some cash. What is the story behind this turnaround? What was the technique there, and the way did that pan out?

Anthony Schiavone: This is perhaps shocking, however Hershey truly generates lower than 10% of its whole income exterior North America. As somebody who grew up lower than two hours from Hershey, I used to be shocked once I discovered that as a result of Hershey is in all places in Pennsylvania, worldwide continues to be actually an enormous untapped marketplace for the corporate. Such as you stated, Michele Buck took over 2017, the worldwide enterprise was shedding cash, however it’s one among our objectives to enhance that profitability in that section. The previous few years, Hershey’s actually simply invested in its provide chain to enhance capability, effectivity, and alter its go-to market technique in a number of nations that have been underperforming. Then, lastly, they’ve actually simply doubled down on advertising and marketing their strongest manufacturers, REESE’S and Hershey, in its worldwide markets. The tip result’s they went from a money-losing enterprise to at least one that now generates greater than 100 million in working revenue in 2023. It is positively been a formidable turnaround, and I feel you are still driving the expansion.

Mary Lengthy: You talked about {that a} spotlight of a advantage of this firm is its resiliency that it has been round for some time. The flip aspect of that is perhaps that it has been round for some time. How far more development is there that is potential for Hershey? We talked about this rising worldwide section, their new step into snacks. Any development alternatives right here that you simply see as significantly attention-grabbing that may in any other case slide below the radar?

Anthony Schiavone: Nicely, I feel the snacking portfolio and the worldwide enlargement are positively the 2 huge ones. That is going to maneuver the needle probably the most for Hershey. One other attention-grabbing factor that administration lately introduced is that they are beginning a brand new gummy model that is popping out late this summer season, and Shaquille O’Neil, the Corridor of Fame basketball participant, he’ll be a model ambassador for it. I feel that is attention-grabbing. I am undecided if it’ll be an enormous needle mover for the corporate, however it’s good to see them frequently innovate to new merchandise.

Mary Lengthy: You talked about the model fairness, like superstar endorsements, and getting influencers hooked up to manufacturers is definitely one strategy to construct that out. You talked about earlier that administration treats capital as if it is their very own, and capital allocation has been referred to as out by administration as being an enormous precedence for the corporate. I feel you talked about return on invested capital earlier. In comparison with opponents in the identical confectionery and snacking area, Hershey blows them out of the water. Hershey’s return on invested capital is about simply shy of 24%, whereas take Pepsi; that is simply shy of 15%. There is a huge distinction there between opponents. What does Hershey get proper about capital allocation?

Anthony Schiavone: I feel largely, it comes all the way down to administration’s mindset round capital allocation. The CFO, Steve Voskuil, is on document saying that they need to be the most effective capital allocators of their area. After I learn that for the primary time, I completely cherished that. As you talked about, the outcomes over the previous couple of years have positively proven that they constantly have industry-leading profitability metrics, returns on capital, and the factor that I like about them is, once they haven’t got a excessive return funding alternative, they love returning that capital to shareholders by means of dividends and, extra lately, share repurchases, which is attention-grabbing. One other factor that administration stated is that their job is to not warehouse a shareholder’s money. The money belongs to the shareholders. If they do not have a great use of the money, they will return it to shareholders. I simply love their general mindset round that and the way they consider that.

Mary Lengthy: You have talked loads in regards to the issues that you simply love about Hershey, however there are some exterior traits that appear like they is perhaps positioned to harm this enterprise doubtlessly. One which involves thoughts is weight-loss medication. Do you see this rising use of weight-loss medication as impacting the long-term thesis for Hershey in any respect?

Anthony Schiavone: It is a robust query as a result of there’s a lot we do not know but about GLP-1 medication, what are the negative effects? Will it ever turn out to be inexpensive for the broader inhabitants? Even when they’re these miracle medication, what second-order results will there be on Hershey’s enterprise? Will Hershey have decreased competitors since one of many greatest chocolate snacking firms are of their area? Will they someway have extra pricing energy, oddly? I feel these are questions that all of us must ask, and we simply haven’t got many solutions proper now. But when I’ve to provide a solution, I feel on the margins, it will have an effect on Hershey. However at this level, I do not suppose it’ll have materials impression on the corporate. You suppose too, like 1 / 4 of the income comes from holidays like Halloween, Easter, Christmas. Are folks going to cease shopping for sweet at these occasions? I am not so positive.

Mary Lengthy: That is an excellent level. That a lot of sweet is much less for the meals, like sustenance facet, and extra only for the enjoyable, the gift-giving, and so forth. Does that go away, even in a world the place using weight-loss medication simply continues to develop? Most likely not. One other exterior impression that’s already doubtlessly having results on this firm is commodities pricing. Cocoa costs are manner up. For probably the most a part of the last decade, cocoa has value about $2,500 per metric ton, and it has been fairly constant round that worth, however final December, it hit $4,200. That quantity hadn’t been seen because the ’70s on this market. Now it is almost double that. Simply at present, it was over $9,000 per metric ton. It bought nearer to 12 in mid-April. These are large spikes. What is the story right here that is pushing cocoa costs thus far up?

Anthony Schiavone: There is a couple elements that we are able to discuss, however the primary one is admittedly simply poor rising circumstances in West Africa, which accounts for about 70% of the world provide of cocoa beans. Since demand is outpacing provide, that is what’s largely resulting in greater cocoa costs. There’s another elements, like monetary hypothesis, regulation, and simply the illiquidity that is in cocoa markets, that has made issues worse. However actually, the availability demand deficit is the primary issue there.

Mary Lengthy: What is the repair for this? If these are costs which are unseen for many years, and cocoa is clearly a key ingredient for a chocolate tier to be shopping for, do you count on these costs to go down anytime quickly, or is that this one thing that Hershey and different chocolate makers and sweet makers are simply going to need to issue into their pricing transferring ahead?

Anthony Schiavone: Nicely, I am going to return to Hershey’s resiliency that we talked about earlier. Excessive cocoa costs is perhaps new for traders at present, however it’s not new for Hershey and a few of its opponents. After World Conflict II, cocoa costs spiked. Then in Seventies, such as you talked about, they surged once more, so I feel Hershey goes to have the ability to deal with this value inflation similar to it did again then. It is going to deal with it at present. There’s just a few methods they’ll do this; they’ll elevate costs much more. They’ve already raised costs fairly a bit, however they’ll elevate costs additional. They’ve hedging packages in place. They’ve much more scale than lots of their smaller opponents, so that ought to assist. They’ve extra numerous sourcing choices out there too. There’s lots of choices that Hershey can use. I feel profitability might be going to be impacted this 12 months, however if you happen to’re a long-term investor, I do not suppose that is one thing we will be speaking about in just a few years.

Mary Lengthy: The upper value of cocoa, you talked about that we would see this impression Hershey’s profitability by the tip of the 12 months, however it hasn’t appeared to have had an impact on the corporate’s margins fairly but. Is that largely as a result of they’re elevating costs, or are there different causes behind that?

Anthony Schiavone: I feel that is in all probability the primary factor they’re elevating costs in step. I feel towards the again half of the 12 months, we would see margins come down. However on the finish of the day, the treatment for top commodity costs is excessive commodity costs. Finally, they will revert to the imply, and once they do, I do not suppose Hershey’s going to be so fast to scale back their costs. That is after we would possibly see margins transfer greater. They’ve lots of cost-saving initiatives that they are setting up proper now that is going to have an effect in a few years for the corporate. You might have increasing margins due to decrease commodity costs in just a few years. Then you definately additionally profit from these cost-saving initiatives we’re setting up now. I feel the long run seems shiny for Hershey.

Mary Lengthy: You suppose the long run seems shiny for Hershey; the market would possibly suppose in any other case; they appear to be down on huge chocolate. Hershey’s buying and selling at a reduction to the market’s PE ratio. Hershey’s is about 19, whereas the S&P 500 is about 21. Once more, I do know that you simply suppose that good occasions are forward for Hershey, however simply to placed on the opposing cap for a second, what finally may go improper with the Hershey thesis long-term?

Anthony Schiavone: I feel once I have a look at the snacking portfolio, if Hershey actually desires to turn out to be that snacking powerhouse, I feel they will doubtless must make an acquisition or perhaps even two to get there. SKINNYPOP, Dot’s Pretzels, PIRATE’S BOOTY, they’re all robust manufacturers, however to be a real powerhouse, I feel they will want a little bit bit extra. Though administration has been top-notch capital allotted thus far, I do fear a couple of main snacking acquisition that is perhaps diluted to the corporate’s general model. That is one factor I am watching.

Mary Lengthy: As you have talked about, resiliency is an enormous a part of the Hershey story, and so hopefully for traders like your self, that continues to be the case. Thanks a lot for speaking about this with me. Actually recognize having you on the present.

Anthony Schiavone: Thanks. Admire it.

Ricky Mulvey: As at all times, folks on this system might have pursuits within the shares they discuss, and the Motley Idiot might have formal suggestions for or in opposition to, so do not buy your self something primarily based solely on what you hear. I am Ricky Mulvey. Thanks for listening. We’ll be again tomorrow.