In this podcast, Motley Fool analyst David Meier and host Ricky Mulvey discuss:

• On Holding's blistering sales growth.
• Why pharma investors aren't reacting to President Donald Trump's executive order on drug prices.
• If Alphabet's stock deserves to be in value town.

Then, Motley Fool personal finance expert Robert Brokamp joins Ricky to discuss why investors should consider buying individual bonds.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

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A full transcript is below.

Should you invest $1,000 in On Holding right now?

Before you buy stock in On Holding, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and On Holding wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $635,275!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $826,385!*

Now, it’s worth noting Stock Advisor’s total average return is 967% — a market-crushing outperformance compared to 171% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of May 12, 2025

This podcast was recorded on May 12, 2025.

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Ricky Mulvey: Does Alphabet deserve a grocery store multiple? You're listening to Motley Fool Money.

I'm Ricky Mulvey, joined today by the smirking David Meier. David, thanks for being. What are you smirking about? What's so funny?

David Meier: Oh, it's all good today. All good.

Ricky Mulvey: Good. Just making sure I don't look funny or anything. That's why we do a audio only podcast for today. Politics keeps mixing with markets, and we have some earnings from a fast growing apparel later in this segment, Dylan and Ja-mo hit the trade deal-ish trade agreement question mark between the US and China yesterday. But there's another move from the White House that could have significant implications for markets. President Trump signing an executive order that Americans must get a "Most favored nation price for prescription drugs." David, when I saw this, my first reaction was sweet. You know what? I bet the big drug makers stocks are going to dive on this. They did not flinch. The US is where a lot of their profits come from. What's going on here?

David Meier: The reason they didn't flinch is because the market doesn't believe that those profits are going away. It's as simple as that. If we look a little bit under the hood at what the executive order actually says, it does lay out some cases where other countries around the world pay lower prices than we do in the US. Well, they negotiate differently. The market for drugs is way more open in the United States than it is in other countries. Governments tend to negotiate on behalf of their people because they're the ones making the purchases. They have some negotiating power. We here in the United States tend to let markets determine prices. There are other players. There's PBMs and things like that. But this is basically the market saying that the US markets will withstand higher prices. Basically, with the stocks not really moving on the news, the market says, Well, we look ahead and we don't see how you're going to do this. Basically, the other thing that the executive order said was, Health and Human Services Secretary, go out and put together a plan in 30 days for what you think the prices will be. There's a negotiation that's going to happen in between, so we'll see what happens, but as of right now, I think that's what the market is saying.

Ricky Mulvey: Well, the pharma lobbyists are saying something else, David, they're certainly sweating a little bit. According to Bloomberg, the brand drug lobby, PHRMA my old employer had an emergency call on Sunday and said that this could cost the pharma industry one trillion dollars over a decade. You look at a drug like Ozempic. This was mentioned in the press conference with President Trump, where a month of is almost $1,000 in the United States, about 60 bucks in Germany. That's not great if you need Ozempic. That's also a huge profit margin for Novo Nordisk. Novo Nordisk CEO trying to defend the practice in Congress a little while ago saying, don't look at me. Look at the pharmacy benefit managers. Those are the ones that are really screwing up prices here. The lobbyists are certainly concerned here, and is this a time where if you own stock in a drug maker, especially one making weight loss drugs, is this a time to revisit your thesis?

David Meier: The short answer is yes. Should you panic? I don't think so, but you should go back given how this all tends to work. Regulation does play a part in many industries, but in pharma specifically. The lobbyists are going to have to basically make the case to the HHS secretary to say this is why we think these drugs should be priced here. Again, this is about pricing power, this is about bargaining power. The lobbyist pharma is going to have to roll up their sleeves and do some work over the next 30 days and beyond that because if I read everything correctly, there's some other milestones at 180 days and a year out and multiple years out. This is going to take a while to play out. They're going to have to do some work to basically say, look, there's a reason that we one should be able to charge these prices, and two, there are benefits to our industry as a result. Because you got to remember, a lot of that gets plowed back into research and development of all kinds to bring the next generation of drugs and next generation of care. I don't think anybody would want higher prices just for the sake of higher prices. We should want our healthcare to be reasonably priced. But at the same time, we don't want to disrupt the long term innovation that happens here as a result.

Ricky Mulvey: I think the administration is saying and I would actually agree on this point. I've been accused of being too liberal and too conservative on this show, so we'll see what complaints I get this time. The administration would basically say, we don't want to stifle innovation necessarily, but it shouldn't be on Americans alone to fund that innovation when you have other developed countries in the European Union, Australia, for example, paying significantly less for the exact same drug coming out of the exact same factory.

David Meier: That makes sense. Then the question is, who's going to do the negotiating? Is our government going to step in and do the negotiating? That would be a big change to how our markets work today.

Ricky Mulvey: We'll see how it goes. I should also mention I've never worked for a brand name pharmaceutical lobbyist. I'm afraid of catching heat today, David. I don't know why. Let's move on to earnings. [laughs] Let's talk about earnings. Let's focus on the fastball here. On Holding the maker of comfortable shoes, where rocks and mulch often get stuck at the base of it, I enjoy wearing them still, they reported this morning sales up a blistering 40% from one year ago. That is on a constant currency basis because we're going Swiss francs to US dollars with this earnings report, getting us in some trouble. It's about $860 million in sales for the quarter. That's in US dollars. I'm looking at a retailer that is earning basically 40% more sales than one year ago. David, what is On getting right in this environment?

David Meier: They have the product that people want. I hope I don't sound glib when I say that, but that is true. Their products are very good and in demand all around the world. They had good growth in all of their geographical segments, and it's because they have taken the time and made the investments to put technology into their shoes that make them both comfortable, functional, whether you're running, whether you're working out, whether it's casual, all these things, but playing tennis can't forget about Roger Federer they have product that people want. As we saw here this quarter, more people wanted it, even as we're starting to get into a little bit of the impact of the tariffs.

Ricky Mulvey: On Clouds were one of my tariff panic purchases. Those included airpods for a birthday gift. I had to get some basketball shoes. Then I was like, my On Clouds have completely worn out at the bottom, where the rubber is gone, and I need to get these before the prices get jacked up by maybe 50-100%. I don't think that's going to happen now that we have the pods, but I do have some new On Clouds. I'm a big fan of the product. Is this something you own? Are you taking a lynchian look at this company?

David Meier: I don't own shares, but I was a bit of a sneaker guy. I have tried them, and also like them. You probably aren't the only one making a purchase ahead of what may have transpired, and you did it because you liked the product. It was their direct to consumer channel that actually had the best growth. I don't think you are in the minority in terms of maybe pulling a purchase forward. But to management's discredit, they actually said, we still see plenty of demand for the rest of the year. It's not a top line thing for them. What they are actually saying in terms of the tariff impact is maybe margins will get pinched a little bit. We're doing our best to figure out what those might be. We're not really knocking them down heavily, but we just want to let you know that it could be volatile. But on a top line basis, they say our product is in demand. We're making sure that all the places where we sell our shoes have plenty of product and good up to date products. I credit management for at least at the beginning handling this uncertainty pretty well.

Ricky Mulvey: Let's dig into the numbers a little bit more. Looking at operating margin here, I think there's a story because now On is about on par with Nike's historic average, about 10-ish, 11%. Nike dipped in a recent quarter, but we'll take that out to be nice to our friends at Nike. This is significant for a younger brand that you would think needs to spend more as a percentage of their sales on marketing or maybe have less negotiating power with shoe stores like Foot Locker and yet, there they are in an efficiency basis, pretty much on par with Nike, what story does that operating margin number tell investors?

David Meier: This is actually a fantastic question. Let's use the Nike and On Holding comparison. Both companies do sponsor athletes. But Nike, man, think about the suite of athletes that market their products. That's actually a huge expense for Nike, and they make the most of it by getting in terms of volume and pricing that they've been able to generate for their products over the years. Even though On does have, again, those sponsored athletes, it's less compared to what Nike spends. They have actually done a good job of again, creating a product that people want, creating a product where word of mouth marketing is probably more important than necessarily the sponsored marketing. Again, getting the products to consumers in the way that want to buy them. On has the advantage of having a consumer that is more apt to buy in a direct consumer channel, an online e-commerce type channel than Nike had when it was starting out.

The other thing I credit is, in addition to putting good technology into their products, they've actually done a good job of building their business from a supply chain management standpoint, from managing their marketing all these things, and figuring out where they can price their product in order to keep moving it at the volumes that they need. At the same time, they've been able to reinvest back into the company to say, hey, here's our latest technologies that we want to put in shoes. We want to expand into apparel. Hey, we need to open up a distribution center in Atlanta. I give management a lot of credit for not only creating a good product, an emerging brand, but they've created a very good business around this. This is something that's important for the long run because if you look at the history of Under Armour, Under Armour had a phenomenal brand, but they weren't the best operator. Eventually, that caught up with them as they tried to get bigger and bigger. Going forward, we'll see how all this plays out for On, but they've done a good job of balancing all the things that they need to balance in terms of creating a good long term business.

Ricky Mulvey: You don't think Elmo is getting Step Curry rates for those commercials?

David Meier: I don't know. Depends on how good Elmo's agent is.

Ricky Mulvey: That's a good question. They have the commercial with Elmo and Roger Federer. They're using Elmo quite a bit in their commercials. I think On looked at Adidas and saw the trouble they ran into with Kanye West and said, what is the opposite celebrity we can find? Then you get Elmo selling shoes for him.

David Meier: You asked about my smirk earlier. There is nothing but good entertainment value as well as educational value in what we're talking about today, because that is just awesome.

Ricky Mulvey: Let's close out with the story on Alphabet. We've gotten a few questions about this company from listeners. Because of its underperformance relative to the market and story line going into it, there's a Wall Street research report from an analyst named Gil Lurie. He would like to set the company on fire, basically saying the only way forward for Alphabet is a complete breakup that would allow investors to own the businesses they actually want, making the point that the entire business is valued on the worst multiple that investors can find. That's the search multiple. It's about 17 times. Before I get to your question on valuation, why do analysts need to assign the worst multiple to the whole business? There's a lot of smart people looking at Google, and I assume some of you can do math.

David Meier: [laughs] That is essentially the average. One way you could go about valuing Google/Alphabet is value the search business, which is by far the biggest business, generates the most cash flow, has the most uncertainty around it today. What is AI search going to bring in the uncertain macro environment? Is search going to go down? Is it a commodity now? There's all things facing the search business, but they have many other segments. What this analyst is basically saying is, hey, these other segments deserve higher multiples. Well, maybe that's true. As an analyst, you could do that yourself and say, YouTube is worth this. The Cloud business is worth that. The chip business is worth something else. If you think that as a whole, the business should be trading at maybe 24 times a weighted average multiple instead of 16, as an analyst, you can say that. The challenge, in my opinion, in breaking this up, is where do these companies get their capital from? All of them need investment capital in order to operate, and a lot of that comes from search. While I understand that breaking everybody up could unlock a lot of value, if you look at the most recent breakup of a very large company, go to GE. General Electric has split into GE Aero, GE Vernova which is the energy business and GE Healthcare.

That had a conglomerate discount, and it took years to divide that business up. Now, the sum of those parts is greater than the previous whole. But it's not necessarily easy for those companies to operate on their own. Again, the internal capital allocation process is taking a lot of cash flow that comes from search and putting it in new businesses, making new investments, making new moonshots. Is moonshots a thing still associated with Google?

Ricky Mulvey: We can count Waymo. They got self driving stuff going on.

David Meier: There's all sorts of stuff. While I understand breaking it up could unlock a lot of value, I also am sympathetic to the idea that, hey, most of the capital comes from search. If you put these businesses on their own, does that mean they have as much capital as they need in order to grow as fast as they want? I don't know the answer to that question. It's a risk to basically set all those free as individual companies in the market, and the market might say, well, this is great, but, Waymo, you need a lot of capital going forward.. Maybe I'm not going value you at the multiple that somebody else thought you were now that I can see all of your financials.

Ricky Mulvey: Let's close out with the question that introduced the show. There's some narratives going against Google right now. The search business is declining. You're doing nothing compared to ChatGPT. Your business there could become obliterated. For that, Mr. Market is assigning Alphabet a lower than average earnings multiple about 17 times. David, that is what Kroger trades at. A very mature grocery store business. Here, you have Google, which still dominates the search market. It's got a growing Cloud business. It owns YouTube, which is the biggest streaming service anywhere. It's free, but we can set that aside for now. I've got this company on my watch list. Should I pick up some shares while Alphabet's in value town? Are we looking at a falling knife here?

David Meier: Me personally, as someone who I've followed this company for a long time. I'm in agreement with you. I think shares are probably undervalued, but they're probably a little undervalued for a reason, and that's because there's a lot of risk and uncertainty that's ahead of the company in the short term. If you have a case where the lawsuits don't have a big impact, if there's not a call for a breakup by the FTC, if the other businesses that are growing, again, the ones we mentioned, YouTube, GCP, things like that. If they have all of the earnings power that this analyst thinks they do, eventually the market will be able to see through all of it and figure out what's the right multiple. I just personally think this is a phenomenal business generates significant cash flow. They have multiple ways that they can reinvest that cash flow. It's probably a little undervalued today. Even as a conglomerate.

Ricky Mulvey: We'll leave it there. David Meier, thank you for your time and your insight.

David Meier: Thank you so much, Ricky. This was a lot of fun.

Ricky Mulvey: Hey, Fools, we're going to take a quick break for a word from our sponsor for today's episode. Real estate. It has been the cornerstone of wealth building for generations, but it's also often been a major headache for investors with 3:00 AM maintenance calls, tenant disputes, and property taxes. A Fundrise Flagship Fund, a 1.1 billion dollar real estate portfolio with more than 4,000 single family homes in the Sunbelt communities, 3.3 million square feet of in-demand industrial facilities all professionally managed by an experienced team. The Flagship Fund taps into some of real estate's most attractive qualities, long-term appreciation potential, a hedge against inflation, and diversification beyond the stock market. Check, check, and check.

All without the complex paperwork, massive down payments, and soul sucking landlord duties. Visit fundrise.com/fool to explore the portfolio, check out historical returns, and see just how much easier investing in real estate can be. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the funds perspective at fundrise.com/flagship. This is a paid advertisement. Up next, Robert Brokamp joins me for a look at bonds and what investors should consider before adding them to their portfolios. Investors own bonds for safety and income, but recent history has occasionally told a different story. The total return from the overall bond market has been flat to slightly negative over the past five years. That's if you bought into this safe investment as COVID kicked off. Over the past few years, investors in bond funds have experienced unexpected and historically steep declines. In 2022, the Vanguard total bond market ETF lost about 13%. Bro, that is nothing for a growth stock investor, but this could spook anyone who's closer to retirement.

Robert Brokamp: Yeah, and 2022 was probably the worst year for the stock market in US history. It was quite notable. The main cause of the declines has been the rise of interest rates. If you go back to 2020 in the middle of the pandemic, the 10 year treasury yielded an astounding 0.5%. But over the last few years, it has risen to almost 5%, reaching that in 2023. It's fallen down a bit back, but it's still at around 4.5%. When rates go up, the value of existing bonds go down. Why? Well, if you had bought a 10 year treasury back in 2020, that yielded 0.5%. It's now less attractive because after all, who would want 0.5% yield if 4.5% is now available? The price of the 0.5% treasury has to adjust downward. However, there's good news. The price of that bond will return to its par value as it gets closer to maturity as long as the issuer, in this case, uncle Sam, is still in business, so the price decline won't last forever.

Ricky Mulvey: Unfortunately, that same dynamic may not play out in a bond fund, which could hold hundreds or even thousands of bonds with different maturities and credit ratings that are constantly being bought and sold. But you can get varies with your 12 month trailing yield, your 30 day SEC yield, or your weighted average coupon rate. One solution is to buy individual bonds instead of bond funds. However, it's not as simple as it sounds, so Bro's got a few tips starting with invest enough to be diversified.

Robert Brokamp: There's one rule of thumb that says you shouldn't attempt to construct your own bond portfolio unless you have at least $50,000 to invest. That's because the issuers, whether it's corporations, municipalities, foreign governments, they can all go bankrupt and default on the debt. That doesn't mean you'll lose everything, actually. Investors typically recover 40% to 60% of the original value of the bonds after a company restructures, gets liquidated, but it usually takes a while for investors to get some money back. You want to spread your bond books around. When it comes to investing in stocks, we hear at the Fool generally say you shoul down at least 25 companies, and that's probably a good starting point for bonds as well. Though if you invest in really really safe bonds, you can get away with a smaller number. For example, you can feel more secure with a smaller bond portfolio or a smaller number of issuers if you invest primarily in US treasuries, which are still considered among the safest investments in the world.

Ricky Mulvey: Fledgling casino developers may not like this tip, but Number 2, stick to investment-grade bonds.

Robert Brokamp: To minimize the risk of buying bonds from a company that may go belly up, you want to stick with investment grade issuers, and those are rated Bbb or higher by standard and Poors or Baa or higher by Moody's. According to fidelity, here, the 10 year default rates on bonds of different ratings from 1970-2022 as rated by Moody's. Tripple A bonds have a default rate of only 0.34%, so pretty darn safe. Investment grade 2.23%. Speculative grade, high yield junk, whatever you want to call it, 29.81%. That's a high default rate, which is why they pay such high yields. But even if you stick with investment grade, there's still the risk of default. In fact, if you own individual bonds long enough, you probably will see a couple of defaults. It's still important to diversify your bond portfolio, but you can mitigate that whole default risk by choosing highly rated bonds.

Ricky Mulvey: Next up, find out whether the bond can be called.

Robert Brokamp: Every bond has a set maturity rate, but many can be called before then. What happens is that a company decides to pay off its bondholders before maturity. You bought, let's say, a 10 year bond, but then it got called five years in. Why did they do that? It's usually because interest rates have dropped or the bonds credit rating has improved. It allows the issuer to redeem the old bonds, issue new ones at lower rates. Unfortunately, that leaves investors left with having to reinvest the money at lower rates. You want to make sure you know beforehand whether the bond you're going to buy is callable, and if so, what the yield will be. You'll often see at the quotes, you'll see either the yield to call, YTC, or the yield to worst, YTW, and that's what you'd receive if it does get called. By the way, another benefit of treasuries is that they're not callable.

Ricky Mulvey: This next one gets a little tricky if you like owning investments in standard brokerage accounts, Bro, but pursue the primary market.

Robert Brokamp: When bonds are first sold to investors, what is known as the primary market, they're usually sold in $1,000 increments and will be worth $1,000 when they mature. This is known as their par value. But once a bond is issued, it trains on an exchange. This is known as the secondary market. At that point, a bond rarely trades for $1,000. The price is going to either be higher or lower, depending on changes in interest rates and what's going on with the company, maybe what's going on with the economy. If you buy a bond that is below or above its par value, this is going to add a layer of tax complexity because when the bond matures for $1,000, you're either going to receive less or more than you paid for it. This is a really complicated topic, but in most situations these days, investors are buying bonds at a discount, meaning they're paying, let's say, 950 bucks for a bond that will eventually mature in 10,000.

That $50 difference is going to be taxed as ordinary income in most situations, not as a capital gain. You can avoid all this tax complexity if you buy bonds right when they're issued in the primary market and then hold to maturity. That said, buying bonds in the primary market isn't easy. You're going to increase your chances by having an account with a brokerage that underwrites a lot of bond offerings. Some of the bigger discount brokers also have access to some primary offerings, but you might want to check with them beforehand to see how big that inventory is going to be.

Ricky Mulvey: If you want to play this game, you got to know what you're buying. Understand how bond prices and yields are quoted.

Robert Brokamp: Now, if you've never seen the quote for a bond, it's going to look a little interesting to you because despite being typically worth $1,000 at issue and at maturity, bond prices are quoted in a different way. You basically move the decimal point to the left. A quote for 99.616 for a bond indicates that the bond is being offered for $996 and 16 cents. You'll likely see both the coupon and the yield quoted. The coupon was the interest rate on the day the bond was issued. But once the bond begins trading and moving above or below its par value, the yield is a more accurate representation of what you'll actually receive as a percentage of what you paid for the bond. Then finally, most bonds pay interest twice a year. When you buy a bond in the secondary market, you'll owe accrued interest to the previous owner for the time she or he owned the bond in between payments, but then you'll get the full six months worth of interest during the next payment, even though you only owned the bond for maybe less than six months.

Ricky Mulvey: Bro, our engineer Rick Angol was asking for more excitement before we started recording in our segments. Really I think he's getting it with understanding how bond prices in yields are quoted. Let's keep going with the tip of buying directly from Uncle Sam.

Robert Brokamp: You can buy savings bonds, treasuries, I bonds, treasury inflation protected securities, otherwise known as tips, directly from the government, commission free @treasurydirect.gov. It's a really convenient way to buy treasuries. Unfortunately, it can only be done in taxable accounts because the government isn't set up to serve as a custodian for IRAs. But the consolation here might be that interest from treasuries is actually free of state and local income taxes, so that makes them somewhat more compelling. Also, in the case of treasuries and tips, you don't actually buy the security immediately, knowing the exact yield you'll receive, rather, you're basically signing up to participate in an upcoming auction. Once the auction is complete, you'll be informed of the rate you'll receive.

Ricky Mulvey: Finally, you can get the best of both worlds with defined maturity ETFs.

Robert Brokamp: If you've been listening so far, you can see that buying individual bonds requires more education and effort than just buying a bond fund. Fortunately, there's a type of bond ETF that offers most of the benefits of buying individual bonds. These are known as defined maturity or target maturity bond ETF. These are funds that only own bonds mature in the same year, and that year will be identified in the name of the ETF. Toward the end of that year, after all the bonds have matured, you'll just have a bunch of cash. The cash will be distributed to the shareholders and the ETF ceases to be. The two main issuers of this type of ETFs are Invesco, and they call them BulletShares or iShares, and they call them I-Bonds, but that's not to be confused with the inflation-adjusted bonds issued by Uncle Sam. You can use these ETFs to invest in all kinds of bonds, corporates, munis, TIPS, high yield bonds. Both the Invesco and iShares websites have tools that can help you build a bond ladder with these ETFs.

You have a certain amount coming due each year, probably particularly attractive to retirees. Like all bond funds, these ETFs are going to go up and down in value depending on what's going on with interest rates in the economy, but they should return close to their initial share price, that is the price of the ETF on its very first day once the fund matures. But there are no guarantees, and this is more likely if the ETF invests in safer bonds, less likely if you're choosing an ETF that invests in high-yield or junk bonds. But the bottom line is that with these ETFs, you can get the ease and diversification of a bond fund, yet a measure of the predictability about what the ETF will be in the future, similar to what you'd get from an individual bond, in other words, most of the best of both worlds.

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about in the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear personal finance content, follows Motley Fool editorial standards, and we not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only to see our full advertising disclosure, please check out our show notes. Motley Fool only picks products that it would personally recommend to friends like. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Meier has no position in any of the stocks mentioned. Ricky Mulvey has positions in Kroger. The Motley Fool has positions in and recommends Alphabet, Moody's, and Nike. The Motley Fool recommends GE Aerospace, Ge Vernova, Kroger, Novo Nordisk, On Holding, and Under Armour. The Motley Fool has a disclosure policy.

In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:

• The U.S. and China's short-term trade truce, and why there's some hope that a more permanent deal will be struck.
• Fox's next step into streaming with Fox One, its existing Tubi footprint, and success in video advertising.

GoDaddy is known for its commercials, less known for its capital allocation strategy. GoDaddy CFO Mark McCaffrey walks Motley Fool host Ricky Mulvey through the company's philosophy on share buybacks.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

Should you invest $1,000 in GoDaddy right now?

Before you buy stock in GoDaddy, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and GoDaddy wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $635,275!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $826,385!*

Now, it’s worth noting Stock Advisor’s total average return is 967% — a market-crushing outperformance compared to 171% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of May 12, 2025

This podcast was recorded on May 11, 2025

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Dylan Lewis: Set the time machine for a few weeks back. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst Jason Moser. Jason, thanks for joining me.

Jason Moser: Happy to be here, Dylan. Thanks for having me.

Dylan Lewis: On this bright and sunny day for the market. S&P 500 up a little over 2%, Nasdaq up, the Dow Jones up, everybody up on reports of the US-China trade deal. I've seen this called tariff cuts, Jason. I've also seen it called temporary trade truce. The market's excited about it. What are you calling it?

Jason Moser: I definitely understand the excitement. Yes, bright and sunny day in the market. It's bright and sunny day here in Northern Virginia, and hey, happy belated Mother's Day to all of the mothers out there. What a tremendous Sunday. We had a great time here, and I hope everyone else did too.

We woke up to a great headline, of course, the market responding obviously very positively to it. I think that goes back to what we have been talking about for the last couple of months, is just day by day, you just don't know really what is going to happen. This is a very headline-driven market, and for as bad as things may seem one day, you just don't know the next day they could turn on a dime, and it seems like today we hit that turn on dime status. I think it's worth remembering, this is a temporary solution. This is not something that is locked in in a full-on deal, but it does seem at least like there is some progress in diplomacy and talks. Perhaps the UK deal that was announced late last week, is a bit of a catalyst here. Maybe that's a sign of good things to come. We will have to wait and see.

But I think a lot of what we've been discussing in regard to tariffs and trade talks, most of this is really centered around ultimately China. China is the pot of gold at the end of the rainbow, as they would say. This is where we really need to figure this deal out because when you talk about trade deficits, and there are positives and negatives that come with all of that. But in regard to China, specifically, we've become very dependent on China through the years. When you think about the relationship we've had with China through the years, going all the way back to the 1970s when we really started diplomatically working together, over time, we've seen this trade deficit, where we're importing more than we're exporting. This trade deficit has just continued to grow.

You look at the 2000s. Around 2000, that trade deficit had reached around $85 billion. From there, it just continued to grow. It hit a peak of close to $420 billion in 2018. Today, it's closer to around $300 billion. But the goal, I think, here, is to try to balance that relationship out. Hopefully, this is a sign of good things to come. Again, it's one headline. We don't know a lot. There are not a lot of specifics, but it does seem like progress is at least being made.

Dylan Lewis: If you're like me, you've probably had a hard time following where we are relative to where we've started with a lot of these escalations. From the reading and from some of the reporting out there, it seems like this essentially resets to where we were with the US and China relations in late March. Initial tariffs announced by the Trump administration, retaliations on both sides. You were on the show last week with our colleague Ricky Mulvey, talking about how the S&P 500 had essentially retraced the Liberation Day losses. In terms of macro mentality, are we basically looking at 90-day amnesia here, where we lost some time, but we wound up back in the same place?

Jason Moser: When we look at the numbers, it's just been such a boring year. The market is essentially flat. Ho-hum, who cares? This has just been a really bumpy ride, going back to, you remember how this all started? This was what? The late February, early March, where the conversation really centered around Canada and China in certain trade negotiations there, but also fentanyl stuff and border stuff. Then it expanded very quickly to it seemed like virtually every country on the face of the planet, which is, I know, something like 180, 190 countries. It does feel like we are back to where we started. It's nice to see at least some progress being made. Go back to that UK trade deal. Hopefully, that is a sign of things to come.

We know that countries are coming to the table and want to negotiate. But again, given our relationship with China, and to an extent, our reliance on China, I think China is really seen as the most important of all of these deals. Again, time will tell there. Again, this is not a permanent solution. This is just something that it's extending the timeline. It's indicating that, hey, conversations are being had, because if you think about it, this tit for tat just doesn't work. Hey, I say 175% tariffs. Well, hey, I'll say 185%. Well, I'm going to go 195. It can just go up and up and up and nobody ends up benefiting. We certainly know that China's economy is suffering from this. But we also know that our economy will suffer from this as well. Particularly as we get closer to the holiday season, if you start seeing supply dwindle and consumers aren't able to get what they want, there are going to be real problems. There will be political ramifications that come from that, as well. It's good to see progress being made. I certainly would not look at this as a solution, but it seems like at least a step in the right direction.

Dylan Lewis: Your dogs seem to agree there, Jason.

Jason Moser: They do. They're big fans of diplomacy, Dylan.

Dylan Lewis: As we noted, good day for the market. Even better day for companies that are in the business of buying and selling, and really, anybody in retail, anybody with international supply chains. As you noted, this is a reset, but a reprieve as well. Not a full solution. Any wise words for investors seeing some major moves with their stocks today?

Jason Moser: I think it's great. We always love to see our portfolios in the green or the black, however you want to put it. But it's always nice to see positive as opposed to negative. I think it's really interesting to see the companies that are reacting most strongly to these results. Look at some of these companies that stand out, Wayfair, for example, have better than 20%, totally understandable. They really depend on the supply chain centered around China. Shopify, again, we've talked about that before, plenty of small and medium-sized businesses that do not fare well during these heavy tariff times, all the way down the line there. Amazon doing well, Nike doing well. I think it's nice to see those companies at least starting to recover a little bit from these lows. Again, I think this reiterates why we invest the way we do here. It is so if you tried to time your way in and out of this stuff, I can't imagine that many people would have been very successful. Continuing to invest regularly, staying invested, that is something we just need to reiterate to people because that is really, truly, that's the solution to long-term wealth creation.

Dylan Lewis: We may get some more commentary on the big picture here when we see Walmart and some of the Chinese companies like Alibaba report later in the week, fairly big earnings week, and Fox got started. They're out with earnings this week, and they also had an announcement that their upcoming streaming service, Fox One, will be launching before the upcoming football season, which I can't imagine is an accident. I imagine that's quite intentional. This is something we've been looking forward to for a while, Jason. There's a history of legacy media companies getting streaming services right. There's a history of legacy media companies getting streaming services wrong. I think CNN+ lasted for about a month. What are you thinking about as you see Fox stepping up to the competition here?

Jason Moser: I think it's noteworthy to acknowledge that Fox is looking at this streaming service as something where they want to attract the cord cutter. There's two sides of the coin here, in that we've got folks who are still very happy cable subscribers, and we were looking at it countrywide. There's still plenty of cable subscribers out there. Now, we know the trend is toward cord-cutting, but Fox wants to make sure to offer something for everyone. If, for example, you are a cable subscriber and you get your Fox channels, well, then it sounds like you're going to get access to this Fox One streaming service as well. If you're a cord cutter and you don't really want to participate in the cable network, well, then you have the opportunity to go ahead and subscribe to this Fox streaming service. It's important to note, I think this Fox streaming service is going to be all of the properties. It's not just Fox News. It's the stand-alone Fox channel. It's all of the Fox Sports channel. It's everything that comes within that Fox portfolio.

Let's be clear. It's a very popular portfolio. It garners a lot of viewers, and I think that really matters. You referred back to that NFL relationship there, and that is obviously a very big driver come August when we start talking about preseason and getting into September with the regular season games. NFL is just big business. We know that, and Fox benefits greatly from that. I think we don't really know exactly what pricing is going to look like for this service yet, but it does sound like at least they are not looking for some type of discount or low cost price point, something like, think about Disney when they introduced Disney Plus, for example, and I think they started that out at 599 or 699 per month. I don't think that's what this is going to be. It's going to be something that's a little bit more reflective of the value that they feel like they're returning to all of their viewers. But all things considered, I think this makes sense. It's going to be something that I think helps expand their viewership and gives everybody a chance to participate in that Fox portfolio, how they want, whether they're cable subscribers or whether they are cord cutters that really just want to find access to the best content.

Dylan Lewis: One thing that might bolster some market confidence here in what Fox is able to do, this is not their first horse in the streaming race. They already own Tubi, which is a free ad-supported streaming service. A sleeper in the streaming space in a lot of ways, but at a critical mass. I think with what they saw for Super Bowl editions, they are probably over 100 million monthly active users at this point. It's not a profitable operation for them yet, but they've done over a billion dollars in trailing 12-month revenue. There is some track record of success here, and I think crucially, Jason, there's success in connecting with advertisers and working that ad-supported model. That really seems to be the future of where a lot of this industry is going.

Jason Moser: Well, we've talked about this a lot in regard to ad-supported video-on-demand. This is a massive market opportunity worldwide. I think when you get outside of the US and you get to economies that are a little bit more cost-sensitive, it makes even more sense. But when you look at revenue in the advertising video-on-demand supported market right there, worldwide, it's projected to reach around $55 billion in 2025. That's only going to continue to grow. For me, it makes a lot of sense that they continue to pursue this. It's just interesting that, I don't know about you, it's not top of mind for me. I'm not the biggest Tubi user. I know we have the app on our TV, and I guess we use it every once in a while if we're searching for content. But again, you mentioned this massive base of user, closing in on 100 million monthly active users. They saw in the quarter, their total revenue is up 27%. Fox's total revenue is up 27% for the quarter. Advertising revenue increased 65%, and that primarily was due to the impact of Tubi. They saw tremendous benefit there from the Super Bowl. I think that's something that is slated to continue. For me, it makes sense that they continue to invest in this business because not only do they benefit from this portfolio of central Fox offerings that they have, but then they've got these other little ancillary properties that they just continue to invest in and they fly under the radar.

But obviously, it's working out very well for the company. I think it's worth noting, you look at Amazon, for example, Amazon making a lot of investments in their Freevee offering, which is something essentially, you're going to get Amazon Freevee if you just have Amazon at all, if you're a Prime member. However your relationship is with Amazon, you're going to have access to Freevee. Amazon clearly sees an opportunity there as well. Again, I think, going back to those growth numbers in the AVOD market there, it's nice to see that Fox continues to invest in this business because it's obviously working out for them.

Dylan Lewis: Fox is not a name that we talk about all that often and to our detriment. Shares up almost 60% over the last 12 months. I was glad that we had the opportunity to check in on it because it's one that not a lot of folks have been paying attention to. Stock basically set new all time highs earlier this year, not too far off those levels now. It seems like advertising is a big part of the recent run. If this is getting onto people's radar at all, anything else you pay attention to?

Jason Moser: I think just continue to pay attention to the overall advertising revenue. The ratings that Fox brings in, I think we all know. Fox does pretty well with all of its properties. I think they really benefited tremendously from this most recent election cycle. They noted in the call from last call that on election night, they saw over 13-and-half million viewers tuning in, and then I think they said Fox News Channel had grown. It become the most watched cable network in total day and prime time in that space, growing total day audience by nearly 40%, and then their prime time audience by 45% year over year. It's not just Fox News. We go back to the NFL relationship in all of the different ways they can really win. It's not just Fox News. It's Fox Sports. It's Fox News. It's the stand-alone Fox offering there. They do have a lot of different ways they can win with their media properties. At the end of the day, it does boil down to ratings and as it stands right now, Fox continues to bring in strong ratings across all of its properties. That would be a very encouraging thing for investors looking to maybe get some exposure to the entertainment space.

Dylan Lewis: Jason Moser, thanks for joining me today.

Jason Moser: Thank you.

Dylan Lewis: Hey, Fools, we're taking a quick break for a word from our sponsor for today's episode.

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Listeners, coming up on the show, you may know GoDaddy for its commercials, but you probably don't know its capital allocation story. One that's made the stock a market beater. My colleague Ricky Mulvey caught up with GoDaddy's CFO, Mark McCaffrey, for an interview about the company's growth engine and philosophy on share buybacks.

Ricky Mulvey: A lot of our listeners may know GoDaddy as a domain registration business. They may not know GoDaddy as a long-term market outperformer, which I want to get into. We'll focus on the quarterly results, though, because right now, the growth engine and about a third of your revenue is coming from this applications in commerce business. This is not just registering websites. That's where you're getting 17% sales growth. For our listeners who just know GoDaddy is a spot where you're buying websites, what should they understand about the applications in commerce business?

Mark McCaffrey: Absolutely. It's a great question. We've become so much more than just being a domain company over the years. We just hit our 10-year anniversary of being a public company. We've been around 28 years. We've become a one-stop shop for micro businesses that provide them the IT services for them to be effective, them to be efficient, them to compete on a much broader scale. We're talking the mom and pop shops. I always refer to them the underdogs. They are doing what they love. They are passionate about what they do. They want to do it broader. They want to connect to more customers. They may not be IT savvy. We provide them, I sometimes refer to it as the operating systems for the micro businesses. That's what our application and commerce segment represents. Our core platform was the traditional domain part of our business, but this is the software that gets attached.

It's more often than not a website or an email or commerce capabilities. But it represents a second and third and fourth product attached that makes our customers successful. Because it's proprietary software and some third-party software, but proprietary software, it comes at a much higher profit margin for us and therefore has been our growth engine. It has become a bigger and bigger part of the business.

Ricky Mulvey: We've been talking on the show about how very large companies are using artificial intelligence, Microsoft building up with OpenAI. Palantir getting inserted into every government and any company they can find. You're at a micro level with very small businesses in helping them use AI to build and grow their businesses. At a very broad level, how do you see AI impacting small business creation in the US right now?

Mark McCaffrey: When you think about it, and again, when we say micro businesses, we're probably smaller than the small businesses others refer to. They don't think about AI as to, oh, my God, I want to use AI, but they want to have help. They don't want to hire necessarily more employees. But yet, for example, they have to respond across multiple different social media platforms to inbounds, and our tools do that automatically. They write in their voice. They allow them to be in multiple places at multiple times. I was just meeting with, I call them the pizza guys, but they're two guys who run a mobile pizza oven, and between putting a pizza in for 90 seconds, they're on our conversations tool just clicking Send to make sure that they're setting up their next gig. That's the type of customer we want. They don't sit there and think about, oh, my God, I'm using AI. They're sitting there going, oh, my God, this just works better. That is the customer we want. That's what our product does, Airo, A-I-R-O, just for the record. It allows our customers using AI to respond more effectively and more efficiently within their customer base to grow. It works because we have so much data around it.

Ricky Mulvey: This is a zone where Shopify also plays. We talk about Shopify a lot on the show. What's the differentiation of Airo? If I'm a micro business, if I'm starting my own pizza business with my brother, why would I do it on GoDaddy's platform instead of Shopify?

Mark McCaffrey: Number 1, it's a seamless experience for us. You come to one place and you're able to get all the functionality. Number 2, the cost effectiveness of it. We do it at such a good price point for the value our customers are getting. It allows them to start up, be more successful, and quite frankly, manage across one application. When you think about it, we're the only company in the world that has the technology stack all the way from the domain to the transaction. Because we can combine that into one seamless experience with them, they don't have to manage eight apps. They manage one app, and when they need help, they go to our care organization, and our care organization is designed to work with this customer base, work with the micro business. This is what they do best and why they're so effective. Between the technology itself and our ability to guide them through all of this, I always say, you can be up and running with a business in 15 minutes. I get corrected by my internal people to say, no, actually, we can do it in three minutes. Can you stop saying it takes so long. But you can get everything you need almost instantaneously bundled together as a great price, be up and running with website, transactions, professional email, and a domain, and you can be getting all your traffic across multiple social media platforms. That's what we offer. It's simple. It's easy. It's easy to use, and it's easy to maintain.

Ricky Mulvey: One of the reasons I'm happy to have you on the show is that GoDaddy has a very interesting capital allocation story. There's a long-term outperformance for your stock since GoDaddy IPOed. But 2023 is when a lot of that performance came, and that's in line with when you started a stock repurchase authorization program. Since 2022, GoDaddy bought back four billion dollars worth of stock. I don't want to dismiss the growth in the actual business, but there's a capital allocation story here that's important for shareholders. As CFO, you've really focused on share buybacks. You've got another three billion dollar authorization plan moving forward for the next few years. But just conceptually you've got a lot of options at your disposal. You can buy back stock. You can pay a regular dividend. You can pay a special dividend. Why stick with the buyback so much?

Mark McCaffrey: I'll start with the underlying premise that we think investing in our own stock is one of the most attractive returns we have out there. We've shown that we've been able to execute on this buyback strategy very effectively. Thank you for pointing out. We've done it over four years, four billion dollars. Not many companies have reduced their fully diluted share account by 25% over a period of time such as this. We're very proud of that, and we're very proud to not only share the success we've had, obviously, we generate a lot of free cash flow that allows us to have these options, but also return that value back to our shareholders and do it in a manner that we continue to, I would say, create this great model. I'll even take it a step further, how many companies out there today are growing 6-8%, have expanded their normalized EBITDA margins by 900 basis points in five years, and then bought back 25% of their fully diluted shares over a similar period of time and still are able to compound to free cash flow per share on a CAGR of 20%. That whole model works together for us fantastically. It's durable. It's resilient, and we continue to put it forward because it works, and our investors keep giving us the feedback. They really like the program. They really like how we do this, and they want us to continue doing this.

Ricky Mulvey: Since GoDaddy's IPO 10 years ago, I mentioned this at the top, it's been a quiet market beater, and a lot of that performance has come within the past few years, so I don't want to dismiss that. But when you look at the overall results, the S&P 500 compound annual growth rate of about 12%, the Nasdaq about 16%, and GoDaddy at 25%, smashing the return of the S&P 500. When you look back on 10 years as a public company, any reflections on the outperformance or maybe what's been the recipe for that at GoDaddy?

Mark McCaffrey: The recipe is focusing on what we call our North Star and making sure that everything we do is in honor of that North Star. We call our North Star free cash flow per share. We generate free cash flow, whether it's growth, whether it's profitability. We're always looking to do that in a way to maximize that equation, understanding that our model is durable, it's predictable, and we can use the levers to make sure we continue to compound into that equation and drive that value. As we've done that, as we've grown as a company, as we've hit this milestone, because we are a very large tech company, we know that hey, 90% of our revenue starts with our existing customer base. We know we have great products and innovation that bring people into our funnel. We know this model compounds on itself year after year as our customer retention rates get stronger. That compounding free cash flow is what creates the value within the business itself, and that's the same value we can use to return to our shareholders.

I would say the model works. Our execution of our strategy works. Our model works behind it, and it's about the compounding effect of layering on every year just to be a little bit better and to grow based on these metrics that just continue to generate cash flow. I would also say, three years ago, we took an effort to really simplify our infrastructure so that our operating leverage just supported this going forward. We're growing revenue at over two times. We're growing our operating expenses right now. That allows us to be so efficient in how we do things. When we're efficient, we can do what we do best, which is focus on our customers. Again, it all holds together, but it all compounds on each other. The balance sheet gets stronger. We're able to generate free cash flow. We're able to look at the options for capital allocation, and it puts us in a great spot going forward.

Ricky Mulvey: Good place, send it. Mark McCaffrey. That is the chief financial officer of GoDaddy. Appreciate your time and your insight. Thanks for joining us on Motley Fool Money.

Mark McCaffrey: Thanks, Ricky. Thanks for having me.

Dylan Lewis: As always, people in the program may have interests in the stocks they talk about, and Motley Fool may have formal recommendations for or against, so don't buy sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards. It's not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure. Please check out our show notes. For the Motley Fool Money team, I'm Dylan Lewis. We'll be back tomorrow.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dylan Lewis has positions in Shopify. Jason Moser has positions in Amazon, Shopify, and Wayfair. Ricky Mulvey has positions in Shopify. The Motley Fool has positions in and recommends Amazon, Microsoft, Palantir Technologies, Shopify, and Walmart. The Motley Fool recommends Alibaba Group, GoDaddy, and Wayfair and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

In this podcast, Motley Fool analyst Jim Gillies and host Dylan Lewis discuss:

• Warren Buffett's plan to step down as CEO of Berkshire Hathaway.
• The parallels between Berkshire's succession planning and Apple's transition from Steve Jobs to Tim Cook.
• The available cash, opportunities, and challenges ahead for Greg Abel and team.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

A full transcript is below.

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Dylan Lewis: After 60 years, Buffett passes the torch. Motley Fool Money starts now. I'm Dylan Lewis. I'm joining for the airwaves by Motley Fool candidate analyst Jim Gillies. Jim, thanks for joining me on this momentous Monday.

Jim Gillies: Indeed. Thanks, Dylan.

Dylan Lewis: We talk about the news very often. We don't always get something this good when something happens over the weekend. To quote the great Warren Buffett himself, the Time Has Arrived. After 60 years as CEO of Berkshire Hathaway, Warren Buffett announced he'll be stepping down at the end of 2025 for a well deserved semi retirement. He announced this Jim, closing out the annual meeting in Omaha over the weekend, which was news to basically everybody except his kids.

Jim Gillies: Correct. Yes, I had I had a number of friends on the floor, and one of them texted me with literally as he was speaking going, holy insert golf word here. Buffett just announced his retirement and I'm like, OK, I have to take a moment to process this.

Dylan Lewis: Yeah, in typical Buffett fashion, it wasn't I'm leaving the CEO seat. It was him handing over the reins, but it was in an overview of board meetings and votes, and recommendations. I think if it weren't for the standing ovation, if you had tuned out for a second, you actually might have missed it because it was right at the end of the meeting and discussion.

Jim Gillies: Yeah. Look, I'm a Berkshire shareholder for almost three decades. The entire way, Dylan, I've been told, aren't you worried? He's so old. He's going to die soon. Thankfully, a key lesson from Buffett reiterated many times over the years, including in this most recent annual meeting is like, you know what? Take your time, think through, things things are not that imperative in the moment. I'm very glad I've ignored all of the people saying, Oh, boy, he's really old. I similarly think about it a little bit today. It's like, Buffett has been prepping people for this for quite honestly nearly two decades. I remember after his first wife passed away, Susie, it was always the intent of the Buffett to give away the vast wealth that he's created. Susie was supposed to be the one because she was expected to outlive Warren. She was going to be the one handling the dispensation of that money. Susie's been gone for almost two decades now, Dylan.

We've seen him, I remember back might be 15 or so years ago now where they were first started talking about having the names of multiple people who could take over for him, step in whenever. The names in the envelope that could step in for him have changed. But a number of years ago, Charlie, who, of course, left us just over a year ago, Charlie let slip at one meeting that the only real name in the envelope that could take over for Buffett was Greg Abel, longtime CEO of Berkshire Hathaway Energy, MidAmerican Energy beforehand, and that he just confirmed what everybody largely knew. I don't think much is going to change. First off, in a completely unsurprising development, the board did, in fact, vote unanimously along with Warren's suggestion hands up, who thought that wouldn't happen.

Dylan Lewis: Yeah, zero surprise here.

Jim Gillies: Exactly. Well, also two board members are Warren's kids who, as you said, knew about this. They have, in fact, voted unanimously to pass the CEO's title to Greg Abel. This is the start of 2026. You've got another almost eight months with Uncle Warren at the helm, at which point he will remain as non-executive chairman. He did allude to the idea that should markets behave in a certain way, and he didn't say it, but I will plunge precipitously, they would be interested in deploying some of the massive cash hoard they've got now, which I think is playing with $350 billion. That he would be useful, perhaps reputation wise to help deploy some of that capital should circumstances require it. Again, he was too polite to say, if the markets blow up and people freak out. But that's what we're talking about here. Go back to 2008.

Dylan Lewis: If you find my advice helpful during any time, just let me know, essentially, the.

Jim Gillies: Yeah, exactly. But I don't think a lot's going to change, and part of that is because they've been gradually transitioning the day to day operating business into the hands of Greg Abel. They've long transitioned the decision making at GEICO or I say GEICO, just in the insurance arms, all of the insurance arms into the hands of Ajit Jain. They have long been adding to the responsibilities of Ted and Todd, the investing lieutenants. Buffett has long espoused that a ham sandwich should be able to run this business. In fact, I saw someone was quipping. Another Fool was quipping with us this morning. I hope Greg had a T shirt at that board meeting that said ham sandwich on it. I see the stock fell as much as 6 or 7% today. I wish it fell more. I hope it falls more in the next week or so, because obviously, I'm talking about it now, so I'm locked out. I would be a happy buyer of shares today without a thing and without a concern, frankly.

Dylan Lewis: Yeah, I was going to say this is the first time we've ever seen the market have to weigh what they think of a Berkshire without Buffett, maybe a 4% or 5% discount on shares today. I don't think anyone could find that unexpected. It's a surprise, no matter when it happens. It's a surprise no matter how well they lay out the succession planning. We've known Greg Abel since 2021 formally, would be taking over this seat. I think you're right. I think they've done such a nice job telegraphing what's coming and also telegraphing. There are core Berkshire principles to the way that we approach things, and that probably isn't going to change very much. I remember looking back on some of the content from the morning meetings and the Q&As, and stuff like that over the weekend. Someone had the foresight not knowing what was coming to ask, hi, Greg, what is something you've learned from Warren Buffett over the years? Incredibly pressing question, it turns out.

He talked about how when they were first meeting talking through MidAmerican Energy Holdings and that acquisition, the first thing that Buffett did was zoom in on the balance sheet. The first thing he did was zoom in on the derivative holdings for the company and start asking all these questions about risk exposure, what was actually there. Abel and Buffett both talked quite a bit at the annual meeting about the importance of being balance sheet oriented, looking at the fundamentals of these businesses. If you're a Berkshire shareholder, none of that stuff is going to change. That is going to continue to be the guide for how this management team is making decisions.

Jim Gillies: Yes. I don't think it was a surprise to anyone who's been a long term Buffett slash Berkshire follower. If you were not aware that Uncle Warren likes his balance sheets. If you ask Greg, what's one thing you learned? I thought you were going to say how to keep a secret because it did that a little bit.

Dylan Lewis: I'm guessing Greg maybe had a little heart palpitation there on stage, learning alongside all the Berkshire shareholders that this was happening.

Jim Gillies: What a vote of confidence, though to have that even though he knows the job is going to be his? Again, look, Uncle Warren is 94. He'll be 95 at the end of the summer. If you don't expect someone approaching that anniversary of their existence to be maybe wanting to slow down a little bit, plan for retiring. It had to have been the subject. Well, as I said, I have heard variants of the, are you sure you want to be here for as long as I've held shares, and my own personal shares, at least my earliest ones, I can legally rent a car in the US.

Dylan Lewis: Yes, they've matured.

Jim Gillies: Exactly.

Dylan Lewis: Way to put it.

Jim Gillies: They should hit the gym more. They're starting to have that middle age precursor happening there. Continue anyway.

Dylan Lewis: As you noted, this is a business now sitting on an incredible amount of cash, 347 billion, I think, as of most recent report and the updates over the weekend. I have to imagine that that was also some of the intentionality with this planning was Buffett unwinding some of the large positions that existed with Bank of America with Apple over the years and really putting Abel and the management team in a position to make decisions that they were excited about that they were interested in that followed Berkshire playbook and probably to be opportunistic as there's possibly some clouds out there on the horizon.

Jim Gillies: Yeah, he downplayed some of the people saying, Oh, you're just trying to set up things for Greg Abel. It's like, no, I'm not so charitable to make life easy for him. If an opportunity was here for me, I'd take it paraphrased. Apple is unquestionably the best a stock investment that Buffett has made. You could argue others have done better percentage wise or over a longer term. But in terms of the sheer amount of money, Buffett himself said, Tim Cook, Apple's CEO. Tim Cook has made more money for Berkshire shareholders than I have.

Dylan Lewis: Point taken.

Jim Gillies: Well, point taken. I will push back a little bit on Buffett and say, yeah, but you were the one that went into it. Again, ignoring what other people were saying, which 2016 ish was that it's the biggest company in the world. How much growth is there left turned out to do OK. I think it's going to be prescient for Berkshire because, of course, Apple itself went through its own, shall we say, high profile succession plan back in 2010-2011, because founder Steve Jobs, of course, famously, unfortunately, and I say this with all respect, drew the short straw in life. Had a health issue that tremendously shortened his life, and that was tragic. But before he went, of course, and Tim Cook had stepped in for a lot of the day to day stuff with Apple before that. But officially, I think a few weeks before, it's now it's back in 2011. It's a few weeks before Steve's ultimate departure. Tim Cook was made the official CEO. On that day, the stock didn't have a great day. I've said for a number of years now on various Foolish forms from a value creation perspective. Tim Cook has been a far better CEO for Apple than Steve Jobs was. Now, Tim Cook doesn't get this opportunity without Steve Jobs and without the vision and the idea.

I always say, Tim Cook is an execution guy. Steve Jobs is an idea guy or was an idea guy. The execution guy doesn't get to work as magic without the idea guy to start, and so you need both. But the sheer value that's been created at Apple in the Tim Cook era greatly outstrips what was created during the Steve Jobs era. But you got to give Job some credit for what he planted the seeds so that Tim Cook could have the harvest. I think that's what's probably going to unfold with Berkshire Buffett, Greg able is that Buffett has put all seeds in play and has put the culture in play, and has been, as we said before, slowly farming out bits and pieces of the business to the key players at Berkshire. He himself has said, literally at this meeting that he thinks the Greg Abel era going forward will probably make more money for Berkshire shareholders than he would.

Dylan Lewis: Yeah, I think he said, I will remain a shareholder, and that is a financial decision.

Jim Gillies: Exactly.

Dylan Lewis: I trust the management team here. I'm glad you brought up the Apple example because Buffett gave a nod to that, too. He hit a quote, "Nobody but Steve could have created Apple. Nobody but Tim could have developed it like he has." I think you could swap out the names there, and he's essentially talking about his own business.

Jim Gillies: He is. Now, will Greg Abel overseeing Ted and Todd? Will they be able to create some of the magic that we've seen in stock picking? I think actually, that'll be a tough sell. But I also think it's a tough sell under Buffett because of the size of the company. Again, Apple has been the last real big home run. There's been a bunch of little things that haven't worked out, and that's fine, or IBM didn't work out, or the airlines didn't work out. Now, I'm of the opinion that Buffett got out of the airlines during COVID. Because when the facts change, I changed my mind. What do you do, sir? The world changed. A worldwide pandemic that shuts down air traffic for a not insignificant period of time makes those airlines worth it changes the calculus about how you calculate the fair value of those airlines. He knew they were going to need government assistance, and he also knew that the optics of having Warren Buffett one of the richest people on Earth through Berkshire Hathaway, it wasn't Warren Buffett owning them, but it was Berkshire.

The fact that Berkshire Hathaway being the largest shareholder of all of these airlines that now all of a sudden need a bailout, the optics of that are going to be pretty bad. He also knew he didn't want to be the guy bailing out the airlines. I'm going to sell my shares. That takes him off the board and takes Berkshire off the board. That way, they can qualify reasonably well for government funding and whatever you think about airlines and their perpetual need to go hand in hand with the government at every crisis. I leave that as an exercise for the listener. I think it will be an interesting play from here. I don't think, and I say this again. I know I've said I'm trying to remain respectful and giving Warren Buffett and Berkshire Hathaway have been very good to me personally. As I've mentioned, it is my largest shareholding. It is my longest held shareholding. But let us be honest. The stock picking over the past decade or so has not been spectacular aside from Apple. I would argue that is not because Warren Buffett has faded in abilities or anything. That is because this is a $1.15 trillion company with a bazillion different irons in the fires, and there's not a lot. They mentioned there was a $10 billion acquisition, as well that they passed on. My response to that, all I could think of when I heard about that over the weekend was, who cares $10 billion? A $10 billion acquisition for a company with 348 or 350 billion in dry powder. It's 3% of your cash.

Dylan Lewis: It's not material.

Jim Gillies: It's irrelevant. I don't want to hear about $10 billion acquisitions prospectively. I want to hear about minimum $100 billion prospective acquisitions. Bigger is better. How many of those companies are out there that will be available at a price that Berkshire and Buffett, and Greg Abel, and Ted and Todd would think compelling? I submit to you there ain't many, which is one reason why I think Buffett is, Oh, you know, I'll go play. He's going to go day trade.

Dylan Lewis: It's a good time for him to step away. The house is relatively tidy. He's been able to put things in pretty good shape.

What is amazing to me, taking a step back on Berkshire is sitting on record levels of cash, and we know what cash is earning right now. It's year to date up more than 10%. The market is in the opposite direction, down about 4% year to date. Investors haven't seemed to mind giving them a little bit of time to put that money to work, and they've been rewarded for their patients so far. I don't think that will change. I think anyone who's expecting anything really large is going to be waiting quite a while. I think we're going to see a capital allocation and deployment strategy that is very much like what we've seen in the past, and that might mean we're looking at three figure billion dollar of cash on the balance sheet for a long period of time.

Jim Gillies: Yeah, I think you can probably assume because they've said this. Expect that cash balance to never again drop below 50 billion. Now, when you have 350 billion.

Dylan Lewis: There's room to go down.

Jim Gillies: Oh, we can just hold that, and it's fine. I'm genuinely curious to see, and I don't think you're going to see it anytime soon. I think Buffett probably needs to ultimately exit the board fully before you'll ever see anything here. But I'm curious to see because it took about a minute and a half after the announcement before various denizens of Twitter started saying, Oh, break up Berkshire Hathaway now. It needs to be broken up, or when are they gonna pay a dividend? Calm down, folks. I think really truly, nothing is going to change. Nothing is going to change as long as Buffett is consuming oxygen. I think nothing changes. When he ultimately leaves the scene, I think nothing's going to change really for a little while longer. I think they will continue in reinvesting in their existing businesses. It wouldn't shock me to see them deploying incremental capital in some of their already existent areas. More energy. They famously talked over the past, I'll say 15-20 years about how they like businesses where they deploy significant capital at good expected returns, but that would be the railroad, and that would be a few of their other businesses where again, have the utilities. I would be shocked outside of a market dislocating event. I would be shocked to see them make any meaningful draw down of that cash hoard. I don't think they're going out and buying Disney tomorrow. I don't think they're going out, or to go out take out Hershey, or try to acquire MARs privately. They might but these are the types of businesses that would be fun to see them make a run at Coca Cola. I will say that would tickle me a little bit.

Dylan Lewis: It would fit the profile, and it would certainly fit Buffett's tastes. Yeah, I think you're right. The market may give them that dislocating moment. We've talked at length on the show about how there is a bit of a precarious situation going on.

Jim Gillies: I don't know what you're talking about.

Dylan Lewis: Buffett has provided some commentary on that, and I can't think of a better position to be in to have $350 billion in cash if you expect there may be a lot of headwinds away and there may be some discounts available to the business. You mentioned railroads. You talked about energy a little bit. Any other sectors you think might fit the profile for a Berkshire acquisition if we start seeing some things on sale.

Jim Gillies: Coca Cola would be funny, but it's also possible. I don't know how far they'd get. No, I think you want to look in a space where they already have an interest. It will not be technology motivated. It's always going to be, well, where we like to invest in places where we think we know. There's the famous story about what was the best selling candy bar in the 80s? Well, it was Snickers.

Dylan Lewis: Snickers.

Jim Gillies: What was it in the 90s? Well it was Snickers. I don't know who's going to have the dominant operating system in 20 years. You probably make a good guess.

Dylan Lewis: But people are going to still be eating Snickers.

Jim Gillies: But you're probably going to be buying Snickers, and the pricing power of a Snickers or the pricing power of a can of Coke is probably going to or a bottle of ketchup he's famously got the Kraft Heinz Association is probably going to be there. I would like to see them. It's going to be a low technology possibility. The obvious things are more insurance, more energy consumer products with a significant brand mode. A Coca Cola, I joke a little bit, even at Disney, but even Disney's there are problems if Disney were to ever be something like that. I think it's going to be interesting to see where it goes. I'm signing up for the ride. I've been signed up for the ride for a while. At the very least, I'd like to not vacate my shares while I'm still drawing a regular paycheck because I don't particularly want to hand the government a large check. As you say, it's a great place to be. It has been a great place to be in the cornerstone of my philosophy.

My investing philosophy has to have the ballast holdings in my portfolio, of which Berkshire is absolutely one. It's the largest one, as I've said. Those ballast holdings that, for me, Brookfield is another one. Some people really like Fairfax Financial. Have your ballast holdings so you can go out and do some more riskier plays. I'm not talking day trading or penny stocks, or stuff like that. But still, things that may or may not work out for you, but you've always got the ballast and just to keep you calm. Then in days when you see those market dislocations, I would really encourage people to go back and look at what Buffett was doing during the global financial crisis, the 2008 crisis. He wasn't panicking. Stock got hit along with everything else. That's fine.

Buffett has said even this weekend. We don't care about that stuff. Berkshire's fallen, I don't know how many times by 50%. Doesn't bother us in the slightest. Focus on the business, all that wonderful stuff. But remember what he did back then. Goldman Sachs came hat in hand. The vampire squid came hat in hand. Buffett said, sure, I'll help you. Here's your 15% anchor. Harley Davidson came hat in hand. Sure, we'll help you. Here's your 15% anchor. Bank of America. I think gave penny warrants or dollar warrants as part of the investment. Don't call it a bailout, as part of the investment that Buffett made in Bank of America, and there's others. That's one thing I think I want people to remember about. Buffett's got this kindly Midwestern old dude cut of persona. When it comes to allocating capital, dude's killer. You want my money, it's gonna be 15%. My end is 15 precious, and that's how we're starting, and we'll take a little bit of equity comp, as well. I hope that Greg Abel and Ted and Todd can be similarly value extractive, shall we call it, during future market dislocations, which as Buffett again, said this weekend, are coming. We don't know when they are. They will come. Probably be a Tuesday. He seems to think that the business is in good hands with Greg running it. Again, if we have trusted Buffett's process on the building of Berkshire, I would suggest to you we should be similarly trusting of his transition planning for the business that he's booking.

Dylan Lewis: Jim, it sounds like even though he won't be calling the shots for your largest holding, his tenets, his investing style, remain the pillars of your portfolio and how you expect the Berkshire will continue to be rough.

Jim Gillies: Sounds about right to me, yes.

Dylan Lewis: Jim, thanks for talking through it to me.

Jim Gillies: Thank you, Dylan.

Dylan Lewis: As always, people on the program may have interests in the stocks they talk about and Motley Fool make formal recommendations for or against. So far it's I think based on what you hear. All personal finance content follow Motley fool editorial standards is not approved by advertisers. Advertisements are sponsored content, provided for informational purposes only. See our full advertising disclosure. Check out our show notes for the Motley Fool Money team. I'm Dylan Lewis. We'll be back tomorrow.

Bank of America is an advertising partner of Motley Fool Money. Dylan Lewis has no position in any of the stocks mentioned. Jim Gillies has positions in Apple, Berkshire Hathaway, and Brookfield Asset Management. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Brookfield Asset Management, Fairfax Financial, Goldman Sachs Group, Hershey, International Business Machines, and Walt Disney. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.

In this podcast, Motley Fool analyst Asit Sharma and host Mary Long discuss:

• What to do with 2 extra minutes.
• Earnings from Starbucks.
• What's cooking at Wingstop.

Then, Motley Fool analyst Yasser el-Shimy joins Mary for a look at Warner Brothers Discovery, in the first of a two-part series about the entertainment conglomerate and its controversial CEO.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

Should you invest $1,000 in Starbucks right now?

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This video was recorded on April 30, 2025

Mary Long: A dollar saved is a dollar earned, so a minute saved is what? You're listening to Motley Fool Money. I'm Mary Long joined today by Mr. Asit Sharma. Asit, good to see you. How are you doing?

Asit Sharma: I'm great, Mary. How are you doing? Good to see you.

Mary Long: I'm doing well. We got reports from Starbucks today, that's the coffee chain that most listeners are probably pretty familiar with. They're in the midst of a turnaround. They dropped earnings yesterday after the bell. I want to kick us off by focusing on Starbucks' measurement of a different currency, not dollars, but time, Asit. A big focus of Starbucks' turnaround is returning the chain to its golden age of being a neighborhood coffee house. But as a part of that, there's also a focus on efficiency. Management seems to think they're making good progress on that efficiency front. The company shaved two minutes off its in store wait times thanks to the help of a swinky ordering algorithm. If you had an extra two minutes in each of your days, what would you be doing with that time?

Asit Sharma: Well, I'm not giving it back to TikTok and YouTube shorts, I'm done with you guys. I'm grabbing the cast iron bookmark, breaking out of that house, and I'm getting two minutes extra to read Orbital by Samantha Harvey, which is my Middle Age men's book club read of the month, and I'm behind, I need it finished by Saturday.

Mary Long: It sounds like you're being very productive with those extra two minutes.

Asit Sharma: Living my best life.

Mary Long: There's a detail here that's very interesting to me because notably, this algorithm that's shaved off these two minutes of order times is not powered by artificial intelligence. Instead, it follows an if then structure. This is fascinating to me because it seems like every other company is going out of their way to highlight its AI capabilities, build themselves as an AI company, even if they don't really play in the tech space. What does it say about Starbucks that they seemingly have an opportunity to do that with the rollout of this algorithm and yet they're not?

Asit Sharma: Well, on the one hand, I think they would love to be able to float some great AI stuff to the market, but truthfully, everyone knows that it's going to take more than AI to solve Starbucks' problems, so let's get real here and go back to some very elementary type of algorithmic thinking to solve some of the throughput issues they have.

Mary Long: Again, Starbucks seems pretty proud of these shorter wait times, but that doesn't necessarily seem to be translating into great sales numbers quite yet. I'm going to call out some metrics from the report, including same store sales, which is closely watched here, and you tell me how you're interpreting these numbers. Do they spell to you, Asit Sharma, promise or peril for the coffee company? We'll kick things off with same store sales. In the US, that's down about 3% for the quarter. What do you say, Asit, promise, peril, something in between?

Asit Sharma: I think that's an easy peril. This is the trend at Starbucks. They're losing a little bit of traffic. They're trying to turn it around to get people to come back into the stores or come back to the drive throughs. They have a strategy for this, back to the good old days. We can chat about this. But this is emblematic of Starbucks larger problem, so this is a peril call, easy.

Mary Long: Two hundred and thirteen net new store openings in the second quarter, bringing the total store count to nearly 40,800 around the world. Promise, peril, something in between?

Asit Sharma: Promise. I like that. Brian Niccol, turnaround artist. Let's slow this puppy down. Why should we be expanding when we don't have the unit economics right? Why should we be expanding when CapEx, capital expenditure is one of the things dragging this company down? Most people don't realize Starbucks has a pretty big debt load because it has invested so much in its stores over the years. Why don't we try to figure out how we can solve some of our problems with operating expenses versus capital expenditure? Let's also try to renovate stores at a lower cost. All of this points to taking it very easy on that new store development, so I like that, it's promise.

Mary Long: Just to be clear, you're saying that that 213 net new store openings number sits right at the sweet spot of, Hey, you're still growing, but it's at a small enough clip that it's not distracting from the real focus, which is improving throughput at existing stores?

Asit Sharma: Yeah. It's also a signal that the new management isn't taking the easy way out. Conceivably, one way you could solve Starbucks' problems would be to take on a little bit more debt and to speed up new stores and to say, We're going to actually increase revenue, but traffic will take a bit of time to come back to the stores. We know people of our brand, so we're going to throw a bunch more stores out in places where we don't have this dense concentration and cannibalization. We're going to map this great real estate strategy out. They could have easily said that, but I don't think the market would have liked it too much, so they're doing the sensible thing, which is like, we're not really worried about adding new stores right now, that's not the problem that we have to solve today.

Mary Long: Our next quick hit metric, GAAP operating margin down about 7% compared to a year ago. How do you feel about that one?

Asit Sharma: It's a little bit of peril situation going on there, Mary. Starbucks is doing something which I think should help the business, which is to say, we've got a couple of pain points for customers. One is the time that it takes for customers to get through their order, average wait times of four minutes. You pointed out going this algorithmic route, so very old school. If a drink is very complex to make, don't make that the first thing you do, or in some cases, maybe you should if it has x number of ingredients, so that way it's ready and the stuff isn't melting on top when the customer gets it. Don't just do first come first serve. I think that is a really insightful way to start from scratch if you're a new CEO. Starbucks has these problems which they're thinking can be solved by labor. Then bring more people in so that we can satisfy customers, we can keep that throughput moving, but that increases your operating expenses, and they've got leftover depreciation from all of the investments they've made in technology.

Under the previous CEO, they were trying to solve their problems by having more components like the clover vertica which make things automatic, and they had a cool brew system, which was very expensive, so now we're seeing that work through the profit and loss statement. What we're seeing in the GAAP numbers is that net income is going to be pressured. Number 1, they still have a lot of depreciation that they have to account for, and Number 2, to keep customers happy, which should be the first order of business, they're going to have to hire more baristas, keep those shifts occupied. That is not a clear out type situation, it will take time to resolve. That's a peril.

Mary Long: Last but not least, we got GAAP earnings per share. That's down about 50% compared to a year ago. I think I know where you might land on this one. What do you say?

Asit Sharma: It's a peril. Something that was a little iffy in the earnings call is both Brian Niccol and his new CFO, who's actually a veteran of the retail business, Cathy Smith. They were like, don't worry about earnings per share too much. We really think you should focus on us taking care of the customer, us becoming that third place again, us becoming the brand that attracts people, us being the place where you can have these day parts like the afternoon where we're going to revive your desire to come into the store and maybe have a non alcoholic aperitif, mind you, I'm not sure that's what investors want to hear. Investors will give a long line to Brian Niccol because he has been successful in the past, and so has his new CFO. But I didn't like that, don't pay attention to this because we're investors, we want money. We give you money, you make money, you give us back money in terms of dividends and share price, so a little bit of peril there.

Mary Long: Another data point that I do think is relevant to the Starbucks story and just like the consumer story more broadly is GDP data, which we got out this morning. That showed a contraction of 0.3% down from 2.4% growth a quarter ago. This is the first decline since the start of 2022. Starbucks can improve wait times all they want, they can implement this back to Starbucks strategy, but if we are headed toward a recession and the company is already still struggling, how does that macro picture affect this chain that sells seven dollars drip coffees and $10 lattes to people?

Asit Sharma: Mary, the first thing I'm going to ask you is, I actually throw circumstance Kanata Starbucks once every two weeks, and I buy drip coffee and sometimes hot chocolate, and we'll buy a pastry here and there. Where are you getting these seven dollar drip coffees from? Is that some venti with adding some special milk? I don't get that. It is expensive, stop, but seven sounds excessive.

Mary Long: Okay, Asit. I was at a Marriott Hotel earlier this month for a latte.

Asit Sharma: Here we have the first qualification. Like, well, I was at the airport Starbucks. It's not the airport Starbucks, but everyone listen to Mary. It was at Marriott Hotel. Go ahead.

Mary Long: There are some asterisks attached to this example, but it fired me up, so I'm going to use this platform to share it. I'm at Marriott in Collierville Tennessee for a wedding earlier this month. There is no free coffee in the lobby at this hotel, which was my first red flag. I go down searching for coffee, and all that there is is a Starbucks Bistro, so I say, Okay, I'll go to the Starbucks Bistro, buy my coffee. It was a large, but it was a drip coffee. No fills, so easy, they turn around, pour the cup, and it cost me $7.50. I was so enraged, I was ready to throw that coffee across the lobby. I did not. I held it in, but I'm using this moment to share that. That is a real number. Though, again, perhaps that's not the price at every Starbucks.

Asit Sharma: Well, I want to extrapolate from that. Which is to say, if it's seven bucks at that Marriott, that tells us something about what's happened to the price over the last few years because in all honesty, that entry level drip coffee, a tall order with nothing on it has increased. I'm going to guess it's 30-40% more than it was just two years ago. Now, some may say that this is taking a little bit advantage of commodity inflation and inflation in general, that Starbucks took an opportunity to bump up those prices, even though it has tremendous purchasing power, and it should be one of the first places to say, Hey, we're going to hold your price steady because we're Starbucks, because we buy from I don't know how many coffee providers across the globe. It's interesting Brian Niccol is saying, We're not going to raise prices anymore this year. I think he's sensing the winds and maybe realizes that Starbucks took a little bit of advantage of its most loyal customers by bumping up these prices.

This is yet another thing that makes this very hard. But all in all, I do want to give the new team credit for leaning toward, again, OpEx people versus machines because under the previous management, Starbucks was really thinking that it could solve so many things by having automation. They could improve the rate at which people are going through the drive through lines and the wait times that you have even if you ordered in advance on your mobile order app, and it became something where they lost connection with the customer, and management, of course, is well aware of that. But it reminds me of something that Ray Kroc said years ago, the man who bought McDonald's when it was all of two restaurants, I think, and turned it into what it is today, he said, Hell, if I listened to the computers and did what they proposed with McDonald's, I'd have a store with a row of vending machines in it. Under the previous leadership, I almost felt like that's where they thought they could go, it's just a really automated format without this customer connection. Bringing that back, even though it sounds a little iffy, Mary, whoever is going to go back to Starbucks as a real third place when so many great community coffee shops have sprung up and our consumption preferences have changed? I still applaud management for getting that, that you've got to do right by your customers, price wise, ambience wise, connection wise, brand wise. Maybe there's something in there. Of course, this is a harder problem to solve than Brian Niccol had at Chipotle.

Mary Long: I want to close this out by getting another look at the fast casual business from a different company, one that really is leaning more into this digital landscape, and that's Wingstop. Not even a year ago, this chicken wing joint was flying very high, indeed. Shares have dropped significantly since then, down about 45% from their high in September 2024. We're going to get to their earnings that dropped this morning, which were more positive in just a moment, but before we get them, let's look at the past several months. Why that drop? What headwinds was this company up against?

Asit Sharma: Wingstop created its own headwinds in a way, Mary, because it had been so successful improving same store sales. The company has a really light real estate footprint, stores are incredibly small compared to some of their wing competitors, and they're meant for just going in, maybe sitting down, but mostly picking up and taking away. They really started to get a deeper concentration, some good metropolitan markets, not huge ones, but decent markets. They saw such an increase in traffic that their comparable stores went through the roof on what's called a two year stack. You compare what you sold today versus not just one year, but two years ago. When you lap great results, it becomes really hard. You can't keep increasing those results exponentially. This year, it turns out what they're doing is holding the gains over the past two years, but it's not like they're having another year where you're seeing same store sales increase by 25%. The projections were, this year we're going to grow those same store sales by mid digits to single high digits, and with this latest report, they're saying, Well, they could be flat this year. The market like the report for different reasons. But that's what happened to the stock because investors were like, Wait a minute. You're spending more on marketing. Yeah, because we're getting to the NBA. We're the official wing of the NBA. But I want those profits. Well, you're not going to get them because we're scaling, and people are just lining up to develop new franchises, and we're going to build this business out globally.

Investors were a little bit confused last quarter. We're not getting profits that we want or as much profit as we want. We're not getting the growth that we want to see. But in the grand scheme of things, those were very understandable pauses in the business model and the economic model, and I think over time, it's destined to pick up. But you had some questions about the earnings today.

Mary Long: Help us make sense of this most recent quarter because, OK, we saw a teeny tiny improvement in same-store sales. That number only ticked up by 0.5%. But there are some other numbers that seemed pretty impressive. You've got systemwide sales increasing almost 16%, hitting $1.3 billion, total revenue up almost 17.5%, net income increasing, wait for it, 221%. That's all in spite of what's obviously a very tricky, very uncertain macro environment. We've already seen that impact trickle down to other fast-casual chains. Domino's, for instance, reported a decline in same-store sales earlier this week, which is pretty rare for them. What's working and what's not in the Wingstop model, as we've just seen it reported today?

Asit Sharma: Wingstop has been a company that's invested a lot in its technology. They've moved digital orders to some, I think, 70% now of their sales. That helps them with a leaner cost structure. Also, Mary, the company has its tremendous cash on cash returns. If you're an investor, let's say, a franchisee in a Wingstop business, you can make 70% cash on cash returns, 50% if you use financing, and that's just a stellar type of return in the QSR, quick service restaurant industry. What they have is tremendous demand in their development pipeline. Their franchise groups are like, we love this, we want more, and that's propelling a really fast store growth count. With Starbucks, they're slowing down. Wingstop is trying to build out new units as fast as possible, and that's where the growth is coming from. What investors are seeing is, I can live with this equation. You have a lean operation. You don't really own your own supply chain. You work with partners, so you've got less exposure to that. You seem to be able to manage all-important bone-in chicken price really well and not pass those increases on to customers for the most part, so I want in and I want to develop more stores.

I will note that the company, one of the things that investors did like earlier this year, is the company keeps increasing its total advertising spend based on systemwide sales. It used to be 3%. Then it was 4% of systemwide sales was advertising budget for local markets. Now it's something like 5.5%. But look, with these big brand partnerships, like I mentioned with the NBA, and a lot more advertising in local markets, that's only increasing the flywheel of returns for the franchisees. This is a company that just looks destined to grow, almost like Dunkin' Donuts did in the early days. That's. A powerful equation for investors who can withstand the volatility of angst over same-store sales in any given quarter. Think of this as like, I'm going to buy this business for 10 years, and I'm going to watch it expand into Europe, into the Middle East, here in the States, and I'm going to watch you take market share from some of the bigger competitors who have larger store footprints. Of course, there's a lot that can go wrong in that. They have to keep executing and they have to make sure that they do manage those all-important bone-in chicken cost over time. But I like their chances in this environment.

Mary Long: Asit Sharma, always a pleasure to have you on the show. Thanks so much for giving us some insight into coffee and bone-in chicken wings today.

Asit Sharma: Thanks a lot, Mary. I had a lot of fun.

Mary Long: Two of the biggest movies of the year, a Minecraft movie and Sinners, both came out of Warner Brothers Studios. But there's a lot more to this company than its movie-baking business. Despite the success of those two films, the stock WBD has been far from a winner for its shareholders. Up next, I talk to Fool analyst Yasser El-Shimy about Warner Brothers Discovery. This is the first in a two-part series. Today, we talk about the business. Tomorrow, we shine the spotlight on David Zaslav; the character charged with leading this conglomerate into the future.

Warner Brothers Discovery came to be as a result of a 2022 merger between Warner Media, which is the film and television studio that was spun off from AT&T, and Discovery, another television studio. Together, today, this is a massive entertainment conglomerate, and it owns the likes of HBO, Max, CNN, Discovery Plus, the Discovery Channel; a mix of streaming services and traditional cable networks. One of the reasons, Yasser, why I find this company so interesting is because you can't really talk too much about it without hearing all these different names, all these different services, a fascinating history of mergers and acquisitions and spin-offs, etc. I want to focus today mostly on the person who has been tasked with leading this massive conglomerate into the shaky future of media. But before we get to David Zaslav, let's talk first about the company. Again, WBD is a big conglomerate. What are the most important things about this business as it exists today that investors need to know?

Yasser El-Shimy: Well, thanks, Mary. To tell the story of WBD is to almost tell the story of entertainment itself in the United States. We're talking about structural challenges that are afflicting almost all television and film studios across the board, as well as TVs on TV networks. On the one hand, you have a structural decline of linear TV viewership. That is your basic cable, basically people, paying a monthly fee for whatever provider there might be to get a whole host of channels that they flip through at home. We've heard of the phenomena of cord-cutting. It has almost become a cliche at this point. It has been going on for years, at least over a decade at this point, but recently, it seems to have accelerated even further as people migrate more and more toward streaming options, subscribing to such channels as Netflix and Disney+ and Max and others. This has created quite a dilemma for a lot of studios like Warner Brothers Discovery, where much of the profits and the free cash flow has traditionally come from those very lucrative linear TV deals that they have had with the likes of Charter Communications and others. They have had to effectively wage a war on two fronts. They are being disrupted by the likes of Netflix, they're losing subscribers on the linear TV site, but at the same time, they can't go all in on streaming, at least not just yet, because so much of their profit and so much of their sales actually come from that linear TV side that is declining.

What do you do? You try and just be everything to all people, and that has become a challenge. Warner Brothers is no different here. We're talking about a company that started off in 2022, as a result of that merger. You talked about between Discovery and Warner Brothers. Since then, they have focused on two main objectives. The first one is to pay down as much of the debt on the balance sheet as possible, and we can get to that later, and the second goal has been to try and effectively promote and develop their streaming business. Initially, it was HBO Plus, now it's called Max, and try and actively compete with the likes of Netflix and Disney. They've actually done rather OK on that front, as well.

Mary Long: Let's talk about the debt before we move on because this is a big gripe with the business as it exists today. Warner Brothers Discovery carries $34.6 billion in net debt. That's as of the end of fiscal 2024. You get to that number because there's $40 billion gross debt minus $5.5 billion of cash on hand. How did they end up with so much debt? $34.6 billion is a lot of debt. How did they end up with so much of that in the first place?

Yasser El-Shimy: That is a lot of debt. Let's just say that David Zaslav who was the head of Discovery, he was very enthusiastic about putting his hands on those assets from Warner Brothers. As a result, he actually saw that merger with the Warner Brothers assets from AT&T. AT&T took a huge loss on the price it had originally paid to acquire Time Warner, a 40% loss. However, what they did do is that they effectively put all the debt that they had from that business, as well as some of their own debt, into this new entity that was to merge with Discovery. Warner Brothers Discovery just was born with a massive debt load of $55 billion or so. That was nearly five times net debt to EBITDA, or earnings before interest, taxes, depreciation, and amortization, which was very high leverage for this new company. From the very beginning, Warner Brothers Discovery had to deal with paying down that huge debt load. Luckily, a lot of that debt was in long-term debt effectively that most of it will mature around 2035. Can be easily rolled over. It has an average interest rate of about 4.7%. It's not the worst in the world. Considering how much cash flow per year that Warner Brothers Discovery is able to produce around, again, the $5 billion range or more, you can see that the company has been able to effectively navigate this and pay down that debt. David Zaslav has paid down over around $12 billion since that merger took place. That leaves them with the $40 billion you're talking about. Still more to go, but at least you can see that they are able to accomplish that feat.

Mary Long: Let's also hit on the streaming service because that's an essential part WBD and where it wants to go in the future. Max, which is the streaming service that's basically HBO plus others allegedly has a clear path to hitting, this is per their most recent earnings, at least 150 million global subscribers by the end of 2026. At 150 million global subscribers, that would make it about half of Netflix's current size. What metrics and what numbers does Max have to post in order to be considered a success?

Yasser El-Shimy: I would say that Max has to, again, focus on growing that subscriber base, and they have done an excellent job at that. They've almost doubled subscribers year over year, reaching around 117 million subscribers currently. They accomplished that through a strategy that had two wings to it. The first is that they effectively bundled a lot of content into the Max service. The previous HBO Plus service, it merely had some TV and film IP that the studios produced from the namesake HBO, but also from the Warner Brothers Studios. But then they decided to expand that to include also shows and other content from the reality TV side of the Discovery side of the business. Think of your home network, HGTV, or Food Network, and so on. They accommodate a lot of that content in there. They also introduced live sports and live news into the Max. That made it a lot more appealing to be a place where you can have almost all of your viewing needs met. That has been a successful strategy for them. They have also struck a partnership with Disney to bundle Disney+, Hulu, and Max together for a reduced price, but that has definitely also helped with the increase in their subscription numbers. But I would also be remiss to say that they have successfully and actively sought to expand their presence in international markets.

They are still at less than half the markets where Netflix is, so the opportunity is still pretty vast on there. However, as you started your question with asking about the metrics that we need to be watching out for, obviously, we need to be watching out, as I said, for subscriber numbers, as well as the EBITDA operating margins that will come from the streaming side. They are targeting around 20%, which would actually very good if that turns out to be the case, long term. But also we need to look at things like average revenue per user or ARPU. How much are these subscribers contributing, both to the top and bottom line for Max? I think on this metric, there might be a little less confidence because especially when you expand internationally, you're going to get a lot of subscribers who are not paying as much as a US subscriber might, so you might be looking at a decline there. On the bright side, they've introduced advertising as part of the package, but the basic package that you get. That strategy we have seen it successfully play out with Netflix, and I think that they may be able to increase or ad revenue on Max, and that can be a big contributor for their profits as well.

Mary Long: 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. For the Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.

Asit Sharma has positions in Marriott International, McDonald's, Walt Disney, and Wingstop. Mary Long has no position in any of the stocks mentioned. Yasser El-Shimy has positions in Warner Bros. Discovery and Wingstop. The Motley Fool has positions in and recommends Netflix, Starbucks, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Marriott International and Wingstop. The Motley Fool has a disclosure policy.

In this podcast, Motley Fool analyst Jason Moser and host Ricky Mulvey discuss:

• How trade disputes are impacting the Port of Los Angeles.
• What PayPal's advertising business means for its growth story.
• Earnings from Spotify.

Then, Motley Fool personal finance expert Robert Brokamp joins Ricky to discuss how to diversify your savings.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

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Ricky Mulvey: The ships are slowing down. You're listening to Motley Fool Money. 'm Ricky Mulvey joined today by Jason Moser, the man who can do it all by himself. Jason, thanks for being here, man.

Jason Moser: Thank you for having me, Ricky. How's everything going?

Ricky Mulvey: It's going pretty well. I'm going to Casa Bonita tonight, which I feel like is a real introduction to Denver, and I will tell you about what that is maybe after the show, because we got a lot of news to break down.

Jason Moser: Yes, we do.

Ricky Mulvey: Let's get to this story. We have a lot of earnings going on, but I think this macro story is worthy of investors attention. Gene Seroka is the executive director of the Port of Los Angeles, and anytime you start getting port directors going on cable news, it's usually not a great sign for the economy, JMo. He went on CNBC's Squawk Box, and he said that he expects cargo volume to be down by more than a third next week, compared to last year, and that a number of major American retailers are stopping all shipments from China based on the tariffs. To lay out the law, who's getting hurt by this?

Jason Moser: Maybe the better question is, who isn't getting hurt by this? Because it does seem like something that is going to hurt an awful lot of folks covering the spectrum there. I think, generally speaking, small businesses stand out as ones getting a bit more hurt by this, at least in the near term. They tend to not have the same financial resources and are a little bit more dependent on imports and whatnot. I think large companies like Walmart, your Costcos of the world, they're able to shoulder the burden more just because of their scale. Now, with that said, I will say Walmart is particularly levered to China, for example. It's estimated that 60-70% of Walmart's globally sourced products actually come from China. Even more noteworthy, I think there is market research that suggests that figure could be closer to 70-80% for merchandise sold in the US so they're not immune, but they have the ability to shoulder that burden. They can handle it and bye their time as all of this tariff stuff plays out. I think ultimately that really points to the biggest question mark in regard to all of this is just when is this going to ultimately be resolved? And that is still just very unclear, but there's just no question, small businesses are going to feel the brunt of this very quickly.

Ricky Mulvey: Well, I think there will at least be an inflection point when these decreased shiploads lead to empty shelves in physical stores and on online stores like Amazon. I've noticed that these looming tariffs have absolutely impacted my shopping habits. Are you doing any pre tariff shopping in the Moser household right now?

Jason Moser: I have not yet, but it is still early. Now, when I start seeing Chewy telling me that our dog and cat food is out of stock and that shipment's not coming, then I know I've got serious problems because I have three dogs and a cat that won't stand for that, and I can't explain it to him either. But as of now, listen, I've got a garage full of toilet paper and paper towels so I think we at least have the necessities for now.

Ricky Mulvey: You've got a big yard, and you just might need to learn how to hunt in order to provide for your dogs. I've noticed it over here, I just bought a set of AirPods because I'm like, Oh, these are made in China and better get them while I can, first of all, get them and while they're on sale. I've been stocking up on clothes just because I don't know what's going to happen to the shelves. I don't know if my size is going to be impacted, but yeah, it's absolutely impacted my shopping habits, Apollo's chief economist Torsten Slok released a presentation earlier this month, and he laid out a timeline for tariffs, and there's a slide with the spicy title for a PowerPoint slide, the voluntary trade reset recession. Points out early mid May, that's when you start seeing those containerships come to a stop. Then in mid to late May, that's when trucking demand also comes to a halt a fewer trucks are taking things off containerships. Then right in that late May, early June window, that's when you're going to see empty shelves and companies responding to lower sales. What do you think about that timeline?

Jason Moser: I think it's certainly a potential outcome in theory. Now, if that happens, I think there will be massive political consequences. We have to look at this and say well, This is self inflicted. We started this, and it's a matter of trying to figure out, ultimately what the goal is here, and I think that is still unclear, and we're operating just on this day to day headline economy, so to speak. My hope is that this is a worst case scenario and that cooler heads prevail sooner rather than later. But listen, we're just getting ready to start May here, very soon so that's not far off and if that happens, clearly, the consumer will have their say.

Ricky Mulvey: Let's take a look at PayPal reported this morning, and JMo is an investor in this company. I'm pretty happy to own a company that's not making big moves on earnings right now. I'll take some stability that seems to be what PayPal is offering, revenue up 2% on a currency neutral basis. Transaction margin dollars, which is just direct transaction revenue minus transaction expenses. Think things like payment processing, and PayPal likes that is a core measure of its profitability. That was up 7% to about $3.7 billion. Free cash flow, and adjusted free cash flow, both down from last year by about 45% in a quarter respectively. There's some cash flow questions, some operating profitability targets happening. What are your big takeaways from the quarter?

Jason Moser: Yeah, I think it was an OK quarter. It was right in that meaty part of the curve, as George Costanza might say. Not showing off, not falling behind. It was their fifth consecutive quarter of profitable growth, which I think is really encouraging for Alex Chriss. As you mentioned, revenue growth was really non existent, but I wouldn't really look into that as much. I think what we're seeing with PayPal, they're doing a very good job of bringing things down to the bottom line. We saw GAAP earnings per share, up 56%, non GAP earnings per share, up 23%, and really just flew past the guidance that they offered from a quarter ago. I think when you look at the metrics that really matter for the business, things like total payment volume that was up 3%. $417 billion going through those networks there. This is up 4% currency neutral, payment transactions and payment transactions per active account saw a little bit of a decrease, but that's in regard to the payment service provider part of PayPal so, ultimately, those numbers actually excluding that payment service provider part of the business were up as well, and active accounts grew 2% to 436 million.

Remember, they went through just a period not too long ago of trying to call a lot of those inactive accounts that really aren't using the service, so to speak. But returned 1.5 billion dollar to shareholders with share repurchases, which I think was very encouraging. In regard to cash flow, I think the one thing with cash flow with PayPal, it's going to ebb and flow a little bit, particularly because of the buy now pay later side of the business, that fell a little bit, just because of some timing stuff between originating some European buy now pay later receivables and then the ultimate sale of those receivables so I wouldn't read too much into that. This is still a business that generates a ton of cash.

The one thing that stood out to me, though in the quarter that I just can't help but wonder what the future holds for this, because PayPal is building out this little ads part of the business right now, PayPal ads, and they're making some progress. I don't know is this a sneaky ad play? It could be, they're starting to introduce programmatic advertising, and they're starting to launch offsite ads, which ultimately those are ads that are generated from all of this data that PayPal and Venmo and those properties get. that's the beauty of this company. They generate a ton of data because of the consumers that use these services so it reminds me a little bit of Amazon back in the day. If you remember with Amazon, several years back, we knew they were getting into advertising, but didn't really know if it was going to be anything material so it was starting from nothing. But you fast forward to today, Amazon is generating they're on a $70 billion run rate for their advertising business alone. Now, I'm not saying that PayPal could get to that scale. But I do think PayPal could get to meaningful scale relative to its business, and that is very high margin revenue. I think that's going to be something fun to follow with this company as time goes on, particularly as they're launching this offsite advertising business.

Ricky Mulvey: I think one of my big questions then for PayPal's future is the buy now pay later initiative. You see here, Alex Chriss, touting the growth in that in that people are when they use buy now pay later, they're making more transactions. But if we're skidding into a self induced recession, there may be consequences for that, and on a personal level, I'm not super thrilled about buy now pay later. I understand it's part of the business. But speaking strictly as an investor is a growth lever. If you're looking at the growth in that and you're also seeing credit card delinquencies going up, maybe that's not a great thing for that part of PayPal's business.

Jason Moser: I think that's a very valid point. Buy now pay later is just credit card ultimately in another form and you have to count on the fact that some of those loans, so to speak, are not going to pan out, and they're going to write off delinquencies and non payments there. We are seeing consumers relying more and more on buy now pay later for. Buy now pay later, it's a clever product for things that maybe aren't necessities, but when you start seeing data that shows consumers are using buy now pay later for things like their groceries, that's where you start wondering what is the real condition or what is the real state of the consumer? And when you see consumers resorting to BNPL for necessities like groceries, that starts to raise at least some yellow flags in the near term.

Ricky Mulvey: What do you think about CEO Alex Chriss reaffirming the full year guidance? We talked about the macro pressures that will have an impact on this company. A lot of PayPal transactions are consumer spending. If you're in the office of the CEO, what are you telling him? Are you telling him to pool lower guidance? What's going on with that?

Jason Moser: I wouldn't tell him to pull guidance necessarily. I think that what we've seen with Chriss over the couple of years that he's been with the company at this point, he seems to at least like to underpromise and overdeliver I like that. Now, some people will call that sandbagging. I don't care, whatever you want to call it, it's fine on me. But he sets the bar fairly reasonably so he's not setting these super high aspirations, and we know how that works. You set the bar high, eventually, you miss it, and the market really punishes you. But if you set the bar just not low, but just right there in that mid range, that goldilocks range you can hit those targets, you can continue to grow at modest rates, and you're not disappointing the market in the near term. You're not really thrilling everybody in the near term either, but at least you're able to hit those targets and keep on moving the business in the direction that you intend. I don't mind them maintaining that guidance because it does seem like they are offering relatively modest expectations. But as we know, and we're seeing as the headlines change day to day, things can materialize very quickly so it'll be something to keep an eye on for sure.

Ricky Mulvey: Let's go to Spotify real quick. Monthly active users growing 10% for the company. Premium subs grew 12%, but the analysts did not like the user growth projections. That's why the stock is getting punished a little bit. CEO Daniel Ek quickly on the conference call saying we could be impacted by tariffs, but people still want to be entertained. They want to learn stuff they want to listen to music. Before we get into the meat of this conversation, JMo, we have a content partnership with Spotify. The Motley Fool actively recommends the stock, I own the stock. How's that for bias? I also want their algorithm to promote this podcast, as well. I'm speaking from a pretty biased perspective but still, in my view, a pretty strong company when you're looking into the actual business results, anything there stand out to you from Spotify's quarter.

Jason Moser: The stock has been on a heck of a run here recently so a little pullback is understandable. There was a bit of a miss on operating income there, and that was due to what they were calling social charge, what they call social charges, which are ultimately payroll taxes associated with employees salaries and benefits in other countries. But to me, this is still just such a strong business. You see the growth in the users, whether it's premium or ad supported. It's amazing to see what this business has become, and it's evolving so far beyond being like a music streaming app. I think that when you consider that you consider the fact that Spotify has such strong market share in the entertainment industry at large, to me I understand there are some macro concerns there in the near term, but I think when you look at it, at the end of the day, Spotify and things like Netflix, those are the subscriptions that consumers will probably cut last. The value-focused consumer is looking for value and understanding what are they getting for their dollar. That monthly charge for Spotify or for something like Netflix, given how much we all use those, they, I think, give this company a resiliency that probably more don't have.

Ricky Mulvey: We'll leave it there. Jason Moser, thanks for being here. Appreciate your time and your insight.

Jason Moser: Thank you.

Ricky Mulvey: Hey, it's Ricky, and I want to shout out another podcast called Radical Candor. Based on the New York Times best selling book, Radical Candor talks about how to be a great boss without losing your humanity. Kim Scott, Amy Sandler and Jason Rozov deliver actionable insights each week to help you improve your career and relationships. They have other business experts, including Guy Kawasaki and Steven Covery to stop in and share how they use Radical Candor concepts and their work. Their guidance will help you move beyond ineffective flattery and brutal criticism toward guidance that drives real growth and development. Listen every Wednesday for new episodes wherever you get your podcasts and see how you can apply Radical Candor in your life.

Are you feeling a little concentrated? Up next, Robert Brokamp joins me to discuss some ways to diversify your portfolio. This year has been a reminder that stocks can be volatile. In 2023 and 2024, investors were treated to 20% plus returns in the S&P 500. This year, both the NASDAQ and the Russell 2000 were in bear market territory, and the S&P 500 got pretty close. That's if we define a bear market is a drop of 20% or more from all time highs. A drop that in and of itself is the cost of doing business in the stock market, even if the reason this time is, well, you can decide for yourself. Still, it's a good time to ask some questions. If you're near retirement, are you too concentrated in tech stocks? This is a question that even indexers should ask since about one-third of the S&P 500's market value lies in just seven companies. Should I follow the lead of institutional investors spreading their bets outside of the United States, or even Berkshire Hathaway, which now has the most cash on the books of any company Bro ever? All of this is to say, how can I diversify my portfolio to take some of the bite out of bear markets?

Robert Brokamp: Well, there are plenty of investments that may add some balls to your portfolio, and we're going to talk about the most popular candidates. But I first want to talk a little bit about diversification in general. We're going to talk about what diversifies a portfolio for what I see as the typical Motley Fool investor who owns stocks primarily in the S&P 500, which, as you mentioned, Ricky, has a tilt toward growth leaning tech-oriented, tech adjacent companies, and a lot of our listeners also own those companies outright. That's the starting point here. I do want to emphasize that diversification is somewhat of a double-edged sword. You often have to own a diversifying asset through many stretches of, frankly, pretty mediocre ho-hum performance in order to eventually get the payoff. Then as I talk about these various things, I do think it's important that when you're looking for a diversifier, it's helpful to know how they perform basically during past market downturns, and over the last 25 years, there's been a good range of examples to see how investments perform during different types of bear markets. We had longer ones such as the dotcom crash and the Great Recession of 2007-2009. Market dropped more than 50% then. I took more than five years for the market to recover. But then we've also had shorter ones like the pandemic panick and 2022. With all that said, here are some diversifiers to consider, and I'm going to give each a letter grade.

Ricky Mulvey: What's the grade then for the dividend payers?

Robert Brokamp: I'm going to give dividend payers A, B, and here I'm talking about a diversified mix of companies that have paid a consistent and growing dividend for many years, and many have an above average yield. With the current yield on the S&P 500 being 1.3%, it doesn't take much to have an above average yield. It's not necessarily the dividends themselves that make these good diversifiers, though, getting a reliable stream of income is nice, especially since historically that stream will outpace inflation, it's that these types of companies tend to be more value-oriented, a little less volatile than the overall market, and score high on other factors such as quality, which is dined by different people in different ways. But basically comes down to a company that is profitable. The earnings growth is less volatile and they have a strong balance sheet, meaning not a lot of debt. I recently looked at the returns of the 10 biggest dividend focus ETFs, and they're all down this year, but not as much as the overall market. In 2022, when the S&P 500 was down almost 20%, NASDAQ was down more than 30%. The losses in these ETFs were in the single digits, and a couple actually made money. That's it. The diversification among dividend payers is important. During the Great Recession, some of the best dividend payers were financial stocks, and they got walloped. You definitely want a diversified portfolio of dividend payers.

Ricky Mulvey: Our colleagues, Matt Argersinger and Anthony Shavon, who run our dividend investing in service would also tell you that dividends are great for companies to pay because they make them a little bit more disciplined on capital allocation decisions when they're not maybe pursuing growth at all costs, and they have to return a little something to their shareholders. Another idea, international stocks, getting outside the United States. Bro, how are you feeling about these? What's the grade right now?

Robert Brokamp: I'm going to give them a C plus, which doesn't sound great, though, I think most people should have a little bit of international exposure. I'm giving them a C plus because, frankly, over the past 15 years, it's been tough to argue for international stocks. US stocks have outperformed them by some measure, it's a historical amount. But looking longer-term, there are many long-term periods, several years, even a decade or more, when international stocks outperform US stocks. You could saw it in parts of the '70s, the '80s, and the early 2000s, and looking very short-term, the total non-US stock market is actually up 8% so far this year, while US stocks are down, developed market stocks are doing even better, returning almost 11%. I do think there's something special about the American economy, and it explains why US stocks have outperformed the vast majority of other national stock markets over the last century or so, which is why I'm giving international stocks a C plus when it comes to diversification. But there's no question that there are long stretches when international stocks will do well, and they're certainly a lot cheaper these days than US stocks when you look at P/E or dividend yield or anything like that, which is why I personally have between 15 and 20% of my portfolio overseas.

Ricky Mulvey: The next one is a big one. We could be talking multifamily REITs, rental properties, office buildings. We could be talking about the Vanguard entire real estate index fund, but I'll make it easy for you, Bro. How are you feeling about real estate?

Robert Brokamp: As you hinted at, there are all real estate, so I'm going to give it a range of grades from C plus to B plus, depending on the type of real estate. A few weeks ago, we did an episode on what happens to different types of assets during a recession. We cited research which actually found that home prices actually hold up well. In fact, they tend to do better during bear markets and stocks than during bull markets with the very notable exception, of course, a 2007-2009 recession when both the economy, the stock market, and home prices collapsed. But usually, over the long-term, residential real estate, whether it's your own home or perhaps investing in rentals, can provide some excellent diversification. Now, you hinted at REITs, real estate investment trust. These are stocks and companies that own and operate real estate. It can be all real estate: apartment buildings, medical facilities, office facilities, storage, and they can be a good portfolio diversifier as well, though, like international stocks, man, they have lagged the S&P 500 for a good while now. Their diversification benefits can be mixed. They did very well during the dotcom crash and the ensuing recession, but also they were part of the real estate bubble, and boy, they got pummeled in 2008. As a starting point, I think it makes sense to have maybe a 5% allocation to REITs, and you can use that Vanguard ETF that you suggested. That's what I choose, especially if you're close to in retirement since they have above average yields, but they're still moderately to highly correlated to the overall stock market, so the diversification benefits are going to be mixed.

Ricky Mulvey: This next one has been on a run. Two investments over the past 12 months. One of these has returned about 7%. The one that I'm talking about now has returned 42%. Bro, this is the comparison between what the S&P 500 has done over the past year and gold.

Robert Brokamp: It's been quite remarkable. I'm going to give gold a diversifying grade of C plus, though I could easily be moved to a B minus on this. Gold has been in the news a lot lately because, as you pointed out, the return has been exceptional. It's up 26% so far this year, based on the performance of the SPDR Gold Shares ETF, and as you may have seen on social media, it's actually returned about the same as the S&P 500 over the past 20 years, almost identical. Why am I giving it a C plus? Well, first of all, part of it is just philosophical. We at the full believe in owning businesses with products, services, innovations, they generate a growing stream of cash. Gold, on the other hand, just a piece of metal, pass some decorative industrial uses, but mostly you're just betting that someone will be willing to pay a higher price for it in the future, not because it's going to be generating more cash in the future, but you're just hoping that there'll be more demand. Gold has gone through some really long stretches of lousy performance. It did really well in the 1970s due to the high inflation, peaked in 1980, went the other direction, and it took around 25 years to get back to its 1980 peak. All that said, it is true that gold has done well during bear market in stocks. We're seeing that this year, saw in 2022, 2008, and in two of the three bad years during the dotcom crash. It's fine to own some Gold as a hedge against bear markets, which is why I own little myself. I own some of that SPDR Gold Shares ETF.

Ricky Mulvey: By the time you notice it's outperforming, maybe that means you're a little late to the party on gold, Bro? It is you're betting on someone to pay more for it than you are today. However, gold has been around for thousands of years that people have been accepting it is a store of value. A little bit more of a track record there than something like crypto or even the tulip bulbs I was trying to sell you before we were recording. Let's get to crypto, because this is one that is interesting, and some investors still see it as a store of value. Let's talk for hours about Bitcoin as a digital gold in this economy we live in.

Robert Brokamp: We could talk for hours. In terms of a grade, I'm giving this one incomplete. I'm going back to my teaching days. I just feel like I can't give it a grade right now because it's just too soon to say what diversification benefit you're going to get from crypto. We'll talk mostly about Bitcoin, but as you know, there's so many varieties of it. It just doesn't have a long enough history for me. Bitcoin is flat for the year, which means it's doing better than in the stock market, so that's good news. But in 2022, it plummeted more than 60%. For me, the jury's still out. There's no question that it is gaining wider adoption, both in terms of by investors, by countries, and it's boosted by the availability of ETFs to make it easier to invest. I'm more comfortable investing in it than I would have been maybe three or four years ago. But the value of it as a diversifier is pretty much still unproven.

Ricky Mulvey: How about as a strategic reserve? Moving on. Let's get to alternatives, however you define them.

Robert Brokamp: This is a very broad category that can include really all investments that aren't commonly held by everyday investors. We're talking commodities, managed futures, currencies, hedge funds, private equity, and so on. For the most part, it's difficult or expensive for the regular investor to buy into these types of investments, and you're often not getting the cream of the crop. You're getting what's left over. Depending on how you invest in them, they keep illiquid and/or endure really long periods of bad or at least mediocre performance. For most people, I don't think they're necessary. However, I will add that the proponents of these types of investments do make some good points. Primarily, they say that a standard portfolio of stocks and bonds isn't as diversified as some people think because they often rely on a single factor like the overall economy or maybe just the movement of interest rates. We saw that in 2022 when interest rates skyrocketed and stocks and bonds fell. If you have the time and the inclination to research more about alternatives, you actually might find some things that strike your fancy. Just be prepared to pay higher fees to hold on to something that will behave very differently from a standard portfolio, which, I guess is the whole point.

Ricky Mulvey: The next one is Uncle Warren's one of his favorites right now, and that is just cash, Bro.

Robert Brokamp: Cash is boring, but I'm going to give it at an A, front of the class. I won't belabor this, cash is king or queen when times get tough. It's the only investment that you can feel reasonably sure won't drop in value. Just make sure you're putting in the effort to get the highest yields possible, which these days is close to or around 4%, and you're going to have to accept the fact that returns will never be great. When you invest in cash, you're making a trade-off. You're choosing lower return certainty over the unpredictable possibility, and you can even say historical probability that you'd earn a higher return in stocks given enough time. But for money you need in the next few years that you want to make sure holds up in value, it's hard to beat cash.

Ricky Mulvey: Another way you can take your money out of the stock market is to put it in bonds. Bro, there are some higher-yielding bond funds that look pretty attractive to me.

Robert Brokamp: This is why I'm giving this a range of grades, actually, from C minus to A. Because when it comes to bonds, the returns will depend on the issuer, the duration, meaning short or long-term, shorter-term bonds are going to be less volatile, longer-terms are much more volatile and how you own them, individual bonds versus bond funds. But let's start with the safest and move on to the riskiest. US treasuries are considered very safe, maybe not as safe as they were like five years ago, Fitch and S&P have downgraded them, and Moody's made some announcement recently about they might be doing some things as well, but they're still considered the safest investments in the world. Investment grade corporates are considered safe. Not super safe, but safe. Then you have below investment grade corporates, otherwise known as junk, and they're very risky. This is where you get the higher yields. You'll get much higher yields from junk bonds and somewhat higher yields from corporates, but you got to understand that they will often go down during recessions, and junk bonds really go down.

I'm going to talk about 20% or more during the tough times. Bonds are holding up pretty well this year, by the way, returning around 3%, but they've been disappointing over the past several years. In fact, it's really been one of the worst stretches for bonds in US history. I would say the future looks brighter, but if you want more certainty from bonds, explore investing in individual bonds because you know exactly how much interest you're going to get. How much you're going to get back when the bond matures at maturity date, assuming the issuer is still in business, of course. I would also explore what are known as either target date bond funds or defined maturity bond funds. These only owned bonds that mature in the same year. That way you have a little bit more certainty about what they'll be worth when that year arrives. The two biggest issuers of these ETFs are iShares and Invesco.

Ricky Mulvey: Bro, junk bonds are how I started my casino chain. Let's wrap it up with annuities.

Robert Brokamp: Yes, annuities. Not everyone's favorite topic, but let me explain. I'm going to give these an A for the right people. When I mean annuity, I'm saying anything that sends you a regular check in retirement for the rest of your life. In the original versions of annuities, you'd get that check or that payment every year. You'd get it annually, which is why they're called annuities. We all get some of this. By this, I'm talking about Social Security. Yes, Social Security is in trouble. People in their 50s and younger may not get everything they're promised, but you'll get most of what you're promised, and you'll get that check every month, regardless of what's happening in the stock and bond markets, it adjusts for inflation. It's partially tax-free. I think if you can maximize your Social Security benefit to some degree, that is a great diversifier in retirement. Same principle if you're getting a defined benefit pension, the traditional pension. If you can maximize that, that's good. Now, you can buy more, actually buying annuity from an insurance company. But the only annuity that appeals to me personally it's called a single premium Immediate annuity. You hand over a lump sum, say, $100,000, and you'll get $68,000 a year for the rest of your life. You give up a lot of liquidity, so don't do it without understanding the loss of liquidity when you do that. If you choose to go that way, you take that money from the portion of your portfolio that would otherwise have been taken from the bond part of your portfolio.

Ricky Mulvey: Very good. Robert Brokamp, appreciate being here. Thanks for your time and insight.

Robert Brokamp: My pleasure, Ricky.

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about in the Motley Fool may have formal recommendations for or against, don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser has positions in Amazon and PayPal. Ricky Mulvey has positions in Chewy, Netflix, PayPal, and Spotify Technology. Robert Brokamp has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Bitcoin, Chewy, Costco Wholesale, Moody's, Netflix, PayPal, Spotify Technology, and Walmart. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short June 2025 $77.50 calls on PayPal. The Motley Fool has a disclosure policy.

This episode offers two looks at prediction markets. In the first half of the show, Kalshi CEO Tarek Mansour joins Motley Fool host Ricky Mulvey to discuss:

• What he learned about Kalshi from this past election.
• The difference between an events contract and gambling.
• How prediction markets could disrupt sports betting.

Then, New York Magazine features writer Jen Wieczner joins Motley Fool host Mary Long to discuss her reporting on the billion-dollar betting platform Polymarket, and its legal challenges in the United States.

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A full transcript is below.

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This video was recorded on April 26, 2025

Tarek Mansour: But the important thing here is that these prediction markets are not a crystal ball, they're not almighty. But they're as close as it gets. They're the best way to forecast the future because of this skin in the game aspect. People don't lie when their money is involved.

Ricky Mulvey: I'm Ricky Mulvey, and that's Kalshi CEO and co-founder Tarek Mansour. On today's show, we're taking two looks at prediction markets, one from a leader in the industry, and another from a journalist telling its story. In the first part, Mansour spoke with me about how prediction markets can differ from gambling, and his platform is a source of truth.

A basic question for you, but one that I think is important to your company and for our listeners understanding, Kalshi, what is the difference between an event contract and a bet?

Tarek Mansour: That's a great question. Obviously, we get asked this a lot, and it's one of the central questions around prediction markets. And the way I like to answer a question usually is in some ways, to outline that this question has been consistently asked whenever it came to taking new financial markets mainstream. People are not familiar with this, but when grain futures first came to the US, there was a question. There was actually a Supreme Court decision about whether these are gambling or not. Are these bets or are they not? The answer where the Supreme Court landed was, sure, there's a lot of people that are speculating on these markets, so speculation is a form of betting, it's similar in many ways. But these markets have economic utility beyond that speculative activity. That's what makes them extremely important and makes them a financial instrument rather than a bet.

A simpler way to even think about that is, and I like to think about this in that different frame, which is there are two types of risks, artificial risks and natural risk. Now, artificial risk is a risk that you create for the purpose of speculating on it. So it's like rolling a dice or doing a roulette spin. Speculating on that or betting on that doesn't have really any utility outside of that betting activity itself. But something like, will Brexit happen or not? That's a natural risk. That's going to happen and impacts people in many ways, beyond whether you have a bet or speculative activity on it or not. An event contract on Brexit would be something that would qualify as a financial instrument. That's a really different thing from obviously, speculating on a die roll.

Ricky Mulvey: Let's get into the sports because your platform now offers, March Madness is still going on at the time of this recording, not when it's being released. What is the economic utility of an event contracts for the outcome of a sporting event?

Tarek Mansour: Just to take a step back. We have Kalshi markets on a very broad range of things, so politics, economics, weather, COVID and health, science, and recently entered sports. Our entry to sports was due to massive customer demand, both retail and institutional customers are in Kalshi today. Obviously, there is an industry the sports books and other that offer markets where you go and trade or bet against the house. Our market is different, and the difference is here, for any of our other event contracts or prediction markets, it's like a financial market. It's like a stock market where people are buying and selling these shares where the event is happening or not. The types of events we focused on, so for example who's going to win the Super Bowl or these title events, these are big events that have massive economic ramifications, both economic and social ramifications to the teams, the things around the teams like the cities, the towns, localities around them. You've seen there's a bunch of reports that came out. The Eagles won. That has drastic economic impact on the city, on the teams, and so on and so forth.

You see, there's massive amounts of money that are being invested on these leagues and these games and sports these days. It's a massive industry. That's not just a game. Those people could basically be taking a position to increase our volatility or hedge their volatility against a bad outcome, which is their team losing. The other thing that's really important is that people care. One of the functions of financial markets, a bit like going back to the grain futures argument, was this notion of price basing or basically figuring out what the pricing or the forecast of something is. At the time farmers needed to know what the future price of grain was going to be. The beauty of our markets and prediction markets, they give you a price, which is a forecast of whether event is going to happen or not, which can enable people to make better decisions, figure out where they should invest, and rely on a market based forecast rather than pundits saying different things.

Ricky Mulvey: I am rooting for your platform to dramatically disrupt the sports betting market, and I think it will. I think it's an interesting case to be made, especially for economic utility. If let's say the Cincinnati Bengals win the Super Bowl next year, there's an economic impact on that city, and I think that argument is pretty strong. If you look at something happening this weekend, there's a UFC featherweight title fight that's also on your platform, Alex Volkanovski versus Diego Lopez. Volkanovski's from Australia, so if he wins, there's an economic impact for Australia when you have the title coming back to that country. When you think about the future of your platform, though, let's go deeper, do you see that going across all sports? Because I think that's a strong argument for a title fight. But the first fight on the preliminary card, is that something that you expect to see in the future for calls? Do you expect to see the wide range of sports betting options that one can find on DraftKings and FanDuel, you planning on sticking to those high impact events?

Tarek Mansour: The general answer to what you're asking me, do I expect this to look like a traditional sportsbook? The answer is no. It probably won't look like a traditional sportsbook because there are key differences. Some are regulatory and they're very critical and others are even in the business model. I'll start with the business model. You've seen so our market benefits from concentration. You need these big events that a lot of people care about or have economic or social impact toward that concentrates volume and liquidity. Our business gets better and better with more volume, more liquidity. The reason is because we don't take bets against the customers. That's not how we make money. So for us, we need large sums of volumes to make money based on our small transaction fees that we take. You might have seen some of the results for example, in March Madness, and I was looking at some of the reporting, our platform within two months of launch is actually one of the large players already in the industry in terms of volume traded through the platform. Our markets really benefit from volume.

As a rule of thumb, then it makes more sense for us to concentrate as a business rather than have all this long tale of different things that you can get exposed to or bet on traditional sportsbooks. Again, because we don't make money off of someone losing a bet to us. That's just not how it works. From a regulatory perspective, we need to focus on markets that they have to satisfy number of core principles are extremely heavily regulated. There's 23 core principles we have to abide by. But two that are very relevant here. One is around the markets have to have economic relevance. If a market is totally doesn't have any impact or people don't really care about it or whether it goes one way or the other, doesn't matter in any way, shape, or form to anybody, then it's harder for us to do and doesn't really fit in our model. Number 2 is they have to be not readily susceptible to manipulation, which is another really key thing that we think about. When you think about designing a marketplace that has market integrity and fairness, you have to put up things that are not easily manipulable, where, for example, a player decides to do something, even if the economic gain is very limited, they could still do it because it's very easy to do it. Those are the two things that we think about that make us really fundamentally different from what you would see in a traditional sportsbook.

Ricky Mulvey: We'll stay on manipulability, the ability to manipulate a market. Because I want to get to the visibility in your market in a second, which I think is incredibly important and groundbreaking, really, what you're doing for retail speculators. But the ability to manipulate things, one of the things you can bet on is whether or not someone will say a word. What Caroline Levitt will say at a Trump press conference, whether or not the CEO of Netflix will say gaming in the next earnings call, to me, that's the thing where I wonder if that can be manipulated. Let's say I'm an investment analyst who's going to be on the Netflix earnings call, and I place a bet on gaming. I don't hear it in the comments uptop, but I've got a bet on gaming, so that's going to inform what question I ask the CEO at the bottom. For manipulating in sports, that's one where we'll use the UFC example. There's consequences beyond the bet to manipulating a fight. If someone loses a fight, there are physical and career consequences for that. But if I'm an investment analyst and I'm just like I'm going to ask this question about gaming, that seems almost like a harmless manipulation outside of the prediction market. So how are you thinking about manipulation, especially with what word will someone say in a press conference?

Tarek Mansour: Totally. I think that's a great question. I will say it's a few things to think about here. One is, the rules around Kalshi and the way that it's structure is very similar to a traditional financial market. A very simple analogy is the stock market. If people trade based on insider information or you're trying to manipulate a stock for the purpose of gain, that is actually illegal and there's a whole suite of systems in the New York Stock change and NASDAQ and so on and so forth that have been built over the years to flag this type of activity, figure out who did it, and then you can prosecute these people appropriately. It's the same exact thing on Kalshi. We have developed over the years, and that was a big thing. You might know some of the history of the company. We spent three years getting regulated upfront so that we can be legal, and today, we're the only legal broad prediction market in the US, with the CFT to develop some of these systems to figure out how do we preserve market integrity and make sure that these types of activities are not happening. A few things.

First, we KYC everybody so we know who's trading on the product, we know everything about them. Second, all the trades go through our surveillance systems that flag any unusual patterns or patterns of erratic or statistically weird behaviors. Then those go to our investigation team that runs investigations, and these are happening every hour every day. We have a whole team that basically does these. If we flag someone doing something like this, they can be prosecuted from a fine all the way to criminal prosecution. These are same as typical what'd see in traditional financial markets. My answer to this at a high level is, this is pretty much on par with that investment analyst trying to manipulate a stock by asking a certain question or saying something on that earnings call. So that person, if they did that, they wouldn't be allowed to take a trade. Even if they tried to come up with some smart scheme, if the money is sizable enough if it matters, we're probably going to find it, and they're going to be prosecuted. That would be a crime. Different markets have different susceptibility to manipulation, but earnings calls have quite stringent rules around them. Same with the Fed, people ask about the Fed a lot. What Powell will say in a speech, that moves trillions of dollars in the economy. If he's slightly more hawkers than expected or more, that's why the Powell script is very well scripted beforehand, and there's rules around it because if someone leaks it before to the bond market or other, you're not going to have drastic move before the speech. I think it's very similar.

Ricky Mulvey: One of the things I really appreciate about your market is the visibility into what's going on. You can see trading volume for stocks if you go on Schwab, that kind of thing. But especially on the speculation side, for something like a March Madness game, DraftKings is not listing the betting volume for each game, whereas your platform, it does. Your platform also, you can see what people are betting on, you can see the live trade order flow, which is also something for stock markets. That's something that is not available to retail participants. I'll ask you some hard questions. I'll throw you some flowers. What's your philosophy on making these markets visible to the retail participants? Why is it important to you to make basically all of your markets visible to everybody on your platform?

Tarek Mansour: Absolutely. One comment on the hard questions, please keep them coming, I love the hard questions in some ways. A new type of financial innovation should and needs to be met with some degree of healthy skepticism, and that healthy skepticism is the thing that pushes us to improve over time. There's this nice feedback loop that improves these financial markets to get to the study state they should get to. I've always been a fan of these types of debates, and hopefully you'll throw more at me. This is a great point. Transparency has been a very core piece of the mission and the vision for prediction markets. That's the whole point. We want a market based mechanism to price the future. We don't want the pricing to be a book. We don't want the pricing to be an analyst or a pundit or one single market maker or so on and so forth. We want it to be this wisdom of the crowds aspect. We bring a variety of people with diverse opinions. Some of them may be from Wall Street, but actually on Kalshi, a lot of them are not the top hedge fund manager, and the topper's retail individuals that love reading the news, know a lot about politics and feel like they don't have an edge in traditional financial markets because the large hedge funds have all the edge and all the asymmetric information. Whereas on Kalshi, information is equal.

That's a very big part of this. We want everything to be out there. The price at any point in time, how the price comes to be, who's trading where? If you open Kalshi right now on the masters or on our economic or any of our markets, you see the live trades, as you mentioned. Who's trading what? What is the size that's going on either side? We don't want anyone to pay for that. That's open source. It's free. You can access, even if you're not a member of the product. This is really in vain with creating a level playing field where anyone can beat anyone else, if they're looking to do research to get smart about the future and be better. It will give you one anecdote about this. This is something that really makes us really happy at the company, these types of anecdotes about our customers, which is I always tell people, Kalshi has been the most accurate forecast for politics. We saw it at the election, economic inflation and so on and so forth. I've been asking people, guess who has been the best inflation forecaster, who has the best ROI, return on investment on our inflation markets in the last 2-3 years. People come and guess, and we have some hedge funds on the product and market makers and really institutional players.

They usually gets some of those typical players. But actually, the answer is it's a random dude from Kansas, never traded financial markets before, doesn't trade options. This person is an avid news reader, reads the news every day, likes to be engaged with what's going on with the economy, what's going on with geopolitics, what's going on with a variety of different things. They ended up being pretty sharp where the economy is heading. Those are types of people that are making real money. Now it's their full time job on Kalshi. If we weren't transparent, if there wasn't extreme transparency to the platform or you're trading against other people and you can see everything out in the open, it'd be harder for these people to beat the books or the traditional hedge funds, which is counter to what we're trying to build.

Ricky Mulvey: If this gentleman in Kansas is available for podcasts, our email is [email protected]. Hope he has an external microphone. We'd be very curious to talk to him about the macro economy if he's truly the best on your platform. There was a fundamental event for Kalshi and that was the presidential election. That was where you got the most attention on your platform, and it was groundbreaking where you were the first legal market in the United States where people could bet on the election. Now that we're a few months past that, even though it feels like a lifetime ago, what did you learn about your market in speculative behavior from the 2024 presidential election?

Tarek Mansour: A few things that led us to the election. The history of Kalshi is we first spent three years upfront getting regulated by the federal government to get a license from the Commodity Futures Trading Commission to operate the first derivatives exchange that can list prediction markets legally in the US. Then we operated for a while. We wanted to list the election market, but our regulator believe that we should not list it and blocked us from listing it. We sued our regulator and took them to federal court over this election market, and we won that lawsuit a few weeks before the presidential election last year. Once we won that lawsuit, we legalized election markets, and really a broad suite of prediction markets event contracts in the United States. For reference, election markets have been illegal since the Great Depression, and so we've opened up the ability to trade on the election based on our lawsuit. Once we won that lawsuit, we have grown at an unprecedented rate. It was truly incredible, and I'll give some stats.

We did $2 billion of volume in the span of a month, month and a half after we won, we were Number 1 on the app store overtaking Kalshi, Instagram, TikTok, and a number of other apps. On election day, we were the largest out of all prediction markets by quite a bit, and we got around 500 million unique people visiting our site. That's a substantial chunk of people in the world. What we've seen is, like, first of all, the entire planet really cares about US elections. This might be obvious, but I think now we have real data to prove that. Number 2, there was a period in time around the end of the day where our number of site visits overtook CNN and Fox. That was a sign where people did not know where to look, because if you looked at CNN, they were saying one Candida is winning, Harris, and if you looked at Fox, they were saying that Trump is winning, and people didn't know where to look. They came to us the prediction markets where people have their money where their mouth is to figure out who's winning and what was going on. That was really incredible. It was amazing because it worked. I don't know if you saw the announcement. We announced Don Jr. joining as an advisor in January, and a big part of why ended up being rallied about the mission, and he tweeted about this was how in Mar-a-Lago, they were using the app and the site and they were looking at the odds for figuring out who was going to win.

We've come a long way, this was a niche Internet thing to now being totally mainstream and people are using it normally. But it worked and people were saying that these markets were biased or manipulated, and so on. But actually, you saw that the polls were all at 50/50, and Kalshi and other prediction markets were at 62, 63%. The prediction markets were right. I think now there's this moment where people realize, like, we should embrace this technology. It's working. It's being used, and I've talked about this, like Doge and Elon Musk uses our markets to inform how much they're going to be cutting in federal spending. Fed and others are pulling our market data to figure out how to influence economic and government policy over time, same with institutions and businesses. But the important thing here is that these prediction markets are not a crystalbll. They're not Almighty. But they're as close as it gets. They're the best way to forecast the future because of this skin in the game aspect. The people don't lie when their money is involved.

Ricky Mulvey: I don't begrudge any financial institution for lobbying or trying to get close to politics. You mentioned Donald Trump Jr. as a strategic advisor. What strategy is he advising you on? What are those conversations like right now?

Tarek Mansour: I think people always mention things like lobbying and other, look, we're not a partisan company. Like, that's very important to understand. We have Democrats and Republicans involved with the company, both at the board level and obviously in the company itself. What we are is we're believers in the mission that we're focused on. Anyone that agrees with that mission, I think we would welcome them and we'd hope for them to come and help us. That's true for both sides of the aisle. I think it specifically when it comes to Don Jr., it's Don and actually, the Trump family for a decade now have been big fans of going direct. Talking to people directly. Twitter is obviously a big part of it, Truth Social, and so on. Part of it is like generally, the media has been pretty adverse to Trump. The intermediaries didn't really work out for them, so they had to go direct and talk directly to the people. X was a big vehicle for that. I think of prediction markets are being very complimentary to that, which is being directly involved with the people and the wisdom of the crowd or decentralization of news. Like, you go on X to get news from people, not from an authority or an institution, like a newspaper.

You go to prediction markets to get news about the future from people, from markets. I think these two gel very well together. Don has been pretty big fan for prediction markets. Obviously, they went mainstream at the end of the year that's heightened the interest, advising us all things go to market. We're expanding to new jurisdiction, the new types of markets that may be actually useful and may help us educate. This is going very mainstream. Now we have millions of customers. Like, how do we take it to the next 100 million customer? I think he's been very helpful with that over the last few months.

Ricky Mulvey: You talked about going direct to market. I think your platform is incredibly useful for things like odds of a recession. People have to put their money where their mouth is. It's not just opinions from an economist. We talked about the election. There's stories that can be told within your platform. Right now, Kamala Harris and Stephen A. Smith have the same percent chance on your market of being the 2028 Democratic nominee. I know you've talked about the TikTok ban before. When you look at the chart of that on your platform, up and down the volatility in that, even the Jeff Epstein files getting released, you can see people's belief wavering going up and down. Is there a story from your market that you find yourself thinking about a lot?

Tarek Mansour: There's so much interest around a variety of different things, and each market, and you might have seen this, there's a Kalshi idea section below the market, which is this notion that it's a bit like Twitter, but you can only post if you have a position in the market. It's beautiful because people sometimes they're making jokes and so on, but often they're talking about the analysis behind their positions. Why do I think TikTok is going to get banned? Why do I think that Gavin Newsom has no chance of being a Democratic nominee? I believe that Stephen A. Smith has actually pretty big chance, and I think the odds right now are a buy, and I think the odds are mispriced. The beauty of that is, like, you can actually craft that story from this community that is doing all this research and they're putting money where their mouth is.

Look, I think right now, the story on Kalshi is that there's a lot of volatility, and you see it in the odds. Like, the odds of a recession are moving a lot. The beauty is these markets work. If you trust that these markets work and they are accurate at every point in time. If the odds are constantly moving, so they were at 70%, three days ago, now they're back at 55%. That just tells you that right now there's a lot of volatility and instability in financial markets or really the system more broadly. We see it across politics, geopolitics, economics, financial markets, even things like science and technology. It's like anything is fair game. In some ways, if anyone is on the news right now making these bold assumptions and predictions about exactly what's going to happen, they're probably being over certain and overconfident. They're probably wrong. Our markets are basically showing that volatility today. We'll see what happens. Recession market has been extremely heavily quoted in the last few days. I think it's because people don't know what's going to happen. I think they want to know, like, are we going into recession or not? Right now, the odds are, you might have checked them. I think they're like 55%.

Ricky Mulvey: Above 60?

Tarek Mansour: Oh, 64%? They're back at 64. Oh, wow. They're back up. Two thirds chance of a recession this year.

Ricky Mulvey: The other thing going on, there are people that are not big fans of Kalshi, and that includes casino lobbies. You've gotten cease and desist orders from Nevada, Maryland, Illinois, Montana, New Jersey, Ohio. I understand the arguments that you're not a gambling pool because you're not trading against a casino, you're trading against other players, so it's a little bit different. But just broadly, what's it like going up against a casino lobby? What's that experience like for you?

Tarek Mansour: Look, I don't think of it that way. There's a lot of headlines, a lot of news. The thing I say sometimes, like, don't trust the news too much. Like, the news loves to create these duels and fights and this tension because news is tension. You want to see what's happening in the background and so on. Actually, a lot of the operators, we're having a lot of very constructive dialogues with them. You see we have kalshi.com, Kalshi direct, where people go to Kalshi directly and become members of the exchange, and they trade with us. But the traditional go to market for exchanges, like the New York Stock Exchange or CME, is you don't go to CME or New York Stock Exchange to buy an option or a stock. You go to Schwab and Robin that's where you go. You go to your financial broker. Right now, we're launching brokers, so we've launched Robinhood and we have something like 10-12 brokers in the pipeline today, and that's going to be a big part of our go to market for a year, and that can and will include a lot of the sports operators that want to get into a financial market offering or a prediction market offering that will be powered by Kalshi. In many ways, what people are viewing as this very conflictual competition is actually much more complimentary and looks a lot more like a partnership than people are like, thinking about.

Because people are thinking, like, the prediction market offering is not actually that competitive player props and all these different things that the books usually do and definitely not a casino, which is what casinos really do. Our offering really have nothing to do with that. But it's much more of a compliment, like, could we provide odds to the participants in those products, and could there be just much more of a healthier merger? I think a lot of operators in the space see that, and that's why they're talking to us and working on partnerships with us and so on and so forth. I think the premise is not quite right. Yes, so we do have some lawsuits right now in some of the states that believe that they have jurisdiction over this, and you might have seen the federal court in Las Vegas and Nevada ruling against Nevada in this first step or ruling in favor of our preliminary injunction because our message has been very clear. Like, financial markets are regulated at the federal level. You can trade stocks anywhere in the US because it's regulated at the federal level. If it's a state one day bans trading stocks, you can still trade stocks in a state because that's how the constitution and the law works. It's a similar thing for anything that an exchange, what we call a DCM, which is what we all does at the CFTC level.

Ricky Mulvey: I understand constructive dialogue, but also you got casino lobbies selling you cease and desist letters, which is usually not a let's keep talking kind of thing. If I understand, you're offering something different from the sports books and the casinos.

Tarek Mansour: Look, my point wasn't about everyone. I think anything new that's disrupting a potential, like, a mechanism or industry and so on, obviously, we'll come as always, a healthy degree of skepticism. I'm not saying that this is everybody in the industry. I think there's a lot in the industry that I think are looking to partner and work constructively. We want to work with anyone, anyone that's willing to partner and work with us. Then some that maybe are more resistant and are still figuring out what they want to do with this. To be clear, we didn't receive any cease and desist from casinos or rather, we received from states, which is they're not the same parties, so that's important to flag here. Again, not everybody, but, hopefully, over time, we'll rally more and more. I think the pie of people that are basically getting excited about this is growing in that industry.

Ricky Mulvey: You also recently announced a partnership with Robinhood. I know it's early days, but how do you expect that to impact activity on your platform? What do you expect Kalshi to do for Robinhood?

Tarek Mansour: Right now we have Robinhood and Webull launching the product. We have around 10-12 other brokerages that are in the process of integrating and hopefully launching sometime this year. Partnership has been extremely successful. The way we see it is very similar. Financial brokers like Robinhood, Schwab, Fidelity, Webull and so on. What they do is they list products that are exchange traded, whether it's stocks or commodities or options, even crypto now more recently. One of the markets our exchange traded today, really, the fastest growing one and the most exciting one is prediction markets because the markets are listed on Kalshi. As a regulated exchange, we no different than New York Stock Exchange or CME, and we over time, are going to put more and more of our prediction markets next to stocks and options in the brokerages so that people can really benefit from this diversity of offerings. Like, I can have my Tesla positions, for example, and I can hedge against Tesla earnings or against the Fed raising interest rates or other types of things that may going on in the world around me in one comprehensive portfolio. We're extremely excited about that direction where this can be heading. The partnership has been extremely successful. We expect and anticipate, quite a few launches in the coming quarters in terms of brokerages, and we're very excited about that part of the business.

Ricky Mulvey: Tarek Mansour, who's the CEO, co-founder of Kalshi. Thank you so much for your time and insight. Appreciate you joining us on Motley Fool Money.

Tarek Mansour: Thanks for having me, Ricky Mulvey, it's awesome. [MUSIC]

Ricky Mulvey: There's another major player in prediction markets. It's called Polymarket. This one runs on crypto and is currently not legal in the United States. Americans have to use a VPN if they want to play on the platform. After the break, New York Magazine features writer Jen Wieczner joins my colleague Mary Long to talk about how Polymarket achieved escape velocity in a crowded field and the chance it'll become legal in the US in the next few years.

Mary Long: Jen Wieczner is a features writer for New York Magazine. Her latest story is a profile on Shayne Coplan, the founder of the prediction market, Polymarket. Jen, to kick us off, I'm going to quote a quote from Coplan that you use in your story. He told you, "The plan is to build something that didn't yet exist and needed to exist that I cared more about than anyone else." That's the end of the quote. This is interesting to me because tech titans like to sell us a lot of stuff that they say we need, but that maybe we don't actually need. Why does Coplan believe Polymarket needs to exist?

Jen Wieczner: It's interesting. I think a lot of people see Polymarket as a betting site, but he doesn't sees it as sort of an alternative source of truth, a potential alternative to news in a way to gain information that isn't readily available in the mainstream news landscape that we have. In other words, this is a way of sourcing information. You could call it crowd sourcing. There have been other attempts to harness the wisdom of the crowds, but nobody has really been able to get it to a mainstream scale where you can actually learn something about what the large part of the world is thinking this critical mass of people. That is what he set out to achieve. How could you tap into the wisdom of the crowds in a way that nobody had yet done, where you could actually glean some real insights and make predictions that were better than pundits or what you would see on TV or hear from the news.

Mary Long: Interestingly, and perhaps importantly, too, Polymarket called the election. Post that win, Coplan posted on X that Polymarket single handedly called the election for anything else. The global truth machine is here powered by the people. This wisdom of the crowds approach is interesting to me. But when I read that, I think, Okay, yes, Polymarket got the election, and I don't want to downplay that. I think there's something compelling about the idea that when you're using prediction markets, you're not betting against the house, you're just putting money on whatever you think the outcome will be. But I'm skeptical if that actually makes it a verifiable truth teller. Is there a running track record of the percentage of bets made on Polymarket, the final outcome that is predicted by the crowds? Then what percentage of those predictions actually turn out to be correct? If it's pitched by Shane as this is the truth, is there a running tab of how often they are actually right?

Jen Wieczner: I have not seen one, like a report card for prediction markets. That would be really useful. I do know that on the ones that really mattered, you know, would Biden drop out of the race huge. Would Sam Altman return as CEO of Open AI after they tried to oust him and who would win the election? They have a very good track record. As do some of the other leading prediction markets such as Kalshi, but Polymarket has kind of made themselves into the gold standard for most things. Notably, everybody got wrong that Beyonce was going to be at the DNC, including Polymarket, which I think is a notable of a funny one of one where they did not get right. But they were still even people who were close to the situation thought that Beyonce was coming, so I give them a little bit of a pass there. But I wish there was something like you're describing.

Mary Long: Who is actually on this platform? Because when I think about it, the image that comes to my mind is, OK, it's mostly regular people, and they're making miscellaneous bets on everything from who wins the presidential election? Will Beyonce be at the Super Bowl to whether Blake Lively and Ryan Reynolds are gonna get a divorce this year. Is there institutional money playing too, or is that, Hey, it's mostly Normis for lack of a better word? Is that pretty accurate?

Jen Wieczner: No, I think probably a large part is, you know, these professional traders, Wall Street types, hedge fund managers. I mean, we even saw the so called French whale, who made a big bet on Donald Trump is an institutional investor. There's a lot of hedge funds that are actually using Polymarket to potentially hedge their own bets as they've put a bet in the stock market that's based on some prediction about something geopolitical or macroeconomic, and they want to hedge that by also putting money on Polymarket, which I think is an interesting trend. I would say, as I talk to people, I hear a lot of people in finance in crypto who are really excited about this. Of course, there's people like me and others who just want to bet on the Oscar's. I do think most of the money is coming from that professional institutional side.

Mary Long: In your conversations with Shane, does the fact that so much of this money is seemingly coming from the institutional side, does that corrupt at all in his mind, this wisdom of the crowd, this democratization of truth concept that he seems really excited about?

Jen Wieczner: Yeah, so I should be clear. I don't know 100% that it's coming from the institution. That's my sense based on who I've been talking to. But I don't think in his mind that it corrupts it. I think, Heath sees this as a platform for everyone, the way that Amazon is a store for everyone. But he has talked about potentially the future business models and how Polymarket which doesn't currently make any money could eventually gather revenue by saying charging hedge funds a fee to list their own markets. And so I think they see this as one avenue, but they wouldn't want to we wouldn't want to limit it to only, you know, professionals.

Mary Long: Thanks for mentioning that Polymarket does not actually make any money at the moment. That was fascinating to me and reading your piece. For those less familiar, Polymarket was the most downloaded free news app on the Apple store this fall, and processed more than $3 billion on the presidential election alone. Despite that, as you write, it's still in world Eating expansionary mode. It does not collect fees. It does not actually make any money at the moment. Do you have a sense of when that might change? You mentioned, Okay, maybe they would turn to hedge funds and not charge the individual person that's going on in betting. But do you have a sense of what the actual business plan might be moving forward?

Jen Wieczner: That's a very good question. Shane was strangely unconcerned about it when I spoke with him. He's not in a rush to make money, I'll put it that way. He really wants to gain growth and mainstream audience and get as many millions of people using Polymarket to make it the most accurate source of predictions before they actually start charging. They could charge everybody a small transaction fee. I feel like he sees it as an easy change to make. When the time comes, you flip a switch. Suddenly, everybody's getting charged a small cut. You charge hedge funds a little bit more, maybe to list their own markets. But basically, you're saying when there is money flowing through, the more money that you have that people are wagering on their own predictions, the easier it's going to be for the business to actually make money just because there's so much money in the ecosystem.

Mary Long: Joey Krug was the founder of a blockchain based backed prediction market that's now since shut down, but he was an early investor in Polymarket. You write in your story that Krug was skeptical of Shane's pitches at first. In fact, he told Shane that prediction markets are one of the hardest types of start ups to build. There are dozens of them, and none of them hit escape velocity. Today, 90% of all prediction market activity happens on Polymarket. It seems to me like it has hit escape velocity. What's the story of how exactly it got there?

Jen Wieczner: I asked a lot of people this question, and what everyone pointed to was just Shane's own determination. He was so determined that he was going to make this work working around the clock. Tweeting sending every single thing he put on Twitter or X to all of his investors to try to gain traction, asking them to make bets, making it happen. I think that's part of it. Another part of it is just branding. They've been made themselves the go to prediction market. They're also available to the whole world rather than just limited to the US as others have been. Then I think they just made it fun. It's very easy to use, even though it's based on crypto, which allows this ease of use, they're not doing some of the know your customer regulatory hurdles that some other platforms do, which allows you to get on and put your money to work very quickly and if you're in the US, you do have to use a VPN. But I think those few decisions and just combined with Shane's own persistency. He's just so passionate about that, and I think you need all those ingredients together.

Mary Long: You mentioned that if you're in the US, you do need to use a VPN to use Polymarket. This is important to note, and it's an essential piece of your article because while Polymarket has seen massive success, it is an illegal operation in the United States and in France and Singapore and Thailand and Belgium. This is because prediction markets are considered evens contracts under US law, so they need to be regulated by the CFTC so that companies that want to offer such contracts have to apply for permission to do that. Polymarkets not done that. Again, your story opens with an arrest of Shane, raided by the FBI in his house. Polymarket hasn't filed for this license. Why? What is stopping it from doing that? You mentioned regulatory hurdles. That seems like yes, a hurdle, but a smart one to jump over.

Jen Wieczner: I would agree that that is the most obvious path. I think what happened was when they first started out, they just skipped ahead to it. He was young. He wanted to put this online as fast as possible and didn't bother to check the laws and go through those regulatory hurdles upfront thinking that if I just build something, if I build something that's great and then I make it popular and people will love it, then it will all just work out that people will welcome this. That's not exactly what happened, especially under the Biden administration. Prediction markets were very taboo and you have the CFTC cracking down on unregulated platforms like this. Very early on within months of their launch, really, they're dealing with an investigation from the CFTC that they eventually have to pay a pretty big fine for, especially for a young start-up. With that settlement, they basically agreed to not offer to US customers.

That closed off that path for the time being and now I think that they are likely going to reconsider that, especially under the Trump administration, which is not just friendlier to crypto, but much more friendly to prediction markets as it appears so far. Trump could potentially just give them a hall pass, write an executive order. All prediction markets are illegal now, something like that, which would give them even faster shortcut, or they're going to have to work with their lawyers of whom they have a lot and find a regulatory path, whether it's through that application or, you know, kind of trying to overturn the CFTC settlement.

Mary Long: A key question that you raise is, like, whether or not this illegality even matters, as you mentioned Trump could give them a hall pass. You've been in this story for a while now. Do you want to take a 50 50 bet on how this plays out over the next 12 months? Do you have a prediction will Polymarket become legal in the US, or will they just keep moving forward as is?

Jen Wieczner: I do and I asked all of my sources this question, as well, and by and large, everyone gave it above a 50% chance that they would become legal in the next year or two. I think, the next year to 18 months, I have a feeling they will be legal. As part of the story, actually went on, used a VPN and illegally traded on Polymarket very, very small amount. But it doesn't feel meaningfully different to me than trading on Robinhood where you can also buy extremely risky stocks or anything I'm policing bets on who's going to win the Oscars? Who's gonna win the Super Bowl? You know, what's Trump going to do next? What's Elon Musk going to write on X or how many times is he going to post? It's silly things that, sure, if you want to lose your money that way, like I don't really see the harm in doing it. You could make money. But I don't really see a reason for it to be less legal than all the other forms of risky but legal trading that we already have.

Mary Long: Yeah, fair point, for sure. Another prediction market that does exist legally in the US is Kalshi. They exist without crypto, though. Whereas Polymarket you can solely use crypto to make bets there. What is the fascination with crypto? I know Shane has a long history with ethereum, but why limit yourself to just crypto? Why do they like to stay in that lane?

Jen Wieczner: I think they've built their whole system on top of Blockchain, which allows for these bets to settle on the blockchain, so they're using actually smart contracts, which gives in some ways the outcomes of these bets an objective referee, if that makes sense, where it's not so subjective, they've set the rules and these smart contracts are just going to settle the way that they are. All the bets are also placed in crypto because it allows people this anonymity that then makes them more likely or less afraid of betting on their beliefs because they can do it without fear of people finding this out. Some of the other platforms have similar formats. But I think, this was a way to open it up to the world very quickly, and skirt the regulations that also come with using dollars. Polymarkets not actually handling any of the money because it's all just settled through smart contracts, so they don't actually have to be the bank and Shane, it speaks to his strengths as well because he was early in aim and became very passionate about crypto, while he was basically still in high school.

Mary Long: You paint this picture of Shane early in his 20s. It's around 2016, and at that time, he's running pretty deep in the crypto crowd. But at some point through that, he grows relatively disillusioned with that scene. You write that he became unimpressed with what he calls the Bildeba lineup of copycat start-ups and crypto scams. That's his wording, scams. You spend a lot of time with him. How now does he distinguish between the scummy side of crypto and what he might deem to be the more righteous side of it?

Jen Wieczner: Yeah, so one of the most ironic parts about Shane is that despite running a platform that's technically illegal and having had to deal with the regulatory consequences of that, he sees himself as the good guy, as the person who's built a platform that should be legal, that's useful, that's popular, that people really love, and he's providing an important service in the landscape of news and information. Whereas in the past, he saw people who were basically less hardworking than himself take a lot of money but not follow through on actually building it or build a wonky platform that wasn't that great or wasn't good enough to gain mainstream attention. What they built didn't match up to what they promised. Shane, who talks a huge game, like this guy, his ambitions are off the charts. He really believes that he's going to make it happen, and he swears he's not going to stop until he does.

I think he's raised a large amount of venture capital, and he just believes in himself to the point where, I'm going to do this. I'm going to build this until it's legal. It's going to be something that's as useful as the other technology that we rely upon. I mean, he's a big fan of Uber and Apple and these Meta on Facebook. He's admired these CEOs and entrepreneurs for a long time, and he really sees himself as one of those big tech giants as opposed to these anonymous crypto scammers who don't even use their real name, even as they're raising money and trying to build stuff. He puts himself in a different category.

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 stocks based solely on what you hear. While Personal Finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back on Monday.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Charles Schwab is an advertising partner of Motley Fool Money. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Charles Schwab and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, and Uber Technologies. The Motley Fool recommends CME Group and Charles Schwab and recommends the following options: short June 2025 $85 calls on Charles Schwab. The Motley Fool has a disclosure policy.

In this podcast, Motley Fool analyst Sanmeet Deo and host Mary Long discuss:

• Poor results from Tesla's automotive segment.
• Whether Elon Musk turning more attention to the company can revive it.
• Half-marathons, and the future of humanoids.

Then, Motley Fool analyst Asit Sharma joins Mary for a look at AMD and how the chip company is different from its biggest competitor.

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A full transcript is below.

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Mary Long: The robots are coming, but maybe not very quickly. You're listening to Motley Fool Money. I'm Mary Long, joined on this fine Wednesday morning by Sanmeet Deo. Sanmeet, great to see you. How are you doing?

Sanmeet Deo: Hey, nice to see you.

Mary Long: We've got one story that's going to be our single story today because there's a lot to talk about in this report, none other than Tesla. Dropped earnings yesterday after the bell. Lots of anticipation with this one. Obviously, it's a large company. It's a company led by a controversial leader. Let's put it at that. Coming into this report, we had Wedbush analyst Dan Ives. He's a longtime Tesla Bull, and he told NBC that this report is a ''Moment of truth for Tesla.'' We're going to dive into the details of this report in a second. As I said, it's our single, our sole story today. But let's start with the big picture idea here. You own Tesla? What truth was revealed in this report?

Sanmeet Deo: I think the truth is that the automotive segment is hitting the brakes. The one number that can symbolize everything that's happening for their segment this quarter was the 2.1% operating margin, which was significantly lower than last year's 5.5%. The whole story is really captured in that margin number. It's lower average selling prices for vehicles, lower delivery volumes, volume time price, lower revenues, and higher R&D expenses. That margin has significantly is lower than what they've had in really over the past few quarters, so very concerning in that sense. Now, energy and storage, and services came in very strong. That was great, but they're much smaller part of their revenue. The question is have they taken the eye off the ball? Is competition hitting them harder than the market suspects? The one other truth I'll say is that the market liked Musk's comment, which I think we're going to talk about, about reducing his time with DOGE and getting back to focusing on Tesla.

Mary Long: Let's hone in on that piece, because in spite of that comment seems to be what is causing this rise in Tesla stock that we're seeing this morning. We also saw a rise after hours yesterday, pre-market this morning, and that's only continued throughout today. But again, you just walked through the earnings. There were some glimmers there in other segments, but this automotive segment, as you said, largely was hitting the brakes. It seems that the surge is largely attributable to Musk's comment that he'll be taking time away from DOGE and returning to Tesla as soon as May. I've got a question on this, but is that what you two attribute this jump to, or do you think, maybe, there's something else going on?

Sanmeet Deo: No, absolutely. This quarter, if you look at it, with automotive segments being probably 80, 85% of their revenues, this is a bad quarter for them. Their vehicle deliveries were disappointment. That we already knew. That was already reported. Profitability came in a lot lower than expected. I would anticipated on a report like this, the stock would be down. But given that Musk made a statement that he's going to focus back on Tesla, that's something that has been an overhang on the stock. Also, the market is very big today off of relief rally. That, too, is helping their stock bounce.

Mary Long: This time allocation comment is an interesting one to me because I can see, obviously, why Musk returning to Tesla could be a boost for the company. But I also wonder how much of Tesla's miss here, in this quarter, is attributable to the time that he's not spending at Tesla versus how much of it is attributable to the political associations that he's tied himself to. How do you think about that? How much of this miss, especially in the automotive segment, do you say, hey, this is a problem that's due to Musk not actually being at the helm, and that will be solved by his return to the helm or actually, this is a problem that's attributable to the political associations that Musk has made for himself.

Sanmeet Deo: I think a decent amount could be alleviated with Musk spending more time at Tesla. He's known to have a tight reign and high attention to detail when he's focused on the company. I've heard reports from people that work at Tesla that he's very detail-oriented. He's very in the weeds when it comes to the company, but that's if his attention is there. His attention has not been there, so that's that eye off the ball part where he's not allocating the time needed to really guide that ship. Some of it, too, is increasing competition, cheaper cars from China, causing some effects there. I think there's been a lot of talk about brand degradation. Tesla is a brand. It's successful a lot due to its brand. Musk political associations have rubbed people the wrong way. People may not like his associations, how much time he's spending. It has taken a hit to the brand. That's pretty noticeable in the numbers as well.

Mary Long: We talked about this morning about how Wall Street is buying up Tesla. They like this comment from Musk. But if you look at insider activity at the company, it seems that over the past 12 months, Tesla insiders have been doing the opposite. Over the past 12 months, Tesla insiders have sold 28 times and bought zero times. You like to pay attention to insider activity here at The Fool. What do you make of this? Is this a red flag, yellow flag, or something that you can put an asterisk by and justify somehow?

Sanmeet Deo: I think there's no flag on the play, honestly. All these sales were part of a planned or pre-arranged stock option exercise strategy. I like to look at open market buys and open market sales when it comes to insider buying or transactions, and none of the ones I saw were really open market sales. Although there was one open market sale in the past six months from Elon's brother, Kimbal Musk, for 75,000 shares totaling $25.6 million. Maybe he's buying a new house? I don't know. That in itself could possibly be a yellow flag, but all the others I'm not too concerned about.

Mary Long: If he's buying a new house with $25.5 million, I want to see that house. [laughs]

Sanmeet Deo: Absolutely.

Mary Long: Tesla's all-time high was last hit on December 17th when it closed at nearly $480. Today, it's closer to 250, again, it's moving up, so that might change by the end of the day, but that's where it is right around the time we're recording. Breakfast News, which is our daily newsletter here at The Fool. It gives a rundown of daily market happenings. They asked readers this morning in the newsletter when they think Tesla will return to its all-time high, if ever. I'll pose that question to you before we dive into more of the details of this report. When do you think Tesla will hit its all-time high again, if ever? How do you think it gets there?

Sanmeet Deo: I think it's going to hit the all-time on April 23rd, 2030. Now, I'm kidding. [laughs] I think it could be at least five plus years or so, something like that. Usually, when we see these huge massive market corrections, what I've noticed is whether it be the market or certain stocks, they hit highs, they correct heavily, and then it takes a long time to hit that all-time high again at some point. That's assuming the businesses continue to succeed and do well. In order for them to get there, the automotive segment needs to gain its growth momentum, and we're going to talk a little bit about that later, too, about how they could do that. Some positive traction on the fully autonomous driving humanoids, which we'll talk about, too. That could really boost the enthusiasm for the future prospects of the company and the business, and the stock. If they can start making more traction rather than empty promises, then it could hit all-time high again.

Mary Long: The large weak spot in this report was the automotive segment. We were told during the earnings call that, ''Given economic uncertainty, resulting from changing trade policy, more affordable options are as critical as ever.'' The idea of a more affordable Tesla has been teased for a while now, though plans have remained ambiguous, elusive. Growing this segment back and gaining traction here again, a clear path to that seems to be, if you can make this affordable option a reality, that would be a great way to, again, revive this automotive segment. How do you see that playing in? Again, I've mentioned that these plans for an affordable Tesla remain ambiguous. What would you like to see that plan and practice for a more affordable Tesla actually look like?

Sanmeet Deo: I think that affordability is absolutely critical to Tesla's automotive thesis related to their electric vehicles because they're getting heavy competition from Chinese makers. Like I said before, they're producing very cheap cars. Now, whether those cars are just as cheap here in the United States versus those in their home countries is something to wonder. When I think of affordability, when it comes to cars, I think the Gold Standard Hondas and Toyotas. Those are the most affordable that are out there. You see them all over, and they're for the masses. If Tesla can create a car for the masses, I think they need to get it to around $20,000 price point because you have Hondas and Toyotas at their lower base models at around $23,000, $25,000. I think that if they can get to that price point, make it profitable, it could be huge for the automotive segment. Then you'll start seeing Teslas literally everywhere, not just for the high-end. I think, though, they need to create a clear product roadmap and what is going to look like for them to get there, because Musk has the tendency to overpromise and underdeliver, and they need to flip that script and really make it plausible that they can achieve this mass market.

Mary Long: If Tesla can develop this more affordable option, that's one way to revive its automotive segment. But if we see vehicle deliveries truly begin to flatten out, as seems to be happening in this report, what does that mean for the Tesla growth story?

Sanmeet Deo: It's going to be challenging because, again, automotives vehicles are about 80 something percent of their revenues. If that just starts to flatten, that's a majority of their business that's flattening. While energy and storage and services, and all these other great pie-in-the-sky autonomous and humanoids are great. They're not a huge core part of their business. This is vehicles are a core part of their business. If they can't make it work, their business will struggle. Now, that's not to say that autonomous and humanoids can come out of nowhere at some point down the road and make up for all those losses. That could happen, but that's still a very aggressive and far-out into the horizon prospect.

Mary Long: Then let's focus on where those other business segments are today. The energy generation and storage segment of Tesla has seen nice steady growth over the past several quarters. This is an area of the business that actually saw notable revenue gains this quarter. Where is that growth coming from?

Sanmeet Deo: They're getting a significant increase in demand for both residential power walls, grid scale, the megapac battery solutions because of things like renewable energy adoption, growing need for grid stabilization, resilience, rising energy costs. They're in a sweet spot of the market where their demand for their products are high.

Mary Long: We had this whole conversation at the top about what it means that Musk is away from Tesla, what it might mean if he returns. What's interesting to me is that we're seeing this growth in the energy segment while Musk is away, running DOGE. Is that a bright spot? Does that mean that, hey, the energy side of the business can actually effectively run itself?

Sanmeet Deo: I think the overall operations, the day-to-day, can probably do a decent job, like we've seen, because of how they've performed on a day-to-day basis without Musk, but the overall vision, strategic direction of the company. I've always thought of Musk and Tesla, you can't get into the mind of Musk, really. But he has some grand vision of how things are going to all piece together when it comes to autonomous and cars and energy, humanoids, all this stuff is going to it's probably altogether in his mind. He's probably having a hard time delivering the message to all of us. That whole vision is needed, and I think him providing that and focusing on that is going to help guide things. Day to day, they can probably do well, but whether they can scale to another level without him, I don't know if that can happen.

Mary Long: A piece of that vision that's long been teased is this idea of the robotaxi and the Cybercab. Musk said on the call that ''We remain on track for the pilot launch of robotaxi in Austin by June.'' June is right around the corner, so that feels very soon. It will be interesting to see if that is indeed something that the company can deliver on. But notably, Musk also says, the purpose-built robotaxi product Cybercab, is scheduled for volume production starting 2026. We throw these terms around a lot, robotaxi, Cybercab. What actually is the difference between the two products, and how do they work together?

Sanmeet Deo: I'm glad you're asking, because that's critical, and I always confused myself before I actually looked into it. The robotaxis, basically, they're going to utilize existing Tesla models, primarily the Model Y, to run the fully self-driving mode. Cybercabs are going to be specifically built cars for the robotaxi service. Its whole purpose is to be used as an autonomous taxi service. The robotaxi service it's a pilot program in Austin. They're going to collect data. They're going to get that experience out there, see how it operates. Then the dedicated cyber calves will come out, start being produced around 2026, which then they'll roll out at some point. On a side note, I was in Phoenix a few weeks ago, and I saw Wemos all over the place, and they're pretty wild. It's very futuristic. That's all I can really say about them.

Mary Long: I'm sure. We'll close out by touching on what I think is your favorite piece of this company, which is the humanoids. Again, this is something that we're still seeing ramp up in production, still in development largely. Musk said, though, on the earnings call that he expects to have thousands of Optimus robots working in Tesla factories by the end of the year, and that he expects to scale Optimus faster than any product he thinks in history, to get millions of units per year as soon as possible. He later clarified that timeline and said that perhaps the company could reach a million bots per year in less than five years, maybe four. Why is Optimus allegedly so easy to scale/do you buy this timeline fully, or is this another example of Musk overpromising and potentially underdelivering?

Sanmeet Deo: [laughs] I love humanoids. I'm a humanoid fan. But I think it's potentially easy to scale because of Tesla's expertise in manufacturing, AI, vertical integration from developing all these, at least the EVs and the software that they build. They can scale it. Whether this timeline is believable, I'm not buying it, because I think that, again, Musk has a tendency to overpromise and underdeliver. Could it happen in 10-20 years? Possibly. Is it going to happen in the next couple of years? Not so sure about Optimus.

Mary Long: Whenever this does happen, Musk has called out that he thinks that the humanoid robots can bring in $10 trillion in revenue for Tesla. What does your analysis say? Regardless of when these robots are actually delivered at the scale that Musk is talking about, do you see the same possibilities in terms of revenue that he does?

Sanmeet Deo: Ten trillion does sound like a wild number, probably very unachievable. But if you take a step back and think about it, there's about 128 million households in the United States. Maybe you assume each one purchases at least one. They've been rumored to be about 30,000 once they've brought the cost down to a reasonable amount. That right there is about three trillion in revenues for households, commercial side of humanoid production, could it hit seven trillion? Possibly, you have them in factories, even in businesses, even in restaurants, you have in different places. Then you have to factor in maybe parts or pairs servicing all the revenues that you get from that, as well, because it's not just going to be sales of these humanoids. It's going to be all the other ancillary stuff, too. Ten trillion wild sounds wild. Maybe not that wild.

Mary Long: Over the weekend, humanoid robots raced against actual people in a half-marathon in Beijing. The point of this isn't for humanoids to outrun humans. I saw this all over the news, and I was like, wait, really, what is the point here? It seems to me maybe more like a publicity stunt or just a test case to see, hey, how capable are these robots actually doing human actions? Well, close out on a fun question. Optimus was not in this race, but had it been, how do you think it would have stacked up?

Sanmeet Deo: I think it would have been terrible. If you've ever seen them walk, they walk really slow and really measured, and I don't even know if they can run, honestly. That was funny. The first thing I thought of when I saw that race was, why are humans trying to create something better than us? Why do we do that?

Mary Long: Well, and it misses the point of why people run marathons or half marathons in the first place. We all know that we can't hit the fastest time in the world, but we're about striving to be better and for self-improvement.

Sanmeet Deo: Exactly. I wouldn't be as impressed if a human breaks the fastest speed record versus a human doing it.

Mary Long: For sure. Sanmeet Deo, always a pleasure. Thanks for coming onto the show and for giving us a bit more insight into Tesla Earnings today.

Sanmeet Deo: Thanks, Mary.

Matt: Hello. My name is Matt.

McKinley: I am McKinley. We are the Father-Son team that brings you history dispatches.

Matt: History Dispatches is a short daily history show where we talk about topics from all over the world and all throughout history. We talk about people, places, events, and even objects.

McKinley: While anything is fair game, we have a soft spot for the weird, the wacky, and the obscure things you may have never even heard of.

Matt: Do you have any examples?

McKinley: How about Waj tech, the bear who rose to the rank of corporal in the Polish Army, or the Great Emu War? Or how about the biggest treasure taken in the history of piracy?

Matt: That sounds cool, but do you have a story about the head of Oliver Cromwell? What about the ancient Library of Alexandria? A story about the first woman to climb Mount Everest would be cool.

McKinley: Well, we got those as well. Every weekday, there's something new and fun.

Matt: Sweet. How do I get this trove of goodness?

McKinley: All you have to do is go to historydispatches.com or just look for History Dispatches in your favorite podcast app.

Mary Long: NVIDIA is not the only chip company in town. Up next, Asit Sharma joins me for a look at Advanced Micro Devices, or AMD, the company that's trying to give NVIDIA a run for its money. Asit, despite the fact that semiconductor stocks are largely cyclical, it feels like they've been in the news all the time over the past few years. One of the names that's often in the news nearly every day is NVIDIA, but a competitor that gets a little bit less time in the spotlight is AMD. The news, the media love NVIDIA, you love AMD. Maybe, help us set the table here. These are both chip stocks, but how are they different? What is AMD doing that's different than what NVIDIA is doing?

Asit Sharma: Mary, yes, to full disclosure. I do own both companies. I own AMD, I own NVIDIA. I have both recommended NVIDIA and AMD, and services I personally run, and services that I work on. I like both companies. AMD is a little bit different because it's more of a diversified player in the semiconductor ecosystem. Although I'm sure there's someone out there who's listening right now and saying, wait, NVIDIA is becoming incredibly diversified. It's branching into so many areas. But the traditional way we look at how semiconductor companies operate I think you give AMD the edge in diversification. It plays in the chip market, so it makes chips for servers. It makes embedded chips that go into industrial Internet of Things devices. It makes chips for gaming, GPUs for gaming, like NVIDIA does. It also makes GPU accelerators, which is where all the attention is focused. I didn't know you were saying. It seems like if these are such cyclical companies, why are they always in the news cycle? But I think we're going to be talking about such companies for quite a while.

Mary Long: Help me understand this. AMD's biggest customers include Microsoft, Meta, Alphabet, Sony, Oracle, big names. We know a bunch of them. The list also continues beyond those big names. NVIDIA does not publicly disclose its customer list, but it is widely believed that its biggest customers are get ready, Microsoft, Meta, Alphabet, Amazon. There's a lot of overlap between those customer lists. You mentioned that AMD is more diversified. But if I'm the person who works at one of these tech companies and I'm in charge of buying up AI chips, what's getting me to buy AMD chips rather than solely purchasing from NVIDIA?

Asit Sharma: Mary, first, we're going to make a distinction here because you said AI chips, and that signals to me that you want to talk about GPU accelerators, the kinds of chips that are used for artificial intelligence, specifically generative AI that help us use large language models and are being applied to so many different industries. If you are, let's say, a hyperscaler, like an Amazon Web Services, or a Microsoft as your or an Oracle, why would you want to buy these chips? Number 1, it decreases your sole reliance on NVIDIA, which has been leading the charge and really developing the strongest, most powerful chips for the last three years since GenAi exploded onto the scene. But also, there's a growing argument within these companies that we want to be able to offer the ability to use generative AI at a lower cost to our customers and for our own bottom lines. Hence, Oracle just placed an order for about 30,000 MI 355x. I think that's the name of the accelerator, a series from AMD, which is an order worth billions of dollars. This was disclosed just a few weeks ago in Oracle's earnings conference call. Because one of the reasons is that total cost of ownership over time for Oracle is going to be less versus buying similar GPUs from NVIDIA. There's some case where you want to buy NVIDIA's GPUs to offer that power and performance. But there's lots of places in the generative AI world for inference, the outputs of these models and for some training purposes, too, where AMD's chips are just as good for lower cost.

You name NVIDIA as being the player with the strongest, fastest chips. The general consensus is that, OK, AMD creates chips that can compete pretty well with NVIDIA, but they still have to catch up with NVIDIA from a technological standpoint. As retail investors, how can we understand the intricacies of the differences between these technologies? What does that path of catching up to NVIDIA from a technological standpoint actually look like for AMD from the outside? I think in some ways, it's becoming a little bit easier to understand than it used to be. There's one very visible thing that I think so many listeners may have heard of. One of the things that makes NVIDIA's products great not only is the GPU hardware, but it's the software libraries, collectively known as CUDA, that you get when you buy NVIDIA GPUs. Some of these come with the purchase for these big hyperscalers and even, academic institutions. Some of those have higher costs associated with them, but they make those GPUs really powerful, and that's been an edge that NVIDIA has had for a long time. Now, that's a closed system. It's NVIDIA'S own.

AMD has chosen to go another route with ROCM. This is their open-source version of accelerator libraries, which they basically invite the world to come and help improve that. That's getting better and better. One of the things that we need to see out of AMD is not just being able to be within spitting distance on the GPU side, but to have its software libraries become more powerful. To bring down that total cost of ownership, but also just to make their GPUs function at a level that NVIDIA's do. Now, there's another big picture thing for folks to watch in the coming years. NVIDIA is so ahead of the race because it's now moved on from supplying these great GPUs to supplying rack-scale systems. You and I were talking about Vera Rubin a couple of weeks ago. All these crazy names that NVIDIA has that are poetic. What this simply means is that instead of buying GPUs and making them operate, companies that are hyperscale companies or think even enterprise businesses now can connect those GPUs on racks and have those GPUs communicate with each other and become this integrated unit of computation that's much more powerful than just buying them piecemeal and throwing them up on a server rack. Rack Scale means interconnecting a lot of these GPUs. NVIDIA has the connection technology, which is ENV Link, and I have talked about.

They also have these great GPUs. We're going to Asterisk this bit because I know you're going to ask me about an acquisition that AMD made that answer is part of this question, but AMD needs to develop Rack Scale systems to really compete with NVIDIA. These are the two things. Get better in software and migrate to Rack Scale systems. I think between those two things, it can really have a competitive offering. I think we've moved beyond the day where we're always looking at the specs. Like, how fast is this GPU? What's the performance of it? What's the workload? How's it performed vis-à-vis benchmarks? AMD is getting closer and closer on the benchmarks. Now it becomes a question of software and making those GPs talk together.

Mary Long: If you're an outside investor, one of the ways that you might measure AMD's progress in those two areas is not just listening to what the company actually says, but also keeping tabs on their R&D numbers. Between 2021 and 2022, AMD nearly doubled its R&D spend. It's continued to tick up in the years since, but at a slower pace than that interval. We haven't yet seen that payoff in AMD's margins. Operating margin was north of 22% in 2021. It's under 8% in 2024. For comparison, NVIDIA's operating margin was nearly 62.5% for fiscal 2025. You're seeing foundation being laid by AMD to try to catch up with NVIDIA. When and how will investors be able to tell whether those R&D investments are actually paying off for the company?

Asit Sharma: One of the things I want to point out before I answer that question, Mary, is that NVIDIA's operating margin of 62.5% is an unfair comparison, not just to AMD, but to any major company. This is probably the first or second-highest operating margin in the S&P 500. If you think about the biggest and baddest US companies, this is NVIDIA riding a wave of demand in which it's exercising a lot of pricing power. Historically, NVIDIA's operating margin is healthy because it's more of a GPU-dominant business. It can range between 15 and 30% in good times. But it's a company that also has negative operating margins at the bottom of the cycle, we've seen that too, out of NVIDIA. Right now, it's taking that advantage and exercising the fact that its products are so in demand. As an NVIDIA investor, I watch that as one of the things that's going to come back down to earth, what should be an operating margin for AMD in a good part of the cycle? To me, it should be somewhere around 20% above. You mentioned it was hitting that in 2021. Again, it's a more diversified business. It has different paths to win.

I think we're seeing that R&D investment paying off this year in 2025. We should see operating margin move up to around 10% this year. The cadence looks like it's going to hit somewhere between 12 and 14% in 2026 and should hit around 20% in 2027. Only now we're seeing the investment in that R&D payoff, but that was a lot of quick-turn investment where AMD pivoted to the accelerator space because they saw the opportunity. Recall something that Lisa Su did when she first took over at AMD in October of 2014, which is to say, guys, we're going to innovate. We're not going to worry too much about the outside world, and we're going to make great products. It took two or three years for those investments to pay off, but it became look a leader in the chip space. This year, it displaced Intel for CPU coverage in data centers. I think as these years play out, the next three years, we're going to see that operating margin climb all the way up to 20% by 2027.

Mary Long: You teased out news about this recent acquisition that AMD has pursued and followed through on. If you're one way to play catch-up in this chip race is to build things in-house, another way to grow your company might be to acquire businesses that are doing work that you're already doing or that you haven't yet touched. AMD earlier in August of last year, announced that they would be pursuing an acquisition of ZT Systems. They're a service maker. AMD shelled out nearly $5 billion for that company, paid about 75% of that price tag in cash. What does ZT Systems do, and how is that going to expand AMD's potential?

Asit Sharma: ZT Systems is a designer of server systems, rack systems that I was just referring to in data centers. It not only designs them, but it manufactures them. AMD, yeah, shell out that $5 billion. Interestingly enough, Mary, it's going to actually sell off the manufacturing portion of ZT Systems because at its heart, AMD is a design company. They design chips. They don't really manufacture them. TSMC is one of its partner companies that actually manufactures chips. It's going to do the same thing here. That will help it also keep from maybe competing with some of its own suppliers. But I like this a lot because it lets AMD take a technology of its own, which is called Infinity Fabric, and basically replicate what NVIDIA is doing with its rack-scale systems. We should see in a system that's called the MI 4,000 sometime in 2026, AMD's first real convincing answer to NVIDIA's dominance. My thesis all along is that AMD doesn't have to displace NVIDIA, just needs a few billions off the top. NVIDIA is rolling with tens of billions of dollars of GPU revenue every quarter. Just give AMD a few billions of that, and this company is going to see a great boost to its margins in free cash flow. Free cash flow, I should mention, is going to more than double this year, even after AMD has announced a tariff hit from export controls on a lower-level chip it was designing for the Chinese market. It's still going to double its free cash flow this year, and it's on its way to a triple probably by 2028 in terms of free cash flow.

Mary Long: Throughout this entire conversation, we've been making the comparison between NVIDIA and AMD and you just pulled out some numbers stating that, AMD's free cash flow is going to double, potentially triple relatively soon. If you look back from where we are now over the past year, whereas NVIDIA shares are up nearly 30% in that year-long time frame, shares of AMD have fallen over 40% in the same time period. What gives? It sounds like you're laying out a very compelling case for AMD and its growth path forward. Why does the current share price not seem to reflect that?

Asit Sharma: I think the market's concerns are legitimate. The market is saying, look, if you are so great, AMD, then why didn't we see you explode in GPU sales in the first year after you said you were also going to play in this business? They did get off to a slow start out of the gate. There are questions about execution. Companies want to know if AMD really can provide that cost advantage. The other thing, I think, that poses a cloud over AMD is just this comparison. I've argued all along that AMD doesn't need this business to succeed as a company, but the market sees it very much as a race between the two most capable makers of GPUs, and NVIDIA is today been so far ahead that I think it suffers from that comparison. There's execution risk, and there's also this, I think, slightly unfair comparison that AMD suffers under, but that's actually a good place to be. AMD loved that position when it was just a shadow beneath Intel and took over that business. I'm not trying to forecast that it's going to take over NVIDIA's business.

Again, I love both companies but I do think there's room in a company that now seems relatively cheap versus its future potential for it to grab some of that market share. I think the order that Oracle made that I mentioned at the beginning of this conversation is one of the first indications that the cost proposition is making sense to companies that don't want to keep spending indefinitely year after year at the pace that NVIDIA is rolling out as innovations. Remember, you and I were chatting about NVIDIA trying to have a new better product every 12 months. That's great until people's appetite and capital propensity starts to really push up against this. I liken it to people who have sort of free money and can keep buying the latest either car or stereo equipment, and then suddenly, when that money is tight, you start to really love what you've got. I like this vehicle. Sometimes those people turn into, and I have friends like this from trading out cars and leases to, I'm going to drive this car into the ground. I paid it off. I get that. AMD can really benefit from a world in which some of these hyperscalers are like, hey, I want to run some of these GPUs into the ground.

Mary Long: 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 are not approved by advertisers. With the Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma has positions in Advanced Micro Devices, Amazon, Microsoft, Nvidia, and Oracle. Mary Long has no position in any of the stocks mentioned. Sanmeet Deo has positions in Alphabet, Amazon, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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This video was recorded on April 23, 2025

David Gardner: Did you grow up believing the sacrifice bunt was baseball's surest path to a run, or that a smooth mid range jumper in basketball beat the risk of a 35'3"? Modern analytics have put those debates to bed. Most times you're better off letting your batter swing away, and as a league average shooter, you'd score more from downtown than from the mid post. This week on Rule Breaker Investing, we're stepping off the trading floor and into the stadium with longtime sports journalist, podcaster, high school basketball coach, and Major League baseball scout Kimball Crossley, one of the sharpest rule breakers I know in athletics. Kimball has spent decades challenging the orthodox playbooks of pro sports. You may know the Sack punch line and the mid range jump shot punch line by now, but Kimball's here to throw some new thoughts your way. What are sports journalists, fans, coaches, owners missing or getting wrong in sports today? This week, only on Rule Breaker Investing.

The world of sports has as much conventional wisdom wrapped in all around it as the World of money and Investing. As the Micah Lewis book made into a movie, pretty good one entitled Moneyball, clearly demonstrated the world of sports and of finance are inextricably bound. Just as we're looking to invest in stocks that will win the share of profits in their industries and do so with excellence, over, we hope, a long sustainable period of time. Those are the Rule Breakers I talk about every week. So too, do teams look to make investments in players, this one, not that one, akin to picking stocks. Those teams hope those players perform, win on the field, make a lot of money for the organization, as well as for themselves, reward the fans, win, win, win. But as Moneyball and the great baseball mind of Bill James that came before it, have proven not every team's investment in a player or a play or a strategy or tactic or head coach, not every team's investment in those things is well thought out or pays off. Sports has its losers and losing investments, too. Just as I think taking a Rule Breaker mentality as an investor, exhibiting the six habits of the Rule Breaker investor will win in your investing, turns out breaking the rules, rethinking or reframing how to approach the game can also win in sports. Think about dunking. Dunking was actually illegal in college basketball 1967-1976. The NCAA banned the Dunk before the 1967/68 season, citing injury concerns and a desire to reduce the advantage of taller players like Lou Alcindor, Kareem Abdul Jabar. Yeah, times change and thoughts change, too.

Conventional wisdom rules the roost on sports commentaries, whether it's hot takes you see on ESPN or that morning sports calling show you may listen to during your commute. If you're a sports fan, you're in for a treat this week. Get ready to rethink one or more of the things you may take for granted as a truism in sports. My guest this week is Kimball Crossley, a favorite sports writer and podcaster of mine, who's been a Major League baseball scout since 1999. Kimball's podcast Three Point Range features him and two other bright lights, all of whom bring a point each podcast to challenge our thinking about what we're seeing on the field and in the sports headlines. I first got to know Kimball way before that when we both attended the University of North Carolina at Chapel Hill. Before that, we were actually at the same New England school, no less. Kimball is a friend I want to share with you this week.

Speaking of sports, I want to mention we have a Rule Breaker investing podcast Weekend Extra, George Foreman dearly departed this Earth earlier this month, a wonderful man, great athlete, great human being, also a great guest on the Motley Fool Radio Show back in the day. I'm going to be joined by Motley Fool, longtime producer Mac Greer. Mac and I are going to relisten together to our short form Motley Fool Radio Show back in our NPR days. That interview we did with George Foreman, Mac and I will offer some thoughts, as well. It'll be short. I hope it'll be sweet. A Rule Breaker weekend extra popping up in your feed this Saturday morning.

But first, as I shared at the start of the year, my 2025 book, Rule Breaker Investing is available for pre order now. After 30 years of stock picking, this is my magnum opus, a lifetime of lessons distilled into one definitive guide. Each week until the book launches on September 16th, I'm sharing a random excerpt. We break open the book to a random page, and I read a few sentences. Let's do it. Here's this week's page breaker preview, a few sentences from around page 40 of the book, and I swear I randomized this week of all weeks, it's about baseball, and I quote. "A single home run is far more impactful than a single strikeout. In fact, even if a player strikes out four times every single game over and over, known as a golden sombrero, but hits a home run on his fifth at bat, that player would be on the short list every year for league's most valuable player. What's true in baseball is truer in investing, where the contrast is even sharper." That's this week's page breaker preview to pre order my final word on stock picking shaped by three decades of market crushing success. Just type Rule Breaker Investing into amazon.com, Barnes & Noble.com, or wherever you shop for great books. Think about it of all books, a great investment book literally pays for itself. Should anyway. To everyone who's already pre ordered thanks, that means a lot to me. Kimball Crossley. Welcome.

Kimball Crossley: Thank you. It's great to be here.

David Gardner: Kimball, you've brought along several examples we're going to go through this week, conventional wisdom and sports that you've observed that likely many of us, Kimball have observed, and you are you're like, no, that's wrong. They're not doing it right. Whether we're talking about the athletes, the coaches or the media who cover them, it's not limited to anyone's sports. Let me start by asking you about a very popular sport many Americans love, which kicks off around Labor Day every year, and that's American Football. Kimball, even in just the last decade, the game has changed. Somebody had a light bulb go on over their head, gathered the data, and proved that we were doing it wrong. The example I'm thinking of is the rot tendency in football on fourth down and one or two or three. Just a punt, give up the ball or try a field goal. Maybe Kimball, I know it started earlier than that, but by way of getting into Rule Breaker sports spirit this week, what happened there and why?

Kimball Crossley: Well, it's interesting. That's a great example. When I was younger 30 or 40 years ago, I read the hidden game of baseball, which tried to prove some of these points. Then I found the hidden game of football, which had some of those. I believe one of the things in there was, you should almost never punt because giving up the football anywhere is worse than just taking your best chance. It is interesting that years and years later, finally, we're seeing it, but we're seeing a lot of teams are still pushing back. A lot of analysts or pundits, I should say, are pushing back on that. I think it's funny ever the contrarian I will almost push back on that myself because I do coach. I'm going to mention your cold open where you talked about how we realized that the three pointer is much more valuable than the mid range jump shot. But just like going for it in football on and down, when you're coaching, it's not so much the fear of being wrong and I'm going to look so bad if I go for it here is the biggest factor. You know what your players can and can do. Going back to the basketball example of the three pointer, like, yeah, if we could shoot open three pointers or three pointers all day long, we'd probably throw more points. But guess what? The defense isn't going to let us get three pointers wherever we want. They're also going to do a good job of now they realize taking away the inside shot and the layup and the dunk. It's funny when I coach, one of the things I coach my team to be good at is the mid range shot.

Of course, I'd rather have an open layup, I'd rather have an open three. But when you don't get that, you better be able to do something else, and that shot is often the mid range jumper. I want to be good at that when we have to get it. I noticed that a couple of years ago, I think that in the NBA finals, it came down to one mid range jumper as another after another because both teams were taking away the two things yeah, the teams want me to do. In football, you might say, it's worth it trying it on fourth and five from here. But you're like, look, we can't even push these guys back for a yard. We're better off kicking the ball away, and maybe our defense can make something happen. Of course, it all goes to time and score and things like that. But, it's just time is it's been funny to watch over our lifetimes, Dave, we've talked about this when we first met about a lot of baseball analytics. We've seen teams embracing them things that we were like running around, go like, oh, my gosh, why don't you do this? Why don't you realize this? Just like your example, the home run. Now, years and years later, they're pretty commonplace, and most people realize how much more valuable the home run is. In fact, that's why we're seeing a lot of problems in baseball now where teams, it's not pleasant to the eye to watch a game where all anybody does is walk, strike out, or hit a home run.

David Gardner: Well, we're going to talk some about Major League baseball coming up I know. Kimball, you and I talked about it ahead of time, you're bringing three cardinal points. There may be some other challenges to conventional wisdom beyond just that, but you have three primary ones in mind. Let's get started with point number one from our Three Point Range podcast host.

Kimball Crossley: This one is that momentum is not a real phenomenon. It's not a reliable phenomenon. Of course, we hear it every sports broadcast, every game we watch, and it's like they've got the momentum now. What I like to say is, you know what? If momentum existed in sports, the team that scored first would win every time. It's like they've got the momentum. What good is momentum if it could change at any time? That doesn't mean you had it. It's like they've got the momentum. Well, now they don't. I just think we observe it, we see a pattern, we see a team go on a run. But it's not like this real reliable thing. I don't do a lot of gambling, but I'm sure gamblers must run into this all the time, and it's similar, I guess, to stocks. Just because something is happening several times in a row doesn't mean it's going to happen the very next time. Just because it's gone up 10 days in a row doesn't mean it's gonna go up at 11th. In fact, the opposite is true.

David Gardner: It occurs to me, Kimball, the line we never hear because you're right. Announcers are always referencing the momentum. What we never hear is they're losing the momentum or their momentum is switching. Those are lines I literally, and I have watched thousands of hours of sports, I'm not sure I've even ever heard a main line announcer say something like that. It's always just recognizing as you just said, what we've already seen on court, the fans are all reacting to it because, of course, the team scored three times in a row so they have the momentum. But Kimball, does the data also back you up here? Is it generally true because I imagine in basketball, I'm thinking about a sport where people "hot." Somebody hits their first two threes, when they attempt their third three back to back to back, I would think maybe they have a higher percentage chance of draining that three. I don't actually know, I'm not presuming you know. This is a little bit analytic, heavy, but is there some momentum out there?

Kimball Crossley: No, I have seen studies about the hot hand, and in fact, the studies have pretty much shown it doesn't exist. It makes sense, because it would be the same idea like you're hot until you're not. When you say, stop the study now he made four in a row now we're done. I don't care that he just missed the next five, but he made four in a row. He had the hot hand. It's funny because I do still coach. I coach at that high school level and and have for the last 30 years at one level or another. It's funny because when you coach, and when I made this point on Three Point Range, the other two hosts were pushing back at me and saying, well, what about when you call time out in basketball? I said, well, there's lots of times you call a timeout, and it doesn't change the momentum. We think it does, but sometimes. But when I call time out, it's usually to fix something to change a real thing, not to like I'm just calling this to change the mood and the team.

David Gardner: When your team is on the road and the other team just went on a 10-2 run and the fans are going crazy, you've never called a timeout just to shut the fans up?

Kimball Crossley: I've called the time out to say, you know what? They scored 10 points in a row because we didn't box out, because we didn't deny the post or because we keep turning the ball over. It's usually to fix something real. It's funny because I do think that as we talked about in the pod, confidence and momentum could be closely aligned. I do think confidence is definitely a factor in sports. A lot of times you call the time out to change the confidence level of your team. Say, I know it feels bad, I know they're going crazy, I know they scored 10 points in a row, and this guy just dunked in your face. But guess what? If we had just run the right play there and hadn't turned the ball over, they wouldn't have had that breakaway dunk. How about we get back? Remember this play runs with you screening down and you doing this? You make some adjustment, usually. You talk about something real, or you just give it to him confidence. I know it seems like we can't play with these guys, but remember what we worked on in practice and this and that, and you're trying to instill confidence. I play individual sports, too, and I'm always trying to boost my own confidence when I've got a non hot hand, a cold hand. The same things happen in sports, but I don't think it's a real thing the way announcers talk about it.

David Gardner: That is obviously so contrarian, because it is ubiquitous. The momentum talk, it is taken as gospel, I think, by the media who covers sports and also by all of us, so many fans watching sports. We're talking about the momentum, change the momentum. No one ever says again, they appear to be losing the momentum we talked about.

Kimball Crossley: It was funny because I coached football briefly at the high school level, and I remember one coach, I really respected him. But one time on the sideline, I heard him say something like, let's change the momentum. I'm like, Coach, how do you want to do that? Shall we? It's like every team says we want to get off to a good start. Yeah, of course. You don't say let's start slow. Makes no sense.

David Gardner: Kimball, you are based in Providence, Rhode Island. You've been there a long time. I think you grew up in New York City. Am I right?

Kimball Crossley: Yes. Right in Manhattan.

David Gardner: How long have you been in Providence?

Kimball Crossley: Most of the last 35 years, I did live in Phoenix, Arizona for seven, but for the most part, the last 30 years, I'd say.

David Gardner: I remember you writing for your local newspaper, both, I think, in Massachusetts for a while and then also over in Providence. Yet, you're talking now about your many coaching experiences. That's really what I wanted to ask you a little bit more about now. Did you have your eyes opened in new ways? Did you see with new eyes as you began to coach more regularly after having written about the game for so long or not?

Kimball Crossley: No, I think so. I think it's funny because I did start out as a sports writer and have worked as a sports writer for 10 years, but I was covering baseball, I was covering basketball, two sports that I've always loved. I think it was no accident that I ended up doing both because I think part of the problem I had was I would covering them. When you're a writer, you're a little bit of a skeptic, a second guesser and you want to know, hey, what's it really like? Here I am criticizing this coach or this team for doing dumb things in baseball or dumb things on the basketball court. Why am I put myself on the line? I was like, yeah, I'd rather do then comment on it, and it just worked out that I was able to get a job in baseball and put some beliefs that I have into practice and coach basketball and test my beliefs there and realize this is why it's a lot harder than you think to do these things, but also in some ways, to prove that the things that I believed in do work. I think with baseball, especially just as I alluded to before, when you and I were into Bill James and the Analytics, well, every team has embraced those, more than we could have ever imagined when we were younger.

David Gardner: Yeah. One of the things I've always enjoyed talking about with you, and we're going to do it a little bit now, but the comparative sports observations, because you have coached many sports, you've played many strokes. You're an avid tennis player. You've played and coached many sports. There's a tendency to group sports together and say, sports works like this. You either get knocked down and get yourself back up for the win. We try to use aphorisms and statements that work across sports, and no doubt ones that are about mindset probably makes some sense. But I'm wondering, just as we close up momentum, it does strike me that a live action game like basketball would be perceived to have more momentum. The word would be used more for basketball than let's say baseball, a sport that you dearly love. There is some sense of momentum in baseball, but that pitch by pitch rhythm and the pauses in the game seem to fight back against the idea of real exciting momentum in baseball.

David Gardner: Any thoughts outside of those sports in terms of sports most lending themselves to misleading fans and other observers who are seeing too much momentum in that other sport?

Kimball Crossley: It's funny because you talk about momentum in baseball. I remember there's a famous quote, Momentum is tomorrow's starting pitcher. [laughs] We see that in baseball all the time. When a team loses a tough game in the ninth, they like, and everybody always say, and that doesn't just hurt you tonight, that's going to carry over to the next game.[laughs] Again, studies have shown no, it doesn't. It's all about the next guy that's out there the next moment. That's all momentum is. It's the next play that you make. Other sports, it's funny because it was your brother, when I think he might have been coaching girls' basketball before I was coaching boys' basketball, and he was coaching at a very low level. Whether it was girls or boys, he said, you know what the key is? If you score first and put on your press, it's almost like the other team can't get the ball up the court. It's whichever team scores first and gets in the press, but, of course, if one team breaks the press, finally gets a basket, and puts on their press, it changes.

I think about that, but it's funny lacrosse seems to have a way about that, a momentum. I think lacrosse is such a strange sport in terms of how it's scored. We know in baseball and hockey and even football, even though they inflate the scoring by giving it seven for a score when really it's three touchdowns to two, 21-14. But a score means so much. Where in basketball, it's like, well, teams score 100 points, 80 points, and it's more about the pattern of how they score. Why would you think lacrosse is stuck in the middle? Because lacrosse is 12-7. It's like that goal was big, but it wasn't that big. It wasn't hockey big. It wasn't touchdown big, but still was big, but here came four in a row. So maybe lacrosse has some of that. Even in other sports, maybe it's more obvious that the momentum can change because you just scored a touchdown and now you kick off, and now they have the ball, well, is your momentum really going to carry over to your defense when your defense teams?

David Gardner: Just to be clear to all our listeners, momentum, every time I've used it in this podcast, is in air quotes throughout the written transcript of this podcast one day. Well, thank you for the Kimball momentum and pickle-ball, by the way, pickle-ball.

Kimball Crossley: Sure. Well, it's funny those sports that you have to win serve to score.

David Gardner: Good point. Volleyball? Or that used to be how it was anyway.

Kimball Crossley: I think that contributes almost to the momentum because a team can go on a five point run while they have the serve and it feels like just like, Oh, my gosh. As the alternating of winning serves and no one scoring for a while.

David Gardner: I think we did a pretty good job taking down momentum or at least encouraging everybody listening to ask twice. Think twice about it, and see if you can ever find an announcer saying, it appears that they are presently losing the momentum we talked about. Let's move on to Number two. Kimball, Rule Breakerism in sports Number 2. What you got cued up?

Kimball Crossley: I've argued this one all my life, and I believe it. But it's very hard to prove in some empirical way. But the quarterback is the most overrated physician in sport.

David Gardner: In sport?

Kimball Crossley: In sport. I have a good friend who's very smart guy who says, no, it's opposite. It's the most important position in sport. I'm like it might be important, but it still it gets so overrated in terms of its importance. Everyone thinks it's like one guy out there facing the other guy. Oh, that's going to be Brady versus Russell Wilson and it's like, in football, especially having coached it a little bit, and one of the reasons I coached it was again to find out about this mysterious sport. It's 11 on 11. To me, it's the ultimate team game, because if your guard screws up, your quarterback's face down in the dirt. Any one of those other 10 guys can screw up his job, and your quarterback looks terrible. I always like to say, every quarterback looks great until he's under siege. Every on under siege looks terrible. [laughs] I know, like, people will point to Tom Brady and Pat Mahomes. But even Pat Mahomes in the Super Bowls, where he hasn't had the pass protection running around for his life.

I always think of Trevor Lawrence when he was in college and everyone thought he was just unstoppable and then he got into, like, the championship game, and all of a sudden his line was overwhelmed. Then he was running around looking terrible, throwing the ball around all over the place. I just say like, any quarterback without a line is going to look like garbage. I know Brady won a lot of Super Bowls, but he happened to have good teammates around him. Now maybe he is better than every other quarterback, but he's not as much better as people think by giving him all the praise that he didn't do it alone. Of course, I have argued this one, and every time a non descript or a non famous quarterback wins the Super Bowl, I'm like, there you go. Mark Rypien or Jalen Hurts. No one's saying he was the best quarterback in the world and Nick Foles a guy like, had trouble getting a job, and then he played one of the best games ever. I am there on that, but it's a tough one to argue with people because they love them some quarterbacks.

David Gardner: It's so compelling, I think, for the media, and I don't mean to bash the media too much this week, but it's not just the media. It's the television ads. It's the producers. Mahomes versus Josh Allen coming up this Sunday. Literally Mahomes never actually is on the field or faces off against Josh Allen. Anyway, it's like a prize fighter fight where only one boxers ever in the ring, and they're strutting around. We're like, look at Mahomes. Wow. Mahomes versus Josh Allen. Where's Josh Allen? Mahomes leaves the ring. Josh Allen. It is almost inevitable. It's just producers and hype masters and the people who want us to watch things. They can't not do that.

Kimball Crossley: It's all we really know how to watch. It's easier to see what the quarterback does. You don't have the camera on the guard all game long. You don't even know what's going on with a lot of the plays and the positions. It's hard to tell even what's happening out there. I think it's easy to see when a guy throws an interception or throws a touchdown pass so it's just part of how the game is produced and brought to us, but it definitely is one that drives me crazy, and I find myself loving to root for a team without a quarterback with a no name quarterback with the third string quarterback, and they just beat the team with the best quarterback in football.

David Gardner: You mentioned football, which to me, the sports that I watch, I think of it as the ultimate team game. Maybe it's because there are more people on the field than, let's say basketball or hockey. People are very specialized and you absolutely have to rely on the person your left and right to have a successful play. But also part of the team, Kimball, and I wanted to go this direction now is the coach, the offensive coordinator who's calling the plays or the head coach. The design and execution and choice of each of the plays is I mean, that happens some in basketball. It happens some in hockey, not so much in baseball but in football, it's such a profound part of it. That's why, at least from my standpoint, as a longtime sports fan, I've always said it's the coaches who keep winning and coming back every year. The superior coaches are the more sustainable competitive advantage than the quarterbacks. Now, I realize a lot of people would say Tom Brady, there are other examples, too, as you pointed out. But I want you to speak briefly just to the dynamic of how much the coach matters in football maybe versus baseball.

Kimball Crossley: It's huge, as you point out, and it's funny because just a small anecdote, I am from New York, and I've lived in New England for a lot of my life, maybe more of my life than I haven't. I've had to be around New England sports fans and teams and as a New Yorker, it's my duty to hate them. [laughs] I've had to live through the Brady Belichick years and had to test Belichick cause he left my Jets famously to go to the Patriots. I found myself when the Brady Belichick split happened. I thought, Oh, my gosh, am I going to have to root for Bill Belichick? Because I have to pick the coach instead of the quarterback here, and I can't have Brady succeed without Belichick. Belichick not succeed without Brady and, of course, that backfired. I mean, Brady won the Super Bowl. He's got all the brand new rights. Belichick has now has to go to college football and had a rough last few years without Brady. If that's someone's argument, it's hard, it's very anecdotal, obviously, but I can't fight that. But you're absolutely right. Especially when you coach football, it's not just the play calling.

The play calling is huge because you really have to make a huge decision. It's not just run or throw, but where do you run? What kind of run? It makes such a difference. I know coaches must live and die with, their thought. Famously, Pete Carroll and the Seahawks not giving the ball to Marshawn Lynch one more time on the goal line instead of throwing interception. But again, when you coach you realize, as a coach, 95% of what you do before the game is what's more important than what you do in the game. You can call it time out, which everyone thinks is the key to coaching. It's like, no, the key to coaching is like teaching your guard how to pull properly and its footwork and how to hit the guy and how to tackle. It's just amazing all the work that goes into a football program and building a football program and creating these guys and then just as you said, it can go on the field, and so much can go right or wrong, based on your decision. I agree. I think it's funny because I think I've always admired coaches and followed coaches more in sports more than I have athletes.

David Gardner: That is itself very contrary. Obviously, most of us are idolizing the athletes, and especially starting as kids, we don't really think so much about the coaches. There's some old guy, usually. But I appreciate that point, Kimball, and I'm just wondering the implications of what you're saying that the quarterback is the single most overrated position in all of sport. I think what you're saying, if we're trying to translate this. If we're trying to money ball, if we're going in, let's say we acquire your Jets, you and I somehow hit it huge on the stock market. We buy the Jets together. How are you running the Jets differently, thinking in part salaries or allocations than how everybody else seems to be running their teams?

Kimball Crossley: Well, we're a great example of this problem because the Jets, I don't know how many times in the last 20 years, 30 years, the Jets have traded up in the draft for their next quarterback hope and had it backfire on them. Or they've gone out and acquired Brett Favre or Aaron Rodgers, the big name quarterback, two of the greats, the all time greats who each of all only won one Super Bowl each, by the way, with all their playing time and all their accolades and then see not backfire. Yes, if I ran the Jets, I said, what we're not going to do? We're not going to spend big money on a quarterback. We're not going to trade up to draft a quarterback. We want a good quarterback, but you know what we also want? We want a good line. We want good defense. We want good everything.

Let's make prudent decisions on all those. What I would probably do is I'm going to sign, I think the one thing you want in a quarterback is don't screw it up. Don't take all our hard work and just throw the ball away. I think sometimes young quarterbacks, the young hopes, do that. It's just inexperience, and they're more likely to throw that giant interception, which if you talk about analytics, an interception has to have, amazing negative value on your chance of pinning a game. I say, like, give me safety, Tom, and just say, go out there and just do a good workmanlike job. I know you have no one respects you. You've been in the league 10 years. You never made any money, no one cares. Give me that guy, and I'm going to build this great team around you. That's what I would try and do.

David Gardner: I'm inspired. You've inspired me with your mini speech. Before we leave football, let me just briefly ask you, a lot of people were predicting some years ago that concussions were just going to ruin the sport and it was going to disappear. Kids were going to stop playing it, etc. I'm really not there at the youth league level, and I know you're not coaching football right now, but you're a longtime fan, observer, and journalist. Any thoughts about the state of head injuries and how it might change or might never change? Are we all OK with it? Where are we here in 2025?

Kimball Crossley: Well the sports at the level are very focused on head injuries and especially in a lot of sports where you don't get a lot of head injuries. If you have a player that does get a concussion, he's out for a while, and there's lots of concussion protocol and any of that's not the worst thing. It's not the best thing for a coach who's trying to get his kids back on the field and for the player that has to sit out. But they're very aware of it. It is interesting because I do think there are hot beds where football is still popular, but definitely it's harder and harder to field a high school football team. It's harder and harder to get parents to let their players play multiple sports, especially if one of those is football, and it's not their first sport. I do wonder if one day it's going to, say, dry up and they're going to be like, we don't have enough players out there to choose from. But we can't leave football without me giving you some credit and telling you that just about every time I watch a football game, and part of my being a contrarian is I'm always thinking about how we can improve the rules in football and any sport I watch.

There's a rule that can just make the game so disappointing. We're playing this great game, and now there's a pass interference call, and it's 50 yards downfield, and it's so hard to tell what happened. The two guys are like, slapping each other with their hands, and they called on the defensive back and it's 50 yards. I'm like, 50 yards. You just gave him five holding penalties. You just gave him 10 illegal procedures, 10 offsides. I've always said, we've got to somehow reduce the penalty there. It's just a clear call, and maybe if like, blatantly, you just wrestle a guy to the ground when the ball is coming, it's so obvious, you can give Max. But Id always said, like, half the distance. Split the baby.

David Gardner: Nice.

Kimball Crossley: But the point I wanted to make was football has so many of these. It's so frustrating to watch, like, the little things that go wrong and it was you, David Gardner, who said, just let him wrestle. [laughs] Just let him play. In other sports, I disagree. Like, basketball should not turn into wrestling match. But football is mano a mano. Football is about, toughness and you can still out run your opponent so he can never catch you so he can wrestle you to the ground. But just let anything go. I think about that all the time. Why don't we just let the defensive back if he wants to grab that wide receiver and throw him to the ground or an offensive guard wants to hold him great cause the defensive guys allowed to throw him away and do all that stuff, and maybe you don't allow hicks to the groin or head slaps or pokes in the eye but almost anything else goes, I really think it would be a better sport because we wouldn't have the game tipping on, I think he touched him a little bit there and that's for 50 yard penalty.

David Gardner: It also slows down the game as we watch the Insta Replay eight times. But thank you, Kimball. I appreciate that. I think that fewer rules is always better and less influenced by referees, even though as a contrarian myself, I like to celebrate the referees. I'm used to watching youth sports. I'll never forget a moment in Little League where one of the parents on the other team was badmouthing the umpire who I think was a dad on our team and he turned around and he said ma'am, we actually have a real shortage of umpires in this league. Not many parents have volunteered for this we would love to have your help. [laughs]

Kimball Crossley: That's great.

David Gardner: I mean, it is great. So more power to the referees a little bit more often. A great moment happened in a Minnesota Twins game a few weeks ago. For the second time in recorded baseball history, they started keeping these numbers in 2015, I think, Kimball and umpire called every single ball in strike correctly. Again, it's only happened twice in all recorded Major League baseball games, and I was watching it. There were 168 pitches in total between both teams. Of course, some of the pitches were hit, so those aren't being called by the umpire, and the umpire was 168 for 168. That little white rectangle that we all watch and wonder, why don't they? Like the alien visiting from Outer Space watching baseball seeing a ball outside the white box and it gets called a strike. If I'm that alien, I'm like, why did that happen? We have technology. Why are we doing that? Anyway.

Kimball Crossley: Well, no, stick to that because I was going to say before you even said that, you must be in favor of ABS, Automatic Ball Strike system, which is you can use technology to call balls and strikes. They've experimented within a lot of games I've seen because I am a baseball scout and I go to a lot of Minor League parts and that's where they've done their experimentation, and I've seen it up close and personal, whereas other people have this spring training, Major League baseball used it some, so I think some people finally got to see it live or on TV that never went through a Minor League game. But, Dave, it's amazing.

One of the things that I think they've talked about just having the ABS do all the calls for balls and strikes. But an interesting compromise, which I actually think makes a lot of sense and has worked is to give a team three challenges. Unlike challenge in other sports, these challenges happen fast. You're at a game, and the player, unlike in, let me just say in baseball, I'm all for the George Brett rule on any instant replay. If you have to look at a replay yourself to tell him to look at the replay, no, if you're not running out of the dugout, like George Brett in the pine tar incident, you don't get the challenge. It's got to be immediate like, you missed that, buddy. On the balls and strikes, you have to signal right away that you're challenging, and it goes right up on the scoreboard, and you see, and it's amazing because it proves how good the umpires are because when they're wrong, they're wrong by an inch. It's like, good luck with that. If you're right on the challenge, you get the challenge again as many times as you're right.

What that does is going back to our youth, Eric Gregg, Livan Hernandez, Atlanta Braves, one of the worst officiated games ever when he was called, strikes like a foot or two outside the zone, and Atlanta Braves' season went down the drain and their dynasty in many ways. If an umpire is wrong and you challenge it, and he sees he's wrong, he's not going to keep calling that, whereas the whole thing of, like, well, now he's established that is the zone. He's established that you can get three inches on the corner. It is so good. It is so effective. It is so quick. Hopefully, it's coming.

David Gardner: I have not seen that in play, but again, talking to a Major League baseball scout, you see stuff before the rest of us. That's pretty cool, Kimball.

Kimball Crossley: That's great.

David Gardner: Well, let's queue up Number 3. Before we do, I just want to mention you can start your day with the Motley Fool's free daily market email newsletter. Yes, all those volatile days we're experiencing from one day to the next in the markets, it's our breakfast news, daily expert market analysis, and company updates sent straight to your inbox every weekday at 7:30 AM Eastern. Sign up at www.fool.com/breakfastnews. Kimball, Number 3.

Kimball Crossley: This one, if you excuse me, it's not so much like the others. This is something that I think needs to happen. This goes to basketball. I've had some success. I've been a contrarian for a long time, and it goes back to my undergraduate days at UNC. When I swear for an English class and I had a college basketball fan as a teacher, I wrote about the NBA and its legal defense rules. At the time, the NBA was just unwatchable because they didn't want pins to play zone. They had all these rules about how you had to guard your man. Teams would literally take two of their players and put them in half-court, and two defensive players would have to go stand there with them. Otherwise, they were in legal defense violation. Then they play three-on-three. It's like, you have the best players in the world, and they cannot all play. I was trying to solve that problem. I wrote an essay, and it was basically saying that the new rule should be, you can't stay in the lane for three seconds. Now, that's not that controversial because the offense, for as long as they've had the lane has not been allowed to stand three seconds or more in the lane.

David Gardner: Supposedly. I say, they almost never call it these days.

Kimball Crossley: They rarely call it. That's true, and that's too bad. You love reefs, but they rarely call it. But I said, don't let the defense stand then, either. They can be in there for three seconds. If obviously an offensive player goes in there, they can be in there, and then it'll be offensive three seconds because you're not going to just leave them alone, and then it's going to be on the offense, which maybe then they'll call it when they realize the defense is in there. Basically, the NBA has adopted that rule years later, and that's basically their new illegal defense is this idea of you can't be in the lane and you have to be in or out of it. I was so proud of that. My next one to solve to help basketball because basketball was helped by their three-pointer. There's no question that the game was too much of a wrestling match inside and it was too hard to score when you could have these giant Bhimas just clogging everything up. The three-pointer came along and it opened up the game, but it's gone too far as a lot of people pointed out.

It's not necessarily a strategic thing or as a coaching thing; I think it's more for the fans because when you watch basketball and you love basketball, you don't want every team to play the same way. Unfortunately, almost every team now plays the same exact way. They put three or four guys around the three-point circle. They might set a screen with a high post, and they come off and screen and roll, and if you don't guard the post, they'll throw it to him. If you do guard him, the guard will take it. If you come off and help, they'll throw it to the three-point shooter. It's ridiculous. It's really become annoying to me as a fan of the game. It's just not pleasant to watch. We have to remember that as much as we love sports, it is entertainment. It's not you and I going out and playing tennis and no one watching. These high-level sports, they exist because people love to watch them and pay good money to watch them. There has to be an aesthetic quality to these sports. Basketball is in danger of losing its aesthetic quality at every level, even, because now it's college is the same way as the NBA and it's even becoming a little bit that way at the high school level.

My solution to that, and I think in our lifetimes, if we live long enough, Dave, we're going to see this, as I have suggested the three-point circle should end at the foul line. In other words, the arc goes, but instead of going straight line down to the corner like it does, it goes off and it either cuts straight to the sidelines or angle to the sideline. In other words, you're eliminating the Corner 3. If you eliminate the Corner 3, which in funny way, has always been unfair because it's shortest three. It's not as long as the regular three-point shot because you can't have it go all the way out to the sidelines, you'd be out of bounds. It's an easy shot. But it also makes it so hard to defend because when you coach basketball and realize how much leaving your man and giving help and staying in the middle of the floor and seeing both man and ball and all these things that happen, it's so hard to do when teams spread themselves and can be four or five guys around the three-point circle. You can't really give help, and it leads to just again, this freer flowing game, but again, what's become a very homogenous game.

I think if we just take away the Corner 3s, we still have great shooters, we still have a more wide-open game, but we bring back a little bit of variety. I think you'll see more teams going to the post more often, because right now it doesn't pay to go to the post because, as you talked about with a three-point shop being so valuable, you work so hard to get it in there and you get two, and you don't get three. I think we're going to see that in my lifetime that they will do something. You can't really move the circle out because that's not going to solve the corner problem unless you bake the quartz bigger, which I just don't think is going to happen. What do you think about that, thinking sportsman?

David Gardner: I think it's really interesting. We're about to play buy, sell, or hold to close the show, and I have something in that direction, so I'm going to hold off on that. But Kimball, as you're talking, I'm thinking about traditionalism. There's so much traditionalism, of course. It's the game I played, my kids played, etc. I'm wondering how that starts. You just mentioned the new balls and strikes system for Major League baseball that might be implemented. It's in minor leagues, etc. That starts at a lower level. I'm trying to picture, are there high school leagues that might start dropping that line down, marking where you think, etc. But then if there are, you start making it so your players aren't ready for the next level, and it's hard to implement something like that. How do you picture the movie of that actually occurring?

Kimball Crossley: It's going to start at the highest levels first, I think, or maybe at the college level before the NBA level. The reason why it's not as big a factor at the youth level, the lower-level basketball is the opposite effect. The problem with basketball as a sport for kids is you're playing the same game, but the hoop is 10 feet tall. Supposing in Europe they have shorter hoops, and they start teaching their kids on a shorter hoop, and it's actually smart because they can develop better form and habits with a more realistic goal, literally. The lower levels, you have almost the opposite problem; kids can shoot from outside. Teams in and clogged the paint anyway, and so it's not a problem. But I do think at the college level where they've always been much more concerned about the aesthetic and it's always been a much more beautiful game to me than the NBA game. They will be the ones to realize, maybe we need to tweak this. It's not going to happen tomorrow. But I do think it's going to happen. I really do. I just feel it. I thought of this myself, but I must admit now I have seen other people writing similar things and talking about similar things. It's a gut feel that it's going to happen, and I think it will.

David Gardner: Might be the OG, but it's awfully good to have people backing you up there because that's the way movements occur and rules change. TV ratings, I don't watch the NBA. I love college basketball so much. I watch so much college, but I don't care and never have about the NBA. Well, I should say I did care up until maybe the age of 16 or so, but I agree. College is so much more interesting. Maybe that semi-aspect of NBA ball, TV ratings start to decline fan interest, that would be the clear little new fire that ignites some change that some of the money starts drying up because people aren't really that compelled by it.

Kimball Crossley: Well, the NBA has improved this product, I think, and it's partly because of what we talked about before the defensive three-second rule. Now with the three-pointer, it rarely happens because it's the last thing people want to do. They are more free-flowing. I think there might be more the shot clock. The irony of you're trying to make it a faster game, but it's in fact, slower because it's more frantic and it's not as pleasant to watch because you always have to be quickly getting into it more quickly than you should instead of setting up a pattern which we see in college basketball. There's a nice, beautiful ballet to a pattern to a good college basketball game.

David Gardner: Well, has Kimball opened your eyes to anything this week or maybe even slightly upset you at some point? Great. That's why I do a Mailbag at the end of every month. The Rule Breaker Investing Mailbag is next week, April 30. Right in with a question, a thought or a challenge, or a poem. We love reading and sharing out your feedback. Our email address is [email protected]. You can tweet us @RBI Podcast on Twitter, X. Kimball you have graciously consented to play our, game buy, sell, or hold. I've got five for you, a lightning round. You ready?

Kimball Crossley: Yep, I think so.

David Gardner: These are not stocks, but if they were stocks, would you be buying, selling, or holding, and why? Let's kick it off. Number 1, with buy, sell, or hold, the four-point shot in the NBA? Because if we're already shooting from the logo, why not just reward it from half-court?

Kimball Crossley: No. Don't want that.

David Gardner: I love it. Why not? Come on. You can sell that.

Kimball Crossley: We've already addressed this. My problem will solve the problem that you're talking about. I think you're going to make it worse with a four-point shot. Now we're just going to go out further and jack up shots. Talking about use, they already are jacking up three-point shots because that can them imagine the logo on the floor. No.

David Gardner: I can't wait for it. If the line goes right across the court, it's the four. Sell.

Kimball Crossley: Please, no.

David Gardner: Let's move on to Number 2. Caitlin Clark as a billion-dollar brand, a cultural phenomenon on and off the court, but is the hype sustainable? Buy, sell, or hold, not just Caitlin Clark, but as a billion-dollar brand?

Kimball Crossley: Wow, I'm going to hold, I guess, because, I'm glad she exists. I'm glad it's really made the game more popular. But I think there's a negative aspect to it. Well, I'll say because I've said it on my pod; I think there's something a little off about Caitlin Clark. It's a little [inaudible] people think she's just America's sweetheart. In a way, to be such a good competitor, she's got to be a little ruthless. Maybe when they see that she can be a little tough. It won't be such a squeaky clean image for her and her brand won't be as popular as it's been.

David Gardner: We'll hold that. Let's move on to Number 3. That popular fan-driven phenomenon, rising from your seat briefly in rhythm with those around you and then sitting back down, again over and over, creating a visual undulation around the Colosseum. Kimball, buy, sell, or hold the wave?

Kimball Crossley: Wow, I love that you're giving me a forum for some of my pet peeves. No, sell that fan thing. But I'll tell you what, if you could police it and say, you're allowed to do the wave between innings, between innings is a great time to do the wave. This is like my problem in baseball. I want there to be announcement every baseball game like, hey, there's, like, 18 natural breaks in this game. Move then, get up from your seat, get back to your seat then. Don't do it during the game. But if you go to a major league game or minor league game, it's the opposite. I think because of all the noise they play between innings. Fans think nothing's going on during the game when they're watching a slow baseball game, and they get in a bend. Yes, if you want to do it during breaks during the game.

David Gardner: But I'm trying to figure out, where's the hate? Why? What is bad or wrong about the wave happening?

Kimball Crossley: We've come to see the game. I came to see the game. I don't want people standing up in front of me, especially, if it's the scout. I'm sitting there often with stuff in my lap writing stuff down and they're waving. It's like, no, do this between innings.

David Gardner: Let's stick with baseball for Number 4. Campbell, buy seller hold. Baseball's pitch clock making it to Little League, speeding up America's pastime, even for 11-year-olds.

Kimball Crossley: [laughs]. Informally, maybe I'll say, I can't be a strict pitch clock. You don't want to do that to a kid. One of the reasons I love baseball players and admire them is because I can't believe they can do what I do. I can't perform under pressure. To be anyone, baseball, focus on each individual who's so high, that poor kid in Little League standing on the mound. It's easy to be lost in a basketball floor in a football game, but when you're the kid on the mound or even the balls hit you in left field, there's so much pressure. We don't need to up that at all. But yeah, if it's a slow-paced game, maybe informally, the umpire is allowed. In football low levels, it was ridiculous coaching freshman football. You could kill a quarter with a drive because they did not enforce the play clock. You could take forever to get your play in and out, and the clock is just running.

David Gardner: Well, you even started sounding like a seller at first, but I think I did hear a buy in there somewhere, Kimball. Thank you.

Kimball Crossley: I don't know what hold means because we don't have it. How am I holding?

David Gardner: Holding, you're like, I can't tell, I don't know. Actually, I think that was a hold because it may put too much pressure on the poor 11-year-old kid who held a little too long Ball 4. He didn't even throw it. He walks in the losing run. That will scar someone literally for life. Maybe we shouldn't be too intense, but maybe we could speed things up. Only six innings in the Little League. Last one. Got to end it here. You'll understand why very shortly because it's a phenomenon. Kimball Crossley, buy sell, or hold Taylor Swift in the owner's box.

Kimball Crossley: You've given me a tough one. I'm going to say, hold. I have no real problem with it. I don't think we need to focus on it so much, but I can't say, like, oh, Travis, you can't have your women there. I'm going to say hold on that.

David Gardner: We'll close with the hold. Some nice holding going on in that buy seller. I think it's the nature of what I brought you. I didn't know I was touching off your pet peeve around the wave, which is something I'll delight in afterwards thinking back on that. Kimball, thank you.

Kimball Crossley: Man's moving between innings and the hold.

David Gardner: I got it. Kimball Crossley, thank you for joining us for fearlessly challenging the playbook. Great stories, great insights, whether you're on the field or coaching or just like me sitting in front of your TV with a remote control in your hand. Sports is such a big part of American culture. Really always has been and continues to be, I think, a bigger business than ever it was before. It's such a delight to be with a fellow rulebreaker who helps us see things not just differently, but I'm going to say a little bit better. Kimball, thanks for joining us.

Kimball Crossley: My pleasure.

David Gardner: Kimball Crossley can be heard as a regular on three-point range, where he throws down other Rule Breakerisms every few weeks or so. You can find that where you find podcasts, Three-Point Range. Thanks, Kimball. Fool on.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Gardner has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

In this podcast recorded April 2 before President Donald Trump's big tariff announcement, Motley Fool analyst David Meier and host Mary Long discuss:

• How different companies were bracing for the tariff impact.
• Tesla's sales slump.

Motley Fool contributor Jason Hall joins host Ricky Mulvey for a look at Texas Instruments and Taiwan Semiconductor.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

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This video was recorded on April 02, 2025

Mary Long: Welcome to Liberation Day. You're Listening to Motley Fool Money.

I'm Mary Long. Join on this Wednesday morning, the Liberation Day of all Liberation Days by Mr. David Meier. David, great to see. Happy to have. How you doing?

David Meier: I'm doing well. It's great to see you, too.

Mary Long: Today is April 2, the day after April Fool's Day. As I've mentioned a few times already in this show, it's also Liberation Day. What the heck does that even mean? It's a great question. It's a fair question. We don't actually fully know.

David Meier: No, we don't.

Mary Long: But we are set, allegedly, to find out later today at 4:00 PM Eastern Time when President Donald Trump is scheduled to make an announcement from the White House Rose Garden. This event is being dubbed Make America Wealthy Again. We're recording this at 11:30 AM Eastern. The show won't come out until right during right after the Make America Wealthy Again event. We're not going to talk too much or make too many predictions about what exactly is going to unfold during that event. David, I will ask you to kick us off. Anything you're keeping an ear out for that you're especially going to be paying attention to or any bets you're making on what exactly might unfold?

David Meier: We literally have no idea. It could be anything. We can't make any bets right now, and that's actually that's actually an issue that's facing the business community at large. It's actually an important event where we're going to get some information. One, what's the magnitude. We keep hearing 20% across the board, but it could just be reciprocal when other countries don't have big tariffs on us. There could be carve outs. There could be exemptions. There could be anything. We can tariff certain parts of the world and not tariff certain other parts of the world. We really don't know. It's going to be the thing that we have to do is just listen and digest the information that we get this afternoon from 4:00-5:00.

Mary Long: You hit on this point. Many other people have hit on this point. It's worth hitting on this point again that so much of the anxiety wrapped up in this event is that there is so much we don't know. We have no idea what's going to happen. That uncertainty is what's largely been tied to the freak-out that's been happening in the markets. We know markets love certainty. It sounds like we're going to get some details from 4:00-5:00 Eastern Time today. The result of those details might not be something that everyone is rooting for, but still, we'll have a bit more certainty then than we do now. Do you think that that certainty, however great or small it might be, will be enough to calm investors?

David Meier: I don't know. [LAUGHTER] I know that's a horrible answer, but here's the thing. This is the way markets tend to work. There's a set of expectations. What we have seen for a few weeks now, some days the markets are getting a little bit worried and the trend has been down. Investors are definitely thinking that there's perhaps some bad things coming forward when they look out into the future. There's a little bit of worry about recession. There's a little bit of worry about inflation coming up. If we get information where tariffs are higher than the market expects, that means that, oh, no, I need to change my expectations as investors. Something like that could put pressure on the market and cause it to go down. We've been hearing 20% across the board as the one thing that's been coming out pretty steadily. If it's 5% across the board, if that's not priced in, that could actually cause markets to jump. As far as calming investors, we don't know, but there's a little bit of level set right now where there's an expectation of something around 20% across a wide swath of the globe. Markets haven't really liked it for the most part, if you look at the general trend. It's also interesting that the White House moved this from 3:00-4:00 to wait until markets closed.

Mary Long: The Trump administration argues that tariffs are just one part of Trump's large economic agenda. The point behind them is that they will work to boost US manufacturing and American jobs. Short-term pain is expected to be a part of that process. Perhaps, why? We've seen this event move from 3:00-4:00. It explains the downward moves that the market's been making recently in the past quarter. Let's zoom out, and let's run a little bit with this longer term trajectory. When will we know if those intended long-term effects, more American manufacturing, more American jobs is actually starting to come true, even in spite of some continued short-term pain?

David Meier: It's a great question. It's actually a very Foolish question because ultimately, we don't want to necessarily be responding to the ultra short term. We want to figure out, longer term, what is this going to mean? I love what you've asked here. Unfortunately, increasing manufacturing, both from a plant standpoint as well as a job standpoint, that just takes a while. You can't just build a plant overnight. That's not how that works. When will we start seeing results? First of all, we got to figure out what's being said. Business leaders need to start figuring out, what does that mean? Some people have made some commitments already about, "Hey, we want to be a part of this. We want to bring manufacturing back."

But others like the CEO of Ford in an investor conference the other day, basically said, "Right now, it's all chaos and costs." Once you get enough information to remove the chaos and then actually figure out what the costs are, then we'll start to see businesses making plans. Then we'll start to hear, "This is what we're going to do in response to the tariff. We're going to go after this market. We're going to start making this many widgets. We're going to make them in this state by opening up a plant." Unfortunately, it's not going to be probably 3-6 months before we start seeing those business plans and serious business plans. Not just, "Hey we want to be a part of this," but here's actually what we're going to do. Here's how many dollars we're going to spend. Here's where we're going to build those plants. That's just unfortunately going to take a while, so we're going to have to be patient.

Mary Long: As you allude to, we're already starting to see some companies respond to these tariffs, and they're doing so in a number of different ways. You've got some like Johnson & Johnson, which just announced it's making commitments to boost its own US production. It's going to commit $55 billion in US investments over the next four years. That includes the development of three new manufacturing sites. You've got other companies like Walmart that are turning to their suppliers in Walmart's case, many Chinese manufacturers and are asking those suppliers to cut prices and essentially shoulder Trump's tariffs for the company. You've got other companies, Target and Best Buy, being two in particular that have warned customers about higher prices as they strive to preserve their own profit margins.

The opposite of that is Nike, which adjusted its margin guidance, suggesting, "Hey, it'll attempt to absorb the tariffs for the time being." There's still a lot of uncertainty, but we're already starting to see these different defensive moves come into play. If you are the CEO of David Meier Enterprises, and I intentionally kept that unspecific because it doesn't matter what industry these companies are in, but if you're a CEO of David Meier Enterprises, how would you be bracing your company for whatever tariffs might be coming down the pike later today?

David Meier: I'm going to work on the assumption that I make something that I'm a manufacturer because I think this will help illustrate some stuff. First of all, we knew this was coming. This was something that the new administration campaigned on. They've talked about ever since. We've seen companies do this, too. Hopefully, I've already made some advanced purchases of things that I think I'm going to need from other countries before the import tax, which is what a tariff is, gets put on the stuff I'm trying to buy. That's the first thing. The second thing is, I need to run some different scenarios. Again, if it's 5%, if it's 10%, if it's something ridiculous, like 50%, what does that mean for demand for my products? Hopefully, I've also done some scenario analysis.

Then I'm going to actually talk about something real quick as it relates to Walmart and then assume that my company has this as well. Walmart can be considered what is known as a monopsony, and that is essentially where one company is powerful enough to really control prices by their buying power. Think about Walmart. Huge company. Lots of stuff goes through there. Of course, they can go to their suppliers and say, "Look you don't have that many other options. We buy most of your stuff. We can go and find other suppliers and work with them.

We have plenty of people who want to work with us. You're going to have to take the pain here because we're not willing to bring that on the American consumer as Walmart." If I was fortunate enough to be in that position, as CEO of an enterprise that could do that, I would be telegraphing that to my suppliers as well, because what we want to do is try to make as many plans as possible before it comes. Then once we get the information, more information, better information to figure out this is the direction we want to go from this point forward. That's how, hopefully, I would have been preparing for, digest, and then say, "We now have the information to say, 'This is the direction our business needs to go' and then go."

Mary Long: We'll move on to related, but also unrelated story. Tesla dropped their first quarter delivery and production numbers this morning. Vehicle sales fell to an almost three-year low. Analysts had expected the company to sell more than 390,000 vehicles in the first quarter. The real number was shy of 340,000. Is this sales slump attributable to Musk backlash, or is there more to the story? How do you parse this out when you look at these numbers?

David Meier: A good question. There's actually a little more to this story. For a little additional context, I will also say that prediction markets were expecting about 356. Not only do you have experts say they were expecting 390, but you have wisdom of crowds saying 356, so this number is really was lower than a lot of people expected. Recently, Tesla has been having some struggles. It's not just for Musk backlash around the world based on what he has decided to do injecting himself into the global political scene. There was already a little bit of waning demand. Unfortunately, I think that people have said, "Hey this is not something that we agree with," and they were able to vote with their wallets and say, "Hey, we're not going to buy your car under these set of circumstances." It doesn't mean it won't change in the future, but right now. I think some of it is that this is a continuing trend that Tesla's experienced, but I believe that there's been a little bit of catalyst in terms of the backlash for how Musk has interjected himself into the global political scene.

Mary Long: This Tesla piece does tie to the tariff conversation that we were having earlier. Many Tesla vehicles are produced in the United States. The Model Y scores as number 1 on Cars.com's American-Made Index. Still, though, they do import an estimated 20-25 percent of goods from international sources. We don't have an exact number on that. That estimate comes from the National Highway Traffic Safety Administration, doesn't specify which countries Tesla imports from, but we know that it does get a number of its goods from international sources. A 25% tariff on all imported cars and car parts starts tomorrow, April 3. Tesla is one of the car makers that stands to be less affected by those tariffs because so much of its products are produced in the United States, but that tariff change that's rolling out to all automakers, might Tesla expect to see an uptick in vehicle sales in the nearest future because of that and changing dynamics in car prices?

David Meier: I certainly think it's possible, and you are right. One of the advantages of having less content produced outside the United States is that they have better visibility into the cost structure in a world where there are more tariffs. The other thing is Tesla's in an advantaged position. Who's to say they can't get an exemption on all those parts that they bring in from other countries? It's a very real possibility given the relationship that Musk has with the current administration. It is absolutely very possible. One of the things that Tesla has been doing is bringing down the prices for their cars in order to make them more affordable. In a situation where other substitutes, the competitors have to figure out what to do with the tariff and the amount that's been levied on them. How much are they going to pass along in terms of prices? How much are they going to deal with in terms of their margins?

This very well could give Tesla an advantage in the short term. What's interesting is the initial market reaction today on April 2 was the stock fell on the production and deliveries news, but last I checked at almost approaching noon, the stock was up, so investors taking a longer term view may be seeing that very same thing that you're talking about.

Mary Long: David Meier, always a pleasure to talk with you. Thanks so much for coming on the show this morning and helping us sort through and make sense of all of the uncertainty that we're seeing unfold today.

David Meier: Thanks, Mary. I really appreciate it.

Mary Long: How do you know if a company is walking the walk or just whispering some sweet nothings to shareholders? Up next, full contributor Jason Hall joins Ricky Mulvey for a look at two semiconductor companies, Texas Instruments and Taiwan Semi.

Ricky Mulvey: Jason, we are recording this approximately 48 hours before Tariff Liberation Day as we talk about two semiconductor manufacturers, we shall see what happens on that day. But we're taking some time to check in on Texas Instruments and Taiwan Semiconductor, primarily because I was watching Scoreboard on Fool Live and saw your take that you think that Texas Instruments will outperform Taiwan Semi over the next five years. I own both companies, so what an excuse to talk about them?

Jason Hall: Absolutely.

Ricky Mulvey: It's a little bit of an intro for people less familiar with this space, what is different about the chips that these companies make from each other?

Jason Hall: Basically everything, I think, is a summary of it. But Taiwan semiconductor, it's called TSMC in the industry parlance. TSMC is the manufacturer of basically 100% of the leading edge logic chips out there. You think about the chip in your smartphone that powers your smartphone. Obviously, NVIDIA's GPUs, anybody that follows that industry closely knows that TSMC is the company that makes the chips for their GPUs. The CPUs and GPUs, that's logic chips. Then you have memory chips that companies like Micron and others manufacture. Semiconductors, the leading edge stuff, that's TSMC. They also make the bulk of all of the used to be leading edge stuff because they've built out the capacity, and they're such an incredible operator. They do the contract manufacturing for the big fabulous semiconductor design companies. Basically, everybody that designs their own chips but doesn't make them.

If it's Apple, we mentioned NVIDIA, AMD is a big TSMC customer. Those companies go to TSMC to actually do the manufacturing. Texas Instruments is a fully vertically integrated semiconductor manufacturing. They do their own design. They work with some clients to design special needs chips, but a lot of it is just stuff that they've designed over the past 50 years. Some of the chips that they designed back in the 80s are still being sold to go in industrial machinery and that kind of stuff. They have a big direct sales channel on their website. Over 100,000 customers, and a lot of them just go on their website and find a part off the shelf and order directly from Texas Instruments. Now, here's the biggest separator is its chips are analog chips and integrated chips. The best way to think about what they make is the logic chips that TSMC makes and the memory and all that kind of stuff, all that stuff operates in the virtual world in the electrical electronic world. Those chips have to interface with the real world. They need to get power in. They need to send signal out. That's what Texas Instruments chips do. Is there how electronic devices actually interact and interface with the real world?

Ricky Mulvey: Both of these businesses, semiconductor stocks have historically been cyclical businesses, Taiwan Semi, definitely at a high point right now or highish point, I should say. Do you still see semiconductor stocks as cyclical businesses, and does that affect the way that you invest in them?

Jason Hall: Yeah, absolutely. Businesses are cyclical when their customers and end markets are cyclical. The end market for chips are still cyclical because of that reality. What has changed, Ricky, is the size of some of those end markets. We think about logic, that's TSMC and memory. Those industries have benefited from this explosion in demand for accelerated computing infrastructure. It's bigger than just AI. It goes before AI, is the Cloud, this accelerated computing infrastructure. Now more recently, of course, AI has been like the nuclear explosion in demand, and that's led to this super cycle for TSMC and some other companies that are reaping those gains, and the demand is so big. This new market is so big for those companies that they're more than making up for loss volume and revenue from other sectors that have been weaker, like PCs, consumer electronics, industrial and automotive.

Ricky Mulvey: Now let's separate these companies a little bit, both cyclicals, but both have different stories right now. Texas Instruments has come off a bit of a weak period, 2024, a bit of a down year from a revenue and operating profit perspective, and that has a lot to do with their embedded processing business. Can you explain what's going on there?

Jason Hall: Yeah, so there's definitely some kind of asynchronous cyclicality between its analog business and its integrated business. But the big thing that we're seeing broadly is that it's in the late stages of a transformation in its manufacturing. It's shifting to a larger form factor for its chip making that's going to give it some structural benefits. But there's a protracted downturn in demand across multiple end markets. We actually just saw the last quarter that it reported was the first quarter in about two years where its analog business actually showed just a little tiny bit of demand growth. We can go back to 2023 when demand was really down for its analog business. This is the larger business too. There were some periods where demand was actually up for the integrated business. It's a little bit of a difference in how different parts of the cycle can affect those key businesses. But again, the big key right now for Texas Instruments, is that not only is the business weak, but it's kind of exacerbating its bottom line because it's about three quarters of the way through this big capital project to spend to make some structural changes to its cost structure and its manufacturing that are going to eventually help the business do better, but the timing is just really tough.

Ricky Mulvey: In the past few years, extraordinarily strong for Taiwan semiconductor, its shareholders have been rewarded quite a bit. Why are you seeing an opposite story for that chip manufacturer?

Jason Hall: The easy answer here is AI, and it's largely the correct one. We've also seen some recovering demand in other areas like smartphones. But being essentially the only contract manufacturer that has both the capability and the capacity to make the most advanced chips, it's been a massive boon for TSMC. In one sentence, if you're NVIDIA's foundry, you're doing really well right now.

Ricky Mulvey: With TSMC, there's a different political component because it is sort of this national security infrastructure for Taiwan. China has had its eyes on Taiwan. It's an extraordinarily complicated story between the Taiwan and Greater China relationship. All of that is to say, if you are sitting in the United States, this is a company that carries some political risk that you probably don't fully understand. I don't fully understand it. How do you think about this if you're owning shares of TSMC, which I own a few shares of.

Jason Hall: I do, too. I think it's definitely kind of in the too hard pile for most people, and even the people that are true experts in this area of geopolitics and military threat and risk, would say the same thing. It's a bit of an unknowable but it is a legitimate threat. There's significant national security implications across every Western country if those chips were made unavailable. TSMC, of course, is taking steps to address this expansion in the US. We know that's been ongoing for a while. There's also expansion in Europe, multiple facilities are looking to bring online by around 2027. Now, here's the thing. Those moves might be great for getting diversification of chips to the market if there were a military event actually on Taiwan. But that's not really going to protect shareholders very much. I think it's important to decouple those kind of things down from one another. But what it really comes down to me for is thinking about individual risk tolerance. How much do you have? If you have some tolerance to be able to be exposed to that too hard pile sort of answer, then position sizing comes into play. I'm sure there are a lot of investors, Ricky, that have done incredibly well with TSMC over the past five, 10 years, that might find it prudent to reduce their exposure, take some of those profits now off the risk table, despite there still being a lot of growth potential still for TSMC.

Ricky Mulvey: I own Texas Instruments as well. When I bought the stock a few years ago, I found this was a leadership team that was saying all the right things. We measure our performance on free cash flow per share. This is something that activist investors Elliott Management has more recently sort of held management's feet to the fire. They point out on their investor relations page. Look at us. We've reduced share count by almost 50% over the past 20 years. But during this time, I'll say, over the past five years, this total return has underperformed the S&P 500, and for me, more importantly, it's underperformed the Schwab US Dividend Equity ETF SCHD, which is probably the more appropriate comparison, big strong companies that pay dividends. Management's saying the right things, but there's a little bit of a long term underperformance problem here. Jason, what's going on?

Jason Hall: We look at Rich Templeton, who the company has basically built in his image over the past quarter century. Over the past five years, we've gone from a transition to his second retirement to Haviv Ilan, who's a long term insider, who's now running the company, and some people might say, well, what's going on? What's the shift here? I want to push back a little bit here, Ricky. Yeah, it's underperform those indices, but over the past five years, it's earned an average of 14.7% annualized total returns. It's not like it's been a bad investment. It's just a period that the market's CAGR has been over 18%. Let's contextualize that a little bit. Also, again, think about the cycle. Shares are down some 20% from the high back in late 2024. All this is happening during a period where its end markets are weaker. Now, one more thing. If we've had this conversation just about any other time over the past few years, Texas Instruments total return would be a little bit better than the benchmark, even again, during that persistent downturn in demand. It's not like it's been a bad investment. It's just not doing as well as some of its peers, and again, it's trailed an incredibly good market.

Ricky Mulvey: Hey, I own the stock. Don't blame me. I'm just looking at the numbers here, Jason.

Jason Hall: [LAUGHTER] As a shareholder, I'm right along with you on this.

Ricky Mulvey: Let's get back to the original premise of this conversation. TXN greater than TSM over the next five years. So investors have been more excited about Taiwan Semiconductor. Texas instruments, it's doing boring stuff. It's checking the temperature on things. It's doing analog processes. This isn't the big explosive, exciting AI chip making stuff. why are you more bullish for the long term future of Texas Instruments than Taiwan Semiconductor right now?

Jason Hall: It gets back to the story of the cycle, and I think it's so important with these chip makers to remember that. High fixed costs. You leverage those fixed costs when demand is strong to make more money, take that money and reinvest in your business when the opportunity is there. Texas Instruments has been steadily spending money through the downturn, and I think that's made its stock maybe look a little more expensive on both earnings and cash flows. On the other side of the coin, TSMC's CapEx spending is actually down from the peak in 2023, and it's monetizing much of that spend already. Now, its CapEx is about to start ramping back up. We talk about all of the capital commitments it's made in the US and Europe. As it deploys that capital, it's going to be going for a couple of years before it really starts to get a return on that capital. So its shares might look a little cheaper than maybe they really are. I also think that we need to acknowledge that we always overinvest in these big buildouts. History has shown us that that is the reality. All of these businesses are in a land grab mode, and we're going to get to a point where there's going to be too much supply, and that will lead to the cycle turning for TSMC.

Now, there's going to be a shift from the buildout to the upgrade cycle, and I think we might be maybe closer to that shift from buildout to upgrade cycle than others do. The flip side of the coin here is that TSMC is going to continue to spend capital. TXN, on the other hand, is about three quarters of the way through its current CapEx cycle, which means that its CapEx is actually about to fall just as it starts to leverage the 300 millimeter wafer size for its chip manufacturing. This is going to give it some real structural cost advantages versus its competitors. In other words, its cash flows could really begin to soar in the years ahead making today's stock price that might look a little bit more expensive, really compelling for long term outperformance.

Ricky Mulvey: Jason Hall, I'm going to end it there. Appreciate your time and insight. Thanks for joining us for Motley Fool Money.

Jason Hall: Cheers, this was fun, Ricky.

Mary Long: As always, people on the program may have interest in the stocks they talk about, and 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 are not approved by advertisers. With Motley Fool Money team, I'm Mary Long. We'll see you tomorrow.

David Meier has no position in any of the stocks mentioned. Jason Hall has positions in Nvidia, Taiwan Semiconductor Manufacturing, and Texas Instruments. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Texas Instruments. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Best Buy, Nike, Nvidia, Taiwan Semiconductor Manufacturing, Target, Tesla, Texas Instruments, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.