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Lululemon (NASDAQ: LULU) shares dropped roughly 20% in value last week after the company delivered an earnings report that included less enthusiastic earnings expectations for the year. While its revenues are still expected to be relatively in line with previous guidance, the added costs that tariffs will impose led management to dial back earnings estimates, causing the market to hit the stock pretty hard.

To be fair, Lululemon has historically been a fairly expensive stock, and companies need to produce solid results if they want to sustain higher valuations.

Lower guidance

Arguably the biggest factor impacting Lululemon shares right now is the guidance cut. Yes, the apparel retailer beat estimates for the first quarter, but management nonetheless reduced earnings per share (EPS) expectations for the year to a range of $14.58 to $14.78 compared to previous guidance of $14.95 to $15.15.

As with most things these days, the weaker outlook is largely due to President Donald Trump's tariffs. Clothing companies like Lululemon largely hire overseas subcontractors to do the manufacturing of their clothes, which puts them in the crosshairs of Trump's policies. When I wrote about Lululemon in April, I noted that the tariffs Trump was imposing on Vietnam would impact 40% of Lululemon's production. Though those new taxes are currently paused, the president set the tariff rate on imports from that country at 46%.

Despite a 7% increase in revenue, Lululemon's earnings fell year over year in its fiscal 2025 first quarter. For the period, which ended May 4, net income was $314 million compared to $321 million a year earlier; a lower overall share count was responsible for its EPS growth. According to CNBC, comp sales increased a mere 1% compared to Wall Street's expectations for a 3% increase.

From what I can see, Lululemon has two main problems. Its costs of production will rise due to tariffs while the premium prices it charges for its goods could be putting a damper on its sales, especially in the United States, where recent Commerce Department reports have shown weak consumer spending growth.

Valuation

One positive that can be pointed out for the stock is its now-lower valuation. According to fullratio.com, Lululemon has historically averaged a P/E ratio of around 42. After the stock's latest pullback, investors can pick up shares for a mere 17 times earnings. Based on the low end of the company's new guidance for 2025, the stock is trading at roughly 18 times forward earnings. But are these valuations low enough to make the stock a buy?

Previously, my stance was that the market conditions Lululemon faces make it a stock to avoid for the time being. That's still my view. CFO Meghan Frank said that the company plans to make some "strategic" price increases on certain items to pass their tariff costs along to their customers. However, I don't see how the company can keep raising prices on what are already $100 leggings. Granted, Lululemon has really branched out into different categories, even offering golf-oriented apparel, but I still think that any price increases will be a problem at a time when U.S. consumers are tightening their belts. The combination of high tariffs and reduced consumer discretionary spending is going to pressure apparel brands like Lululemon and Nike (NYSE: NKE). Until those headwinds abate, there isn't going to be much momentum here.

As a final note, I would also add that Lululemon operates in a highly competitive area of the apparel industry. It's constantly vying for market share and consumer attention with the likes of Nike, Gap (NYSE: GAP), and others. In the end, prices do matter in that fight.

Should you invest $1,000 in Lululemon Athletica Inc. right now?

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

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David Butler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool has a disclosure policy.

When thinking of the most powerful brands on the planet, Apple and Coca-Cola might immediately come to mind. I wouldn't be surprised if Nike (NYSE: NKE) gets brought up as well.

The leader in athletic footwear and apparel has a storied history, to be sure. However, it has hit a major rough patch. The share price, which is down 39% in the past five years, reflects underlying fundamental issues with the business.

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But opportunistic investors hunting for strong returns could see a turnaround play here. Can this consumer discretionary stock double a $1,000 investment over the next five years?

Nike's strategic missteps

Nike generated $11.3 billion in revenue in the third quarter of 2025 (ended Feb. 28). That figure was down 9% year over year and also 9% lower than the same period in fiscal 2023. What's more, earnings per share (EPS) tanked 30%. These financial metrics are wildly disappointing.

With the benefit of hindsight, it becomes very clear what mistakes Nike made to get to this point. The business relied too much on classic footwear franchises, which contributed to a lack of product innovation that drove a loss of customer excitement.

On the distribution front, Nike leaned heavily on going direct to the consumer, mainly in e-commerce, alienating retailing partners in the process. And this opened up shelf space to up-and-coming rivals, particularly in the important running category.

Fashion is a tough industry to crack. Companies have to work hard to cater to the constantly changing tastes that consumers have. For example, the rise of the athleisure trend was a boon for Lululemon Athletica while spawning new businesses like Alo Yoga and Vuori. It seems more recently, there is growing interest in looser-fitting clothes. Change is the only constant.

It is surprising, though, that Nike has taken such a big hit financially. After all, this company has been around for decades, leading the global sportswear market. It should have a better pulse on consumer trends than any business in the industry. But even the best can still run into problems.

It's time to focus on the brand

Nike possesses one of the world's most iconic brands. I don't believe anyone would disagree here. This brand is precisely what makes up the company's economic moat. It provides a key asset for Nike to focus on.

CEO Elliott Hill, who was brought in last year to orchestrate a successful turnaround, is focusing on the right strategic priorities. It's all about getting back to product innovation and meeting customers where they are. Nike recently started selling its products on Amazon again after taking a six-year break from the dominant online marketplace.

For what it's worth, Nike still has a leading market share in the worldwide sportswear industry. Its brand, high-visibility athlete endorsements and league partnerships, broad distribution capabilities, and marketing prowess give it the tools it needs to succeed.

Nike's path to doubling your money

Nike shares are near the cheapest they've been in the past decade, trading at a price-to-earnings (P/E) ratio of 20.9. Expectations are understandably low, but that introduces upside potential.

Investors must believe that Nike will get back on track sooner rather than later. And by this, I mean it starts to register solid revenue and EPS growth. Making real progress could take some time, but this is the formula for investment success.

I wouldn't be surprised if the stock can double in five years, turning $1,000 into $2,000 by the end of the decade. A cheap starting valuation, coupled with improving fundamentals, can drive huge share-price gains. However, I still think this remains a very risky investment opportunity as the uncertainty is high.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Lululemon Athletica Inc., and Nike. The Motley Fool has a disclosure policy.

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.

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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:

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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.

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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.

Nike (NYSE: NKE) is still regarded as the leader in the sportswear industry, but investors know that it's been a rough few years for the Swoosh.

Nike stock recently hit a seven-year low as a combination of declining sales and profits, concerns around a trade war, and a weakening economy have pummeled the stock.

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However, there is reason to hold out hope for Nike. The company brought in longtime company veteran Elliott Hill as its new CEO last fall and Hill seems to be making the right moves, rebuilding relationships with retail partners that his predecessor had backed away from, controlling inventory to return to a pull marketing strategy, investing in new product to reclaim the mantle of innovation, and putting sport back at the center of the company.

While those initiatives aren't yet visible in the overall results, there are some green shoots that look promising. For instance, the company has returned to growth in running, a sign that it's doing a better job of competing against industry upstarts like On Holding's offerings and Deckers' Hoka brand.

If Nike's self-inflicted wounds weren't bad enough, the company is now facing tariffs that are unprecedented in its history. Though it's diversified its manufacturing base away from China, making Vietnam its primary production hub, China is still a major production center.

How tariffs are impacting Nike

The footwear industry is already vulnerable to tariffs as essentially all production takes place outside of the U.S., and it would be cost-prohibitive to bring that production back to the U.S.

While President Trump has paused "reciprocal tariffs" on most trading partners, there is currently a 145% tariff in effect on goods from China. In fiscal 2024, 18% of Nike brand footwear and 16% of its apparel came from China.

Nike's earnings call in March came before the escalating trade war with China, but management acknowledged that tariffs would have an impact on the business, noting that it included costs from tariffs in its forecast of a gross margin decline of 400 to 500 basis points in the fiscal fourth quarter.

According to Motley Fool Research and an analysis from the Budget Lab at Yale, a nonpartisan research center, footwear and apparel products are particularly vulnerable to tariffs. The study found that based on tariffs in effect as of April 15, apparel prices would rise 65% in the short run and 25% in the long run. The study didn't single out footwear as a category, but said that prices for leather products, including shoes, would rise 87% in the short run and 29% over the long run, faster than any other category.

There's another factor weighing on Nike in the trade war. China represents a significant market for the company and one where sales are already falling sharply down 15% on a constant currency basis in the most recent quarter. If the trade war impacts the Chinese economy or the reputation of American brands, Nike's China sales could take a hit as well.

What Nike is doing about tariffs

Nike already moved much of its factory production out of China to mitigate the risk of a trade war, so in some way it's better prepared for it than investors might think. Since the company sells its products in China, it can ensure that China-made product is sold there and it already does that to an extent.

The detente with Vietnam also favors the company, but over the long term, Nike is unlikely to dramatically rearrange its supply chain. It may be forced to pass along any tariffs along to its customers, though it will do its best to remain competitive, meaning it could absorb costs if that's what its peers do.

What tariffs mean for Nike

Overall, tariffs are likely to impact Nike, but not as much as some investors expect as its China product can be sold in China and the reciprocal tariffs on Vietnam are currently paused.

However, the trade war seems likely to delay the recovery plan Nike was implementing and will slow its return to growth, especially as it could lead to a recession.

Still, Nike's competitors face the same set of challenges, meaning the sportswear giant isn't at a competitive disadvantage here.

While there's still a lot of uncertainty around the trade situation, Nike stock deserves some patience especially as it's fallen so far. Hill seems like he has the right strategy, though with the trade war disruption, it will take some time to see the results. Despite its recent weakness, Nike's brand is still strong enough for the business to return to steady growth, regardless of the tariff situation. A recovery will take time, but Nike should get there eventually.

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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Deckers Outdoor and Nike. The Motley Fool recommends On Holding. 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.

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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.