Broadcom’s CEO said What?

0:00Broadcom had a record scratch moment today. This is Motley Full Money. Welcome to Motley Full Money with the Hidden Gems team. I'm Tyler Crowe and today I'm joined by longtime full contributors Matt Frankl and John Quast. Before we begin, we've been watching the situation in the Middle East and the conflict in Iran, just like most everyone else here probably listened to this podcast. There will surely be a lot of investing worthy topics to come out of this and it felt a bit awkward not to acknowledge it at the top even though it's not on our topics for today. There will likely be a lot of investing related topics to come out of this and we'll get to them as we better digest and understand it, but I just want to acknowledge that even though it's not on the show, it is on our minds and we're trying to deliver the best information we can to you and analysis when we are able to do it. But on today's show, we're going to discuss a recent string of insider stock purchases

1:00and we're going to discuss Vail Resorts and their plea to get Generation Z on the mountain. But first, I was getting a lot of holy cow. Did you see Broadcom's earnings report messages this morning? So it seemed like the appropriate time to have opened the show with this one. Shares of Broadcom are up 5.6% today as we're taping in a down market after reported fiscal first quarter earnings, earnings and revenue beat expectation, but not so much that it would be getting all these messages in the morning. So John, you were one of those messengers on Slack to me being like, holy cow, did you see this? What did you see in the numbers? Well, here's your headline, Tyler. Broadcom says it has a line of sight for 100 billion in annual AI revenue in 2027, 100 billion in AI revenue. Now, if my math is right, it's generated less than 30 billion in AI related revenue over the last 12 months. So compare that 30 billion to 100 billion in 2027. It's calling for a massive gain in this part of the business. You might say that it's at an inflection point right here.

2:02And one of the really underappreciated aspects of Broadcom's business is it actually has the raw materials to pull this off. And so if you listen to this podcast, you know, we've talked about potential bottlenecks in the AI industry. And I know that's a little bit vague, often we're talking about electricity. But another, if you will, bottleneck in the industry is something called T type glass or T glass. This is basically a material that is needed to make these AI chips. And a little known Japanese company called Natobo is one of the only ones that supply this material. And Broadcom kind of saw a head around the corner and saw that there could be a potential shortage here. And it went ahead and secured supply through 2028. So it actually has the materials it needs to be able to service 100 billion in AI related revenues. So that's a really big thing. And then when you look at profitability, have you ever heard a CEO tell an analyst that they're hallucinating? Well, Broadcom CEO, HawkTan did on the earnings call.

3:06An analyst basically was saying, well, looks like certain products are going to bring down your gross margin in the future. And Tan said, no, you're hallucinating. Our margins are fine. So if you look at this, this massive revenue gain and the margins being fine, Broadcom stock might not be overvalued at all right here if all of these things are true. Yeah. I mean, John, on the surface, you're right. It might not be overvalued. It's trading for roughly 28 times forward earnings. You mentioned AI revenue. Yeah, they're projecting it's a triple year every year. I'm taking that with a big grain of salt. But it did grow by 100 and the 6% year over year in the fourth quarter. Their AI revenue did. So there's some precedent for that. I mean, compare that to Nvidia's 73% growth. So really impressive results. They do have the raw materials. It's absolutely true, but you need customers to be able to spend the money and doubling from 15 million to 30 billion is one thing more than tripling from 30 billion to 100 billion is something else. And it's going to require a lot of spending. And if the spending doesn't really meet what their forecast is, it could be an issue.

4:09They do have pricing power. Their margins are not excessive. I'm more worried about Nvidia's margins than I am broadcams. But really solid quarter, great AI revenue. And there's not much to not like here. You know, Nvidia's stock went down after earnings. Broadcams is up. There's a reason for it. It's because investors seem to be buying their story a little bit more. Matt was kind of foreshadowing here with all that discussion about Nvidia because it's really ties into our discussion last week about Nvidia earnings. We all kind of landed in the Nvidia can't keep this up sort of camp with its spectacular growth. And part of the reason for that was companies would start to look elsewhere. And none of us thought Broadcom would be, you know, discussing that kind of growth that they just displayed this most recent quarter when we were discussing Nvidia. But it does underscore the idea that like purchasing managers at hyper scalers, you know, the ones that are buying Broadcom and Nvidia chips, they're going to start having wandering eyes for other equipment other than Nvidia in their various data centers. And I think this was evidence of that. So after looking at Nvidia's results last week, which were spectacular in their own

5:11right. And Broadcom's this week, I want to put you both on the spot here, like if you're forced to pick between these two companies over a five year investment time horizon, which one would you pick? So yeah, both companies posted very solid quarters. I joke that I referred to both of them as having just so, so earnings because they did exactly what was expected. But that really doesn't take it to account the stellar growth potential and stellar growth numbers that they're putting up. Even though Nvidia looks like a bargain at least on paper, 22 times forward earnings for a company with 73% revenue growth, 56% net margins, and that's on track to get hundreds of billions of dollars in AI infrastructure spending over the next few years. But as you and I have discussed before, I'm wondering if Nvidia is going to face margin pressure as those competitive threats ramp up for GPUs as lower cost alternatives improve. On the other hand, Broadcom trades for 28 times earnings. So it's the more expensive stock on paper. It does have stellar margins, but in my mind, it has a more diverse revenue stream than Nvidia. And it depends on data center GPUs, you know, for all of its business and video does almost.

6:14And I like the diversity. It's the same reason I own AMD instead of Nvidia. So I'd have to go with Broadcom here for a five year investment. Yeah, man. I'm really glad that you mentioned the diverse revenue because I did fail to mention when I mentioned 100 billion earlier, that's just AI related revenue. It has other sources of revenue that contribute as well. But I think it's important to keep in mind, Tyler, this question of which I prefer Nvidia or Broadcom, it's incredibly hard to answer this. But I will try to do it anyway, call me chicken little. I'm always leery of investing in the top dog when its profit margins are at historic highs. To me, the top dog is always going to face that margin pressure. And I really think that most times it returns to historical norms. In the case of Nvidia, its margins are still at those historic highs. I still expect them at some point to come back down to what would be considered historically normal for the company. That would put a little bit of pressure on the profits. By contrast, I think Broadcom is hitting an inflection point and could actually see some margin improvement over the coming years.

7:14And on top of it, it does have a slightly better dividend than Nvidia's. So if I would choose Broadcom today, if I had to choose between the two, but it's an incredibly hard choice. I'm just glad I'm playing the host today and actually don't have to give an answer. So I'll punt on it for until maybe you guys put me on the spot. After the break, we're going to dive into insider buying and what that can mean as an investor. These days, I'm all about quality of a quantity, especially in my closet. If it's not well made and versatile, it's just not worth it. That's honestly why I love quints. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quints makes high quality wardrobe staples using premium fabrics like 100% European linen, silk, and organic cotton poplin. They work directly with safe, ethical factories, and cut out the middleman. So you aren't paying for brand markups or fancy stores, just quality clothing. Everything they make is built to hold up season after season and is consistently rated 4.5 to 5 stars by thousands of real people like me who wear their clothes every day.

8:15The quints Mongolian cashmere crewneck sweater may be the most comfortable one that I own, it's light, soft, and was a lot more affordable than you think quality cashmere would be. Stop waiting to build a wardrobe you actually want. Right now, go to quints.com slash motley for free shipping and 365 day returns. That's a full year to wear it and love it, and you will. Now available in Canada too. Don't keep settling for clothes that don't last. Go to cuince.com slash motley for free shipping and 365 day returns, quints.com slash motley. So last week we were discussing the trade desks decelerating growth, and we did a little premature grave dancing with some potential companies that could take over trade desks who's trading so cheap, you know, maybe it's a takeover target. But today the stock is up over 70% after some news that it is discussing helping open AI sell ads on its platforms or wherever it wants to do it. And there was also an SEC filing showing that CEO Jeff Green had made a $148 million open

9:20market purchase of the trade desks stock. And similar stock buying news, Berkshire Hathaway CEO Greg Abel, which looks going to take me a minute to get used to saying that set a Warren Buffett, but we'll get through this, right? Abel said he's going to purchase a whole year's worth of salary at Berkshire Hathaway stock every year that he's in charge. I mean, it's kind of funny, because clearly he doesn't need the salary. I want to tie these two stories together into a topic about like insider stock purchases. Many investors out there follow insider stock purchases and sales. And almost as religiously as they do like earnings and things like that, you know, others not so much. We all have our flavors in this sort of investing world. Let's start with these two news stories. Neither the trade desk or Berkshire Hathaway seem to been knocking out of the park lately for various reasons, very different for the two of them. Do you see these moves as real signals of better times ahead for both companies or more less small gestures to change the market narrative around them a little bit?

10:21You know, I don't grade all insider buys or share repurchases in the same way. I think that investors really need to take a step back and evaluate each one on its own merits. Honestly, here I give greater weight to the Berkshire Hathaway news. And that might be a little bit surprising, but historically Berkshire Hathaway's management does not like to repurchase shares unless they're trading below its intrinsic value. Or this number that they say, this is what our business is intrinsically worth. And when it goes below that, that's when they start repurchasing and they're pretty strict on that. Or at least Warren Buffett always has been. Now you have a new CEO, Greg Abel. He really is eager to preserve the culture. He wants to really project this concept that he knows intrinsic value like his predecessor, Warren Buffett, right? I don't think Greg Abel is going to risk buying back Berkshire Hathaway stock too early here. He's buying back. He really does believe it's a good deal. And so to me, that's signal there. I think that's worth paying attention to.

11:23With the trade desk, I don't think it's that simple. I think there's a lot of things going on here. On the one hand, this is the largest insider purchase in the company's history. And so I think that is worth noting. On the other hand, CEO Jeff Green who just bought these shares, he already owns over 10% of the company. And so relative to what he already owned, it's big, but maybe not quite as big as it first looks. So keep in mind that Green sold shares back in January 2025. And in dollar terms, he's buying back less than what he sold then. So I'm not saying that, you know, sell the top and buy the bottom, but I'm just saying it's worth noting. And also, it's interesting, the timing of this. It's right when the deal with open AI is coming out. So there's a lot of things going on. We don't know fully all of Green's motivations. He did say he's going to announce and explain his decision on LinkedIn tomorrow. So it's tuned in for that. I just put more weight on the Berkshire halfway news than on the trade desk news. Yeah, I mostly agree. So with the trade desk, I'm not sure if it signals that there are better times ahead as much

12:23as it signals confidence by Jeff Green, the stock's cheap right now, even if growth continues to be kind of muted in the near term. So even after today's rally and the stock is rallying pretty big on the other news, the open AI news that Tyler mentioned, but even after the rally, the trade desk gets priced at about 14 times forward earnings. So it's not a surprise to see some insider buying. I'd be surprised if we don't see more insider buying at that level with Berkshire. I'm not too impressed with Abel's purchase. I mean, he added $50 million to the roughly $170 million of stock he already owned. And it's pretty common when an executive jumps to the CEO role to see their skin in the game rise. On the other hand, the restarting of buybacks is a more significant development for me because one, and John kind of alluded to this, he still has to get Buffett's permission. Although Abel wants to put his own mark on it, the buyback program has been rewritten that he needs the permission of the executive chairman, which is still Warren Buffett to sign off before he can do it. And they can only do it if they both agree that the stock trades are to significant discount due intrinsic value.

13:24So to me, and I am a Berkshire investor in full disclosure, that's the more significant of the two. Look, I'm a weirdo. I think anyone who's been listening for the past few months already knows that. But executive behavior is like one of my favorite topics, like executives. How much do they own? How much are they paid? Like what are the incentives for taking home those paychecks and how can those incentives be good or bad for shareholders outcomes? I really ascribe to that Charlie Munger line show me the incentive and I'll show you the outcome. I think it's a pretty good investing philosophy to follow in that same vein, kind of thinking more broadly about how executives behave, how they buy stock, how they're compensated, things like that. How does that work into your investment analysis? And what are some of the words of advice for someone out there listening to this who wants to incorporate those sort of things into their analysis of a company? I mean, I'm somewhat a fan of incentive pay, but there are two big caveats I've mentioned. So first, I prefer when incentives are paid in cash or at least in performance stock units,

14:25as opposed to just simply getting a block grain of restricted stock units or just shares. If the executive wants to be an owner, they can choose to use their incentive to buy stock, which is exactly what Greg Abel's doing, except he gets a whole big flat salary regardless of how well Berkshire does. There are some incentive pay packages that are based on short term goals. And I don't like those, not just meeting stock price targets, which there's plenty of that out there, but meeting things like, you know, this year's earnings per share goal or things like that. There's financial engineering that executives can do to make their earnings per share look better. Like, you know, aggressive buybacks, for example, can boost earnings per share to a level that they need. I'd rather see something long term oriented. Like I love it when CEOs are incentivized to produce a certain level of revenue growth over like a five year period. I like long term incentives. And if it's done right, it's a good thing, but you have to really pay attention to the details. Yeah, Matt's hitting it right on the head. The devil is in the details generally speaking on my fan, but there are incentive pay packages that I wouldn't be a fan of just because of those details, whether it's as Matt said,

15:29they can be short term oriented. They can be overly tied to stock price. I don't really think that those are the incentives that matter, but the ones that Matt pointed out, the ones that are tied to business results over long time periods and those incentive packages do exist out there. The ones that are saying, Hey, if our revenue is here, five years into the future, those can be really strong incentives because you can't fake those over the short term. You've really got to build for the long term if you're going to achieve those. And then you have to assume if the business does achieve those and it's going to be good for shareholders more than likely. So those tend to be good. Even the ones that do come with some dilution, I think that those can be okay. So long as the goal that we're trying to reach is big enough that it rewards shareholders even after factoring in the potential delusion. Personally, I'm a bit of a fan of some combination of growth, some rate of return and some sort of guardrail to preserve per share value because last time I checked, we are shareholders and we own a small portion and I want to guard that portion like it's dear to my life.

16:33After the break, we're going to do something a little different. I'm going to hand over the host chair over to John as we discuss veil resort and it's planned to entice the younger generation to hit the slopes. I have lots of thoughts on this topic and I don't want these two to sit through a saliloquy. So after the break, John's going to take over. Have you been sleeping on your mattress a little too long? Like I have my back's getting sore more than it used to. I feel like Homer Simpson with my body shape and printing on the mattress, but like you, I'm busy with the job and kids and who wants to go to the mattress store with the family only to deal with a pushy salesperson. That's why I was excited to learn about Lisa and their premium mattresses that you can shop for from the comfort of your own home. We want a stability and comfort. So we went with the legend hybrid. It has over a thousand individually wrapped springs for extra support. But here's the great thing. It virtually eliminates motion transfer. Just in case one of us has a restless night, no matter how you sleep or your budget, Lisa has a mattress for you. They're made from premium materials right here in the US with a focus on using sustainable materials like recycled steel. Check out which mattresses right for you at Lisa dot com for 20% off.

17:37Plus get an extra $50 off with the promo code full exclusive for our listeners. That's L E E S A dot com promo code full for 20% off plus another $50 off. Support our show and let them know that we sent you after checkout Lisa dot com promo code full. Welcome back to Motley Fool money with the hidden gems team. So we wanted to talk for a moment about veil resorts. That's ticker symbol MTN great sticker symbol, by the way, shares of the ski resort company are hitting 10 year lows. If you're a shareholder, I'm sorry that you've gone up and all the way back down to where you were 10 years ago, Tyler, why isn't veil stock going up? Because if I look at this revenue is near an all time high, it looks like it's still generating a lot of cash. What gives? Yeah. And thanks for you and everyone letting me indulge in this one. I've seen more Wall Street Journal articles about veil resorts in the past two weeks than I think in like the past 10 years. So it seems like an app time to discuss this. Let's roll this back to that 10 year ago, sort of window like for the longest

18:40time, Vales major growth levers came from industry consolidation. Every single ski resort in America to the most part was either owned by a single person or like a mom and pop or maybe like two or three mountains together. And what veiled is it had to solid business model with its multi resort epic pass and it used that more predictable revenue stream to acquire other resorts across North America and become this conglomerate. But here's where it gets tricky. That growth lever really isn't as available to them anymore. It and private company, Altera, have basically spent the past like 10 years in an arms race to nap the crown jewel resorts across North America. And now the old ones that are left are some of the smaller independence that aren't going to really move the needle in terms of like past growth and total revenue and things like that. And honestly, good luck building a new resort in North America. We've actually, I think over the past 30 years, we've lost more resorts than we gained. So it's on a net downtrend finding new acquisition targets really hard. And to make matters more complicated for veil, they really levered up to get a lot

19:44of this stuff. So we're now in a situation where growth is more or less coming from increasing revenue with existing resorts. Maybe you raise your passes. Maybe you can squeeze a few more people onto the slopes in any given time. It's just harder to do. And I think the stock price and its valuation reflect that it used to be this faster growing industry consolidator and it traded for a premium valuation as a result, which today just doesn't really exist anymore. And I think the market is valuing it differently because of that. And that's why we've really landed like a round trip of a company that's now trading at like 19 times earnings. Yeah. So essentially the market is looking ahead into the future and saying, where's the growth going to come from? If we keep looking off into the future, we need to talk about the kids here. And veil resorts is seeing a drop off with Gen Z. And so it's lowering its prices for that demographic, trying to boost demand. I don't know. Is this something that can get things going again? Can the stock get going or does veil resorts need something else? They'll claims to be doing this for, quote, increased accessibility for younger

20:47skiers. But this is a business. It's not a charity. They're doing this to boost revenue and not just at some point in the future. This makes annual passes more reachable for younger people who might typically buy just a few day passes each season. And with any type of resort entertainment destination, annual passholders tend to spend more when they're in the resorts compared with day pass holders. It's the same reason why Disney gives annual pass discounts to Florida residents. It's not because they're having trouble filling their parks or not. It's because annual passholders buy more merchandise. They spend more money on special experiences and add-ons, food and drink, etc. The same logic really applies here. So I think it's a smart move. I don't know if it's going to move the stock, but that's why they're doing it. I said the logic, but kind of from a different perspective, you know, it's get them hooked while they're young and they'll keep coming back at higher prices when they're older. I mean, so I started my kids skiing when they were two years old. Got to get them started early, right? I don't know if this is enough to completely change the growth trajectory for the company in terms of like increasing revenue across the board with

21:49Gen Z spending a higher wall at spend at these particular resorts. What I think it more likely does is increase the odds of repeat customers for many, many years to come. And that's I think going to be the new goal here is milking more out of that existing portfolio. I think considering where the company is at this point, maintaining that slower growth before five, 10, even 20 years and instead of thinking about ways to grow via consolidation and acquisition, like they've done before, move to kind of that stodgy way of growing in a mature industry, pay down debt, pay a dividend, buy back stock, those could be more than adequate ways to generate adequate returns for investors without doing aggressive things like trying to find the next big resort in Europe or God forbid, try to actually build another giant ski resort here in North America. So I want to thank John for letting me go on my long tirade about Vale. That was a lot of fun. Maybe we'll do a little bit of chair switching every once in a while.

22:50But that is all the time we do have for today. That John, thanks for sharing your thoughts. I'm going to hit the disclosure and then we're going to go in here. As always, people in the program may have interests in the stock they talk about. And a Motley Fold 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 Fold editorial standards. It is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only to see our full advertising news closure. Please check out our show notes. Thanks for a producer, Bart Shannon for the day and the rest of the Motley Fold team. From Matt John and myself, thanks for listening and we'll chat again soon.