The Trade Desk's (TTD 0.92%) second-quarter revenue doubled, but shares fell. Berkshire Hathaway's (BRK.A 1.66%) (BRK.B 1.35%) second quarter featured share buybacks (again). In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and ponders the likelihood of CEVA (CEVA 2.07%) still being a stand-alone company in 10 years.

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This video was recorded on Aug. 9, 2021.

Chris Hill: It's Monday, Aug. 9th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Jason Moser. Jason, how are you?

Jason Moser: Happy Monday. I'm well. How are you?

Hill: I'm feeling all right. We've got Berkshire Hathaway's latest results. We're going to talk small-cap tech, but we will begin with digital ads. The Trade Desk's second-quarter revenue was double what it was a year ago. It was double, and their guidance was good. Despite that, shares of The Trade Desk were down a little bit this morning. Although, I will point out that it's bounced back up from where it was at the open, which anytime I see that the immediate reaction, the pre-market activity, is worse than what it ends up being during the day. It makes me wonder if at first blush, maybe this wasn't what Wall Street was looking for and then they dig in a little deeper and they're like, "Oh, this was pretty good."

Moser: That's the trick with pre-market and aftermarket, depending on when the company announced this. Obviously, there are always going to be knee-jerk reactions. Reactions from investors just that are operating on a different timeline, I mean, obviously, a lot of the money that's controlled out there these days are running on a very much shorter timeline than we tend to operate on. You try to look past that, and I've always said, I focus more on making sure that management is doing what they say they're going to do in hitting the targets that they said. To me, that's far more important than the arbitrary numbers that you get from the street, so to speak. It's not to say those are irrelevant, but they're just based on a much shorter timeline. They typically don't tell the whole story. I think with The Trade Desk, it is a business that has just not only set itself up for success, it's also a business in transition, and we'll talk about that in a minute. I think when you look at the numbers, the numbers were terrific. They exceeded the guidance that management set out a quarter ago. Revenue more than doubled from a year ago to $280 million for the quarter and earnings per share followed suit. Customer retention remained very strong, over 95% for the quarter the way it has for the previous seven years, I think, I mean, these companies just for the longest time, just done so well retaining their business and growing relationships with their customers. 

The investments that they're making in the universal ID 2.0, that's this alternative to third-party cookies. They launched their Solimar platform, which is ultimately, it's just another way for advertisers to on board to get that first-party data that's so important to them. Better measurement, better goal setting. This is just a business that continues to reinvest in itself. Given the profitability of the business already, the cash flow nature of the business already. I mean, it makes a lot of money. The valuation has always been seemingly a little bit stretched, but I think it's been stretched for really good reasons. I mean, you've got a company that is keying in on a big market opportunity with good financials and continuing to iterate and evolve and bring new tools to its biggest advertising partners. I think that market reaction today notwithstanding, investors in The Trade Desk, and I'm one, you got to feel really good about what this business is doing.

Hill: In terms of the business of The Trade Desk transitioning, what should people be watching for? There are a lot of businesses and a lot of industries that are trying to either expand what they're doing, increase their optionality. Sometimes it works, sometimes it doesn't. What are you going to be watching with The Trade Desk?

Moser: I think it will be a couple of things in particular, No. 1, management, every quarter really they continue to hammer home this idea that the advertising-supported video on demand market is going to outpace the growth of subscription video on demand over the coming years. That is the basis of this business. I mean, advertising-supported video on demand, that's what they do. It's very easy for us in our domestic box here to view subscriptions as superior because you're able to avoid ads for the most part. When you look at it from a global perspective though, it's far different. There are a lot of economies out there, a lot of consumers that are far more economically sensitive than perhaps we are here. Advertising video on demand is certainly a more attractive value proposition in many cases. I think, also, a lot of the services that we're seeing rolled out here, even domestically, or incorporating advertising level tiers. 

To me, we want to continue to see that advertising video on demand growth continuing. We'll see that continue to outpace the subscription. Then also just the buy-in in regard to this UID 2.0, this universal ID. The more partners, the more customers that buy into this idea, that see the value in this concept, I think the more that really validates the work that The Trade Desk is doing. To that point, they noted that a few more partners really bought in over this past quarter. I mean, Omnicom Group wants AMC Networks to load in. Even with that Snowflake Data Cloud. You've got companies buying into this notion that UID 2.0 is a good alternative to those third-party cookies and the more buy-in you see there, then that just creates a little bit of a flywheel, and we love to see those flywheels. Those are a couple of things, I think, worth keeping an eye on.

Hill: Let's move on to CEVA. Shares of CEVA were down 4%, 5% this morning. We talked about this company back in February. It's a small tech company, with a market cap of around $1 billion. They own a portfolio of intellectual property serving the semiconductor industry. How did the second quarter look to you?

Moser: The second quarter looks great. I mean, this is a neat little business. When I say little, I mean, you hit the nail on the head there. Just breaking through $100 million in annual revenue here recently. CEVA operates a licensing and royalty business model and they ultimately are getting technology into the silicon that gets out there into all sorts of different devices and applications like AR, VR, and artificial intelligence, and 5G, Internet of Things, robotics. I mean, CEVA has a wide reach there. Then when you talk about our customer base and, say, very large and broad one, everyone from Broadcom and Cirrus Logic to Intel, iRobot, Nokia, Samsung, Sony. You're going to find that CEVA owns a lot of the technology that you use on any given day. Again, a company where management set expectations and then exceeded those expectations, revenue for the quarter of $30.5 million was up 29% from a year ago. 

Now, if you back out a royalty payment that they've received, it was a one-time royalty payment. Ultimately, the resolution of a dispute. That growth was only 16.5%, but it was still royalty revenue. It was revenue they were going to get one way or the other. That's more of a timing thing than anything else. They see all-time record high shipments of Bluetooth technology, Wi-Fi, and cellular IoT devices. Then we also saw some new licensing agreements for the quarter. They signed 17 licensing agreements. Six of those were with first-time customers and geographically nicely diversified as well. Over the quarter, they made an acquisition of a little company called Intrinsics, and that's going to give CEVA more exposure to the aerospace and defense, and space markets. Those are obviously very big and fairly reliable markets, so that's encouraging as well. All things considered, the big-picture thesis on a business like this is if you believe in this concept of connectivity, if you think that we're becoming more tech-enabled and connectivity is only becoming more and more ubiquitous, then CEVA is a company that should benefit from those tailwinds and it continues to look like they do benefit from these tailwinds. It's one I've enjoyed following. It's very small, obviously. It is one that's going to be a little bit more volatile. Trading volumes are much lower, so you see some bigger price wings. It's one that I continue to say you need patience with a business like this. 

This is one of those types of companies where you buy it and you own it, you plan on holding this thing for the next 10 years maybe. I know that sounds like a long time, but that frankly is how you need to look at a business like this because we're looking at ultimately a business that should remain very relevant even as we move beyond 5G into 6G, 7G, and so forth. I mean, CEVA is going to own this technology that should remain relevant for a long time to come and those licensing and royalty business models, they produce some really healthy margins. That's a 90% gross margin business. You don't see those often and so when you find them, you need to at least take note.

Hill: How confident are you that in 10 years it's going to still be a stand-alone company? Because it's small enough and they're doing enough interesting things that one of my thoughts, looking at CEVA is, boy, someone with deep pockets has to be looking at this business.

Moser: I feel like you're right and given the size, it would amount to a bolt-on acquisition for a lot of bigger players out there in the tech space. It wouldn't take anything just to buy this company up and add it to your portfolio. I didn't make the recommendation based on that, but when I was doing the research for this business, that was one thing that kept on coming back to my mind. I was like, it really feels like given the technology that they own, given the numbers that they continue to report, and given how many devices this company is in — given this company's technologies is in, it's difficult for me to imagine in 10 years that it wouldn't be snapped up. But stranger things have certainly happened.

Hill: Speaking of deep pockets, Berkshire Hathaway's second-quarter profits were 7% higher than a year ago. We can talk about the reopening boosting Berkshire's railroad and energy businesses. But this really seems increasingly like a share buyback story. Buffett and Munger are sticking to their guns in terms of not overpaying for acquisitions, their cash pile is only getting larger even with the share buybacks. I think it's $140 billion now. Look, I'm not — if you're a shareholder. The stock's up 23% this year. It's not exciting, but a stock going north is.

Moser: True. Yeah, stock going up is an interesting and noteworthy stock. That's one that makes you smile. I think that with Berkshire Hathaway, we're getting what we more or less expect I think with a business like this at this point in its life. Not lighting the world on fire, but still doing well. You look at the last three and five years, I believe it's underperformed the market a little bit, but you stretch that timeline further out and it starts to look better and that's the idea behind this business. You look at a business like this and you own it for a long time and you never really worry about it. This quarter, I think, really explains why. You saw a nice bounce back from what was a difficult year last year. Operating earnings are up 21% from a year ago, because of what you noted, their performance in energy railroads. Obviously, insurance is going to be a little bit more reliable. But yeah, it does feel like this is a story where the conversation is going to become more and more about, how do we return value to shareholders? I know there were a lot of folks out there who would love to see Berkshire start paying a dividend. I feel like that would make sense at this point for them. 

I'm not a shareholder of Berkshire Hathaway, but it feels like they could do that and it would probably make a lot of investors feel pretty good, because they are repurchasing a ton of stock. To your point there, they repurchased $6 billion in stock during the quarter. I think that brings the six-month total to better than $12 billion, basically on track for what they did last year. Yeah, they're not going to go out there and overpay for anything, and it's a market where valuations are stretched really in a lot of ways. It feels like they just believe that Berkshire Hathaway today represents a better value than most of what's out there. I can respect that. Whether you agree with it or not, that's a different story entirely, but these guys are running the show and they have a pretty good idea of what the business is doing. I think they are very disciplined investors. 

To me, I think the interesting question for Berkshire Hathaway really is what this company looks like in the future. At some point or another, it boils down to Greg Abel as the CEO, and Todd and Ted are leading the way with those investment portfolios. You have to feel like there is going to be a pivot maybe toward tech or toward more forward-looking ideas. Whether that happens or not, I guess remains to be seen. I feel like it has to at some point. What does this business look like then? Because if you have these cash-cow insurance businesses and you have some folks who feel more comfortable investing in tech. Munger and Buffett really, that's not really been their forte. They've been very clear about that. This could be a little bit of a different-looking investment portfolio here over the coming decade. It's a Berkshire Hathaway 2.0, so to speak, which could be exciting for investors, I think.

Hill: It could and I don't want to knock the underlying business. You look at the profits generated from operations. This quarter, it looked good. That's what's funding the share buybacks. They've done such a good job finding and acquiring all these businesses that generate cash. It's just that for about a year now this has been the dominant story with this stock. I'm sure if I were a shareholder, I'd be perfectly fine with this. But just as someone who is not a shareholder, I'm like, "Really, you don't want to [laughs] spend any? You don't want to take $28 billion and go buy McCormick and get some spice in that?"

Moser: There's got to be some. CEVA, that's just like you dig underneath the couch cushions. Yeah, I don't know. You wonder what goes on behind closed doors. Allocating capital is difficult and the bigger you get, the more difficult it gets. Particularly, if you have such a long track record of success because expectations are even higher. People expect you to do something genius because you're Warren Buffett and Charlie Munger. Investing is as easy or difficult as you want to make it and it feels like right now they're just trying to keep things simple. They see the most value in their stock and their company. Again, we could argue whether that actually is the case or not, but it's in line, I think, with what they have historically done with the way that they've typically invested. It's not surprising to see. But yeah, again, I think it's going to be really neat to follow this story over the coming 10 years and beyond, just to see what this next iteration of Berkshire Hathaway is going to look like because it just feels like there's a ton of potential there. 

Hill: Jason Moser, great talking to you, thanks for being here.

Moser: Yes, sir. Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill. Thanks for listening, we'll see you tomorrow.