Big Tech: AI, Devices, and Dividends

In this podcast, Motley Fool host Dylan Lewis and analysts Bill Mann and Jason Moser discuss:

• Apple's Vision Pro, Meta's new dividend, and how the cloud keeps performing for Microsoft and Amazon.
• Why New York Community Bank's woes don't signal broader banking issues, but the liquidation of Evergrande could mean more pain ahead in China.
• Two stocks worth watching: Estée Lauder and Etsy.

Will Lansing, CEO of FICO, talks through his team's management philosophy, why investors should focus on more than just the company's scoring business, and the way AI and buy now, pay later are affecting the credit industry.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 2, 2024.

Dylan Lewis: The world of big tech, flash devices, ad businesses and dividends, Motley Fool Money starts now.

It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me in the studio, Motley Fool senior analysts, Jason Moser and Bill Mann. Gentlemen, great to have you both here.

Bill Mann: That's true.

Dylan Lewis: We've got earnings updates from Big Tech, two stories that have us checking in on the panic meter and insights from a CEO that's led his company and shareholders to 3000% returns in his tenure. We're going to kick off with the Big Tech bid. Massive week for earnings, we have updates from Apple, Meta, Amazon, Microsoft, and more. Jason, growth is back at the second largest company in the world. Apple reported top-line growth for the first time in over a year in its holiday quarter results, what got the company back on track?

Jason Moser: I feel like that second largest company was a little bit of a jazz.

Dylan Lewis: It's a little dig.

Jason Moser: Listen, these things come in waves. I think with Apple, relative to the other big this was an OK quarter. Nothing special, but it was good. I think the bigger question really is probably focused more on what do things look going forward. I mean, looking at the numbers, they did return to revenue growth up 2% for the quarter with earnings per share up 16%, so obviously taking advantage of that scale. When you break it out into segment, iPhone revenue was up 6%, Mac revenue basically flat, iPad down 25%, wearables, home, and accessories down 11%, and then services up at 11%. We're seeing more and more. We talk about Apple becoming the services company that continues to a degree and it is important because that services revenue is so much higher margin than the hardware. To the tune of about 2x. Basically double the gross margin of that hardware. Still big questions there in regard to China. China down 13% for the quarter, so I think all in all the tepid response from investors makes a lot of sense given that the future does. It's not so clear right now.

Dylan Lewis: I feel like we've been watching this services increase as a portion of the revenue for a while, but it feels an awful lot trying to change the direction of cruise ship bill. It's just such a big company.

Bill Mann: Well, I just wanted to ask Jason, if you could get into the heads of leadership, Tim Cook, would they get out of hardware if they could just be a services business at Apple?

Jason Moser: Well, I can't imagine that given how well they do hardware. That's just something that they're so well known for, but clearly, they are trying to steer this more and more in that services direction which makes a lot of sense.

Bill Mann: I agree. I view the hardware as being their Mot.

Dylan Lewis: We did get an update on their hardware offerings or at least we finally have hands on their latest hardware offering. Their Vision Pro is officially on sale this week, Jason. It costs $3500.

Bill Mann: That's not on sale. That is full price.

Dylan Lewis: It's available for purchase, I should say. What does this device mean for Apple?

Jason Moser: Well, this is just the first step. I don't think it means a lot at least in the near term. This is the first step for them, and I think what will be a multi years and potentially really multi decades effort. If you listen to Tim Cook, he says the Apple Vision Pro is a revolutionary device built on decades of innovation. It's years ahead of anything else. I don't know that necessarily buy into the years ahead of everything else. It wasn't a form factor to me. It's the same as all of the others, and that to me is the biggest sticking point with all of these, whether it's Oculus or Vision Pro or whatever else. The problem is you got to get the device built first to figure out what exactly you can do with it, and I think that's what we're going to see over the course of the next several years and beyond. It's ultimately these companies trying to figure out what they can do with these devices, why we need them as consumers, and then absolutely they need to continue to work on bringing that form factor down because to me that's the biggest roadblock with all of this. Not just Apple, but with any company that's getting into this headset space. That form factor has got to change or there's no massive option.

Dylan Lewis: We're going to stay in the metaverse and check in on Meta. Company also reported this week, shares up 20% after we saw full year results. We got the standard updates from the company, but also a big time surprise, a dividend.

Jason Moser: Zuckerberg giving himself a little raise there.

Bill Mann: He's getting a little bump, a little $175 million per quarter given his current share count. If you annualize that, which you should do, that's $700 million a year, which is pretty good.

Dylan Lewis: If you don't own quite as many shares as Mark Zuckerberg, you'll be getting $0.50 per share.

Bill Mann: What do you make most of us by the way.

Dylan Lewis: Jason, what do you make of this capital allocation decision?

Jason Moser: It's OK. I don't mind it. It certainly is a nice diversion away from the cash incinerator. That is Reality Labs, and so that's good. Look, you look at the business and what they tried to do in 2023, the year of efficiency. Well, I think so. They saw a 10% point bounce in operating margin from 25% last year to 35% this year, so they really did deliver on that year of efficiency, but even more encouraging is now we're seeing the business start to turn back around on the revenue side. The advertising demand that obviously remains there. Three plus billion users around the world. Listen, they grew that advertising revenue. They grew that revenue 25% with expenses along the way coming down 8%. Earnings per share are better than 200%. You know the one thing that stood out to me on the release and we knew this was happening head count down 22%.

Bill Mann: Incredible.

Jason Moser: On the one hand, you have to ask the question, why did you, why were you so bloated to begin with? Well, they weren't the only ones. I think we've seen this all across the market, but it just really stood out to me. They brought their head count at 22% clearly playing a role in the cost structure.

Dylan Lewis: It seems like a fitting time to check in on Meta because Facebook turns 20 this weekend. Back then it was the Facebook, now it is Meta gone through a couple name changes along the way, and we've seen the business change, and I think one thing that was a little buried in the results that we saw in some of the commentary from management was a bit of a transition away from a focus on the legacy, what was namesake platform Facebook, and much more of a portfolio view of the business, Jason.

Jason Moser: I think you look at the name Meta Platforms. They really are just trying to communicate that we are a platform with a number of different properties. As these companies get bigger and they have more contributors to the top and bottom lines, they don't necessarily need to be so granular. We saw Apple do the same thing back in the day in regard to the numbers of devices that they were reporting this to me. It really does make a lot of sense just given where Facebook is as big as the user base is today with Meta platforms.

Bill Mann: I think the dividend itself and the reduction in headcount both have something to do with each other because you've come to a time in which money is no longer free, and they're sitting on $65 billion in cash that is unencumbered. It's just sitting there, and they have come to the realization that, yes, as a platform company, they've needed to rationalize some of the investments that they've made. I do think it's funny at this point that this company is called Meta, and they barely talked about the metaverse. It would be like a company called Buggy Whip Incorporated beating up $200 billion in a day.

Jason Moser: I think that's the biggest question in regard to Reality Labs in the metaverse aspiration. I mean, reality lives chalking up another $4.6 billion loss for the quarter not for the year, $4.6 billions of the quarter. It made me think of Amazon back in the day, and we could be very critical of Amazon and all of their investments and just perpetuating losses, but it was an easier leap at least then because you know that people are going to buy stuff, and we could see the clear trend that people were buying more and more online. Here I just, I'm not saying it's not going to happen, but it definitely requires a greater leap of faith for investors to believe that the metaverse will develop into something. It just really hasn't yet not for the masses. That's the big question mark, but they're going to keep on investing.

Bill Mann: The thing that you have to know about Mark Zuckerberg is that he's not a romantic, and so when things are not working he is going to cut and he's going to change, and I think that is to his credit as CEO.

Dylan Lewis: On that note, I want to put a reckless prediction over to you, Bill. Will Meta still be called Meta in five years?

Bill Mann: No, I don't think so. I mean there's the Berkshire Hathaway example where the Berkshire Hathaway is actually named after a failed investment. It should be platforms or Reality Labs, but, no, I don't think it will be.

Dylan Lewis: We're going to wrap the segment. Checking in on Microsoft, we have results from the newly crowned largest company in the world, Jason, and they seemed awfully strong.

Jason Moser: Dig number 2. Yes, very strong. The big takeaway for investors. Microsoft is absolutely seen as the leader in the AI space, at least in regard to the big three or big four. Nvidia is just in a world of their own, so I don't include them there, but when you talk about companies like Amazon, and Alphabet, and Meta, and Microsoft, Microsoft is just seen as the leader right now, and they do so many things well, beyond that I mean productivity, storage, developers, security, and now gaming. Listen, they closed that Activision Blizzard deal and that gives them $13 billion plus gaming franchises. This is a monster in the gaming space. I just don't think you can forget about that, but they grew revenue 16% excluding currency effects, cloud revenue up 24%, these guys just keep on getting it done.

Bill Mann: I love the fact that we're shoehorning in a $3 trillion company like right at the end.

Jason Moser: Speak in right before we go to break status quo.

Dylan Lewis: Speaking of after break, we've got one more update from Big Tech and a closer look at some of the headlines that might be scarier than they actually are. Stay right here. This is Motley Fool Money.

Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis joined in studio by Bill Mann and Jason Moser. We hit Apple, Microsoft, and Meta updates, but we can't leave Amazon out of the big tech party. Jason, the Cloud was a huge focus for Microsoft. When we saw results from Amazon. How are things looking over at AWS?

Jason Moser: I think this quarter really pulled back the curtain on how well diversified this business has become AWS revenue because that mean a AWS, that's really the first thing we focus on now. Revenue, $24.2 billion. That was up 13% from a year ago with operating income up 38% operating margin in that cloud division 29.6%. That was up 500 basis points from a year ago. All things considered, AWS continues to, as Ron Gross might say, fire on L cylinders. But back to the diversification of this business, look at the other parts of it, advertising up 26%. They are really seeing a lot of benefit from building out that entertainment aspect, that entertainment side of the business. Then of course, the retail operations continue to kill it, growth spread out equally between US and international. One little snippet I thought was interesting because we know how important third party sellers are to Amazon. Worldwide third party seller unit mix was 61% this quarter, its highest ever.

Bill Mann: You don't want to see a company cost cut its way to success and in fact, that's a hard way for companies to tend to do. Because you always want to go back and say, well, if you're cost cutting now, does that mean that you were lacking discipline before? But this quarter also had, for Amazon, the rocket fuel of a reduction in overhead so they had great online sales growth. But the reduction in cost primarily at their central operations really fueled an unbelievable quarter.

Dylan Lewis: So much of the theme in 2023 with big tech and companies in general was the year of efficiency. Meta got the branding on that, but we saw it across the board really with the companies focusing on their capital allocation and where they're putting money to work. Looking at what we're seeing, Bill so far from big tech and the market's reaction to the big tech results, what are we zeroing in on here?

Bill Mann: I think one of the more interesting things is the fact that Meta decided to declare a dividend and the market is reacting positively to it. Which is the opposite of what happened when Microsoft did a few years ago. People were like, well, don't you have more places you can put your money? Efficiency does, if you are doing it right, leave money to be allocated in a different way. We talked about this last week about how Microsoft is now $468 per man, woman and child on the planet. They are not necessarily going to become more valuable, increasing their revenues across the board as they will be more efficient going forward.

Dylan Lewis: Jason, any other takeaways as we put all the big tech results together?

Jason Moser: I think when you look at big tech particularly, I'm thinking Amazon, Microsoft, and Alphabet. There was some language in a lot of these calls and I'll call out something just from Amazon's call. This is in regard to Cloud, while cost optimization continued to attenuate, larger new deals also accelerated. Ultimately, I think this has broader implications beyond just these three companies. I think it's a sign that, that spend may be coming back around for a lot of these enterprises based on the language in these calls. I think that is certainly something that should play out as a nice tail win for big tech, but also a lot of their customers which represents some great investing opportunities as well.

Dylan Lewis: In addition to the usual earnings updates this week, some pockets of concerns with a couple stories and Bill, Jason, I wanted to get your take on where these rank on the panic meter. First up, shares of New York Community Bancorp down 40% this week after the company reported rising losses and cut its dividend. Bill, the regional banking issues of 2023 still very fresh in a lot of people's minds. Is this something people need to be concerned about?

Bill Mann: Well, yes and no. This is a rather big bank. It is an interesting story because New York Community Bancorp was the company that bought the assets from Signature Bank, which failed basically due to their ownership in crypto when crypto collapsed. How would you like to be a bank director now having to explain that you've lost money off of buying something at a discount that's already taken down other banks?

Dylan Lewis: It's not great. Sounds like an easy conversation to have.

Bill Mann: They did it. Why shouldn't we? It's going to work for somebody someday. It was a bad quarter for them. It also is a little bit of a recognition of the fact that they have a huge amount of exposure to commercial real estate. I don't know if you've heard this, but a lot of offices and a lot of places still aren't full. There have been a huge amount of bankruptcies in the commercial space. I think ultimately the reality for New York Community Bank is that nobody really focused on their need to raise their provisions for credit losses sooner, so they did it all at once.

Dylan Lewis: Jason, this is a literal leveling up of the requirements for this business. Does it seem like something where management is maybe a little bit behind but being prudent here?

Jason Moser: I would hope that's the case. I certainly understand the near term concerns in this situation. You've got a bank now, that's all of a sudden it's going to be lofted into this category for banking. These are the biggest of the bigs. There's a lot that comes with that, enhanced financial standards and reporting. They have to really rebuild this business. That takes time and capital. I certainly understand, cutting that dividend. It's nice that they've at least still maintained it. I understand concerns when you're building up allowances for credit losses. But, hey, listen, they grew tangible book value from a year ago so that's encouraging. There are a lot of unknowns when it comes with some of these deals. But I don't know that I really see this as something to be worried about longer term. But by the same token, I get the short term concerns.

Bill Mann: It didn't happen from nowhere.

Dylan Lewis: Bill, I want to give you the final take there. Is this really something that we should be zeroing on specifically to New York Community Bank, or is this something we should be watching for the industry?

Bill Mann: Their net interest margin collapsed this last quarter and I think that it is specific to New York Community Bancorp. The analysts on the call were absolutely withering with the fact that the changes and the set asides that they made were so big. That why is it that you haven't been able to predict this? By the way, how about some good predictions now for what's going forward now that you've done this. I think it is specific to them, but you're talking about something that's happening in an environment around the world, where commercial real estate is a financial problem. If those are the assets on your balance sheet, you should at some level be worried.

Dylan Lewis: You teed me up better than you possibly could have known for our second topic for the panic meter. This zooms in on real estate, but takes us outside the United States and usually I go global when I've got you on the show, Bill. This week, a judge in China ruled that failed real estate giant Evergran will move to liquidation. This is a story we've been following for a little bit, dating back to the company originally defaulting on its dollar denominated debt. How big of a deal is this, Bill?

Bill Mann: It's huge in a lot of ways. It's huge. Let's start with the top number. They owe somebody $300 billion. [laughs] I don't know if you know that, but that's a lot.

Dylan Lewis: That's a huge chunk of change.

Bill Mann: A bankruptcy judge actually in Hong Kong said, fine. You've been trying to figure out how to reorganize. We're done with this, so now, we're going to wind up operations. This becomes a much more political hot burden in China. The reason is this, a lot of the money that's owed, is owed to people who have put deposits down on apartments and houses that will now never get built. Really the big issue is that this is a political question as much as it is a financial one. In China, most of the money is owed to individuals who put deposits down for houses that they're not going to get. Bankruptcy law treats them very low in the stack, but internationally, most of the debt is owed outside of the country and so what does China do here? Do they follow bankruptcy law or did they do the politically efficient thing?

Dylan Lewis: Bill, Jason, We'll see you a little bit later in the show. Up next we've got a familiar name in your financial lives that might be worth looking at in your portfolio. Stay right here. You're listening to Motley Fool Money.

Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis. When you hear FICO, your mind might go to personal finances and your credit card statements, but you'd be pretty happy if the name was in your stock portfolio. The company is the standard in consumer credit scores and under CEO Will Lansing over the last 12 years, shareholders are up over 3,000% crushing the S&P 500. This week we caught up with Lansing about his team's management philosophy. Why investors should focus on more than just the company's scoring business and the way AI and buy now, pay later are affecting the credit industry. I'm sure our listeners know the name FICO and probably know that you're a number that matters in their financial lives. But could you kick off talking a little bit about how you fit into the consumer credit and scoring place? Because I know there are a lot of players in that environment.

Will Lansing: That's probably the place where we're best known is for our scores, FICO scores, that's one of our two businesses. We have scores and software. Scores has been an evolving business for us and we got started in it long ago. We're a 65 year old company and we got into proprietary scores for lenders in the 50, 60 years ago. What happened was we found ourselves building scorecards for individual banks. We did that for many years and we thought, if we could make one of these more generic, more available to everybody, there would be a market for it. In 1987, we launched the first industry wide FICO score in partnership with Equifax. That had a great success, the lenders loved that. Suddenly they had this low cost, automated way to evaluate credit and so that took off. Our next innovation was, well, instead of just doing it on the Equifax credit file, why don't we do this on Trans Union and Experience also and we'll have more of an industry wide score available to any lender who uses any of the three bureaus data. So we did that and it made the score even more popular with lenders because as you can imagine, it gave them a little bit of flexibility and leverage with the bureaus and suddenly it was available to a lot more lenders. That worked out pretty well.

Then what happened was the regulators who are looking for ways to evaluate the risk in the portfolios of the banks that they regulate, identified FICO score as a common way of evaluating risk. They started to ask the lenders for that. Let us see the average FICO score for this portfolio, for that portfolio, that went over pretty well. Relatively quickly the regulators came to rely on the FICO scores, pretty scientific and easy to get measure of risk for those portfolios. So now you've got the lenders who are using it because it's a great value proposition for them. They can make low cost credit decisions. You've got the regulators who are finding it useful for measuring risk. Lenders are happy to please the regulators as you can imagine. Then, a lot of, certainly in the last 40 years, a lot of lenders have taken to securitizing their loans. You have the investors saying to the lenders, hey, how can we evaluate the risk In this paper you're trying to sell us. Obviously the FICO score, which is available for every one of the loans in there, becomes a really good tool for investors to evaluate the quality of the portfolios that they're buying. Now you've got these three constituencies that are all relying on the FICO score. That's really how we became the anchor of the credit ecosystem. That's why we're so deeply embedded, where we are the industry standard. We're very predictive, there's a lot of good reasons for it. But also the network for effects are very powerful because once you're as deeply embedded as we are, it's hard to get out.

Dylan Lewis: So is the thought there that basically you guys have done something well, and when you do something well, the use for it just continues to grow and grow and you're able to serve more stakeholders?

Will Lansing: For sure. I'm often asked, how is it that FICO became an industry standard. Everybody would like to be an industry standard. How did you guys do it? As I explained, it happened over time with building different constituencies for the score. Then you get into network effects because you have all the utility that happens in different places. Actually we worked on that, we became ever more embedded and then we thought, is there anything else we can do to really cement our position in this ecosystem? We're running a business. We came up with this idea about ten years ago. We came up with this idea of providing the FICO score to consumers. We said, hey, you lenders, you're buying the FICO score from us. How about if we give you a free reuse and you can share it with your consumer customers? Initially they were a little hesitant because they didn't want us even more embedded than we already were. But over time they came to recognize the utility of it and a number of big lenders explored it, experimented with it and found it very successful. Consumers really liked it. Now we're in 250 million accounts across the country providing free FICO scores to consumers. You probably get your FICO score from your bank for free. That's typical, but again, it just cements our position. How's the bank going to say goodbye to FICO when there's so much reliance by the consumer and everyone else on the score.

Dylan Lewis: Looking at the state of the business now and some of the recent results that you guys put up when you posted earnings, it seems like you're seeing good growth in scores. Seems like you're seeing relatively good growth in software as well. What are the portions of the business that you're excited about and that you feel like people should be paying attention to?

Will Lansing: Well, I think you're absolutely right that we have good growth on both sides of the business and that wasn't always the case. I think if you go back 15 years ago, our software business was growing one or 2% a year. Our scores business was growing five, six, 7%. It really went with GDP. It went up and down with GDP. Which is understandable given its role and we've done a lot of things to it. Now both our software business and our scores business grow double digit, almost consistently year in year out. I'm excited about both sides of the business. They're different because the scores business is an IP licensing business. So it's got very, very high margins. It's a 90% margin business, growing double digit. That's part of why our stock is as popular as it is. Then our software business is much more of a business of the future because we're growing very fast. Our software platform business is growing over 40% year over year and has been for four years. I think that tells you that the dog is eating the food. The CRM business is alive and well and it's going to do very well, but it's not a profitable business today. It's a break even business and that's because we're pouring money into R and D, we're chasing market share and maintaining our lead from a features and functionality standpoint. Someday, we'll improve the margins. That's up to us. We have the opportunity to do that whenever we choose to. But right now, we're putting all the energy into growth, growth, growth. Which side am I excited about? I love them both. There are two wonderful children that I love equally.

Dylan Lewis: You've mentioned the stock performance there by my count and these are round numbers. I think stock is up about 3,000% since you took over the CEO role in 2012. Top line has gone from about 650 million to over 1.5 billion. Net income is about five x to 450 million on a trailing 12 month basis. Can you talk a little bit about the management philosophy you mentioned focusing on growth right now. But just what you guys are prioritizing when it comes to allocating capital and the projects that you're interested in.

Will Lansing: Yeah, absolutely. Well, thank you for pointing out statistics out, and it's really great when you point them out relative to the S&P 500 or the Russell 3,000 because we're in the top 1%. We're in the 99th percentile on total shareholder return against all the major indices. We're top 10 company out of the S&P 500 on TSR over the last 12 years. So that's the track record and the philosophy that goes with it is you start with believing that your job is to make the stock more valuable. Your job is to take care of shareholders. That's what we think we have to do here. That's what we wake up every morning thinking about. Now obviously, the only way you get there is by focusing on customers and quality product and employees and all the constituencies that the company touches. But there's no fuzziness in our thinking. There's a lot of clarity. Our goal is to take care of our shareholders and to maximize the value of FICO over the long term. We take a three to five year horizon. We do nothing on a quarterly basis. So unlike a lot of software businesses, we do not chase quarterly earnings. We give guidance annually and the business goes up and down on a quarterly basis, and we don't really pay a lot of attention to it. Unlike a lot of software businesses, you don't get extra discount for closing a deal at the end of the quarter. Our guys are instructed to tell our customers, well, this is the price and you can have next week, you can have this week when you're ready to buy the stuff we'll work with you. It's a much healthier relationship with your customers. In the long run, it took a while to get this culture in place, but in the long run, I think it's good for the business, it really is good for the business. Shareholders for long term view of the business, we treat it like a family business. We have three values in our company.

Speaker 1: Act like an owner, delight our customers, and earn the respect of others. Those are the three. But the Number 1 value in our company is act like an owner. I never miss an opportunity with our people to talk about, this is your company. We have very wide stock ownership also with and we have 3,500 employees, over a third of them on stock. I mean, a lot for a public company. I encourage them to think about it as a family business and you have money and resources at your disposal, you have budgets that you work, you have people who work for you, you have your own time. If you don't feel like you're spending your financial and human capital the right way, you have an obligation to stand up and change it. This is your business. If it were a family business, would you be doing what you're doing or would you change it? That's really the mentality in our place. It's a real ownership mentality. I too I'm a big owner of the business. I'm a public company CEO, but my network is tied up in this company. Everyone knows it. I treat it like a family business. In terms of capital allocation, we don't do a lot of MNA. It's an interesting problem because we have a very high PE and so virtually anything we wanted to do would be a creative. If our only goal were accretion, we would do a lot more MNA than we do. But the problem comes when you start comparing a business that we would buy with the business that we're already in. On that basis, they're all dilutive.

We look at it and we say, well, do we like that business better than we like our own? If the answer is no, we don't and that's typical. We say, well, let's take our free cash flow and put it into stock buyback. If you look at that over the last, it's more than just my tenure. But certainly, during my tenure, we have been very big buyers of our own stock. I mean, we were 76 million shares at the high point. We were 36 million shares when I joined the board, and we were 30 million shares when I became CEO, and today we're about 25 million shares. So we've come down quite a bit. We're basically kind of a slow-motion LBO. We like it that way. We're very confident in our own business. We love our business, we're confident in our business, and given the choice, we'd rather put the money into our own business than into another one. We still do very small acquisitions, little tuck ins for technology, sometimes talent acquisitions. But although we look all the time, we're always looking. The reality is we just like our business better than everyone else's. There's a reason we love our business. I mean, it's a good business.

Dylan Lewis: There are a couple things that seem to be affecting the industry that I want to dig into with you and get your take on. The first one, and this is true of anybody in the tech space, anybody of the software space, is artificial intelligence. Knowing that you're in analytics and knowing that you're in software, what do some of the AI investments look like for FICO?

Speaker 1: We are obviously involved in AI. We have a bunch of patents in AI. It's an interesting area for us because we've been in analysts, we've been in AI for a very long time, and machine learning, and neural nets, and there's a time place for it. On generative AI, which is what everyone's buzzing about these days, I think that FICO will benefit in the same way that everyone else does in terms of lowering costs and call centers, and coding, and things like that. I think that in underwriting, it'll be quite a while before AI really works its way into the production side of underwriting. That's because it's so heavily regulated. The regulators demand to understand, why did you make the decision that you made? Let's make sure that it complies with fair lending practices. AI doesn't lend itself easily to that. It's a little bit more of a black box and you have to unpack how it is that the AI got to the decision that it got to. Now, we have a bunch of patents in this space where we call it explainable AI, ethical AI, and we do have patents in the space and we are prepared to use it. We do use AI and synthetic data in our modeling. You have to be careful and use it in the right places. That's how it affects us. We definitely are investing in it. For others, sometimes it's a hobby and a toy and I think there's also appropriate uses.

Dylan Lewis: One of the other things I wanted to ask you about was buy now, pay later. This is an interesting topic in credit. It's been growing very quickly. We actually saw quite a few consumers taking use of buy now, pay later programs this holiday season. Can you talk a little bit about how it fits into the credit industry right now?

Speaker 1: Yeah, absolutely. Buy now, pay later typically is people who are expanding their access to credit by working a deal with a buy now pay later company to essentially buy a product on installment. That's basically what it is. The challenges are that the bureaus don't all treat the payments the same way. They don't treat this data the same way. There's not a consistency yet in how it's treated. I think that there's a benefit for consumers because not only do they have the access to the incremental credit, but they also can provide more data to those who care about their credit practices. There are opportunities to improve your credit standing with buy now, pay later. FICO is working with a firm right now to sort out how do we standardize the use of the buy now, pay later data so they can really be incorporated in scores and give people access to credit they wouldn't otherwise have on the revolving side. I think it's a good development in the industry. It fits a very specific need. I mean, we've had installment loans forever, but I think we've figured out how to do it in 21st century way. I think it's a good thing and we're working on trying to get the benefit of it for the consumer on the data side. We're working out how to do it well.

Dylan Lewis: Listeners, we're always looking for ideas on companies and leaders you want to hear from. If you've got an idea, shoot us a note at podcasts at fool.com. Coming up after the break, Bill Mann and Jason Moser return with a couple stocks on their radar. Stay right here. You're listening to Motley Fool Money.

As always, people in the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell based solely on what you hear. I'm Dylan Lewis, joined again by Bill Mann and Jason Moser. We're going to jump right into radar stocks. Each week you bring the stocks, our man behind the glass, Dan Boyd, hits you the question, or sometimes even better yet, more of a comment. Bill, you're up first. What are you looking at this week?

Bill Mann: I'm looking at one of the most powerful cosmetics brands in the world, a company called Estee Lauder. Their company has been hit very hard, lost a lot of market share. They've lost a lot of gross margin. The question for me, and their earnings are on Monday, are they going to get back to their former glory? They are forecasting $2.60 in earnings. Two years ago, they were seven dollars. If it is a $2.60 stock, it's very expensive. It's more to a seven dollar stock. It is very cheap. It's a company that's a family run company. Basically, they've had a story line that would have fit on succession, [laughs] but here we are, and the company still goes forward. What are we going to get on Monday?

Dylan Lewis: Dan, a question about Estee Lauder.

Dan Boyd: Yeah. Bill, respectfully, what the heck do you know about cosmetics?

Bill Mann: Dan it depends. Eighty percent gross margins. Do you like money?

Dan Boyd: I mean, that makes sense. You can't just ignore it just because you're not necessarily the end customer.

Bill Mann: I use product.

Dan Boyd: Yeah.

Bill Mann: I've got a facial regiment. I don't know what your problem is, Dan.

Dan Boyd: All right. Jason, what's on your radar this week?

Jason Moser: Keeping an eye on Etsy. Ticker is E-T-S-Y. We will see Etsy earnings toward the end of the month, but before that, we saw this week Elliott Management is going activist on Etsy. They built up a 13 percent stake in the company and even got a board seat. You know, it's funny. You read management's take on this, they seem to be optimistic about this. I don't know. But clearly the company has pulled back significantly after the big COVID bounce that so many companies saw over the last few years. Etsy is a good business. Let's get that out of the way. Fundamentally, it's a good business but they've hit a wall. They pulled a lot of growth forward as most did and I think now you have some questions in regard to the house of brand strategy they did, dump Elo7 in the middle of last year, and that was a relatively smaller acquisition. But it at least begs the question, are these other acquisitions paying off or will they pay off as management had hoped? Given Elliot's track record, this could very well be a positive catalyst for the stock in the coming quarter, so looking forward to the earnings report at the end of the month.

Dylan Lewis: Dan, a question about Etsy.

Dan Boyd: How about a comment and said. This is one of those shops where whenever my wife is on Etsy, I start to get a little concerned about the bank accounts, boys.

Jason Moser: Right there with you.

Dylan Lewis: I was going say, I mean, I think that this is a very Valentine's radar stock segment. We have gift ideas. We have gift ideas abound. Dan, which one's going on your watch list this week?

Dan Boyd: Honestly, this is a tough one. But the truth is, I don't know Estee Lauder very well, so I got to go with Etsy.

Dylan Lewis: I'm a proud customer and a fan of the pick, Dan. Thank you for weighing in. Bill Mann and Jason Moser, thanks for being here. That's going do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll catch you next time.