In this podcast, Motley Fool analyst David Meier and host Deidre Woollard discuss IBM's potential acquisition of HashiCorp and how it could help grow the business. And what was it about Meta's earnings that gave the market pause?
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This video was recorded on April 25, 2024.
Deidre Woollard: Meta, IBM in a down-market buying opportunity. This is Motley Fool Money.
Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst David Meier on this very busy earnings Thursday, David, how're you?
David Meier: Yes, I'm very busy. I'm well, but very busy.
Deidre Woollard: I think everybody at The Fool is just dealing with this flood of earnings enders. It's not just the earnings, but there's a lot of excitement. I want to talk to some of them. I want to talk about Meta. But first I want to start with IBM because there were earnings, but also this big announcement that they're buying a HashiCorp for 6.4 billion. This is fascinating. Tell us a little bit about what HashiCorp is.
David Meier: HashiCorp is software company that basically allows companies to make sure that their cloud offerings and their on-premise offering, otherwise known as a hybrid model, do in fact talk with each other. Not only communicate with each other, but that they maintain security between the two things. It's a company that's been growing quickly. They have a nice technology and yes, IBM has said, hey, we would like to have you in our hybrid cloud solution portfolio of products and services.
Deidre Woollard: Well, and it's interesting too, because I'm tracking this movement toward hybrid cloud, multi-cloud. IBM said, Hey, we need to have this to grow. This is great news for us. Lets us get into different markets. I don't know if the market fully loved this. There's some other macro stuff going on that we can talk about but, what makes this deal important?
David Meier: The push to the Cloud is still very strong. By push to the Cloud, meaning companies are looking for others to basically to rent or by computing power from other companies that do it better. In essence, no one is going to fully put everything that they do, whether it's data collection applications. Not everything is going to go out to an external clouds. Some of it will be on-premise. Pretty much all companies have some form of a hybrid solution. Depends on if it's 50/50 or 90/10, depends on what each company needs. But also, when you talk about multi-cloud, there's some security and saying, hey, I don't want all of my stuff with one cloud provider, so you have multiple clouds as well as stuff on-premise. That is the spot where IBM has been finding success recently. It helps people set those things up, maintain them, and make sure that they scale with those company needs. IBM believes that HashiCorp can help. Not only can actually, it help HashiCorp grow by giving it access to new customers from IBM's Rolodex. I don't know, do the kids even out there even know what that is? Basically it's the list of relationships that they have with potential customers. Then IBM gets incremental growth. That's the reason for it. They're a player. They're a HashiCorper player, and IBM has said, hey, we'd love to have you in our fold to help bring this to our customers.
Deidre Woollard: You mentioned Rolodex, that outdated thing, and I think IBM gets clumped into that like, oh, it's IBM. Who cares about IBM anymore? Yet they were doing AI before a lot of other people were. I think they're trying to get more awareness into that space. It's interesting to see their growth in software and consulting less so in the infrastructure which was more of the bread and butter. Are people missing maybe that IBM is a player in AI?
David Meier: No. I think it's a matter of categorization. IBM, despite its past, the innovation that it's brought to the computing industry in the past is not the leading innovative company for next-gen things, that's coming from other places. What IBM has decided to do is basically say, Hey, as new technologies get developed, and sometimes those new technologies actually cause problems, that those problems need solutions. We'll help companies use AI, will help companies use the cloud, will offer them ways to reorganize their business to organizations to be able to get more out of it. We'll make sure it works correctly because we have that know-how people trust us, but they're not necessarily at the forefront of groundbreaking innovation. Quite frankly, that's probably fine. You want these groundbreaking innovations usually to come from smaller companies or even individuals who say, hey, I have a better way of doing it. Those types of things are hard to get through the bureaucracy of huge company like IBM. IBM basically plays a role. It's just not a leading forefront of technology role. It's still a big one. They still generate over $60 billion worth of revenue. May not be as growing as fast, but, but that is their role, we want to help people use these technologies as they get rolled out. Quite frankly, as their customers are get ready, not every big customer that they serve is ready to use. AI is ready for all this stuff. It takes time for those bigger companies to plan and make changes to their business model.
Deidre Woollard: Yeah, it sounds like that's a fine place to be for them that they've got plenty of cash to buy up the players that they need to.
David Meier: Quite frankly, IBM is good at this. Again, a lot of revenue. They generate lots of free cash flow that they distribute back to shareholders in terms of dividends and buybacks and things like that. It's just not going to be a fast-grower. That's the limitation. Now they have their spot in the market and they're just going to keep doing that.
Deidre Woollard: Let's get into Meta. I think a lot of people are curious about this one. The market hasn't liked it. The revenue was up 27% year-over-year. That was down sequentially and it was the guidance. I think that the market really that was the problem here.
David Meier: Definitely. Here's my take on this based on my experience in the technology realm and my experience as an investor, Meta stock has been on a phenomenal run since about November of 2022. That was when it troughed most recently. Most recently. During that time as performance improved, financial performance improved, it's multiples at reexpand it. That's where we are today. Anytime you have a tech stock or any stock really that sees these rich valuation multiples. If you don't quite meet expectations, it's going to cause volatility. It's going to [inaudible] sell us like even if it's small. Even if you continue to do things in the right directions, but keep moving in the right direction but Meta is trading at very rich multiples. If you're not continuing to do better and better each time, at some point the market is going to say, whoa, like I didn't expect that from you. That's some of the sell-off and it's not helping today. We got a weaker than expected GDP growth and higher-than-expected inflation around the macro front, which caused interest rates to rise, which is an important thing for a company. Lots of growth companies like Meta, your future cash flows are less valuable in a higher interest rate environment.
Deidre Woollard: Yeah, definitely. It's confusing too, I think the market is trying to make sense of this because if GDP is down, but yet consumers are spending. I think when there's not a clear signal, the market tends to react negatively.
David Meier: Yes, we will, what's the old adage, shoot first, ask questions later. We're going to sell first. They will figure out what's going on if we want to get back in. One of the interesting functions of the market is liquidity. You can get in and out of things.
Deidre Woollard: Yeah. Well, the other thing I think that was dragging it down was the earnings call because Mark Zuckerberg spent a lot of time talking about smart glasses, which people don't care about. They also spent some time talking about reality labs and also about the spending too. I think part of that is also what's dragging it down is that they didn't feel the rallying cry that maybe they were looking for.
David Meier: A 100% agree with what you saw there and how you summarized it. Let's call it the past four to five years, Meta has been spending a lot of money, and rightfully so, they've been making investments not only in their own infrastructure, but in new products within the metaverse itself. Reality labs, all these things that it wants to do. It hasn't necessarily seen growth from those investments. Incremental revenue growth adds still are the biggest driver of revenue that they have. Then you come out and say, oh, by the way, we're going to spend a lot more money than you thought, both in CapEx and expenditures on improving our AI capabilities across the platform. Great. More spending. That's the glib way that you could summarize it. But I would say this, Mark Zuckerberg and company, they have to make these investments like they've always been a data-driven company. They've always been on the forefront of data analytics because that's, again, that's what drives their business. As these AI tools become more advanced, become more powerful, and Zuckerberg and company are also at the forefront of developing those tools themselves, like for their own use. They have to do this or they risk having revenue taken away from them by somebody else who could potentially do it better. Plus they have so much data and that data trough is just increasing, continuing to increase exponentially. If they need even more tools to make more sense of the gobs and gobs of data that they, that they have so I would think that's shortsighted if you're actually selling because the company is making investments. I understand the rationale from what I said before. I would actually applaud that might, why aren't you do it more? That might be a better question.
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Deidre Woollard: Let's talk a little bit about ServiceNow. This is a company, it's a Fool favorite but a lot of people don't know what it is or what it does and yet it is behind so many of the companies. It seems like a large portion of the Fortune 500 companies are using this platform now.
David Meier: You summed it up so well, right there saying this is a totally behind-the-scenes important piece of a lot of companies technology development, that's what it does. It helps companies organize their IT infrastructure on many levels. Not only from tasks standpoint but the work that's being done, we can catalog it. We can help you figure out how to organize and manage it such that you can figure out, I'm making a change here in this part of my technology stack, what are the implications down the road? It is so powerful and yet so underappreciated because it's in the background, it's not necessarily at the forefront. It's pretty amazing company and as you'll talk about it a little bit, Bill McDermott is a pretty amazing leader and entrepreneur.
Deidre Woollard: Definitely and so part of understanding this is that this is a company that was doing all these things before and now it's taking generative AI in general. It feels like it's running with a ball because of which I think is Bill McDermott always strikes me as a football coach. But so thinking about that, I'm starting to wonder. I was actually talking to Tim Beyers about this earlier is the idea that enterprise tech and consumer tech are maybe starting to separate a little bit. Is there some saturation here or is there some business cycle concern?
David Meier: I don't think so because again, the thing it's not dissimilar to IBM that we talked about earlier. ServiceNow helps companies manage their their tech infrastructure, as well as their technology development plans and so if they ServiceNow, can have AI, make people within those organizations more productive as they're performing their tasks. That could be a game changer because if you can make the simple tasks be performed by an AI, you can then perhaps take that resource and get more, we'll call it creativity or innovation or hey, I have this new tool here are other things that I can do with it. It frees them, perhaps frees them up into being even more productive, that's the way I look at it. The more that ServiceNow can help people be as productive as possible, the stickier their products become, because companies that use them are happier with the money that they're spending with them.
Deidre Woollard: When I hear productive, there's a little part of my head that goes, oh job loss. Is there some risk with this? Which actually would work against ServiceNow because they're a subscription platform. But is there a line between getting to productive almost.
David Meier: The answer unfortunately is yes, there is and this is where it would be both incumbent on ServiceNow as well as the buyer of ServiceNow's products. Via ServiceNow's products, how can I make those resources even better? Are there different things that I can do with them in different spots of the management of the IT process. What I mean is, hey I don't need this person necessarily generating a little bit of code that solves a small problem. I should be able to say, hey that person can now start the AI program which generates the code that solves a little problem so that they can go and solve a bigger problem. The thing that pushes off the job loss part of this is if employees adopt it, be creative with it and add more value with it, then it actually flips the script, instead of being a potential job loss candidate, you've actually become more valuable. In the end, I think that's the direction everyone wants to go. The unfortunate reality is that doesn't happen all the time.
Deidre Woollard: Well, this company has been full steam ahead for a long time. You've got that hard-charging CEO, is there anything that is maybe a sign of slowing growth or things that we need to worry about?
David Meier: I would say it's just sheer size. This is a very big company that's doing quite frankly very well. It continues to grow at greater than 20% even given its size. There's nothing standing in the way because I think Bill McDermott, being a serial entrepreneur and a very successful one at it, does a good job of looking ahead and then working backwards to see in what direction should we be going or what new thing should we be doing? I'm not worried about ServiceNow from that standpoint but it does get hard to manage. Just continuing to get bigger and better every year. But like you said, he's a good football coach. He knows how to strategize against different defenses, if you will. I have complete faith in his ability to set the vision and then go execute.
Deidre Woollard: Got to love a CEO like that. Well, as we wrap up, it's not just these three companies that were reported yesterday, so many oh, my goodness. I can't listen to all the calls but one of them that I wanted to touch on briefly that I was watching was Chipotle. I find this fascinating. We just can't get enough burritos. Even with raising prices, even with dealing with minimum wage in California, still had a traffic rise of over 5%. Same-store sales keep growing, fascinates me. What companies earnings surprised you or delighted you even?
David Meier: Real quick comment on Chipotle. It is amazing what that company continues to do in order to, get talk about productivity. It's stores continue to get more productive and you can pay your people even better if they continue to make it more productive. They have a great product and great service, so no surprise there. But one company that has caught my eye yesterday was Align Technology, so they make the 3D printed braces Invisalign. They had good sales growth, little better than expected. They're forecasting that it should be another good year of growth for them. The stock has been volatile since their earnings and quite frankly, it's sold off pretty sharply given the macro data that just came out. I was pleasantly surprised having followed the saga for quite a while now and I would encourage investors to take a look at what they're doing.
Deidre Woollard: I feel like today is a little bit of a buying opportunity day because regardless of the results the market is being pulled down. I'm not a market timer or anything but it's interesting.
David Meier: That's a good point because it's the macro data, it's pretty much putting pressure on all stock prices and so if there's a company out there that you believe continues to be high-quality, has plenty of growth prospects ahead of it? Yes, as long term investors at The Motley Fool. These are times where we go, hey this might be a time to grab a little or add a little based on an outside market for us as opposed to something wrong happening within the company.
Deidre Woollard: Who doesn't like a good sale? Thank you for breaking it down with me, David.
David Meier: You're very welcome.Thanks for having me.
Deidre Woollard: 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. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
