Expanding the Cloud for AI

In this podcast, Motley Fool host Dylan Lewis and analysts Ron Gross and Matt Argersinger discuss:

• Why recent job numbers dramatically boosted the likelihood of an interest rate cut in 2024.
• Intel's dividend cut, and what history has to say about companies that stop payments to shareholders.
• Why Apple and Meta are holding up well during a tough earnings season for big tech.
• Amazon, Microsoft, and Alphabet's combined $45 billion in capital expenditures this quarter, and how investors should be thinking about this investment phase in AI.
• Two stocks worth watching: Designer Brands and MercadoLibre.

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 August 02, 2024.

Dylan Lewis: We've got the big macro, Big Tech, and some big declines in the market. This week's Motley Fool Money Radio Show starts now.

From Fool Global headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio Show. I'm Dylan Lewis. Joining me over the airwave is Motley Fool senior analysts Matt Argersinger and Ron Gross. Fools, great to have you both here.

Ron Gross: Dylan.

Matthew Argersinger: How're you doing, Dylan?

Dylan Lewis: I'm doing alright. We've got the latest updates on Big Tech, a fun earnings week to talk through. We've also got what's going on in Cloud spend and AI buildout and, of course, a look at stocks on our radar coming up later in the show. We are going to kick off today, though, looking at the big macro. We have fresh jobs data. We have some updates from the Fed and where rates might be going. Matt, where do you want to start?

Matthew Argersinger: Well, Dylan, I'll take jobs for door number A [laughs].

Dylan Lewis: Number A. Have a number 1.

Matthew Argersinger: [laughs] Sure. Good call. I would say the jobs report is probably the biggest reason we're seeing this big sell-off on Friday in the stock market. You had an increase of just 114,000 jobs, well below the 175,000, which seems to be the consensus number. You also had downward revisions to both May and June, which is interesting, and we've seen, week by week, the jobless claims number tick higher. By the way, last month, guys, this might be earth-shattering to you. The Sahm rule was stress.

Ron Gross: Yes.

Matthew Argersinger: Yes. If you're an economist nerd like Ron and me, the Sahm rule is a recession indicator that was developed by Claudia Sahm, a former Fed economist. According to the Sahm rule, a recession is actually underway if the three-month average unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months. It's been a fairly accurate predictor of a recession, and it was triggered last month, and the employment situation has only worsened here in July. I think that's the key issue here. The market has stepped back and says, hey, guess what? We might actually be in a recession. The numbers have turned down, the economy might be turning down, and the Fed not deciding to cut rates this week. Are they now behind the curve? That is the question I think that markets are asking.

Dylan Lewis: Ron, I think so much of the conversation when it's come to rates has been inflation-dominated. We do have to remind ourselves, hey, there's a dual mandate here. The Fed is looking at several things, not just the inflation picture, though it seems like inflation is getting a little bit more under control. Do you buy that we're going to see some rate cuts soon?

Ron Gross: For sure, I would say, at this point. Let's remember, the stickiness, the strength of the labor market was actually a problem. It was keeping the Fed from lowering interest rates. Everyone has to be careful what they're wishing for. Now, we have some weakness. We have unemployment at 4.3% triggering the Sahm rule, as Matty said. But guess what? Four point three percent is still considered full inflation. I don't really know.

Dylan Lewis: Full employment.

Ron Gross: Full employment, sorry. I don't know if the Sahm rule really applies here because 3.5% unemployment was just so incredibly low. It will be interesting to see what happens. I do think this all boils down to if the Fed waited too long to cut rates. Will we get the soft landing we've been hoping for, or will we fall over the edge into a recession, either shallow or perhaps something more? There will be lots and lots of yelling and screaming at the Fed, for sure. Just turn on one of those TV stations after you're done listening to this show. I'm not an economist. In this case, I think I'm an optimist because I actually think we're going to be fine. We'll either get a soft landing, which is great, or a shallow recession, but either way, inflation's moderating, employment is still good, interest rates are going to come down, and the economy should be on fine footing. Current correction in stock prices, combined with lower rates that are coming could actually set us up for a couple of years of some good stuff. That's where I'm going. Call me an optimist, if you must.

Matthew Argersinger: Well, and going back to the Fed and what they're going to do in September. It's interesting that as we tape here on Friday, there's actually a higher probability of a 50 basis point cut when they meet in September versus their standard 25 basis point cut. But I will just say to Ron's point, actually, interest rates have already come down. The treasury market is already signaling an economic downturn. If you look at the 10-year yield, it was close to 5% just two months ago, and as we're taping it's 3.85%, the lowest so far this year. In a way, the bond market is doing the Fed's job, whether they decide to cut or not.

Ron Gross: If you do turn on any of those other shows after this one, I want you to all take a breath first. Nice deep breath. Because the S&P 500 is still up 11.5% this year. The NASDAQ is up 11.5% this year. Even the DOW is up 5% this year. We're all theoretically, depending on when you enter the market with what amount of money are wealthier now than we were at December 31. Stock markets go up, stock markets come down. We're all going to be fine.

Matthew Argersinger: Man, Ron, the optimist here. I love it.

Dylan Lewis: I'm loving optimist Ron. This is very Zen-like. I think we'll get into some of the big companies that are facing some declines and driving those overall market dips a little bit later in the show. I'm going to need some optimist, Ron, I think for this next discussion. Matt, you mentioned that we were seeing some job reductions and job additions slowing a little bit. The reductions really coming on the information side when you look over at the jobs report. We are unfortunately going to be seeing more of those Intel announcing earnings this week, but also announcing plans to cut roughly 15,000 employees as part of cost reduction measures. All told. This puts us in a spot where we are looking at one of the worst days ever for Intel. As we tape shares down 25%, what is going on?

Matthew Argersinger: It's brutal there, Dylan. I would say I think I checked and Intel stocks are around $21. It first hit $21 when I was in high school. I won't tell you what year that is, but that was a long time ago. This is pretty devastating if you're an Intel shareholder. Let me give credit to Anthony Schiavone, an analyst who works with me on Dividend Investor. He found this quote from 2022. This is CEO Patrick Gelsinger to investors in 2022. The turnaround train has left the station. Get on board. He also went on to say, we're committed to a stable and growing dividend. Well, less than a year after he said that, Intel cut its dividend 66%, and on Thursday of this week, they suspended it. Whether or not that's at least part of the reason the stock is down so much, but I would just have to say whatever Intel's plans are, whatever market might think about their turnaround and whether they can write the ship and get into the AI competition, management has no credibility now with this company. I just don't know if the trust is ever going to come back. By the way, Gelsinger, I won't speak to his prowess as a CEO, but he's been paid over $200 million over the last three years, and he's overseen a stock that's fallen over 50%. Again, no credibility here from the market, and I can understand why the stock is at a, I'll admit a 25-year low.

Ron Gross: The business model seems to be restructuring and pivoting. That seems to be depending on the year they go different ways. Now, they're trying to be the fab, the manufacturer for others. They're going up against Taiwan Semi of all companies. It just doesn't seem to be working, as you said. Leadership really seems to not know which direction to take this company. Even after the sell-off, I'm going to say it's trading probably around 40 times forward earnings for a company that really just doesn't know what it's doing, and now, as you said, the dividend is suspended as well.

Dylan Lewis: Zooming in on the dividend piece for a second. We have some of the specific elements of what's going on at Intel. But, Matt, I'm curious as someone who studies dividends and the history there. What does history have to say about companies that cut or just totally abandon their dividend?

Matthew Argersinger: History is not kind, Dylan. Anthony and I have looked at data going back over 50 years. If you look at companies in the S&P 500 that cut their dividends or suspend, they are the worst-performing part of the index. Anytime a company cuts its dividend for reasons outside of some noncontrollable macro factor, like a global pandemic.

Ron Gross: Not Disney. How dare you?

Matthew Argersinger: Oh, boy. But anytime, usually, I'll say 99% of the time, if a company cuts its dividend, you almost want to sell immediately because it's a signal of bad things to come.

Dylan Lewis: Coming up after the break. We've got the latest results from Apple and Meta. We'll keep the tech conversation rolling. Stay right here. This is Motley Fool Money.

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Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis, here on air with Matt Argersinger and Ron Gross. Intel gave us one look at tech landscape this week. We also got some updates from other titans in the industry. We're going to start things off with Apple. Some fresh numbers out this week for one of the largest companies in the world. Matt, you dove into the results. What do you see?

Matthew Argersinger: Well, I see a company that was certainly bucking the trend versus other big techs in terms of their stock price on Friday, which definitely helped. But I can understand why. Beating on revenue and earnings per share, I want to point to the services side of the business. Before we talk about the hardware side, because I think Apple is always known for the iPhone, iPad, and their great hardware, but the services side of the business, which is almost now 30% of revenue, that increased 14% year over year. I think that's telling. Even though iPhone revenue was down 1%, China sales were down 7%. Those were disappointing. I think investors are ready for the upgrade cycle. They know that's coming in the fall. They know what Apple Intelligence, the new AI platform, might do for the hardware that enters Beta stage this fall, I believe, but I think what AI could probably do for Apple's services is bigger. If you think about the third-party apps that could be built based on some of those new AI technologies, what Apple itself could do in terms of new tools and services, and there's rumors that some of that might come with paid subscriptions, and so I actually believe that maybe investors are keying off the services side growth here, which was impressive. I know Apple has been chided for being slow to the AI race. But I think we followed Apple a long time. We know Apple is known for being patient. They take their time. They only deliver a product or service when they know it's ready to go, when it's ready for market. If you look at Apple's CapEX spending in fiscal Q3, it was up less than 3% year over year. Where was Meta's CapEX spending, or some of the other technology companies that are really going after AI? I think it just shows you Apple's being patient, and the market is giving respect to that, I think.

Ron Gross: I like a lot in this report. CapEX is one of them. As they said, some of their customers take care of the CapEX for them.

Dylan Lewis: Good point.

Ron Gross: Which is interesting. I did like some of the comments about China firming up, although the numbers appear somewhat weak. There seems to be a bit of firming, which is important. The upgrade cycle will hopefully or possibly be driven by AI because you really need the iPhone 15 or higher in future iterations for that to be available to you, so anyone who wants to take advantage of the AI offering will really need to upgrade. I remember back in the day when it was 10 times. Remember that? When Apple was a value stock? Now, it's at 30 times now, so we're not there. But I still think this is a wonderful company to own for just the long term and not really worry about valuation in the true sense and certainly not to trade it by the stock. They're doing great things. It's a behemoth, and I think there's still good things to come.

Dylan Lewis: In addition to the standard updates on the different operating segments for Apple, also got an update on the way they are deploying capital. The company spent 32 billion dollars on dividends and repurchases during this past quarter. If you're keeping score at home, that's approximately one Moderna, or you can buy dotted Airlines and then have some change to spare just in case. That is phenomenal in a lot of ways. That is a massive number, and yet, Matt, dividend yield is 0.45%.

Dylan Lewis: Apple's dividend hikes have been pretty modest. Should we be looking for some more here?

Matthew Argersinger: Right, and it goes to what Ron was saying about the valuation. I would much rather them paying out more dividends and buying back stock yet. If you look at the breakdown of this last quarter, they spent almost 29 billion on buybacks, less than 4 billion on the dividend. Apple could easily triple its dividend, and the cash payout would still be well below less than half of their free cash flow in the quarter. I'd like to see them pivot more to the dividend and really grow that dividend at a faster rate than they have been.

Ron Gross: I'll take a special dividend anytime they want to pay.

Dylan Lewis: You heard it here. Ron Gross would appreciate a special dividend. Tim Cook, see if you can make that happen. [laughs] Sticking with the big tech companies, a strong earnings release for Meta as well. Company beat on the top and bottom line. Ron, this seemed like another one, where the market is throwing out some tough reactions to big tech earnings. Meta held up pretty well after reporting.

Ron Gross: This is a pretty good report, as you said, better than expected. It's amid a warning about higher capex. So in contrast to Apple, and more along the lines of what we're seeing across the board from big tech. But warnings about higher capex in 2025, which is, as I said, a pretty common theme. But as far as the quarter goes, I like what I'm seeing. Sales are up 22%. Daily active people were at 3.7 billion on average for June, that's up 7%. Ad impressions were up 10%, average price per ad also up 10%. Now, if you're a Metaverse fan, you might not like the 4.5 billion dollar loss in the reality labs division, but who's counting? 4.5 billion among friends. They've got some work to do there, but profit was very strong, up significantly from this time last year. But the capex is where investors are somewhat focused, if you're seeing anybody focus on a negative part of this report. They expect infrastructure costs will be a significant driver of expense growth. They've been spending heavily on data centers and computing power as they attempt to lead, or at least compete in the AI race. They raised their full year projections for capex to a new forecast of $37 billion-$40 billion that's up 2% on the lower end of the range. Zuckerberg just said they're releasing an open-source, large language model called Llama 3.1. They're certainly heavily into this space. I think they probably have to be, but these are large amounts of money they are spending. If you recall last year was the year of efficiency, so they cut some of the fat to perhaps make room for this large spending, 20,000 layoffs and other cost cuts as well. But we're at the beginning of this AI competition and we'll see how it continues to shake out. But at only 21 times forward earnings, I don't think Meta is really necessarily expensive at all.

Dylan Lewis: What I think is interesting there, Ron, is you mentioned the year of efficiency, and so much of the story with this business has been getting costs under control, right sizing after a very big growth spend period. But it's also a very new look Meta, in the sense that topline grew 22% in this most recent quarter. That is the fourth straight quarter. They've posted 20% plus growth. Shares up over 300% since the beginning of 2023, when you get that combo of a more efficient business and a high growth business, again. Looking at the multiples that you were talking about before, that sounds pretty attractive.

Ron Gross: It does. Hindsight is great. There was a time not too long ago, where everyone was pretty sour on both Zuckerberg and the Metaverse and the direction that Facebook Meta was going. They've done a really nice job. When you get ad impressions up 10% and at the same time average price per add up 10%, that is a powerful combination. The spending side, we're going to have to keep an eye on. We're going to talk about it with other companies as well. We're in the wild west here. There's a lot of new things going on that are very expensive. Is it a race to the top or perhaps a race to the bottom, depending on how much you're spending and how competitive you're going be? But again, at 21 times with a little dividend yield, you get a 0.4% yield. There's a little kicker. I don't think it's expensive.

Dylan Lewis: It's right there with Apple. Come on. [laughs] Matt, Ron mentioned Meta's 3.27 billion DAUs. We're used to hearing that focus from them because they are a user-focused company with a lot of their metrics. Apple also putting out a similar look, talking about the number of active devices. They said that they had set records for active devices across regions. One of the things I'm just keeping tabs on with a lot of these companies, especially ones that are more consumer and user oriented with AI, is we're starting to get more and more focused on the installed base that some of these companies have, and maybe they'll be able to roll out with AI ambitions.

Matthew Argersinger: In a way, it's all a scale game here. How many impressions, how many eyeballs, eyeballs is like an old term, but how many connected devices and connected people to your marketplace or business or software? I feel like it's one of those key metrics that it's a way for these companies to increasingly keep score.

Dylan Lewis: That's a look at how consumers are interacting with AI. You may interact with them in the future. Up next, we're going to take a look at one of the main markets businesses are spending in order to fuel their AI efforts and how big tech is scaling up. That's the Cloud. Stay right here. You're listening to Motley Fool Money.

Welcome back to Motley Fool Money. I'm Dylan Lewis. The earnings parade continues, and I'm joined by Ron Gross and Matt Argersinger to help tackle some of the other names in big tech that reported this week. We're going to look at the Cloud, and we're going to look at a lot of AI spend here, gentlemen. We're going to start off with Microsoft. I have to be honest. It looked like we saw a pretty decent quarter here, Ron. The market did not seem to like the look forward, though.

Ron Gross: Correct. Cloud growth, I think, is the main thing that disappointed investors. Then if you're just looking at the stock, you've got a rotation out of big tech into small caps for a little while. That seems to have reversed later in the week. Shares are down 13% since early July, still up 8% for the year, but certainly we've taken a bite out of that performance. Overall sales and profit growth did beat expectations for the quarter. Revenue in the Azure, is that the way to pronounce it? I never get it right. I say differently every time. Azure Cloud business rose only 29%. I say only in quotes, 29%. Below the prior quarter is 31% growth and less than analysts expectations. CFO Amy Hood said that growth came in at the low-end of their guidance because of soft demand in a few European markets for non-AI services, as well as some limits in their AI-related hardware. She added growth in that segment will continue to slow in September quarter. Investments in data centers and servers should allow a company to capitalize on demand and accelerate growth in the second half of fiscal 2025. What CFO doesn't say that? Things are not so great now, but we expect acceleration later. She may be correct. We'll wait and see. We'll take it at face value as the data comes in. Overall revenue in the quarter was up 15%, Cloud revenue, which includes Office and Windows online, increased 21%, the Xbox video gaming unit up 61%. That does include the newly acquired Activision Blizzard. Net income overall was up 10%. That's not bad for a company of this size. CEO Satya Nadella, betting heavy on AI, as he did bet heavy in Cloud years ago, transformed this company, huge partnership with ChatGPT maker OpenAI. I think most people know, 13.9 billion of capex last quarter, largely for AI, 55% increase from last year, and that's going to continue. Guidance was pretty good. Anticipate double digit revenue growth and Cloud's expected to grow 28-29% year over year in the first quarter of fiscal 2025. I think things look pretty good. There were some disappointing numbers versus expectations, but overall, I like what I saw.

Dylan Lewis: Ron, while we're checking in on Microsoft, I'm going to get us outside of the earnings beat a little bit on this one. Most of the global IT outage that happened over the last week and a half, two weeks, had the blame sitting with cybersecurity company, CrowdStrike. But the scope of that was limited to Windows machines, and we did see Microsoft getting worked into some of the coverage and some of the blame there, any thoughts or any updates from management with the report?

Ron Gross: They're harping or focusing on the fact that only 8.5 million windows computers were hit and less than 1% of their footprint. But this shows you how interconnected everything is, and we all are. This hit across sectors of airlines, perhaps the biggest hit. Delta is now suing Microsoft and CrowdStrike, and let's face it, there could be others coming down the pike, as well. I don't know how you solve for this because I said, we're in interconnected world at this point, but it shows the power of what can happen with only one or two companies.

Dylan Lewis: Sticking with big tech, a rough day for Amazon. As we tape shares down around 12% following the company's earnings release this week. Matt, what has the market down?

Matthew Argersinger: Well, I was struggling with this one, Dylan, because, yes, Amazon down 12%. They lost to Disney in terms of market cap on Friday. [laughs] Revenue came in slightly below expectations, up 10%. Maybe investors also keyed on the North American core retail business, which was up 9%. Again, slightly below expectations but 9% growth for a business, that's very mature. Still seems very solid to me. But then Amazon's web services revenue up 19%, that's an acceleration over growth in previous quarters. I thought, wow, the market's going to love that. But no, still the big sell off. Amazon AWS remains the profit engine for the company, and speaking of profits, by the way, Amazon's operating income in the second quarter up 91% to 14.7 billion. That was the second largest quarter ever in terms of operating profit, outside, except the first quarter when they generated 15.3 billion in operating profit. Operating cash flow also up 75% to 108 billion. This is a business that's more profitable than ever, generating more cash than ever. AWS is accelerating. I guess it's probably the guidance for the third quarter, which again, slightly lower than expectations for revenue, slightly lower expectations for operating margin and income. Maybe the stock, just as Ron talked about Microsoft, maybe the stock just got ahead of itself. It was close to $200 a share a couple of months ago. It was trading for about 40 times forward earnings. This is a little bit of air coming out of big tech, and Amazon, investors were looking for a home run, and they got great results. Just not a grand slam.

Dylan Lewis: I like stacking both of these companies here together, Amazon and Microsoft, because they are similar in so many ways. They do so many different things. They have very large segments that in and of themselves would be S&P 500 companies. But it seems like with both of these businesses where the Cloud segment goes and really where the outlook for the Cloud segment goes, the stock goes, Matt.

Matthew Argersinger: That's right. That's why I'm so surprised, just given the acceleration that we're seeing in AWS, and Andy Jassy, the CEO, had nothing but glowing comments to say the work they put into that segment of the business and how they're seeing just greater activity, greater engagement with a lot of AWS customers. There's excitement about generating of AI and all the tools they're rolling out. There's all kinds of momentum behind that business.

Ron Gross: I would personally be interested in taking a look at Amazon from an investment perspective on the weakness in the stock price. I see some things here that I really like, as you said, especially in AWS, in the Cloud segment. That's mostly what's interesting to me. But taking advantage of weakness, whether it's this weakness or weakness across the board in the market as a whole, rather than panic and sell, sometimes we can really take advantage and actually do some great buying.

Dylan Lewis: Bringing us around with our Cloud roundup here. They reported last week, but kind of nice to bring them into the discussion. We had results from Google Parent Alphabet Market was down on this report as well. Ron just continuing the theme here. Bring me some optimism. Tell me what's going on.

Ron Gross: Well, did we talk about CAPX yet today? Because this is again, the investors were really focused on CAPX here. This is a similar story from a stock price perspective to Microsoft. Even stronger year to date, it's still up 19%, but down 13% since early July, as we saw a rotation out of Big Tech and then the stock market weakness this week in general, the different segments looked strong, and the report was strong. Revenue up 14%, driven by Search D and Cloud segments. Cloud exceeded 10 billion in quarterly revenue for the first time and generated $1 billion in operating profits. For the longest time, we said, if Alphabet's Cloud business can ever turn the corner and go from losing money to making money, that's a significant shift. They're now generating 1 billion in operating profit, which is, I think on the upswing. Search was up 14%, YouTube up 13%, that was actually below expectations so people did not like that number, but operating margins were significantly higher, three percentage points. That's a pretty big widening of margins, and earnings were up 31%. CAPX, 13.2 billion for the quarter. Higher than most analysts were expecting. Ruth Porat said on the conference call that quarterly capital expenditures will continue at or above $12 billion. Again, we have a race in the AI space. It shouldn't really be surprise to anyone. They're building AI models across deep mind, Google research organizations. They doubled the $1.1 billion spent during the same period last year to 2.2 billion just on the AI models alone. Again, they've been freeing up cash by making some cost cuts, doing some layoffs. That's a smart thing to do. Will it be enough to offset this big capital spend? We'll see. Headcount has declined rather significantly so we'll see. I think spooking a lot of people is the fact that OpenAI launched a test version of SearchGBT, is what they're calling it. Since obviously Google is the big boy in search, that's got a little people spooked that perhaps that leadership role that they've enjoyed for so long could be starting to crack. Let's keep a real sharp eye on that.

Dylan Lewis: Taking the results from Amazon, Microsoft, and Alphabet together here. We are looking at $45 billion in CAPX spend this quarter from these three companies. If you look at the commentary from management at these businesses, Alphabet CEO Sundar Pichai saying, when you go through a curve like this, the risk of under investing is dramatically greater than the risk of over investing, Amazon CFO, Brian Olsavsky, saying, there's a lot of money at stake here. It's a revolutionary shift in a lot of industries, and we think we can participate in a high class way based on our existing position. Matt, I see the commentary here, and I feel like we're basically at this juncture where the market is waiting to see some things materialize, and all of these businesses are saying, we're going to make the investments because we can't afford not to.

Matthew Argersinger: Well, Dylan, I think it's a great sentiment, but I think it's a sentiment that many CEOs, tech CEOs had in the late 90s as well. We got to keep spending on fiber and network capacity because the Internet is going to be huge and look at all these things that are coming and our business is going to boom. Guess what? It did. But it took a lot longer than investors in the market thought. Yet billions was spent and eventually, from say the year 2000 to roughly 2010, a lot of these businesses, Mega Cap tech, in particular, really underperformed. Look at Cisco. Look at Intel. Look at Microsoft from 2000. That's my only word of caution there is, I think I like the sentiment. I like the optimism, but over investment might not actually be what you want to be doing right now.

Ron Gross: This is where leadership really earns those hefty salaries. Capital allocation is perhaps one of the most important things a leader can do at a company, and it's perhaps one of the most difficult to do well, especially when you're in the middle of a revolutionary paradigm shift, as we are in right now, how aggressive to be, when to hold back, what level of spend, where the spend goes, very difficult to get it right. It we'll only know in hindsight who got it right and who got it right to what extent that's going to be the name of the game. As Matt said, history is littered with people who got it wrong, and I don't envy those who are trying to get it right at this moment.

Dylan Lewis: Coming up after the break. We've got a few more takeaways from this earning season, and, of course, some stocks on our radar. Stay right here. You're listening to Motley Fool Money.

Dylan Lewis: As always people on 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 anything based solely on what you hear. I'm Dylan Lewis joined again by Ron Gross and Matt Argersinger. We were all earnings on today's show, and we've had a lot of the Big Tech company report. We've also had a lot of the big banks report and a lot of the big food chains report with so many of the large, incredibly influential companies already getting some results out. Want to check in on some themes that we're seeing in the market. Maybe some spaces that we haven't heard from yet. Matt, what are you looking out so far on this earning season and paying attention to?

Matthew Argersinger: Well, Dylan, revenge of the Rets, real estate sector, check it out. If you look at the Vanguard Real estate index ETF, VNQ, which is roughly 95% Rets. It's a great proxy for the real estate sector. That index, I don't think it includes Friday's results, but it's up 10%. If you look at that compared to the S&P 500, which is down or the QQQs, which are down 5%, It's been a great month or so for real estate since the end of June. I just think rates are definitely part of the story here. But if you look at a lot of the results, like results from Prologis, Mid America Apartments, (MAA 0.51%) or some of the other big Rets, they're holding up incredibly well. Occupancies rates are high. Rental rates are holding up. There's still pricing power for a lot of these real estate companies, and the index itself is so beaten down. It's one of the few sectors of the market that's still in bear market territory. It was due for a bounce. I love seeing it. I still think there's a lot more upside to go.

Dylan Lewis: Ron, I feel like the world's conspiring for Matt. We have Rets on the rise. We have tech companies paying dividends, everything is upside down, and everything's going in dividend.

Ron Gross: Coming up roses. [laughs].

Dylan Lewis: What are you paying attention to, Ron?

Ron Gross: I'm definitely keeping an eye on the health of the consumer and this feeds into what we discussed earlier, the jobs report, unemployment, even things like credit card, debt, levels of debt, savings account, balances coming down. I think even though we theoretically are at full employment and inflation has come down. Consumers are being cautious. Even reasonably priced McDonald's, for example, is feeling the weakness and some price sensitivity from customers. McDonald's CEO said lower-income consumers began reducing their visits last year, but the slowdown has deepened and broadened across the US and other major markets. Using McDonald's as a barometer, which I think is fair to do, I'm going to really be keeping an eye on the consumer. It's such an incredibly important part of our overall economy.

Dylan Lewis: Ron, interesting to pair that with what we saw from Chipotle this earning season, which was pretty strong results. I feel like the deciding factor there is really, who do you serve? If you're serving more of a middle and upper-middle-income customer, you're probably doing OK. Some of the businesses that tend to serve lower income customers is probably going to be struggling a little bit more of the earning season.

Ron Gross: I think that's fair. There's a perceived value as well. McDonald's, for example, just introduced their $5 value meal, which actually appears to be getting some really strong traction. If that follows through, it will help McDonald's, and it will help the lower end consumer, as well. But I think that bifurcation to a certain extent, I think you're right about that.

Dylan Lewis: I made the sacrifice and tried that $5 value meal for the show just to make sure everything was on the open up, and it is quite good. It is exactly what I'm looking for.

Ron Gross: Nice.

Dylan Lewis: Let's get over to stocks on our radar. Our man behind the glass. Dan Boyd is going to hit you with a question, Matt, you're up first. What are you looking at this week?

Matthew Argersinger: I am looking at Mercado Libre, ticker MELI. We talked about Apple bucking the trend on Friday. Well, Mercado Libre share price up almost 10% last I checked after it reported QT results the night before. For those who don't know Mercado Libre, it's kind of considered the Amazon of Latin America, for better or worse. It's got a leading online marketplace and digital payment solutions in countries like Argentina, Brazil, Mexico. Incredible results, revenue up 42% in the quarter, gross merchandise volume or the dollar value of goods and services that are transacted on Mercado's platform, up 20% to 12.6 billion, 420.9 million items were sold across its platform in the quarter, 57 million unique buyers. Numbers are just insane. Average and total payment volume here up 36% year over year. As Ron might put it, where Mercado is firing on all cylinders. What's amazing to me is that this company's market cap is still less than 90 billion. It now has an annual revenue run rate of more than 20 billion per year. That 90 billion market cap does not feel expensive to me, especially as we know, e-commerce and digital payments penetration in places like Latin America is a lot lower than it is in countries like the US or in countries in Asia. I still think there's tremendous upside, even multiparo potential Mercado break from here.

Dylan Lewis: I love to hear it, Matt. It's one of my largest holdings. Dan, I'm curious. What do you have to question or comment about Mercado Libre, ticker MELI.

Dan Boyd: What else is there to say? We hear about Mercado Libre here on Motley Fool Money all the time. I guess, Matt, the only question I have is, is this stock trade-able on the New York Sock exchange or NASDAQ, or do I have to get permission for a broker to buy it?

Matthew Argersinger: No. It's traded on the NASDAQ, so any kind of brokerage in the US will be able to buy and sell.

Dylan Lewis: Ron, what do you got on your watch list this week?

Ron Gross: I'm looking at Designer Brands, DBI, formerly known as Designer Shoe Warehouse, one of the world's largest designers, producers, and retailers of footwear, 675 stores under the DSW brand. You may be familiar with that. They also own the shoe company and Rubino brands as well. It's a pretty solid business, long history of consistent free cash flow generation, a little bit like Raw Stores or TJ Max, but actually not as good. But they do have significant purchasing power where they can buy large volumes of merchandise at reasonable prices. They do a really good job of buying close out inventory at deep discounts, and then they pass that along to the consumer, as well. They've been acquiring several smaller shoe brands. That's added to their revenue, as well. They'll sell into stores like Nordstrom or Dillard's, even Amazon and that makes up 25% of sales today. Interestingly, there has been some artificial selling because a small CAP ETF fund had to get out, and that's created some pressure on the stock, so we could have an opportunity to eat that up.

Dylan Lewis: Dan, a question about designer brands. Ron, what's your favorite shoe?

Ron Gross: I'm a favor of an on sneaker at the moment.

Dylan Lewis: That's a bonus third one for this radar stock segment. Dan, which one's going on your watch list?

Dan Boyd: Well, there's no idea if they sell on sneakers at DSW or not so I'm going to go Mercado Libre this time around, Dylan.

Dylan Lewis: The crowd loves it. That's going to do it for this week's Motley Fool Money Radio show. Shows mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next.