Dear Reader,
Today I want to talk about META:
===NVIDIA’s Secret “Royalty” Program===
Elon Musk is warning: without this investment, “civilization will crumble.”
JPMorgan Chase announced: “global depression” without this investment.
Sam Altman predicts: Continuation of AI “depends” on this company’s work.
See how you can collect a “royalty” every time someone uses a NVIDIA chip.
===
A lot of you wrote in asking my take on Meta’s earnings.
Takeover Targets members will remember getting my BUY recommendation when Meta crashed in April.
That was a great opportunity, wasn’t it?
It was the worst April for the stock market since The Great Depression…
And as we were going through it I just kept saying to myself, ”this is going to be great.”
I was so happy telling Takeover Targets members to buy Meta at $486. Under $500? That was such a no-brainer for me.
Well, Meta smashed earnings Wednesday after the close and broke to a new high yesterday near $780.
It’s up about 60% from where we recommended it on April 7th.
Now, as I said to Takeover Targets members, and as I say to anybody who will listen to a cranky old person like me…
The easiest way to make money in the stock market is to buy good companies…
The easiest way to make A LOT of money in the stock market is to buy GREAT companies when the market is crashing.
Meta is “exhibit A” proof of this.
Remember back in April when the world was coming to an end?
“Trump’s gonna destroy the world!”
And here we are - three months later…
Just - wow - $486 to over $770, in just over 3 months.
Now, in the interest of full disclosure - Meta is my largest personal holding.
It’s one of a few stocks I own that whenever they get hammered, I just buy.
I like consumer products - companies that interact directly with consumers.
I find that to be very advantageous.
Because as I’ll explain in a minute, other types of companies that don’t interact with consumers have difficulties.
But first, I want to just talk about Meta for a minute…
Let’s take a quick look at their quarter.
I was talking to my research assistant, telling him what’s so interesting about their quarter, and he said, “you should really do a Dylan’s Diary about this…
“Because you see all these earnings come out - these figures…
“And they look one way to me, another way to you…
“And people might be interested in hearing how they look to a professional investor.”
And I thought, why not?
So here’s the way I see it:
Meta posted $47.5 billion in Q2 sales, up 22% - that is very, very good.
Net income is $18.3 billion, which means they are bringing 38.5% of their sales right to their bottom line.
You’ll remember from business classes or know from your own business that you always want to focus on the most-profitable things you can do.
If you have a business and you do three things, what would your business look like if you get rid of the least profitable of the three and double down on the most-profitable?
That’s how you make real money in life.
Now, I want to point out that Meta’s had $17 billion in capital expenditures.
CapX, when we’re talking about the Magnificent 7, has become almost a synonym for “AI.”
So with their CapX reporting, Mega is telegraphing to you that they’ve spent $17 billion investing in AI - that means Nvidia chips, data centers, electricity - all this infrastructure.
Plus, hiring people. They’ve been hiring a LOT of people.
What Meta’s earnings report is showing us is that it is an AMAZING business…
They can spend $17 billion investing in their business, and still earn 8.5% to the bottom line.
It’s just astonishing.
I was going through their report yesterday and they said over 3.5 billion people used one of their applications last quarter.
Isn’t that astonishing?
Every day, an average of 3.5 billion people…
The numbers are outrageous.
It just shows you the awesome power of that business.
Now, Meta has a market cap under $2 trillion.
But in my view it’s going up to $2 trillion… $2.5 trillion… and even $3 trillion. Very soon.
Microsoft also reported good earnings and plans to spend $27 billion in CapX for the quarter.
Microsoft did $76 billion in sales and $27.2 billion in net income. Again, a high margin, over 35%, like Meta.
It’s unbelievable.
Now, one of the things my research assistant asked me is:
“Meta’s sales are now roughly two-thirds the size of Microsoft’s.
“Microsoft has close to a $4 trillion market cap…
“While Meta’s market cap is just under $2 trillion…
“So, why isn’t Meta’s market cap two-thirds the size of Microsoft?”
That is such a great question. I’ll share with you what I told him…
There’s a couple of reasons:
First, I want to tell you my bet is that Meta goes higher - especially in a bull market - you know, people get crazy. So in my view, it’ll go higher and close that gap a little.
But remember, Meta doesn’t have the same power Microsoft does.
Microsoft is embedded into the infrastructure of things.
Meta basically lives on the kindness of strangers…
When Meta is accessed via an iPhone, Android, PC, whatever it is - Meta has to cross a “toll bridge.”
And the toll bridge operator, be it Apple or Microsoft, can really mess with you.
They can say, “we’re not going to show your ads; we’re not going to let you attract people. We’re going to do these things and block you out.”
Apple and Microsoft are “toll bridge” operators, so they are more valuable companies.
Meta’s a supercompetitor, for sure…
But Microsoft is a supercompetitor with a dominant competitive position.
Meta’s a supercompetitor, but not a toll bridge company.
As an aside, the biggest “toll bridge” to AI, actually isn’t a tech company - it’s this little-known Texas firm, which I consider the last retirement stock you may ever need.
The other thing I wanted to point out here is that we know the AI boom will keep going as long as Meta, Microsoft, the Mag 7 and everybody else keep showing they’re doing so much Capital Spending on AI investments.
Now, I remember in the nineties, one of my old bosses, a mentor, used to say, “the boom ain’t stopping until all these companies stop buying Cisco routers.”
Well, that took a long time.
Nvidia is today what Cisco was then -
The dominant company selling to other businesses.
So, we won’t see this AI boom finish till we see the Mag 7 stop spending on AI.
Until then, you can collect an AI “royalty”...
Cash, paid directly to your account…
On this stock, earned every time someone uses an Nvidia chip.
Now the question investors like me ask is this:
“Is Meta getting a return on its investment?”
The answer is, they’re starting to.
They’re starting to see their ads converting at higher rates.
Meta is an advertising platform, and they’re getting more people to buy stuff from their ads because AI is getting better at serving these ads.
So the answer so far is yes.
It’s not gamechanging, but it is incremental.
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