Deep Dive
Shownotes Transcript
Welcome to Liberation Day. You're listening to Motley Fool Money. I'm Mary Long, joined on this Wednesday morning, the Liberation Day of all Liberation Days by Mr. David Meyer. David, great to see you. Happy to have you. How are you doing? I'm doing well. It's great to see you too.
So today is April 2nd, the day after April Fool's Day. It's also, as I've mentioned a few times already in this show, it's also Liberation Day. What the heck does that even mean? It's a great question. It's a fair question. We don't actually fully know. No, we don't.
But we are set, allegedly, to find out later today at 4 p.m. Eastern time when President Donald Trump is scheduled to make an announcement from the White House Rose Garden. This event is being dubbed Make America Wealthy Again. We're recording this at 1130 a.m. Eastern. The show won't come out until right during, right after the Make America Wealthy Again event.
So we're not going to talk too much or make too many predictions about what exactly is going to unfold during that event. But David, I will ask you to kick us off. Anything you're keeping an ear out for that you're, you're especially going to be paying attention to or any, any bets you're making on what exactly might unfold. We literally have no idea. It could be anything we can't, we can't make any bets right now. And that's actually, that's actually an issue that's facing the business community at large. Um,
It's actually an important event where we're going to get some information. One, what's the magnitude? We keep hearing 20% across the board, but it could just be reciprocal when other countries don't have big tariffs on us. There could be carve-outs, there could be exemptions, there could be anything. We can tariff certain parts of the world and not tariff certain other parts of the world. We really don't know.
So, it's going to be the thing that we have to do is just listen and digest the information that we get this afternoon from four to, I think it's four to five. So, you hit on this point. Many other people have hit on this point. It's worth hitting on this point again, that so much of the anxiety wrapped up in this event is that there is so much we don't know, right? We have no idea what's going to happen. Yeah.
And that uncertainty is what's largely been tied to kind of the freak out that's been happening in the markets. We know markets love certainty. Okay, it sounds like we're going to get some details from four to five Eastern time today. The result of those details might not be something that people are rooting for, that everyone is rooting for, but still it will be interesting.
We'll have a bit more certainty then than we do now. Do you think that that intel, that certainty, however great or small it might be, is enough or will be enough to calm investors? I don't know. I know that's a horrible answer, but here's the thing. This is the way markets tend to work. There's a set of expectations, right? And what we have seen
for a few weeks now. Some days, the markets are getting a little bit worried, and the trend has been down. Investors are definitely thinking that there's perhaps some bad things coming forward when they look out into the future. There's a little bit of worry about recession. There's a little bit of worry about inflation coming up. If
We get information where tariffs are higher than the market expects. That means that, "Oh, no, I need to change my expectations as investors." Something like that could put pressure on the market and cause it to go down.
If we get something like -- we've been hearing 20% across the board as the one thing that's been coming out pretty steadily. If it's 5% across the board, if that's not priced in, that could actually cause markets to jump.
As far as calming investors, we don't know. But again, there's a little bit of a level set right now where there's an expectation of something around 20% across a wide swath of the globe. Markets haven't really liked it for the most part, if you look at the general trend.
So, again, we're just going to have to see. It's also interesting that the White House moved this from three to four to wait until markets closed. So, yeah, the Trump administration argues that tariffs are just one part of Trump's large economic agenda. And that ultimately the point behind them is that they will work to boost U.S. manufacturing and American jobs.
So, short-term pain is expected to be a part of that process. Perhaps why we've seen this event move from three to four. It explains the downward moves that the market's been making recently in the past quarter.
But let's zoom out and let's run a little bit with this longer term trajectory. When will we know if those intended long term effects, more American manufacturing, more American jobs, is actually starting to come true, even in spite of some short term pain, continued short term pain?
So it's a great question. It's actually a very foolish question because ultimately, you know, we don't want to necessarily be responding to the ultra short term. We want to figure out, okay, what, you know, longer term, what is this going to mean? So I, I love what you've asked here. Unfortunately,
Increasing manufacturing, both from a plant standpoint as well as a job standpoint, that just takes a while. You can't just build a plant overnight. That's not how that works. When will we start seeing results? First of all, again, we have to figure out what's being said.
business leaders need to start figuring out, "Okay, what does that mean?" Some people have made some commitments already about, "Hey, we want to be a part of this. We want to bring manufacturing back."
Others, like the CEO of Ford in an investor conference the other day, basically said, right now, it's all chaos and costs. Once you get enough information to remove the chaos and then actually figure out what the costs are, then we'll start to see businesses making plans. Then we'll start to hear, okay, this is what we're going to do in response to the tariff. We're going to go after...
this market, we're going to start making this many widgets, we're going to make them in this state by opening up a plant. Unfortunately, it's not going to be probably three to six months before we start seeing those business plans, and serious business plans, not just, "Hey, we want to be a part of this, but here's actually what we're going to do, here's how many dollars we're going to spend, here's where we're going to build those plants." That's just unfortunately going to take a while, so we're going to have to be patient.
We are already, as you kind of alluded to, we're already starting to see some companies respond to these tariffs, and they're doing so in a number of different ways. You've got some, like Johnson & Johnson, which just announced it's making commitments to boost its own U.S. production. It's going to commit $55 billion in U.S. investments over the next four years. That includes the development of three new manufacturing sites.
You've got other companies like Walmart that are turning to their suppliers for, in Walmart's case, many Chinese manufacturers and are asking those suppliers to cut prices and essentially shoulder Trump's tariffs for the company. You've got other companies, Target and Best Buy, being two in particular that have warned customers about higher prices as they strive to preserve their own profit margins. And then you've got kind of another, the opposite of that is Nike, which adjusted its margin guidance
Kind of suggesting, hey, it'll attempt to absorb the tariffs for the time being. So, okay, there's still a lot of uncertainty, but we're already kind of starting to see these different defensive moves come into play. If you are the CEO of David Meyer Enterprises, and I've intentionally...
kept that unspecific because these approaches seem to be -- it doesn't matter what industry these companies are in. But if you're CEO of David Meyer Enterprises, how would you be bracing your company for whatever tariffs might be coming down the pike later today?
I'm going to work on the assumption that I make something, that I'm a manufacturer, because I think this will help illustrate some stuff. First of all, we knew this was coming. This was something that the new administration campaigned on, they've talked about ever since. Hopefully, I've already made -- and we've seen companies do this, too.
Hopefully, I've already made some advanced purchases of things that I think I'm going to need from other countries before the import tax, which is what a tariff is, gets put on the stuff I'm trying to buy. That's the first thing.
The second thing is, I need to run some different scenarios. Again, if it's 5%, if it's 10%, if it's something ridiculous like 50%, what does that mean for demand for my products? Hopefully, I've also done some scenario analysis. Then, I'm going to actually talk about something real quick as it relates to Walmart, and then assume that my company has this as well. Walmart is...
It can be considered what is known as a monopsony. That is essentially where one company is powerful enough to really control prices by their buying power. Think about Walmart. Huge company. Lots of stuff goes through there. Of course, they can go to their suppliers and say,
You don't have that many other options. We buy most of your stuff. Sorry, but we're not in a position where we can go and find other suppliers and work with them. We have plenty of people who want to work with us. You're going to have to take the pain here, because we're not willing to bring that on the American consumer as Walmart.
If I was fortunate enough to be in that position, as CEO of an enterprise that could do that, I would be telegraphing that to my suppliers as well. Again, what we want to do is try to make as many plans as possible before it comes.
Then once we get the information, more information, better information to figure out, okay, this is the direction we want to go from this point forward. So that's how hopefully I would have been preparing for digest and then say, okay, we now have information. We now have the information to say, this is the direction our business needs to go and then go.
We'll move on to a related but also unrelated story. Tesla dropped their first quarter delivery and production numbers this morning. Vehicle sales fell to an almost three-year low. Analysts had expected the company to sell more than 390,000 vehicles in the first quarter. The real number was shy of 340,000. Is this sales slump attributable to...
to Musk backlash, or is there more to the story? How do you parse this out when you look at these numbers? A good question. There's actually a little more to this story. Also, for a little additional context, I will also say that prediction markets were expecting about 356. Not only do you have experts say they were expecting 390, but you have wisdom of crowds saying 356. This number is even lower.
really was lower than a lot of people expected. Recently, Tesla has been having some struggles. So it's not just full, you know, Musk backlash around the world based on what he has decided to do, injecting himself into the global political scene. There was already a little bit of waning demand. Unfortunately, I think that, you know,
people have said, hey, this is not something that we agree with. And they were able to vote with their wallets and say, hey, we're not going to buy your car under these set of circumstances. It doesn't mean it won't change in the future, but right now. So I think some of it is that this is a continuing trend that Tesla has experienced, but there's been a little bit of a catalyst in terms of the backlash for
how Musk has interjected himself into the global political scene. This Tesla piece does tie to the tariff conversation that we were having earlier. Many Tesla vehicles are produced in the United States. The Model Y scores as number one on Cars.com's American-Made Index. It's
Still, though, they do import an estimated 20 to 25 percent of goods from international sources. We don't have an exact number on that. That estimate comes from the National Highway Traffic Safety Administration. Doesn't specify which countries Tesla imports from, but we know that it does get a number of its goods from international sources. So a 25 percent tariff on all imported cars and car parts starts tomorrow, April 3rd.
Tesla is one of the car makers that stands to be less affected by those tariffs because so much of its products are produced in the United States. But might that tariff change that's rolling out to all automakers, might Tesla expect to see an uptick in vehicle sales in the nearish future because of that and kind of changing dynamics in car prices?
I certainly think it's possible. You are right. One of the advantages of having less content produced outside the United States is that they have better visibility into the cost structure in a world where there are more tariffs. The other thing is,
Tesla's in an advantaged position, right? Who's to say they can't get an exemption on all those parts that they bring in from other countries? It's a very real possibility given the relationship that Musk has with the current administration. So it is absolutely very possible. And one of the things that Tesla has been doing is
is bringing down the prices for their cars in order to make them more affordable. So, in a situation where other substitutes, the competitors,
have to figure out what to do with the tariff and the amount that's been levied on them. How much are they going to pass along in terms of prices? How much are they going to deal with in terms of their margins? This very well could give Tesla an advantage in the short-term. What's interesting is, the initial market reaction today on April 2nd was
The stock fell on the production and deliveries news, but last I checked at almost approaching noon, the stock was up. Investors taking a longer-term view may be seeing that very same thing that you're talking about. David Meyer, always a pleasure to talk with you. Thanks so much for coming on the show this morning and helping us sort through and make sense of all of the uncertainty that we're seeing unfold today. Thanks, Mary. I really appreciate it.
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How do you know if a company is walking the walk or just whispering some sweet nothings to shareholders? Up next, Fool contributor Jason Hall joins Ricky Moly for a look at two semiconductor companies, Texas Instruments and Taiwan Semic.
So Jason, we are recording this approximately 48 hours before Tariff Liberation Day as we talk about two semiconductor manufacturers. We shall see what happens on that day, but we're taking some time to check in on Texas Instruments and Taiwan Semiconductor, primarily because I was watching Scoreboard on Full Live and saw your take that you think that Texas Instruments will outperform Taiwan Semi over the next five years. I own both companies, so what an excuse to talk about them.
Oh, absolutely. It's a little bit of an intro for people less familiar with this space. What is different about the chips that these companies make from each other? Basically everything, I think, is a summary of it. But it's a Taiwan semiconductor called TSMC in the industry parlance. TSMC is the manufacturer of basically 100% of the leading-edge logic chips out there. So you think about the chip in your smartphone that
powers your smartphone. Obviously, Nvidia's GPUs. Anybody that follows that industry closely knows that TSMC is the company that makes the chips for their GPUs. It's like the CPUs and GPUs, that's like logic chips. Then you have memory chips that companies like Micron and others manufacture.
So, semiconductors, the leading-edge stuff, that's TSMC. They also make the bulk of all of the used-to-be leading-edge stuff, because they've built out the capacity and they're such an incredible operator.
They do the contract manufacturing for the big, fabulous semiconductor design companies. Basically, everybody that designs their own chips but doesn't make them. If it's Apple, we mentioned NVIDIA, AMD is a big TSMC customer. Those companies go to TSMC to actually do the manufacturing.
Texas Instruments is a fully vertically integrated semiconductor manufacturing. They do their own design. They work with some clients to design special needs chips, but a lot of it is just stuff that they've designed over the past 50 years. Some of the chips that they designed back in the 80s are still being sold to go in industrial machinery and that kind of stuff. They have a big direct sales channel on their website, over 100,000 customers. A lot of them just go on their website and find a part off the shelf and order directly from Texas Instruments.
Now, here's the biggest separator. It's chips are analog chips and integrated chips. The best way to think about what they make is, the logic chips that TSMC makes, and the memory and all that kind of stuff, all that stuff operates in the virtual world, in the electrical, electronic world.
Those chips have to interface with the real world. They need to get power in, they need to send signal out. That's what Texas Instruments chips do. Is there how electronic devices actually interact and interface with the real world?
Both of these semiconductor stocks have historically been cyclical businesses. Taiwan Semi, definitely at a high point right now, or high-ish point, I should say. Do you still see semiconductor stocks as cyclical businesses? Does that affect the way that you invest in them? Yeah, absolutely. Businesses are cyclical when their customers and end markets are cyclical. The end market for chips are still cyclical because
of that reality. What has changed, Ricky, is the size of some of those end markets. We think about logic, that's TSMC and memory.
Those industries have benefited from this explosion in demand for accelerated computing infrastructure. It's bigger than just AI. It goes before AI, the cloud, this accelerated computing infrastructure. Now, more recently, of course, AI has been the nuclear explosion in demand. That's led to this supercycle for TSMC and some other companies.
that are reaping those gains. And the demand is so big, this new market is so big for those companies, that they're more than making up for lost volume and revenue from other sectors that have been weaker, like PCs, consumer electronics.
industrial and automotive. So now let's separate these companies a little bit, both cyclicals, but both have different stories right now. Texas Instruments has come off a bit of a weak period, 2024, a bit of a down year from a revenue and operating profit perspective. And that has a lot to do with their embedded processing business. Can you explain what's going on there? Yeah. So there's definitely some kind of asynchronous cyclicality between its analog business and
and it's an integrated business. But the big thing that we're seeing broadly is that it's in the late stages of a transformation in its manufacturing. It's shifting to a larger form factor for its chipmaking that's going to give it some structural benefits. But there's a protracted downturn in demand across multiple end markets. We actually just saw
The last quarter that it reported was the first quarter in about two years, where its analog business actually showed just a little tiny bit of demand growth. We can go back to 2023 when...
Demand was really down for its analog business. This is the larger business, too. There were some periods where demand was actually up for the integrated business. It's a little bit of a difference in how different parts of the cycle can affect those key businesses. But again, the big key right now for Texas Instruments is
is that not only is the business weak, but it's exacerbating its bottom line. It's about three-quarters of the way through this big capital project to make some structural changes to its cost structure and its manufacturing that are going to eventually help the business do better, but the timing is just really tough. In the past few years, extraordinarily strong for Taiwan Semiconductor. Its shareholders have been rewarded quite a bit. Why are you seeing an opposite story for that chip manufacturer?
The easy answer here is AI, and it's largely the correct one.
We've also seen some recovering demand in other areas like smartphones. But being essentially the only contract manufacturer that has both the capability and the capacity to make the most advanced chips, it's been a massive, massive boon for TSMC. In one sentence, if you're NVIDIA's foundry, you're doing really, really well right now. And with TSMC, there's a different political component because it is sort of this national security thing.
of infrastructure for Taiwan. China has had its eyes on Taiwan. It's an extraordinarily complicated story between the Taiwan and greater China relationship. All of that is to say, if you are sitting in the United States, this is a company that carries some political risk that you probably don't fully understand. I don't fully understand it. How do you think about this if you're owning shares of TSMC, which I own a few shares of?
Yeah, I do, too. I think it's definitely in the too hard pile for most people. Even the people that are true experts in this area of geopolitics and military threat and risk,
would say the same thing. It's a bit of an unknowable. But it is a legitimate threat. There are significant national security implications across every Western country if those ships are made unavailable. TSMC, of course, is taking steps to address this expansion in the U.S. We know that's been ongoing for a while. There's also expansion in Europe. Multiple facilities are looking to bring online by around 2027. Now, here's the thing. Those moves might be great for
getting diversification of chips to the market if there were a military event actually on Taiwan. But that's not really going to protect shareholders very much. I think it's important to decouple those things down from one another. But what it really comes down to me for is thinking about individual risk tolerance.
How much do you have? If you have some tolerance to be able to be exposed to that two-hard-pile sort of answer, then position sizing comes into play. I'm sure there are a lot of investors, Ricky, that have done incredibly well with TSMC over the past five, 10 years, that might find it prudent to reduce their exposure, take some of those profits now off the risk table, despite there still being a lot of growth potential still for TSMC.
I own Texas Instruments as well. When I bought the stock a few years ago, I found this was a leadership team that was saying all the right things. We measure our performance on free cash flow per share. This is something that activist investors, Elliott Management, has more recently held management's feet to the fire. They point out on their investor relations page, look at us, we've reduced share count by almost 50% over the past 20 years.
years. But during this time, over the past five years, I'll say, over the past five years, this total return has underperformed the S&P 500. And for me, more importantly, it's underperformed the Schwab U.S. Dividend Equity ETF, SCHD, which is probably the more appropriate comparison, big, strong companies that pay dividends.
Management's saying the right things, but there's a little bit of a long-term underperformance problem here. Jason, what's going on? We look at Rich Templeton. The company has basically built in his image over the past quarter century.
Over the past five years, we've gone from a transition to his second retirement to Haviv Ahlan, who's a long-term insider who's now running the company. Some people might say, "What's going on? What's the shift here?" I want to push back a little bit here, Ricky. It's underperformed those indices. But over the past five years, it's earned an average of 14.7% in annualized total returns.
It's not like it's been a bad investment. It's just a period that the market's CAGR has been over 18%. Let's contextualize that a little bit. Also, again, thinking about the cycle, shares are down some 20% from the high back in late 2024.
All this is happening during a period where its end markets are weaker. Now, one more thing. If we've had this conversation just about any other time over the past few years, Texas Intramint's total return would be a little bit better than the benchmark, even, again, during that persistent downturn in demand. It's not like it's been a bad investment. It's just not doing as well as some of its peers. Again, it's trailed an incredibly good market.
It's, it's, Hey, I own the stock. Don't blame me. I'm just looking at the numbers here, Jason.
As a shareholder, I'm right along with you on this. Let's get back to the original premise of this conversation. TXN greater than TSM over the next five years. So investors have been more excited about Taiwan Semiconductor, Texas Instruments. It's doing boring stuff. It's checking the temperature on things. It's doing analog processes. This isn't the big, explosive, exciting AI chip making stuff. Why are you more bullish for the long-term future of Texas Instruments than Taiwan Semiconductor right now?
It gets back to the story of the cycle. I think it's so important with these shipmakers to remember that. High fixed costs. You leverage those fixed costs when demand is strong to make more money. Take that money and reinvest in your business when the opportunity is there. Texas Instruments has been steadily spending money through the downturn. I think that's made its stock maybe look a little more expensive on both earnings and cash flows.
On the other side of the coin, TSMC's capex spending is actually down from the peak in 2023. It's monetizing much of that spend already. Now, its capex is about to start ramping back up. We talk about all of the capital commitments it's made in the U.S. and Europe.
As it deploys that capital, it's going to be going for a couple of years before it really starts to get a return on that capital. So, shares might look a little cheaper than maybe they really are. I also think that we need to acknowledge that we always over-invest in these big build-outs. History has shown us that that is the reality. All of these businesses are in a land grab mode. We're going to get to a point where there's going to be too much supply, and that will lead to the cycle turning for TSMC.
There's going to be a shift from the build-out to the upgrade cycle. I think we might be maybe closer to that shift from build-out to upgrade cycle than others do. The flip side of the coin here is that TSMC is going to continue to spend capital on
TXN, on the other hand, is about three-quarters of the way through its current capex cycle, which means that its capex is actually about to fall just as it starts to leverage the 300mm wafer size for its chip manufacturing. It's going to give it some real structural cost advantages versus its competitors. In other words, its cash flows could really begin to soar in the years ahead, making today's stock price that might look a little bit more expensive really compelling for long-term outperformance.
Jason Hall, I'm going to end it there. Appreciate your time and your insight. Thanks for joining us on Motley Fool Money. Cheers. This was fun, Ricky. As always, people on the program may have interests in the stocks they talk about and Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. With the Motley Fool Money team, I'm Mary Long. We'll see you tomorrow.