Nike’s Fall, Netflix Growth, and What We Learned in Q3

Motley Fool Hidden Gems Investing

The hosts review Q3 market dynamics, emphasizing that while artificial intelligence continues to drive capital flows and economic activity, the financial payoff remains years

Key takeaways

• Apollo Global Management estimates AI end-user revenue must reach $1.5-$2 trillion annually by 2030 to justify current hyperscaler CapEx spending.
• Nike's stock has declined roughly 81% from its peak as the company grapples with a failed direct-to-consumer pivot and fragmented brand loyalty in a saturated market.

Main topics

• Q3 Market & Economic Takeaways
• AI Investment Realities vs. Hype

Notable quotes

AI has been all we're talking about this entire year, and it has been driving the market.

Conclusion

Investors are advised to recalibrate expectations for legacy consumer

Transcript preview

Speaker 1 (0:01) Nike just didn't. Motley Fool Hingem's investing starts now. Speaker 1 (0:09) Welcome to Motley Fool Aid and Gems Investing. I'm Travis William, joined today by Lou Whiteman and Jason Hall. I do want to get to Nike's numbers, guys, because they were not very impressive after the market closed yesterday. But we've also ended the third quarter, the calendar third quarter. So I want to know what you guys think we've learned about investing, about the market, about where we're going from here. Lou, it seems like there's a lot mixing together. Interest rates are higher. But when we look at... The market overall, what is driving things? Speaker 2 (0:40) Yeah, well, kind of a state of the union, right? Okay. Well, I mean, look, I think we have to start with AI. AI has been all we're talking about this entire year, and it has been driving the market. I think what we've learned in this last quarter, though, is that maybe, just maybe, the frontier, that's where the hype has been, but that's not where the money is. All of these companies that were racing to get to, you know, imaginary friends, super intelligence first. All of the billions being spent in the meanwhile, real companies are putting lesser models to work and driving real efficiencies. I kind of think that's sort of been the gloom and doom talk. I'm convinced that Anthropic and OpenAI are just kind of trying to maybe slow to spending and focus on revenue ahead of a potential IPO. And so maybe that's kind of why they're talking about, well, we can't, we got to just slow down in the frontier. But I think it's pretty clear at this point that maybe one day. frontier will be where the money is. But for now, you don't have to be the best of the best to actually start to drive revenue. Speaker 1 (1:41) Yeah, Jason, it does seem like we're in a strange place with AI because it's not only driving the market, it's also driving the economy. We'll get to some of the consumer, your consumer thoughts in just a second. But have we learned anything about where the business models are actually working in artificial intelligence? Because this is one of the things where if you look at these stocks, some of the valuations are up crazy. And then some like Oracle, for example, is down, I think, over 50 % since they signed that huge deal with OpenAI. So it seems like it just, it depends on where you are. It's not AI is lifting all boats. It's lifting most boats, but not necessarily everything. Speaker 3 (2:15) Well, it's lifting the big boats, right? If you look at the hyperscalers, the massive multi-trillion dollar companies, they're being lifted a ton. The picks and shovels companies, the big tech companies that are making the tech, they're being lifted because the money is flowing to and through those businesses right now. But I think the bigger... thing to remember is that this is super duper early. Yeah. Now it's lifting the economy too broadly because money flowing to companies that are building stuff and skilled tradespeople that are earning great money. And then they're spending that money back in the local economies, all that's happening. But again, it's so early as much as like the big dollars are flowing into a small group of companies. Now look at Anthropic and to a little bit lesser degree, but still pretty impressive. Open AI, their revenue growth rates are off the charts. And if those growth rates continue, even if they moderate a little bit, they're going to be generating some gigantic numbers in Speaker 2 (3:07) just a few years. Hopefully. Hopefully. Because, yeah, I mean, the business model question, I think the interesting part is I don't think we know. As Jason says, it's way early, so I don't think we have to know. But the business model right now is throw you know what at the wall and see what sticks. And some of it has stuck. I mean, Anthropic has a pretty good enterprise business going. We'll see if and when we ever see like actually their their their S1 and their their full set of numbers. There's been rumors about maybe that momentum hasn't proven sustainable. So I'm curious. But just a couple of quick stats on this, because I think that this is the biggest question we still have. This is just one one person's opinion. But Apollo Global Management estimates that. Annual AI end user revenue has to hit between $1.5 and $2 trillion annually by 2030 to justify all of the build-out spending. All right? Right now, guys, worldwide, according to the Gardner Group, all spending on software, business and consumer, every dollar we're spending is $1.47 trillion. Basically, Apollo says this only works out for these companies if they represent the entire global software spending budget for consumers and businesses, plus a little for inflation, in just four years. I think an important part Speaker 3 (4:32) of that to remember, though, is that it's not zero-sum. It can sound zero-sum. And I know, Lou, you're not trying to make it sound zero-sum because AI is not replacing all software. I think a lot of what's going to happen is there's going to be some zero sum stuff in the enterprise where AI tools make businesses more efficient. They need less people to do things. But I think broadly, it's going to create new industries and new opportunities that things that don't exist, that didn't exist 10 years ago, are going to exist five years from now. And that means that the economic pool is going to be a little bit larger. So I think that's part of the story. Initially, there's going to be disruption and it's going to be ugly and uncomfortable. But on the other side of it, just as we've seen with every massive groundswell and change, new technology, new innovation, the other side of it is more productivity and economic gains for the world largely. Speaker 2 (5:24) It's an interesting thing, though, if you take that to the macro, because you're right, there's a lot of ways this can go. But what you're implying is then that companies will expand what they're spending on, which means. I have questions about the efficiency gains that were the point in the first place. Are the companies actually becoming more efficient in spending more? And if so, does that mean a bigger drag on the rest of the economy because these companies somehow gain pricing power, a new pricing power because they're using AI tools? It still feels like something has to not work there. You know, I mean, if business and. retail consumers are spending more with these companies, therefore they can justify higher spend on new opportunities. Where are those businesses and consumers getting that money from? You know, there's just there's a lot of assumptions that money pile grows and they might be right, but there's a lot of blanks to be filled in there. Speaker 1 (6:21) Well, Jason, the other thing that's very different this time around is if we look at the. Changes that happened, whether it was in the 80s or 90s with computers, with mobile in the in the aughts and then the 2010s with things like cloud computing. I mean, I'm just looking at Amazon's CapEx numbers when Amazon was building out not only the retail business, but also AWS. If we go back to 2013, they spent three point four billion dollars on CapEx. OK, that was like the. peak of their growth, peak of their powers. Right. They probably Speaker 3 (6:52) spent that last week. Speaker 1 (6:53) Right. $173 billion over the past year. Now, the thing that I have trouble kind of pulling apart is if we want to use the bubble word, when bubbles happen, it doesn't mean that the technology doesn't work, that something amazing isn't being built. It's that the finances get ahead of the actual payback. And that's as we're spending trillions of dollars. If this isn't changing the world, if it isn't changing the way that we work in the next couple of years, it seems like that's where there's big question marks for the market over the next five to 10 years, which should be the timeframe that we're looking at as Foolish Investors. Speaker 3 (7:31) Well, I mean, more than one thing can be true at the same time. And I think that what we're going to see is that AI broadly is going to be transformative in a lot of ways and a success and is going to grow a lot of different parts of the economy. And overall, I think. Five years from now, probably 10 years from now, certainly, there will be tremendous value created by these AI tools. But along the way, individual company plans are going to blow up. Things are going to fail. That's the way capitalism works, right? This is the biggest capitalism experiment in some ways, maybe in history, thinking about the fact that we've got... how AI is being built in the US, how it's being built in China. So we've got these dueling models of how do we do it going on at the same time. And there's definitely going to be things that are utter, utter failures. There are going to be billions of dollars in losses, maybe trillions in some cases, while at the same time, there's going to be massive amounts of wealth and value created at the same time that money's being lost. That's how these things always play out. The financial crisis is an example of that. The dot-com crash is an example of that. All of those infrastructure and assets that were put in place had massive value over the long term. It's just you never end up taking the journey to get to the destination that you thought you would. And that's, to me, maybe the most compelling thing about this. Speaker 1 (8:58) Jason, I wanted to get your thoughts. We've covered a lot on AI, but the consumer is a... Big story here, too, going into the end of 2026. What have we learned about the consumer? Speaker 3 (9:09) You know, it's interesting. The consumer spending is still really held up broadly, like as a big number. But what we're seeing is a small percentage of the population controls the majority of the consumer dollars, like the discretionary dollars. So the resilience has been there, but there's plenty of people that are struggling. You know, stock market's still, you know, these very high levels, but... Look at McDonald's, look at Wingstop, TJX companies, TJ Maxx, Marshall, you know, the parent company behind some of those home goods. Nike, we're going to talk