In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:
- The 7.5-magnitude earthquake in Taiwan affecting Taiwan Semiconductor and highlighting global dependence on the region for chipmaking.
- Our first look into Intel's foundry business, and why we'll probably see more pushes into manufacturing.
- Bob Iger and Disney's board victory, and where the company should be focused now.
An overlooked benefit of AI? Weather prediction. Motley Fool host Ricky Mulvey caught up with Spire Global CEO Peter Platzer to discuss the company's partnership with Nvidia and unique uses for space satellite data.
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 April 3, 2024.
Dylan Lewis: We've got two different stories on the global chip trade. Motley Fool Money starts now.
I'm Dylan Lewis and I'm joined with the airways by Motley Fool analyst Asit Sharma. Asit, thanks for joining me,.
Asit Sharma: Dylan, I appreciate you having me.
Dylan Lewis: We've got two different looks at the world of chips and an update on a chippy board vote as well. Asit, let's start out with the news in Taiwan, the country dealing with its largest earthquake in 25 years, a 7.5 magnitude earthquake affecting plenty of things locally so far, hundreds injured, and there have been deaths as well and a lot of damage, so obviously, our thoughts and concerns with the people that are there locally as they're dealing with that. The markets focus as they look at that is with the operation of chip manufacturing because Taiwan is home to Taiwan Semiconductor, Asit, perhaps probably one of the most important chipmakers in the world.
Asit Sharma: Certainly, Dylan. Something like 90% of the world's most advanced chips are manufactured at TSMC. So anytime you have some type of cataclysmic event, investors return to the big risk of investing in TSMC, but also the risk to the entire supply chain of chips that power economies all over the world.
Dylan Lewis: This is something that I think TSMC and really Taiwan has been in a lot of ways somewhat prepared for. They've gone through this before, I think back in 1999, they were hit with an earthquake of a similar magnitude and they were able to very quickly get things back up and operational. I imagine that will continue to be the case here and we'll see a pretty quick reaction. But it does seem to really highlight that there is so much dependence on a very small portion of the world and one that is really subject to these massive impacts by way of earthquakes.
Asit Sharma: Certainly. I think we should really commend the company first of all for its preparation after that earlier around of earthquake so many years ago. The fact that employees are returning to the fabs is the latest news we have that they're going to start production back up, I think says a lot about their preparation for this event. But you're right, Dylan, everyone is aware of how critical this one tiny island is to the world's technological advancement. TSMC has been investing all over the place to try to diversify outside of their base in Taiwan. They have a new plant in Japan in Kumamoto, which is on the island of Kyushu. That's an $8.6 billion fab, and they're following that up with a second one that's going to be around $13.5 billion investment. There are two extensions right there. Of course they have a fab in the works and dressed in Germany. That's an $11 billion investment. They have their Arizona fab and a second one that's supposed to be built in Arizona. Those are, of course, multi-billion-dollar investments as well. But it's interesting if you look at the processes behind each of these planned manufacturing plants, they're not the most advanced chips. They are chips that will help among a wide range of industrial applications. But most of these are going down to five and four nanometer process at the most. If you look at where TSMC is building capacity for its most advanced two nanometer process chips, those are in three cities in Taiwan. It's going to be years and I think maybe a decade out before various players like Taiwan Semiconductor, like Samsung, like Intel, can really make a dent in this concentration. We're stuck with this situation or investors are. But the good news is that there is a lot of investment around the world. Of course, here in the U.S., we have the CHIPS Act, which is trying to spur some of that investment stateside.
Dylan Lewis: To dig into the jargon a little bit for people that are more casual observers of the chip market. You mentioned fabs there, Asit. I think crucially, TSMC is a company that manufactures chips. We have a lot of other chip companies out there that use TSMC for the manufacturing on chips that they design. You name-checked Intel there as well. They are increasingly pushing into this business. They want to be more involved on the foundry and the manufacturing side. Actually this week we got to look into what those ambitions look like. At the moment. It's a money-losing prospect for Intel. But you have to imagine that they're going to continue to push into the space just given everything we just talked about.
Asit Sharma: Dylan, Intel, a few weeks ago, told investors that it's really formerly going to divide the company up into one part that designs chips and makes product and a second part which is going to be that manufacturing or foundry fab business. We got a press release and SEC filing out of Intel yesterday, which for the first time broke apart the results of the foundry business, which they've been working on for a few years, and it showed some stunning losses, so the company had about, I think, $19 billion of revenue in its foundry business. It lost $7 billion on that. I think what's worrying for some investors is that run rate is a little higher than the previous years. They actually went back two years. The company was generating this loss of roughly $5 billion from its foundry in 2021 and 2022 so it's jumped to $7 billion on lower revenue. Now, on the other side of this is ambition. Investors sometimes don't like ambition when you tell the market that, we're going along this journey which is going to take about five years, seven years. But hey, we've got some great customers. I mean, Microsoft is going to be a foundry customer. Investors just, I think, always lean toward instant gratification if we can get it. When Intel tells us that look, these losses will hopefully trough from here, maybe we'll hit breakeven next year in 2025, but really we'll get momentum around 2030, that's not a message that the market likes to hear, although for those of us who are very long-term investors and want to study Intel's roadmap and its potential to get a lot of blue-chip customers force foundry business, it could be an interesting investment.
Dylan Lewis: Yeah, Asit, I was going to say, shares down 7% on this news and the fixation was clearly on the losses here. But this seems like exactly like the long-term bet you'd like to see a company like Intel make because let's be honest, you look at the five-year chart for this business, it's not particularly inspiring. They are trying to find opportunities for growth and there is a clear global need in this space. It feels to me like this is something where the short-term hiccups are maybe distracting people a little bit from the long-term vision that this company has.
Asit Sharma: You may be right, Dylan. I mean, management has been pretty upfront on a number of things they did wrong. They're like, we didn't really hire enough talent. We didn't invest enough in capacity. We didn't buy enough of the extreme ultraviolet lithography machines that you can buy from ASML to compete at this level, so all that has to be done, it's billions in capital investment. It doesn't happen overnight to get really good at this stuff. But it's a start. If any company on the planet has the legacy technology to make a leap, it's Intel. They were the world's leader before TSMC came around and stole that mantle from them. There's still, I think a lot of capability in the company. They have hired a ton of new engineers to work on this process, getting their fab process down to where the cost structure isn't so large. It's a story you want to follow if you follow this industry at all, because it means something not just for investors but for the planet at large in the context of that concentration in TSMC that we were just talking about.
Dylan Lewis: You named the CHIPS Act earlier. Intel was a big beneficiary there. I think they received about $8.5 billion in funding from the CHIPS act and I think they were eligible for about 10 billion in loans related to it. Given the news that we see from Taiwan this week and given Intel's push, to me, it seems like both for TSMC and for the global chip industry, we are only going to see more and more of a push to diversify outside of Taiwan when it comes to the manufacturing of these chips.
Asit Sharma: Yes, and I think also from the Taiwanese government, we may see a little bit of loosening of that relationship. They've always incentivize TSMC to produce internally justice. Here with the chip sack, we are incentivizing companies, both domestic and global to produce here. But I think the Taiwanese government is also seeing a way that they can continue to benefit. That's partly because so much demand is surging from generative AI that if TSMC were to keep its most sophisticated processes in-house on the island, but keep expanding for not-so-sophisticated chips around the world, that's a plus for them, it's a plus for Taiwanese GDP. I think the writing is on the wall all over the world. The only problem though that I worry about is that as much as all of these companies are trying to expand production, gee, it just seems like there's insatiable appetite for AI and the end of the day are we just going to be filling capacity for more demand rather than being able to substantively diversify outside of this one choke point. But that's all for the future. Maybe few and higher around in 10 years, let a decade pass and we'll see how things shake out.
Dylan Lewis: By then I think Intel's foundry business will be break-even Asit, so we'll be able to check in on that as well.
Asit Sharma: More than that, maybe.
Dylan Lewis: Our final story for the news roundup today, it seems Disney will be able to stave off its chippy argument with activists looking for seats on the company's board. We're taping as the company's annual meeting of shareholders is happening. But from Reuters, their reports that Disney's Board of Directors have the votes to keep Nelson Peltz and former Disney CFO Jay Rasulo off the board. Asit, what does this mean for Disney and Bob Iger?
Asit Sharma: I think for Disney, it means that they can continue to focus on the simple things they need to do to get better as a business and resume the great cadence of earnings they had before things fell apart, which has made up by the parks, earnings, by the movie business, streaming, ESPN, etc. I think it also means that the board has this wake-up call, which we'll now turn toward the succession, like who comes next after Bob Iger. I do think that Nelson Peltz had many good arguments to make about Disney. I think they did mismanaged that movie business, is just way too much quantity without quality. Bob Iger is trying to solve that. But he never had a persuasive argument on the board level. His and his partners' whole 130-page white paper was basically, look, Disney sucks because of bad management, but it can be fixed by two board seats. What they really need is a better board. What they really need is a better cost structure. They need some wheeling and dealing which Iger is doing. He's trying to find partners for ESPN. We saw the partnership with Epic games for the Disney brand and they need to build the brand as well. So it's basic stuff, basic blocking and tackling, but you do need a condiments entertainment mogul with deep experience like Bob Iger, to pull this off. I think from here, we'll probably see maybe even more momentum behind Disney stock. It's been the best performing stock in the Dow with good reason because it had totally tanked last year when pessimism was at its highest. I think you'll see reprieve there. But right now, investors are going to be focused on the earnings, on those unit economics and the streaming business, on the unit economics of the parks and the movie business. That's really what matters.
Dylan Lewis: The way I look at it Asit, this solves maybe a symptom of the sickness of Disney, but there is still broader illness that needs to be addressed by this business. That does that seem fair to you?
Asit Sharma: I think so. I think it's a really healthy call out, this whole proxy fight, which is to say that Disney has missed a lot of opportunities. They allow themselves through probably poor succession planning to fall from a pinnacle. The movie business itself was a juggernaut up until the pandemic. Billions of profits every year, blockbuster movies that's totally gone now they're really a second at the box office and in some quarters a third. There is a lot in this whole proxy fight which is drawing attention to a company, which had all the brand advantages, but just couldn't stick to its game and couldn't evolve rapidly enough. This is a symptom of something that is a larger problem. It looks on the surface like Iger is treating that. But time has to tell, the proposition still has to be proven on a bowl on Disney, but I know that one quarter doesn't make a difference. We've got to see several quarters, especially in that streaming business, of moving toward profitability. We've got to see a few movie hits. But I like the lower cost structure. I like the fact that they're not trying to just cram a bunch of cycles down the throats of loyal viewers. Quality over quantity with a lower cost structure should help. It's going to be such an interesting year on all fronts. I don't think the drama ends here just with the subsiding this proxy fight, Dylan.
Dylan Lewis: Maybe now that the distraction of the proxy fight is gone, we can have that focus on the business and some of those improvements that you want to be seeing. Asit Sharma, thanks for joining me today.
Asit Sharma: Thanks a lot for having me, Dylan.
Dylan Lewis: Coming up, weather forecasting could get a lot more interesting and accurate. Ricky Mulvey talks with Spire Global CEO Peter Platzer, about the company's partnership with Nvidia and why every business needs a space strategy.
Ricky Mulvey: I've heard you say that basically every company needs to have a space strategy. What's does a space strategy look like, maybe it's Spire to begin?
Peter Platzer: I, ever since being a kid, had like this vision of how can we leverage space to improve life on Earth. But it was this very, very slow moving beast at that point in time because fundamentally speaking, it wasn't powered by an exponentially improving technology. Like we all lived through the '80s and '90s and had read about the explosion of compute capability, as Moore's Law provided a 2X performance every two years. Now what has happened recently is the same thing in space where we have something that came out of a research, had it in my last credit degree in France, 10X performance every five years. About the same as Muslim, maybe a little bit faster. As that has been deployed now with more and more capabilities and applications, McKinsey, in a recent report came out and said, guys, if you do not have a space strategy now, you need one. Because this is a technology providing data from the ultimate high-ground that is influencing almost every single aspect of modern life.
Ricky Mulvey: If every industry company needs a space strategy, what are some industries that maybe aren't thinking about it, but maybe they should?
Peter Platzer: I think, for example, energy companies are not necessarily fully embracing and understanding what is already possible today. Anything from monitoring a greenhouse gas emissions to pipeline performance, to weather impacts that is driving the demand for their products is something that you can do on a global scale from space, that's the power of space. As soon as you're operating space, you provide data from anywhere on planet Earth.
Even just very hardcore companies like a Caterpillar, they have operations all across the world and many of the operations are, for example, impacted by the weather. Now, by incorporating capabilities that are powered by a space, for example, weather prediction or local weather measurements, they can vastly improve their operational results. They can also improve the tracking of their devices and the operation of their devices. Global trade is something that is happening to about 90% or more on ships and those performances of global trade, their logistics supply chain is impacting, I want to say literally every single industry that we can think of by incorporating information of when something is, where, when and how they can improve their outcome. Those are just some examples that I can think of where we have seen companies maybe at the verge of leaning into it. Because they still think of space as something that costs a billion dollars and takes a decade to deploy. But costs and timelines have come down more than an order of magnitude in the last 10 years.
Ricky Mulvey: One big focus of your company is weather, and this is for your mission of helping out on climate change. But what's the kind of data you're picking up with your satellites that allows you to make better weather forecasts?
Peter Platzer: We track very finely granular temperature measurements that we are literally talking every few hundred meters all the way up to as to add to 60 kilometres. We track soil moisture, which has huge impact on the creation of thunderstorms overland, we track ocean surface wind speeds like for example, hurricane wind speeds and we track rain, which of course is obviously impactful for the weather. But we also like in the process of tracking what's the meteorologists call it atmospheric moisture. You and I will probably call it clouds, all of which then goes into weather prediction models. Now a third of the global economy that's always $30 trillion of GDP is impacted by weather. Now admittedly, you can't necessarily change the weather, but at least 10% of that weather impact scientists is estimated is avoidable by knowing what the weather is going to be. That's three trillion dollars of economic output that is lost because we don't yet know what the weather is going to be far enough and advance. Having more data and having the right types of models and compute capabilities allows us to impact industries is far ranging anything from logistics to transportation, to energy production, to renewable energies, to agriculture, and much more, by telling them what is going to be the weather early enough in advance.
Ricky Mulvey: The National Weather Service and NASA also operate weather satellites. What is your company doing differently, or more specifically maybe then the weather satellites that are already out there.
Peter Platzer: It's not an either-or, it's an and. We are providing data to both NASA and NOAA. NOAA in particular is one of the premier institutions in the world in collecting data from space to drive weather prediction and we are a provider of data to NOAA at NASA to help them further their kind of outputs, but we're always taking data that they do not purchase from us and feed it into our weather models. We are also taking data that they are producing because they're of course a public goods and the sister organizations across the world and feed that into our weather models. Then we can make them very specific to a particular use case. Like what is the wind speed going to be at 300 feet off the ocean surface area offshore for a wind farm. What is going to be the ceiling visibility over an airport? What is going to be the temperature and is it going to freeze or not for an aircraft landing or for a street so being very precise for a particular business use case. Then in particular location, very often in remote areas, that is something Wes fire can help corporations and sometimes countries as well with our data and our weather predictions.
Ricky Mulvey: I can also see this being insignificant for events. If you're planning a large-scale event for people, you might need to know a little bit sooner than others.
Peter Platzer: Correct.
Ricky Mulvey: One partnership you signed that I'm sure our listeners are very interested in is with Nvidia and a lot of it has to do with your weather data and their simulated Earth model. But that's the very rough outline. Can you provide a little more color or tell our listeners about this partnership you have with NVIDIA.
Peter Platzer: AI machine learning is one of the technologies that we had identified very early on as one of the supportive driving forces for demand of Spire. Because what AI and machine learning models allow you to do is they shift the power from those that have access to massive supercomputers, to those that have access to massive super data. It moves that power to those that have differentiated hard to get data and we always knew that we had capabilities to collect very valuable data. Now Nvidia, of course is the premier institution of providing those AI machine learning infrastructures where you can train the models and then can run them off. We're very excited, of course, of that partnership of being able to leverage that hybrid infrastructure as well as the training infrastructure and then bring our data to the table to create capabilities that are more accurate and more valuable to our customers and our applicable to even more customers than it has been in the past.
Ricky Mulvey: How does this partnership work? You have a large data set that Nvidia seems to want. Are they paying you for the data set? Are you paying Nvidia to use their AI platforms? Or is this, as we say, technically a trade seize?
Peter Platzer: Technically a trade seize I would say. It is a true partnership where both parties spring there supreme capabilities to the table, then create outcome that is better for both of their customers.
Ricky Mulvey: Right now you have 100 satellites in orbit. I'm a neophyte on this, I know very little about space, but what do you dream about finding out maybe three to five years from now, 10 years from now, if you had maybe 10,000 satellites in orbit giving Spire data to make decisions.
Peter Platzer: For us, we actually feel pretty comfortable with the number of space gaps that we have. I understand where you're going from. I dream of a future where we can really make whether as predictable as Swiss train schedules. Where we can really help humanity tackle climate change and reduce that negative impact from the unpredictability and increased severity of weather and where we can bring transparency. Transparency is just the best disinfectant. When it is shown into areas of the world that are trying to do something on the dark side to help global security to be on a much more level playing field. Then we can keep on walking down that pathway. Making weather prediction as accurate as Swiss or Japanese train schedules and bring global transparency to all corners of the world and bringing that transparency there. I think we have really made a difference.
Ricky Mulvey: You have a net revenue retention rate above 100. Now that you have more than 100 satellites in orbit, your company seems to be shifting toward more operating profit. Is that part of the reason you're able to do that is, as you just said, you're like we got plenty of satellites in order, but we don't need the launch double, triple of these.
Peter Platzer: Totally nailing it, for us it's really we are fully deployed from a constellation perspective and now we are fully in monetization mold. Last quarter we announced we had a very strong cash flow from operations positive. We achieved adjusted EBITDA positive ahead of schedule. It really comes from the monetization of a deployed capability that yes, we maintain it but it's five, seven million bucks a year that allows us to just maintain that infrastructure and keep on driving new products with new customers coming online just like in any data business with very little marginal cost.
Ricky Mulvey: You understand Foolish philosophy quite well. You know what it means to be a Foolish investor and we're talking to quite a few of them right now. What do you want to leave the Fools with? How should they continue to track and monitor the growth of your company?
Peter Platzer: I think going the way you should look at Spire is that you should start by, it's a SaaS company where you can look at an ARR. You can look at the high net retention rate off the company and you can look at the profitability of the company. Then you can look at in particular the sales cost of the company compared to more typical SaaS companies and you start to see that, net sales is a much smaller portion because we have combined the best of deep tech companies, high and massive barriers to entry with the scalability of SaaS companies. Then you look at the multiple that the company is trading and the growth rate. I remember when I was an avid reader and customer, there is always like this, where can we find 10 baggers? I think a combination of a highly scalable business model that has very high margins, close to 70% gross margins in a massive TAM that is supported by global trends that is trading at a very attractive multiple compared to similar companies is a place where we Fools normally would look for potential 10 baggers.
Dylan Lewis: As always, people on the program may own stocks mentioned 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. Thanks for listening. We'll be back tomorrow.
