DeepSeek's Rise Challenges US AI Dominance, Sparks Efficiency Debate

DeepSeek and AI's Efficiency Era | The Motley Fool

The tech battle between China and the U.S. is heating up, and investors are rattled. In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss: Then, Motley Fool Analyst David Meier interviews John Zahurancik, Fluence Energy's president of the Americas, about the utilities side of the renewables market. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. When you're ready to invest, check out this top 10 list of stocks to buy. Dylan Lewis: DeepSeek enters the chat. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Tim Beyers. Tim, thanks for joining me on what has proven to be a tech filled Monday. Tim Beyers: I see. Not caffeinated, but I'm very ready to go. Dylan Lewis: Some energy, some headlines maybe getting your attention and bringing some of that energy. The tech battle between China and the United States continues to heat up. Over the past week, AI app, DeepSeek has topped app store charts as one of the most downloaded apps, period, and its rise is leading to some pretty serious questions about the resources and investment in AI, in particular, from American publicly traded firms, we are seeing the market process that very much in real time today, Tim. Tim Beyers: Part of the issue is the freak out that China has essentially developed an AI model for orders of magnitude less than the dominant models here in the United States. You have OpenAI, Anthropic's Claude, Perplexity, all of these others. We have spent hundreds upon hundreds of billions of dollars, and we are still spending hundreds and hundreds of billions of dollars building out AI models. We have presumed here in the United States, the predominant narrative is, these are resource intensive. They take a lot of capital to build out. They consume unbelievable amounts of energy, and so we have said, look, we have to invest, we have to invest big. It is here in the United States AI has been a go big or go home story. Then China came along with DeepSeek, and the Chinese entrepreneurs had introduced this and said, actually, not so fast. We can make this for a fraction of what you're saying it is. Now, I don't know if you should believe their exact number, Dylan. I think they said something like six million, but I don't think it matters. I don't think it matters. I think that we have now on the market a model that is objectively far more efficient than the competitors. They're tweaking us a little bit, or maybe I should say, DeepSeek is tweaking OpenAI because they've named their latest model R1, as what seems to be a very cheeky hat tip to OpenAI's A1. Dylan Lewis: I think we will have to dig through a lot of these details today, this week, and I think over the coming months because this is one of those stories that is developing very much in real time. I think this competitor came out of nowhere, and I think a lot of folks in the US press are working to put it together. What we do know based on some of the initial reporting is researchers claim it was developed for less than $6 million. That seems low to me, and it seems like in reality, that is a number that is being bandied about. The real costs are probably quite a bit higher, but this is a free and open source system. From a lot of the testing that has been going on on the technical side, it seems to be at parity with some of the major models. I have seen reports that if you go into more technical things, more advanced, more industry specific things, it has some more limitations, but I think part of the concern here for a lot of the American firms is for the average use case, it is right there with a lot of the major ones that already have some substantial market share. Tim Beyers: There's no question. I think you're spot on about that. I think the thing I maybe object to broadly, like the freak out we're seeing is we're surprised. Why are we surprised? I don't understand why we're surprised, Dylan, and here's the reason why. This is one of the rules of technology. When you introduce constraints into a system, you unleash the possibility of innovation, and this is what venture capitalists love. They love to invest in companies that are building something magnificent with massive amounts of constraints. That's where the biggest innovations come from. Now, let me take you to the backstory of DeepSeek. DeepSeek comes out of China, where there's a ban. There's literally a ban on the most advanced GPUs, the stuff that has been used, and we are ordering like it's Bourbon at Happy Hour here in the United States. It's flowing like crazy. GPUs are everywhere, and we're just buying them hand over fist. You can't do that in China. You can't do that with the most advanced chips. You have to work with incredibly significant constraints. What do you do in that situation? You work on what you can optimize. You take the limited resources you have, and then you use clever software engineering to create optimizations. That's what DeepSeek did. You know what? What you said, Dylan, you get parity, and this is the arc of technology innovation. You get the big bump, you get the hype, and then we spend, we get all bought into the new idea, the new thing, and we overspend to scale the idea. Then at some point, CFOs look at the spending and say, you think we could do a little better than that? That's when software engineers start looking at the system and saying, I bet we could make this better because we don't have as much money to spend anymore. Once you do that, you start getting innovations like what we're seeing with DeepSeek. In many ways, Dylan, my point is that DeepSeek feels like it came out of nowhere, but DeepSeek is also something that we should expect because technology always operates this way. Dylan Lewis: I think, speaking of venture capitalists, venture capitalist Marc Andreessen called this a Sputnik moment in AI. This idea that we are no longer looking at American supremacy in this technology, there are other countries that are able to develop this and move this along in spite of some of those constraints that you mentioned. One of the main things that has popped up a lot in the reporting on this is that the compute necessary for what is running on DeepSeek is a fraction of the compute for some of the other systems. Watching the way that the market is processing this, we are seeing big tech companies take a hit. We are seeing some of the chip companies take a hit. We're also seeing energy companies take a hit because there is this feeling that maybe as we get a little bit more technologically advanced as other players start coming into the space, some of the energy demands for this technology won't be as big as people have maybe originally thought. Tim Beyers: Yes. Why is that a surprise? [laughs] Because those energy demands, I know I'm sounding hyperbolic here, Dylan, but didn't we all realize that come on, we're not going to bring 50 nuclear reactors online in the space of a couple of years. I don't deserve any credit for this insight, Dylan. I think this is obvious, and I'll tell you who was way earlier than this than I was. Our colleague, Seth Jason. He was like, there is no way we are going to be building out the amount of energy infrastructure required to service all this at the level we are talking about in the timeframe we were talking about. Then what happens? You have a constraint. Do you keep doing what you're doing and overwhelm the energy infrastructure, knowing full well you can't build it out at the level that you want to, in the timeframe you want to, or do you do what the industry always does, which is find areas of efficiency to scale in a better, more economical way? That's what always happens. In a way, I feel like I'm saying, of course. This was always going to happen. You point out something important, and I guess I'll maybe tee up the rest of our conversation around this. I am certain I have not looked at the markets today yet, but I'm sure Nvidia is taking a proper beating right now. Dylan Lewis: Down to 10%. Tim Beyers: Is that fair? Some of it's fair because you are probably at a point where the arc of innovation in AI is going to be less hardware driven going forward. Is it appropriate to be a little bit more skeptical of Nvidia right now? I would say that's not an irrational response, but we're still going to use GPUs, Dylan. India is going nowhere. Dylan Lewis: I think what is interesting about this news is it feels a little doomy if you are looking at coverage of US companies today, but to your point about the evolution of technology and the natural way that this tends to happen over time, this feels like great news if you are long term interested in the development of AI and you want to see this technology flourish become cheaper, become more accessible, and have more players that are pushing it forward. Tim Beyers: Big time. There's no question. This is the breakthrough that unleashes more innovation. It spins the flywheel of AI innovation would be how I would describe it. You have constraints now, and now you have a player that has discovered a way to get past those constraints. That creates a constraint now for the existing US players are like, well, we have to figure this out. We cannot be all in on just buying all the hardware. Sam Altman can't be like, well, I'm just going to raise a trillion dollars, which by the way he wanted to do, trillions of dollars. You can't just do that anymore. You have a new constraint, and now that new constraint creates an opportunity for new innovations here in the US, but also abroad. Now it's a race, and that is super interesting. I'll tell you, I am excited about that because let me tell you where I expect the US to show up and deliver some real innovations in this space now. May I introduce you to the open source community? They will be all over this, Dylan, and I think that is great. There is so much investment in US open source and just around the globe, but this is perfect for the open source community to get involved and figure out the next stage of optimizations, because what we're building is a foundational layer of technology that we can use and reuse to build new things. We're going to have maybe improvements in foundational models that will lead to new types of AI driven applications. It's a very exciting time. I don't think it's a nervous time. I guess I'm a little off kilter here, but I think it's less doom more, are you kidding me? We are about to see the introduction to take Andreessen's analogy say, great. It's a Sputnik moment. Give me NASA. Let's go. [laughs] It's an exciting time. Dylan Lewis: I'm with you, and I do understand the concern for investors that are seeing red in portfolios, because as we tape, I think a couple hundred billion dollars in market cap have been taken off the books, looking at some of the big tech companies. I tip my cap to the cosmic scriptwriters on this one. Tim Beyers: Sure. Dylan Lewis: Because not only did this news come out this week, but we also are going to be getting quarterly updates and management calls from ASML, Meta, Microsoft, Tesla, and Apple this week. [laughs] Tim Beyers: All of those companies are very interested in this news. Dylan Lewis: I'm guessing there are probably going to be some analysts on their conference calls that are interested in this news. What do you expect to see? We can do a little bit of a big tech earnings preview here with this news and what these companies are going to be talking about this. Tim Beyers: Well, over the last several quarters, the most important thing I've been watching is capital expenditures. I've been doing this a lot on This Week in Tech when we do the earnings reviews, Tim White and I, and every time I'm looking at, what's the growth rate for CapEx? It has been extraordinary, Dylan, these last few quarters, routinely over 50% increase in capital investment. Will that continue? It'll tell you the actual numbers will continue to be high because they'll have been before this news came out, but it'll be super interesting to hear what their CapEx guidance is going to be, and where they're going to point resources over let's say the next quarter and next fiscal year, because I'll tell you, I would expect a little bit of a drawdown in the overall number, but I would expect significant R&D investment because I love that we have reached this point in the AI cycle. Let's just do a reckless prediction here because I've done this reckless prediction on This Week in Tech. We have reached the point in this market where it's less about hardware, and it's a lot more about clever software engineering and clever software engineers, and I think that is exciting. Dylan Lewis: It's an interesting dynamic because for the last six quarters, eight quarters, these companies have been applauded for those CapEx numbers. The market has said, we want to see that investment, and watching how management teams navigate this idea that maybe there is a cheaper option out there. Maybe there is a route that is not so capital intensive and trying to strike the balance of what they've been rewarded for and what they might be rewarded for going forward is going to be fascinating. Tim Beyers: It's going to be very fascinating, and I would expect that you're going to have reporting over the next several quarters from each of these companies on efficiency scale in their models, and more than that, building out interfaces into their models to try and grow ecosystems around, hey, look at all of the applications or stuff that's being built that leverages my model. It's a real race right now, and it's very early, and that makes this a very exciting time. I do feel bad for portfolios that I run. One of them has Nvidia, it's going to take a giant beating today, and that stinks. Short term losses, I don't take that lightly, especially if you are retired and you are on a fixed income and you have a big position in Nvidia, I feel for you a little bit, I think, but I wouldn't panic about it, either. I think this is one of those, Dylan, where we're going to figure out a lot over the next year, and companies that are well positioned today are likely to continue to be well positioned. But how they allocate resources is probably going to be different. Dylan Lewis: Let's keep that look out for the rest of the year. I think in a recent conversation for our Fool members over on the premium side, you talked with Francis Schweppe who's a venture capitalist, early stage investor. You said 2024 was the year of the GPU. I know it's early, and I know we are trying to process some very disruptive information basically in real time here. But what do you feel like 2025 is the year for AI? Tim Beyers: It's a year of AI efficiency. DeepSeek made sure of that. I said this on This Week in Tech. Tim and I have been talking about this a lot for several months now, where we both thought that the most likely next big breakthrough would be on the software side. The thing that makes AI models just such resource hogs and such energy hogs, is that it can be like every word is a token. If you're going to make a prediction and you are constantly using tokens just for basic words, and you never sharpen the results, then it's always going to be a hog. Let's go all the way back to Bletchley Park and Alan Turing and the creation of the first computer and the breaking of the enigma code. What broke the enigma code wasn't that the computer could crunch all of this unbelievable information. What broke the enigma code, Dylan, and what's happening with DeepSeek right now is, what if we know some words that are always used in every single code. We don't have to process those words. Then we can make the processing more efficient. That's what won World War II, efficiency. I'm sorry, I sound like Morgan Housel right now. [laughs] I'm talking about World War II. Dylan Lewis: But it's important. We say it time and time again that history has a lot of very good lessons for us here in the present. Tim, I am grateful that you are here to help teach me and our listeners. Thanks for joining me today. Tim Beyers: Thanks, Dylan. Dylan Lewis: Listeners, Tim mentioned This Week in Tech. That's his weekly show with Tim White over on our member Live Stream. You get access to that and get two stock picks a month by joining stockadvisorfool.com/signup where you can do that. Coming up on the show, last week, Fool Analyst Seth Jason joined Mary Long to talk through some of the struggles that the rooftop solar industry is facing. Today, we're taking a look at a company that operates more on the utilities side of the renewables market, where the outlook is a bit rosier. This is Senior Fool analyst David Meier, interviewing Fluence Energy's president of the Americas, John Zahurancik. David Meier: For those who don't know Fluence Energy, can you please give us a quick summary of what your business does? John Zahurancik: Sure. The easiest way to say it is we build big batteries, and we build very large batteries that are connected to the electric power grid to allow it to work more efficiently, less costly, and produce less emissions. When I mean big batteries, think of something on the order of a Home Depot sized lot of batteries systems that are all connected, and effectively a battery that's operating like a power plant. Instead of building a new gas-fired plant, a new coal-fired plant, something else, we're building this very large battery. It stores electricity when we are producing a little too much and then allows us to use that electricity when we need some more for the grid. David Meier: I think this is a good jumping off point to really set the stage for what's happening in the energy market. Right now, if you looked at a headline, probably nine times out of 10, you'd see the word nuclear, because that's been getting a lot of the headlines over the past, let's call it six months. However, you talk about renewables. Renewables is still, if I recall correctly, one of the fastest growing segments of the energy market. Let's talk a little bit about that. How is the renewables market as well as other pieces of it? How is that driving your business today? John Zahurancik: There's a couple really good pieces of news if you're in this business right now. The big news, really, that's occurred over the last year is we're seeing real load growth in the sector. Over the last 20-30 plus years, we've really only seen load growth as a reflection of population growth. We've seen general load growth in the neighborhood of 2% per year is what people plan on. Now we're starting to see many of the different utility service areas and transmission service areas starting to predict load growth at six, seven, 8% per year. A lot of this is being driven by increasing use by server farms and AI coming in where we're seeing much more constant power use as these large power consumers are built out, and those large power consumers are looking for places that have low cost, stable electricity, place that they can get access to land relatively easy and they can permit and build new facilities fast because the growth and the time speed that those systems work on, these data center systems work on is very short. In some cases, it's a little bit of a mismatch to what the electricity system works on because the electricity system is used to being relatively long dated, planned, somewhat slow moving. From the beginning of a new project, whether it's a transmission project, a generation project or whatever, you might be looking at five to seven to eight plus years from the beginning of that to when something comes online. In some cases longer. If you look at large scale transmission projects, some of the newest transmission projects that we're building across the country, a lot of those projects began their work more than ten years ago where they started to get permission to connect, they started to lay out the route and then go into construction and do everything there. The electricity market has generally been a somewhat slow moving market in terms of large scale infrastructure, and we now have this very fast moving demand cycle from these urgent fast moving demanders of electricity, and so finding the ways for those things to fit together is creating a lot of excitement in the electricity sector. There's a push to demand. That's a big factor. Then the other big transition over the last few years has been renewables in most places have become the least cost source of electricity. David Meier: It's super interesting, by the way. John Zahurancik: When we used to talk about solar and wind or hydro or other things, we were mainly talking about it from the standpoint of environmental benefits. Typically, you had some an incentive-based program that created the initiative to create renewables to exist. You might have a direct incentive, you might have some other form of an incentive. Today, renewables have really gotten to the point where they're the least cost source of generation, both wind and solar. Less expensive than putting in a new coal plant, a new gas plant. You mentioned nuclear, nuclear is very expensive to build, and it's a long cycle. Once you have it in place, the electricity is relatively cheap, and from a carbon standpoint, it doesn't produce any carbon emissions. You have to deal with the waste, but that's why nuclear has come up so much recently as people are saying, we want large stable generators at low cost that don't produce carbon. Nuclear seems to fit that. The challenge is the people that want that most also want it tomorrow. [laughs] They don't want it ten years from now, they want it tomorrow. The challenge with the nuclear industry is to get something that you can build more rapidly. I think what we find mostly being built today is renewables. A lot of it's solar, some of it's wind in places where we have access to good hydro assets, run of the river or different hydrosets, people are building that. We still see a little bit of geothermal. But it's mostly solar that's driving. It's been a very interesting market. High demand from the base need for electricity and then this massive transition to a new forms of electric generation in renewables. David Meier: Let me put this in some perspective for our investor listeners, and then you tell me, make sure I get this correct. You're seeing a bump up in demand for electricity. On a dollar per kilowatt basis, the prices of solar has come down dramatically, which makes it very economic relative to other forms of power, namely, we'll call it group name, fossil fuel, and nuclear. I think when you combine those two things together, as well as, again, the intermittency of the renewable generation, that's what's driving you to say, in 2025, we're expecting 40 plus percent revenue growth. Have I got that right? John Zahurancik: That's right. What energy storage is doing in that whole mix is it's playing this role of a utility infielder. It can run this way, it can run that way. In the case where we have a lot of conventional generation, fossil fuel generation, we can put storage in and we can improve the operation of that fossil generation. Many of the early projects we did, I've been working in energy storage since 2007. Back then, it was almost a dream myth. If you will, that we could put large batteries on the grid and do something with them. But we did. We combined large battery systems with conventional generation. The first ones we did actually were batteries combined with coal plants, and we made the coal plant run more efficiently. Instead of having the coal plant have to cycle up sometimes when there was more demand and cycle down when there was less, and in some cases have to move very quickly to manage intermittencies and outages on the grid, we let the battery do that. A bit like hybridizing your car. If you think about what a Prius does, for example, you added an electric motor and a battery and you also still had a gasoline-powered motor by having the battery take the intense pulses, you allow the internal combustion engine to run at a much more consistent cycle. Because of that, you get better fuel economy, you have fewer emissions, you have lower total cost of that system. Effectively, adding a battery to a gas plant or a coal plant is like hybridizing a car that way. We added it, we lowered the cost, we improved the efficiency, and we improve the reliability. That was Job 1, let's say. Then in this cycle, you start moving into the 20 teens and the later 20 teens, especially, you saw renewables really have a massive uptick, and as we put in lots and lots of solar, lots and lots of wind in places, what we're finding is, it's great during the peak part of the day, solar in particular, which is when most of the demand is, people are awake, they're doing things, they're consuming. But as you get toward the end of the day, for example, people are still pretty active. You're still in your job, factories are still running, people are cooking dinner, they're watching TV. They haven't really started to completely ramp down yet, but the sun has, and so we end up with this period where we still have relatively high consumption of electricity, but the solar is starting to slack off and so you don't have production. You have windows of one to two to three to four hours maybe where we still need that peak load of electricity to supply for demand, but we don't have it coming from the sun. Our choice is turn something else on, turn a gas plant on, run it for a few hours, and then turn it off, which is not really the most efficient way to use a plant like that, and you end up having to have these backup plants, which is costing somebody something. But we can put a battery to do that. The battery can be absorbing some of that excess power at peak. It can use it to fill in that gap in the evening and that gap in the morning. It can absorb stuff overnight if for some reason, you need to keep some unit on for minimum load or reliability requirements, that battery can absorb that energy and use it for the morning when things start to ramp up. The battery system just adds efficiency, if you will, to the whole system. By adding efficiency, you're essentially reducing cost and you're reducing emissions and you're making the whole system work better. That's what we're doing. As you get increased demand and as you have this transition to renewables, there's more and more of those jobs for batteries to do all the time, and so we're seeing very rapid growth. We've been seeing generally 30-40% year over year growth in storage demand the last few years. The third thing, maybe just to mention one more as I throw one thing in here is as we've scaled up the battery industry, we've seen price declines and the cost of battery systems. Similar to what we saw in solar, as you increase the scale, by a lot, you find that you can incrementally take cost out, and this is getting cheaper and cheaper to install batteries alongside other elements in the system. That's also fueling demand. We're very excited about it. We've been at the forefront of this. We started this a long time ago and have been one of the real leaders in driving storage into the grid system and see a lot more to come. Dylan Lewis: As always, people on the program may have interest 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. All personal finance content follows Motley Fool editorial standards and it's not approved by advertisers. Motley Fool only picks products it personally recommend to friends like you. Tim Beyers and David Meier. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.

The Stargate Project: An Investor's Take | The Motley Fool

In this podcast, Motley Fool analyst Asit Sharma and host Mary Long discuss: Then, Motley Fool analyst Seth Jayson joins the podcast to walk through why the rooftop solar industry doesn't look so sunny. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. When you're ready to invest, check out this top 10 list of stocks to buy. Mary Long: We're headed up to the skies and the stars. You're listening to Motley Fool Money. I'm Mary Long, joined today by the one the only Asit Sharma. Asit, thanks for being here on this lovely Thursday morning. Asit Sharma: Mary, I am excited for this conversation. Mary Long: As am I, we're going to kick things off today because there's a new partnership in town. I'm going to use that word because I don't fully know what else to call it. It's allegedly worth about $500 billion. Put another way, that's half $1 trillion, so a lot of money. Yesterday, President Trump announced a new AI venture that brings together some big names, Oracle, SoftBank, and OpenAI, being three of them. Much has been made about who's in and who's out of this project. I got a lot of questions actually about the project itself. Let's start there, Asit. What is Stargate? Why are these three companies the ones that are at the helm of whatever this really is? Asit Sharma: Stargate, Mary, is nominally a joint venture, some type of partnership that is aimed at building out AI infrastructure nominally data centers. There is a 500 billion price tag associated with this buildout that we think will consume some capital expenditure between a few companies over the next five years. Other than that, the details are sparse. The actual announcement was handled by OpenAI, which was and is a key player in the AI landscape and is going to be a key player in this project. But as you mentioned, there isn't really a detailed roadmap for exactly what this joint venture is supposed to achieve. Maybe the best way to talk about this is for you to throw your questions at me, and I will try to answer them. Mary Long: In the announcement that OpenAI put out about this venture, they noted that SoftBank has financial responsibility. OpenAI is going to oversee operations. But Oracle was a big mention in this rollout. Do you have any sense of how they're going to fit into this venture? Asit Sharma: Oracle is probably going to be one of the leads when we think about building out those data centers and the know-how that's involved with bringing together servers, softwares, networking, hardware. Oracle is very good at this. Of course, they were the preeminent database company for many years, famously thought that the Cloud wasn't going to be a big deal and then basically reinvented an approach to Cloud computing. Now, present themselves as a very good competitor to Amazon Web Services, Microsoft Azure, etc. Larry Ellison himself, the Chairman of Oracle, is a visionary. I think he's a good point person, and Oracle is a good point company to have as an infrastructure partner in this deal. I did gloss over what SoftBank is doing. SoftBank Group, this is the big investment company, Japanese, helmed by the truly one and only Masayoshi Son, who is a big venture capitalist and has been on the scene for many years. He has a tendency to invest in companies very early on, Mary, and he's all about scaling unit economics. Son has had a number of successes, but he's also had some prominent failures in the venture capital world. But I would say, overall, he's a respected partner here. Then of course, we have OpenAI itself, which is, as you mentioned, supposed to be overseeing operations. OpenAI is somewhat capital-constrained itself. It is the company that is developing large language models, and it gets most of its coin just now for Microsoft, which we'll touch on in just a bit. Mary Long: The number that you hear a lot when we talk about Stargate just over the past, what, 24 hours has been this $500 billion number. But it's going to be about $100 billion that's put in upfront. That 500 billion is going to theoretically be invested over the course of four years. How did this number come to be? Because I've heard that part of the plan is to build out 20 data centers. That number has been specific. Just do some back-of-the-napkin math, 500 billion divided by 20. That's $25 billion per data center. There's got to be more that's a part of this plan than just building out those 20 data centers. Asit Sharma: Yes, and the fun thing here is that there are any number of ways we could make that $500 billion or imagine it playing out. One of the ways is to take that number that you just came up, very nice pack of napkin math, I think, and add in some GPUs. Just look at Elon Musk. His side project to develop an AI supercomputer thinks in terms of 100,000 GPUs. If you're looking at Nvidia hardware, now we're talking in terms of $3 billion or $6 billion when we're looking at 100,000 GPUs in a big data center or 200,000. That doesn't include associated server costs, so it's not just the GPUs. You could quickly tack on, I think, several billion dollars to each of those data centers if you start to increase the compute capacity, but that still doesn't get you up to $500 billion. Where is all that buddy going? Part of it could be going to OpenAI, which tellingly, with this new deal, also announced along with Microsoft that they would not be an exclusive partner with Microsoft going forward. Microsoft is still going to fund OpenAI. They will still rely on Microsoft to provide Cloud computing, but now they're free to be more of a venture partner with Oracle which has really great and fast data centers. They're building out some $16-17 billion worth of data centers each year now. We see lots of moving parts and pieces. I think finally, there is something of the venture capital sovereign government ethos going on here, which I mean throw a big number out and see if it sticks. This is what Masayoshi Son is good at. I note that MGX, which is a sovereign government fund from the Middle East is also an equity partner. These types of ambitious projects sometimes gain momentum just by throwing out a huge number, even if the principals haven't worked out the exact feed of money into the project. Mary Long: We focused thus far in the conversation on a lot of the private sector players. But importantly, it was President Trump who announced a lot about this. That $500 billion number that we're talking about, it does not include funding from the US government. Then where exactly does the USG fit into this project? What does support from the federal government actually look like in Stargate? Asit Sharma: It's speed, Mary. Under the previous administration, the Biden administration, there was a lot of government investment into semiconductor technology. That piece, as you pointed out, is obviously missing here. But what the Trump administration brings and what the US federal government will bring is a faster process to build out. There'll be less regulatory scrutiny on any of this. There will be, I think, streamlining of permitting maybe less attention to environmental impacts. Everything that the previous administration were sticklers on, whether you agree with that or not, is going to be pushed a little bit to the side here so that these data centers can get built out as soon as possible. Of course, President Trump mentioned the ongoing geopolitical tussle with China to be preeminent in artificial intelligence. It's not just a corporate thing or a business thing or a tech thing. For the US, it's a national security interest. You have that element as well, so they will make this whole thing flow pretty quickly. Mary Long: Three big names that we've talked about this far that are involved in this. We've got Oracle, SoftBank, and OpenAI. But there are other companies that are also listed within the OpenAI press release, not mentioned within the OpenAI press release, but that you flagged is MGX, some equity from the Middle East featured there. But other business partnerships that are involved here are also ARM, Microsoft, and Nvidia. They're named as key initial technology partners by OpenAI. If you're an investor in ARM, Microsoft or Nvidia, is there anything not to like about a potentially $500 billion deal with other massive names in tech and the US government? Asit Sharma: Well, if you're an investor in RMA or A-R-M, it's Jekyll and Hyde. Yesterday, we saw the stock of ARM shoot up because they licensed chip technology. Today, I think investors woke up and said, wait a minute, if SoftBank is a funding equity partner of this deal, and we know that SoftBank isn't quite the beast on its balance sheet that it used to be, where are they going to get some of their funds? Well, they might sell some of that huge stake they have in ARM to raise billions for this project, which would dilute ARM shareholders. That's something that you may want to evaluate if you own shares of ARM. For Microsoft, it's good in a way, we heard Satin Adela. Even though Microsoft isn't one of the funding partners, say, hey, I'm good for 80 billion, my 80 billion this year. Microsoft this year was projected to spend in capital expenditure, about $60-65 billion. Anyway, they've added another 15 billion. That's good because Microsoft will have a yield on their CapEx investment when we're all spending more and more time using these large language models. I think in Nvidia, it's generally positive for them as well, because as I mentioned before, part of the data center power comes from how much compute you pack into it. They are still the major player here for the highest value computation. Mary Long: Much has been made about Elon Musk's reaction to this and his responses to Sam Altman on X. I want to focus on another big name that stays a little bit more out of the spotlight than Sam Altman and Elon Musk. Dario Amodei, what's his reaction been to all this? He's notably not included in this venture. Asit Sharma: He's vague and amorphous to me. I don't think that's sour grapes. I think, you and I have talked about Sam Altman in the context of Amodei and how different their personalities are, how different their backgrounds are. I think this is just a rational builder of large language models who sees the need for this to get built out. Wanting to ask, OK, what's the roadmap here? How does this get expressed? He has the same questions that you have, Mary. I still can't get to the $500 billion number. I think his was a rationalistic question. I will note that he said, look, overall, we probably do need to be investing on this scale. But I'll say personally, Mary, I think that $500 billion was going to get invested anyway without this deal or no from various players. Mary Long: I got one more question for you on this before we move on to our next topic of the day. You're a student of literature, Asit, I'm a student of literature. We're both self-professed words people. What do you make of this name? Where exactly do the stars come in in this Stargate situation? Asit Sharma: I don't think the stars are aligning here. [laughs] When I heard Stargate, it made me think of things like Space Force which is not a great name for our ambitions to be a military force in space. It brought up Heaven's Gate in my mind, which wasn't that, like, a big budget failure at the box office. It seemed like Star Wars manque, so not quite Star Wars either. Just a rapid mishmash of concepts. The idea of a gate is really fun in the semiconductor industry, but not so much as a metaphor. Wouldn't you want the path of least resistance? I'm going to grade this one since we are students of literature. [laughs] Actually, let me ask you first. What's your grade on this name? Mary Long: Well, I'm going to give it a low. On the one hand, the star it gets you excited about the future. It whips up some hope. But I have to say, especially from a political perspective, gate doesn't have a great track record. I'm referencing Watergate, typically. [laughs] Typically not an awesome history to be attached to. Anyway, we will take the Stargate and use that as a nice segue into GE Aerospace, which reported earnings earlier this morning. Share is up about 9% after dropping fourth-quarter results last time I checked. This was GE Aerospace's first year as a stand-alone company, and the picture looks pretty rosy. I'm just going to throw out some top-line and bottom-line results here. We've got revenue for the commercial engines and services unit that grew 19% year over year. Total orders increased 46% reaching $15.5 billion. Adjusted earnings per share for the quarter up over 100%, planning to hike the dividend by 30% and repurchase $7 billion in shares. Asit, what sticks out to you? Asit Sharma: Mary, I think the themes that management has been talking about for more than a year now are just coming into play, and that's really what stands out to me. The industry itself is supply constrained now. There's so much demand for new commercial airplanes and new military airplanes, and there's only so much production that can be output, and we've had supply chain kinks going on all of last year. This is something where it seems on the surface of it, you would think, OK, building planes is so hard. How fast can that industry grow? But there are estimates that it can grow anywhere between eight and 13% for the next several years. GE is benefiting from that, that really leap out in the numbers to me today. Mary Long: I'm glad you brought up that growth because already three out of four commercial flights are powered by GE engines. That growth point is important because that's a bigger number than I would have honestly expected. There aren't to be fair, many others that play in this business. There's Boeing, there's Airbus. But how does GE Aerospace fit into the broader jet engine landscape? Asit Sharma: As you mentioned, Mary, it's one of the few companies that can make jet engines that satisfy a few demands. One that they should be faultless if they are kept in good working condition. Two, that they can be economical, they can provide fuel efficiency as this industry keeps expanding and the costs keep rising. GE Aerospace through a joint venture with a French company called Safran. The joint venture is called CFM, produces these specialized jet engines and only has a handful of competitors, as you mentioned. We have to say it's a dominant force in this industry but don't forget it also has a defense component as well. It supplies to the US defense industry and some other global purchasers as well. Mary Long: You've written that GE Aerospace is, I'm quoting you here, Asit, "The quintessential razor and blade model in the aerospace industry. If engines are GE's razors, what exactly are its blades?" Asit Sharma: Its blades are simply maintenance services and spare parts, so you sell the engine, but that engine has to be aloft for thousands and thousands of hours. In fact, modern jet engines now can last up to 20 years, so while the company does make a lot of money selling a single jet engine, what it's really going to capitalize on is a revenue stream for 15-20 years of helping keep that engine in good working order, so we compare that to a razor blade versus the razor, you buy the razor once, you have to keep buying the blades. Mary Long: I mentioned at the top of this segment that this was GE Aerospace's first year as a stand-alone company. Once upon a time, it was only a portion of the larger General Electric conglomerate. Now we've got three separate companies that trade on the New York Stock Exchange, GE Aerospace has retained the GE Ticker symbol and the CEO, Larry Culp but you've also got Vernova, which is the energy segment of the business, and you've got GE Healthcare, whose specialty is self-explanatory in the name. Remind us why Larry Culp spun off these three companies in two separate entities in the first place. Asit Sharma: There was a time when GE was held up as the model American Conglomerate because it had so many industrial companies, and it also had this huge financing arm, GE Capital, and they were so great at managing earnings expectations to the penny, used to be the phrase of how Jack Welch, the then CEO of GE, managed investor expectations. What happened along the way is that Welch overprioritized financial management, various industrial businesses under GE themselves lost their ambition and were just cobbled up into this big hole that started suffering from pension obligations, from mismanagement of its financial arm and we had just a train wreck of a stock and what Larry Culp has done is to bring value to shareholders by separating these businesses out, letting them run on their own, giving them ambition again. He's also just brought so much clarity to the investment thesis in each one of these and split out or spun off the underperforming parts of GE, sold off divisions that weren't going to affect the bottom line, so he came in as someone who had a vision to pull out what was important of the company and leave the non important parts, the parts that were obscuring performance or dragging it down behind. Mary Long: Asit Sharma always a pleasure to talk to you, I feel like often when we get together, we come up with, like, side hustles that we could be good at and if there's any takeaway from today, it's that you and I both might be in the business of helping to name newly formed government partnerships better than the agencies themselves. Asit Sharma: We are going to work on that idea, Mary, and we are going to have ourselves a very focused revenue stream a GE aerospace. Mary Long: Appreciate it. When Asit's not talking stocks with us on the show, he's got a whole other day job searching for quality companies that can beat the market for long term investors. Asit works on our flagship service, Stock Advisor, in addition to a number of other premium Motley Fool services. If you're interested in more analysis from Asit, two stock picks each month, access to stock advisors full score card of companies and more, visit www.fool.com/sign up. There will also be a link in the show notes. Up next. The outlook for solar stocks is looking a little cloudy. Fool analyst Seth Jayson joins me for a look at phase and the existential crises facing the rooftop solar industry. Seth, we're talking about a solar energy stock that's been on quite the ride, before we dive into the business of Enphase, can you give us an overview of the science of solar energy, how it works, and where exactly in that process phase the business fits in. Seth Jayson: Well, I don't want to get too sciencey because I'm not a scientist, but I can get you the basic, which is that when the sun pours all of this light onto your roof, it gets hot unless you have some solar panels in the way, and then it can turn that into some electricity but it turns it into DC electricity, direct current electricity. When you plug stuff in your wall, a lot of people might know this, but some may not. When you plug stuff into your wall, you're using alternating current, AC electricity, so different current, different voltage, the job of an inverter in a solar setup is to change that DC electricity into AC electricity and there are tons of different kinds of these different scales, you can imagine a utility is going to need enormous inverters for those solar farms, and even roof top systems used to use well, still probably still use string inverters, which is an inverter that might handle, say, a group of panels, five or eight panels or something like that. Enphase' business was to put a smaller microinverter underneath or attached to each panel and the idea was that as shade is on maybe a portion of the roof or the panels are varying despite the fact that they're the same, they're varying in output, instead of an entire string or a bank of panels having to put out a lower amount of electricity, because of that, the micro inverters handle each panel on their own and thereby designed to give you the most from your system, as well as hopefully last longer because you've got each inverter doing a little bit less work underneath one panel, so that is the business in a nutshell, the inverter piece of the business. Mary Long: Yes, so there's that inverter piece of the business, and you know where I'm going with this, Enphase also has a battery business and EV chargers, so how substantial are those offerings to the larger Enphase business model? Seth Jayson: Well, the EV Charger business, that's not a great business for anybody, but you might be a little better off if you're integrating with an entire system for a home solar but I've been involved with EV charging stocks in the past, and so I know from experience looking at their financials, it's not a great business, it's a bit of a commodity product with a lot of differentiation but what is a better business for Enphase is that backup battery business and so that is putting in enough power to say last six, eight hours in case of a power blackout, but more recently, that was the backup battery biz until a few years ago. More recently, the idea is to use batteries that can be attached to smart systems that will allow you to tap them and fill them at certain points and then use them at certain points in order to try to take advantage of differing electricity rates if that is the case in your system, if you're in certain places, the rates can change, certain plans, the rates can change. The problem with backup batteries as a way of trying to fix some of the net metering changes, which will probably be our next topic is the backup batteries, we'll just say for right now, they can add 50%-100% to the cost of a system. In other words, if it's going to cost you ten grand to put a solar system on your roof, a backup battery, can add 6-$10,000 to that pretty quickly. Mary Long: Renewable energy broadly, is a sector that I get pretty excited about, I hear about this solar technology. Here, you describe it, hear what Enphase is doing and I think, OK, this is pretty cool stuff, sounds like awesome to me and yet, Enphase shares have been on a steady trend down down down since late 2022. What's behind that drop, why aren't investors feeling the same excitement that I feel just hearing you talk through this company? Seth Jayson: Well, in one word, regulation and regulatory changes. The reason that it used to be an OK deal in some jurisdictions and maybe still in others, but especially in places like California where there's a lot of sun during the day, is that they had a system where you got a credit for the full amount of energy that you put back into the grid during the afternoon when those solar panels were really pumping out a lot of electricity, you got a credit on your bill for the retail price, so if you were paying, I'll just say 0.18 a kilowatt hour, you got a credit for 0.18 per kilowatt hour that you put back in and California and many other states now have changed in case of California and are considering changing in many other states to a regime where instead of getting that retail price credit, you only get a credit for the cost of the electricity that the utility would have paid that they didn't have to deliver. That may in some cases be two thirds to half of what that retail credit used to be and so that has the effect of really reducing the payback that you got every year or month from putting electricity back into the grid, and that completely changed the dynamics of financing rooftop solar systems and at the same time, we saw mortgage rates go up and a lot of loan rates, consumer loan rates also went up, and so attaching solar to new homes got more expensive, attaching it to existing homes got more expensive. We're still talking about systems that in some states might cost $20,000 for a house. Mary Long: As we were talking about this company, before we started recording, you mentioned to me that you'd sold Enphase and that this rooftop solar has a bad and often negative payback. Is what you just explained, is that why you wound up selling Enphase or is there a way that this company might be able to overcome the problems that you just mentioned? Seth Jayson: Well, they'll keep selling those inverters, the level their sales will be is the real question. The solar industry in general, really is in trouble in places where it was formerly doing great and a lot of that is like we were talking about, if you want to use a tool out there that's easily accessible, you can use Project Sun Roof from Google to grab your house and get an estimate of what your payback is on a solar installation. I actually before the podcast during my preparation, grabbed a house in Southern California that had a good south facing roof, I picked it off. I zoomed into Google Maps and picked it off the map, so it was a perfect house for a solar installation, no shade on the roof or anything. It wasn't that big a house, so they said the upfront cost of a 2.5 kilowatt installation would be about $10,000, and that it would cost about $24,000 over 20 years to use the electricity from this plus the electricity you still need to buy, you wouldn't be replacing all of your electrical use all year round. This was their estimate, even after subtracting a $3,000 state and federal incentive, your 20 year cost with solar was going to be $31,000. Without solar, just paying your electrical bills was going to be $44,000, so over 20 years, you were going to save $13,270. If somebody gave you a check for $13,000, right now, you'd say, that's awesome. If somebody gives you a check for 120 of that, you're not as excited and if you take the net present value of that at a 4% discount rate, it's actually less than $7,000, so it's just not as good a deal as it used to be in the phases, revenues have dropped back to where they were a few years ago because of this situation and like I said, batteries are expensive, so it's much more difficult to sell a solar system and say, but if you use this battery, you can bank that extra energy and then not have to buy it that sounds great, except you might be paying another 5, 6, $10 for the batteries, so the economics for rooftop solar just don't work as well. It's different for utility-scale solar, which is what we're seeing still expanding quite a bit in the United States, even places like Texas, but rooftop solar is in trouble and is going to remain that way. Mary Long: It sounds like the rooftop solar industry has some existential crises that they've got to parse out but if we look at Enphase and one of their competitors, SolarEdge, I see an interesting split, right? Solaredge has burned cash for the past seven quarters. Meanwhile, Enphase, despite facing these very real again, I'll call them existential crises that we've talked about, their free cash flow has been a little wobbly, but consistently positive, so you've got these two companies playing in the same space, what's driving that split in their management styles and their results? Seth Jayson: Well, NPAS has had pretty good free cash flow production, and so I don't want to get into what Solaredge is doing differently but Enphase they were just doing a better job of converting their sales into actual cash but I like to look if you're an investor, so if you're only looking at free cash flow from the outside, it'll look great but of course right now, it's actually dropping quite a bit for the last trailing 12 months. I see free cash flow, according to my spreadsheets here of like 336 million, and that is down from let's see, the prior year almost 600 million, so that is cut in half, which is what you'd expect but a deeper way of looking at free cash flow, especially for growing companies like these, I like to have another bar on my charts that is free cash flow, subtracting the amount of money that they spend on stock buybacks, because as an outside investor, those stock buybacks, especially in these fast-growing companies tend to be just to soak up equity that is delivered to employees as compensation, so the free cash flow seems nice, but when you look at how much of it is basically just converted straight to compensation, picture is a little bit different. In that case, I see for last say for fiscal year that ended 12, 23 in phase had free cash flow of 586 million but if you subtract the stock buybacks, you are left with the 55 million in free cash flow, which isn't as great and through the trailing 12 months, that free cash flow figure, once you net out stock buybacks is actually a -56 million, so the free cash flow picture there isn't as great. It might look at first blush, and other investors may disagree with netting out that cost, but that's just one of the ways I do it, when I make a spreadsheet, I have about four different ways of measuring free cash flow because some of them are more applicable to some companies, and some are better applied to others. Mary Long: As always, people on the program may have interest in the stocks you talk about, and the 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, she Motley Fool only picks products that it would personally recommend to friends like you. For Asit Sharma and Seth Jayson, I'm Mary Long. Thanks for listening, we'll see you tomorrow.