Motley Fool Hidden Gems Investing - AI and ai

Episode Date: November 22, 2023

Uppercase, lowercase, doesn’t matter. Nvidia and OpenAI are the ones to watch in artificial intelligence.  (00:20) Asit Sharma and Dylan Lewis discuss: Nvidia’s epic quarter and the market’s ho-hum response.  The OpenAI drama, corporate governance, and  How they’re making their turkeys this Thanksgiving.  Companies discussed: NVDA, MSFT Send us your questions, show ideas, and feedback at [e-mail], or leave us a voicemail at 703-254-1445. Host: Dylan Lewis Guests: Asit Sharma Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Asit, thanks for joining me. Dylan, thank you for having me. We are heading into the Thanksgiving holiday, and we are talking about the hottest dinner table topic, artificial intelligence. We've got earnings from the industry's number one supplier and the latest on the open AI drama. Asit, let's start with NVIDIA earnings. I have to be honest, the numbers don't even seem real when you look at what this company did on the top and bottom line, Asit. Yeah, totally, Dylan. Looking at a quarter in which NVIDIA booked $18 billion in revenue and on that had net income of $9.2 billion. It's better than a 50% profit margin. Revenue was up 206% year-over-year and even accelerated 34% quarter-over-quarter. This is just something

phenomenal, but it also proves out a bit of the case on NVIDIA that it is a central player in artificial intelligence going forward that its GPU, its supercomputer GPU complexes especially, are mission critical for companies that want to work with large language models. So I think we saw a company just executing to its potential, really fulfilling as much of its sales book as it humanly could. And we see the stock down a few percentage points today. That's actually a win for NVIDIA, considering how far the share price has come since, say, November of last year, when people started to notice on Twitter that this latest release of ChatGPT was something different. Yeah, shares of NVIDIA up 230% year-to-date, and we saw a fairly muted

response here. Was that really, Asit, in your view, just the numbers backing up where the stock had run to over the last year? In some ways, yeah. I mean, I think that NVIDIA now is at a place where most investors who are skeptical understand the forward revenue potential of the company. So we have just a little bit of normalizing. This was such a fantastic quarter. It would have been a win in any case if the stock didn't retrace 10% to 15% or 20%. That's what I was expecting after so many great orders the company had and how it's executing, especially in its data center segment. The thing that's so funny though, Dylan, is we get caught up as humans in the report on the last three months of earnings. We don't see how the company is

obtaining more and more sales and generating more and more profit every single day. And with a company that suddenly gets such a windfall of opportunity and makes good on it, it's going to somewhere like normalize at some point. And in our human brains, it seems like a loss. NVIDIA fell 20% after earning something must be wrong. Well, no, as you point out, the stock has gone up several hundred percentage points. So it's just normalizing a little bit to a more specific or precise type of valuation on a forward basis. So I just, at this point, find any stock moving on NVIDIA's part that's less than a few percentage points to be almost comical, but I get it. You mentioned the data segment and the data center segment.

And I want to kind of take a step back and remind folks that this was not the business that this company was in, or not the main driver of this company's business, when AI was just a glimmer in the eyes of the tech community. This was generally a gaming-driven business for a really long time. That segment up 80% year over year, which would be good for almost any other company, Asit. But the data center business, now worth, I think, $14 billion, up about 280%. Amazing that 80% is a lag on top-line growth. It's so true, Dylan. And this is a demonstration of the power of unbridled curiosity. A lot of where NVIDIA is today is the result of CEO Jensen Huang's desire to be able to have more realistic image processing

years and now decades ago and his quest to make this happen through chip architecture. So all the architecture that NVIDIA has prepared has its genesis in a bunch of engineers wanting to do something better. And that architecture has proven great for so many use cases. But it's also a demonstration of a great CEO's flexibility and understanding what could be an add-on service, what makes a lot of sense. And everything that NVIDIA has done to make its GPUs better, I'm thinking of the CUDA libraries here, these acceleration libraries that help the GPUs work even faster within various disciplines, scientific applications, et cetera. All of that really has a relationship to how information moves through pipes. So, NVIDIA started some time ago working on its own data center, networking to sell sort of a competitor to Ethernet as a product, and then got more and more into the actual gears of a data center, the actual physical products. So, it's representation of how everything can really come together, not just in a great CEO, which I'm pointing out, but the people he or she hires.

And along the way, NVIDIA has hired amazing engineers in almost every discipline that they touch. Not that this company needs a next act or a next trick. I think AI is going to be a wave that pushes them forward. But they are so consistently able to find that next tailwind and that next application for their technology. Is there anything not named AI that you should be excited about with this business? I think if we can make the AI lowercase and look into the extension into a few areas, it's going to be very exciting because there is so much going on beneath the hood in industries that most of us don't pay a lot of attention to. I think of genomics research as a really interesting space where NVIDIA's products can play, and that may be less of a solely gen AI focus and more of a combination of gen AI with the networking, with perhaps some quantum computing that NVIDIA is also preparing itself to play. way. There are really fun possibilities that we might see new products come from NVIDIA,

but they'll be in a realm of extension. Just to put a bow on that, if you think about how chips are architected just now, we have this need to put more and more information on a chip that's never going away. Jensen Huang has talked about this so much. He's said that Moore's Law is dead. At the same time, he's investing with chip producing partners with foundries to be able to do just that. I think the yield on Nvidia's investments into even founders, which they talked about on this call, is going to enable these next generation confluences of technology in science where you've got computing power, you've got the networking, and you've got an application of a quantum layer to produce stuff that is hard for us to vision

right now. All right. We're going to get over back to the capital A, capital I artificial intelligence conversation and focus in on the drama at OpenAI, which seems to be coming to a close. Asit, after being ousted from the CEO role less than a week ago, it seems Sam Altman will return to the chief executive position for OpenAI. We still don't really know a lot of the details behind what led to his ousting, but we do have some details on what the new look OpenAI will be. It seems Sam Altman will be back. It seems some of the board members that wanted him gone originally will no longer be board members. And there will be two new board members, Brett Taylor, former co-CEO of Salesforce, and former Treasury Secretary Larry Summers joining OpenAI's

board. Asit, I feel like we have had to become armchair experts on a lot of topics over the last year, and it seems the latest flavor of that is corporate governance and board seats. True. This is a board that originally started with the intent to help govern a nonprofit, which turned into a for-profit company. And some of the board, particularly two board members, Tosh McCauley and Helen Toner, along with Adam D'Angelo, who is the CEO of Quora, were the installed skeptics to be able to rein in the company and or Sam Altman if the company lost its focus on trying to be a fair AI player and one that kept the good of society and its heart. If this sounds a little bit like I'm alluding to doomsday scenarios

where AI takes over the world and destroys the world, well, there's some of that in the thinking. And you can go to extremes. I know there's been a lot of discussion on both Macaulay and Toner as being part of the so-called effective altruism movement. So those are ostensibly people who are very skeptical about the ability of normal human beings to do good in the world, and we need to have sort of gatekeepers to make sure things don't get too out of control. This is something that's so interesting about corporate governance. To me, though, if this is really your objective to put, let's say, a wall or a backstop in how a company could be governed, it takes a lot of gameplaying and scenarioizing, it isn't enough to put in a few board members who are going to

balance out the voting on some initiative or company direction. Case in point, this company, OpenAI, didn't have non-compete agreements in place. Now, that's sort of the norm in some Silicon Valley startups. But here, it meant that the board had no leverage, and it opened the door for Microsoft and Satya Nadella to come in and try to salvage their investment because they held the chips. They could simply hire Sam Altman and Greg Brockman, his right-hand man, over to Microsoft and potentially, as everyone has heard, recreate open AI by bringing the mass of employees over. We focus on the corporate governance here, and I think it's generally something that's interesting or not very interesting until it's incredibly interesting and it really comes into

focus. I think this episode really brought Microsoft's exposure, upside, and potentially the downside of OpenAI into focus as well. Asit, how do you think about where this sits for Microsoft now, I guess, as an investment, but also just kind of strategically for this business? Dylan, the investment itself is about $13 billion in OpenAI. There are many billions more that Microsoft has invested in its servers. We just talked about NVIDIA. I mean, the two have teamed up. And it's an investment in the billions of dollars for Microsoft to build supercomputers that will help companies train AI models. So the biggest and baddest yield Microsoft can have is to bring people over to their servers. OpenAI right now is their portal to do that. I think

that's a more persuasive revenue stream than maybe the AI component of their Bing advertising or what they can get with these great bots in Microsoft Teams and Microsoft Office. It's really about getting enterprises to use the AI models, large language models on their servers. So Satya Nadella had to make sure that he salvaged that pipeline, whether it meant getting Sam and Greg back to OpenAI or recreating the company in-house. That was the objective there. There's something else here that's really important for investors to note, though. The media has portrayed Sam Altman sort of as almost like a messianic figure over the last few days, and OpenAI is like the AI company. But generative AI is a lot larger than OpenAI, and right now the game is still in its very early

innings. So the idea that this is a lock on Microsoft's future dominance that they had to make sure they could support is maybe missing the bigger point. We're really at a stage where academic institutions, other companies, Meta is a great example, are playing around with large language models. So much of it is open source. Meta's Lama 2 is a great example of this. So, what Microsoft is doing is to reinforce an early advantage, but that doesn't mean as impressed as I am by Microsoft and as an enthusiastic booster of Microsoft as I've been recommending the stock in one of my services, it doesn't mean that they've won the game yet.

There's still a lot to play. Asit, this is our final episode before we take a break for Thanksgiving, and we'll be taking Thanksgiving Thursday off. Before I let you go, I know that you have some hot takes when it comes to Halloween candy and the right way to celebrate that holiday. I'm curious, when it comes to the Thanksgiving table, do you also have some hot takes? I do, Dylan. So in my household, this going way back to the late 70s my mom who is an immigrant very warmly adopted by the local rotary club women learned to make a lot of amazing southern dishes but the one thing she insisted on every thanksgiving was to take our thanksgiving turkey and base that sucker in a lot of tandoori

sauce and indian spices it was full of masala spice rich and i hated it you know i wanted to fit in. I was like, mom, can't we just have this normal like butterball turkey like the rest of the neighborhood? And years later, I'm like, you know, that didn't taste so bad. We've tried it a couple of times. Now I've switched recently to being a pescatarian, but I have family who still loves the turkey dinner. So we're going to make a turkey. And I think I might put some cardamom, cinnamon, cumin, a little bit of bay leaf spicing. I might spice that turkey up this year just for old time's sake. Oh, wow. You know, I, I usually go herb butter for the Turkey for my family. Um, but I'm going to have to borrow that recipe. I said, that sounds pretty darn good.

Well, we'll compare tasting notes later. Yeah. Um, and, and for our listeners, uh, we'd love to know what you're cooking this holiday. Uh, and we'd love some inspiration and some recipes podcasts at fool.com is where you can do that. Uh, asset. Thank you so much for joining me for today's show. Dylan. Thanks as always for having me. I appreciate it. Have a wonderful holiday. listeners as i mentioned we'll be taking a break tomorrow for thanksgiving we hope you and your families have a great holiday if you're on the roads hope they're clear and safe if you're in airports hopefully not too crowded and if you're at home hope you get a chance to kick your feet up and spend some time with the people you care about we're thankful for you all because we only

get to do the show because you're out there listening and we're always looking for ways to make the show more fun and bring our listeners in. If you have a question for the team or a topic for the show, shoot us a note at podcastatpool.com. And even better, leave us a voicemail at 703-254-1445 with your question. We love getting listeners' voices on the show. And if you're a fan, beyond listening, one of the biggest ways you can help us is by giving us a five-star review on Apple Podcasts or wherever you listen. 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

after the Thanksgiving holiday.