Motley Fool Hidden Gems Investing - AI Is Not A Person

Episode Date: June 5, 2023

The Directors Guild’s deal shows just how much the entertainment industry sees AI as a theat. (00:21) Jason Moser discusses: - What a potential Directors Guild deal means for entertainment. - The challenges facing streamers as they look for more ways to profit from content. - Whether or not Apple can take headsets out of their gaming niche. (16:36) A simple pack of casino playing cards leads Ricky Mulvey and Asit Sharma on an exploration of how old products can become new again. Companies discussed: SNPS, META, AAPL, NFLX,DIS,WBD, PARA Host: Deidre Woollard Guests: Jason Moser, Asit Sharma Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Directors want you to know AI is not a person, and Apple is looking to a mixed reality revolution. You are listening to Motley Fool Money. Welcome to Motley Fool Money. I'm Deidre Willard, and I'm joined in studio by Motley Fool analyst, Jason Moser. Hey, Jason, how are you doing today? Hey, Deidre, doing fine. How about you? Doing good. I want to talk entertainment with you today. The Directors Guild reached a tentative deal with the Alliance of Motion Picture and Television Producers. It seems like a pretty

good deal. It's got some wage increases, better benefits, higher streaming residuals. The writer's strike is still going on, but it seems like we're one step closer to getting back on track. Should those of us who hold entertainment stocks and really like streaming entertainment be breathing a sigh of relief? Well, I think for sure it's a step in the right direction. I would say I think some are going to weather this better than others, to be sure. I think we're seeing a lot of damage that's already been done here, though, unfortunately, in that a lot of these shows are facing these long delays. You look at some of these really popular shows that have

recently rolled out. HBO is a good example. You've got The Last of Us and House of the Dragon. Two very well-received popular shows. It's looking like this is going to contribute to a much longer span of time that goes between the next season dropping. That, as a consumer, is not ideal. As investors, probably not so ideal because it's not ideal for consumers. It leads me to the idea here that some of these companies are going to be able to deal with this better than others. I think the bigger companies, the companies that have been in the space a little bit longer and have built out these streaming models and these libraries with all of this content, they've got more to fall back on while we

wait for all of this to play out. Some of the obvious names, you look at something like a Netflix, of course, because they really were the first to this space. You look at Warner Bros. Entertainment, what they have with HBO and ultimately what it is Max now, that's a tremendous library of content. Disney, another good one that'll be able to deal with this. So, yeah, a step in the right direction, for sure. But, as you said, it's not come to a full conclusion yet. A lot of these streaming services are going to have to rely on some of their libraries of content, so to speak, to be able to fill the time. This content does not live a very long life anymore. It is something that just does not, particularly

when these companies drop the whole season at once. People binge through it, they finish it in a day or two, and then it's over. You can start to see, a lot of these services are reverting back to, we're going to release these more linearly. You're seeing episodes coming out every week as opposed to all at once. It's very interesting to see between that and the advent of advertising in the space, how streaming is evolving. It's not like the streaming that we knew from just maybe 10 years ago. Yeah, it's definitely evolving. One of the things I think you just mentioned is the idea that some of these new hits, if we're waiting a year or so for another show, maybe we forget

about them a little bit. That could also be a concern. Easily. It slips under the radar, you kind of forget it happened, and then all of a sudden, oh, wait, I forgot about that one. The longer that time passes, the greater that risk becomes. Again, I think that does speak to the advantages in releasing this content more slowly. It does feel like we're seeing more and more streaming services relying on that. Netflix was the one that really started all of this. They were the ones. They're famous for dropping all the content all at once, and people just binge right through it. I think, as consumers, we've enjoyed that luxury for a while. The problem is, it's not

the most sustainable model. I don't think it really works out as well for the business in the long run, which is why we're starting to see some of these businesses reverting back to sort of the linear fashion and releasing things sort of on a timely basis as opposed to all at once. Yeah, absolutely. Well, in the proposed deal, there's this language that really struck out to me, which is this idea that they say that we have the agreement that AI is not a person and that generative AI cannot do a director's job. I think that speaks to our overall fear that AI is coming for our jobs. But is this really necessary at this point? Was this on the table? I do think we're so early in the actual development of this space. When I say space,

I'm talking about AI in general, understanding exactly the implications of AI and how it's going to impact our lives professionally, personally, its capabilities, what it does well, what it doesn't do well. I think that a little caution is warranted. It's something that can be changed down the road if it's deemed to be unnecessary. But I absolutely understand from an individual perspective wanting that protection. There is this narrative out there right now that AI is coming for everyone's jobs. That's scary. I don't think it's going to be to that effect. But AI is going to change the landscape, much as technology does. Probably will make some jobs redundant, and it will change how we do things. Now, I think, on the flip side, do we get

to a point where AI can actually do these jobs and do them even better? We could get to that point. Entertainment may be a space where AI has dramatic implications. We just don't know yet. We're going to find out here over time. I do think, at the end of the day, one thing to keep in mind. I feel this way. Content, at the end of the day, is art. It is art. For many, art and the human element are inextricably linked. There's something to that. I don't know that consumers necessarily will feel the same level of respect if they know that their content is coming from AI-generated sources. There's an artistic component to this that I think does matter, not only to the creators, but to us as the consumers as well.

Yeah, I think that is an interesting concern as we go forward. Part of the other piece of this puzzle is, you've got the Writers Guild, their strike is ongoing. We've also now got to worry about SAG-AFTRA, that's the big actors union. They're headed to the bargaining table this week. I'm assuming AI is going to become even more of a factor there, too, because now we have the ability to generate versions of actors. We've got the ability to generate writing that sounds like a particular writer. I'm thinking about that. I'm also thinking about how these streamers figure things out going forward. If they cut a lucrative deal with all of these unions, does that mean that they're going to have to slow down their production

or make other decisions going forward? Well, I think we are seeing a trend towards less content and higher quality content. Going back to Netflix is the obvious example here, because it really is the company that got the ball rolling in the space. Netflix has been known for having a ton of content. They're trying to scratch an itch for everyone out there. They're not targeting one specific kind of consumer. They want a a little bit of a lot for everyone. The flip side of that is, you end up with a library of a lot of less-than-compelling content. I would say that's not just with Netflix. I look at a lot of these services today. A lot of these services have some excellent content.

They have a ton of less-than-compelling content. I think what we're seeing more and more is that these companies are starting to realize that more isn't necessarily always better. Technology, hopefully, will continue to help improve the quality of that content. But we're absolutely seeing these leadership teams really approaching these content budgets now with a little bit more scrutiny, recognizing the fact that it's not always about just having more, but there's a quality dynamic to it that consumers really care about. And also, I think that ultimately speaks to the consolidation in the space. We're seeing more and more of these streaming services falling under one corporate umbrella,

so to speak. Some acquisitions, I think, are likely to continue. We see a few really big entities that dominate the space. We're already seeing that shape out with things like Disney, Netflix, Warner Brothers with Max. That will be an advantage to these companies because they have more resources, they have greater distribution, they have these greater audiences in a way to push that content out so many different ways. While we're talking Netflix, we got something in the mailbag from Bill in Seattle. He said, why didn't Netflix put the advertising tier option in the notice about sharing passwords? I would have put my kids on that instead of the no ad tier. If they're really going to make more

money on the ad tier, this would have been the perfect time to offer it. What do you think, Jason? Is it that Netflix is still more interested in grabbing that subscription revenue than the ad revenue? Well, if you go by what they're saying in their calls, and Disney and Netflix both struck a tone here where the ad-supported model is a very attractive one from an economic perspective. They like the economics of that ad-supported model. So, I think in regard to Netflix, as quickly as they were leaders in the streaming space, they are not so when it comes to ad-supported TV. They are really behind the pack there when it comes to ad-supported TV.

So, I think they are approaching this with a little humility, a very open mind, and wanting to learn the dynamics of how this ultimately works, because that's not their specialty. Their claim to fame was, we're keeping it simple, it's an easy, cheap subscription model, and it just makes sense. And for a long time, that really worked. But what we're seeing now and now is, more of these companies realize the benefits of having an ad-supported model, and they're really rolling those out. So, I suspect as time goes on, as Netflix gleans some lessons from the space, learns what works and what doesn't, I think they'll start to tap this ad-supported model a little

bit more, because the economics are really very attractive. Yeah, we'll have to keep an eye on that one. Speaking of another kind of entertainment, today we've got Apple's Worldwide Developer Conference. That's the WWDC. In the past, there were a lot of surprises. This year, we know what it's going to be, pretty much. It's the Reality Pro headset. VR headsets, they haven't quite taken off, right? This was going to be the next big thing.

Is this going to be the moment where it shifts, do you think? It is really, really difficult to say. On the one hand, you want to say yes. Apple has such a reputation for sitting back and watching an opportunity unfold. learning, gleaning the lessons from their competitors, and understanding what works and what doesn't work in a particular space, whether it's smartphones, laptops, whatever. This is the same thing. We've got plenty of headsets out there already, but we've still not seen the traction that some were hoping that we would see at this point in regard to mixed reality, augmented virtual reality. I think a lot of that just boils down to trying

to figure out what the core use cases are. On the consumer side, the core use case remains in the gaming space. I think it's most attractive for gamers looking for a new way to interact with their content. I can speak just anecdotally. A couple of years ago, we got one of my daughters an Oculus headset. It's the last second birthday gift. We just thought it'd be fun, she'd enjoy tinkering with it. She did for a couple of weeks. Now, it doesn't get nearly as much attention as you might have thought. Having used it myself, I understand that. It's amazing technology. It's phenomenal what it can do. It does put you into a whole other world. To think that we have technology that can do that is really impressive. But we haven't

really come down to the core use case as to why a consumer needs this stuff yet. That may just take some time to develop. I think Apple is very well known for creating those opportunities, finding those killer apps, those core use cases that can help take their hardware and software to another level. I think the other real challenge with Apple right now is, if they do indeed announce this, and the price point is in that $3,000 range that has been quoted, that's going to be very prohibitive. You're talking about Oculus that goes for $500 vs. an Apple headset that goes for $3,000. That's obviously a tremendous delta there. It's going to be very difficult for consumers to justify that, at least in

the near term. But you have to remember, this is Apple. It's a company that has afforded itself so much brand equity through the years. You just can't ever count them out. You can't doubt them. Over time, they do such a wonderful job of learning those lessons, taking those lessons away from what their competitors are doing and ultimately figuring out what works and what people want. They deliver it in a seamless, elegant package. Their hardware is just really, really good stuff. I think in the near term, it's probably going to be a bit of a bumpy ride for this. Longer term, if they can really convince us of those core use cases, then I think they stand a better chance. Folks out there are going to give

Apple a shot no matter what. That's the kind of brand equity they've got. What they don't want to do is put a product out there that just starts collecting dust and people forget about. Yeah. I think that's really important. If it ends up just being a gaming product, that's not that exciting. I know when they were originally thinking about doing this, they were looking to do more of an augmented reality glasses sort of thing. That ended up taking a backseat. Maybe long-term, that's where we go. Do you think that this is maybe just the start of a whole new revenue stream for them? Yeah. I think it has that potential.

I love the fact that they're looking at this and saying augmented reality and virtual reality. One of the big challenges with Oculus is that it's straight-up virtual reality. You're immersing yourself into a digital world that is fully made up. That's entertaining, it can be fun for a little while, but there's not as much utility. It is more entertainment than anything else. I think if you're talking about a mixed reality headset that would incorporate augmented and virtual, if we're overlaying some digital on top of the physical world, there's more utility there. There are more potential use cases there that I think Apple could certainly exploit.

That could be one of the lessons they've learned from a lot of these headsets that have been released into the market over the last several years. Ultimately, while virtual reality is amazing technology, maybe it's not the most useful for the masses. I think that with something like a mixed reality, augmented reality. To me, there seems to be more core use case opportunity there. It's going to be fascinating to see exactly what this product looks like and what it does. While it'll most certainly be early days, Apple has a knack for figuring out ways to get products into consumers' hands. It takes me back to, I don't know if you remember, 10 years ago, the Onion article that was titled,

new Apple campaign urges consumers to buy iPhone for other hand. As silly as that sounds, in hindsight, that's basically what they did with the watch. I don't know that anybody really needs the watch if you have a phone, but they convinced a lot of people that they should have it. They find core use cases for devices. They convince consumers that they want them, that they need them. The brand affords a lot of trust and gives them a huge benefit of the doubt there, where consumers will give it a shot because it is Apple. This is going to be a fun one to watch develop. Yeah, absolutely. Well, thank you so much for your time today, Jason. Great to see you.

Thank you. Innovation doesn't always come in the form of something brand new. Rikki Mulvey and Asit Sharma discuss a mainstay tech company that's still improving a decades-old product. Joining us now is a Motley Fool analyst who demanded a present in order to record a segment with me. Welcome, Asit. Ricky, it's good to be here. You make that sound so quid pro quo. Well, it might be a little quid pro quo because you said, I have this great idea, and it's that you send me a present, and then we'll make a podcast segment about it. And I thought it might have been nicer to kind of do the other way in reverse. You would send

me a present, and then we'd make a podcast segment about it. I mean, we'll chat about that later, Ricky, but the real present was the fact that I was barreling down I-40 in North Carolina on a very sunny Sunday afternoon, listening to the radio and a thought popped into my head. And what was that thought? The desire to discuss something with Ricky Mulvey. I mean, that's the present, dude, that I thought of you during my time off. All right. Well, I'm happy to send you something. After about three months, I sent you a deck of playing cards, which is a little bit different from, I think, normal playing cards because they got a QR code design in the back, which I think represented an interesting mix of just a very old product and very new technology. But more than that, the entire endeavor cost me about $5.30. Before we get to that, by the way, when you originally pitched this

to me, you mentioned comic books like three times. So, I thought that this whole thing was just like you wanting me to send you a comic book and then we could talk about comic books, which we can do as a segment at some point. I mean, some people have trouble grasping a very obvious message that's right in front of them. But hey, that'll lead to another segment. I think that would have been really fun. Let me describe what you sent me though, Ricky. So, I get this package from you. it's old school because you've handwritten your address my address like we used to do back in the day inside i find a packet yes of playing cards from the golden nugget casino with the edges crimped these are authentic casino played cards they've been played in a casino before

now on the back of these cards it's a beautiful deep burgundy color it's got minute floral etchings all over the place. So I think there's an interesting reason that there's these QR codes on these playing cards. And it's because I think they're in order to stop something called edge playing, which is when very skilled gamblers, or they wouldn't even be gambling at this point because they have an edge, are able to spot very tiny imperfections in the backs of cards. And then therefore they know what card is under it. So let's say you have the six of hearts and you're able to tell that it's the Six of Hearts because on the back, there's just a slight misprint when they're doing these sheets of playing cards. The most famous example of this

was Phil Ivey and Kelly Sun. Kelly Sun basically was this, I would say, addicted gambler and actually got kicked out of MGM Properties in Vegas for playing a bad marker, which was asking for $100,000 when you didn't have the cash to back it up. MGM ends up getting her sent to jail because in Vegas, that's the equivalent of writing a bad check. Since then, she's had this mission of revenge against MGM, closely studying the backs of playing cards, and is able to team up with Phil Ivey in some ways to get bankrolled. They play together with this very specific rule set, very specific cards in Baccarat, which the casinos are happy to oblige because they're playing such massive hands. You can ask for anything you want when you're playing $100,000

a hand. This goes on for years, and eventually, it comes tumbling down. Rockford's Casino in England notice what's going on, and they claw back all of the winnings from them. Phil Ivey appeals this. This is a years-long court battle, but eventually, the Supreme Court of England sides with the casino, saying that Phil Ivey cheated. In America, you have a similar situation with the Borgata Casino. Ivy and Son win tens of millions of dollars and Borgata says, hey, you were cheating there. They argue that they weren't. They were asking for a specific rule set that you obliged them on, but they weren't touching the cards or anything. They weren't manipulating the game with anything other than their eyes and an edge that they saw.

They saw an inefficient market. In the first court case, Borgata won. They were able to claw back their winnings. However, on appeal, there was a settlement for an undisclosed amount. We don't really know how the story ends, but I think that's why you see these random QR codes, or maybe not so random QR codes, on the backs of a lot of cards now. Because, hey, what if we just have thousands and thousands and thousands of designs? Good luck finding and spotting the small differences in them when all of them have small differences. I think that's where there's a little bit of a cybersecurity angle as well, because these casinos now are using something called a trapdoor function, which is you have a function that's easy to create, but very difficult

to draw how they got there. You could think of a hundred digit number, which means that it's very easy to multiply into a hundred digit number, but it's very difficult to find the two numbers that got you there. And I'll stop there before I keep rambling, Asit. You know, I have several observations. The first, Ricky, is that there's a thin line between an inefficient market and a game of chance breaking down into something that's not really a game of chance. And that's why there's so much legal ambiguity there. The second is, you know, I used to work in the offset printing industry. I was in the finance department of an offset printer. And you and I had the pleasure to meet for breakfast. You were in town, in my town, for a wedding this past weekend. And I was

relaying to you how it took me a moment to grasp that certain sets of cards could have these imperfections that went from deck to deck to deck. Then I remembered from being in the printing industry, that's entirely possible. You can have imperfections that go from plate to plate, so the press prints off of a plate. You can have variations in what's called make-ready, so that's getting the colors right, right before a run. There's all kinds of potential in older school technology for this to happen, but technology progresses. As I was getting out that industry, digital printing was all the rage because now you'd be able to print different addresses on a run of envelopes to be mailed. That was like variable printing. It was the next

big thing. Technology marches on. There are ever new ways created to try to beat the house and get an edge over the house. I want to say one more thing about this idea of the trapdoor function, which you explained to me. I think it's really cool because in this case, the trapdoor was inadvertent, right? And poker itself is informed by encryption. Some data is available to all the players, but your hand is encrypted. I mean, theoretically, only you know what your hand is. So, in games of player versus player and some games of player versus the house, we create these unintentional trapdoors to our data. In poker, this is known as the tell. That's the feature that gives away some kind of information inadvertently.

For example, Ricky, if you and I play poker a bunch, and you notice that my right eyebrow always twitches slightly whenever I have a really good hand, that's the tell, that's the trapdoor to my data. And in the Phil Ivey case, that trapdoor was also inadvertent. Yeah, I think this was also, the casinos were a little more upset about this because it was the trapdoor against the casino. They were playing Baccarat, and Kelly Sun and Phil Ivey were asking for these very specific sets of cards where I think Sun was able to more easily tell what those tiny little imperfections

were, and they weren't just taking money from the players, which casinos don't like. We are legally obligated to talk about stocks, Asit. One of the reasons I sent you this is because it is that mix of innovation with a very old product. We always associate innovation with something completely brand new. I'm guilty of that. That's how I like to think about the future in these bleeding edge technologies. But there's plenty of companies that have been around for tens, maybe even more than 100 years that are still innovating on very old products. What's a company that you think has shown some interesting innovation on very old products? Well, I am obsessed right now with a company called Synopsys, symbol SNPS. This is a company

that provides electronic design automation software. It helps companies automate the process of designing chips. That's a really old technology. Ricky, the first iteration of transistors was, I think, introduced in 1947. Since the 50s, we've been trying to really make chips more efficient. In the present day, it's how many billions of transistors can we fit on one chip. We start bumping against something called Moore's law, which proposes that the number of transistors we can pack on a chip is going to double every so often. We're seeing physical limitations of Moore's law. One thing many manufacturers are doing is turning to purpose design chips, because if you design a chip for a certain task, in

words, avoid buying off-the-shelf chips, you can get more efficiency out of that silicon. Synopsys does only this. It works on providing the software to help companies design ever more efficient chips. They are now using artificial intelligence to further this process. The company trades at pretty reasonable multiples. I think it's going to benefit from this need for ever more computational power and efficiency. Generative AI is only the the latest demand factor that's pushing up society's need for computational capacity over the long term. It's like an earnings call. We always come back to generative AI. Asit, I haven't heard of this before we started recording.

This was a surprise. Is this profitable? What do you think about the valuation here? As per the valuation, lots of great tech companies now who have double-digit, high-20s revenue growth are trading still at some lofty multiples, say 40, 50 times their forward earnings. Synopsys trades a category below that. Depending on which multiple you're using, they are trading either in the mid-30s against forward earnings, and a slightly smaller multiple if you like something like enterprise value to EBITDA. I think they're in the high-20s last I looked. Final question, when am I getting a present? Well, Ricky, I've got to one-up you now, so we know it's going to be less than three

months from today. Sounds good. Asit Sharma, always a pleasure. Thanks for joining me. This was a lot of fun. Thanks, Ricky. 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 stocks based solely on what you hear. I'm Deidre Willick, thanks for listening, see you tomorrow. We'll be right back.