Motley Fool Hidden Gems Investing - AI Leaders Want to Slow Down Development For…

Starting point is 00:00:01 AI leaders are looking for the brake pedal. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by longtime full contributors, Rachel Warren and Travis Hoyam, doing a little bit of a mix-up. There has been a fair share of we need to slow AI development chatter out there. But this past weekend, that conversation appeared to hit a fever pitch. We had several employees leaving Anthropic and opening AI over safety concerns.

Starting point is 00:00:32 And now both Sam Altman and Dario Amode are calling for the slowing down of development of frontier models, lest they go out of control, I think was the words that Sam Altman used. Even the CIO of the hedge fund Bridgewater Associates was on podcasts over the past week, like talking about human extinction and the probability was higher than 10%, which is, you know, kind of silly if you think about it or startling depending on how you want to look at it. This isn't anything new, but it does appear to come at a very specific time where both Open AI and Anthropic are on the precipice of IPOs. And spending on these businesses is getting tougher to swallow, especially at the frontier level where the bulk of their spending is going.

Starting point is 00:01:18 The cynical view, at least to me, is that all of this slowdown chatter comes at a time when they want to slow down spending more than anything else without disrupting business growth. So I want to pose the question to both of you. On a scale of AI will be the death of us. We need to slow down. And we're trying to middle this spending versus growth challenges of business. Where do you land on the spectrum here? Honestly, I think the truth is probably somewhere in the middle, but I do tend to take a bit of a more cynical view to what we've been hearing. And I want to talk about why. I think there's a lot of calculations going on behind the scenes. And I don't think that means that there aren't real justifiable concerns about AI safety and the constraints or lack thereof

Starting point is 00:02:05 of some of these frontier labs. But I also think you have to look at the math behind all of this. I mean, you talk about Open AI and Anthropic, right? You're kind of moving out of the easy money venture phase. These are companies that are anticipating to have huge entrances into the public markets where they're going to face a very different level of scrutiny than they have in the private space. And infrastructure spending has become a real black hole. I mean, you look at opening eyes internal projections, which were reported not that long ago by the information. They're expecting a $14 billion loss in 2026. They could have cumulative losses of about $44 billion by 28. You know, think about how a single next-gen data center runs about $35 billion on its own.

Starting point is 00:02:48 This is not something that Wall Street is necessarily going to be forgiving on. Talking about Anthropic for a moment. I mean, we have heard for a while now from from Dario Amote. He's been spending almost the last year warning the industry to slow down. Meanwhile, we also saw a report from the information that Anthropic has locked in $517 billion in compute commitments. That's 14.8 gigawatts of capacity. It's enough to rival just for scale a dozen nuclear reactors. You know, they're funding that obviously with revenue. They have their confidential IPO pipeline. A lot of that is going to alphabet, Amazon, Microsoft, SpaceX. The outside voices that are making this case as well have a lot of skin in the game.

Starting point is 00:03:29 We had an interview with Greg Jensen that we saw from Bridgewater in recent days. He's not a neutral bystander. He was one of the earlier investors in both Open AI ananthropic. He's the one that was telling Bloomberg on a recent podcast, there's a 30 to 60 percent chance of a catastrophic AI disaster in the next few years. Bridgewater's own SEC filings show that has been building up positions in Vividia Broadcom, Amazon. So we're seeing this push for regulation in compliance costs, but it's more likely to just price out the open source community and the small players who can't afford the legal overhead. The biggest labs can absorb it.

Starting point is 00:04:04 So I think the risks are very likely real. I'm more inclined to believe that there are justifiable concerns there. But I also think one of the loudest voices calling for caution are the same people holding the largest stakes. You have to question what the motivation is. we're in such an interesting time with this entire debate. And from an investment perspective, I mean, we're talking about trillions of dollars

Starting point is 00:04:26 and many multi-trillion dollar companies that are involved here. So this isn't something that we should take lightly. And as a reflect on the weekend, it was so interesting to see, first of all, the leaders of these labs almost all agree with what Dario wrote. I mean, that was a little bit stark to me.

Starting point is 00:04:44 And it's felt a little bit coordinated. I don't know whether that's good or bad. But I also came away thinking that all of these things can be true. They can be really worried about safety. Critics can be correct in that they're just trying to pull the ladder up and get regulatory capture so that they can build a moat around their business. Everyone can also be wrong about all of those things. These companies are crying wolf a little bit because they've been doing this for years.

Starting point is 00:05:13 Dario Amadei has been one of the biggest critics. And yet he started a company that is, now in the lead, arguably in the lead in AI development, and also thinks that this is going to lead to some terrible, it just, there's a lot of cognitive dissonance going on here. And the history of technology says that something bad will probably happen. We just don't know what that is when, when the internet was invented. We didn't necessarily think that was going to lead to more isolation and mental health issues among younger people, but this is where we are today because of, So the root cause and the cause and effect is sort of unknown here.

Starting point is 00:05:53 And I think that's the real challenge is that it's almost like these people are saying, hey, you got to protect me from myself because if I continue to develop this, I'm going to do something really bad. And one of the things that's most resonant to me is that there are laws in place for a lot of these things. If you build a product that goes out and hurts people or steals things, it is your fault. And so I almost wonder, too, if, you know, after this hugging face incident, my understanding is that there were laws broken. There were felonies committed. And is open AI, we just seem to be kind of glossing over that.

Starting point is 00:06:32 So if we, if the next big thing is suddenly financial institutions are broken into and, you know, these AIs steal money are people going to go to jail? And that's what they're worried about. It all is a very interesting and sort of complicated push and pull of many things that are probably have threads of truth but are not completely true. And ultimately, we're investors here. Something bad is probably going to happen. And the question is going to be then what are we going to do? Because especially in the U.S., we don't typically act first. we act after the thing happens.

Starting point is 00:07:10 And that's probably, you can go back to the great financial crisis, you know, anything in the last 20 or 30 years at least. And that's just the way that it's, I think it's probably going to play out. I think that's what regulators are looking at. That's what the president says as well.

Starting point is 00:07:24 So a lot of uncertainty, but take these risks very seriously, but also ask questions about who is bringing them up. I got to say, hearing all of this, I feel like reading the S-1, for Anthropic and Open AI of seeing like in the risk sections like, our AI agents might commit felonies and we don't know if it might happen.

Starting point is 00:07:44 I mean, that'll just be great. Like, I don't normally read the entire risk section like line for line, but I might have to if this is what we're going to find. But you guys kind of touched on a point. I want to drill down a little bit deeper into here. You're talking about like this, you know, a little bit more the idea of regulating AI development, stuff like that. And it really feels like the Silicon Valley play.

Starting point is 00:08:06 book that we've seen before, where it's this land and expand role of like you saw with Google, where it dominated search or meta where it started to dominate social media. And then what ends up happening is regulations come down. You know, think about like GDPR in Europe or something along those lines where the regulatory burdens are put up. And it's the idea of like trying to make it more fair. But what ends up happening is these giants, are the only ones that can handle the regulatory compliance to make it happen. And so I am curious, to get your specific point, do you think this may actually just be like a regulatory thing?

Starting point is 00:08:50 It's like we have pushed ourselves far enough ahead of other people that we want to, you know, drop the drawbridge now and then, you know, use the regulatory advantage to our benefit or is this more like the money side of it? I think it's a nice happenstance that it also is to their competitive advantage if the latter is pulled up. I don't necessarily think. I anthropic in particular, but I think all the AI developers in general, it is in this, this sounds crazy. Again, we're an investing podcast, but there is much more of a religious view to this in a lot of ways because they don't really know how this thing works. They can't explain to you why AI is doing the things that it's doing.

Starting point is 00:09:33 And so there is this sort of ineffable view that they have of this technology that they're developing. And that's why I think they're very serious about being concerned. And oh, by the way, if it happens to help our business, that's a nice byproduct. Yeah. I mean, look, the genie is out of the bottle, so to speak. And I think there's multiple ways to look at this. I mean, I think I was pretty clear about, I have a sort of a cynical take. in the sense that I think a lot of this unity that we're seeing among the leaders of these

Starting point is 00:10:09 frontier labs goes back to the reality that the bottlenecks are their concerns about growth as they enter the public markets and trying to set expectations. But I do also think that we see that these leaders are talking about a technology that they have helped to create and develop that is rapidly outpacing their ability to control and even fully understand it. And that creates a very difficult paradigm to unlock because how do you regulate something that is evolving and learning so quickly? Well, at least at the short term, the answer is you have to pull the brakes a bit. You have to scale back development to understand how to regulate it. So, I mean, if they are watching somebody's recent incidents,

Starting point is 00:10:53 obviously the Hugging Face One is one of the most prominent, there could be a real concern about what liability could look like for these businesses moving on to the next three, five years and beyond. So I think it's both to their benefit and of course more broadly for the benefit of mankind for there to be regulation. But that is a much more difficult type of technology to actually set real legal guardrails around than what we've seen come out of Silicon Valley in the past. And I think that is part of why this is so challenging. Tyler, I just want to bring up one quick thing. I wonder if something happened at one of these labs that we don't yet know about.

Starting point is 00:11:32 Going to get a report? We didn't know about the Hugging Pace incident until long after it happened. Could be. Is there a reason that all these people who seem to be fighting each other to lead the world, the AI world, why are they suddenly all on the same page? Just bringing that up. Waiting two months from now for the big news drop, he's like, there was an oopsie at OpenAI. or something like that, yeah.

Starting point is 00:11:58 Something that we're all going to be following, and not exactly the most chipper way to start your Monday as a, hey, AI might kill us, but maybe it's just for regulatory compliance purposes. But I promise we're going to do a little bit more of a pallet cleanser here in the next section coming up to the break. New from Nespresso.

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Starting point is 00:12:37 Whatever lies ahead, don't change your morning. Let your morning change you. Discover coffee plus on espresso.com. AI dominates the headlines, especially this conversation. You go to any news website today and it's all about AI coming to kill us all. So I wanted to just shift the focus a little bit. And just some of the investing trends, I wouldn't say it necessarily, say, outside of AI, but outside of directly like the open AI, anthropic discussion, of trends in the investing

Starting point is 00:13:08 world that you are following right now that through the end of the year, you're like, I think something big could happen. I think there's a major momentum going on here. And I think more investors should be paying attention to what's going on here. Travis, I want to start with you. What are you most excited about? excited. I guess you said what are the things that we're looking at? The consumer is something that I'm really looking at and I don't know if it's reason necessarily to be excited because

Starting point is 00:13:35 some of the data that we've seen coming out from earnings, even just anecdotally little things are maybe not as positive as we would like to see. And with the market where it is at or near all time highs with all of the spending that's going on in AI, I have to wonder how much of the economy is being held up by that AI trade. And as I look at consumer, particularly shoe and apparel stocks have gotten absolutely hammered this year. Restaurant stocks have not done well because, you know, same store sales comps are rough. Margins are getting squeezed because they have no pricing power. Now you have gas prices continue to rise and it doesn't seem like that's going to be ending anytime soon.

Starting point is 00:14:17 So I'm keeping an eye on the consumer because I think the market is thinking about two things right now. the AI trade and the consumer, the consumer has fallen by the wayside because the AI trade just kind of overwhelms that. But if that AI trade does slow down and then we find out we have a weak consumer underneath, that's probably not great for investors. But that said, I'm finding a lot of really interesting opportunities because some of those stocks that have been beaten up are trading for 10 to 15 times earnings. If you can find companies that are going to be able to grow long term at those prices,

Starting point is 00:14:47 this is actually an interesting time to start building positions. certainly connected to that is the idea of like the housing market too and it would be the one I'm going to be watching is because the idea of like home equity loans and things like that are almost like a thing of the past because they're so the interest rates are prohibitively expensive and everyone's kind of looking at the housing market and being bummed out you can imagine why that might start to have some trickle down effects into into the consumer as well and some of the more discretionary purchases they're making I'm looking at a chart right now and and consumer discretionary is the worst performing sector right now on the market.

Starting point is 00:15:24 It's down 5.3% year to date. Well, things like energy and tech are up 28, 30%. So certainly not the most interesting so far this year, but again, a lot of cheap stocks that could be compelling. Rachel, what are you looking at? Well, I am very excited as I see what's happening with AI as it pertains to health care, to put a little bit of a more positive follow-up to our earlier discussion. You know, this is a space where you're not maybe seeing as much of the flashy use cases of AI that we do in other industries.

Starting point is 00:15:58 What AI is doing in healthcare is it is really helping to refine and optimize the long help processes of drug development, discovery, optimizing clinical trials. You know, it's not replacing doctors and scientists. It's helping companies develop, you know, commercialize, manufacture, and optimize really the entire timeline from drug discovery. to approval to getting it into the hands of patients at a much more favorable rate. I mean, you have to think about how the average drug, it can take over a decade, a couple billion dollars on average to bring a drug to market. 90% fail in later stage trials anyway. And so AI is really being used as an automation and data engine to attack a lot of the bottlenecks

Starting point is 00:16:41 that have historically made drug development so slow. And you can see that everywhere from, you know, the big pharmaceutical companies that are leveraging AI models behind the scenes to biotech companies that are much more kind of upfront about the use cases for which they're finding value in AI. I mean, you know, Madurta is a great example, right? Obviously, they're working on their cancer vaccine with Merck. This has been something that's gotten a lot of attention from investors recently. Well, they have their own, you know, system called Maestro that helps orchestrate these personalized vaccines. It reads a patient's tumor sequence. It predicts the best immune response. Crystal Biotech is another really interesting

Starting point is 00:17:15 company, they make reducible gene therapies for rare skin disease, and they are using AI and machine learning to run real-time quality control in their production lines. So seeing the way this technology shows up in really practical use cases as someone who is following AI broadly, but is also a health care investor, that's really exciting, and I think it creates a lot of opportunity for investors. Rachel, one thing I've seen in the healthcare space and chatter, I guess you will, and you can see it in performance of stocks, too, is contract resource organizations, MedPACE holdings, ICVA Holdings, companies like this. They're the worker bees of the healthcare industry, the ones that actually conduct a lot of

Starting point is 00:17:54 clinical trials for startup biotechs and things like that. There has been a thesis that AI is going to kill them because it takes away that drug discovery side of the business. But I've also heard the counter that says, well, if drug discovery is booming because we've, you know, been able to get so many out of drug discovery through AI, doesn't that just make all this clinical trial work that much more productive or not more productive, but there's just going to be that much more of it because we have that many more candidates. So where do you land on that spectrum? Are we seeing like the death of the CRO because of AIA or are they going to be absolutely booming because they have to conduct all these clinical trials? You know, it really depends on the individual

Starting point is 00:18:36 CRO. There was a lot of fear around this, especially, I would say, a year ago and, you know, well into 2024 and 2025. And again, it really depends on the organization. I mean, like, historically speaking, CROs would make money by billing for the number of people typing data, monitoring sites, redlining contracts. And in a day and age where very user-friendly AI tools are optimizing a lot of these processes behind the scenes for healthcare organizations, obviously those types of kind of wrote administrative tasks, that's not as necessary. But, And we've seen some biotech startups that have actually kind of delayed signing some of their CRO contracts.

Starting point is 00:19:11 But because AI is accelerating the early stage drug discovery process, which is one of the most time intensive phases of developing a drug, we are seeing a lot of opportunities for these more tech-fluent CRO organizations. And so I think that that will continue to be an opportunity for the businesses that step up. There are certainly some of these kind of old school mom and pop organizations that may not stand up to the test of it. But companies like MedPace, for example, you know, they are very prominent global CRO. They have a lot of proven relationships with players in the space. So I think that, you know, companies like that are going to be just fine, but something to watch for sure.

Starting point is 00:19:50 Coming after the break, we're going to hit the mailbag. You got to try breakfast at A.W. You got to try break. And what better way than with a delicious pratt organic coffee, starting with just $1 all day, every day, Now until December 31st. You gotta try breakfast. I'm participating A&W locations in Ontario. Do you wish you could just hit skip on the worst parts of your life? You know the same way you can skip an ad?

Starting point is 00:20:32 I get it. I'm Siyaya 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.

Starting point is 00:20:56 Hey, everyone. Reminder, if you want to get a question into us, email us at Podcasts at Fool.com. That's Podcasts with an S. I also put the email in the show description so you can get it there as well. Today's comes in from James from Atlanta. He's a huge fan of the show, been listening since COVID, and loves what we do. So the question is, we'd love to hear everyone's thought on how you view dividends, both in the return calculation and the company's messaging. While I see the role they play in energy stocks,

Starting point is 00:21:21 he mentions Exomobiles, Chevron, kind of that, been doing it for a long time, growing dividends here. I struggle to see the value of a growth stock paying one. He uses Disney, Google, or Alphabet more specifically. And as I would think that the capital could be better spent on capex and business growth rather than dividends. So where do you kind of land on the spectrum here?

Starting point is 00:21:42 Is it, you know, should these growth companies like Alphabet and Disney be not spending dividends and probably be spending on business growth or, you know, is there value into the dividend? One of the things you have to look at is a company is trying to communicate with investors, what sort of investor they want to attract. So when you bring up two interesting examples, you know, Alphabet would be a case of, hey, we got so much cash. We got to return this somehow. Dividend, I guess. Disney is a different story where they want to have dividend investors as part of their investor pool. So when you look at what are the sort of the pools of investors, that's an area that they want to play historically. So that's, I think something that you need to think about is that part of this is communication with investors.

Starting point is 00:22:29 With that said, I would love to lobby for a regular dividends. I think one of the things that we get stuck on with dividends is they always have to go up. They always have to be consistent. That's not the way the business works. If you own a private business, you have a great year. You just pay yourself more this year and maybe don't pay yourself as much next year if it's not such a good year. We should do that in public markets. But that said, one of the things that I think about with dividends is it's actually a lot of times

Starting point is 00:22:55 a sign that a company doesn't have as many investment opportunities as they once did. You don't see young companies paying dividends. You don't typically see high growth companies paying dividends. It's much more mature companies. if you're looking at dividend stocks, just understand where those companies are on their investment phase. Make sure the underlying business is solid because if it isn't, then that dividend isn't solid. You risk the future dividend cut, which then again goes back to the first thing I said, which is the investor pool, you know, maybe shifts because they cut that dividend. Now your stock

Starting point is 00:23:29 starts to drop and it's sort of a downward spiral. So make sure that underlying business is good. And if it is, if they pay a dividend, fine. If they don't, it's not really something that I worry about. But at the end of the day, whether you're looking at dividends or not, make sure the business is on solid footing because that's ultimately the most important thing. Yeah, I think that's right. And I mean, just injecting cash back into the business doesn't necessarily create more growth. I like when I see a business that is flush with cash rewarding investors in the process.

Starting point is 00:23:57 I mean, it's a discipline signal, right? I mean, it's telling you that a company isn't going to hoard cash when the balance sheet can afford it. They're rewarding shareholders. Obviously, as an investor, it's cash in your pocket on a schedule. And that's something that can be really favorable for, you know, reinvestment, just to grow your overall returns with time. And obviously, dividends open up a stock to a much bigger, you know, buyer base. A lot of the funds, a lot of the conservative pension money are mandated to only hold dividend pairs. So more demand can meet more support under the price. Now, obviously, dividends can be less tax efficient than buybacks, for example. You know, it's not a guarantee. Even Disney posits

Starting point is 00:24:31 dividend back during the pandemic briefly. So that can happen. But as a general rule, I mean, when you see companies that have, you know, an immense baseline of profits and cash, they have a favorable dividend payout ratio, they're able to support that long-term payout to investors. That can be great if you have a diversified portfolio and you're looking for extra ways to generate capital. So as someone who likes growth stocks and also likes dividend stocks, I tend to include both types of businesses in my basket of holdings. Travis, I think that might be one of the first times I've ever heard you advocate for American companies to act more like European companies with irregular dividends. There's a Melko Crown.

Starting point is 00:25:13 I don't know if that's still the name. They've changed the name a couple of times, but they actually do this where they think they pay out 50% or a third of their net income as a dividend. So the dividend kind of goes all over the place. But it makes a ton of sense, right? It just makes sense to not get stuck in this position where you go, oh my gosh, this company that I own. is a 7% dividend yield, but they're paying more than their net income and their free cash flow and dividend. That's nuts. I interviewed a CFO in the oil and gas industry once, and I proposed that idea of like an irregular dividend. I was like, you could pay like a penny a quarter and then just pay

Starting point is 00:25:45 like excess like what you think is distributable. And he's like, I would get murdered in the capital markets if I ever tried to do that. No, that's true. Winners arts does this. So there are examples out there. Yeah. But you have to kind of establish a track record with the market and be like, This is what we do. And if you haven't done it before, you're probably going to get in trouble with the market when you do it. Well, that's all the time we have here today. As always, people on the program may have interest in the stocks they talk about, and the Motley

Starting point is 00:26:11 Fool may have former recommendations for our guest. So don't buy ourselves stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and it's not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. See our full advertising disclosure. Please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motley Fool team for Travis, Rachel and myself,

Starting point is 00:26:30 Thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - AI Leaders Want to Slow Down Development For…

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