Motley Fool Hidden Gems Investing - Google Flexes Its AI Muscles

Starting point is 00:00:00 Is Google back in the AI lead? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Horn. I'm joined today by Rachel Warren and Lou Whiteman. And guys, the big news yesterday in the market and the technology was Google had their I.O. event. Lou, I'm sure you watched the whole thing, didn't you? I.O.

Starting point is 00:00:25 This was a very interesting presentation. they announced a whole bunch of different things throwing spaghetti at the wall that said it seems like they are pushing forward with their really good models depending on who you are and then also changing their products a little bit we thought or a lot of people thought a few years ago hey 10 blue links are going to be dead google's in real trouble now we're seeing some updates to google itself the google website that's going to incorporate some of these ai tools their flash 3.5 model is getting really good reviews as long as you aren't a coder we'll maybe talk about that in a moment but when you looked at this it seems like they're kind of playing a card that nobody

Starting point is 00:01:07 else can play with their vertically integrated stack with their consumer focus sure they're not going to win where anthropic is but their prize may be even bigger in the end is that the right way to think about it kind of from the top we need to do a disclaimer here okay these events are designed to impress. And maybe with the notable exception, if you're an investor, you should mostly ignore these. That day when Steve Jobs stood up on stage and said, we invented the iPhone. Yeah, that day you probably as an investor should have listened. But for the most part, investing off of these events and taking this as gospel is a bad idea. It doesn't make it mean it's not worth talking about. It does show where they're going, but we shouldn't take any of

Starting point is 00:01:46 these product demos or announcement too seriously. If announcements were product successes, we'd all be at parties with Bella Ramsey right now, knowing who we're at the party with because of Siri, right? I mean, that commercial, I don't think that has aged well at all relative to reality. They're not the only one. But if anything, I don't know. So my takeaway here is I think what you said is right. Of all the AI companies we talked about, Alphabet is the one with the most ways to win. And truth be told, we don't know what AI will look like in five years. We don't know whose next model is the best model. We don't know how much consumers or enterprises, they're going to be using AI. We don't know to what extent or how. So the one with the most, I guess, irons

Starting point is 00:02:31 in the fire and the most ways to win is probably the one that should be the most attractive to us. And I think Google, if nothing else at this event, made the case that they have a lot of irons in the fire and a lot of ways to win. Rachel, one of the things that stuck out to me is that they seem to be looking at artificial intelligence kind of differently than a lot of these other companies. You've seen Anthropic has always been focused on coding. That was always their secret sauce. OpenAI has kind of been forced to move in that direction because that's where the money is. So they're following Anthropic towards that pile of money. And they're, by the way, losing market share in chat GPT to Gemini, who now has over a billion monthly users or 900 million monthly active users, over a billion using the AI mode and search.

Starting point is 00:03:15 But it seems like one of the takeaways is that their world models, Omni is what they talked about. I don't think we can try that one yet. But they're trying to build this world where you can put anything in and then get anything out, which is very different than the other successful companies today. Is that the right strategy? And we're not technology people, but it seems like the kind of thing that I could see myself or my wife or even my kids using more than I could Anthropic to write code. I do think that that's the point, right? I mean, so much of what we have seen from that core business, right, the search business, it's consumer facing. And I do think that is sort of the driving nature behind a lot of these rollouts we're

Starting point is 00:03:55 seeing, right? A lot of what we've talked about with AI and specifically with Alphabet's approach has been sort of the smart chatbot, right? Gemini, you type a question in a box, get a response back. So I want to talk about a few of the things that they introduced. You know, I don't think this moves the needle right now, but I do think it speaks to their broader strategy. And I think if you're an investor, you're interested in this business, it's important

Starting point is 00:04:13 to understand where they're going. So that Gemini Omni that you mentioned, it's this basically world model. It doesn't just look at text. It can look at video. it can listen to live audio, it can understand complex code all at the exact same time. And the idea is that it can generate accurate, realistic content. It's even coming to YouTube Shorts. So the goal is to help creators edit their video. They paired this with their new Gemini 3.5 engine, which I think we'll talk about in a little bit. It starts with a 3.5 flash and basically it's

Starting point is 00:04:40 supposed to process responses four times faster than prior Frontier models. They unveiled Gemini Spark, they're calling this a 24-7 personal AI agent, right? We've been talking a lot about the growth of agents and what that can mean for consumers and businesses alike. So unlike a chatbot that tells you how to do something, Spark actually does it for you. So it connects to your Gmail, your Google Docs, about 30 different third-party apps like Adobe, Uber, Dropbox. So you can imagine telling it to say, find a flight confirmation in your email, check your calendar, calculate the driving distance, and so forth. And then the final thing is they gave their core search engine a major facelift, the biggest one in about 25 years,

Starting point is 00:05:17 because they have integrated all these models right into the daily queries. They actually added a feature called Ask YouTube. So I think a lot of this is consumer facing. We're going to have to see what the adoption looks like. But having so much of this built into these platforms that millions of people use every day, I think is actually a really genius approach to Alphabet's world of AI. Lou, I want to end this segment on this. We're going to stick with Google I.O. and what the implications are in the next couple of segments. But we've been talking a lot and asking questions about what's the actual payoff from artificial intelligence, especially as these companies spend trillions of dollars to build out this AI infrastructure. One of the things

Starting point is 00:05:57 that really stuck out to me is that Flash 3.5. So the new model, you can actually use this today. if you go into Gemini, you can use Flash 3.5. I've found it to be pretty useful, but it is significantly more expensive than previous models to be exact 22 and a half times more costly on a per token basis than Flash 2.0. So we've heard a lot of these companies talk about where compute constrained, meaning demand is higher than supply. I have always wondered if demand is actually higher than supply why aren't you raising your prices google actually did it is that a sign that we're moving to this hey we need to actually make money on all this compute phase or is this just yeah we don't necessarily want to be the anthropic of the world but we want to get our pound of flesh here

Starting point is 00:06:42 maybe here's what strikes me about this is and we'll get into consumer versus enterprise in a second but i think that this shows maybe that just getting all of the consumers isn't the way to go Yeah. I think pushing towards profitability, we have to at some point, right? We don't need just profitability. Historically, these companies had double digit return on invested capital. Look at the invested capital that they are putting into this project to get double digit returns on that, to get even like, you know, mid teens, like they've done before. Prices need to go significantly higher from here. I think that at least they are looking at that or experimenting with it. And I think it's probably safer to experiment with the consumer than it is right

Starting point is 00:07:23 now, necessarily the enterprise. So maybe, I don't know though, if we're at the verge of just the floodgates opening and prices really hitting reality now, I think it's going to be subsidized for a while longer. Well, it'll be interesting to see what the economics for Google Cloud looks like next quarter, because those margins have been really, really good. They may even be going higher with this one. We will see. We'll get to, is AI going mainstream in a little bit different way in our next segment. You're listening to Motley Fool Hidden Gems Investing. New from Nespresso. Blend wellness into your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving.

Starting point is 00:08:09 Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. welcome back to monthly fool hidden gems investing i have a question about ai going mainstream and you know we see these stats about chat gpt having so many hundreds of millions of users if you're on twitter you can't go anywhere without anybody talking about how much they use ai in the real world i have a harder time believing that that's actually the way that people are using artificial intelligence and i always use my wife as a proxy not an early user of chat gpt but she suddenly

Starting point is 00:08:54 saw oh this ai mode shows up in google and in google search and that's how they've gotten to this point where they have i believe the number was over a billion monthly active users with ai mode another rachel you mentioned they're they're moving more of these ai tools into search the products that we already use they have distribution with chrome they have android rachel is this the kind of thing that will take AI to another level from those early adopters who were willing to download ChatGPT, sign up for an account, and heaven forbid, maybe even pay for it, to a world where it's just in the browser, we're just using it, and it just kind of slows, it's a boiling frog of artificial intelligence. Five years from now, we're suddenly all using Google's products because

Starting point is 00:09:40 they just folded into what we were already using. I think that's the idea. I think it remains to be seen what that long-term utility is, but I think that's where the success lies. If you're having these types of tools woven into the everyday experience for the consumer so that it becomes second nature, I think that becomes something where the runway to adoption is much more prolonged. I think if you think about it from the consumer perspective, the last few years, AI has felt a bit like a tech novelty. Maybe you had to go out of your way to open up a browser tab. And I think what Alphabet, what Google's trying to do is really bridge the gap between the tech enthusiasts you know, who have been talking about the utility with great excitement for a number of years now

Starting point is 00:10:17 and everyone else. Right. And that's the key point. And I think that idea that AI is shifting away from some of these complex prompts, morphing into a more seamless, invisible utility that helps people navigate daily life. I think we're getting there. But I think in the long term view, it's still very, very early days. It feels like we've been talking about AI's mainstream moment and whether or not this is it for a good year plus now. I mean, look, the funny thing is, is that on consumer side, it's not really like I have a choice, right? It's just showing up in my search results. So whether or not, I mean, I do think that's the best way to teach behavior. So I think it is happening, but look, I go back to this. I don't know how much the consumer matters

Starting point is 00:10:55 right now. There's implications of the future, which we'll get to, but right now enterprise is where it's at to get that return on invested capital. Anthropic is showing that. And it's important to remember Alphabet, congrats for winning this. And it does look like you're winning this. But look, that is backfill for them. That's holding serve. That's not growth because they are the ones that were seen as vulnerable. Where the thesis has changed is it's not Alphabet will be destroyed by AI because search will be destroyed by AI. It's Alphabet can hold serve. So yes, this is good. This is especially important for Alphabet since they were the leaders in the club hell. So they need to retain, but I am hesitant to make too much of it just because I think this

Starting point is 00:11:40 is just, we're in a very long process of retraining the consumer or maybe redefining the internet and what the internet is. And yeah, the one with Chrome is winning. I don't know if that's a shock or really investable. Yeah. I will note that on the coding side, which is where Anthropic has really gained market share and grown a ton over the past year, it does not appear that at least 3.5 flash is going to be taking market share from them anytime soon. That's been the early reaction on other areas, it does seem like 3.5 has been a little bit better to quote a tweet from Aaron Levy, who is the CEO of box financial services significantly better public sector healthcare and life sciences 3.5 flash is significantly better than some of their older

Starting point is 00:12:25 tools like flash three so it does seem like there's improvements but not necessarily equally distributed in the world of ai all right i want to also talk about something that i think was very interesting and they've been talking about for quite a while which is hardware and glasses is something that i think we're moving to a world where we can see that some sort of ai augmented reality glasses are the future of hardware well how long that adoption curve takes is maybe up for major debate but rachel they did announce some partnerships with gentle monster and warby parker very interesting that warby parker's stock plummeted yesterday because i think people were so unimpressed by these glasses i mean those were actually glasses to be to be honest i feel like

Starting point is 00:13:11 i could have designed those yeah that there was uh let's just say there was a instant wave of skepticism and i think you know the internet had a bit of a field day joking about the design and also, I mean, anyone who remembers the Google Glass backlash of a decade ago, maybe you've got a right to be cynical. So how do these things work? So they basically embed these tiny low power cameras into the frame. There's dual direction speakers into the arms of the glasses, and then there's this display on the lens. They don't actually do heavy computing. The idea is that it's going to stream a live video feed of whatever you're looking at via Bluetooth to your phone so that Gemini acts as like a real world visual assistant. There's a lot of questions

Starting point is 00:13:46 about the battery life, the frames overheating, the privacy nightmare as well. So I think there's a bit of design and social flaws, perhaps, that still have to be explored. I don't think this is where we get the consumer on ramp to AI. So I'm actually quite skeptical about this particular hardware edge. I guess we'll see what that looks like, though, in the next couple of years. I am yet to be convinced we don't already have the AI device sitting in our pocket right now is the phone. So I mean, again, Apple sort of wins by default. It is. Well, and Google or the pixel. Yeah. I mean, look, I'm just going to be that guy and do this because I do think you ignore this until it works. You know, if you go by what companies promised at IO like events, we'd all be

Starting point is 00:14:27 segueing to work on streets devoid of cars. We'd get our nutrition from Juicero health presses instead of actually going to restaurants. And we'd be doing our work via the humane AI pen. remember that? Look, AI will cause hardware to evolve, but whether or not this is, and maybe I'm just going to show my ignorance here, but here's my question on the glasses. As someone who actually wears glasses, okay? The Meta Ray-Ban version 2, so the newest, they say battery life between four to eight hours, okay? Now, I'm going to guess that- Gets you through breakfast. Well, right. From what I know about consumer tech, I'm guessing that it isn't the full eight hours after a few weeks, right?

Starting point is 00:15:07 Yeah. So what do I do when I'm charging my glasses midday? Do I take a nap? Do I not see? I feel like there's some really fundamental questions. Be dangerous, Lou. Or do I have to buy two pairs of these glasses? I just feel like there is a long history of tech innovation

Starting point is 00:15:22 and lives getting better for it. And again, the iPhone, the things we do on our phones here, there's also a long, long history of companies putting out products because they think they're cool and not actually thinking, wow, consumers will like this. I am still of the opinion that these glasses are more novelty than essential. Why do I need a device to reiterate what is on my phone and to reiterate what is on my watch?

Starting point is 00:15:49 And I'm already paying for a watch to reiterate what is on my phone. I get that, oh, it would be neat if I just saw directions as I walk through town instead of having to look down at my phone every five minutes to see the directions go through town. But we've got way more for that. Right. I don't see the killer app here, I guess is the way to put it. To your point, and I think this is why this is an interesting topic for investors,

Starting point is 00:16:11 Silicon Valley has been promising the next big thing for a very, very long time. And I think even in a world of AI, we're seeing that the incumbent, Google, who was supposed to be disrupted, is just going to continue being a strong company because they just do the boring stuff that people want to do. Yep, it's not the best chatbot. It's not the best at coding, but it is the thing that's in your browser and answers the questions that you need. And people are used to it.

Starting point is 00:16:38 And that's all most people, most normies want out of their AI. And let's be clear, look at the success of the iPhone and you will understand why every other tech company would like to create the next iPhone, right? That doesn't mean it's necessarily going to happen, but there's a real reason that they are trying to do it. And if they succeed, there's a real reason investors can benefit. But as an investor, again, I think it's worth waiting till you actually see some traction here, because I don't know if there's a void that needs to be filled at this second. When we come back, we're going to get to some potential ancillary or downstream effects of Google's announcements.

Starting point is 00:17:13 You're listening to Motley Fool Hidden Gems Investing. to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com when you're a mid-sized business you need every competitive advantage you can get like an ai solution that works for you not against you sap grow is built with ai embedded at its core, working across every system. And it's ready to go from day one, so you can hit the ground running. Bring it with SAP Grow, AI cloud ERP for any size business.

Starting point is 00:18:14 Welcome back to Motley Fool Hidden Gems Investing. It seems like Google's hitting on all cylinders, at least on the consumer side. They've got their models doing well, TPUs are doing well. But Lou, I want to know about the other implications across a lot of these companies that are some of the biggest companies in the world, some of the biggest companies, best performing stocks in the market. OpenAI is losing market share, which you mentioned. NVIDIA is growing, but also losing market share. I mean, that's just the reality if TPUs are growing this quickly. Do those trends get worse? Is there upside for companies like Broadcom, who's a partner? When you see growth at Google, some of these new products and their improvements with search and maybe keeping the

Starting point is 00:18:54 share that they have there, where does your head go from some of these other investments? The chip thing is fascinating because we had the Cerberus IPO too. And it does seem like it doesn't make sense that indefinitely everyone's a winner because we won't keep growing forever. So NVIDIA is a winner. Google is a winner. This new company is, I don't understand that, but I'm not a chip person. I think probably the truth is somewhere in the middle and there's the market for all

Starting point is 00:19:18 of these, but maybe not. Isn't the possible impact though, just margins go from 80% to 40%, which is what you would be more historically normal? Yes. Yeah. Gangster capitalism is over. You can't just extract whatever toll you want for this. You actually have to compete, you know. But look, here's and these are sort of the boring answers on losers. But I think there are a couple losers to look at. First of all, this has been true for a while. SEO focused content creators and maybe publishers in general. What Google is trying to do here is keep you in its ecosystem. Gone are the days that they linked you to other sites. But the days of the Internet, some of the best sites on the Internet is those silly forums that allow you to just fix something that needs fixing or something. And it feels like that's all just going away. So I'm a little sad about that. It's all on YouTube now, Lou.

Starting point is 00:20:08 Well, it is, I guess. But look, Google is definitely their goal is to keep you there. And I don't think that's good for those who have built their business around getting those links. The other one, and this is probably too hot of a take, but should Amazon be worried about this? I mean, one thing we didn't talk about is the universal cart. Yeah, the shopping. Yeah, that's going to be interesting. AI-driven shopping tools.

Starting point is 00:20:31 It feels like, and this is a very oversimplistic, I don't know if they can do this, but it feels like Google is trying to take every other retail operation on the web that isn't Amazon and make them a consolidated Amazon killer. like where you could just like the reason we love amazon is you can get anything there right and you can just check out and go so on the flip side that would mean that shopify would be a winner because they're helping power those sites yeah i guess unless google wants to eventually move there but look if they can become the shopping default for discovery and research why can't they be the place you check out too so you know which isn't ideal for shopify but i do think that Yeah, I'm not ready to short Amazon on this. I think it's still ambitious and it involves changing consumer habits. Good luck with that. But I do think that Amazon is sort of the interesting company to spotlight with what Google is doing. Rachel, what comes to mind to you?

Starting point is 00:21:23 I think the big takeaway for me is the AI landscape. It's not heading towards a winner takes all monopoly. I think what we are going to continue to see is the fragmentation of the space into specialized territories with every player playing to their own kind of specific strength, right? I mean, we've been talking a lot about Alphabet today. Their advantage is the sheer distribution they have. They have an unmatched flywheel. You know, they're weaving Gemini into search, Android, YouTube. They're winning in that passive consumer lane, especially with people that don't care about AI models, but maybe they just want to use their phone or their search bar to get smarter results and outcomes. I mean, you think about OpenAI, right? They have the agility,

Starting point is 00:21:58 the developer mindshare. They've also got very high operational burn rates. They have a very heavy reliance on capital backing, but there is a very different place within this industry in which they operate. Then you go to NVIDIA, right? I mean, they're kind of insulated from the software battle because they control that foundational hardware toll road. Obviously, Alphabet is scaling their own. But it's notable that the two of the biggest companies, Google and Anthropic train their models on TPUs, not on NVIDIA chips. Well, and that's the thing. And that is one note I want to add. We were talking about sort of the lack of, at least in my view, utility of these new glasses. I think the hardware utility for

Starting point is 00:22:33 Alphabet is as they're scaling that TPU business. But do I think that means suddenly NVIDIA chips go away? No, I think we could live in a growing enterprise world where there is room for multiple successful players. I think we're seeing that advantage play out. And I do think 10 years from now, this is a far more fragmented space than we see today. Definitely a lot for investors to follow, especially since these are some of the biggest companies in the world. They drive the S&P 500. They drive the NASDAQ. So whether you're investing in index funds or individual stocks, probably a pretty big implication for you. As always, people on the program may have interest in the stocks they talked about, and The Motley Fool may have formal recommendations for or against,

Starting point is 00:23:12 so don't buy or sell stocks based solely on what you hear. All personal finance content follows of Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show. For Lou Whiteman, Rachel Warren, and Christy Waterworth behind the glass, I'm Travis William. Thanks for listening. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Google Flexes Its AI Muscles

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.