Motley Fool Hidden Gems Investing - Google Speaks, OpenAI Listens

Episode Date: May 15, 2024

Step aside, Siri. A new generation of AI voice assistants has arrived. First, (00:21) Asit Sharma and Mary Long dive into today’s inflation report and talk through the latest AI offerings from Alphabet and OpenAI. Then, (16:03) Ricky Mulvey asks Jason Hall whether co-CEOS are ever a good idea. Stock Advisor discount for podcast listeners: www.fool.com/asit Companies/Tickers discussed: GOOG, GOOGL, MSFT, BOC, SKYH Host: Mary Long Guests: Asit Sharma, Ricky Mulvey, Jason Hall Engineers: Dan Boyd, Heather Horton Learn more about your ad choices. Visit megaphone.fm/adchoices

Her is happening, and you're listening to Motley Fool Money. I'm Mary Long, joined today by Asit Sharma. Asit, wonderful to have you here. Mary, I'm excited to be here. So we've got some macro data that landed on our laps today. We're going to get to that also later on. We're going to talk about some AI updates from Google and from OpenAI. But again, let's start with the macro stuff. So the April inflation report is out as of this morning. Big idea up front is that prices are cooling. Core CPI, which is the measure that excludes the more rollercoaster-y stuff like food and energy, that rose 3.6% year

over year. That is the lowest reading since April 2021. So is the Fed doing a victory lap? Yeah, Mary, I think the Fed is doing a victory lap today, but let's not get ahead of ourselves. Don't picture a parade-style lap around an F1-sized circuit. Instead, picture Jerome Powell or your favorite Federal Reserve Board governor of choice taking a brief happy dance around their office desk, and then sitting back down and pulling the charts back up. I mean, this is just one month of data, right? And previous months, we've seen inflation actually exceed expectations. So I always say you need more than one point of data to make a trend. But I think this does bump up the possibilities that we could have that September rate cut that the market has been

asking for. Awesome. I have to ask, do you have a favorite Federal Reserve governor of choice? No, I don't actually. I think Ricky had once tricked me into, I think it was Jerome Powell attending some kind of rock concert. Grateful Dead concert. Grateful. And I still don't know if that was the real Jerome Powell. And since then, I've adopted a policy of being very noncommittal, very objective about anyone at all that's involved in monetary policy, lest I get more hate mail. I'll also say we're being corrected live. It was not a Grateful Dead concert, it was a Dead and Co. concert. Well, excuse me.

But it was allegedly the real Jerome Powell. Okay, so with this macro data, we get all this information, a bunch of numbers. What in that report are you paying closest attention to? I think the thing that sticks out to me, and I've actually said this a few times over the last year on Motley Fool Money, is that stubbornly high reading of shelter inflation. So, the shelter numbers include rent. They also include an equivalency to rent that homeowners pay. They include lodging like hotels and other forms of third-party housing. That number just keeps pushing a little bit beyond the overall number. I think it rose 0.4% this month and is up 5.5% over the last 12 months. As long as that stays up, I think you've got one component there that

That is just going to be something the Fed focuses in on. I know they pay attention to that number. And also, it's a sticking point in the economy in general. When rents are high, when mortgage payments are high, that just cuts into everyone's disposable income. So I'm keeping my eye on that one. So you're keeping your eye on that. But broadly speaking, it sounds like markets were pretty positive on this data.

The S&P 500 and the NASDAQ, they each hit all-time highs this morning. And last I checked, the Dow was half a percentage point away from hitting its own all-time high. All that said, can you put those climbs into context a little bit? Wait a minute, Mary. Aren't you reading notes from like January of this year? JK, just kidding. We had such a strong 2023. And then in the spring, it felt like the market was limping along.

You know, we had those very concentrated weeks of selling. And now, you wake up and see that markets are back at all-time highs. It doesn't feel right. I'm thinking, what's going on here? Well, what's happening is, the leaders are starting to lag. All those big tech companies like Microsoft and Amazon and Meta that were leading the charge, and in fact, causing many armchair quarterbacks to say, this market is getting too concentrated, they've been taking a breather. Actually, we're seeing breadth in the market improve. One thing that I'm keeping my eye on is the S&P 500 Equal Weighted Index. This is a version of the S&P 500 Index that doesn't award weight based on market capitalization. It was trailing the S&P

500, its sister index, by a wide margin all of last year, in fact. When you look at the last trailing 12 months. The S&P 500 has returned about 20%. The S&P 500 Equal Weighted Index has only returned 19%. That's because of all those big tech names and huge companies that have pushed the markets forward. But looking at the last few weeks, the S&P 500 Equal Weighted Index is back, baby. It's almost equal to the S&P 500. What we're seeing here is the rest of the market is starting to participate in the advance. That's actually good news for investors. It means that these gains could continue if this trend continues. I'm going to pivot a bit because we've gotten some big AI updates this week. On Monday,

Microsoft's OpenAI hosted an event launching their latest version of ChatGPT. Yesterday, Google hosted its annual developer conference. The theme of that conference, no one will be surprised to hear that it was basically all AI. So I want to focus first on what this means for search, because that was a big focus of what Google was talking about. Changes to Google's bread and butter, the search engine, began to roll out to US users yesterday. Here's what those changes are. We get AI overviews, which are basically summaries that are going to appear at the top of search results, and a new planning mechanism. So you can ask Google to help you make a meal plan, and it will scrub different recipes for you. Or you can ask it to find a nearby gym

with a solid intro offer. What's this mean for me the next time I Google something? I think what it means for you and me, Mary, is two things. One is that we're going to have much more of a chat GPT or Bing-like experience. This is really a reaction to what it's like to search now on that search engine and large language model, respectively, or vice versa, respectively. But I think it also means that we're just getting one step closer to putting a stake into the heart of traditional publishers and any content providers who benefit from an advertising model. What this means is that you don't really have to click through to go to a site that has that data. If the search engine is acting like a chatbot, a large language model

chatbot, sort of summarizing it for you, giving you a nice overview, and giving you the assurance that, hey, I grabbed this from real sites. I didn't hallucinate this stuff. And here's the sites I looked at. Why do you need to click through? Some people will. But if I were part of a major publishing house, and there's several rolled up media companies with different acronyms, Ricky and I were talking about this recently, I'd be on the phone to some of these execs saying, hey, I use this stuff to see what I'm going to cook tonight too, but this is really, really bad for our business. Okay. So yeah, as you said, this is a stake in the heart of traditional advertisers. What does that mean for Google's

ad business? Yeah, it's sort of hard to parse out. I mean, they are a walled garden. So in one sense, Google is doing its best to keep you on its site as your main site to search, which does benefit their ad business. But at the same time, it also makes it more difficult for people to participate in that ecosystem, for businesses to participate in that ecosystem, if the results are going to be served up in summary format with attribution. So it's hard to say. To me, I think it's too early to tell. Probably the bigger story to follow continues to be this movement towards a post-cookie world. Google has its own solutions for privacy. There's a consortium of other advertisers and companies that are involved

in the demand side and the supply side of digital advertising that have these solutions. There's like 20 major ones. Probably the best known one is the Trade Desk-led UID 2.0. I think that's the bigger story right now, but gee, the pace that AI affects business, it's just hard to keep up with. I guess if we have this conversation in six months, it'll be all about what these search results meant and how that changed the landscape. It seems like a lot of what Google is doing with AI is using it to improve things that already exist, that it already offers. I'm guessing that in the future, we're not going to get a specific breakout line on Google's earnings that says, this comes from this RAI segment. Because of that, what will you be looking for to gauge

user interest in these improvements and to track the actual success of them? I think seeing that the run rate of advertising revenue doesn't diminish too much, to see that Google keeps up its revenue cadence and margin cadence is the easiest thing. If it does that, you know that the business isn't losing its sharpness at the margins, that Microsoft, OpenAI, etc., aren't taking share of those margins. That might be the easiest way just to work backwards and then look for the details. There are different sites that in research you can consult that monitor usage statistics as well. For those who are interested, you can go to some of those sites and just see what the traffic flow is like. But I think really for an investor,

it's understanding that the business still is operating at incredible margins. It's throwing off its free cash flow. That's still been the case with Alphabet, the parent company of Google, over the last several quarters. If you work backward from the numbers, they're actually not yet really losing in this space. They just haven't made quite the splash in the consumer's mind, in the brand presence that Microsoft has, OpenAI, Meta, etc. Perhaps a change to that last point. Another announcement from this conference was that of Project Astra. It's an AI assistant. It can run as a smartphone app and it's kind of being prototyped as a pair of smart glasses. You show Astra something through your video camera

that can be like a line of code, the view outside your apartment window, a bunch of dogs, and it will read that code, make suggestions to improve it, tell you what neighborhood you're in, come up with a band name for the dogs. If it sounds like Google Lens, it's because it is basically a souped up voice and video activated version of that. All that said, is this a game changer for Google? I actually think this is a small game changer. I mean, Google's so big, right? It's not going to change their whole game. But this is something very interesting. And Mary, when you and I were talking before the show, you had pointed out that you thought this was sort of cool. And I do too. I mean, this answers a fundamentally different question than traditional search has allowed.

the traditional search is like, okay, explain this to me. Give me the history of X. How do I do Y? When did Z happen? All those types of questions. Project Astra answers a completely different question. What the heck am I looking at? Where am I? I point at an object. Here's an object, reverse engineer it for me, speaking to your example of code. So I think this is very, very interesting. And it really posits a future in which a lot of the reasoning that we have to do by ourselves can be instantaneously solved when trying to figure out where we sit in a context. It's very contextual. So that's sort of cool. I think this is something they can build on. So we can't, of course, talk about AI without mentioning OpenAI, which hosted its own event

earlier this week on Monday. At that event, the Microsoft-backed company unveiled ChatGPT 4.0. The O, in case you were wondering, stands for Omni. This version is app-based, which is new for ChatGPT. It's also incredibly conversational. It can change its tone. You can show it a video of yourself, and it can decipher your emotions. It can analyze math problems through a video feed. I am not the first person to make this comparison, but it sounds and acts a lot like Scarlett Johansson's voice-only character in the 2013 Spike Jonze movie, Her. Another comparison you can't help but make is that between ChatGPT 4.0 and Project Astra. So based on the teasers we've seen and kind of recognizing that these announcements were only made in the past two

days, are there any key differences between the two technologies that right now stick out to you? You know, Mary, the biggest difference that leaps out to me, and you mentioned it, is just this conversational ability of ChatGPT 4.0. You can direct it to change its tone to be more conversation, and it really looks and feels like you're having this reasoned conversation with another party. It's less sort of a funny AI voice and more natural human conversation. conversation that you don't see in, in Astra project Astra, because that right now is more focused on sort of the image, uh, to text and other modalities. This is a modality that's really built

to, to have a conversation with. And in that sense, it's pretty cool. Although many of the things that the two technologies are trying to achieve are the same. You find out about the world through asking a question. Here, the question is geared to be voiced by a human. And the fact that OpenAI, which has a lot of engineers who worked with Google's DeepMind, this has been an obsession of different people in the AI industry going all the way back to the 1980s. Could we get to a point where we're not just making connections via algorithm, but we are producing the answers in a way that seems very natural to a human. And this starts to scrape the surface of that. So that just looked to me like something which is almost like a Siri killer.

We'll see. Just to drag Apple into this, what happens? Yeah, the conversational abilities of it are pretty impressive. You can ask it to sing for you. And there are videos in the demos, which some of these things with Project Astra and with GPT-4.0 are better experienced and seen than maybe they are described. So I'll include links in the show notes to demos of each. But in one of the demos for GPT-4.0, you can, the demoers are asking it to be more sing-songy, to be more this. And it's pretty amazing to watch it, watch the technology adjust itself accordingly. Asit, thanks so much for the time for talking big picture stuff and more personal stuff with me today. Appreciate it and talk to you again soon.

Thanks so much, Murray. This was a blast. dot com slash asset. I'll throw a link at the show notes for you, too. A week ago, Boston, Omaha, a holding company touted as a baby Berkshire, had two co-CEOs. Now one remains. Motley Fool contributor Jason Hall joined my colleague Ricky Mulvey to discuss how this shakeup changes the thesis for Boston, Omaha investors. We're going to get into how the thesis around Boston-Omaha has changed with Rosex's departure. To set it up, what was the original thesis for investors buying Boston-Omaha stock like myself? It gets tossed around baby Berkshire. We're always looking for the next Berkshire

Hathaway company, where you have really good capital allocators. Of course, the late Charlie Munger was the partner for Warren Buffett there. Taking your money as an investor in the company, finding great businesses to acquire, building great operating holdings, subsidiaries that generate great cash flows, and then using those cash flows to go out and invest, buy more operating companies, but also buy Coca-Cola and American Express 30 years ago, buy Apple when it's trading for 15X cash flows. Those sorts of things. We're always looking for the next one. We thought that was the idea with Boston Omaha. That was a big part of the thesis. Interestingly enough, we throw the baby Berkshire thing in there. Alex Rozak, the co-CEO who

is no longer with the company, well, guess who his great uncle is? None other than the Oracle himself. We branded these guys very early as great young capital allocators, deep skin on the game. They're going to invest our money for us, and they're going to allocate it well, and they're going to help us build wealth. And the results of their capital allocation skills are still an open question with not the best performance, if you look on basically any time frame. So, co-CEO Alex Rosick is out. That kind of takes away that Buffett comparison.

But here's what bothered me about it, Jason, is that the press release came out a day after he left the company. And I like to hear about CEOs leaving before they leave the company, so you know there's a nice little transition going on. I mean, I'm taking this as a red flag, are you? It's a yellow flag. I will say, the timing of the press release really changes it a lot because it's very par for the course for this company. They're very quiet. Again, it's the inevitable Berkshire comparison. They do things similar. They don't do calls

with analysts on a quarterly basis. They hold an annual meeting. They issue a press release. They drop their 10-K and they drop their annual report. And then they have a big, deep, well-written annual letter to shareholders. Kind of that similar model. It's not a surprise to me at all that this is how it unfolded. And again, I think part of it, too, is, we have a CEO in place that was the CEO before this happened. He's just no longer the co-CEO. The hand on the rudder is the same, so there's less concern about managing through some period of transition where maybe it's good for investors to know advance of that, so you're not a little concerned about it. I'm not so concerned about the timing, but I'm very concerned about what does the future

of the company look like as a result of this massive, massive change in how they're planning to allocate capital going forward. Maybe I should put my red flag away. Maybe that was a little hyperbolic. I'm putting that away. I'm going to my closet. You can have a yellow flag, even two yellow flags. This also begs the question, if you have two CEOs, you have one standing, one leaving, why do you think Alex Rozak is the one taking the departure and Adam Peterson is the one who's staying put? I think there's a couple reasons. If you think about it just from a structural perspective of Boston, Omaha, the assets that

it owns, the market value of it, it's trading for a discount to book value, possibly it's a discount to the actual net asset value, the actual market value of those assets? There's questions, because they have $190 million in Goodwill. But I think the assets are probably worth more than the stock's trading for, and interest rates have skyrocketed. If I'm Adam Rozek, and I'm this hunter that's going out there looking for acquisitions, looking to grow the business that way, it's not an attractive vehicle for me, if we're being honest. You have these existing assets that are in place, they're generating cash flow. It seems like Adam Peterson is more of the farmer. He's the one that wants to take those existing assets,

leverage them as good as possible, take care of those assets, and then take the produce that they generate, the cash flows that they generate, reinvest back in the business, acquire more billboards, bolt on an insurance agency expansion, if that makes sense for the surety insurance business, expand into new neighborhoods with the fiber network, not go invest in a startup HomeBuilder. Let's give Roseanne and Peterson both some credit. They've had some successes in that way. Think about DreamFinder Homes and Sky Harbor. They invested in some things that went public, and they made a ton of money on those things. They still own some Sky Harbor, but they're completely sold out of DreamFinder Homes. Besides those things, though,

the core operations of the business so far hasn't been a cash cow. Doesn't make sense for Rosek. Then you factor in this thing that I think is even more important. Philosophically, Adam Peterson has a bigger economic interest in the business. They both own a similar amount of the super-voting, non-traded founder shares that they have. It's a little over 50% for Peterson, just a tiny bit under 50% for Rosek. But then, in the common shares that you and I can buy on the market, you factor those in, and Peterson's got a far larger economic interest in the business, makes sense that he would be the one that would stay. It could also be seen that the interest rates have affected this company, especially for someone

like Alex Rozak, who wanted to go out and hunt acquisitions. That becomes a little bit more difficult when the cost of capital rises. Yeah, it's a double-edged sword. Your stock's too cheap to use it as capital, and then capital's too expensive to use it as capital. Taking on debt is a real challenge. So, no matter how you'd want to try to leverage and grow the business, it's a tough time. Margin of error is much, much tighter to try to make good acquisitions. Yeah, there's a lot of reasons why that previous model is not best served for this business at its current market value, discounted to its book value. So, here you go. Rosex out. So, you've mentioned book value a couple of times. What is Mr. Market saying about

Boston Omaha by having its market cap trade below its book value? And for those listening, it's just the assets minus the liabilities. Yeah. The short version is, I think there's two things the market is saying. The No. 1 thing that I think they're saying is, you haven't shown us the growth. We don't fully believe in your business model because we haven't seen high rates of return. I'm not talking about the stock price. I'm talking about returns at the business level, generating cash flow and earnings growth. You haven't demonstrated the ability to generate returns. We're not going to pay a premium for a business that's not showing the ability to generate returns. The other thing that the market's saying, I mentioned earlier that

$180 million to $190 million in goodwill that's on the books. Goodwill is price that you paid above the market value of an asset to acquire that asset, because you think it's worth more and you think it's going to generate additional profits for you a long time. I think the market is probably also taking that goodwill and discounting it from what it thinks that the business is worth. If you haven't generated returns, it's going to be very questionable about the price that you've paid for assets in the past being the right price, put it together, and you get a business that's trading for a discount to market value. Again, I think that it's probably a discount that's an opportunity for investors if Peterson can deliver. If you

look at the operating cash flows for the business, they've been okay. They're great. Not great, but okay. But the market has questions for good reason. I think that's the main thing to remember. We talked about the thesis at the beginning, which the company is going to use your capital to grow businesses and go out and build their own businesses and things like billboards and broadband. The thesis has changed. You've written about this, where the goalposts have shifted. Now, if you're buying Boston Omaha shares, it's a little bit less about the capital allocation, and more about a bet on Adam Peterson being able to grow the businesses he already has. Yeah, that's exactly right.

Again, we mentioned a couple of those early investments the company made that were big wins for companies that went public, but we haven't seen just a focus on the core business without the distraction of those external focused investments. Again, operating long-term through the interest rate environment we're in, where you really have to be more disciplined about how you allocate capital and be thoughtful about how you expand to live within your own means, to live outside of your own wallet and not going with your hat in hand to use somebody else's money. It's clear, if you look at everything that's been said by management and the press release, if you look at the filing that they did that broke everything

down, Peterson's laser-focused on that. He's very laser-focused on living within cash flows, being very thoughtful about future investments being within those core three businesses that they're in. To me, the way I think about this right now is that because this is such a big change, and it has happened so seemingly overnight, even though we got some signs that it was coming because they closed the asset management business and that sort of thing earlier this year, it's definitely prove-it time, where Peterson needs to demonstrate over a few quarters of steady hand at the wheel, being mindful about costs, taking those cash flows and being thoughtful about where you reapply them into the business to generate a positive return for

investors. Based on what you said, you think there might be a little bit of a discount going on with the valuation. It doesn't sound like you're a seller of Boston Omaha stock. That leaves the other two options. Are you treating this dip as an opportunity to buy? Are you a buyer? Are you holding on? Are you waiting and seeing how Peterson's approach works out for this company? I think most investors, the best thing to do is give Peterson a chance to earn capital. I have a I guess you could say a full position for myself. That context is really important for what I'm doing. Anybody that's listening to this, think about what they should do. For me, it's time to hold and just watch and learn and let them demonstrate the ability to execute based on

this new strategy. Some investors out there, maybe if you're a little more out on the risk curve and you're willing to take the risk that the business is trading for a discount to book value, but the assets probably aren't worth that much, so it's really a fair value right now to find out if we have the right operator or not. Nine years having a partner to bounce ideas off of them, even though maybe Divergent Styles, that's a long time to no longer have that person in your corner. Probably most investors should just be waiting right now. I think that's what I'm doing. But more risk appetite investors, maybe an opportunity to think about a discounted asset. But again, I don't want to say turnaround, because it's

not really a turnaround, but discount with a caveat that, well, could be a value trap. Jason Hall, thanks for coming on and appreciate your time and insight on this. Glad to be on. This was fun. 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 Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.