Motley Fool Hidden Gems Investing - Is This The Beginning Or The End Of OpenAI?

Episode Date: November 20, 2023

With the dust still not settled, what could be next for Microsoft and OpenAI? (00:13) Bill Barker and Deidre Woollard discuss: - Winners and losers in the OpenAI schism. - If anything will slow the pace of AI. - What former Cruise CEO Kyle Vogt might do next. (17:55) Ryan Severino, chief economist at BentalGreenOak, part of the alternative assets business at Sun Life, talks with Deidre Woollard about the latest in commercial real estate. Companies discussed: MSFT, NVDA, GM, GOOG, GOOGL Claim your Stock Advisor discount here: www.fool.com/mfmdiscount Host: Deidre Woollard Guests: Bill Barker, Ryan Severino Producer: Mary Long Engineers: Dan Boyd, Tim Sparks, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. open ai's drama is a must follow motley fool money starts now welcome to motley fool money i'm deidre willard here with motley fool analyst bill barker how

you doing today bill i'm well thanks i don't know about you but i think i spent my entire weekend thinking about sam altman former now ceo of open ai so i want to catch people up on the saga just in case they missed it and weren't glued to every sort of Twitter or whatever this over the weekend like I was. So Friday, the OpenAI board, they fired Altman. Very surprised move. They named their chief technology officer, Miramarati, as interim CEO. And then over the weekend, there was all this back and forth that the investors, including

Microsoft, Thrive Capital, some of the other companies, they were trying to get Altman and the board to kind of work it out. Then Sunday night, it was announced that former Twitch CEO Emmett Shears, the new CEO at OpenAI, Sam Altman, now has left, along with former OpenAI president Greg Brockman, some of the other colleagues joining Microsoft. So this, really what people consider the most important private company right now, had this massive schism. How important is this? Well, you spent all weekend thinking about it, so you must know more about it than I do. It feels pretty important to me. How important is this to the market at large?

Not at all, I would say. Not yet. You know, market's up a little bit today, nothing too meaningful. I mean, it's very important to all the players and the exact track that things will play out. But in terms of what ultimately happens with AI, I think it all is going to happen regardless. Regardless of where the particular players are and what the corporate structures are. I think it is much more like the situation in Jurassic Park, where the dinosaurs figure out how to reproduce, and Jeff Goldblum just says, life finds a way.

AI is not going to be thwarted by any configuration of the particular individuals that we may talk about in the next few minutes. All right, Bill, that's not terrifying at all. So, you know, so much of the dispute about Altman and the board was about the direction of the company, right? So you have OpenAI, they're a 503c nonprofit. Their aim, right on their website, benefit humanity. Altman has kind of, he's been launching new products.

He's been moving quickly, clearly with Microsoft's approval. Now, given this new situation, you've got, you know, Microsoft CEO Satya Nadella, he's close with Altman. He's close with Greg Brockman. Now, he said he's working with OpenAI still, but does this change? Will Microsoft slowly be pulling away money, be pulling away resources? And did Microsoft get what it wanted all along on our Motley Fool morning show for members? I think it was Jim Gillies who said maybe this was the quietest takeover in the tech space.

I mean, it's kind of amazing. Yeah, we're all guessing. Yes. But that puts us in company with everybody else. I watched a little bit of the morning news, and there were plenty of guesses about who was doing what, why, and so we'll join that, but with a big warning on it. You know that the structure of OpenAI is so much different from other companies, it's a nonprofit, and the nonprofit wing had all of the board power here to do whatever felt

necessary under the dictates of the way the nonprofit was set up, which was to benefit humanity. And so they started this for-profit part within the nonprofit or adjacent to it or something, but ultimately answerable to the nonprofit board. And I guess without knowing enough of the details to do anything other than speculate, I kind of liken the situation that Altman was in to Pete Rose as manager of the Reds when he was betting on his own team. And so a lot of people don't understand why he was banned from baseball for betting on

his own team. He was betting on his own team. He wasn't throwing games. But the interests of a manager when you've got money on a particular game are slightly different than the interests you have as a manager over the entire season. You might use your pitchers longer than you otherwise would if you want to save them for tomorrow. Tomorrow, you might let somebody have another at-bat if you're not putting all your chips on this game so that he's got more confidence in this situation later in the season.

Your interests are largely aligned. But if the for-profit wing of OpenAI was looking at certain projects and saying, Look, there is a 99.98% chance that this does not wipe out humanity, and there's an almost infinite amount of money that we can have for taking that almost inconsequential risk. We're going to do that. And, by the way, if we don't do it, Google's going to do it anyway. So, there's no difference. And the nonprofit wing, which is looking out for humanity, supposedly, under the dictates of the structure and the 503C, might say, you know, why don't we just take it a little slower?

Let's just get that to 100%. 99.9% is good, but 100% is infinitely better. Let's just take the time. There's no time to take, because somebody else is going to do it anyway. I'm not saying that that was one of the actual scenarios that played out. But in general, the scenario that seems to have been playing out was the for-profit angles were like, let's keep going fast. And that came into conflict with the rest of the company. Yeah, I think that's absolutely true.

Didn't know where you were going with that Pete Rose thing. It was a long way around, wasn't it? You made it work. You made it work. Most people have tuned out. That way, it was great. So part of this, too, is there's this saying in tech, you know, your greatest asset walks out the door every day because it's all about the talent. So, you know, with Nadella's announcement, it said, you know, Brockman, Altman, and colleagues.

And so we don't really know how many colleagues. Everybody's been speculating. But we do know that over 500 OpenAI employees have called for the resignation of the board. So, thinking about this sort of talent shift, how important is it? And does the talent, does Microsoft have to suddenly make room for that many people? I mean, it's Microsoft. It's probably not an issue. They've got the room.

They do have the room. But is there also the potential for a talent grab? Is there a way, you mentioned Google, is there a way for Alphabet to get in there and scoop up some other people? I think there's some busy HR departments out in Silicon Valley and adjacent spaces. I think 500 employees, or all of them, whatever, they all have an extremely large pile of bargaining chips being in the field they're in, where there's a lot of demand. We're talking about the engineers, the HR department for OpenAI may not have a competitive advantage over anybody else in terms of their finding another employer.

but all of the engineers are in a position to walk out and find a job very quickly, one assumes, and working together even more so. The board has gotten nothing but condemnation for how they've done this, or their level of experience outside of this particular choice they made to fire Altman. It's a very small board, shouldn't be this small. They didn't replace the people who left the board over the last 12 months or more. And what they were left with was a thin crew to deal with a big situation. And so I think the employees have all the power and the board has none. Yeah. Well, and in situations like this, you tend to bring in, sometimes you want to bring in the adults. I mentioned Mira Marotti. She was interim CEO for two days. Not a great

weekend for her. I don't know. Does that look good on the resume or not? I think you leave that out. You just sort of drop that out. Well, I was head of OpenAI for a while. Really? Can you tell? No, I'd rather not go into it. It's a long story. It's just on my resume. Exactly. Well, who knows how long the new CEO is going to be there. He's the new adult in the room, former Twitch CEO Emmett Sher, brought in and he posted something on X this morning. He said his three-step move is to sort of dig in what happened with the dismissal on

the board and all that nonsense that you mentioned, talk to all the stakeholders, of course, pretty basic stuff, reform management, sounds necessary. But if you're him, armchair CEO for a second, anything else on that list? Well, the list, as you gave it there, sounded like it could have been written by AI. What are the things you will do with your new CEO job? AI might write that for you. There's nothing specific there. No, not really.

Again, for us to speculate on what he should do, he's got to figure out what the ... It starts with the board. The board has to be aligned with the ongoing mission, whatever that is. And if there's a for-profit element to the company which comes into constant conflict with the nonprofit, they need to figure out how to resolve that first, and who needs to be on the board. It's a bit utopian to think that you can navigate those seas for an infinite amount of time. That's a major challenge. For the CEO, that's not actually his or her job to form a board. But that's where whatever the next steps are, I think, start.

It's weird, because it's almost like the board has been cleared and you have two companies starting from scratch, the Altman and Brockman and whoever's over there starting something new under Microsoft, and then you've got whatever's left of open AI trying to become its own thing. So you've got a lot of, you know, it's like you had something solid and now it's really kind of amorphous. Yeah. It's a fascinating equation for a CEO, a new CEO to take on because of the complexity of the choices. And given that, it's very hard to know what should be done. But if there isn't an alignment of the board and the employees and management, then it's not going to work out. Definitely not. I mean, the other thing that I'm thinking about, too, is the larger

ecosystem, because we've got NVIDIA reporting tomorrow evening. So does this end up being good news for them. Maybe they've got one customer became two, maybe, but also Microsoft did announce they're building their own AI chips, which obviously is going to take some time. And NVIDIA announced new chips last week. So, you know, it's a little interesting for what happens with the larger ecosystem in terms of how their custom is, you know, is this customer the same customer? It's not the same customer that it was, you know, two days ago. No. I think for Nvidia, it's more business. Whatever the breaks are that have been employed up to date by OpenAI on, let's not go too fast because we don't know where this path

takes us or all the different branches that it might take, some of that is going to be released by this. At the very least, Altman and company will have left. Maybe they'll be back, By the time you listen to this, something big will have happened that we don't know about, as we're talking about it, three hours or four hours from now, whenever this is published. And then when you, listener, actually listen to that, it could be days from now. The whole thing could be over. It could be. But I think that one of the things that happens is there is just more.

There is more, and it's going faster as a result. And it may be that Microsoft is a competitor, it may be that everybody who is Microsoft and OpenAI's competitors gets some more talent to work with. People who leave the door and don't necessarily all go to Microsoft. I just think this speeds things up. Yeah, absolutely. And that works to NVIDIA's benefit. Yeah, definitely.

Well, before I let you go, I want to talk... Maybe not humanities. What you said earlier about Jurassic Park. It's all part of the same equation, yeah. Before I let you go, I want to talk about one more CEO transition over the weekend. Kyle Boyd, CEO of Cruise. That's GM's self-driving division. He stepped down on Sunday. He used the spend more time with my family excuse. Pretty standard. Also written by AI.

Also written by AI. Cruise has had a ton of problems. California DMV has basically said that they cannot operate anymore, you know, with the robo-taxis in San Francisco after a couple of incidents. GM spent so much money on this. What do you think is next for Cruise? Is this really in trouble? You know, on a compare and contrast, this is, on the one hand, you've got open AI, which may or may not destroy all of humanity and has no regulation. On the other hand, you've got cars, which are about as regulated as anything could be. So, if anything goes wrong in any test with any robo-taxi or automated drive system, it's

a national story. It's an international story. One person injured is going to bring on new levels of regulation. So, if you're CEO of that and you're looking at, well, I just want to do stuff, where should I throw my talents? It may be like, well, where you get to do a lot of stuff fast and nobody can stop you, right? That's not the auto industry. The auto industry is subject to state regulators, the Federal Highway and Safety.

There are so many, and thank goodness there are, multiple regulators that enforce safety in the exercise of making and using cars. But as a CEO, when you're trying to do something new and innovative, you're probably going to get very frustrated with the very real problems that occur along the way and the hoops that you have to jump through and that we all benefit from, you know, taking things slower on bringing out this technology. We don't all benefit from that going slower. Cruise does not. Yeah. But, you know, it's our interest against theirs. Well, just to kind of wrap up all of this speculation, this is my own little weird piece of speculation, is that in that when he stepped down, he said, you know, he said, spend time with my family, but also working on new ideas.

Now, he and Emmett Shearer, both co-founders of Twitch. I wonder if something's happening there. I mean, total wild speculation on my part. But what do you think? Is there a possibility that something happens there where maybe Emmett Shear calls in some of the people he knows and maybe Calvo is among that? Sure. As I say, if you want to go and work on things where things are happening fast and anything could happen and nobody can stop you, except maybe a board that seems to have no power or has power to get rid of Altman, I think it's very possible.

that there could be another chapter for the two of them there or elsewhere. But I think it's a good day to speculate about anything because it might be true by the end of the day. It is indeed. We'll have to stay tuned on that. Thanks for your time today, Bill. Thanks. You just found out that your sales team is at risk of missing quota.

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analysis from our team, two stock recommendations per month, and access to Stock Advisor's full scorecard of companies, visit www.fool.com slash MFM discount. Which sectors of commercial real estate should we be watching right now? I sat down with Ryan Severino, Chief Economist at Bentle Green Oak to check in on what he's keeping an eye on. The biggest question, of course, everyone wants to know is office real estate. Everyone has seemed to forecast the end of office real estate. I don't think it's quite as black and white as that, but there's an issue here. There's a crisis. We're seeing occupancy sort of stabilize. Every once in a while, we see some green shoots from somewhere and every once in a while we see a foreclosure somewhere

else. So what are you looking at right now with office real estate? It's funny that you say that. I tend to see the world similarly to you. I made a joke in a publication or a piece that I wrote this week, I was really digging into the depths of my dad jokes. And I said, uh, with the Halloween theme, I said, Oh, even office is showing some signs of rising from the dead, so to speak, ha ha. But, but I, I like you, I think that that narrative has been overblown and that is something that we do see in, in commercial real estate. As I, as I mentioned before, there is this propensity to overreact when there is some kind of exogenous shock, some external force that, weighs in on it. I've heard multiple declarations of how bricks and mortar retail is going to be

dead. And that really hasn't been the case. And then I heard how housing was going to be dead last cycle, or at least for sale housing, because, you know, millennials were never going to own anything and just live in urban areas, taking their bicycles and our public transportation to their green open plan offices where they were going to hold hands and sing Kumbaya or something like that. And that wasn't really the case either. And now we're onto offices. My thought on offices is there's a reckoning that office needs to go through. There is excess inventory relative to the demand that exists. This was true before the pandemic.

I think the pandemic has really, really ripped the Band-Aid off in a very quick and pronounced fashion. Anyone that was on the fence about what to do with their assets, I think, has been rather unceremoniously shoved off of the fence by the pandemic. I think there's just a lot of obsolete inventory that really needs to be, at least raised. It's hard to do those kinds of conversions to something like residential, certainly more than I think the public, the layperson who's not thinking about this understands. But I do think there is still a valuable role to play in the economy and the markets

for higher quality office space. And I think that's where office almost needs to go through a little bit of a reckoning the way retail did. We don't build as much retail as we did once upon of time. I don't think we're going to need to build as much office moving forward as we once did. There were a lot of obsolete retail centers that were raised and converted into something else. And I think there are a lot of obsolete offices that need to be raised and converted into something else. And I think once we fully go through that process, then I think that office will be a viable part of the economy and the real estate markets, just maybe not as prominent as it once was in terms of not just the macro economy, but its role in diversified commercial real estate

portfolios. Yeah. It's the something else that gives me pause because you're right. Converting to residential is complicated. I mean, I've seen some really beautiful conversions, but they're expensive at a time when the owners don't have the money for these kinds of conversions. As you think about the kind of the central business districts, what do you think some of that something else could be? It certainly could be residential, but to your point, it's probably going to require raising the buildings and then starting over again. I make this joke, but I mean it seriously. If you're going to convert office to residential, you're really going to have to understand this newfangled creation called plumbing because the plumbing

in an office building doesn't work the same way that it does in a residential building. And it can be really expensive to try to go back and retrofit. I think there's tons of research, including my own, that shows how we are undersupplied on housing in the U.S. in many places, especially a lot of the expensive barrier to entry, high productivity markets in the U.S. It's not a slam dunk, and it does require some heavy lifting, probably greater partnership with local municipal governments and private investors. But to me, I think that's where we can get rid

of some of this obsolete inventory and then potentially turn it into something more useful. I'd say primarily that would be residential because we are so undersupplied in a lot of these important markets, but I don't wanna make it sound as if that's an easy lift. It is a heavy lift and it will probably require better coordination between governments

and private entities than we've seen even historically. Yeah. Part of the issue with housing is that rents are sort of stabilized out. And I'm a little concerned that there's some oversupply of luxury multifamily in certain markets. Certainly, we have this huge workforce housing problem that has not gotten better. But at the high end, which is where some of these conversions might aim, there may already be some oversupply there. Yeah, I think in certain sub markets that that to me is if there are any issues about supply in the residential market, there are potentially certain sub markets where just because the economics only works, if you're going to develop this top of the market world beater class A product. One of the worst jokes that you'll ever hear is, you know, how do you build a class C apartment? You build a class A apartment and you wait 30 years.

The economics just doesn't work otherwise, unless municipalities are willing to step in and make it worth the while of some kind of developer to build some kind of units that are more accessible and palatable to someone who can't pay those top percentile, top decile rents. it's possible. But again, I want to acknowledge the fact that this isn't an easy lift. I mean, there are reasons why we have gone through now 13-ish years of being chronically undersupplied in housing. It's a problem that everybody knows. As my grandfather used to say in his slightly imperfect English, if it was easy, everybody would do it. So I'm not overstating how difficult it is. But I do think if you're looking for an opportunity set, that's probably where it is. I don't think we're going to need as much office going forward. I don't think that we're going to need a lot of that turned into hotel inventory. The idea of 80-story industrial or self-storage seems a little fanciful to me. So that's probably where I think you would most likely see any kind of redevelopment or repositioning would probably have to be in the residential sector, even though I concede it's going to be a challenging lift, however it plays out.

Yeah, absolutely. Yeah, I thought about the industrial too, but you're right. The 80-floor industrial, probably not happening. Although, we are getting deeper into multi-story warehouses, which leads me into talking a little bit about some of the publicly traded industrial REITs that I follow and invest in, like Prologis and AmeriCold. Industrial, I feel like this has been the leading sector for a while, but there are some signs growth is slowing a bit. What are you seeing and what are you looking at long-term for this? I agree with you. The way I always frame it out is that I have thought of industrial as the darling of commercial real estate for the last, at least the last five or six years. I agree that the supply-demand dynamics are changing a

bit. It's almost like everything else in real estate. When the market really tightens, the first person who thinks developing an industrial property is a good idea has a really good idea. By the time you get to the 47,000th person that thinks it's a good idea, maybe it's not as good of an idea anymore. But I want to keep that in context. I think what we're seeing and certainly in what we're forecasting and as we try to peer into the crystal ball is more of a normalization, a return to what the world was like before the pandemic, which is not to say that it's bad. It's still characterized by low vacancy rates and relatively high rent. I just don't think the rent growth that we've seen over the last few years in the wake of the

pandemic is remotely sustainable. I'm trying not to date myself, but if you went back once upon a time and told my 22, 23-year-old self who was just starting out in this business that we would ever see year-over-year rent growth in industrial and some markets 25% to 30%, I might have looked at you like you had lobsters crawling out of your ears or something like that, because it would just seem so impossible to me. I don't think that's tenable, but I do think moving forward as the market adjusts, it's probably the sector that I think, that we think will continue to command the greatest rent increases, because industrial has, and is continuing to, if I'm being fair, gone through an evolution, which is not something that you see in commercial real

estate that frequently. What I mean by that is once upon a time, industrial was just a box to store other boxes. It was pretty boring stuff. I'll be honest with you. I used to not like going on industrial tours back in the olden days. I would think, can you take me to the mall or something like that? Can we do a retail tour? That's so much more interesting. But now it's very technologically oriented. And it's part of this very advanced integrated global supply chain, this very sophisticated logistics network that did not exist once upon a time. And I think as a consequence of that, it adds more value to the economy. And because of that, it doesn't surprise me that the properties are more valuable and that the rent growth that it can command is

higher than what we've seen historically. Because I think it fills a different role in the economy than it did once upon a time. So anyone expecting the kind of rent growth that we've seen over the last few years, that is a very low probability event to me. But I do think the outlook for the sector in general is pretty optimistic because it continues to evolve and play this role in the economy that we haven't ever really seen. It's really a function of how the economy in the world's changed over the last couple of decades. Not to be hyperbolic about it, But I think that is really where industrial stands today versus it just being a box to store other boxes once upon a time.

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 Deetra Woolard. Thanks for listening. We'll see you tomorrow. Thank you.