Motley Fool Hidden Gems Investing - Meta's Big Pop, Google's New Threat

Episode Date: April 27, 2023

For the first time in a while, Facebook's parent company gave shareholders reason to smile. (00:21) Bill Mann discusses: - Meta Platforms starting the fiscal year with a bang - The Reality Labs division posting an operating loss of (gulp) $4 billion - The current state of regional banks and the magic word he's seeing appear in the financial media (14:25) How much of a threat is ChatGPT to Google's business? In this excerpt from the most recent episode of the Stock Advisor Roundtable podcast, Brian Stoffel talks with artificial intelligence expert Hamza Lebbar and Motley Fool CEO Tom Gardner.  To hear the entire new episode of Stock Advisor Roundtable, click here: https://open.spotify.com/episode/6MWIz55NW99Av1l7w9FrXU?si=05100b2801f84f63&nd=1 Companies discussed: META, GOOG, GOOGL Host: Chris Hill Guests: Bill Mann, Brian Stoffel, Hamza Lebbar, Tom Gardner Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Motley Fool senior analyst and Newcastle United fan extraordinaire, Bill Mann. Thanks for being here! Bill Mann. Big match today, big match this afternoon. I know you're excited for the Everton-Newcastle tie-up this afternoon. Bill Mann. I'm excited because you're excited. You're excited at the 1.7th derivative. Exactly. Let's start with the stock of the which is Meta Platforms, starting off the fiscal year with a bang. Not only was first quarter revenue higher than expected, but it stops the streak of three consecutive quarters of revenue declining and shares of Facebook's parent company up 14% this morning. This was big. Congratulations to Meta to no longer being the worst performing FAANG stock over the last five

years. You've done it. Look, baby steps, right? Yeah. If baby steps came in $10 billion increments, I'd say that that's about right. It bears remembering that this entire company was valued at $200 billion six months ago. As we speak, it's up about 14% today. Doing the math, That's about $80 billion by itself. It has been a massive re-rating. For the life of me, I can't figure out why, if you take the $200 billion as being a reasonable valuation, and the current valuation of $500 billion-plus as being reasonable, there's not that much in between what the company has actually done then versus now. No, I suppose that's true, although I think a lot of this, and this has been the case

since the company went public, a lot of this is about the CEO and the direction set by the CEO and the language used by the CEO. Mark Zuckerberg has been talking for a while now, language that is music to the ears of institutional investors on Wall Street. It is the language of, we're going to rein in spending a little bit, layoffs, cutting costs, that sort of thing. Now, the Reality Labs division of Meta Platforms, which is the VR and AR, they managed to post an operating loss of $4 billion. It's not to say that they've cut costs across the board. But you're right. It's interesting to watch, for lack of a better term, how hated the business was six months ago versus how beloved it appears to be right now.

I love the fact that we're dancing around conspiracy theories as we speak. If you think about it, six months ago, they basically said, OK, we have shrinking revenue, but our operating expenses are going to go up to as high as $24 billion. And now they come back and they say, we're reducing our overall operating expenses. And that, by the way, is where most of the gains that they are forecasting over the next year are coming from. So, it's almost as if they kitchen synced all of the bad things six months ago, and now they're coming back and saying, well, you know, it's not so bad. Oh, but by the way, the division that we named ourselves for at this point, those revenues declined 45%, and we're losing $10 for every dollar in revenue that we

make there. Yeah, the metaverse stuff is, again, to go back to the language that Zuckerberg is using, it's being de-emphasized, at least from a public-facing standpoint. But as you said, you look at the actual numbers, they are what they are. Are you suggesting that they named themselves ironically? I don't think that was the intention from the outset. But on a more serious note, one of the other things that has happened over the last eight months or so, and this is not just something MetaPlatforms is dealing with, this is any business that is tied to advertising in any significant way.

the softening of the ad market. Maybe the pessimism six months ago was overdone, but the softening of the ad market was not. That was a real thing, and that continues. It was not overdone. But one of the things that Meta recently pointed out was that as far as they have been able to figure every dollar of advertising that's spent at Facebook returns for those advertisers $3.13 of gains, which is still an astounding return. I'd love to be able to get that for most things in my life. So, yes, the advertising market has perhaps softened. It's also perhaps shifted. But it bears remembering that at Facebook, much of their advertising was smaller advertisers. They didn't have some gigantic

Johnny Walker campaign going across run of sight. It was local advertising. It was small service providers, so very locally done. And that advertising market is fine, especially with those kinds of returns. I mean, that's some of the best returns you can get. They continue to deliver on the main part of their business. I mean, in some ways, that is the part of meta platforms that gets the least amount of attention and yet is the most important part. They continue to deliver for the advertisers. Yeah. No, I think that's exactly right. And that's very well stated. Now, I think that they actually went out and de-emphasized what they were doing there. And I think that if I were to psychoanalyze Mark

Zuckerberg and their team, it's because they had what they believe was a near-death experience a decade ago when they were so far behind in mobile, when Facebook was primarily a desktop experience and they missed the fact that the iPhone was revolutionizing how people interacted with social media. So, I understand perfectly why they would try to get out in front, even if they're losing. And by the way, $4 billion, that may be a lot to you and me, but if you view it as an R&D budget for Facebook or for Meta, it's nothing. So, I understand exactly why they would de-emphasize the thing that's just sort of chugging along, because that's continuing to generate the free cash flow that will make sure that they have sufficient fuel to make sure that

they don't end up behind again. I want to shift to a completely different industry, and that is the banking industry, and specifically the regional banking industry, and wondering where you think we are now in this story, now that we are just about two months in from what started with Silicon Valley Bank earlier this week, First Republic continued to fall. And something I'm starting to read a little bit and hear a little bit on CNBC that I wanted to get your reaction to is the question of whether or not regional banks, that the fear around regional banks has now reached its apex to the point where, wait a minute, let's put aside First Republic. Yeah, because that's bad.

Yeah, putting them completely aside. But just regional banks as a group, where do you think we are right now with them? When you look at whether it's ETFs tied to regional banks, individual shares, the sell-off across the board has been probably what a lot of people, including you, were expecting. Do you think it's now to the point where it's like, hey, some of these are starting to look pretty interesting if you're going to sell me this regional bank at this price? I've started to see the magic word that I look for, which is that a sector is considered to be uninvestable. A couple of weeks ago on the show, I interviewed Howard Marks, billionaire investor, and he said something that I completely did not expect in a slightly

different realm. He said, you know, I'm not all that interested in China, but when people will tell me that it is uninvestable, that makes me wonder if there are things that I ought to be looking at. And I have started to see the same things in this segment. It bears remembering that the regional banks, although they are a tiny fraction of the overall deposit base in this country and the overall lending base in this country, they are drivers of economic activity in whatever region they're in, in a way that companies like Citibank and Chase cannot be. So, they are very fundamentally important. I don't tend to get all that excited about banks. If you think about it, it's a bit of a utility, and then there's a risk-taking operation sort

of pinned to the top of it. And so, sometimes, the surprises and risk-taking are bad, and they're so regulatorily restricted that the surprises are rarely good. So, but when you're going to tell me that a bank that has made as many mistakes as First Republic made, and as unlucky slash as many mistakes as Silicon Valley Bank made, that that is going to tar the entire sector, I'm interested in looking at some of the best performances from that sector. Yeah, because I'm assuming, when someone says X, insert name of company or industry, is uninvestable, one of the interpretations of that is, this thing is going away completely.

Now, I'm not saying that people are saying that with respect. This just in, Chris Hill says banks are going away. Well, no, no. I'm saying, in some cases, you could look at, like, hey, that technology is going to become obsolete. Therefore, it is uninvestable. I'm assuming that is not the case, that people are using that word around regional banks. But instead, as you indicated, this is just so toxic right now. Tell me when the smoke is clear. Yeah. If you think about the social proof, and we can take it on our level, but you can take it going even into the institutional level, there is no one out there who's willing to risk their

reputation on saying, oh, I think banks are cheap, right? They just aren't. You cannot find the person who's out there making that statement. So, you also have to figure flowing from that, that institutional investors are not necessarily looking to signal to their investees that that's the area where they are finding the most opportunity, because all we see is fear in the banking sector. But we know, I mean, Warren Buffett basically tells us that you should be greedy when others are fearful and the reverse. So, it makes sense. You also just have to kind of remember that when he says when others are fearful, it may actually be that you are fearful as well. I mean, we are not robots. So, it makes perfect sense to me that this would be an area

right now where we would want to look for opportunity. What's the next thing you're going to be watching over the next month? And I'll point out that in the next, what, 10 days or so, we have the Berkshire Hathaway annual meeting. It's entirely possible that Buffett and Munger, during that marathon Q&A session they do, will get asked about regional banks, certainly banks in general. Is that something we should be watching for? Yeah. In fact, Warren Buffett, or Berkshire Hathaway, I should say, sold almost all of their banking positions with the exception, I believe only the exception that they retained

was M&T Bank. Most of the rest of them are ones that they had held for as long as a quarter of a century, and they sold down substantially because they saw so much of the banks not really minding the store, like taking on a little bit too much risk in a time in which interest rates were going up at a clip that would make the balance sheets for banks to put them at risk. I think banks, in some ways, are going to be an interest rate game from here. And a lot of people, because rates have just gone up so much, may think that they're going to keep doing so. But we know that that's not the case. It never has been the case. So, I think one of the more important things that we need to look for right now is an attenuation of interest rate rises.

And I think that then banks will get onto a much more solid footing. Attenuation, good 50 cent word there. I pulled that out just for you, my friend. Bill Mann, thanks for being here. Thanks, Chris. How much of a threat is chat GPT to Google's business? That's just one of the topics discussed in the latest episode of the Stock Advisor Roundtable podcast. You've heard me talk about this show in the past and we decided to give you a chance to hear it for yourself. This is Brian

Stoffel, the host of the show, talking with Hamza Labar, an expert in artificial intelligence and Motley Fool CEO, Tom Gardner. I want to just pivot for a second and talk about some of the companies that we might be investing in, in the Stock Advisor universe. So let's talk about some of the companies that are really in the meat of this. We'll start out with Google, because Google's answer to ChatGPT is barred. It's something that I think was kind of made fun of when they tried to come out and show this tool being used, because it didn't work as well as what people experienced with ChatGPT. So my question is, and Hamza, maybe we can start with you and tom i want to get your thoughts on this how much of a threat is chat gpt to google's

business i think definitely chat gpt is a threat to google's business but i rather see them as partners in a way that like the ultimate solution would be to have a combination of both like each one of them has pros and cons and exactly what i see for example for google they do give the references of the data they return, they do have also real-time data incorporated with all the algorithms they have. So this is something ChargeGPT does not have for now. So ChargeGPT is very good at summarizing the answers

or going on in different places and getting the data, process it, and digest it for you and present it in a very good way. So the perfect solution for me would be when the user has a specific query, just types it. And then we have as an answer the aggregated, digested answer from ChatGPT with references to the parts, maybe websites, books, or whatever, where this data comes from,

where this answer comes from, and also with real-time data. So it's kind of a combination of both. It's like, to me, I think of ChatGPT as the model that came to tell to Google, hey, you're missing out this part. That is very good to have in a search engine. And we do also see this already in Google. Sometimes when you put a specific query,

you do see that there is a specific answer highlighted from a given website. So it is something like chatGPT, but it's not really the same. So I do think that both solutions will kind of merge to give birth to a more complete solution. I have some deeper concerns about Google, but we should always start with just looking at their balance sheet and recognizing that they have $100 billion of net cash on their balance sheet. This company has the resources to invest heavily and has already an

AI. Obviously, DeepMind, if we remember AlphaGo, the documentary, if you haven't watched it, it's now six or seven years old, but it's still highly relevant to watch and understand what's happening. Google has been at the forefront of making these investments. I think the problem for Google is almost in the literature of Clayton Christensen, almost mapped out perfectly. And I mean that in this regard. What OpenAI brings to the table is something that is not as reliable as Google, but it undermines Google's business model. Because if I can search for anything on ChatGPT that would replace a single search on Google, or 3% of my searches, or 8% of my searches. I'm doing it and that's taking ad revenue away from Google. Furthermore, it's

in a way starts to become a better experience for me on ChatGPT because ChatGPT is upgrading. ChatGPT5 is expected to be released sometime around the end of this calendar year. And there is at least some intelligent people presenting a thesis that it might pass the Turing test. In other words, the breakthrough, the acceleration of the potential exponential growth of the the effectiveness of chat GPT could be transformative much more quickly than we think it already is in some ways. And it's not interrupted by a bunch of sponsored ads. And to be clear, the Turing test means that you would not be able to tell the difference between a computer and a human responding to you. Thank you very much for clarifying that. I already

see, which maybe many have, the individual on Twitter who took all of the audio of Steve Jobs and then connects it in so that you're gaining access to everything Steve Jobs wrote or said and everything that's ever been said about Apple or written about Apple. And you ask Steve Jobs, what happened with COVID at Apple? And Steve Jobs gives a very lucid, in his voice, exactly answer. In a way, that kind of passes the Turing test, at least in a small way, because if you didn't know that Steve Jobs isn't here anymore, you might think that's really Steve Jobs talking about COVID. So, to me, the threat to Google is that it chips away at search volume, and that's their whole, that's the entryway of all their business cash flow. And it's not stuck at GPT-4.

It's moving, it's changing, and it's gaining relevance. It's the center of conversation. So in a way, I think Clayton Christensen, for me, his methodology doesn't quite work as well for B2C companies. He actually thought Apple was really going to be undermined in 2007 because it would be undercut with lower prices. But I think consumers are willing to pay up for the convenience in something cozy like Starbucks or Apple. I don't think they always get undermined by Dunkin' Donuts and the Android, et cetera. I don't think that happens B2C as much. But this is B2B. That's Google's business. And I think that the ad volumes may start to shift as and if ChatGPT finds a way to integrate that so it's not a proliferation of sponsored ads for

every search that you do, where you know, I'm getting an economic meritocracy here in Google's system. I'm not actually getting an interactive answer that's based on merit and that's evolving quickly. So I think it is a threat to Google. I wouldn't be selling all my shares of Google, but I'd definitely be watching to see what happens quarter by quarter now with their search volumes. If you want to hear the entire episode of the Stock Advisor Roundtable Premium Podcast, just click the link in the show notes. 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 Chris Hill, thanks for listening,

we'll see you tomorrow.