Motley Fool Hidden Gems Investing - Meta's New Specs

Episode Date: September 26, 2024

Meta’s Reality Labs division burns about a billion dollars per month. One result is Orion, augmented-reality glasses that let users see the outside world. No battery pack needed. (19:30) Jason Moser and Ricky Mulvey discuss:- Updates from Meta Connect 2024. - Use cases for AR glasses - New details about Southwest Airlines' overhaul. Then, (17:01) Brookfield Corporation CFO, Nick Goodman, joins Motley Fool Senior Analyst Buck Hartzell to discuss how he thinks about capital allocation. Host: Ricky Mulvey Guests: Jason Moser, Buck Hartzell, Producer: Mary Long Engineers: Rick Engdahl, Kyle Carruthers 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. the headset race continues you're listening to motley fool money i'm ricky mulvey joined today by jason moser jason how you doing man hey ricky i'm doing well how

about you i'm doing pretty well good we got a we had a developer conference yesterday that gives us some fodder to talk about and uh did you forget that meta was a metaverse company no no i didn't but i tell you it does seem like the the metaverse is kind of taking a little bit of a backseat here to ai recently which which i reckon is understandable it is it is back yesterday connect conference we got some ar vr updates some artificial intelligence announcements that i think are pretty interesting to parse through most significant was when mr zuckerberg went on stage and showed a prototype of glasses called the orion maybe a little bit of a response to Apple there. This thing does not have a battery pack. And you can see the outside world

with holograms overlaid on what you're seeing. Early reviews from the journalists who were allowed early access to go see this product have been very positive, though I want that qualifier in there. What was your impression? Are you buying the hype around the Orion? Well, so I've said it before. I mean, I really am fascinated by the technology. I mean, I think the technology itself is borderline magic. And for me, Orion, it's the next logical step, right? I think we've always talked about form factor being one of the big challenges here in regard to headsets and immersive technology.

And so this is definitely a step in the right direction. I think the remaining challenge still remains, though, use cases. And as technology does, I mean, the form factor will continue to come down over time. So again, this is a great step in the right direction. But I think ultimately it still begs the question of the use case, and that hopefully will develop in time. It's just not as obvious today in regard to the mass consumer, and ultimately that is the pot of gold at the end of the rainbow as it pertains to these types of headsets. Yeah, you lose a little bit of the – everything's a tradeoff. So you lose the immersive gaming world.

There's videos of Zuckerberg playing Pong with the journalists. You get maybe one of those sort of Wii Sports things, but you're not getting the inside the world of Batman and inside Gotham, which is the game that's being released on the MetaQuest that's getting out there. But to your point on use cases, the thing that they are trying to plug is productivity, right? Maybe you don't need to sit at your computer with a keyboard and staring at a screen. We're going to broadcast the screen on your desk. I mean, when I see this, the real use case, not being sarcastic, is if you're traveling to another country. and you can get everything translated for you, you get a little more context. But for now, my Luddite brain is struggling to think of more use cases for these holographic

glasses. Well, I mean, so I think that the language barrier, I think, is a tremendous use case. I mean, I think going back to my time, you know, we lived in Cairo, Egypt for three years and in Astana, Kazakhstan for two. So dealing with the Arabic and Russian languages was an interesting challenge for us. And if you're in a place where you're walking down the street and you're looking at these street signs written in Arabic, and ultimately, you can have that translated to English. That, to me, is actually a very compelling use case. I tend to agree with you on the productivity side, though. It's a noble idea, but it's hard for me to see it today, at least, at the mass use case level, right? It makes me think a little bit about the argument

for self-driving cars. One of the arguments being that, well, now your car is driving for you, And therefore, you can be more productive. I'd be willing to bet that most people are just sitting in the backseat of that car playing games on their phone or social networking, whatever that may be. So I'm not sure about the productivity thing there. Now, on the flip side, there are plenty of industrial AR use cases that I think can indeed increase productivity. I mean, you think about things like safety training or in the field operations. We're already seeing that in play today. But those are obviously still somewhat specialized in nature. So when you look at what consumers want from immersive technology, from AR, VR, things like that, surveys clearly indicate that most customers are interested in using this technology to enhance experiences in things like concerts, gaming, and absolutely some educational implications as well. Productivity still, I'm not quite sure there yet because it's just not so obvious for us right now. It absolutely could develop in time.

I think another interesting use case, we saw a headline out this morning, Google's venture arm backing a little startup there that's trying to bring mixed reality to car windshields or plane cockpits. Things like that make a little bit more sense because, again, you're not dealing with a form factor issue so much. You're not talking about having to wear headsets for these things. I mean, you're just looking at a windshield and your windshield is communicating that information. Again, that's a benefit for consumers. I'm not sure necessarily on the productivity side where that falls out.

So everybody loves to say the development of technology, it's going to enhance productivity. That is just kind of buzzword. And hopefully that doesn't materialize. But it's one thing to say it. Really, I think what we're going to see in time is how these companies demonstrate it. And it's just not as clear today because it's still such new technology. So this Orion, these glasses, this was the rabbit out of the hat. And Meta's gotten ragged on less for its spending on reality labs.

But according to an interview in The Verge with Zuckerberg, most of the money in the reality lab spending is going to glasses. It's a bigger budget than virtual and mixed reality programs. they've been burning a billion dollars a month since june of 2022 yeah how satisfied should meta shareholders be with this is the first prototype product well i i think you should be satisfied i mean it's not surprising to see this given the relationship with um i think what is it rayban right they're they're looking to to ultimately whittle down this form factor and make it a little bit more usable for everybody and i mean obviously they are spending a ton of money to do this. And it's exciting for me, at least, to see companies that are willing and able to

invest such capital at such rates. And you have to figure, I mean, they go in there knowing that not everything is going to work. But ideally, there will be some exciting ideas that come from it. I think we sort of took that angle with the Amazon Fire Phone back in the day. And while the Fire Phone flopped, I'm sure they learned a lot from it in the process. And that's sort of always been one of Jeff Bezos' sort of philosophies, right, is to just continue learning, even though everything won't necessarily work. So, yeah, it's exciting to see that they're spending this kind of money. It reminds me of Google's Other Bets, of Alphabet's Other Bets segment, right? I mean, that's a part of the business that continues to more or less burn a lot of capital. But

they've been doing this for a long time and they continue to find new ideas and develop new concepts that come from that investment. So ultimately, yeah, you want to see, are they going to be able to figure out a return on that investment? Because these are very advertising centric business models and that they can figure out a way to diversify from that. I think that's exciting. And again, I think it'd be one thing if you're looking at a smaller company doing something like this. But when you look at a company like Meta, that has so many valuable properties and so many eyeballs tuned into it, it every second of the day on a global basis. I mean, this is a company that can afford to do this. It's just a matter of trying to see around

the corner. And hopefully this this is an area that will that will yield some return on that investment time. We also got some updates on artificial intelligence. Some of it's a little spooky. I'll be honest, J-Mo, because Zuckerberg is essentially opening the door to these AI agents. There was at one point in the presentation, Zuckerberg interviewed like a digital twin of an author creator named Don Allen Stevenson III, asking him like, oh, what's the main thing you hope that readers take away from your book? That was the demonstration. What he later said in an interview is that he's opening the door to more AI agents being on Facebook. And the way we interact with them now, the way we interact with ChatGPT is it's you send the first thing and then they

respond directly to you. And Zuckerberg sees a broader vision of that future where AI agents might be interacting with you, commenting on your posts, being a little bit more proactive in how they speak to you. You talked about the advertising angle earlier. I'm sure that's in the back of his brain. Yeah, I would imagine. I mean, I guess the way I see this, at least the way I understand it, it seems like ultimately using AI agents to allow creators to scale engagement, right? So it serves the creator economy better. It allows them to create better engagement between the creators and their followers. And then that ultimately benefits meta in the process. And that all makes perfect sense. The question I have, and I'm not the

biggest social media guy in the world. I mean, I fully admit, I mean, I'm not on Facebook or Instagram or that stuff. So take this with a grain of salt. I just wonder, I mean, how meaningful is engagement if you know it's not actually coming from that creator, right? If you're just getting sort of an automatic reply, for lack of a better description there. I mean, it's neat to get that engagement and I'm sure it probably ultimately benefits that in the process. But I wonder from the user side, from those that follow the creators, I just wonder how meaningful that is over time. So, they'll really need to figure out a way to nail down as personalized an experience as possible. And my suspicion is that as these LLMs continue to evolve and

get better, obviously Meta is sinking a lot of money into their Lama models, then it probably starts to make a little bit more sense, probably starts to get a little bit more personalized. And maybe that doesn't really materialize as an issue, but that's a question that's stands out to me at least how does the dopamine hit change when you've posted a selfie of jmo on vacation and hey looking good there jason but wait did this come from a real person or is this is this a branded opportunity um other part of the genuine question yeah no very real question um it's like you know you get a like on you get a like on x and you see that it's come from a name you really don't recognize and you're like huh i wonder if that's a real person behind uh behind

thinking that i'm really clever about this point yeah i'll tell you about the other the other thing that caught my attention is the ability to edit photos with their new ai engines i think this is meaningful for adobe so zuckerberg's up there it's like him uh doing some pose he's wearing a gray t-shirt and says hey llama make my gray make make my gray shirt tie-dye in this photo and it's able to snap and make that change if you're able to edit photos pretty well with natural language you know, what do you need the Photoshop for? Well, I think that certainly is something that Adobe would be keeping on their radar. I mean, this could be something competitive to their offerings, at least to an extent. But I would also keep in mind, I mean, there is going to be a

little bit of a difference there between what your average everyday social media user is using something like this for versus what professional creators might be using Adobe for. It is worth remembering, Adobe specializes in this stuff. And they themselves, they poured a lot of money and a lot of resources into their AI aspirations as well, continuing to build out those Firefly models, for example. And so, whereas this is what Adobe does as a business, for Meta, at least as it stands right now, this is a bit more of a feature and not necessarily the business use case. Now, that can change over time, for sure, but I'm not sure in its current state that it's something where Adobe customers would be so quick to jump ship. But

absolutely for Adobe investors and IAM1, something to keep an eye on. Let's go to Southwest for a couple of minutes. We got the multi-year plan to transform the airline. This is like, they give you occasional updates of what they're going to do. Stock popped about 10% this morning on the Southwest even better plan. Jason, it's not just Southwest, it's Southwest even better. How are you feeling about that name? Are we buying shares right now or what? Ricky, I like to say there is always room for improvement. So, I mean, you know, the name is Southwest even better. It does communicate a few things from leadership, right? I think there's some humility there in knowing that, hey, we can do things better. Some excitement, I think, about how they can improve. So, you always got to come

up with a clever name or acronym or tagline for your strategy to lead the business forward. And And, hey, listen, it's a lot better than Southwest just kind of, yeah, we're making progress. Southwest making progress. Southwest, let's focus on the good things. Yeah. Okay, we knew what Southwest was adding already. I was trying to make a joke about how they're, like, occasionally dropping release updates, but the joke wasn't going to work. But anyway, so they're adding things.

This is what we know they're adding. Premium seating, assigned seats, that's coming in 2026, and red-eye flights. So here's what's new. We're getting vacation package sales. Hey, how about that? Elliott Management, we're going to give you a $2.5 billion buyback. We're going to allocate that to share repurchases. And also, they have committed, making it very clear,

they want bags to keep flying free. Basically saying it would cost us more in lost sales if we get rid of this policy. And also, 97% of people are aware that bags fly free, so we don't want to make those people angry. How are you grading the revitalization plan in the latest shareholder update? So I think I would give it overall right now,

I would give this a B. It's really early. I like the overall thinking here, acknowledging that consumer behavior can change over time and you need to be able to change with it. I think things like bags flying for free, right? I mean, that's something that Southwest, I think has been known for a while.

And when you have such a connection to your brand with something like that, taking that away, yeah, that would rub consumers the wrong way. And that would be problematic for Southwest. I think the share repurchase plan, I mean, they haven't repurchased shares in quite a while. And I think that's been a good decision. I mean, they haven't been really making anything in the way of cash over the past few years. And so, it's given them an opportunity at least to bolster their balance sheet, keep it in a good position so they had some flexibility there. And so now they're in a position where travel is starting to normalize. They've got this balance sheet, which can more than take care of share repurchases, regardless of whatever kind of cash the business is bringing in. And at today's price, that would be, I think, more than 83 million shares, ultimately, which would be very significant for the business and for shareholders.

And then I think ultimately, looking at how they are pursuing the markets where they perform the best, right? I like their Sunbelt angle, their focus on the Sunbelt. They remain a large provider in that part of the country, and it's actually the preferred airline in most cities in that region. And then on top of that, you see that population continues to shift to the Sunbelt. Economic growth is trending similarly. So to me, again, putting all of this stuff together, it seems more than reasonable. It doesn't seem like they're biting off more than they can chew. It's just going to be a matter of time to see if this is really working out.

But I give them a solid B for laying out a pretty good framework there. That's a good place to end it. Airlines. That's a really tough business, Jason. I don't know if I'm trying to get involved with it, even with all of these upgrades and plans. A very tough business. And I tell you, even to this day, I don't own airlines. And it just, to me, it's a scary one.

It's just a little bit too cyclical for my taste, I guess. Jason Moser, thanks for being here. Appreciate your time and your insight. Over the past 25 years, a Canadian corporation has compounded at a better annualized rate than Amazon, Berkshire, and Walmart. That company is Brookfield Corporation. Up next, Fool analyst Buck Hartzell speaks with Brookfield CFO Nick Goodman about the company's capital allocation strategy and how Brookfield thinks a little differently than Berkshire. Coffee Plus B12 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 Nespresso.com. Brookfield is a great business that a lot of people don't understand so well, and it has a lot of moving parts around it. You have a lot of publicly traded entities that are part of the Brookfield empire. And so I'm going to ask you in a couple sentences, just describe to an investor who's not familiar with Brookfield, what does Brookfield actually do? What is Brookfield Corporation? Yeah, I mean, listen, at the heart of the organization is we're an investment firm. We're a leading global investment firm investing in the backbone of the global economy with

a focus on creating and compounding wealth for a variety of constituents, shareholders, private investors. And we've built a business with that at the core of everything we look to do for the last over 100 years. And that's really what we are. So when you look at all the component parts of what Brookfield is, what we are firmly focused on is how do we build a business that has really stable cash flow, strong downside protection, and can drive attractive earnings growth over a long period of time. And what that results in is the returns that you saw on that page at Investor Day. It's that consistency of what we're looking to achieve. As an asset manager, you guys are out there launching different products or different funds. You're raising

capital around there. But as you mentioned, you're a participant in that. Can you give the listeners an idea of maybe how much of Brookfield's capital they have deployed across their investment products? I mean, the numbers are incredibly sizable. Today, directly into the funds. We have over $12 billion, but then we have another over $20 billion invested into the listed entities alongside public shareholders. And it's our capital in the insurance company. We have, which is unique about Brookfield, permanent capital at the corporation, almost $150 billion of permanent equity capital. And everything that we're doing across the organization is focused on how do we compound that capital. And that aligns perfectly with

third-party capital that comes into the organization and they see that alignment and it's a key differentiator of how we're able to succeed but also when it's your own money you're focused on achieving returns without taking too much risk right you want to achieve the returns with taking moderate risk and that is crucial to emphasize so the returns that we're focused on are all coming from operational excellence as opposed to excess leverage and again that um ticks the boxes for a lot of our partners yeah and that's awesome i can't emphasize that enough i mean when it's others people's money people tend to take more risks with it and when it's your money you tend to be a little bit more guarded with it and i i like being

invested alongside of people that are that are owners too i want to talk about the investing environment today okay um you guys seem pretty optimistic and i know you have great returns i'm going to throw out there warren buffett recently sold a big stake in apple yeah he has nearly 300 billion dollars in cash sitting on his balance sheet um today and uh and and a lot of diversified revenues coming in from from from berkshire and so there's some people that go well warren's holding all this cash must be coming into a recession or something like that so i just wanted to say like brookfield seems more optimistic about um the opportunities that are available so i just say what are you seeing in the investing environment today and and yeah how are people feeling listen i

would say we are very optimistic and we're very optimistic around the things that we are choosing to invest in by geography and by asset class. But we are very optimistic. And remember, we have over 2000 investment professionals around the world looking for investment opportunities every single day. And then when you add in the hundreds of thousands of operating professionals and expertise, and they're interacting with companies every single day, we're in the flow of so much information every single day, that it truly is a unique vantage point that we have into sourcing originating opportunities and understanding the value that we can create from these investments. And I would say across the business, we are seeing really interesting investment opportunities.

But I think it's hard to see if you don't have that access that we have geographically diverse and by asset class and coming from so much on the ground relationship building that so much comes in just bilaterally, not through processes run by banks, but proprietary deal flow. And again, with the capital base that we have reviewed as a partner of choice, so often people are calling and looking to partner with us. And it just leads to really, really interesting opportunities. Yep. And so that sounds different to me than Berkshire, right? Where Berkshire's been about centralized capital allocation, where Buffett wants somebody to pick up the phone and call him, where you guys aren't waiting for that phone call. You've got thousands, a couple

thousand people out there around the world making relationships and looking for deals where you're kind of sourcing your own instead of waiting for that phone call. 100%. And we're looking for control investments. We're looking to buy 100% of a business and work with management teams that are on the ground that are operating experts to really drive value creation that we're identifying in that specific business. Yeah. And that is one other point that I do want to make. Buffett has always said, I can't provide management oversight. I want somebody else to run it and operate it. You guys are more than willing to take that on. As a matter of fact, you're experts in a variety of areas. So you not only bring the capital to the deal,

you bring the operational ability too. That's right. In all the areas we are, we're rolling our sleeves up over a hundred years of operating capabilities across all asset classes. I mean, in many of our businesses, we're not viewed as a financial sponsor. We are viewed as an owner operator. We're viewed as being a partner where we can bring significant operating expertise to create value and the track record of doing it is so consistent over so many years that it is it is truly unique yep that's great now i want to talk about the the spin out that you guys did back in 2022 this is december you spun out brookfield asset management this was a big deal um as of the last quarter you still own 73 percent of brookfield asset management

So Brookfield Corporation is by far the largest shareholder there. And I know you and your team did a lot of work to separate those two. Not only did they have the same name that we had to swap out there and confuse some of our members, but just a lot of work to spin out a company. And there's costs associated with being a public entity. So give us an idea. We know the costs and things. What are the pros of Brookfield spinning out Brookfield Asset Management when you still own nearly three quarters of it, 73%? Why did you do that and has it been successful?

Yeah. So listen, I would start by saying in our view it's been very successful. I would just start with that overriding comment. When we build businesses in Brookfield and we look to build businesses global champions, as we scale a business, as it gets to size, we think about two key things. One, making sure we push management down closer to the business, decentralizing business so that they can be more effective in making day-to-day decisions and be closer to that business. That leads to better alignment of interest and better efficiency, and we believe better results and outcomes. So we were doing that as part of number one. Number two, we then think about this is a great business that we have.

Is there a way to enhance our access to capital? And can we do something more efficient with this business? And is it better being from a listed perspective as part of the corporation or trading separately? Would it increase our access to capital? And if you think about those two key criteria for a company, one, I would say that the focus and attention of management since we spun it out has been first class even before that. But the growth and what they're looking to achieve, you heard about it investor day. The tailwinds are really strong and we have an excellent management team they're executing

on that plan. but two, it has traded like a premier global alternative asset management business like it is and as part of Brookfield it was attracting different kinds of investors that couldn't really focus in on that and compare it to the asset light alternative asset management peer in the US

and now we've done that it's trading in line with the best in the market and for us that's given us unbelievable new access to capital and when we acquired AEL recently in our insurance business we used a billion dollars of that security instead of cash. And we didn't have that option before we separately listed Brookfield Asset Management. So for us, it's been very successful. We still love the business. So to your question is why do we still own 73%? Because we see tremendous upside in this business,

but we now have this extra currency in the organization we didn't have before. So we're really, really pleased with how it's gone. I want to talk a little bit about capital allocation now. So I think you guys have bought back about a billion dollars worth of your stock and um i would just like to and you mentioned you use some bam shares that's a capital allocation decision to buy ael um can you just remind us of maybe your priorities when you think through capital allocation decisions at brookfield yeah i mean so the corporation has significant cash flow coming in every year um over five billion dollars of cash flow free cash flow coming into us every single year. And we retain a lot of that into the organization. We pay a small dividend

because we like to think that the cash retained in the organization means it's more cash that can compound over the long term. Once we pay the cash out, that's capital that's gone from the organization forever. And when we think about investing back into the business, we want to put it into areas that will deliver 15% plus returns and into areas that have strategic value to the franchise. In recent years, that's meant we've been investing into some of our private funds because the track records, they were excellent. I touched on that in Investor Day, but it's 15% to 20% returns. With excellent track records, we continue to do that. We've been investing into scaling the insurance or wealth solutions business, as we call it now, Brookfield Wealth Solutions.

And that business has been really off to an amazing start. It's delivering 20% cash on cash returns, but the synergies it has with the balance sheet and the asset management business, it ticks all the boxes for a strategic investment for Brookfield Corporation. So we're allocating cash and capital there. And then we look to retain cash to be either opportunistic or to navigate through a more challenging market environment. And then we have excess capital that we look to be opportunistic with. And recently, that's meant buying back our shares. We see that disconnect between value and price. And not only is it to value today, but that value, you know, the earnings are growing at 20% plus over the next five years. So we think it's an

excellent use of capital to be investing back into the business by buying back stock. And it's been about 25 to 30% of that free cash flow has gone back into buybacks recently. And if this disconnect persists, then we'll continue to allocate capital to buybacks because we think it's an excellent use of our capital. That's great. And that's music to our ears. So what we're saying to people is you're strategic allocators. So you're not just buying back to offset dilution or like, hey, we're going to buy back so much every quarter. You're saying, hey, we see a bargain. We're going to take advantage of it. And one business we know pretty well is our own. That's exactly right. Yeah. As always, people on the program may have interests in the stocks they talk about.

The Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thank you.