Motley Fool Hidden Gems Investing - Metaverse Possibilities for Investors

Episode Date: May 26, 2022

Nvidia and Apple are two of the biggest companies investing in the metaverse, but they're making headlines today for different reasons. (0:25) Bill Mann discusses: - Nvidia's unusual stock movement in the past 24 hours - The graphics chipmaker slowing hiring and their guidance - Apple targeting the same iPhone production levels as last year - Why he's more concerned for Android phone makers than he is for Apple (13:56) Asit Sharma talks with Rickey Mulvey about the real possibilities (and companies) that might emerge from the metaverse. Stocks discussed: NVDA, FB, AAPL, U, GOOGL, WDFC, IBM, RBLX, DIS Host: Chris Hill Guests: Bill Mann, Ricky Mulvey, Asit Sharma Producer: Ricky Mulvey Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. We've got the latest from two of the biggest companies in America, as well as a closer look at the metaverse. Motley Fool Money starts now. I'm Chris Hill, and back by popular demand is Motley Fool Senior Analyst, Bill Mann. Thank you you for being here. A vote of one to nothing, which is a landslide. So longtime listeners know that every once in a great while, I will have someone lined up for the show and then something happens. Life intervenes in this case. And it's not important who it was, but in this case, the person who was lined up for today's show, their laptop melted down. So they're dealing with bigger issues. And so, coming in out of the bullpen, my good friend

Bill Mann. So, I do appreciate you being here. I want to start with Nvidia, because this is another sort of interesting day. You know, we focus on the long-term. It doesn't mean that in the very short-term, stock movements can't be interesting to ruminate on. For those who missed at the graphics chipmaker had good results in the first quarter. They said they're going to slow down their hiring, focus more on controlling costs. After hours yesterday, the stock was down 10%. You and I are talking in the middle of the trading day on Thursday and shares are up 4%. Do you think somewhere in between late yesterday and right now, enough people on Wall Street realized, oh, wait, this is a really good business with a really good leader.

Like, what do you make of this? What are we doing? You know, I love the way that you've introed that. I mean, because I think that when it dropped 10%, I think it was very much a snap judgment. And it was a snap judgment based on the fact, at least partially, that Nvidia said that their guidance was going to be lower for the remainder of the year. They're guiding down about $500 billion. Almost all of that is in the form of loss of revenues to China and Russia. That's what they've said. It should not have been a surprise, but I think you really saw a form of ready, fire, aim. It was a very good quarter for NVIDIA. You're right that we don't tend to talk about short-term movements. Looking at NVIDIA right

now, it's a $446 billion company. It has been as high as $700 billion this year and as low as $400. So, you're talking about a $300 billion swing in what the market perceives the value of Nvidia to be. Now, I don't know about you, but I consider $300 billion to be quite a lot of money. As do I. Okay, good. I don't want to make assumptions about your tax brackets or anything, Hill, but to me, $300 billion is a lot of money. And it just goes to show why you should not take short-term movements seriously at all. It means that the market has literally no idea how to value Nvidia, except to say that this company is worth a lot of money

and it's done a lot of great things and still great things are expected of it. This is something we're going to continue talking about in a few minutes, but NVIDIA now joins the list of large, significantly profitable companies that are, to one degree or another, making moves to control their costs. Have you seen enough, whether it's NVIDIA, Facebook, Apple, which we'll get to shortly, have you seen enough from some of the largest companies in America to give you an indication of what the economy is going to be like for the rest of this year? I think that we are likely to go very quickly from the great resignation to the great layoff. It seems like that is coming down the pike. If you've got

companies that have as much cash on their balance sheets as Meta and Nvidia saying, we're going to control costs, then that is obviously a place that they're going to be to be looking at. That is, of course, I think a concern for the economy. You never want to see an environment in which people are laid off. In the case of Nvidia, I think probably most of their cost sensitivity is going to come in their gaming segment. This is the first quarter, I think, ever as a publicly traded company. Guaranteed, one of our dozens of listeners will correct me if that is wrong. I think ever that gaming was not the biggest segment of revenues for Nvidia. People are actually guiding that revenues from gaming will continue to be weak

through the year. I think that that's specifically where they will be looking to tighten up the reigns a little bit. Let's move on to Apple then, because Apple is planning to produce the same number of iPhones this year as it did last year, roughly 220 million. Similar to Nvidia controlling costs, this is part of how Apple's being viewed right now, is they're being conservative, which I think makes a lot of sense. I'm wondering if you think they are being overly conservative, given how much money this company has. Yeah, I'm not sure. I mean, Chris, I've done some math to prepare for the show, and I figured out that 220 iPhone units, 220 million, equals one unit for every 35

people on the planet. Whenever I think about these companies, these massive tech companies, I begin to wonder in the back of my mind if there isn't an efficient horizon for them, if there isn't a place at which they can grow no more because we are just not producing people fast enough. Now, they have absolutely guided down, or not even guided, they're ordering less than was being presumed. But 220 million units of the iPhone for Apple alone for one year, that is a massive number. And it is still an incredibly profitable device for them. They mint cash off of the iPhone, both in the sales of the device and in the sales of all of the ancillaries that go with having apps that they get paid for and everything that they get paid for

due to that ecology. But it has always been in the back of my mind that at some point, the level of growth for the units themselves has to slow down just by virtue of the fact that we're just not creating people fast enough. Where do you think this is likely to go? This is, unfortunately for you, a little bit of a crystal ball question. Hold on, let me shake mine. But I do wonder, you know, with all of these companies, again, huge profitable companies making these announcements, one of the questions that always goes through my mind is, okay, so what's going to be the move after this? I'm not really a chess player, but I know enough about the game to know,

you got to think a few moves ahead. I'm wondering where you think Apple is going next. It is important. Even though the iPhone absolutely dominates the cultural zeitgeist when we think about these devices, they are actually in a competitive market. For Apple to actually hit 220 devices, and this, by the way, this isn't a guide, this is the amount that they have asked their assembly partners to make. They're not guiding to this number, they're producing this number. For Apple to hit the same number that it had last year, and I think it's pretty safe to say that the amount of spending and the willingness for people to spend has switched from 2021 to 2022, I would be much more concerned for their competitors,

the Android manufacturers, most of whom are in China, which have already said that they're having a rough quarter. So I think whenever you see big companies like this that have a huge amount of cash, this is the type of environment in which they get to, in a way, extend their lead and to throw their weight around a little bit and to make things very uncomfortable for their competitors. And so, that's what I think that we're going to see from Apple. The market has not overreacted to this story. Apple is actually up today. I mean, it's down from its high by about 25%, which is $600 billion, if I do the math right, which is, again, kind of a lot. But at the same time, I think when you see a change like this in the environment, it actually

favors the more powerful, the more well-capitalized of the competitors. I'm glad you mentioned the stock price because I was legitimately surprised. Again, Apple shares are up 2%. That's not a huge number. I'm surprised it's up at all because this has been the type of market environment, particularly over the last few weeks, where any type of slowdown is punished? Is the slight rise we're seeing because the stock has come down from its highs, or is it because this provides a level of certainty for Wall Street in terms of the most profitable device, the most important device for Apple? I think it's very much the latter. And again, in this environment for Apple to be saying,

look, we're going to be producing the same exact amount that we did last year, a huge number of devices when we know just how much pressure and just how much their rivals are struggling, suggests that Apple is not about to give up its lead anytime soon in terms of being the most important manufacturer of smartphone devices. And ultimately to me, I think that's why the market has looked at this and said, yeah, well, duh. So we aren't making people quickly enough that Apple's going to continue to grow smartphone manufacturing at a 10% clip. That's not how things work. But at the same time, I don't look at this as being anything other than Apple having the capacity to extend its lead. By the way, wouldn't you love

to have some Wall Street analyst just come out and say, well, duh? Here's my question. Well, duh. Great quarter, guys. If they followed it up, yeah. That's the one-two punch I want to hear on next conference call. Great quarter, guys." Well, duh. Then just, we need a camera of Tim Cook reacting to that. That's right. I want to see his reaction. Bill Mann, great talking to you. Thanks so much for helping out today. Take care, Chris. Thanks. NVIDIA and Apple are just two of the companies investing in the Metaverse. At this point, we don't know what the Metaverse is going to be, but that's not stopping some

investors from rushing in. What are the real possibilities that may emerge? With more, here's Ricky Mulvey. The promises of the Metaverse, Web3, and the virtual revolution are big. One thing I'm finding challenging is trying to separate the signal from the noise. Joining me now is Asit Sharma, Senior Analyst and a contributing learner to The Motley Fool. Asit, I'm so happy to see you today. Ricky, thank you for having me. Looking forward to discussing some signal, hopefully. A little bit of noise. A little bit. Well, in a way, this is just noise, but that's a podcast joke. I had a conversation a few days ago with Matt Greer,

he's a longtime producer at The Fool. He said that one of the concerns he had about the Metaverse and investing there is that he sees some parallels to the 3D printing phase from a few years ago. There's that promise you could print a ballpoint pen in your living room and these everything machines would play a major role in our investment strategy. Are you seeing parallels there? Is that analogy broken? What's your take? It's a spot-on analogy. Every few years, we have a big theme that washes over the popular imagination. We have no end of investors, including myself and probably yourself too, and probably people who are listening, trying to figure out, how do I benefit from this trend if

this is going to have such an impact on society and the way we work, the way we play, all that good stuff. The problem is that big themes rarely live up to their promise overnight. and the effect can be very prevalent. Often at times it takes decades and the investable effects dissipate before we can grab onto them. Yeah. Kind of to that point, I saw it was virtual real estate sales. So it's just plots of land, apartments in the metaverse that reached $500 million last year, which for context is, that's about how much money the WD-40 company made. And when I think about the metaverse and especially investing in it, the thing that concerns me is I see just a mad dash. And I wonder if it's better to just be patient

right now. Patience is always a virtue in investing because our brains are so wired to think about today, this week, next week, next month. But investment results, they really play out over years. And I think this example is so much fun, Ricky, because it shows us that human nature doesn't change. Technology changes and opportunities change. We had the gold rush in California, which is the analog version of this in the 19th century, where everyone was rushing to get in and buy land in California so you could mine for gold. The price of shovels went up. Millions of dollars. In those days, dollars poured into the state of California. They're reaping some of the effect today. It wasn't

an overnight success for tons of people. Most people lost money in that gold rush. The gold rushes keep coming. It's just where they take place. Now, they're more virtual than they are physical. Sometimes, to use the gold rush example, it's the people who make jeans who end up making money. Oh, for sure. One thing I have been thinking, though is, I want to look at these tech companies, but I have a difficult time because they're so complex. How are you thinking about investing in these compounders with a high growth potential? For me, honestly, it's a company I own, and I should have done a lot more research when

I invested in it, which is Unity Software. Yeah. When we were talking about this segment, Ricky, when you and I were throwing ideas out at each other, you were describing Unity as a company with high growth potential, but a complex business model. I think this shows your sophistication as an investor. If you sunk a lot of money into Unity, maybe it shows your evolving sophistication as an investor. I think Unity is a very interesting company with a lot of potential. But I will say this, for investors who look at complexity as a roadblock to investing, just as you might a real-world obstacle that a company has to You're like, I don't want to invest in company A because they have this merger coming up.

I want to see how it does afterwards. I'm not going to go all-in on this proposition today. I'll wait until that merger completes. Complexity can be the same type of hurdle. In my experience, the more complex the business model, the more likely you're going to get one of two outcomes. A, the model ends up succumbing to the complexity, so the investment returns just aren't there. Or B, in practical terms, that complexity gets converted into a long-term competitive edge. My favorite example is IBM, of course. I thought this was the 1950s, but I went back and looked before the show. In the early 1960s, IBM introduced the mainframe computer, which is that decade's version of something like a Unity software,

which has this incredibly broad platform to help game designers, to help digital artists monetize their creative output. That was a fine time to invest in IBM, but it was hard to see it in April of 1964. To me, it's almost that you invest with a starting small position in these types of high-complexity, high-potential models. It's an inverse to the complexity of the relationship. As they become less complex and you see the business results start to merge, you can put more money in. I believe in the continued digital transformation. Are you looking at the picks and shovels, the end products, both? How are you thinking about it as an investor? I think this goes back to what Mac

was pointing out about the 3D printing space. It's hard to invest in the end products just now, wherever digital transformation is concerned, unless you're talking about companies that are providing the structure for digital transformation. You're looking at project collaboration software or automating business processes. Those look actually more like picks and shovels. I'm a believer in early in a big theme, invest in the picks and shovels, because you can see those outcomes, they're a lot more visible, versus going all-in in companies that I like, Unity, like Roblox software, nibble at those positions because it's rare for both that pure play idea and a profitable business model to merge up at the beginning of the game.

It takes time for both of those to synthesize and for everyone to be able to see, this is an awesome investment. I'm going to invest in Amazon.com. It's 2003. I didn't get into IPO a few years ago, but now's the time. You can still make a lot of money being patient. You had a great conversation with Matthew Ball. It's on the podcast feed. You asked Matthew Ball what his dream was for the metaverse. He talked about the decentralization. I think it's very easy to get caught up in the technicalities of it. I think that in the end, there are a lot of very cool things that are going to come from this digital transformation, from the metaverse. What's one dream that you have that you'd like to be able to be a part of?

I'm going to give mine, and then I'm eager to hear yours as well. I have this dream that really great novelists should be able to work with digital designers to show us what they visualized when they were writing their works. Now, when you read a novel, that's a really special experience. It's an act of iterative creation. It's someone else's consciousness that's being introduced to your consciousness. The story you weave, the visuals that you come up with, the mood that you interpret out of that novel is actually more important, I think, than just the writer's conception,

right? So, you're merging two different consciousnesses together. We get a taste of this right now when great writers work with movie studios. I'm thinking of the Harry Potter franchise. So, you get some sense of what writers were thinking about. I don't want to replace that experience of reading a novel and having your mind's eye create the story, but it'd be such a fun adjunct to be able to see something as an author visualized. We've got a great analog version of this. I think it's unique, maybe the only one that exists in the world. But the Nobel Prize-winning novelist Orhan Pamuk has curated a museum in Istanbul, it's called the Museum of Innocence, that has objects he visualized from the time that novel is

place. You can go toward that museum now and see objects as he saw them as he was writing this novel. To replicate something like this in a metaverse experience, I think it'd be a lot of fun. What's the investable take out of that? It could go back to Unity Software or Autotest, the companies that are creating the kinds of tools that will make such an experience happen. It's the way that great artists can merge consciousness between writer and reader. And in this case, it can also be a symbolic and virtual environment. For me, I guess one dream I have, it's a little bit more simple. I'm really excited for live sports. I think that's where you see a winner of something like Disney.

I have family in Ohio. I have family in Australia. And I think this is a way where you could imagine sitting at a Cincinnati Reds game or an NBA basketball game and spending time together is one thing that I'm particularly excited about. Moving on, I guess one question. We've been talking about the metaverse a lot, digital transformation. What's one digital transformation that you're excited about,

that you're watching, paying attention to, that doesn't necessarily have to do with the metaverse? So I'm actually piggybacking off of something that you wanted to talk about when we exchanged our notes, but that's okay, because I think it's so fascinating. For me, I'm interested in a company called DeepMind Technologies, which is a subsidiary of Alphabet, the parent company of Google. DeepMind develops neural networks. These smart networks have a differentiation from what we normally think of as machine learning.

Machine learning is, the model becomes smarter by watching data as it comes in, making its own assumptions. Neural networks at their best, they iterate by themselves, they learn by themselves. The example that I love to talk about, two examples, DeepMind is responsible for AlphaGo, a Go-playing computer program, and AlphaZero, which is a chess-playing program. AlphaZero was trained by just being introduced with a set of rules. It then played 44 million games against itself in nine hours, and came out of that as a bad blank. Out of that experience, challenged the best brute force computing program of the time, and one with some really fascinating examples of how to come at chess in ways we hadn't thought of before. This really excites me. It's

the potential for artificial intelligence to come up with insights into creativity that we just just haven't considered. It's not a lot to monetize there. But you asked outside of the investable universe, what's attracting my attention? Well, I think there will be investable things, especially for companies like Alphabet. Gmail's neural network, for example, which is every email ever written on Gmail is now being used to predict what you will write next, which is incredible. And just because you know that's incredibly valuable, I don't know how to value that as an investor. Yeah, Ricky, there's a very interesting long-form article I read.

I still get the Sunday print edition of the New York Times. And in the New York Times Magazine insert a couple months ago, there was an article called AI is Mastering Language. Should we trust what it says? I think you'd enjoy that, Ricky, or maybe it would just scare you a little more. Okay, I'll check it out. Anyway, Asit, great chatting with you and good to see you. It's a lot of fun. Thanks so much, Ricky.

As always, people on the program may have interests 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.