Motley Fool Hidden Gems Investing - Ok, Cloud

Episode Date: April 9, 2024

Google is the latest tech company to host a conference full of AI pronouncements. (00:21) Asit Sharma and Deidre Woollard discuss: - Why the market is smiling on Alphabet lately. - How Google’s announcements show the company’s AI ambitions. - What Blackstone might buy next. (17:26) Robert Brokamp interviews Steve Chen, the CEO of NewRetirement, on what savers often miss about retirement. Companies discussed: GOOG, GOOGL, BX, MSFT, AZMN Host: Deidre Woollard Guests: Asit Sharma, Robert Brokamp Producers: Ricky Mulvey, Mary Long Engineers: Ricky Mulvey, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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how's your Tuesday going? Spectacular, Deidre. How about you? Good. I like to hear spectacular. I think Alphabet might be having a spectacular day or week. They're very excited. They've got their Cloud Next event in Las Vegas this week. You know, I'm getting a little bit of event conference fatigue of all of these big tech companies. They're coming out with these announcements and it's always a big flood of partnerships and forecasts. But one of the things I find interesting is how the narrative has shifted on Alphabet. A couple months ago, everyone was, NVIDIA's already won the race and everybody else is second and nothing that Google is putting out is working. And now that has really

shifted. What's behind that? Deidre, one of the things behind all this is that Alphabet has deep expertise in machine learning, in algorithms, in generative AI. They were really the seminal or one of the seminal forces that pushed generative AI along. It's just that other companies like Microsoft, with their partnership with OpenAI, swooped in and brought it to a consumer-facing model. So, Google has the chops. It's just a question of getting that out in front of both customers and enterprise businesses. Well, that was really the interesting thing, was that we knew that they had been working on this for years. And then, like you said, Microsoft and OpenAI, you know, sort of got the jump. And then Google, you know,

BARD felt a little flat footed and didn't get a lot of engagement. But Gemini has really, really sort of sped up. I mean, there were a few missteps in the beginning, but it seems like now Gemini is slowly being integrated into more and more things across all of Google's products. Right. So there's some evidence that there may be a toggle switch in Android pretty soon where you can just flip into a Gemini-based environment. And that's a pretty good line of defense against this one business risk for Alphabet, that if we all start using these AI assistants, we're not going to go to Google anymore, which is a big source of their revenue. So, being able to keep you within that sort of search ecosystem by having you switch into a

Gemini mode, I think is pretty smart. And also, we're seeing some things out with their conference today that Google is making Gemini a little bit more robust in terms of avoiding basic errors. Their platform, which is actually called Vertex AI, has been incorporating some lines of defense into misinformation. This is known as grounding in the AI business. The latest models of Gemini are a bit more grounded and tied to fact-based information, traceable information sources. We've seen Bing do a little bit of this as well. So, I think that's going to be pretty good for restoring some confidence in this company. Gemini, again, is not the end-all and be-all of Google's expertise, but it is the most

visible aspect of it for many people. So, it's good that we're seeing some upgrades to Gemini. And also, I'll note this latest upgrade, it's called Gemini 1.5 Pro, I think is going to be attractive to some enterprises because it's capable of understanding longer bits of information and presenting analysis, be it video, text, voice, et cetera. I know that some of the market is like, okay, their last event was eight months ago. And so they didn't wait a full year. So maybe that means that we're going to see more announcements. One of the things that is interesting is, as you mentioned earlier, Google's primary business

is still search. Cloud is around 11% of the business, competing against Amazon and Microsoft. But what advantages does Google have in the cloud space? Well, one is that it's got pretty deep expertise, again, in processing. So it has ways to convince businesses that they have a better return on investment by staying within Google's cloud. And I think some of the announcements we're seeing today are evidence of this. They're introducing a new chip, which is going to be Google's first ARM or ARM-based CPU. It's called Google Axion. So, I saw some news releases that this is an AI chip.

I mean, it sort of is. What it really is, is an alternative to GPU processing. So, this is a central processing unit. It is designed with a very specific set of capabilities and instructions. it's really good for enterprise workloads in the cloud. They're going to test this out on some YouTube workloads. The chip will be out later this year for enterprise businesses to test drive. But Google has an argument here that, look, if you're spending money with us, whether it's AI or other parts of your business, this is an energy-efficient chip. It is superior to x86

chips, which is sort of a standard that Intel and AMD have in the marketplace. And it's really going to help save you money. You can use it for generative AI, but you can use it for all the other great cloud stuff you get from us. So it's important for Alphabet to bring forward some silicon-based advantages like this. This isn't going to shift the world from NVIDIA GPU computing all the way to Google. But Amazon isn't trying to do this either. Neither is Microsoft. All three of these companies are trying to show that they have some compute solutions so customers have alternatives to using GPU processing. It'll be a mix going forward, for sure. But I like that alphabet is showing it's got a bit of muscle in this space as well. One of the things I'm thinking

about is, I know Tim Byers has talked about this too, is the multi-cloud environment and that now it's not just picking one partner. And it seems like Google might be positioned to benefit from that. I know in some of their announcements, they talked about all of the companies that they're working with. And so it seems like there's a race to get all of those, you know, Fortune 500, those big, the big companies, you know, using your platform, but maybe they're, it seems like they're using a bunch of different platforms. But one thing I'm wondering about is for, for you and I, for the, for the people that are mostly experiencing Google through things like Gmail or Google Docs and things like that. We're going to see a lot more of Gemini in our daily

work, aren't we? Yeah, it's going to be popping up in a lot of places. And I think the first wave of experience for some of us may be amazing because you may be an early adopter of generative AI and just will be really pleased with this. For others of us who want to take our time with technology, it's going to be a little irritating. You get little wavy things at you as you use your devices saying, hey, would you like to try Gemini to book this flight, etc. But this has been the business model of Google and Alphabet for a long time. We've seen this on our devices since we first started using the products. I do think we'll see that. For that matter, Microsoft is doing much of the same. If you happen to use Microsoft Office, you've already seen the invitations

to use their AI assistance. This is going to be something that eventually gets woven into the fabric of our work. But that first layer is going to be a lot of pop-ups and invitations to test drive the technology. Yeah, absolutely. It really is all about, you know, about achieving critical mass of adoption and making it seem sort of seamless rather than going to a generative AI location. It kind of comes to you now. Totally. Let's pivot. You know, I wanted to talk a little bit about Blackstone. I didn't get a chance to talk about it yesterday. Blackstone made a big deal over the weekend. They're buying Air Communities, which is an apartment read, a smaller one, but for 10 billion, which is about a 25% premium on

the last share price. You know, it's Blackstone, no stranger to acquiring big REITs. They took out one of my favorites, American Campus Communities in 2022. Part of it is they build up these massive funds. I mean, they're buying this with their real estate fund, which they raised $30 billion for last year. And they make these smart investments, typical Blackstone stuff. But I'm wondering, this current regulatory climate seems like a little bit different. I'm wondering if that's going to put a little hitch in Blackstone's giddy-up. Maybe. I think, actually. Yeah, I mean, you've got a point there, because they are, look, the world's largest alternative asset manager. They have hundreds of billion dollars to sling

around to make acquisitions, to finance big deals, etc. But I seem to think that the European Commission, their regulatory arm, and the Justice Department, all regulatory bodies of the U.S. government are just so focused on big tech right now. That seems to be what they wake up thinking about. So, it opens the door for an innovative company like Blackstone, which is buying and selling in a number of different industries, to make bigger acquisitions, one that might be under the microscope if an Alphabet or an Amazon or a Microsoft made the same acquisition and get by with it. So you're totally, though, onto something that the regulatory environment is sharpening up and governments are more than ever worried about monopolistic power because technology plays such

a big role in today's acquisitions. So companies that have already a lock on a market because of their patents and technological edge get swallowed up by bigger companies that also have locks on other markets. It's never a good look on the tech side of things. But you and I were chatting earlier today about just the variety of investments Blackstone makes. I somehow think this behemoth is maybe going to be able to coast under the radar for a while. Behemoth. I love that word, because that's what it is. Let's go into rumor territory, because there are two other Blackstone rumors that I find fascinating. The first one is that they're looking at Jersey Mike's, this famous sandwich shop, of course, franchise model.

They're looking maybe for about $8 billion. I love the story at this point. You and I were talking about it before about Peter Cancro, you know, started working for this sub shop when he was 14, bought it when he was 17, you know, turns this into this national chain. Maybe he's looking to cash out. Maybe he's looking to do more philanthropic stuff. What makes a brand like this attractive to private equity? I think it's in the keyword brand. I think when private equity sees a business that has extreme customer loyalty, has been able to scale over the decades, they understand that it's not a proposition that will erode quickly. So they can go in, make the kinds of tweaks they're used to. Some call it like hatchet work.

private equity has a bad reputation in industry, and I think some of that's earned. But they don't always do that. Sometimes Blackstone will come and use more of a scalpel approach to optimize operations, squeeze some more operating margin out of a cash-generative business like this, and be okay with it. I think that whenever you have that high customer recognition, that brand awareness, it's really attractive to private equity because it's hard to destroy that overnight. If they make a mistake in cutting too much, they can ease back a bit, and it won't take the business out of its step. I find it interesting, too, because we've had the Kava IPO, and Chipotle had its big stock split. There's very much interest

in food. We always say, never bet against the American eater. I think that remains true. It seems to be sort of like Renaissance time for food IPOs, doesn't it? We've seen tech IPOs dribble down. There's not a lot going on there, but in the food space, wow, it's booming. But this does show the power of certain concepts when they take off and they scale and they have that magic formula that makes you want to walk by a certain restaurant to get to restaurant you want to get to, which isn't really my idea, but Ron Shaikh's idea. He, of course, is the longtime former CEO of Panera Bread and is now himself a public investor. Once you figure out that magic formula, man, you can take that all kinds of places globally.

While it's not a recession-resistant industry and not every concept makes it, the ones that do can have success defined by decades, just as Jersey Mike's we're talking about. For that matter, just back to Jersey Mike's for a second, an $8 billion rumored acquisition if Cancro does sell to Blackstone, there's not a lot of places you can go to cash out when you get that big, except for the public markets and private equity. Maybe if this deal is for real and matures, that might not have been his first choice, but where else are you going to go to realize your $8 billion in equity? Yeah, really, really good point. Our last Blackstone story, it's about the French skincare company, L'Occitane. This one is

different because they're not buying it and taking it private, but they may be helping the owner, which is an Austrian billionaire, Reynald Gaguerre, wants to take it private. Blackstone might provide the debt financing. This is interesting. Looks like this one is even closer to happening. This one trades on the Hong Kong Stock Exchange, oddly enough. Trading was paused yesterday ahead of an announcement. Terms haven't been finalized. Blackstone, they've got about $200 billion in dry powder. They can really do a lot with debt financing in an environment where it's not the easiest time to get money. I think so, too, Deidre. Warren Buffett has talked about this for decades, the problem

of getting really big. How do you keep making outsized returns once you're one of the biggest players in a certain market? This is something that's playing into Blackstone's hand. What I'm referring to, of course, is this high interest rate environment. You have on one hand private equity group, masters of collateral, masters of financing. Number two, you've got companies around the world, bigger companies that may want to get off the public markets or may need some working capital or longer-term debt. Once you get to a size like La Cetaine, where the banks are going to be a little hesitant with this high interest rate and maybe the quality of the collateral to lend you a bunch of money in a financing deal, where else do you go? Again,

the world's largest alternative asset manager, as you mentioned, a few hundred billion bucks in dry powder. I'm sure they can make a deal that both parties will find amenable. It probably will be a complex financing deal. That's another advantage they have. They can deal it out in trenches. They can have some provisions for more financing at a later date. There's different clawback provisions they can put into their debt. These kinds of deals are tailor-made for a bigger company like Blackstone that's trying to find where it can make its profit year in and year out, even as it's got so many billions that it needs to deploy to generate that return. I think this is such a fascinating company to study. They've acquired some companies that

I like and thought were so investable. I believe they acquired Rover Group, which is the pet sitting platform, a few months ago. You also see them taking out smaller companies that might have made a splash on the public markets if given enough time. Yeah, yeah. Never take your eyes off Blackstone. Thanks for your time today, Asit. Thank you so much, Deidre. This was a lot of fun. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment,

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for exclusive access today, rippling.ai slash fool. What assumptions are you making about retirement. Robert Brokamp caught up with Steve Chen, the CEO of New Retirement, a company focused on DIY financial planning at scale, about what savers often miss about retirement spending and when they'll actually leave work. Quick disclaimer, our sister company, Motley Fool Ventures, is an investor in new retirement. One of the first questions that anyone will have to answer, if they use a retirement calculator or even just meet with a financial planner, is, when do you plan to retire? What's your impression of how good workers are at predicting when they'll actually retire? Yeah. I think everyone is ambitious.

People say, oh, I'm going to work till early, mid-60s. Some of them love working. They're going to keep going. That's what people tell themselves internally. If you poll them, that's what they'll say. If you look at the data, many people end up being pushed into retirement through illness through being laid off downsizing or whatever in their late 50s and that can create this uncertainty so i i do think that a lot of people should anticipate that that could happen and build scenarios like what would i do if that happens and then you know there's you could work part-time i mean i think a big insight is actually on the flip side many folks are like well i need to keep working until i'm 70 or late 60s but in fact maybe you could go you know say you're making

$130,000 a year or something. You've got a good income and you've saved. And you're like, I need to keep making this kind of money or whatever it is for a long time. In fact, if you work part-time and you're making $50,000 a year and then maybe claiming Social Security, you could bridge yourself and it would be fine. You talked about doing the Roth conversions and you have suggested in the past that early retirement is a good time to possibly do that. that might be counterintuitive to what a lot of people think, right? I'm in retirement. I shouldn't be doing conversion because why is that a good time to be doing that? You know, the, the Roth conversion strategy is for most people, especially kind of Gen Xers and

above, they've saved up most of their money in 401ks defined contribution plans that are subject to RMDs requirement distributions. And the whole thing is like, you want to move those assets out of that vehicle into a Roth and you can do conversions in lower income years. So you take the money out over age 59 and a half where there's no penalty. And so if you have low income years and like, you know, say you're going to have $20,000 of income or something, you're like, and we have a marginal tax system, right? So you, you solve for, okay, I'm going to put it into the 20 up to 22% or 20, whatever the, you know, the interest income tax rates are like, I'll take out 80,000 bucks this year, push my income up to this, you know, keep it below a certain marginal tax

rate, and then convert most of that into a Roth, which can then grow tax-free. And there's also a bunch of estate tax benefits to it as well. So there's, I also tell younger people that they should really consider a Roth because if you can, you know, get your money into that vehicle, you know, in your, in your twenties and let it compound for 30 years, it makes a massive of difference because it grows tax-free, comes out tax-free in the future. So you're kind of hedging out your future tax liability in a big way. The one thing I'll add about doing the Roth conversions is that, of course, when you convert money from traditional to Roth, that adds money to your taxable income, so it's not a free lunch. And you do have to think about how it'll affect

things like your premiums based on the Affordable Care Act, or if you're receiving Medicare, what you pay. Because if you earn too much money, you'll have to pay for Medicare. So there's a lot of moving parts there in terms of making that decision. Yeah. So one of the most popular parts of our platform is we have a Roth conversion explorer that lets you think through how I would do conversions across multiple years and solving for things like different rates of return that you're expecting. You can say, I want to solve for lowest taxes. I want to solve for maximum estate value i want to solve up to a certain tax rate i want to factor in irma you know medicare means testing we've built all that and the way we do this is and this is where you're going to start

to see compute and ai emerge what's so different is like we one let you frame up everything you've got right all of your savings and your home equity and income sources and one place pensions annuities everything and then we run a lot of simulations um for you when you do this so what we're doing is we're not we're basically like saying okay what if you did this this this and do it you know you do like you know hundreds or thousands of simulations and then we pick the one that is the best fit for a strategy you're trying to pursue so that's the kind of thing that's starting to happen and i think you're going to just see more and more of this where there's, there's parts of planning where computers are great, right? There's parts

where humans are great, but there's, you know, you're not going to do this kind of stuff on a spreadsheet. You know, you're not going to have access to AWS Lambda serverless compute that you can run this, you know, millions of simulations behind the scenes for our billions for millions of people every night. That's kind of where we're headed with this thing. Let's talk a little bit about spending in retirement. The base case assumption, whether you're looking at a retirement calculator or even most financial planners is that your expenses will rise along with inflation in retirement. And in your opinion, is that the right assumption? You know, it's not, unfortunately. I mean, well, fortunately, unfortunately, I think a good way to frame this is like, there's the kind

of the go-go year, the go-go years, the slow-go years and the no-go years. I mean, it does, you know, if you look at, you know, you think about your parents, right? Hopefully they're alive, but like, you know, you know, 60 to 70, you're doing one thing, 70 to 80, you're in something else. 80 plus, it's a pretty different world out there for you. And I think a lot of people, they do over-optimize for trying to solve for like, I want to have plenty of money when I'm 105. Well, you're not likely to be alive then. And that's where things like annuities and stuff like that do make sense. You can hedge longevity by buying a deferred annuity, right? So you could be like, okay, hey, in the unlikely event I'm alive at 90, I'm going to buy enough income so

that with that and social security, I'm not going to starve to death. And then you can set your planning horizon to 90 and then you could start thinking about and this is where there's a shift that happens to people whereas you approach retirement you're like oh man you know what is my one non-renewable resource here time and like i really need to think about how i use my time really intentionally and like maybe i want more time with my kids i want to have better experiences and like you know i might not be how you also see your friends like oh so and so had a heart attack at 65 and they dropped dead it's like you're like you know that's becomes a real thing and you're like, maybe this is like, I want to be like, I don't want to be chained to my desk

until I'm 65 or think that I will be, I want to, I want to take control earlier. So generally, you know, the data on this is that you're real. So your inflation adjusted spending declines by about 1% per year as you go through retirement. So every 10 years it'll decline 10%. So if you're spending a hundred thousand dollars a year or drawing that down on top of social security, say you want to have say between you and your spouse you get 50 000 social security and you're like i want to have 150 000 a year to live on i'm going to draw 100 000 a year well you know 10 years in you'll be spending you know 135 000 on a real basis and 10 years past that you'll be spending more closer you know call 120 000 bucks or something so you will need less money that's

what the data shows over time and you should that will dramatically change how much you need to save Yeah, and that's the important point, right? Because if you assume a more realistic spending pattern, it means you don't have to save as much for retirement. It might mean you can retire sooner and enjoy some of that money. Or it could mean that in your earlier years of retirement, you should basically enjoy yourself a little more while you can, because at that point, you're the healthiest you're probably ever going to be. So you should enjoy it a little bit more or in the words of Dr. Michael Finca, a retirement expert, your first year of retirement is probably going to be your most expensive year because expenses go down. And my parents are alive.

My dad's 85. I talked to him the other day. He says, I drive to four places. That's it. He's got four different stores he goes to. And otherwise he stays at home and takes care of his chickens. And he's perfectly happy doing that. Yeah. No, that's the reality. And you use less resources unless you need significant care and i think that's the that's the big unknown that you really need to think about and the children need to think about i also think that just thinking about your your health is super important if you really step you know like without our health like you know we worry about all these little problems but as soon as you get unhealthy you're sick like 100 of your energy is focused on getting healthy and you know you need

to really like invest in it just like you invest in you know your your your portfolio right but like this is where like walking eating well sleeping stress management matter if you want to be in one piece and be functional uh and get the most out of your kind of your health span really being intentional about that matters a ton 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. Quick programming note, we have a team retreat this week,

so we'll be taking off Wednesday and Thursday from publishing new episodes. But we'll be back with the radio show on Friday. We'll see you then.