Motley Fool Hidden Gems Investing - OpenAI Helps Google Win in Court

Starting point is 00:00:00 Alphabet stock is up 9% today. Did the courts save Google's cash cow? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Travis Hoyum, joined by Lou Whiteman and Rachel Warren. Let's start with the big news today, and that is Alphabet. The stock is soaring today. After the market closed on Tuesday, we learned that Google, while technically still a monopoly, isn't going to have to change a lot about its business, not going to have to spin off Chrome or Android. They can still pay to be the default on devices like the iPhone. So that's going to be a benefit for Apple as well. So there were some changes. They have to share data with competitors. We don't know exactly what those details are going to look like. And the idea is to

Starting point is 00:00:56 more competition into the market. But ironically, OpenAI and the competition from artificial intelligence may have saved Google's massive, massive search business. What did you take away from this, Rachel? I think this is definitely a case that shareholders in Alphabet like myself have been watching closely for a while now. I think the key takeaway here is Alphabet has avoided the worst-case scenario that I think a lot of investors had feared. Shareholders like myself should be happy with that. But I think there's also been been a lot of confusion around this case, trying to understand why is this so important to Alphabet's

Starting point is 00:01:31 future as a business. Well, Chrome plays a really, really instrumental role really in the ecosystem that Alphabet has. It's a key distribution channel for its profitable Google Search business, its advertising services. The Chrome browser itself isn't directly monetized, but it has this key and dominant market position. And so that allows Alphabet to maintain control over user data,

Starting point is 00:01:54 over the flow of internet traffic. And it also really reinforces the dominance of Google Search because Chrome has been set historically as the default search engine. It's also a really crucial mechanism for collecting data on user browsing habits. It serves as a really key entry point to the broader Google ecosystem.

Starting point is 00:02:14 So it encourages users to adopt other products, like Gmail, Google accounts, their AI product, Gemini. I haven't wavered on my thesis for this business. We've seen the stock really beaten down in the last months in anticipation of this ruling. Shares soaring today. I think that this ruling reinforces the strength of the business as it moves forward in the AI revolution. And I think investors should be happy with these results. Yeah, Lou, this is one of the companies that has been the cheapest in the MAG7 for quite a while.

Starting point is 00:02:45 Earlier this year, trading for less than 20 times earnings. We're now up to 22, 23 times earnings. but it seems like this is sort of a sigh of relief for a lot of investors in Alphabet, given that Google, and we're going to kind of use these names interchangeably, but Alphabet is the parent company. Google is the business that we all probably know and use, but it's sort of a sigh of relief for investors right now. Yeah. And Google's the cash cow. So for these purposes, we can go ahead and talk. This is Google. And yeah, it isn't status quo. I think the lawyers would argue with me on that and both sides are going to appeal because that's what they

Starting point is 00:03:18 do. But as far as we need to look at it, it is the status quo, that the important tenants that have made Alphabet the business they are, that they remain. And I think, Travis, the lesson for investors here is, yes, it's underperformed. I think a lot of that has been just vague fears, but antitrust. We probably were too clever for our own good, beating the stock down, worrying about this stuff. So yes, we're getting a bounce back rally here. We were probably overly worried about it before, but the alphabet, we know this cash cow generated this money making machine. There's still threats out there, but the government isn't going to break it up. We can just keep on keeping on. And one of the reasons they're not breaking it up that I thought was really

Starting point is 00:04:04 interesting in the opinion was because of artificial intelligence and companies like OpenAI. They basically said, you know what, a few years ago, I believe the term was a no-fly zone for investors, and then said, you know what, there's hundreds of billions of dollars flowing into these AI companies that have explicitly said they're going after Google's business. So, Lou, is this one of these cases where disruption or the potential for disruption came out of nowhere. This suit was filed long before OpenAI and ChatGPT was launched. OpenAI existed at that time, but ChatGPT was not the name that it is today. And now you do have this vector of competition that has allowed Google to keep these points of strength and maybe give it a

Starting point is 00:04:54 little bit of a leg up trying to compete with these companies that everybody thinks is going to disrupt the core search business. Definitely. And it's a fascinating case. And I guess to the court's credit, they did adapt at a time. I mean, the court wasn't stuck in the past year, which they could have been. But yeah, no, look, disruption is real. As an investor, you always have to be watching all things. We were so focused on the court case. I don't think we've ignored AI. But I do think AI is coming, whether or not that's a threat to Google or an opportunity? Both, probably. But yeah, it's funny to think about how the world has changed since this suit was first filed. And yeah, I think the court appropriately reflected that change in their

Starting point is 00:05:37 decision. They're not anchored in the past, which they could have been. Rachel, one of the companies that we probably aren't talking enough about today is Apple. Apple is the company that is getting that $20 billion or so check from Alphabet, from Google every single year to be the default on the search engine, that's one of the things that was kept in place in this. They can pay for this. And the logic here was pretty interesting. It wasn't that this wasn't going to help Google maintain its previous monopoly status. It was that it was going to harm the ecosystem. So that check that they write gets the most attention. But if you think about companies like Mozilla. I think it's 80% of Mozilla's revenue comes from a similar deal with Google

Starting point is 00:06:23 to be paid to be the default search engine. If that money goes away, Mozilla has a really hard time building their browser. But this is a big benefit for Apple, who's going to continue getting this cash cow for essentially doing nothing but saying, hey, default is Google. Right. Well, and even though Alphabet can't enter into deals that would prevent other search engines or browsers from being pre-installed on different devices, as you noted, it can continue to pay these fees to distributors, Apple being a key entity there to be that go-to or default search engine. And so there is a real positive impact for Apple, which interestingly hasn't seemed to really respond in terms of a share price perspective the same way that we've seen

Starting point is 00:07:05 Alphabet shares rocket today. But that essentially secures what is something like an annual payment of $20 billion from Google for being the default search engine on iPhone. So there are certainly reverberations from this ruling that go far beyond just the Alphabet ecosystem. Final question for both of you, and just to put some numbers on Apple. Apple stock's actually down as we're recording. We're about an hour into trading on Wednesday. So that's a shocker to me, because I think that was really financially the biggest risk. If they were deemed not able to pay that fee to Apple to be the default search engine. That could have just been money that Google kept rather than paying to Apple. But the market is not seeing it that way.

Starting point is 00:07:47 Alphabet's stock is up about 8% as we're recording. We now know that this is at least for now behind us. Lou said that there are going to be appeals. Rachel, I'll start with you. Do you own shares? And does this make you more bullish? Or does it change your thesis with Alphabet at all? Yeah. Interestingly, I own shares of both Alphabet and Apple. Speaking to Alphabet specifically, I think my thesis on the company remains unchanged. I had not been perhaps as alarmed by what we had been seeing in this particular element of the antitrust case in recent months as perhaps the market's broader reflection was. I had an inkling that this would be something that would perhaps end in Alphabet's favor based on just the trends we're seeing in

Starting point is 00:08:30 the AI space. And I think, as Lou mentioned, the judge's ruling was very, very much within the context of the changes we are seeing rapidly amidst the AI revolution. So, I think, you know, for Alphabet shareholders like myself, I think this really bolsters the underlying thesis that this is a business that has a really key role to play in the AI space moving forward. I don't know neither. I am the mag seven through all my mutual funds, so I just don't bother. But I will say, Alphabet still looks intriguing to me. We were caught up in this antitrust thing. We're still caught up in the AI threat that could be an opportunity. There's always dramas. There's always something to worry about. Alphabet is a really well-run, good company. I think buy good

Starting point is 00:09:13 companies for the long haul. Focus on that long haul. I think it works here. I think if I was to buy a Mag7, Alphabet would be on the top of my list. Alphabet is another one that I own as well. I just have not understood why this was so overlooked by the market, but maybe that sentiment is going to be changing just for a little bit of perspective. They're still growing their revenue, double digits. Apple, three-year growth rate, 1.8% on a compound annual basis. And yet, Google, even after today's move, is trading for about 22 times earnings. Apple's trading for 35 times earnings. So maybe we see an inversion of those in the future, But I think Alphabet is probably much better positioned today knowing that they're going to keep Chrome and Android in-house.

Starting point is 00:09:59 When we come back, we're going to talk about the re-split of Kraft Heinz. And Lou is going to explain what disk synergies are. You're listening to Motley Fool Money. And what better way than with a delicious Pratt Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try Pratt first at A&W. At participating A&W locations in Ontario. Welcome back to Motley Fool Money. Kraft Heinz has planned to split again into companies that they are currently calling

Starting point is 00:10:49 Global Taste Elevation and American Grocery Company, inspiring names coming out of Kraft Heinz. The other thing that they talked about was the dis-synergies of this deal. Lou, this has been, I think, probably a failure up and down. It's hard to look at this merger, what was it, a decade ago and see really any positives. But first of all, what are these dis-synergies and what are you taking of this re-split of the companies? Yeah, those terrible names are probably the icing on the cake, right? They're the perfect final chapter of this. Dis-synergy seems like the perfect term because there is no way this drives efficiency. Getting smaller, doubling up back office, everything we talk about when we

Starting point is 00:11:32 talk about the advantage of M&A, they are getting rid of. They're using terms like simplicity, but for logistics, for negotiating, just share in grocery stores, scale matters. Bottom line here, Travis, like you said, this has been a disaster. This has been a failure of management. The deal made sense. The kind of compelling, if you get it right, made sense, but the execution was wrong. So now it's back to the drawing board. They've already divested some assets. Honestly, God, I wonder if that isn't just a better way to go here, see what they can sell off to others, because scale does make sense, but it has to be scale in the hands of a management team that knows what to do with it. This seemed to be,

Starting point is 00:12:17 at least when the deal was initially announced, a management team that should have known what they were doing. 3G ran the deal. Buffett was involved. Rachel, how does this go so wrong for investors? Because this seemed like one of those slam dunk businesses. Kraft and Heinz aren't going anywhere. Turns out they kind of are. Yeah. I mean, look, I mean, the namesake brands aren't going anywhere, even if they're under different entities moving forward. But it's very fair to say that this merger, which was engineered by Buffett along with 3G Capital back in 2015, it has not performed as expected. And there's been a lot of challenges for the Kraft Heinz business in particular. I mean, that's very much been reflected in the share price of the

Starting point is 00:13:01 company in recent years. There's been a sort of shifting consumer preference towards healthier options and away from a lot of sort of the processed products that Kraft Heinz sells. They have, as a business, had to enact significant asset write-downs. All of this has created a picture of difficulty for the business. And it's also been sort of a difficult dynamic for Berkshire Hathaway. You know, this is a company that is the largest shareholder of Kraft Heinz. They hold a 27.5% stake in the business. You know, Buffett has been sort of doing the interview rounds the last few days. He said, you know, he believes this is, quote, a repudiation of the original vision of the 2015 merger. So, there's a lot that's gone wrong with the business the last few years. It's

Starting point is 00:13:42 really unclear, though, whether trying to, you know, turn the ship around, so to speak, from that decision made a decade ago is actually going to solve the problems that Kraft Heinz is facing. Lou, I'm going to put you on the spot. We have two companies. I want to know which one you like better. Global Taste Elevation, $15.4 billion in 2024 sales, $4 billion in adjusted EBITDA. They will have Heinz, Philadelphia Cream Cheese, Kraft Mac and Cheese, or you get North American Grocery, $10.4 billion in sales, $2.3 billion in adjusted EBITDA. You get Kraft Singles and lunchables which one are you taking probably want to take the first one but gosh you can't get enough craft singles right the world revolves on craft signals which one do you want rachel

Starting point is 00:14:30 i gotta say global taste elevation just sounds more exciting as a business it just rolls off the tongue it really does it's just so easy to say say it 10 times fast when we come back we are going to talk about the hot ipo market you're listening to motley fool money trade ice skating at Nathan Phillips Square for ice cubes in your umbrella drink. Let Porter Airlines fly you from Toronto Pearson non-stop to 10 top sun destinations in Mexico, the Caribbean, and Costa Rica. Enjoy award-winning Porter service Toronto has loved for 20 years and start your vacation as soon as you're on the plane. Book your sunny getaway today at flyporter.com and actually enjoy economy. Welcome back to Motley Fool Money. The IPO market has suddenly opened up again with some huge IPOs

Starting point is 00:15:22 from Circle, Figma, and Chime already this year. And we learned that Klarna Figure Technology Solutions and Gemini Space Solutions are pricing their offerings. Stripe and Databricks seem to be kind of waiting in the wings. Is this a healthy IPO market? Are we entering some sort of 2021 style frenzy, given some of these stocks, I think Circle was up almost 10x from its IPO price. So what do you think is going on here, Rachel? Yeah, I mean, I think first it is worth noting in July of this year, we saw the most IPOs since November of 2021. And we have seen a lot of recent IPOs really focus on areas around AI, crypto. There's been a lot of strong first day or first week's gains. There's been a lot of focus as well in the IPO space this year on fintech and other

Starting point is 00:16:13 service-oriented businesses. I don't think it's a one-to-one with what we saw in 2021. I mean, we obviously haven't reached those levels yet in terms of companies entering the public markets, but it's also a very different environment for the market, for investors. A lot of these companies that are going public are tech, blockchain, crypto companies. With the passage of the Genius Act. There's been a heightened appetite for those types of businesses. And I think that that is very much being reflected in the types of companies that are now entertaining public offerings. You know, Klarna, we've been waiting for a long time for them to actually formally announce their IPO after they had halted those plans earlier in the year. They're targeting

Starting point is 00:16:52 a valuation of up to $14 billion in their US IPO. Figure is another blockchain lender that said they're going to go public. They're looking at a valuation of about $4 billion. And then notably, you have Gemini. That's the crypto exchange that was co-founded by the Winklevoss twins. And they're looking for a valuation around $2.2 billion. So, I think a lot of this is hype around AI and crypto. Not all of it, certainly. But as always, it's so important to take each company on its merits. The opportunities are there, but there's a lot of hype and excitement right now. And sometimes differentiating that from a viable business, I think, can be really tough in this market. Lou, IPOs are good. We need to have exits for some of these companies that have been

Starting point is 00:17:32 staying private for longer than we have seen historically. Amazon, NVIDIA came public in the 1990s when they were really small businesses. We don't really see that today, even if even a company like Figure Circle, very well established, if Stripe does come public, that's been sort of rumored for what seems like a decade at this point. But how are you thinking about the IPO market that we have today in potentially considering these investments? Yeah. So, first, some context. Yes, we've had a couple hundred IPOs already this year. That's up from 154 in 2023. So, we are up. But there are over 1,000 in 2021. So, we are not anywhere near that level. Travis, actually, I think a lot of the frenzy, and I do think there is some frenzy,

Starting point is 00:18:16 but like you say, these are names that we, they're quite mature. We know the names. There is just this demand because there's built-in familiarity. We want these companies. But the best advice is that two things can be true at the same time. These can be great companies, and there can be a frenzy that makes the IPO dangerous. I think both of those things are true. If you look at Figma, Figma has lost half of its value since August 1st. I welcome these companies to the public. This is much different than the SPAC boom when it was all pre-revenue. I think this is healthy. But if I'm an investor, I'm not diving in on day one. I'm going to let these things play out. I don't know if all of them will do what Figma did, but I think patience is the best bet

Starting point is 00:19:01 now. If these companies are as good as we think they are, you can get in after a couple months and still do fine over time. Yeah. One example with that is Corweave, their lockup period, and this is something we need to consider as well. There's typically some sort of lockup period for insiders who are not selling during the IPO. Their lockup period just ended, I believe Insider sold 7 million shares of CoreWeave. So Lou, that may just be another reason to wait it out. It's okay to be six months late, not get in on day one. And even some of the best companies in the world, Facebook traded below its IPO price. That was in, I think, the first few weeks. But eventually, the hype cycle typically wears off, whether it's 2022 or

Starting point is 00:19:47 2023 that you jump into those 2021 IPOs or whether it's just a few months later. Yeah, exactly. I mean, look, everybody loves the excitement on day one. You love the pop, you love all that, but real wealth is created over the next five, 10 years by investing in good companies. You don't have to be in a day one. Even getting in late on a IPO like Google a few years late would have been very good for investors. So something to keep in mind that with that long-term, 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. All personal finance content follows Motley Fool editorial standards

Starting point is 00:20:24 and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, Dan Boyd, behind the glass, and the entire Motley Fool team, I'm Travis Hoyum. Thanks for listening to Motley Fool Money. We'll see you here tomorrow. We'll be right back.

Motley Fool Hidden Gems Investing - OpenAI Helps Google Win in Court

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