Motley Fool Hidden Gems Investing - OpenAI Misses Expectations - Should Tech Investors Worry?

Starting point is 00:00:00 Tyler Crowe Open AI Jitters on Motley Fool's Hidden Gems Investing Podcast. Welcome to Motley Fool Hidden Gems Investing. I'm Tyler Crowe. With my longtime colleagues and Fool contributors, Lou Whiteman and Matt Frankel, earnings are kicking up. MAG7 have not reported yet, so we're going to take a quick pause to not talk about MAG7 earnings, although that's probably going to be on later shows this week. Instead, we want to start today talking about OpenAI and some struggles that were released in the Wall Street Journal. We're going to talk General Motors' earnings, as well as hitting a mailbag question that we got earlier in the week. But like I said at the top, we're going to start

Starting point is 00:00:41 with OpenAI. There was a Wall Street Journal article that came out either last night or this morning that was reporting that OpenAI isn't meeting some of its user revenue goals, and it's making all that spending and compute power that we've been talking about for the past several weeks, months, even a couple of years, it's getting harder to swallow. And there's been some knock-on effects on the market as well. Shares of companies with close ties to OpenAI are down on the news, thinking companies like Oracle and CoreWeave. Now, guys, I'm going to ask you, Lou, Matt, I'm going to ask you guys your thoughts on this in a minute. But this is what stood out to me, is that CEO Sam Altman is trying to move towards an IPO somewhat aggressively.

Starting point is 00:01:21 But the company raised $122 billion less than a month ago, and I find it odd that a company that has raised so much money recently is already preparing an IPO for what I would assume is more funding. I thought that's what IPOs are for. So, there's a bunch of other angles I'm sure we can take here. You guys all have your own takes, but let's start with this. Are companies that have hitched their wagon to open AI, like the Oracles, like the Core Weaves of World, in a little bit of stress or trouble here based on what was said in this Wall Street Journal report. Matt, let's start with you. Yeah, so nobody has been more skeptical about OpenAI's longer-term revenue projections, all these circular deals we're seeing among these AI companies. No one's

Starting point is 00:02:04 been more skeptical about all this than me. Maybe you. Management has said $280 billion of revenue by 2030, which that's more than NVIDIA has by a mile. But take this report with a big grain of salt. The report said that OpenAI missed its internal growth projections, which have been aggressive. It didn't specify by how much it missed. And as Tyler mentioned, with a recent $122 billion raise and an upcoming IPO, the company shouldn't have much of a problem fulfilling at least its near-term contractual obligations. On a similar note, though, I feel like Oracle's investors are already very skeptical about OpenAI's ability to pay for what it's agreed to pay already over the long term, even before today's downward movement. Oracle was down 50%

Starting point is 00:02:52 since that surge after the OpenAI deal was announced in September, and a big reason why has to be investor skepticism over the deal's feasibility. Yeah. I don't know who's been more skeptical, Matt or Tyler, who's the most skeptical, but it feels like it's hard to find someone other than Sam Altman who hasn't been skeptical about OpenAI's grand pronouncements. I guess maybe, though, the C-suites at Oracle and CoreWeave would be the exceptions, the ones that weren't. Thing is, these are long-term projections in a Wild West market, a market that still hasn't formed. Two years ago, when OpenAI was the bell of the ball, was riding high, had we even heard of Anthropic? No. And in theory, I don't know why that can't happen again. So, I'm not saying it

Starting point is 00:03:38 will, but I don't think first mover advantage here really matters. And I'm not sure that even if OpenAI isn't on a winning streak today, that really can be extrapolated into the future. My question is, how does any of this make sense, guys? Who's going to make money here? Part of the reason OpenAI put out outrageous revenue assumptions is they have to offset outrageous spending needs. Anthropic is throttling people because compute is so expensive. OpenAI still needs to raise money. I think the market just needs to wake up to just how much money is needed here. It feels like one of three things has to happen. Either, number one, we need models that really dramatically bring down the compute demand, so there's just less that needs to be spent.

Starting point is 00:04:24 Number two, these hyperscalers somehow end up with amazing pricing power from here, even though they're competing with each other, and jack up the prices. Or, I don't know, maybe these valuations aren't sustainable i hate to say it but maybe i like the point of like you know open ai could come back around chat gpt could you know have a comeback we've seen these ai models kind of rise and fall really quickly and makes you think of like internet search browsers of the 90s where it was netscape ask jeeves and yahoo were the dominant forces for a long time and then before you know it google comes around and wallops them all there's there's no reason to think that something like that couldn't happen here and to your point about lower compute lou like we all

Starting point is 00:05:09 in a related news deep seek the chinese open sourced ai model that kind of had everyone shaking in their boots in january last year like oh my goodness they can do this on basically spare car parts how the heck did they do this well they updated their model uh and according to venture beat uh in the release i was looking at it says they either surpassed some of the you know either met or surpassed some of the like specifications of open ai and anthropic models and they were doing it at almost one-fifth the compute cost that we're seeing with these uh you know closed loop llms like what anthropic and open i have now i think for a while the conversation around ai has been capability you know that real wow factor of like what it can do we've seen with like things

Starting point is 00:05:53 like sora with those videos which not coincidentally something that got axed as they're looking to get towards some semblance of looking like there might be profit or some sort of thing that's not an empty vacuum of cost. But I think we're going to now start seeing with these LLM models a focus more on cost efficiency. It's going to be a part of the conversation because, as you said, right now, no one's making money with this. And eventually, creditors, investors, they will want to see something that's moving towards something that doesn't look like a vacuum sucking every dollar out of your wallet. Or at least something that can cover expenses. I think that'd be a nice first start. I like what you did there with car parts, by the way, telegraphing our next story.

Starting point is 00:06:39 And maybe that is where valuation can come from. But yeah, look, if I'm honest, it isn't any one of those three factors or three scenarios that I laid out above. It's some sort of combination of all of them. Inevitably, as you say, the tech advances will happen and the cost will come down. but I also think AI really needs intense compute power and that compute power that there's limits to how cheap it can get. That is expensive. So I think the interesting thing from here and how this all plays out is how far does that cost needle move and how quickly and how that is going to just ripple through all of these customers, what they're going to have to spend, or if they're going to change their assumptions. That is the real question. It's somewhere in the middle.

Starting point is 00:07:24 I still don't know. It's going to be hard to really hit that sweet spot where these companies make money, but they don't bankrupt all their customers for what they're charging. On one hand, I'm taking the deep seat thing with a big grain of salt. One-fifth the cost for a compute sounds a lot more reasonable than their initial claim. Remember when they launched the initial model and said they built it for $6 million or something silly like that? This sounds a little bit more reasonable, but I'm not putting too much stock into that. but so when it comes to the the eventual getting to profitability and things like that on one hand revenue generated by open ai by and profit and all that it should be very high margin as it scales

Starting point is 00:08:05 other than the initial capital spending just like most sass businesses but there's a big question when it comes to competitive pricing pressures from deep deep seek and elsewhere you're like i don't know which one's going to be the ask jeeves as tyler put it um the speed at which growth will happen compared to the speed of the build out there's a lot of moving parts here and if i were an accreditor in this this uh ecosystem i would be nervous now well speaking of competition and cost and trying to move down the commodity curve really quickly we're going to go to one of the ultimate commodity curve businesses and that's auto is talking about gm's earnings coming up after the break you gotta try breakfast at aw

Starting point is 00:08:44 And what better way than with a delicious Pratt Organic Coffee, starting with just $1 all day, every day, now until December 31st. At participating A&W locations in Ontario. Shares of General Motors are down about 1.9% as we're taping this today after the company posted better-than-expected earnings. Earnings per share on an adjusted basis came in at about $2.82 per share, which was actually down from $3.35 this time last year. But there were some adjustments, such as expected tariff refund of about $500 million, and they also notched some one-time costs of about a billion dollars related to its pivot in the electric vehicle business

Starting point is 00:09:40 strategy that kind of boosted the end results and exceeded investor expectations. We could probably discuss the pivot to EVs in the middle of a rising gas crisis. It sounds like an interesting topic for another time. But Matt, you were the one that put GM on our radar, and it's been a stock you have been really pounding the table for a while. So, looking through the report, what really stood out to you. Yeah. So, I don't want to fixate on the headline numbers. You already kind of covered some of those, although earnings were stronger than expected after those adjustments that you mentioned. The tariff refunds also were largely expected, just now we have some actual numbers behind them. It was just a solid quarter all around for GM. Margins were strong despite a

Starting point is 00:10:21 challenging consumer environment. GM's incentives to buyers, pretty impressively, are at the very low end of the industry. A lot of car makers are having to give big discounts, give big financing incentives, things like that. GM is definitely lower than average on that. The company maintained its number one U.S. market share for total sales, which that wasn't a surprise. It is the clear number two in EVs, Cadillac EV sales, which my wife bought one not that long ago, grew 20% year over year. GM now has a 13% market share, and that's up sequentially from 10%. So they have a pretty good share of the EV market, only behind Tesla. Because of the solid results and the reduce tariff impact. GM did raise its guidance pretty significantly. They're now calling for

Starting point is 00:11:04 $12.50 per share in earnings at the midpoint. That applies to GM's trading for 6.4 times full year earnings. So beyond the headline numbers, one thing I would say to watch, because we always talk about software and SaaS businesses and things like that, is the software and services side of GM. Super Cruise, paid subscriptions were up 70% year over year. GM expects to have 850,000 by the end of this year. This is going to be a very high-margin revenue stream. Most reviews agree that Super Cruise is the best with the exception of maybe Tesla, and I've driven it, so I can attest to that. Software has been a big focus of Mary Barra's growth strategy. It's not just Super Cruise, but OnStar has 13 million paid subscribers, and it's largely flown under the

Starting point is 00:11:49 radar, and it's starting to become a significant revenue stream. Yeah, I'd be really curious to see how sustainable that is, because you have a 100-year tradition in the auto business of features starting as premium and moving downstream to standard. I mean, my Honda can do 90% of what Super Cruise does, and it came as standard, non-subscription. I think I'm fascinated. I don't know which way it's going to go, whether or not GM will continue to have pricing power and be able to keep those margins, or if it'll just end up as standard equipment the way, look, windshield wipers and electric windows and everything else has done over time. I'll say this for GM. I hope for their sake it does, because the core industry, the core business is just brutal. And when times

Starting point is 00:12:34 are good, it's a brutal business. So they would really, really benefit from some high-margin software sales. I'm just not sure if we can really pencil that into the foreseeable future. Who doesn't want to be a high-margin software sales company? Even the autos want to get in on this. A couple of weeks ago, we did a longer show on the Chinese EV market and how competitive it is. Talking about the competitive American market, it seems like the Chinese EV market is even more competitive today. That really bore out because BYD announced its earnings earlier this week as well, and they saw their earnings fall 55%. Yes, GM's earnings were down from the year prior, but this is not even close when you're talking about the EV market in China right now.

Starting point is 00:13:20 And it shows how competitive the Chinese market and some of the non-US international markets are compared to what's going on in the US. Because it seems like in a lot of the international markets, I hate to use this word because it insinuates things related to trade, but the Chinese electric vehicles are, quote unquote, flooding the market. Yeah. Flooding, or another word for that might be winning, right? Look, I know we like bold predictions around here. I don't know if this is really going to happen, but I do think it's sort of this is the way the stars are aligning. GM's strength is pickups and SUVs. We see that with Ford, too. The U.S. remains this amazing island fighting back against global trends towards fuel

Starting point is 00:14:02 economy, smaller cars, all of that. And I'd note that, look, elsewhere, it's not so good. GM sales were down 22% year over year in China. I think it's possible that between tariffs, consumer preferences, you know, kind of just restrictions on foreign imports to the U.S. market, we're evolving towards a world where GM and the other U.S. automakers will just dominate the U.S. market, but have a really hard time competing basically everywhere else. Good news there is the U.S. market's very big, but it's not what we would have imagined just 20 years ago. Coming up after the break, we're going to go dip into the mailbag. You've got to try breakfast at A&W.

Starting point is 00:14:45 You've got to try breakfast at A&W. And what better way than with a delicious Pret organic coffee, starting at just $1 all day, every day, now until December 31st. You've got to try breakfast at A&W. at participating A&W locations in Ontario. Hey, everyone, just a quick reminder. If you want to get your questions in, we love answering questions.

Starting point is 00:15:14 This is probably one of my, at least my favorite segment that we get to do on the podcast. So get your questions in as much as you can. We are clearly getting way more than we can actually answer. And I'm going to do my best to try to get in as many as possible.

Starting point is 00:15:27 Maybe we'll even look into some other ways that we can answer them elsewhere. But if you want to get them in, email us at podcasts at fool.com. That email is podcasts at fool.com. We'd love to hear from you. Our only requests are keep it foolish and try to keep it short so I can answer it on air. This was a nice one. This is very relevant because we've had earnings reports out. We're starting to get proxy votes for people who own shares of individual companies, which I think for a lot of people might not know what that is. That's related to today's question. This comes

Starting point is 00:15:59 from Jet Haze, a 25-year-old fool since 2023. As part owners of individual companies, how should we look at proxy voting? Does our vote really count? And how do we as individuals think about using their votes? Thanks. Matt, look, I'm going to go last because this is one of my soapbox topics. So I'm going to let you guys go first and Matt, you can go first. Yeah. I don't really care about my ability to vote in corporate matters when buying stock. And I mean, I don't view it as like my patriotic duty, like voting in presidential elections and things like that. For example, when I buy a stock with both voting and non-voting shares, let's say Alphabet, for example, I'll typically go with the non-voting shares since it carries the same

Starting point is 00:16:47 economic interest and it's usually a bit cheaper. As an individual investor, the reality is your vote isn't likely to have serious pull. On the other hand, I do care about how the company itself structures its voting. Using that Alphabet example, there is a class of shares called the Class B shares that have 10 votes per share, whereas even the voting publicly traded ones only have one. They're designed to give insiders control, and I do care about things like that. There are a lot of companies that do this, and that absolutely factors into my investment thesis. So, straight up, I'm part of the problem here. Tyler, I'm curious to hear what you have to say about me in a second. But I don't think much about it at all. I'm not proud of it. I should

Starting point is 00:17:26 care. I don't even honestly usually vote my shares, in part because my brokerage system is so clunky and annoying. And I own like 80 stocks, and it just takes forever. And yeah, those are terrible, terrible reasons. Don't be like me. I know I should do better. I know governance matters. But if I'm honest, it just does not factor at all into my investment decisions. All right, here we go. I'm climbing up on the soapbox. I'm going to get really high and mighty. We might even need to put some patriotic music in the background while I do this. But look, here is my thesis. And yes, I think you should vote your shares. If you own individual shocks, you should care. You should read your proxy filings. You should vote on everything that

Starting point is 00:18:07 you have. Again, as Jet mentions in the question, you are an owner of the company. You're actually putting in the extra effort to not just buy a diversified ETF and go sit on our butts, that would be great. There's plenty of options to do that out there in the market. But if we are making the choice to invest in individual companies and be fractional owners of that company, management works for us. It's our duty to vote on the results of this business and the things that they're asking us to do. Vote on the board of directors, vote on executive of compensation. Do I really care who the auditor is? No, but that's, that's maybe there's somebody that does, but look, this is kind of one of those things where it's like, it is the one time that we

Starting point is 00:18:55 as individual investors can hold management to account. And yes, maybe my little peons of an ownership in a stock doesn't really matter to the overall voting, but it's just like some moral craw that I have, that if I'm going to own a company, it is my obligation in some way to vote for it. One of my favorite writers of all time was Benjamin Graham. He had a whole chapter dedicated to your duties as an investor, to vote your shares and participate in the companies that you own. I know I'm standing on a very, very lonely island these days when it comes to investing in individual stocks and actually voting your proxy shares. But if I have to be the one last voice before the door closes, I'm going to be it. You know, Tyler, it's funny. I don't

Starting point is 00:19:45 disagree with any of that, and yet here I am. But definitely read the proxies, even if you don't vote. Look, I'm not saying it's easy, but I feel like everyone just has to do it. Even if you just do it once for the first time, it does feel empowering when you see an egregious stock compensation package for one of your executives and you just get to say no, sometimes that just feels good. 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 and is not approved by advertisers. Advertisements are sponsored content and provided for information

Starting point is 00:20:25 purposes only. To see our full advertising disclosure, please check out our show notes. thanks to our producer christy waterworth filling in for our normal crew today and the rest of the motley fool team for lou matt myself thanks for listening and we'll chat again soon

Motley Fool Hidden Gems Investing - OpenAI Misses Expectations - Should Tech Investors Worry?

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