Motley Fool Hidden Gems Investing - The AI the Government Just Shut Down

Starting point is 00:00:00 The government just shut down a really powerful AI model. You're listening to Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm Jon Quast and I'm joined today by Foolish contributors Matt Frankel and Rachel Warren. And we're going to talk about that government concern with AI and leading to that shutdown. We're also going to talk about an acquisition that I didn't see coming personally. But first, we want to talk about the news of the weekend, and that is that the U.S. and Iran have a tentative deal in place to end the ongoing conflict. And it looks like they may sign that deal in Switzerland on Friday.

Starting point is 00:00:42 Hopefully that is the case. But as we think about this as terms of what this does, obviously it ends the conflict. That is really good from a human life perspective. But the main economic benefit is regarding the Strait of Hormuz. The Strait of Hormuz, so much passes through that little narrow part of that waterway, and it's been not working very well since this conflict began. But it seems like maybe we can get this strait reopened. So, Rachel, if the strait was fully reopened, let's just pretend it's going to be fully reopened today as a result of this deal.

Starting point is 00:01:19 How long would it take before we start catching back up from it being closed all this time to begin with? Well, I think it's important to note that fixing the bottleneck will take far longer than breaking it did. So just to put some perspective to this, about 2,000 ships and about 170 million barrels of crude oil are currently stranded or idling in the Persian Gulf. And so clearing these immense maritime traffic bottlenecks, that will take several weeks to a month alone. And this is due to a variety of factors. It's also worth noting that tankers physically move at very low speeds. On the production side, we see independent energy assessments from sources like Wood Mackenzie that indicate that affected Middle Eastern oil fields will require three months to safely ramp back up to 70 percent of prior production and six months to reach 90 percent production levels. So consequently, the global energy supply chain will face a residual lag. It's very unlikely to fully catch up to its pre-war fluid capacity until late 2026. Yeah. And so just to be clear, we're talking about the traffic in the street.

Starting point is 00:02:27 That's going to, according to, I mean, some of Rachel's, what she's been researching is going to take several months at a minimum. And I guess I think that for some of our listeners, they're vaguely aware that maybe they're paying a little bit more at the pump than what they would like to be paying as a result of what has been going on. the fact that oil can't ship freely through that strait. I've got a summer road trip coming up where I'm going to be putting a lot of gallons of gas in the tank. Does this mean that we're not going to see any relief at the pump anytime soon? If the deal holds, we should see relief at U.S. pumps within three to four weeks or so. I mean, we already saw based on the news of this deal, Brent crude plummeting over five percent at one point. It might be more by the time we're recording this. But I also want to note, this agreement is somewhat fragile compared to past

Starting point is 00:03:19 deals. It relies on an intense 60-day negotiation window covering nuclear capabilities and sanctions relief. And all of that creates a dynamic where there is still a lot of uncertainty moving forward. But this also means at a very practical level, for example, that shipping operators are highly skeptical and they're likely going to delay major voyages until, for example, mine clearance is verified. So we are still very, very much at the early stages of this thing. Yeah, that is such a good point because this isn't the first time that it felt like maybe we could see the light at the end of the tunnel, that maybe there was finally a framework to end the conflict only for that to fall through. So Matt, I do want to ask you here about confidence

Starting point is 00:04:00 because it's one thing to have potentially the deal signed in Switzerland this Friday, but does that mean that everyone has the confidence to go ahead and start acting on it? Yeah, I mean, this is the closest we've had to having signatures on a deal. We don't have that yet. But Rachel did a good job of going through all the numbers, but I want to put some kind of just context behind them. So there's a few things that need to happen here. So first, the reopening of the Strait is just one part of it, right? Captains need to be willing to sail their ships through. Insurance companies need to be willing to underwrite those ships sailing through the straight with, you know, like she said, with the mine sweeping, not necessarily

Starting point is 00:04:39 complete, uh, tanker owners must be willing to take the risk that they have. Um, then refining is going to need to ramp back up to produce gasoline, diesel fuel, et cetera. I I'd say a four to six month normalization timeline is reasonable when it comes to normalizing. As Rachel said, we should feel some relief at the pump within a few weeks, but as far as getting back to like pre-war normals, uh, I'd say a four to six month timeframe is more like it likely. So when it comes to consumer confidence and things like discretionary spending, it's a little bit harder to say. So actual consumer spending tends to lag what the surveys are telling us.

Starting point is 00:05:14 So just because we might see consumer confidence spike on this deal, that doesn't mean we're going to see actual increases in spending. Like we've said, gas prices are likely to remain elevated for at least a few weeks, if not more. So it could really delay the house, just middle-class households, you know, willingness to spend more money. And I'm not 100% convinced that this is the end of it. We'll have to see if the straight actually reopens. Rachel mentioned the negotiation window going on. And really, we need to see both sides adhere to their ends of the agreement. None of that is a given at this point. Well, let's

Starting point is 00:05:50 pretend that it is going to go through. We're going to make that assumption. Maybe we're just going to manifest some optimism here. But are there any stocks that are kind of on your radar thinking this stock could benefit from this deal actually being followed through on. Rachel, let's start with you. Yeah, there's a couple. And I have to go to the airline industry, right? So Delta and United Airlines, in my view, are two downstream stocks that could benefit immensely from a peace deal. Obviously, a resolution would eventually lower the skyrocketing cost of jet fuel. I mean, we know that these fuel spikes have already forced United to slash their earnings guidance, Delta already had to absorb about $2 billion in unexpected overhead. And that's

Starting point is 00:06:32 notable. The crisis has been so intense that this even overwhelmed Delta's unique corporate safety net, which is its ownership of the trainer refinery in Pennsylvania. So obviously, if we do see a lasting agreement, there are a lot of first, second and third order ramifications. Of course, there is the hoped for stability for global crude prices, and that would allow these legacy carriers to better protect, you know, their profit margins and also offer more predictable international scheduling. But this will take time, I think, as I've tried to caution. And it's worth noting, these are companies that have achieved all-time records for their recent operating revenues. They're seeing robust demand. A lot of the headwinds they're facing now are very much

Starting point is 00:07:12 external pressures. Matt, how about you? Yeah, so everyone knows me as the real estate guy, so it shouldn't be too surprising what direction I'm going to go in here. Residential real estate in particular has kind of been stuck in a holding pattern for about four years since interest rates started to spike in 2022. And this could be a big catalyst. So lower oil prices mean inflation getting a little bit more under control. That could lead to the Fed resuming rate cuts quicker than they otherwise would have. That could mean mortgage rates finally trending lower. We saw mortgage rates just under 6% for the first time in years, right before the Iran war started.

Starting point is 00:07:49 So not long enough to really see all the potential that that could cause. Rocket companies in particular, ticker symbol is RKT, it soared 10% right after the Iran announcement. And it's easy to see why. I mean, they not only have big exposure to purchase mortgages, but refinancing is really their bread and butter. And even like a 50 basis point drop in mortgage rates could lead to a massive spike in refinancing. So I'm not surprised that the market seems optimistic. And if we get an actual deal,

Starting point is 00:08:17 an actual lower interest rates, Rocket could have a lot of upside. Well, here's to truly hoping that this deal follows through and holds. But after the break, we're going to talk about something else. We're going to talk about how the government just shut down a powerful AI model. You're You're listening to Motley Fool Hidden Gems Investing. we follow the money learn more at bloomberg.com welcome back to motley fool hidden gems investing so anthropic one of the hottest biggest ai companies out there right now it just launched its newest model that's fable 5 on june 9th launched it for general use and on june 12th just three days later, it disabled it for all users. And the reason it did this was because

Starting point is 00:09:35 the government, the U.S. government, requested that it do so, citing it as a national security risk. And so I think it was just incredibly, wow, three days later and we already have the government saying, shut it down. Matt, is AI a legitimate national security risk? Yeah, so I've called Anthropic the IPO that I'm most likely to buy out of the big three that we're seeing this year, the SpaceX and OpenAI being the other two. And this doesn't change that. Just speaking more broadly, AI is certainly a national security issue. I mean, regardless of the reasons for this move or any opinions you might have about

Starting point is 00:10:12 this particular shutdown and the motivation behind it, the fact is that the more powerful AI models become, the more potential damage that can be done with them. It's just like how making chips domestically is part of national security. The shutting down of the Fable and Mythos models for now is not the biggest risk all by itself to Anthropic. Most enterprise customers of Anthropic who I've spoken with, including myself, find the Opus and Sonnet models more than sufficient for most tasks. I can count on one hand the number of times I've had to switch from Sonnet to Opus, the more powerful model, to complete a task. On the other hand, the risk is that the government can simply block its software. That could put Anthropica at a competitive disadvantage to OpenAI and other competitors. But we'll really have to see how this plays out. A temporary shutdown, if they roll out certain safeguards and the government's satisfied and they roll these back out within a week or two, that's one thing.

Starting point is 00:11:08 A prolonged shutdown where the government says this product cannot see the light of day ever is something else. So that's really where I see. I don't see any big immediate moves, but it's definitely something I'm monitoring. Rachel, I do want to drill down into this further because the government wasn't vague in what kind of risks it was citing. It talked about some specifics with what it's concerned about with Anthropix Fable 5. Yeah, their stated reason for the shutdown was a developer jailbreak that exposed cybersecurity vulnerabilities. And it's worth noting this comes after Anthropic had repeatedly rejected the administration's demands for unrestricted backdoor access to deploy its models for purposes like autonomous weaponry, domestic surveillance. We saw a federal judge blocked previous attempts to blacklist Anthropic, but essentially they bypassed that ruling using this emergency export order, leaving Fable 5 and Mythos 5 completely offline. And right now, under active legal gridlock, I think we'll see quite a few further developments on this, though, in the coming days.

Starting point is 00:12:13 You know, when it comes to these potential trillion-dollar IPOs, we just had SpaceX last week, but Anthropic, OpenAI, even SK Hynix looking to tap the market at a trillion-dollar IPO. when you look at these companies, I can't help but think that Anthropic is the one that has all the momentum. Everything seems to be going right. Everything seems to be leading the pack as far as capabilities and adoption rates have been absolutely fantastic. And I can't help but think that if you're a customer here and you got Fable 5 and you started using it, you probably were really liking it. And then to be shut down just three days later and say, hey, I can't use this anymore when I was really counting on it. I wonder if there's any risks to the business here with Anthropic, at least losing the momentum that it had, potentially losing some of its adoption

Starting point is 00:13:04 curve. But then if there is a risk to Anthropic, is there a risk to SpaceX here? Because Anthropic is a very important company to SpaceX, their customer. It's a really good point, John. I mean, remember, Anthropic filed their confidential S-1 on June 1st. They're targeting a record $965 billion valuation for a proposed October listing. About 80% of its $44 billion annualized revenue comes from enterprise clients. So a government decree that could turn off the primary software overnight, that's a massive regulatory risk, right? Now you go to SpaceX's S1 filing. They said they'd pivoted hard into the AI infrastructure business. They're leasing 100% of their 300 megawatt Memphis Colossus data center to Anthropic for about $1.3 billion a month

Starting point is 00:13:49 through 2029. So there's a really important relationship at play here. Ironically, there were reports that actually came out on June 12th that SpaceX rented this facility out specifically because Musk's internal teams ran into major latency issues trying to train their own Grok models across a fractured network. SpaceX then offloaded this hardware bottleneck on Anthropic. Anthropic needs that hardware pipeline to scale its heavy models. So if we see some kind of a prolonged federal embargo that could impact expansion plans. I think it's a little too soon to say. These are some of the risks I'm looking at and keeping in the back of my mind right now. But I think at present, this is very much a wait and see game.

Starting point is 00:14:31 Well, thanks for that rundown. And we will wait and see indeed. But after the break, we're going to look at an acquisition that I personally never saw coming. You're listening to Motley Fool Hidden Gems Investing. where some see heroes and others see egos bloomberg sees the era of billionaire athletes while others follow the noise we follow the money learn more at bloomberg.com welcome back to motley fool hidden gems investing and before we tackle this final topic of the day i do want to note that we want to make you part of the conversation so if you have a stock or an question for anyone on this show, you can email those at podcastatfool.com. We'd love to do it

Starting point is 00:15:16 on air. We'd love to take those at times. And so you can just email the question in, keep it foolish, keep it short enough to read, and that will make it a lot easier for us. That email again is podcastatfool.com, podcastatfool.com. Now, here is the final topic. We had a announcement today that fox is acquiring connected tv streaming dongle company roku and this is a company with incredible distribution and of course fox with its entertainment assets i maybe should have saw this potential deal coming but it never had entered my mind that fox would potentially want to acquire roku here so i just want to go ahead and put this out here to rachel um regarding the terms of this deal. And I also want you to speak to something that Roku has long kind of championed

Starting point is 00:16:10 the fact that it's a neutral platform. And so it's a good partner for all these streaming services that are out there. Does that kind of impact the business model here? Is there some of this loss of neutrality that Fox is going to have to grapple with? Oh, I think that's very much the case. I mean, this is a $22 billion acquisition of Roku by Fox. And I do think it very much shifts what has been the platform's historic status as this neutral distributor. Roku's core value proposition has been that it didn't own content. That really made it an unconflicted gatekeeper, if you will, for rivals like Netflix and Disney. Now, Fox CEO Lachlan Murdoch has stated that Roku will remain a, quote, open, partner-friendly platform. But obviously,

Starting point is 00:16:54 there will be that impetus to favor Fox assets. I think we'll have to see how that turns out. You know, there's also the reality that if rival streaming giants feel that there's unfair fee hikes or they're being squeezed out, maybe they'll pull their apps, maybe they'll steer users towards Google TV, Amazon Fire TV. I mean, that could decelerate Roku's market share. It could impact consumer adoption. Still a lot of questions about what that's going to look like. This is $160 per share deal via a $12 billion financing from Morgan Stanley. So Fox is very much rapidly hooking into 100 million global households. So that is a strong value proposition for them. For Oku there and its platform and the companies that it's historically partnered with, I think

Starting point is 00:17:41 there's still a lot more questions than answers. Another one to not forget for our listeners would be walmart and vizio uh maybe another more neutral platform but we'll have to see i guess my follow-up question here rachel is about fox more than roku does this elevate fox i mean is this a way for fox to really i don't think we think about it very often when we think about the streaming wars is this this its way to kind of strong arm its way in here and and really dominate this scene it looks like after this deal, it will only trail Disney and YouTube. We sometimes forget that YouTube is a streaming service. We don't think about it in the streaming wars, but it is. That's the number one player, Disney number two. It looks like Fox slash Roku is going to be the number three player

Starting point is 00:18:28 here when this deal is done. Yeah, I think that's probably one of the more obvious advantages for Fox to be combining their live sports juggernaut with Roku's ad tech. It immediately creates, as you know, to the third largest U.S. TV player by viewing share. And really, instead of fighting for more standalone subscribers, Fox is essentially now going to own, assuming this deal goes through the operating system that is really monetizing the modern streaming reality. So my takeaway is maybe this deal shows that in an increasingly mature streaming industry, maybe controlling the digital distribution pipeline is even more valuable than stockpiling the content. So, Matt, I want to turn to you here.

Starting point is 00:19:10 Unfortunately, I gave up on Roku stock as a shareholder less than a year ago. I finally sold my shares. Wish I hadn't done that. But let's say that we have some listeners who are still holding on to their Roku shares at this point. What do they need to do here? Should they sell right now or should they continue to hold through the deal? Yeah, I mean, I get where this deal is coming from. And Fox has certainly been falling behind when it comes to digital platforms, especially

Starting point is 00:19:36 connected TV, really having a presence there. That's the fastest growing advertising market in the industry. It is in Fox's best interest because of that. They keep Roku essentially as is, but we'll have to see what happens. I never owned the stock, but I know a lot of people had given up on it like you did and are today, you know, didn't see that coming. As far as the deal itself, if you still own Roku shares, you know, which obviously you and I don't. The cash and stock nature of the deal is what creates the most interesting dynamics.

Starting point is 00:20:07 So it makes you ask questions that you wouldn't have to ask if this was just an all-cash acquisition for $160. Do you want to keep owning Fox? Or do you want to simply take this win and move on? Do you like Fox's leadership? Do we want to hold through the deal's closing, which is not anticipated to happen until early 2027, just to get that extra 10 or 11% upside, which the deal implies. And really because 40% roughly of the acquisition price is going to be paid out in Fox stock, the value of that stock at the time of the deals closing could be significantly different than it is now, depending on how it performs between now and then. I mean, in fact, Fox's stock has dropped, you know, I haven't looked at it since we started recording, but it was down

Starting point is 00:20:49 about 15% on the morning of the announcement before we started recording this. It's fair to say the market and investors aren't that convinced that this is a great fit for Fox. So keep in mind that, you know, if you hold onto your Roku shares, you're getting paid in partially, at least in Fox stock. So in other words, if you're going to hold, you better be a believer in Fox. Right. You're, you're no longer just a Roku investor. It's like when a Redfin or when Rocket that I mentioned earlier acquired Redfin, I had to decide if I wanted to be a Rocket investor because it was a stock deal, not just, just cash. So it creates interesting dynamics there. All right. Well, Maybe we'll look more into Fox in coming episodes.

Starting point is 00:21:28 But unfortunately, that's all the time we have for this episode. As always, people in 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 informational purposes only. See our full advertising disclosure.

Starting point is 00:21:54 please check out our show notes. Thanks to our producer, Dan Boyd, Behind the Glass, and the rest of the Motley Fool team. For Matt, Rachel, and myself, thank you so much for listening today, and we will see you in the next episode.

Motley Fool Hidden Gems Investing - The AI the Government Just Shut Down

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