Motley Fool Hidden Gems Investing - The Future of Google Search

Episode Date: March 27, 2025

The majority of Alphabet’s sales comes from search, and ChatGPT’s product continues to get better. (00:21) Jason Moser and Ricky Mulvey discuss: - The 25% tariffs that the Trump administration announced for imported cars and auto parts. - How Google is trying to respond to the next era of search. - Robinhood’s quest to become the everything-finance app. Then, (17:17) Anthony Schiavone joins Ricky to talk about the state of the office market, and one workplace REIT that investors may want to consider. Bloomberg article link: https://www.bloomberg.com/news/features/2025-03-24/google-s-ai-search-overhaul-racing-chatgpt-for-the-web-s-future NYTimes article link: https://www.nytimes.com/2025/03/20/business/office-market-bottom-remote-work.html Companies discussed: GM, MGA, F, TSLA, GOOG, GOOGL, HOOD, BXP, ARE Host: Ricky Mulvey Guests: Jason Moser, Anthony Schiavone Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Auto tariffs, they're coming, or they're a negotiating tactic. Who knows you're listening to Motley Fool Money. I'm Ricky Mulvey. Sorting through this madness with me today is Jason Moser. Jason, thanks for being here. Ricky, always a pleasure, my man. How are you? oh i'm doing pretty well you know who's not doing pretty well these auto manufacturers it's been a tough day for him jason oh yeah yes at the time of this recording which i want to preface is it

about uh 1 50 p.m eastern 11 50 a.m mountain time because we never get a shout out a 25 tariff is coming for any car entering the united states this initially targets fully assembled vehicles but so far gm was down about seven percent ford down about three percent auto parts supplier magna international which we'll talk about more in a sec down seven percent tesla hey now up six percent you parsed through this with me why are some american auto makers so affected by this news tesla notably not so it this is the ultimate goal here with with tariffs in this case it's the boost domestic manufacturing more than anything, I think. That could certainly have positive impacts. It's obviously also a very complex issue with some potential negative consequences that

come with it, at least in the near term. When you consider how a car is built, there can be thousands of parts that are coming from outside of the country. Now, that all of a sudden throws a lot of uncertainty in here. You look at some of these negative impacts with increased production costs. You could be looking at higher prices for consumers. You certainly could be seeing disruption of supply chains. You could, as we're seeing, see the potential for retaliatory tariffs. And then, obviously, the negative impact on companies that use imported parts. And so, I think a lot of this just comes from that, along with the fact that there is just still so much uncertainty in regard to all of this tariff talk. It's just on one day,

off the next, this much one day, that much the next. It's a frustrating time for investors, but I can imagine that if you're in the auto business, it's even more frustrating because you just don't know what really is going on. If you're in this spot where you're a business that's dramatically impacted by tariffs and investors want quarterly guidance, why wouldn't you withdraw it at this point? You have no idea if these tariffs are going to come into effect, stay into effect if they're a negotiating tactic. If you're a leader at one of these companies, why are you issuing guidance at this point? I think that's a really good question. In many cases, it doesn't really matter to me whether management offers guidance or not.

I feel like we're better off without it, but we are where we are, and investors typically insist on it. We get it from most companies. In this case, I think management would be wise to at least message the uncertainty, if not withdrawing the guidance altogether. Now, there's some downsides that can come with that, right? I mean, there, we go back to that word uncertainty. And typically, when a management team withdraws guidance, it's not a good sign. Now, it doesn't take a genius to realize that the tariff environment is making projecting these numbers very difficult to do for investors and for management teams at the companies. But I do think, yeah, there can be a lot to be said for a company getting out there kind of ahead of it and

saying, we all kind of know what's going on here, and there's a lot of uncertainty in this case. We provided you some numbers from a quarter ago. We just don't know the impact, because I don't think really anybody knows the impact that these tariffs can have, because we just don't know how this is all unfolding. So, it is wise, I think, for management teams to continue to communicate and just communicate the truth. And in a case like this, I certainly understand withdrawing guidance altogether, because it sure seems like it'd be difficult to project. And then a lot of investors sort of on edge for Tariff Liberation Day coming up on April 2nd. Are you preparing as an investor? Are you breaking out the Traeger? How are you celebrating?

You read my mind, Ricky. I'm feeling like I got to smoke something on the Traeger. I mean, as an investor, nah, it's a Sunday, I think, right? I'm probably just going to be hanging home, hopefully enjoying some nice weather. And yeah, I'm going to maybe throw some ribs on there or get a big old pork shoulder or something. I want to talk about this story, cover story in Bloomberg Businessweek for April, which I really enjoyed. If I'm going to throw some mud, we also threw flowers on this show, JMO, by Julia Love, Davey Alba. The article is titled, Google is searching for an answer to chat GPT. And the theme of it, the story is basically that Google has long had a tense relationship between the ads business, between the search business.

And now you have AI answers coming in. And here's this tech giant struggling to adapt as more people on the internet ask questions to chat GPT. This is where we'll take first the Lynchian step. I mean, I've noticed for a few things, I'm using chat GPT a little bit more than Google, especially with cooking. When you're looking around your kitchen and you're like, I got this, this, and this, what can I put together to make it delicious? Can I sub duck fat instead of butter in this recipe? The answer is usually yes, by the way. Can I pull that off? ChatGPT, incredible sous chef, much easier than searching through the recipes on these long pages. But as an internet user, are you using ChatGPT more than Google

for anything? Not really. I mean, I use ChatGPT some, but I find I actually use Google Gemini more. It's been really fun incorporating these tools into our research work. And you're right. They're just tremendous tools that just give you a ton of information at your fingertips. Now, I still do Google search quite a bit. And I think that's just maybe old habits die hard, right? I mean, the apps on my phone, it's easy to use. I mean, when it comes to recipes, Rick, you got to collect those recipes so that you got your little recipe box on your phone so you don't have to go searching around you find a good recipe you save it and then you always have it there maybe you're talking about something else trying to make something with what you've got and then that that can be a

little bit of a different beast there but i do i do think all of these tools are getting good i think they're getting they're becoming very helpful so i think that then it's just really about figuring out which one works best for your needs because because again they chat gpt isn't the only game in town, obviously very powerful, very, very good game. But, but I mean, there are other tools out there. And I think it just kind of boils down to sort of what habits you end up falling into and ultimately incorporating into your workflow. I'm still building up my knowledge based cooking. Not everyone, not everyone has your cooking experience, Jason. I'm trying to learn as I go. And I like to chat GPT to help me out a little bit. I've used your mac and cheese

recipe though before. You've got a good, you've got a good list. It's a good one. Back to business search in Google. All right. Google does a lot of things. It's got a cloud business. It's got a maps business. It's got some venture shots, but search, this is the, the writers describe it, the beating heart. This is true. It's about 60% of Alphabet's annual sales, about $200 billion in revenue in 2024. But now chat GPT is becoming more popular despite your preference for Gemini JMO. But when you look at this story, when you look at this trend, how big of a problem is chat GPT proving to be for Google's business right now? I mean, it's definitely an issue. And we see this kind of as a bit like the evolution of search, right? It's just ultimately doing more

for us, which is great. And Google has definitely been working hard to keep up. But this is becoming a far more competitive environment as we change our behavior and incorporate more of these tools into our day-to-day. Now, I also, I wouldn't dismiss how strong Google is, considering the platforms and the users, right? I mean, they've got at least 10 platforms with a billion or more users alone, right? We're talking about Google Search, Android, Chrome, Gmail, Google Maps, YouTube, those kinds of things. And so, I think it's something that Google will have to pay very close attention to. I mean, they have a company in ChatGPT taking eyeballs away from Google properties and onto ChatGPT's properties. And it just makes for a more competitive

environment. Not that that's a bad thing. Hopefully, it pushes Google to compete harder and come up with equally good solutions. So, here's how Google's trying to pivot. Number one, they got a workforce moving a little bit. So, Google reassigned more than 1,000 engineers, about 20% of the search engineering team. They got 5,000 people doing search engineering over at Google, J-Mo. That's a lot. Anyway, they're putting 1,000 of them on the generative AI efforts. And then there was a new vision sort of presented for what Google is used for, where the search bar becomes less prominent, voice queries rise over time, and then also Google being used more for visual search. So the example given is that you're at a coffee

shop, you see someone with a cool pair of shoes, you take a photo of the shoes, and you can find out what they are to go shopping. The dark side of this is that you're taking a photo of someone and finding out who they are in public, and the veil of anonymity that you have when you go walking around is gone. Anyway, what do you think of this plan? I think it's something that they ultimately have to do. Advertising is ultimately the core of this business. If you go to the 10K, you can see that 75% of total revenue comes from online advertising. And that was just in 2023. And that number has come down relatively significantly over time. I think 10 years ago, it was over 90%. But as they add things like subscriptions and the cloud services side of the business,

I think they're going to start learning how to monetize Gemini from a subscription perspective. And I'm sure we'll probably see advertising inserted into that in some capacity at some point as well. But I think the good plan is to not sit still, right? I mean, there are going to be things that work and there are going to be things that don't work, but you don't know, ultimately you don't try. And how we interact with technology is always evolving. So I would be much more concerned if they were just sitting still. And then there's a lot of good stories in the article. I'm going to put a link in the show notes. I enjoyed reading it. I learned anything else in there stand out to you. It's okay if the answer is no, we can move on to the

next topic. No, I think we can move on. I'm with you. It was a lengthy article, but it was an enjoyable read. It makes you think about what the future of Google is ultimately going to look like from a consumer's perspective. Let's get to this Robinhood story. Robinhood, with a big product launch yesterday, announcing Robinhood banking. Basically, this is going to allow users more private banking features, more investing analysis delivered to them. And then the big one that I think is going to make registered investment advisories sweat a little bit is they are collapsing the fees. So basically if you have Robinhood as a robo advisor, they start at 0.25% of a management fee, but they cap it out at 250

bucks a year. And for a lot of registered investment advisories, when you have a wealth manager like that, they take a fixed percent of the fee, but that, you know, their fee grows as you put more, more money into the pot. Yeah. This seems like it would be a big problem for that business. When you were looking through those announcements, JMO, what were your takeaways? Well, I think that definitely was what stood out to me, was the potential for your RIAs of the world to come under threat with this. Now, I mean, I guess it all kind of boils down to how good the product or service that Robinhood's providing actually is, right? But that's also something that you introduce and you iterate, and it definitely gives them the opportunity. I think

they have, what, somewhere in the neighborhood of 25 million active account holders, something like that. And if you start looking at a product that they introduced that is legitimate and helpful, I mean, there should be plenty of room to continue to grow that number. But yeah, that's the one that stood out to me. The cash delivered to the doorstep is a little bit of a different one, Ricky. I'm not so sure about that. Let's talk about that. Because in the announcement, they're talking about how unsafe it is to go to an ATM, mentioning the rise of ATM attacks growing by 600% over the past few years. And you're like, wow, I'm going to be attacked at an ATM. No, Jason, that is people robbing the ATMs themselves. So that's people going up with a

truck, breaking open the ATMs and then stealing all the cash inside. However, if you're positioning this, it's a little bit different saying, isn't it so inconvenient to go into an ATM? Don't you feel a little nervous when you're in a big city going to an atm what if you could have physical cash delivered right to you at your doorstep so there's a fee involved it's like i think the uh in the demo they gave a seven dollar tip and then it's a five dollar delivery fee which is quite a lot for you know like a two hundred dollar uh withdrawal but anyway have you ever needed cash delivered to your doorstep what do you make of this announcement i i've i've not ever that I can recall needed to have cash delivered to me. Um, this, this just doesn't

sound like a very good idea. I tell you, certainly wouldn't want to be the delivery guy. And I can tell you that, I mean, unless they're going to supply like an armored vehicle or some sort of protection, I mean, word gets out that you're the cash man. Someone's going to come looking for you eventually. Right. That seems like it would be a risky proposition. And then honestly, I mean, how much cash do we really need these days? I mean, it's, it's just not how, uh, it's not how money, I mean, I'm not saying people don't use cash. Don't get me wrong. I mean, they've, of course they do, but, but the need for it, I don't think is the same because you have so many different ways that you can pay now. So you're like, Oh, I don't have cash, but I can Venmo you

or I could, you know, whatever cash app or something like that. Um, the fees seem preposterous and I was just going to ask that. It's like you get a service fee, but then on top of that, you probably got to tip the guy. And I mean, this tipping economy has gotten out of control, man. And all of a sudden you're, you're having to pay what, 15 bucks just to get whatever cash you want delivered to you. It seems like, uh, it seems like the juice isn't worth the squeeze. I think it's the logical end. You know, we've started, you know, you tip at restaurants that makes sense. Then you're tipping for takeout. Then you're tipping a little more for takeout. Then we're at a point where for some like concession areas, they want you to tip for access to the concession

area. And now we're at the base case, which is just getting cash. You leave a tip to get your cash, Jason. Yeah. There is something interesting with this announcement too, though, which is that Robinhood is moving to be this mega app, this everything app for finance. They're going to be doing money transfers, banking, investing, options trading, gambling slash event contracts, predictions, credit cards, cash delivery, which we just mentioned. And for as much fun we're having right now, the shareholders are laughing. Stocks more than doubled over the past year. So we've seen this strategy of being an everything app really not pan out for other companies. But so far, it's working for Robinhood. Why do you think it's working for them,

where it's been sort of a losing strategy for other companies? Well, I mean, I think it's because they continue to focus on services that sort of parallel each other, right? I think there's a lot of overlap there with the types of services that they're offering. So it's not something that's completely outside of their core competency. And I think that can also be a dangerous strategy, right? You can lose focus or you start not executing on all fronts. And I think that would be, for me, the bigger risk there is if they try to do too much. And I think that's what some companies that have tried to get into that sort of everything app strategy, they maybe take on more than they can handle. Maybe they're

doing things that they don't really need to do. I mean, I remember PayPal wanting to introduce stock trading into their app. And I'm like, that's clever. But why in the world do I care about that? I've already got a brokerage where I do my buying and selling. And plenty of people already have brokerages for things like that. So I think it's just a fine balance of making sure that you're delivering, delivering things that your customers want and delivering things that you think can attract new customers to your universe. And they're just making sure you manage it wisely. Hey, leave some, uh, leave some wings and a beer for me for a liberation day. I want to come over. Might have some ribs. Appreciate your time and your insight. Thanks for joining

us. I'm always a pleasure. Welcome to planet fitness, AKA planet strength, planet sweat, planet calm planet social planet me time and of course planet value whatever you're here for we're here for it judgment free get started at planet fitness for one dollar enrollment and then 15 a month 49 annual fee applies deal in september 10th You know the office building story. Everyone's working from home, and are all of these buildings going to go bankrupt? Well, now we're a few years later, and investors may be at peak pessimism. Motley Fool senior analyst Anthony Chavonne joined me to discuss the state of office space in one real estate operator that investors may want to put on their watch list.

They don't ring a bell at the bottom, but there is a New York Times article that's suggesting it may be close to that for the office market. The article, Ant, is titled, Signs of an Office Market Bottom, The Worst is Probably Over. You don't need to read the whole article. You're listening right now. Do you think this is true? Is the worst over for the office real estate market? I think the worst is probably over for the best-located, Class A, highest-quality office space. But for the rest of the office market at large, I don't think it's going to be so lucky. I think it's going to be more of a slow-moving train wreck, if you will. We've just seen a permanent demand destruction with the rise of

work-from-home since COVID. Despite recent headlines that employers are calling workers back to the office, you know, the amount of people working remotely or hybrid isn't really going down. And, you know, now we see office vacancy rates that are around 20% today. And one thing to keep in mind is that office has always been a bet on job growth because there's always been a positive correlation between job growth and demand for office space. So that 20% vacancy rate looks even worse considering that we currently have a pretty strong job market with an unemployment rate around 4%. So, I can't confidently say that the office market, broadly speaking, has bottomed when vacancy rates are still rising during a strong economy. But for

the newer prime office assets with solid capital structures, I think we've probably seen the bottoming out process take place already. And one thing I think is interesting is that every year, the Urban Land Institute and PricewaterhouseCoopers, they collaborate on an emerging trends in real estate report. And one of the real estate professionals that they interviewed said something along the lines of 2025 will be a story of 20% vacancy rates, but we won't have enough space either because we have a shortage of office space that people actually want. And I think that sums up the state of the office market today. It's a bifurcation between class A office buildings and essentially everything else. I'm thinking of the empty office parks I've seen in some of the

exurbs, suburbs around here in Denver and when I was visiting back home in Cincinnati. One concern from earlier in the pandemic is that a lot of these office loans would go delinquent, especially in the Class B space you're talking about. Work from home stays forever, which is partially true. Like many things, it's partially true, partially untrue. And a lot of these buildings would end up being scooped up by bankruptcy investors. But then the question is, what do you do with an office park that folks aren't interested in leasing? How's that turned out? How has that storyline turned out now that we're five years away from that? True, partially true, totally false? What's happening? Yeah. So I'll go with the easy answer and I'll

say partially true. Delinquency rates for office assets, they're still high and they're still rising. So there's definitely some distress, but I don't think that the stress has matched the market's expectations. If we go back roughly two years ago, everybody was concerned about the debt maturity wall for commercial real estate and in particular office space. But office landlords, they still have access to a lot of liquidity, and they've been able to extend and pretend, as the industry likes to say. So they've extended and modified a lot of their loans with the hope that office fundamentals will recover in a few years. And the capital markets have also been cooperating with them as well, with interest rates are now down, credit spreads are historically

tight, and there's tens of billions, if not hundreds of billions, of private equity capital looking to either acquire distressed assets or lend capital to landlords to strengthen their capital structures. I think we've all heard of private credit talk out there, and I think that this is part of that. So, we'll see where office delinquency rates head from here. But with so much liquidity out there, so far, I think it's been much more of a controlled demolition rather than a collapse. Well, let's focus on the positive side, the Class A office spaces. and there's a couple that I've looked at. One is BXP, which says that they are about 90% leased. That's well above the 20% vacancy rate that you suggested. I'm mixing math here.

That would suggest 80% leased for normal office spaces. It's the largest publicly traded workplace developer. You also have Alexandria Real Estate Equities, which operates buildings for large pharma science companies. They're about the same, although they note that 89% of their spaces are leased or negotiating. I think that's an important distinction. But when you're looking at these breeds specifically, why are you seeing demand so strong there? Yes. I just think it goes back to the flight to quality we've been talking about. Employers and employees, if they're going to be in the office, they want to be in the best assets and in the best locations. They want modern, highly amenitized buildings, buildings that have a lot of natural

sunlight, efficient HVAC systems, easy to get to locations. I think most of BXP's and Alexandra's properties provide that. If you're a pharmaceutical company, you probably want to lease space from Alexandra Real Estate because they are the premier owner of lab space at the best locations. They know how to operate these assets better than anyone. In the past, the skill of the real estate operator or the management team probably didn't matter much because interest rates are going down every single year, and that caused asset prices to go up. That math doesn't quite work anymore. So, I think the bifurcation between the skilled real estate operators and the, for lack of a better term, not-so-skilled operators will continue to widen. We've seen

that dynamic take place for shopping malls recently, and I think we'll see that in office, too. When I'm looking at these high occupancy rates, I do wonder, what's going on with the rent growth? Are the renters getting a lot of concessions to fill up the occupancy here? What kind of concessions are these renters getting? Yeah. This is probably one of the biggest problems, I think, for office landlords. Before we even get the concessions, I think it's important to note that a majority of office buildings were built before the year 2000. A lot of the office product that's out there is just functionally obsolete in the absence of major renovations that bring these properties up to a post-pandemic standard. So, landlords need to invest a ton of

capital, capital that's quite speculative in nature, just to make sure that their buildings are more desirable to prospective tenants. And then, if those investments ultimately work out and the landlord signs a lease with a new tenant, then we get to the concessions. And those can include things like free rent, which can range anywhere from a few months of free rent to two years of free rent, depending on how long the lease term is. Landowners are also offering things like tenant improvement allowances, free parking, lower security deposits. It can really be anything. Those concessions add up. There's an article from the Wall Street Journal that I read a few years ago that mentioned that office rental rates, when adjusted for inflation and

tenant concessions were actually negative from 1997 to 2021 in the 50 largest office markets in the U.S. These concessions can be quite meaningful. There's two ways to play this game. There's the institutional investors, the private equity folks that are scooping up super distressed assets at pennies on the dollar, hoping they can rent it out a little bit and make a profit. Us retail folks don't have that option. You have to pick up the publicly traded real estate investment trusts. If you're, if you're looking at this space, are you looking at this space or is this, is this a better game for those institutional folks? Yeah. So I think this would probably be a better, better game for the institutional folks. I think my advice to

people looking to invest in office REITs is to have a very big, too hard pile as Warren Buffett and Charlie Munger would say, and don't be afraid to say no to potential opportunities, because if you look at some of the office REITs out there, many of them have underperformed for decades. And even before the pandemic, these office REITs weren't exactly great investments over long periods of time. And moving forward, I still see this as a challenge asset class. It's highly cyclical, it's highly capital-intensive, and it's highly leveraged. Those three things are not a great combination. And then there's the huge question mark about demand. So personally, I just don't think the risk reward opportunity is that appealing, especially compared to other

real estate sectors like industrial REITs, which have been beaten up recently, or even mall REITs, which are performing very well. So there's just too many unanswered questions for office for me. So I'm putting this one into my, my two heart pile. All right. I might have to change the final question. Cause I was going to ask you if you had a favorite office read. I've been, I've been looking at Alexandria real estate and, uh, BXP and you know, they're both of them are at about 10 times funds from operation per share price, basically the earnings multiple for real estate companies. Do you have a favorite office rate or do you want to close out talking about an industrial REIT or a mall REIT that might be better for the retail folks? No, no. So I would

actually say out of all the office REITs, I would probably lean towards Alexandria Real Estate Equities because they're the go-to landlord for Premier Lab Space. And their office assets, They're, they're clustered in the largest life science markets in the U S and they lease their properties to the highest quality tenants. And, you know, work from home is, is still a risk for this type of asset class, but you know, these life science tenants, they, they generally need to be in their office at least part of the time. So I like that aspect to it.

And there's also some supply risks to, to lab space as well. But here's the thing that I really like about Alexandria, their balance sheet is, is amazing and they can weather a lot of these risks. I think it's like something like 30% of their total debt maturities don't come due until 2049 or later. So that's a long time from now. And one thing I really like about them

is they just recently issued debt at a lower interest rate than their current dividend yield. So I think that's a pretty good sign that this one's trading at a pretty beat up valuation. It's a good place to end it. Anthony Chauvin,

thank you for your time and your insight. Thanks for having me. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.