Motley Fool Hidden Gems Investing - What Alphabet Wants

Episode Date: July 24, 2024

…and it’s not getting from Wiz. (00:21) Asit Sharma and Mary Long talk about abandoned acquisitions, AI, and robotaxis while looking at earnings from Alphabet and Tesla. Then, (17:53) Matt Frankel and Ricky Mulvey check in on Boston Omaha, a holding company that recently lost half of its CEO team. Companies discussed: GOOG, GOOGL, TTD, PUBM, TSLA, BOC Host: Mary Long Guests: Asit Sharma, Ricky Mulvey, Matt Frankel Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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You're listening to Motley Fool Money. I'm Mary Long, joined today by Asit Sharma. Asit, lovely, as always, to have you here. Great to be here, Mary. So we're going to get to earnings from two big names in just a minute. But first, one of those big names is Alphabet, and they faced a pretty public rejection yesterday. So wanted to hit that before we dove in. Last week, the company had made a $23 billion offer for Wiz, which is a cloud security startup. That offer was nearly double Wiz's current valuation, but yesterday, Wiz walked away. Turns out they would rather be alone than couple up with old

Google. So my first question for you on this fine Wednesday morning, what's Wiz got that Alphabet wants? Well, number one, Mary, they've got a cool name. It's the other end of the Alphabet. It's a lot more appealing than Alphabet. Wiz. It reminds me of the movie The Wiz. Other than that, they also have a cybersecurity piece that would play well with Google Cloud Services. If you're on Google's network, then you might as well buy into security services. Amazon Web Services does this. Azure has its own cybersecurity piece. This would have been a nice little tuck-in, and I say little just because Alphabet's balance sheet is so big, tuck-in acquisition. But for Wiz, when they examined the deal, even though the money piece

was good, just the threat of antitrust coming in, the regulators saying, this isn't going to work, you get tied up for a year or two years. Just look at Figma's experience with Adobe. That might not have been worth it for them. And I think also they got a little bit of encouragement from seeing the stumble that CrowdStrike had last week and said, look, you know, let's head for an IPO and make some money there. This might be an opportune time for us. So you mentioned that Wiz acquisition that would have strengthened Google's cloud business, but per yesterday's earnings, that segment seemed to be doing just fine on its own. Nearly 30% increase in revenue for Google's cloud segment. So they raked in about $10.4 billion. Good amount

of cash. But that still pales next to AWS and Azure, which each did more than $25 billion in revenue in the first quarter of this year. So seeing that the Wiz acquisition is off the table now, what does success look like for Google Cloud? I think that success looks like quality over quantity for Google Cloud. Sure, their business is much smaller than their two biggest rivals. But what they're thinking through is the cost of all this acquisition of server equipment of GPUs in order to serve up artificial intelligence over the cloud. For them, it's not some kind of arms race to just catch up in terms of revenue. At the end of the day, the customer is going to want to get the highest ROI on a cloud spend that's infused with AI,

You have to convince the customer that they can get a better experience, faster inference for cheaper with you. You do that by investing smartly, not just trying to build the biggest infrastructure you can. Alphabet executives talked a little bit about this on the call, the fact that their CapEx spend is a lot bigger. It's 50% more than it was this time last year, but they don't see this indefinite march to never-ending CapEx. What they want to do is to build the correct system. They've got an edge here, Mary, because they have a lot of in-house AI expertise. Really, they had a much more robust generative AI offering than OpenAI did. It's just OpenAI went public first and the arms race started. I think it does

look more about profitability than anything else. Cloud is not Alphabet's largest big business segment. What did investors learn about Google's ad business from this call? I think the ad business is surprisingly strong. Google Search is a big digital advertising driver for Alphabet, and that was extremely healthy. It's a huge chunk of their business. YouTube, which also looked healthy, actually showed a little bit of deceleration, so ad revenue from YouTube. I wondered about that because the trade desks, Jeff Green has been saying for a long time that at the end of the day, advertisers want to spend on quality content, long-form content. They think that there are more people

that will buy their products if they place ads in connected TV venues versus short-form video. He's been tagging YouTube as a short-form video place for a long time. For most of us, it's the opposite of that. We've gone to YouTube for learning about things. If I need to change something under my sink, I'm going to go to YouTube. Well, really, I'm going to call a plumber because my previous results have been disastrous. But we're seeing this younger demographic flood into YouTube, and they're all into that short-form content that feels very much like other social media, TikTok, Instagram, you name it. I think that degrades the advertising ROI for some advertisers. I'm really curious to follow YouTube search revenue for the next, I don't know,

year or so, see what happens there. Yeah. When you mentioned CapEx spend and how that has just increased so much as Google invests in AI, I'm seeing something interesting here, right? On the one hand, you have like this massive AI spend and then the search results, you know, you mentioned that there's a lot to celebrate there, but something else to note is that while search revenue rose 14% for the quarter, Google network revenue was down from last year. So that network revenue includes the banner ads that you see on websites and the rollout of Gemini, an AI product, means that you visit fewer of those websites that pay for these banner ads. Google's spending all this money on AI, but at the same time, it's eating its own tail. Do you think

that that cost is worth it? If so, where does Alphabet go from here? What's next? Ads and AI search results? That's such a great question. My dog knowledge is very small, but name me a dog that has a short tail? Poodle, maybe? Do poodles have? No. I don't know. I think we're both showing our dog ignorance here. Hopefully, we'll get some angry letters from some dog lovers. I'm a dog lover. But let's put it this way. The tail is short. What I mean by that, if you look at this whole business, the Google search plus YouTube ads business was $50 billion this quarter, Mary. Google Network was about $8 billion. Google network is like a third-party network. It's the banner ads you mentioned, whereas the ads that we

see in and around Google Search, that's the monster part of this business. We see Alphabet experimenting a lot with ad placement around Google Search. Ads above the little AI summaries, ads below. It really hasn't hurt their business. If anything, it's enhanced it. So I think what they're saying is we'll sacrifice a little bit of that network revenue for third parties because it's so much smaller. We're willing to go there if we can keep growing this other piece and not just be totally taken out of our own game by generative AI. We've got Ricky writing in live to share some short-tailed dog options with us. Wiener dog, Boston Terrier pug, which of those do you think Google most closely resembles?

Right, right. Boston Terrier pug in this analogy. You mentioned the Trade Desk and Jeff Green earlier. As you think about the future of AI as it pertains to Google, what are the ripple effects for other ad companies there? The Trade Desk is down almost 9% this morning. Pubmatic, I think, is down about 3%. Yeah. So these companies have had a decent run. I mean, Pubmatic had gone down to $14 a share, and it's gradually come back. The Trade Desk has been having a pretty decent year. So we're seeing a confluence today of a few things. First of all, the market's very soft because big tech earnings, this is one of them, were decent, but maybe not powerful enough to keep pushing

this market to all-time highs. You've got that bit of weakness there. Then there's a little bit of the softness in the YouTube revenue that I was talking about that I think folks are extrapolating. Now, for the Trade Desk and Pubmatic long-term, those companies are pretty well positioned for this future in which, Chrome, are you ever really going deprecate in which those cookies go away. This deadline keeps getting pushed back and back. Some short-term noise here, nothing substantial for the future of the really strong competitors, as you mentioned, the Trade Desk, Pubmatic, Magnite, etc. Speaking of deadlines that keep getting pushed back, Waymo just removed its waitlist in San

Francisco, and it's getting another $5 billion from Alphabet, its search engine Sugar Daddy. GM just said it was indefinitely delaying its self-driving shuttle. This is when the delays come in. The Tesla robo-taxi launch also got delayed a couple of months. It was going to be in August. Now it's set for October. So when it comes to self-driving, and we'll talk more about Tesla's ambitions here in a second, but is Waymo the leader in this space?

I mean, right now they are the de facto leader, right? They have the biggest fleet that's operating now that's in full mode. You can hail those Waymo taxis in several zip codes. The other thing is that Alphabet has been funding this, as you call it, I think it's such a great term. As a sugar daddy for a long time, it's one of their bets that they have stuck with. There are others that they've just peeled off from. Maybe they see this as a sunk cost, so they really want to preserve their previous

investment because it's so big in scale, they're willing to support it. And right now, there is no other competitor. We've seen other companies pull back. So, de facto leader in the space for now, Waymo, yes. And I know you've got a very interesting question about another type of business that is poised to compete with Waymo in the future, maybe? Yeah. I promised two big names that were reporting earnings up at the top. That other big name is Tesla. Its self-driving ambitions and the theme of autonomy were certainly a focus of yesterday's earning call. It's a big piece of that autonomy wave that they advertise as coming next in Tesla's future is robo-taxis. So there's lots of talk about this yesterday.

I don't doubt that robo-taxis and the cyber cab network that's often been promised, I don't doubt that that's a cool concept. But I'm curious about the bull business case for it, because I look at Uber and their market cap is about $141 billion. Musk has teased that this driverless taxi business could propel Tesla, which currently has a market cap of about $785 billion, to a market value of $5 trillion. So walk me through this, Asit. Help me understand how robo-taxis help Tesla grow by over 400%, 500%. Mary, I don't understand it either. So I cannot not walk you through the bull case. I'll say a few things here, though. I think, for me, this is a 12-quarter exercise because, first of all, this isn't really a product that's

widely available on the market. It has to go through regulatory review. We have to see how strong the demand is. We have to have a number of business quarters to see if the robo-taxis have some unfortunate accidents which crimp their market potential. We have to understand how the insurance industry is going to underwrite this thing. There's so many unanswered questions. There's really no sense in making some $5 trillion business case by anyone except Elon Musk. He's an innovator and a showman in equal parts. It's typical Elon. There's nothing new there. I will say, in general, the business case will rest on the efficiency of the artificial intelligence, the fact that without human drivers, the cost of such a service is greatly reduced

versus a fleet service like an Uber, where you have human drivers. I do think this nexus of technology, low maintenance of the vehicles, the artificial intelligence could be a decent margin business if it gets to scale, but you need a lot of scale. Right now, there's really no immediate data that anyone has that could project with any kind of reasonable certainty this $5 trillion case. Let's skip that for now, is my suggestion. Let's put a date on the calendar two to three years from now, because that's eight to 12 business quarters, and we'll talk when there are some numbers on the table. I'm not panning this service at all. I'm just saying that this feels very Elon Musk to me. It's wait and see. Apart from robo-taxis, was there anything else

on this call that really stuck out to you? For me, the continued emphasis on AI is big, but more important to Tesla investors for the immediate future, is the sort of quasi-promise that a cheaper vehicle is coming. This is really what Tesla, the automobile manufacturer, needs to do. There are some amazing vehicles being put out by BYD in China. Now, they won't hit our market anytime soon because of tariffs, but it shows you where this industry is going. It runs towards lower-cost affordability. Hybrid models, give that to consumers today who want to buy from a number of manufacturers. This is where I think Tesla's really lacked in some ways. Now, they will make arguments that their entry-level models, when you figure in all kinds of consumer

credits, are low-cost of ownership vehicles, which they are. But to get a price tag that entices the average consumer, that's something I feel like Tesla should have done sooner. I was happy to see that at least they still have that in their sights. If you buy a management story, Tesla's currently sitting between two waves. So the first wave was the launch of the Model 3, the Model Y, and this next wave is all about autonomy and this next generation vehicle platform. So we already kind of hit on the robo-taxis and part of the autonomy piece of this, but I want to dive a bit more into what else this next wave might look like. Musk said that Tesla's going to double down on Dojo, which is Tesla's supercomputer,

and he wants it to be competitive with NVIDIA. What does it cost to build a supercomputer, Asit? So the cost these days to build a viable supercomputer, if we're talking about the very latest thing, they start up around a billion dollars because that's what it takes to string together several Blackwell complexes, Blackwell being NVIDIA's most advanced supercomputing complex. At the scale Musk is talking about, you're talking about several billions just to play. That's the cost of playing here, especially for the needs he has between his humanoid robots, full self-driving, other types of training he's doing on his model. I think what was maybe more to his point in the call was that they have to compete alongside

NVIDIA. Basically, they're buying NVIDIA GPUs. They cost a lot, but they have so much already invested in this GPU complex, they have to keep buying. That was the subtext of what he was saying. It wasn't really about building a computer that would be competitive with the supercomputers that NVIDIA can build. NVIDIA built its own supercomputers because that's the test case to sell it to enterprise businesses and hyperscalers. I think what Musk was really saying is, we're in bed with NVIDIA. We love their product. It's great. It's helping us, but we can't stop purchasing this and we've got to now finish this project else we've lost a lot of money that i was a really subtle thread that i was sort of surprised to hear running through there okay we've got cars

we've got robo taxis we've got supercomputers where do humanoids fit into all this funny thing is when we saw the first humanoid robots on stage uh when they were unveiled by tesla tesla's models that is they seemed really really clunky but i was sort of intrigued because they're always taking data from their own movements, and that's being fed back into Tesla's neural networks. So I think from the sound of it, we're probably, I'm going to guess, three years away. What I heard yesterday was that Tesla's going to take the humanoid robots and test them in their own environment, right? Because that's how they can really get better. That sounds to me, again, typical must-speak for it's at least another couple of years out. I think they'll run into

just some more development issues, but within three years, maybe we see them commercially available. I could be wrong. It could be faster, but that's what, that's what I heard between the lines yesterday. Awesome. That's about all the time that we've got for today, but thank you so much for the time for hanging out with me this morning and for filling us in on what's going on over at Alphabet and at Tesla. It's a lot of fun, Mary. Thanks so much. You just found out that your sales team is at risk of missing quota. Don't panic. just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard

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actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. We just talked about two companies that have a lot to say to their investors. Up next, we look at one that's a whole lot quieter. My colleague, Ricky Mulvey, checks in with Fool contributor, Matt Frankel, about Boston Omaha, a holding company in billboards, broadband, and asset management with a lot of new questions. All right, Matt, when you were on for the A segment a couple of days ago, I wanted to chat with you about Boston Omaha, which is an asset holding company where there's been a lot of change. It's, I would say, now one of the more controversial stocks in the

universe and one I know that you follow very closely. I spoke with Jason Hall about this fairly close to when one of its co-CEOs, Alex Rozek, left. But now I know that you're in a very different place with your relationship with the company. Your thesis on the company has changed. Originally, this was an asset manager, owned a lot of billboards, building out some broadband, and you were betting on the CEO's ability to be capital allocators. How has the thesis changed since then with Boston Omaha for its stockholders? Well, it's not just Alex Rosick leaving. If you're not familiar, he was the one who was Warren Buffett's grandnephew. If you ever heard him compare it to the baby Berkshire,

which I never really loved that comparison, but he was the reason for that. In a way, it can be, I'll start with the positive, because I always like to say something positive about any situation. The net positive is that I like the one CEO model. I wish they would have done it years ago. Any time you have two CEOs, you have to have two people agree on anything to get it done. Not to mention, not just that, you have two CEO salaries, two CEO bonus structures. With one, it's a net positive for the business in getting things done and things like that. That's what I'll leave with the positive. The reason the thesis is busted has nothing to do with Alex Rosick leaving. It's because the most exciting parts of the business are

arguably gone now, with the exception of maybe Sky Harbor, which they own 20-something percent of Sky Harbor right now. But that's a publicly traded company. If I want to invest in that, I'll just buy this. It's like saying, I'm buying Berkshire Hathaway just for Apple. Why not just buy Apple in that case? Sky Harbor, real quick, essentially, they have airport hangars where people park private jets. Yeah. It's fancy airport hangars. They took the company public during the SPAC boom. It was actually one of the more successful SPACs that was done during that era. Very, very great business, great economics, and good execution so far. That's the most exciting

part of the business right now. The billboards, broadband, and insurance are the focus going forward. Now, Sol's CEO, Adam Peterson, has made that clear, that he sees the best opportunities in just compounding those three businesses. Whether you like those or not, they do have great economics. They're not particularly exciting. The company's insurance and broadband investments specifically haven't really done anything to impress me yet. So, that's really the problem with those. The big thesis buster is the Boston Omaha asset management business. They had some big plans, and it was really exciting the story they were selling their investors. The first one was raising outside capital to start a built-for-rent real estate

business. The idea was they would invest a little money, but they would raise third-party capital. If they were able to deliver returns for their investors, they would get a percentage of the returns, kind of like a baby Brookfield or one of the big asset managers or something like that. I like that because if these investments go well, it's an unlimited ability to generate capital without putting up a whole lot of their own. They were not able to raise pretty much any money for that. They went so far as to say, we're going to spin this off into a real estate investment trust when it reaches scale. We see a $400 million opportunity to raise for broadband infrastructure. They weren't able to raise any capital and have since said they're

winding down that business. It was a whole lot of investor money down the toilet and building that part out. I'm trying not to be too salty about it. They spent a lot of money hiring people to run it. No, I understand because this is a company that, as of this recording, I own shares of. It's a company that I know that you were heavily invested in. It's okay to be a little salty when leaders say, we're going to do something, and then that doesn't necessarily pan out. Are you excited at all about what remains with the insurance, billboards, and broadband business? Sort of. It's not just that they couldn't execute on their plans. That happens all the time, especially during tough economic conditions. You really can't fault

companies for not being able to execute. Their communication was just terrible. They started the Built for Rent fund two years ago, maybe even more, when they said they're shutting down the asset management business. This year's annual letter was the first we're hearing there's an issue. That's really the big problem. The only reason I'm really excited about owning the shares right now is, when I do a back-of-the-napkin, some-of-the-parts valuation, I can't make a case that it should be a $13 stock. I just can't. It has some embedded upside in the business. It's the market's total lack of faith in the management, understandably so, that it's trading for what it is. My most exciting thing right now is, it's a value business right

now. We were talking earlier. In my opinion, I was like, okay, the thesis changed when one of co-CEOs left. You said the thesis changed two years ago, though. What happened two years ago? Two years ago was when they separated Boston Omaha Asset Management as the fourth business segment, when they decided they were going to raise outside capital. They essentially said, everything's fine, every time they were asked about it. Everything's progressing, we're happy with how things are going, things like that. That's really when the thesis changed. Because two years ago, as you correctly pointed out before we recorded, they were a billboards, broadband, and insurance business. And now they're that again. They didn't have a SPAC

before Sky Harbor started. They had a small asset management business, but they didn't have a third-party capital business or anything like that. So, they changed the thesis, made it a much more exciting story. Investors bought it and rewarded the stock for it. I think it shot up to about $50 at one point. And now the thesis is it's come full circle, I guess, with one fewer CEO. So the communication challenges for Boston, Omaha continue to roll on, I would say. They are having an investor day in Omaha. However, there's no remote streaming for it. It's only going on in person. This is something that I find myself unhappy about because I would like to be able to hear about what's going on without buying a plane ticket

to Omaha. Is this unusual? Does it signal anything to you? It's not unusual, but they normally time it around Berkshire weekend, so people are in Omaha anyway. To be fair, they've done this before. Originally, this year's meeting was supposed to just be streaming and not in person at all. Then a lot of shareholders pushed back and said, wait a second, we like having our annual meeting in person every year. It's one thing we look forward to. They said, okay, fine. But we didn't mean instead of the streaming option. We meant in addition to. Still do the streaming, but have some people in the room if they want to be. You don't need to get rid of the streaming entirely. I'm hoping

they'll reconsider. Adam Peterson, to his credit, I spoke with him on the phone a couple weeks ago, and he said, improving communication is going to be a big priority going forward. He wants to do quarterly investor decks, which they never had. I wouldn't be surprised if he says, okay, let's stream the meeting, because we don't want the 99% of investors who are not going to fly to Omaha, that we don't want them to feel like they're being left in the dark. I hope they do that. At this point, with Boston Omaha, as we look forward, what questions do you have? I want to see what Adam Peterson does over the next couple of quarters, because if I had to put the two co-CEOs in baskets, I'd say he is the capital allocator,

the one who wants to compound businesses and things like that. Alex Rosick is the entrepreneur. He wants to go into a new business line. He wants to see what they can do and build for rent housing. He wants to explore all these different avenues. Adam Peterson is more the compounder. I think the right CEO remained. I'm willing to give him a few quarters to see some progress. But I want to see some progress if I'm going to stay invested in the company. Who's his great uncle, though? Anyway, Matt Frankel, appreciate you being here. Thanks for your time on the inside. 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. I'm Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.