Motley Fool Hidden Gems Investing - Who in Big Tech Is Ready for Agentic AI?

Starting point is 00:00:00 It's Wednesday, so there must be big AI news in the market. You're listening to Motley Fool Money. Welcome to Motley Fool Money with the Hidden Gems team. I'm Travis Hoey. I'm joined today by Lou Whiteman and Rachel Warren. Every tech company that we know is building an AI story. That's been something that's been happening for quite a while now. But this week, Amazon actually won a court ruling against perplexity saying that they can't scrape their website. So the interesting thing here is that you can make an argument that Google and Meta just want to connect companies, consumers with retailers who are trying to sell them products. But Amazon is a little bit different. So I thought it was

Starting point is 00:00:52 worthwhile to dig into how they're such a different player in the AI space today. And And, you know, Rachel, they want people to go to Amazon.com. Right. And they have been the one company that's really been resistant to all these AI companies. You know, the way that they would look at it is scraping their data and kind of getting that into their system for free. The big thing is they generate a ton of money. I think it's over $40 billion now from advertising revenue. Guess what?

Starting point is 00:01:20 AI chatbots don't look at ads. So is this a threat to Amazon? Is this just Amazon trying to play its cards as well as it can? What's going on with Amazon kind of shoving perplexity to the side? Yeah, I mean, I think if you look at this court victory, it's obviously a win for the business in the short term. But I do think it highlights a deeper risk for the business. And I say this as an Amazon long-term shareholder.

Starting point is 00:01:46 But I think you should think about it this way, right? You know, Amazon's entire flywheel is built on a very specific competitive advantage. They own the entire commerce journey from that very first search that a shopper might make all the way to the package being delivered to your door. And they don't just want a sale. As you noted, they want the advertising revenue from the sponsor products that you scroll past, right, as a shopper and the data from every click. And so by blocking perplexity from scraping their site, Amazon is essentially trying to protect that storefront experience that makes their ecosystem so profitable. I think the threat here is that AI agents, which we are seeing become smarter and faster and launched left and right, these are eyeless shoppers, so to speak, right? They're not going to be distracted by the deals that a human shopper would be.

Starting point is 00:02:31 They're not going to go and browse through pages and pages of sponsored results, which are actions, by the way, that fuel Amazon's advertising machine. So if we live in a world where third-party AI becomes the primary shopping interface, there is this concern that that really extensive advertising mode for Amazon could start to dry up. I think that's the extreme bear case. I don't think we're there. But I do think it's clear that Amazon is really fighting to ensure that in a world that could be transitioning to more AI-driven shopping, that shoppers are using their own AI assistance, right? Like Rufus, rather than a neutral third party that might suggest a competitor. I think this court win buys them some time as they are trying to find out where they fit into a potential AI-powered shopping future. But I do think that the battle for who owns the customer's intent and where those AI agents fit in, I think that's just getting started.

Starting point is 00:03:24 Lou, is that right? Is this a threat we need to watch with Amazon's retail business? Stepping out broader, I think instant and complete comparison shopping could be the killer app for consumers. And what you mean by that is instead of going to 15 different websites and Google shopping tried this with search and it wasn't as good. But if you could just tell your little imaginary friend, I want to buy this, go find me the best price. And they, you know, I mean, that's that's a real killer app. You know, I can see why retailers would see this as a threat. And I think what Rachel said is right. At best, Amazon wants to be proactive and retain as much control for as long as they can. You know, it's funny, looking from the AI perspective,

Starting point is 00:04:12 there's sort of a weird chicken or the egg thing. You know, the AI models want consumers to pay for them. They need killer apps. But until the AI models are big enough to force the issue, why would retailers like Amazon sort of like give in to perplexity here? And without, you know, the killer app, how do you get the volumes that you need to then get the killer app? So, I mean, I, I do think, you know, I, I don't know. It's funny to think like, like who ends up paying here long-term say the future happens is Amazon getting money from perplexity for access to its site is Amazon paying the bots as sort of a, you know, advertising fee or somewhere in between. I think, The question that I would have is, does a different ecosystem with different incentives

Starting point is 00:05:03 pop up? You think of a platform like Shopify, where Shopify does have an incentive. If you're a small merchant, you're not getting into a Walmart store, for example. You may not want to go through the costs that are involved in Amazon. That's become a very costly platform to be on, and part of that is their advertising revenue. But what if a chatbot can just find you in your little store that you built on Shopify because the incentive now is to find that perfect product at the perfect price? Lou, is that sort of the risk here, is that these other companies are playing offense, like a Shopify, for example, whereas Amazon kind of looks like they're playing defense? Yeah, or to put it simply, because who knows, that's a scenario, but the status quo

Starting point is 00:05:50 benefits Amazon. Yeah. And so it makes sense for Amazon to preserve the status quo as long as it can. To your point, we don't know what the future looks like, but as these things work, when a shift happens, the incumbent usually isn't the beneficiary, even if they end up being okay with it. So it's in the incumbent's best interest almost always to preserve the status quo. We're going to stay on this AI topic for a moment. And when we come back, Lou is going to explain what a molt book is. You're listening to Motley Fool Money. at participating A&W locations in Ontario.

Starting point is 00:06:51 Welcome back to Motley Fool Money with the Hidden Gems team. The meandering of meta platforms continued this week. They acquired at least the staff of Moltbook. Lou, what is a Moltbook and why does it make sense under meta? Come on, Travis. Everybody knows what Moltbook is. I mean, who doesn't know Moltbook, right? I mean, who hasn't heard of it?

Starting point is 00:07:14 And just in case for those one or two out there who aren't like, you know, Malt Bookers every day, Malt Book is a quote unquote social network for AI agents. It's where AI agents can become friends with each other. I mean, it seems like it's a natural extension, right? One headline I saw described Malt Book is going viral based on the amount of fake news on it, which let's just skip the meta joke there because that's too easy. I don't know. Could there be dating apps coming off of this could we have like you know match.com for uh ai agents but look kidding aside here there is a something here right mo book under the surface really what it is is just you know allowing people and bots to communicate with ai agents in natural language

Starting point is 00:07:58 through chat apps and you can see where there is a commercial use for that other than yeah an agent dating site. Also, look, I don't know what the future is for Meta. We can get into what they're doing with AI, but acquihires happen and they're good. Right now, Meta has all the cash in the world. They are using that cash to assemble the brightest minds they can. The throw spaghetti at a wall and see what sticks isn't a bad strategy at this point in time when everything is developing. I don't know if Malt Book is the next big thing. I don't know if it's that third leg along with Instagram and Facebook, their third big social network. But I do think that you can put the cynical hat aside and say, yeah, there's probably a reason for this. Rachel, Lou's overlooking

Starting point is 00:08:45 WhatsApp because he's obviously a US investor. Well, no, that's a messaging app, not a social platform. Well, yeah. I mean, it's the app of choice for a lot of us. But Rachel, so what do you think about MoBook here? Is there some sort of value? Is this just another talent grab? there's got to be some reason that they keep making these moves. Yeah, I do think there's some value here. I actually think it's more of an admission that the AI strategy is pivoting towards autonomous agents. I think Meta sees that and is trying to ensure that they're capitalizing on those growth tailwinds. So you're saying they've lost the chatbot battles.

Starting point is 00:09:20 I think that they are struggling to develop what they need in-house and have clearly found that the strategy of acquiring and bringing in really quality outside talent is going to be the best move for them. I think that that's what we're seeing. Multbook, I mean, Lou explained that very well, but it's essentially, you know, the social network where only AI bots post and talk to each other while humans watch from the sidelines, which is sort of an interesting idea. It's kind of been compared to a Reddit-like internet forum. It was only launched, I believe, a few months ago. Yeah, January. Yeah. And it essentially acts as this like sandbox for AI to communicate, trade knowledge, debate existence to form autonomous AI social structures. So

Starting point is 00:10:01 what are the long-term applications for that? I think that remains to be seen, but this is all going to be folded into the broader Meta super intelligence labs, right? That's run by former Scale AI CEO, Alexander Wang. I think Zuckerberg is really signaling that Meta's next act, it isn't just smarter chatbots. It's really a whole infrastructure for AI agents to interact and transact. And I think maybe they see value for that, particularly with the ad machine that they have powering their key platforms. So that's kind of my takeaway.

Starting point is 00:10:30 Lou, as we think about Meta, because it seems to me that they're a natural company to benefit from artificial intelligence. We've seen some efficiency improvements with their advertising and things like that, but they're hiring talent that would indicate that they want to be a consumer AI company. Is this just going to be like an agent AI company?

Starting point is 00:10:50 Or is this just that spaghetti at the wall phase for Meta that you talked about? Yeah, I'd push back a bit on the idea that them buying stuff implies that the strategy isn't working out. I mean, Alphabet has spent, what, $40 billion on AI-related acquisitions. Everybody is in an arms race right now. It's just where we are in the cycle. The thing about Meta, though, that gets you is that I don't know if they have the natural audience for what they're building, other than in-house. But they're not spending the money they're spending to make ads a little better. Uh, their whole, you know, you know, how do they get customers that are going to pay for what they're building? I think there's a natural

Starting point is 00:11:34 extension for Microsoft. There's a natural extension for, for alphabet to kind of get their tools in the hands of consumers. I'll be honest as a meta user, I'm not on the agent social network right now, but I am on other products. They're desperate attempts to get me to use their AI are pretty pathetic right now. I mean, it's some story about a basketball game and it's tell me how the coach thought of plays in the second half. And if you click on it, it'll just say, I don't know. You know, I mean, that is right now. I think that I, I, I, I think the, the acqui acqui hires, the acquisitions right now, this is noise that doesn't say much about whether or not they're succeeding or not. I do think though, the open question, it's the question

Starting point is 00:12:23 with open AI too, perplexity, back to our earlier story of just where, how are you going to get what you develop into the hands of consumers and win what looks like in a race to the bottom in commoditization? That is the bigger problem, not the acquisitions. Well, all of this AI development is leading to a lot of demand for Oracle. So we're going to talk about their recent results. next you're listening to motley fool money you gotta try breakfast at a w you gotta try breakfast at a w and what better way than with a delicious pret organic coffee starting with just one dollar all day every day now until december 31st you gotta try breakfast at a w at participating A&W locations in Ontario. Welcome back to Motley Fool Money with the Hidden Gems team.

Starting point is 00:13:22 Oracle announced results for their most recent fiscal quarter after the market closed yesterday. Rachel, what did we learn about this AI giant in the making? Yeah, I mean, so this was their Q3 earnings. A few interesting takeaways here. I mean, Oracle is seeing its highest growth in 15 years, which is impressive, but it is coming at a staggering cost. So the kind of headline-grabbing number was their $553 billion backlog in contracted future revenue. That's a number that was up about 325% year over year. And basically, customers are beating down Oracle's door for AI infrastructure. Oracle's growing its cloud business at an 84% clip to meet that. To build the data centers required to actually fulfill those orders, though, Oracle's spending has gone nuclear. They had negative free

Starting point is 00:14:09 cash flow of about $25 billion just in this quarter. And they are essentially an AI construction company right now, racing to plug in chips faster than the competition. Oracle is debt funding its empire at this point. And the defense we're seeing from management is that they're not just blindly borrowing. They're using this bring your own hardware model, if you will, where customers often pay up front or even provide the chips themselves. And that is designed to de-risk the build out. And I think Oracle is betting that they can convert that significant backlog into high margin profits before the interest on that debt catches up to them. I think that's possible. I think this was a really good quarter for the business, but I think it's really important to

Starting point is 00:14:49 also look at where it's costing the company right now. And we're seeing that in terms of the cost for its free cash flow, as well as that debt that is growing by the quarter. Yeah, Lou, $135 billion is a lot of debt, no matter how you slice it. I also thought it was really interesting, the bring-your-own-chips business model that they've introduced in their hyperscaler business. I guess that's where we are, is they have enough power to say, hey, cool, we'll build up this data center and give you capacity, but you got to bring your own GPUs. It certainly makes life easier for them. I mean, yeah, $135 billion is a big number, but every number here is a big number. So I don't think it's a level of concern.

Starting point is 00:15:28 put it a different way. It's about two times sales, five times EBITDA. That's not unreasonable. That's not nothing. It needs to be watched. But I don't think, as fun as it is to just do the headline number, I don't think that that is the point. Look, RPOs are interesting. And the interesting thing about the RPO number is a lot of this is, I keep using the word, a bit of land grab. I don't know if any of their customers really know if they need all the capacity they've gotten, but if you don't secure it now, you're not going to get a chance later. So I, you know, there is, I don't think you even have to be an AI skeptic to wonder how much of that turns into revenue. You know, I mean, I think, I think AI can go exactly the way people hope, but grows more

Starting point is 00:16:12 efficient or, you know, there are a lot of ways. So who knows? All we know for now is, is that the current business is good. The forecast that they are putting in writing, which, you know, may not hold, but we'll see. But if you can go from $60 billion in revenue now to $90 billion in 2027, that's really, really good, right? So, you know, we'll see if they hit the bogey, but they've set it down. I wonder about a lot of things with this, but you can't really judge it on anything other than what's, you know, the facts on the ground right now. And the facts on the ground are really, really good. And I think the stock's reflecting that. So is the takeaway here that things look really good when we're looking in hindsight, we just don't know what the future

Starting point is 00:16:56 looks like? We don't know the details. There's going to be revenue, but we don't know if there's going to be commensurate return on that hundreds of billions of dollars worth of investment. I'd go a step further. I think we have a glimpse at the future, and the future looks great. What we don't know and what Oracle's management doesn't know either is exactly how the future plays out. that's really really hard to know so it all looks good with the caveat of again the future is hard yeah for at least the foreseeable future it seems like the spending on the build-out is not slowing down anytime soon 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

Starting point is 00:17:38 solely on what you hear all personal finance content follows the motley fool's editorial standards and is not approved by advertisers advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis William. Thanks for listening to Motley Fool Money. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Who in Big Tech Is Ready for Agentic AI?

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