Motley Fool Money - Ok, Cloud

Episode Date: April 9, 2024

Google is the latest tech company to host a conference full of AI pronouncements. (00:21) Asit Sharma and Deidre Woollard discuss: - Why the market is smiling on Alphabet lately. - How Google’s announcements show the company’s AI ambitions. - What Blackstone might buy next. (17:26) Robert Brokamp interviews Steve Chen, the CEO of NewRetirement, on what savers often miss about retirement. Companies discussed: GOOG, GOOGL, BX, MSFT, AZMN Host: Deidre Woollard Guests: Asit Sharma, Robert Brokamp Producers: Ricky Mulvey, Mary Long Engineers: Ricky Mulvey, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Gemma and I wants to be your new workplace friend. Motley Full Money starts now. Welcome to Motley Full Money. I'm Deidra Willard here with Motley Fool analyst Asset Charma. Asset, how's your Tuesday going? Spectacular, Deidre. How about you? Good.

I like to hear spectacular. I think Alphabet might be having a spectacular day or week. They're very excited. They've got their Cloud Next event in Las Vegas this week. You know, I'm getting a little bit of event. conference fatigue of all of these big tech companies. They're coming out with these announcements. And it's always a big flood of partnerships and forecasts. But one of the things I find interesting is how the narrative has shifted on Alphabet. A couple months ago, everyone was,

invidia's already won the race and everybody else's second and nothing that Google is putting out is working. And now that has really shifted. What's behind that? Deidre, one of the things behind all this is that Alphabet has deep expertise in machine learning, in algorithms, in generative AI. They were really the seminal or one of the seminal forces that pushed generative AI along. It's just that other companies like Microsoft, with their partnership with OpenAI, swooped in and brought it to a consumer-facing model. So Google has the chops. It's just a question of getting that out in front of both customers and enterprise businesses. Well, that was really the interesting thing was that we knew that they had been working on

this for years. And then, like you said, Microsoft and Open AI sort of got the jump. And then Google, you know, Bard felt a little flat-footed and didn't get a lot of engagement. But Gemini has really, really sort of sped up. I mean, there were a few missteps in the beginning, But it seems like now Gemini is slowly being integrated into more and more things across all of Google's products. Right. So there's some evidence that there may be a toggle switch in Android pretty soon where you can just flip into a Gemini-based environment. And that's a pretty good line of defense against this one business risk for Alphabet that if we all start using these AI assistants, we're not going to go to Google anymore, which is a big source of their revenue. So, being able to keep you within that sort of search ecosystem by having you switch into a Gemini mode, I think is pretty smart.

And also, you know, we're seeing some things out with their conference today that Google is making Gemini a little bit more robust in terms of avoiding basic errors. Their platform, which is actually called Vertex AI, has been incorporating some lines of defense into misinformation. This is known as grounding in the AI business, so the latest models of Gemini are a bit more grounded and tied to fact-based information, so traceable information sources. We've seen Bing do a little bit of this as well. So I think that's going to be pretty good for restoring some confidence in this company. Gemini, again, is not the end-all and be-all of Google's expertise, but it is the most visible aspect of it for many people. So it's good

that we're seeing some upgrades to Gemini and also I'll note this latest upgrade. It's called Gemini 1.5 Pro. I think is going to be attractive to some enterprises because it's capable of understanding longer bits of information and presenting analysis, be it video, text, voice, et cetera. I know that some of the market is like, okay, their last event was eight months ago, and so they didn't wait a full year. So maybe that means that we're going to see more announcements. You know, one of the things that is interesting is, as you mentioned earlier, Google's primary business is still search. Cloud is around 11 percent of the business, you know, competing against Amazon and Microsoft. But what advantages does Google have in the cloud

space? Well, one is that it's got pretty deep expertise again in processing. So, It has ways to convince businesses that they have a better return on an investment by staying within Google's cloud. I think some of the announcements we're seeing today are evidence of this. They're introducing a new chip, which is going to be Google's first arm or ARM-based CPU. It's called Google Axion. So I saw some news releases that this is an AI chip. I mean, it sort of is what it really is an alternative to GPU processing.

So this is a central processing unit. It is designed with a very specific set of capabilities and instructions. It's really good for enterprise workloads in the cloud. They're going to sort of test this out on some YouTube workloads. The chip will be out later this year for enterprise businesses to test drive. But Google has an argument here that, look, if you're spending money with us, whether it's AI or other parts of your business, this is an energy-efficient chip. It is superior to X-86 chips, which is sort of a standard that Intel and AMD have in the marketplace.

And it's really going to help save you money. You can use it for generative AI, but you can use it for all the other great cloud stuff you get from us. So it's important for Alphabet to bring forward some silicon-based advantages like this. This isn't going to shift the world from Nvidia GPU computing all the way to Google. But Amazon isn't trying to do this either. Neither is Microsoft. All through these companies are trying to show that they have some compute solutions, so customers have alternatives to using GPU processing.

It'll be a mix going forward for sure, but I like that alphabet is showing it's got a bit of muscle in this space as well. One of the things I'm thinking about is, I know Tim Byers has talked about this, too, is the multi-cloud environment, and that now it's not just picking, one partner. And it seems like Google might be positioned to benefit from that. I know in some of their announcements, they talked about all of the companies that they're working with. And so it seems like there's a race to get all of those, you know, Fortune 500, those big, the big companies, you know, using your platform. But maybe they're, it seems like they're using a bunch of different platforms. But one thing I'm wondering about is for you and I, for the people that are mostly

experiencing Google through things like Gmail or Google Docs and things like that. We're going to see a lot more of Gemini in our daily work, aren't we? Yeah, it's going to be popping up in a lot of places. And I think the first wave of experience for some of us may be amazing because you may be an early adopter of generative AI and just will be really pleased with this. For others of us who want to take our time with the technology, it's going to be a little irritating, because we get little wavy things at you as your devices saying, hey, would you like to try Gemini to book this flight, et cetera?

But this has been the business model of Google and Alphabet for a long time. We've seen this on our devices since we first started using the products. So I do think we'll see that. And for that matter, Microsoft is doing much of the same. If you happen to use Microsoft's office, you know, you've already seen the invitation. to use their AI assistance. So this is going to be something that eventually gets woven into the fabric of our work. But that first layer is going to be a lot of pop-ups and invitations to test drive the technology.

Yeah, yeah, absolutely, because it really is all about achieving critical mass of adoption and making it seem sort of seamless rather than going to a generative AI location. It kind of comes to you now. Totally. Let's pivot. I wanted to talk a little bit about Blackstone. I didn't get a chance to talk about it yesterday. Blackstone made a big deal over the weekend.

They're buying air communities, which is an apartment reed, a smaller one, but for $10 billion, which is about a 25% premium on the last share price. You know, it's Blackstone. No stranger to acquiring big reeds. They took out one of my favorites, American campus communities in 2022. part of it is they build up these massive funds. I mean, they're buying this with their real estate fund, which they raised $30 billion for last year. And they make these smart investments, typical Blackstone stuff. But I'm wondering, this current regulatory climate seems like a little

bit different. I'm wondering if that's going to put a little hitch in Blackstone's giddy up. Maybe. I think, actually. Yeah, I mean, you've got a point there because they are, look, the world's largest alternative asset manager. They have hundreds of buildings. billion dollars to sling around, to make acquisitions, to finance big deals, etc. But I seem to think that the Europeans Commission, their regulatory arm, and the Justice Department, all regulatory bodies of the U.S. government, are just so focused on big tech right now. That seems to be what they wake up thinking about. So it opens the door for an innovative company like Blackstone, which is buying and selling in a number of different industries, to

make bigger acquisitions, one that might be under the microscope if an alphabet or an Amazon or a Microsoft made the same acquisition and get by with it. So you're totally, though, onto something that the regulatory environment is sharpening up and governments are more than ever worried about monopolistic power, because technology plays such a big role in today's acquisitions. So companies that have already a lock on a market because of their patent. and technological edge get swallowed up by bigger companies that also have locks on other markets. It's never a good look on the tech side of things.

But you and I were chatting earlier today about just the variety of investments Blackstone makes. I somehow think this BMF is maybe going to be able to coast under the radar for a while. Behemoth, I love that word, because that's what it is. Let's go into rumor territory, because there are two other Blackstone rumors that I find fascinating. The first one is that they're looking at Jersey Mikes, this famous sandwich shop, of course, franchise model. They're looking maybe for about $8 billion. I love the story at this one.

You and I were talking about it before about Peter Cancro, you know, started working for this sub shop when he was 14, bought it when he was 17, you know, turns this into this national chain. Maybe he's looking to cash out. Maybe he's looking to do more philanthropic stuff. What makes a brand like this attractive to private equity? I think it's in the keyword brand. I think when private equity sees a business that has extreme customer loyalty, has been able to scale over the decades, they understand that it's not a proposition that will erode quickly so they can go in, make the kinds of tweaks they're used to.

Some call it like hatchet work. Private equity has sort of a bad reputation in industry, and I think some of that's earned. But they don't always. do that. Sometimes Blackstone will come and use more of a scalpel approach to optimize operations, squeeze some more operating margin out of a cash generative business like this, and be okay with it. So I think that whenever you have that high customer recognition, that brand awareness, it's really attractive to private equity because it's hard to sort of destroy that overnight. If they make a mistake in cutting too much, they can ease back a bit, and it won't take the business out of its step.

Well, and I find it interesting, too, because we've had like Kava IPO and we've had, you know, Chipotle had its big stock split. So you've got, there's very much interest in, you know, in food. You know, we always say never bet against the American eater. And I think, I think that remains true. It seems to be sort of like Renaissance time for food IPOs, doesn't it? We've seen tech IPOs dribble down. There's not a lot going on there.

But in the food space, wow, it's booming. But this does show the power of certain concepts. When they take off and they scale and they have that magic formula that makes you want to walk by a certain restaurant to get to the restaurant you want to get to, which isn't really my idea, but Ron Shake's idea. He, of course, is the longtime former CEO of Panera Bread and is now himself a public investor. So once you figure out that magic formula, man, you can take that all kinds of places globally. So while it's not a recession-resistant industry and not every concept makes it, the ones that do can have success for, you know, defined by decades, just as Jersey Mikes we're talking about. And for that matter, just back to Jersey Mikes for a second, an $8 billion rumored acquisition if Cancro does sell to Blackstone. You know, there's not a lot of places you can go to cash out when you get that big, except

for the public markets and private equity. So maybe that's, if this deal is for real and matures, that might not have been his first choice, but where else are you going to go to raise your $8 billion in equity? To realize your $8 billion in equity, sorry. Yeah, really, really good point. So our last Blackstone story, it's about the French skincare company, Los It's You know, this one is different because they're not buying it and taking it private, but they may be helping the owner, which is an Austrian billionaire, Randall Gaguer,

wants to take it private. Blackstone might provide the debt financing. So this is interesting. Looks like this one is even closer to happening. This one trades on the Hong Kong Stock Exchange, oddly enough. And the trading was paused yesterday ahead of an announcement. Terms haven't been finalized. But Blackstone, they've got about $200 billion in dry powder.

They can really do a lot with debt financing in an environment where it's not the easiest time to get money. I think so, too, Deidra. Warren Buffett has talked about this for decades, the problem of getting really big. How do you keep making outsized returns once you're one of the biggest players in a certain market? And this is something that's playing into Blackstone's hand. And what I'm referring to, of course, is this high interest rate environment.

So you have, on one hand, probably. Private Equity Group, Masters of Collateral, Masters of Financing. Number two, you've got companies around the world, bigger companies that may want to get off the public markets or may need some working capital or longer term debt. Once you get to a size like La Ceytan, where the banks are going to be a little hesitant with this high interest rate and maybe the quality of the collateral to lend you a bunch of money and a financing deal, where else do you go? Again, the world's largest alternative asset map.

As you mentioned, a few hundred billion bucks in dry powder. I'm sure they can make a deal that both parties will find amenable, and it probably will be a complex financing deal. That's another advantage they have. So they can deal it out in trenches. They can have some provisions for more financing at a later date. There's different clawback provisions they can put into their debt. So these kinds of deals are sort of tailor-making.

are sort of tailor-made for a bigger company like Blackstone that's trying to find where it can make its profit year in and year out, even as it's got so many billions that it needs to deploy to generate that return. So, yeah, I think this is such a fascinating company to study. And, you know, they've acquired some companies that I like and thought were so investable. I believe they acquired Rover Group, which is the pet sitting platform a few months ago. So, you know, You also see them taking out smaller companies that might have made a splash on the public markets if given enough time. Yeah, yeah. Never take your eyes off Blackstone.

Thanks for your time today, I'll set. Thank you so much, Deid. This is a lot of fun. What does leadership really look like? On the power of advice, a new podcast series from Capital Group, you'll hear from athletes, entrepreneurs, and executives who've led on the field in the boardroom and in their communities. It's not about titles. It's about impact. Discover what drives them.

and the advice they carry forward. Subscribe and start listening today. Published by Capital Client Group, Inc. What assumptions are you making about retirement? Robert Brokamp caught up with Steve Chen, the CEO New Retirement, a company focused on DIY financial planning at scale, about what savers often miss about retirement spending,

and when they'll actually leave work. Quick disclaimer, our sister company Motley Full Ventures is an investor in new retirement. One of the first questions that anyone will have to answer, if they use a retirement calculator or even just meet with a financial planner is, when do you plan to retire? What's your impression of how good workers are at predicting when they'll actually retire? Yeah. I think everyone is ambitious. People say, oh, I'm going to work until early mid-60s.

Some of them love working. They're going to keep going. That's kind of what people tell themselves internally. And if you pull them, that's what they'll say. If you look at the data, many people end up being pushed into retirement through illness, through being laid off, downsizing, or whatever, in their late 50s. And that can create this uncertainty. So I do think that a lot of people should anticipate that that could happen in build scenarios. Like, what would I do if that happens? And then, you know, you could work part-time. I mean, I think a big insight is actually, on the flip side, many folks are like, well, I need to keep working until I'm 70 or late 60s. But in fact, maybe you could go, you know, say you're making 130,000 a year or something.

You know, you've got a good income, but, and you've saved. And you're like, I need to keep making this kind of money or whatever it is, you know, for a long time. In fact, if you work part-time and you're making $50,000 a year and then maybe claiming Social Security, like you could bridge yourself and it would be fun. You talked about doing the Roth conversions, and you have suggested in the past that earlier retirement is a good time to possibly do that. That might be counterintuitive to what a lot of people think, right? I'm in retirement. I shouldn't be doing conversion, because why is that a good time to be doing that? You know, the Roth conversion strategy is for most people, especially kind of gen Xers and above,

they've saved almost their money in 401 case, defined contribution plans that are subject to RMD's requirement of distributions. And the whole thing is like, you want to move those assets out of that vehicle into a Roth, and you can do conversions in lower income years. So you take the money out over age 59 and a half where there's no penalty. And so if you have low income years and like, you know, say you're going to have $20,000 of income or something, you're like, and we have a marginal tax system, right? So you solve for, okay, I'm going to put it into the 20, up to 22 percent or 20, whatever the interest and the income tax rates are.

Like, I'll take out 80,000 bucks this year, push my income up to this. you know, keep it below a certain marginal tax rate and then convert most of that into a Roth, which can then grow tax-free and there's also a bunch of estate tax benefits to it as well. So there's, I also tell younger people that they should really consider a Roth because if you can, you know, get your money into that vehicle, you know, in your, in your 20s and let it compound for 30 years, it makes a massive difference because it grows tax-free, comes out tax-free in the future. So you're kind of hedging out your future tax liability in a big way. The one thing I'll add about doing the Roth conversions is that, of course, when you convert

money from traditional Roth, that adds money to your taxable income. So it's not a free lunch. And you do have to think about how it will affect things like your premiums based on the Affordable Care Act, or if you're receiving Medicare, what you pay. Because if you earn too much money, you'll have to pay for Medicare. So there's a lot of moving parts there in terms of making that decision. Yeah. I mean, that's one of the most popular parts of our,

our platform is we have a Roth conversion explorer that lets you think through how I would do conversions across multiple years and solving for things like different rates of return that you're expecting. Different you can solve for, you can say, I want to solve for lowest taxes. I want to solve for maximum estate value. I want to solve up to a certain tax rate. I want to factor in Irma, you know, Medicare means testing. We've built all that. And the way we do this is, and this is where you're going to start to see compute and AI emerge, what's so different is, like, we, one, let you frame up everything you've got, right? All of your savings and your home equity and income sources and one place, pensions, annuities, everything.

And then we run a lot of simulations for you when you do this. So what we're doing is we're not, we're basically like saying, okay, what if you did this, this, and, you know, you do like, you know, hundreds or thousands of simulations. and then we pick the one that is the best fit for a strategy you're trying to pursue. So that's the kind of thing that's starting to happen. And I think you're going to just see more and more of this where there's parts of planning where computers are great, right? There's parts where humans are great.

But you're not going to do this kind of stuff on a spreadsheet. You know, you're not going to have access to AWS Lambda serverless compute that you can run this, you know, millions of simulations behind the scenes for or billions for millions of people every night. that's kind of where we're headed with this thing. Let's talk a little bit about spending in retirement. The base case assumption, whether you're looking at a retirement calculator or even most financial planners, is that your expenses will rise along with inflation in retirement. In your opinion, is that the right assumption? You know, it's not, unfortunately. I mean, well, fortunately,

unfortunately, I think a good way to frame this is like there's kind of the go-go year. The go-go year is the slow-go years and the no-go years. I mean, it does, you know, if you look at, you know, you think about your parents, right? Hopefully they're alive. But, like, you know, 60 to 70, you're doing one thing. 70 to 80 to you're in something else. 80 to plus, you know, it's a pretty different world out there for you. And, you know, I think a lot of people, they do over-optimized for trying to solve for, like,

I want to have plenty of money when I'm 105. Well, you're not likely to be alive then, you know. And that's where things like annuities and stuff like that do make sense. Like, you can hedge longevity by buying a deferred annuity, right? So you could be like, okay, hey, in the unlikely event, I'm alive at 90. I'm going to buy enough income so that with that and Social Security, I'm not going to starve to death. And then you can set your planning horizon to 90.

And then you can start thinking about, and this is where there's a shift that happens with people, whereas you approach retirement, you're like, oh, man, you know what? Is my one non-renewable resource here time? And like, I really need to think about how I use my time really intentionally. And like, maybe I want more time with my kids. I want to have better experiences. And like, you know, I might not be, you also see your friends like, oh, so-and-so had a heart attack at 65. and they drop dead. It's like, you're like, you know, that becomes a real thing. And you're like,

maybe this is like, I want to be like, I don't want to be chained to my desk, you know, until I'm 65 or think that I will be. I want to take control earlier. So generally, you know, the data on this is that you're real. So your inflation adjusted spending declines by about 1% per year as you go through retirement. So every 10 years, it'll decline 10%. So if you're spending $100,000 a year, year or drawing that down on top of social security. Say you want to, say, between you and your spouse, you get 50,000 in social security, and you're like, I want to have $150,000 a year to live on. I'm going to draw $100,000 a year.

Well, you know, 10 years in, you'll be spending, you know, $135,000 on a real basis. And 10 years past that, you'll be spending more closer, you know, $120,000 or something. So you will need less money. That's what the data shows over time. And that will dramatically change how much you need to save. Yeah, and that's the important point. point, right? Because if you assume a more realistic spender in pattern, it means you don't have to save as much for retirement. It might mean you can retire sooner and enjoy some of that

money. Or could mean that in your earlier years of retirement, you should basically enjoy yourself a little more while you can, because at that point, you're the healthiest you're probably ever going to be. So you should enjoy it a little bit more than that. Or in the words of Dr. Michael Finca, a retirement expert, your first year retirement is probably going to be. to be your most expensive year because expenses go down. And my parents are alive. My dad's 85. I talked to him the other day. He says, I drive to four places. That's it. He's got four different stores he goes to and otherwise he stays at home and takes care of his chickens. And he's perfectly happy doing that. Yeah. No, that's very, that's the reality. And like, you use less resources

unless you need significant care. And I think that's the big unknown that you really need to think about and the children need to think about. I also think that just thinking about your, your health is super important. If you really step, you know, like without our health, like, you know, we worry about all these little problems. But as soon as you get unhealthy, you're sick, like 100% of your energy is focused on getting healthy. And, you know, you need to really, like invest in it, just like you invest in, you know, your portfolio, right? But like, this is where like walking, eating well, sleeping, stress management matter. If you, You want to be in one piece and be functional and get the most out of your health span.

Really being intentional about that matters a ton. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for Oregon. So don't buy ourselves stocks based solely on what you hear. Quick programming note, we have a team retreat this week, so we'll be taking off Wednesday and Thursday from publishing new episodes. But we'll be back with the radio show on Friday. We'll see you then.