Motley Fool Money - The AI Infrastructure Opportunity: 3 Fools Weigh In

Starting point is 00:00:00 The AI infrastructure opportunity. Just how big is it? You're listening for Motley Fool Money. Welcome, Fools. I'm your host, Tim Byers, and with me are two of my most AI immersed teammates, Yasser Al-Shemi, and Asht Sharma. Thank you both for being here. How are you feeling this morning? Are you feeling suitably enthused about AI?

Starting point is 00:00:35 Well, Tim, after not saying that we're your two favorite analysts, but maybe, you know, two of your most AI forward analyst. I guess I'm feeling okay. Yeah, I'm not, you know, this is a compliment. It's not a backhanded compliment, I said. I hear you, my friend. Yeah, sir, how about yourself? Yeah, well, I'm going to steal your expression here and say caffeinated and ready to go.

Starting point is 00:00:57 Perfect. Yeah, so excited about talking AI with you this morning. Very good. Let's talk about this because there's a lot of AI infrastructure spend. I'll give you a quick stat here because. I find this to be absolutely bonkers. The New York Times is reporting that Amazon, Microsoft, Alphabet, Meta, and OpenAI combined, are projecting $325 billion, that's with a B, $325 billion in spent by year end.

Starting point is 00:01:27 So we're in October. This was published in mid-September. We're in October now, $325 billion by year end in pursuit of AI. That seems absolutely outrageous to me. So let's talk about other outrageous things that AI does before we get into the stocks. I just want to go around the horn because we're spending so much money. What is the last thing you asked AI to do? Could be for work.

Starting point is 00:01:53 It could be for something utterly ridiculous. Yasur, you are laughing. So I want to hear the ridiculous thing that you asked AI to do. Definitely not a ridiculous thing, at least not politely. Although I would say that the last thing I asked AI to do is to help me out prepare for the podcast. So, you know, this is just how tightly integrated into my workflow it has become. I find it actually, and this is incredible, you know, just the short amount of time since, you know, we started using AI here in any capacity. And then now we're at a point where I find it pretty hard to imagine doing most aspects of my job without the help of some generative AI model or the other.

Starting point is 00:02:39 Yeah, I mean, that's a paradigm shift. That's what we call a paradigm shift when habits change. Asset, how about you? So same, Tim. I used it to help me prepare for this podcast, but skipping that, the next, most recent use, explain to me the phrase Hitch, Becklimadinas. This is a Turkish phrase that you didn't expect at all. Enough said, this shows how much this has taken over my learning curve among a number of disciplines.

Starting point is 00:03:05 You know what? Fair enough. I mean, I'll let that sit there. And then, you know, listeners can look that up for themselves. I will say I do this. I have started to use AI more as like a search. It's not replaced search for me, but now I ask utterly ridiculous questions all the time. Like, I don't even do keyword searches anymore.

Starting point is 00:03:28 I ask full questions. But let's talk about the opportunity. We have three views, one for each of us, and three stocks. we're just going to talk about. So I'm going to, again, reiterate the amount of spend here. Microsoft, just over the trailing 12 months, $64.6 billion in CAPX, Amazon, $107.7 billion, Alphabet, $66.9 billion, meta, $52.2 billion. Of the big names, the only one that is kind of like, looks like the sober, responsible one is Apple at 12.4 billion. And I'm not sure they are or they aren't. But here's what I want to know. Yasser, what is your view of this spend? Because at some point,

Starting point is 00:04:21 that spend's got to pay off. So what's your view of this and what's a stock that you think is, it should be on everybody's radar in the midst of all this spend? Yeah, so I'm going to start off here by maybe coding Satya Nadella, and he said every company is becoming an AI factory. You know, we're witnessing these just absolutely incredible numbers of investments that you just outlined, Tim, that all of the big, large-cap, hyperscalor technology companies here in the U.S. and abroad are making, in order to kind of catch up with this, you know, AI revolution. Let's put it that way. I would say when you said Apple is being responsible by spending only $12 billion, in fact, I might argue that could be a potential yellow flag for Apple. And I think that a lot of investors have actually treated Apple accordingly because Apple has not shown us so far, at least, that they are able to come up with any kind of major innovation when it comes to AI.

Starting point is 00:05:23 They have had to rely on chat GPT for the iOS systems. here sold in the US, and they are relying on the Alibaba Quinn model for phones sold in China. There have been constant changes in staff and so on. So anyway, I could go on. But the point is, we're witnessing a wholesale paradigm shift in how we approach computing and what we use computing for. And I was just talking earlier about how tightly integrated AI has become into my workflow. But that's not just me.

Starting point is 00:05:52 That's a lot of people out there, and a lot of companies are spending a lot of time. spending a lot of time thinking about how to invest in AI. Give me the company, then, that profits from this. All right. So the company, in my view, so on a risk-adjusted basis, I would argue that Alibaba probably offers investors the best investment opportunity in AI over the next decade. Predictably or logically, a lot of investors here,

Starting point is 00:06:19 when they think about AI investing, they think only about U.S. companies. And, you know, that's understandably so. However, I think that given just a combination of a very attractive valuation for Alibaba, as well as the massive investments it's making in its AI capabilities, and that includes a full stack. So it's not only building the large language models. I mentioned Quen earlier, which is integrated into iPhones sold in China. But it's also building data centers.

Starting point is 00:06:52 It's building custom chips for AI. that it is even starting to sell to other Chinese companies that are in need of those chips. And that is not necessarily replacing Nvidia GPUs, but they're working kind of on the inference side to supplement and complement, but they have a major cost advantage compared to, let's say, US-made chips or US design chips. We are starting to see the early signs of green shoots of that massive jump in AI deployment, usage consumption from Alibaba's cloud intelligence unit, which has had its revenue grow in triple digits over the past several quarters, where I think eventually, you know, cloud revenue is going to

Starting point is 00:07:37 become a meaningful mix of its overall revenue and margins are likely going to improve as a result of that change. So all in all, I would say Alibaba offers a pretty good, you know, opportunity for investors here. It's a ticker BAABA, BAA, B.A. Aesit, what do you got for me here? Do you agree, disagree, refine? Give me something. Yeah, I'm generally aligned with Yasser's views on AI capacity and the buildout that we're all witnessing.

Starting point is 00:08:10 Several years ago, right before everything exploded with Chat, GPT, and our lives changed without any chance of looking back, Jensen Huang, CEO of Invitya, said that the gains out of Moore's law were coming to an end, meaning thereby this sort of linear ability to pack more and more information on a chip had run out. And at the time, lots of folks thought that he was simply saying that it's going to be harder for us to solve this mathematical type problem. But it turns out he was saying something else. Y'all are going to pay more to use this stuff. Lo and behold, a few years later, he's saying now that the reason all of this capacity needs to be built out. Why we're going to keep using this stuff more and more is because we're demanding

Starting point is 00:08:56 more inference. We demand that reasoning that comes from this complex, multi-step task that a GPU performs. And hence, to, you know, really to go back to what Yasser was just mentioning, we're going to, as consumers, keep using these models. There is no turning back. Now, you're probably going to ask me, okay, if that's the case, what stock should invest you're looking at, right? Read my mind. All right. So, tell me. So here it is.

Starting point is 00:09:25 It is Nvidia's chief rival AMD. So there's news out today that AMD, advanced microdevices, has signed this multi-year deal with OpenAI. AMD is going to supply an enormous amount of gigawatt compute capacity, something like 10 gigawatts over the next several years. And Tim, that deal is estimated to be in the tens of billion dollars of revenue. In turn, Open AI is going to take an ownership stake in AMD that's going to, Fest over time. Hello, circular economy. Let's slide by that for just a second. What I think this deal is, is really a validation of a decision that CEO Lisa Sue made more than a year ago to buy a small company called ZT Systems. This is an AI infrastructure company. It allowed

Starting point is 00:10:12 AMD to provide rack-scale solutions. That is, connecting tons and tons of GPUs together within a data center to provide, guess what? Better inference. This also is a validation of AMD's next generation of accelerators due out next year, which is going to be the first time this company will be able to really compete head-on with Nvidia. So, as we tape, this stock is up some 20% on use of this deal with OpenAI. But I think AMD is going to find many more purchasers for its systems over the next few years.

Starting point is 00:10:44 Oracle already has come out as a very big purchaser of its accelerators. operators. And I think it vindicates the narrative that AMD doesn't have to beat Nvidia in the marketplace. It just needs to show that it is a worthy competitor and it will shave off market share, which is going to be very good for a stock that is really yet to see the love that Nvidia has experienced for the last couple of years. I mean, it's interesting. You both make interesting cases here. Ticker, AMD is, as it sounds, advanced micro devices, AMD. I'm going to go with Cloudflare. I'm going to, I'm going to, I'm going to Zag while you guys are zinging. You're going into the silicon and the big cloud providers.

Starting point is 00:11:24 I think it's interesting. We have not yet reached the era of AI efficiency. I think that history says that is coming. That is one million percent coming, in my opinion. And its recent birthday week, Cloudflare said essentially a la carte at scale in order to serve as many users as possible. What we mean by this is every product, everything that they produce, any company can have it at full enterprise, and a full enterprise license for anything. And so every product's got to be great on its face. Then I'm going to sell you a big bundle. Then I'm going to sell you a big tier.

Starting point is 00:12:05 And then everything is jammed into that tier. They're not doing that anymore. And so essentially what they're doing is instead of looking at trying to win a customer at the biggest enterprise-scale account they can, they want to win problems. I want to solve as many problems as they can and then roll them up, hopefully across customers. I think this is super, super interesting because at some point in a market where AI is just absolutely vacuumed up, money, attention, time, people, resources, it's just covered it all up in. It's just covered it all up in, ways that I think are probably somewhat damaging to some companies. So there is a way to fix that

Starting point is 00:12:53 is to make it a little bit more efficient. So instead of applying huge amounts of resource to solve the problem, we do better with less. And I'm going to come back to that because we've seen that cycle before, guys. But before we do that, we're going to move on to the next section you hear in a minute. We're going to forecast the future and make some reckless predictions. You're listening to Motley Fool Money. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover

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Starting point is 00:14:52 in Open AI. Open AI has committed $300 billion to Oracle, Intel and AMD, are talking about a foundry deal. everybody is doing business with each other. And Asset, I have seen this before. I saw it during the dot-com days when all of the cable companies and all the infrastructure companies, all the telecom companies were doing business with each other and selling fiber agreements and booking revenue that wasn't really revenue. So give me your reckless prediction here. you've got so much experience both of you with AI, but where are we heading here? And does any of what

Starting point is 00:15:40 I just told you give you pause? Of course it gives me pause, Tim. And I hope our listeners today, some of you or all of you are jugglers or can juggle because I can juggle long-term bolognist with this sector with my reckless prediction, teed up so perfectly by Tim Byers. I predict a mini-crash in the AI infrastructure investment theme and that economy that's associated with it within the next three years. Now, at that point, I think we're going to see major hyperscalers suddenly re-evaluating their spends. I mean, we've seen some previews of this already. The entire ecosystem is going to suffer as a result. This will be a time of significant sell-offs across the semiconductor, the hyperscaler, and the energy sectors. And we're going to see lots of pundits come out and

Starting point is 00:16:26 claim they were right to point out this House of Cards in the infrastructure buildout. I think we'll also see a flurry of news articles about the illusory value of AI or the infinitesimally small value of AI. But at that point in time, I think you're also going to see the major hyperscalers will be rejiggering their spends. So we'll sovereign governments who are getting into this game. They're going to complete their first realistic calibration of their investment time horizon versus their expected results. The industry is going to get back to work. It's going to continue to grow. And that point in time, when this mini crash happens, I think it'll be an excellent time to buy your favorite high conviction names. I like it. Yasser, what do you got for me?

Starting point is 00:17:10 You want to disagree with that? Well, I'll disagree with that, but maybe I'll offer a separate prediction later. So I'll, you know, I would say that we are going to be all surprised at how durable the AI infrastructure CAPEX spend is going to be. So right now, we've seen all the forecasting agencies, and that includes Gartner and others, continuously raising their forecasts of AI spend, not because, you know, they are just so extra bullish, but rather because they have been reacting to what CEOs and CFOs have been saying and I've been indicating. So the last I heard was Gartner saying that by 26, we're going to have $2 trillion of investment next year.

Starting point is 00:17:56 Alibaba CEO, Ed Yewu, he's predicting now that by 2030 we're going to see $4 trillion of KAPEX spend. I think that the buildup is real. I think there is a race here in order to kind of create that capacity, compute capacity, be that kind of favor provider, if you will. having said that, of course, I assume that the music is going to stop at some point. Now, when is that point, that's when it gets very testy. And I would say that just as long as you avoid investing in highly speculative, extremely valued companies, you're probably going to be okay in a long-term basis. And just as, you know, the dot-com bubble did burst in 1999, that didn't mean that the internet was not useful and did not create. you know, trillion-dollar companies as we look back in retrospect. So, you know, we just have to be careful on how we deploy our capital and how we invest. Yeah. I mean, and portfolio management is one way. We can do that. We can take small positions and build them up over time. But I'm going to give,

Starting point is 00:19:04 I think I'm going to be in between the two of you here. I do think the dot-com cycle efficiency interrupting capital build out is absolutely going to happen. That is going to happen. That is going to happen. Having said that, I think the way that the efficiency manifests itself will unleash some real potential value here. I've said this before, if you've listened to me on, you know, on Fool 24 or other places, I've said this before. I think that specialist AI models or embedded AI models are the thing that is most likely to gain huge traction over the next five years. In other words, inside of a distinct application, you have an AI model that does something that does something limited, specific, and valuable, and creates a workflow instead of just like something giant and monolithic

Starting point is 00:19:57 where all this spend is going. I see less of that and more of this. And that is a pretty interesting way to spend money and get a return on AI quickly. So for an example of what this is, we'll see whether or not he is right, but Amman Naurang, who is the CEO and co-founder of Toast, has said, I want to make the greatest GPT in the world for restaurants. And so they're working on something that they very cheekily call souschef. They're going to have an AI that they call Sue Chef, and it'll be a specialist AI. That's what I'm talking about. Is it going to add a whole bunch of value to Toast?

Starting point is 00:20:41 I have no idea. but I do know that that is something we're likely to see a whole lot more of. All right, here's what we want to know, fools. Make your own reckless predictions. Comment on this podcast. Tell us which reckless prediction you think is most likely to come true. And your answer can be none of them, and you have a totally distinct reckless prediction. But let us know what you think.

Starting point is 00:21:08 Up next, we're going to talk about some of those companies. that are trying to seed new ground. And we're going to name some fakers or some breakers, the IPO edition. Stay tuned. You're listening to Motley Full Money. In a world full of noise, long-term thinking stands out. On the Capital Ideas podcast, Capital Group Leaders explore the decisions that matter most in investing, leadership, and life.

Starting point is 00:21:35 It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc. All right, we're back. We got three companies, and I want each of you to weigh on on this. I played this game with Rick Bionar as before. This is called Faker or Breaker. This is the IPO edition.

Starting point is 00:21:56 So for those who don't know, a rule breaker is a company that can grow at an accelerated pace for a much longer period of time than expected. A faker is not the opposite of that. it is the fool's gold of the rule breakers universe where there's outrageous growth for a period of time, but it lacks some of those other rule breaker traits. And just as a selfish plug here, you can read more about the six traits of a rule breaker in David Gardner's new book, Rule Breaker Investing, where he lays out the traits, the habits of a rule breaker investor, and the characteristics of portfolio management when you are trying to build a portfolio of rule breakers.

Starting point is 00:22:44 Great book. You should check it out. But we want to distinguish here. A faker is one that has a lot of growth, but can't sustain it because it just doesn't have the traits to back it up. So three companies, and I'm going to get you each to weigh in. Yasserma, start with you. Are you ready? I am.

Starting point is 00:23:04 All right. Ticker. K-L-A-R, that's Klarna, recent IPO, Klarna. I'm going to give you some facts on this one. And then you tell me, faker or breaker. 20% year-over-year revenue growth reaching 823 million in Q2. Fairly strong commercial penetration. They have a deal with Walmart.

Starting point is 00:23:27 They displaced a firm there. Looks pretty good. However, they are relying on people spending because it's a buy now, pay later platform. They may be relying on consumer spending unsustainably here, and we have heard reports about this. People get their delivery, their meal delivery, and then they buy it on buy now, pay later.

Starting point is 00:23:52 Not great. That doesn't seem like a really great habit. So, Yasser for you, faker or breaker, Klarna. Yeah, I'm going to go with breaker here. Okay. This is a company that has been one of the very earliest companies to kind of pioneer the buy now, pay later industry, if you call it that. It has been kind of one of the biggest financial engineering introductions, I guess, in the last decade or so. So it has been able to sustain its revenue growth at a decent clip over the past few years, even though it has only recently IPOed.

Starting point is 00:24:31 so we don't really have a long track record of, you know, share price appreciation, for example, or other trades for rule breakers. But I'm going to go on a limb and call it a breaker. All right. I'm going to keep moving because we're running short on time here, Asset, and move to the next one. And that's going to be Stubhub. You've probably heard of this one if you ever tried to buy tickets for live events in the secondary market here. Dominant 30 to 40 percent of the market here, Asset, ticker STUB. seems to have a flywheel that they can rely on here. $8.7 billion in gross merchandise sales in 2024.

Starting point is 00:25:09 That was up 27% here. But I have to believe this is one that is maybe, if not hated, might be a little bit suspicious. And it might have regulators looking over their shoulder. So for you, Asit, Faker or Breaker, Stubhub. A faker, Tim. Okay. What you mentioned is part of it. Now, StubHub doesn't have quite the consumer hate that Tickrmaster, Ticketmaster seems to elicit.

Starting point is 00:25:38 But it certainly struggles with margins. It's a platform, which I think is very upendable. I think challengers can come in the future. It is one that enjoys a lot of brand presence, so we can't discount that. But its ability to stay as sort of this first mover, top dog type of company, I think is very much open to question. I think in the long run, this is a bit of a bit of. business that runs towards commodity and a business that extracts your irate response on some days, you know, brings hate instead of love. At some points when you're trying to buy a ticket or

Starting point is 00:26:11 get to a game, basketball game that you want to get to, I think it can't be a company that is rule breakery over the long term. I got to say, I agree with that. All right, I'm going to give you both the quick skinny on Fermi. This is ticker, FRIMI. This is a, I mean, this is brand. It is brand spank and new, just born. So this is a company that is building out data center scale electric power, doing it with nuclear, maybe some solar, maybe some natural gas. It's Texas-based. It just went public, guys.

Starting point is 00:26:48 Dual listing on the NASDAQ and the London Stock Exchange, they call this Project Matador. Is their signature product? I don't know. I mean, that sounds ridiculous on its face. but this is 5,236 acre site. This is in Amarillo, Texas. It's going to deliver up to 11 gigawatts of low carbon behind the meter power. I mean, it seems like the theme of this show is AI infrastructure.

Starting point is 00:27:17 This is playing right into it, Yasser. So give me the quick answer here. It's very early. They're building out. Former Texas Governor Rick Perry is leading this. What do you think? Faker or breaker? Faker, faker, faker, faker.

Starting point is 00:27:35 Faker, faker, faker. Wow. Yeah, I would say this is a, it's a business plan. It's not a company. It's a business. It's basically, there are a lot of promises about what this is going to be. And the fact that the IPOed before, you know, pre-revenue, pre-anything happening, I would be extremely skeptical.

Starting point is 00:27:56 And if you, you know, if investors are interested in AI, infrastructure plays, there are definitely a lot of companies already publicly traded that provide that as opposed to just the promise of one in the future. Asa, can you top that? Yes, faker, faker, faker, faker. Nice. It's got one rule breaker trait in spades, overvalued, as Yasser rightly points out. This is contravening famous advice that master investor Peter Lynch gave, which is don't invest in pre-revenue companies. Those are way, way, way long shots. So, be very careful here. Yeah. All right. Thanks to both Yasser al-Shimi and Asa Sharma for joining me today. As always, fools, people on the program may have interests in the stocks they talk about.

Starting point is 00:28:43 And the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers, advertisements, or sponsored content and provided for informational purposes. only to see our full advertising disclosure, please check out our show notes. Fools, thank you for tuning in to Motley Fool Money for Yasser al-Sheemi, Asht Sharma. Our engineer is Dan Boyd. Our producer is Anand Chaka Baloo. I'm Tim Byers. We'll see you again tomorrow, Fools. Fool on, everyone.

Motley Fool Money - The AI Infrastructure Opportunity: 3 Fools Weigh In

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