Motley Fool Money - The Next AI Investment Story: Power

Episode Date: September 16, 2024

One query on ChatGPT takes 10x the amount of electricity as a Google search. (00:21) Ricky Mulvey and Asit Sharma discuss: - How big tech is dealing with the electricity demands of AI systems. - Companies that could benefit from more energy usage. - If Under Armour can turn around. Then, (17:43) Brendan Hughes, the author of “Markets in Chaos” joins Ricky to discuss why he’s concerned about the level of money printing in the United States, and one area for investors to watch. Companies discussed: NVDA, MSFT, DUK, OKLO, UA, META, FNV Live podcast in Denver on Wednesday, September 18: https://www.meetup.com/biggerpockets/events/303028272/?eventOrigin=group_upcoming_events Visit our sponsor: Go to www.monarchmoney.com/fool for an extended 30-day free trial Host: Ricky Mulvey Guests: Asit Sharma, Brendan Hughes Producer: Mary Long Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Chat bots sure are thirsty. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Asit Sharma. Asit, how's your weekend? It was long, and not long enough. Aren't all weekends like that, Ricky? I really like getting topic suggestions from listeners, giving us something to talk about on the show.

And one of our listeners, Praveen, wrote into us, recommending that we chat about the massive power demand and grid strain that's coming from. from these AI companies. And this is apropos, since last week, Jensen Wong, and Sam Altman met senior White House officials to discuss infrastructure needs for AI projects. And, Asset, that means power. Setting the table, just so we get a baseline understanding, is that according to a Goldman

Sacks report, a chat cheap E.T query needs 10x the amount of electricity that a Google search does. First question, Asset, why are these AI systems so thirsty? Hey, Ricky. First, I want to say that I used much less energy to answer this question than you probably did, because I think you told me you consulted chat TPT on this question. So you generated some energy. Think about a Google search when you or I type something into that Google search bar. We're basically, yeah, we're using some computation. We're sending some algorithms into action. But basically what we're doing is consulting this index of knowledge.

And while that's a little power hungry, it's nothing like the experience of you asking chat chipita questions. So what's going on there? We've all heard that large language models are these big neural networks that are sort of self-training, but also human trained. That's one part of what's going on. You have a model that's being consulted by a program. but the larger part of that energy usage is in something called inference.

Inference is simply asking the large language model to make a prediction, an iteration of its prediction in order to answer your question. So, crazily enough, Ricky, it comes down to math. When you ask Chat TPT to make a prediction, it takes a lot more precise math and a lot more complex math for the model to consult itself, to weave between these layers of a neural network, and then put all the statistical inference together to spit out this question that makes sense in a sentence and even contextually sounds like something that is a decent answer to your question.

That is such a more complex problem to solve. It's like the difference between me asking you to turn around and tell me what's in that shop window, or to sit there and I describe this great toy for you, and you try to explain back to me what that toy does, right? You consume so much more power if we are forcing ourselves to think, to use our own neural networks. And that's what's going on here. Yeah, I think you pretty much have it right. You're either sending someone down a path of search engine algorithms, or you're kind of building something from scratch based on previous questions that you've asked the model. And also, it's inferences based on what you're saying in the billions of,

of combinations it has to do to get that going. So now we get to the meeting, the big meeting at the White House. Why are Sam Altman and Jensen Wong there? Well, it's because in some ways they're trying to get maybe a little bit of sugar, a little bit of cheta to get more energy subsidies for these AI companies. They want help on public and private investment. Of course they do. I'm not going to comment on that.

But also, the White House is trying to get these AI companies to use, quote, clean and reliable sources. Another set the table kind of thing is that electricity demand is expected to rise 15 to 20 percent over the next decade, and data centers, Osset, could consume almost 10 percent of all U.S. electricity demand. So who wins from this? Is it the renewable companies that the White House would like to win from this, you think? I think some of the renewable companies, will win. I don't know if that's going to be the hugest win out there, Ricky. Renewable energy certainly has a role in reducing sort of the consumption, peak demand, but it's more indirect to me. I don't think, for example, solar panels are going to be able to supply

this crazy need that data centers have. However, think about a company like Enphase, which has a technology called the microinverter. What that helps N-phase do for customers, what that helps phase do for customers is to have modular electricity configurations. So in a world, in the future, where power is becoming decentralized, because our centralized power is dedicated to serving all these data center needs, for example, then you're going to have smaller and smaller grids. So companies that can help facilitate the building of smaller decentralized grids where you or I might power our homes because it just costs more from the big providers. like that, I think, could be surprising winners here. So in that sense, Renewable has its role to play,

but it's not going to be the end-all and be-all of this investment theme. And maybe this is just because I've been watching Industry Season 3. I don't think you're not watching industry right now, are you? No, man, you've got me with three or four series still on my to-do list to watch. I can't keep up with you, but I will. I'm going to add it to the list. I will add it to the list. We got to put industry. I know we were talking with Mary earlier about some Netflix stuff, but industry goes to the top of the list, the show rules. And a lot of it is about, a lot of the theme of this season is just skepticism around sort of these environmentally friendly companies and the whole ESG play and how many of those companies sort of turned out to be not what investors hoped and not, there weren't the real

fundamentals behind it. So I have that in my brain right now as we talk about this. And then also there's this core part of Miasset, which is, I would love to use all renewable energy. But if you ask me at my core, what do you want? I want cheap electricity. And I think that's going to come from a lot of the legacy energy providers, especially as you need that baseline infrastructure to keep up with all of the demand of these data centers. So who are you watching that may benefit is a legacy player from the increased demand in AI electricity use? Well, Rick, yeah, I'll go with what I know best. So Duke Energy is a company that's in my backyard. They're in Charlotte, North Carolina.

They're one of the largest energy producers in the United States. And I think, to me, what's interesting is just the unprecedented. Precedent power demand they see coming down the road from the forces that you've described as we've had this conversation. I think the CEO recently in a conference call used the word unprecedented to describe what those demand loads are going to look like. So they're working with major hyperscalers like Microsoft, Amazon Web Services, to figure out how they can efficiently serve all this data center need in the future.

But there's something else really interesting that I think is going to benefit these bigger regional providers, and that is the Inflation Reduction Act. There is a ton of investment in the United States going to the semiconductor industry, and that itself is super power hungry. As we try to figure out how to make more efficient semiconductors and build some of that stuff here, guess what? That needs power. So I like some of these legacy providers for members who are listening. If you've got one in your backyard, that's a major provider to several states, there's a good chance they're going to benefit from this tailwind. Okay, so we're not just doing a list of companies here.

I think there's something for stock investors of all types to be optimistic about here. And that's that, so I've been reading this book called A Question of Power by Robert Bryce. It was actually a suggestion from a listener named Dave. Dave, thanks for that suggestion too. And there's a chart, and there's a very close correlation between power usage and a company's GDP. So in some ways, I see this is something that's good. We have some headwinds in terms of population growth, aging populations that could hurt sort of the economy.

But, you know, this is something where there's going to be a lot more power demand and there's a pretty close relationship between power demand and economic growth in a country. So maybe ultimately, through the strains, through this innovation, through what companies are looking for, this is a good thing for the economy if we're looking to use more energy. I agree. It's a good problem to have. and for developed countries like the United States, which lead in terms of so many different services and manufacturing sectors, although I'm sure we're going to get some mail now about

how the decline of U.S. manufacturing is also a big theme. That aside, it does show what a company's development stage can be in the future. So we're in advanced economy, going to something more advanced. We're talking about semiconductors, chat, GPT, large language models. We haven't even mentioned so much investment in things like electric vehicle takeoff, liftoff. I'm getting the acronym all mixed up for Eval because it's a Monday morning. Having said that, I think that's a good point. And also, we can look at the relationship of a company's GDP to its sources.

Are you a small country that's using more energy? You have rising GDP, but it's all coal-powered? Are you an advanced economy like the U.S. who's trying to really diversify those sources, which goes back to the reason you wanted to talk about this. The U.S. is trying to incentivize these companies not to have the least efficient forms of energy and to try to have some cleaner resources mixed in there. And the wild card that we haven't talked about yet is nuclear power. So earlier this year, Amazon bought a 960 megawatt data center, $650 million in Pennsylvania that runs on nuclear power. So that amount of power, 960 megawatts, that's enough to

electrify 800,000 households simultaneously. You also have Sam Altman, who doesn't just do OpenAI. He's also the chair of a company called Oaklo. We had the CEO on the show, but it's a small, they're building small nuclear reactors that could very well power data centers off it. And you've also got Microsoft, maybe separately, investing $10 billion in renewable energy capacity. Are you looking at nuclear?

This is something kind of on my wild card list that I haven't put any money into yet. I think it's on my wild card list, too, Ricky. I'm not looking at it closely. So, I'm not scouring the investment globe for opportunities here. I think it's an industry that needs to mature, and there's all types of flavors. You talked about the company that Sam Altman is working with. Microsoft itself, which is allocating so many billions, has a sort of different approach to any of the companies you mentioned instead of small modular reactors.

They're signs they're looking at something called mini modular reactors. So, it's a nascent sub-industry right now, but I'm fascinated by it. I think this quantum computing, these are all like markers of where the future is headed and the enormous capital for any one of these ideas that's required to get it out of that nascent stage, something we can invest in and compare companies to another. There are not a lot of companies right now, pure play, that you can compare the financials to, let alone any revenue yet, because so much is still development stage. Last week, we talked about a turnaround at Meta.

There's another company trying to brew one up with a co-founder, and that's Under Armour. I was supposed to talk about this with David Meyer last week, but we've been talking turnarounds lately. There's a good Wall Street Journal feature on Under Armour, especially as Kevin Plank is back in the CEO seat. This story, Asset is not Rosie. Quote, more than half a dozen former executives said Plank was responsible for much of the turmoil and complexity that he is now promising to clean up In recent years, they say he foiled marketing plans put in place by others. He pushed product ideas that flopped and blurred lines between his brand role and that of the CEOs who succeeded him.

End quote. We're talking about a CEO who has had trouble letting go, maybe some shades of Disney in there, Osset. But after reading the story, do you think Plank can turn it around at Under Armour? I have no idea, but I'm going to err on the side of an opinion here and say it's going to be a very, very difficult road. So, this is a company that plays in a market, which is exceedingly complex. And we were chatting, you me, Mary, and our producer Dan Boyd just before we started taping. And I was like, we talked about meta last week.

That's a much easier turnaround to turn around a tech company versus a global brand company in the athletic industry. And the reason is you need a few things to succeed here, besides a lot of capital in a big marketing budget. a product which has athletic credentials. So, technical credentials, there's a demand there. People want to use it because they perceive it's better. It gives them an edge. But you also have to have that brand love. You need great endorsements or a brand that really resonates with folks. Those two things are the hardest to put together and do at scale for an extended

period of time. Companies like Nike and Adidas, we've talked about in the past, Nikki, they can stumble and still be around. Smaller brands can be able. upstarts like Lulu Lemon and On shoes, those right now have a lot of mojo and momentum. But if you fall off the horse in this industry and you're not either of those two categories, you're in the middle, it's very tough. And there's a lot of history here that I'm sure will make some listeners skeptical that Kevin Plank can turn his baby around. So I wonder if this only works one way for a consumer brand, Osset, which is that you can go from

premium to non-premium, but I don't know if you can walk the other way. And according to the Wall Street Journal, or this is from Piper Sandler, excuse me, Under Armour, since 2020 has consistently been the number one brand that upper income male teens say they no longer wear. That's tough to get that back once you lose that customer base. And it's tough to go from a non-premium brand, even if you're cutting your product line to becoming a premium brand if people associate you with discounting to begin with. It's very true. And then you get into this sort of death spiral of trying to manage inventory. So to work your inventory down, to reduce the size of your workforce to close distribution facilities, all of which Under Armour has done over the past several years, to try to

get to a point where your costs are low enough that you can start offering price points that are a little higher. It's really hard to do that because few people will buy the story of a tarnished brand. if it jumps up to a high price point, again, without innovation, without something that makes those young, let's call them semi-affluent buyers, spend those dollars on that brand versus the alternatives they have in the marketplace, the companies with the deep pockets who've been hitting them with those great marketing messages. It's just so hard to compete if you don't have all those elements together, Ricky. Now, in a couple of years, watch us eat our words as Under Armour becomes a wonderful

premium brand that's doing gangbusters numbers and we're associating with Lulu Lemon. I think the themes to tie this together from the story from last week, though, is that meta was more able to turn around because it had a business and messaging problem that it could fix due to that tailwind of artificial intelligence. Under Armour has more of a culture problem and sort of a brand problem that might be a lot harder to fix by Kevin Plank. I agree. And I actually think the CEO who was only there for maybe a year, Stephanie Lenartz, who

came from a completely different industry, what's doing some of the right things, the hard stuff to affect a turnaround. And now you have all of her work that's getting scrapped. One thing that Kevin Plank does have a good nose for, though, is what the consumer wants. He's had a couple of misses. As the Wall Street Journal article mentioned, he's never really kept his influence out of brand decisions. But he might be able to come up with a winner and, uh, you know, at least give them some short-term momentum, but longer term. I would be skeptical of the ability to have this become a phoenix that rises up from the brand dashes and challenges both the giants and the upstarts again.

It's going to be tough. The financials are okay. I mean, they're not terrible, but this is going to be a long journey. Good place to send it. Asa Charmer, thanks for being here. Appreciate your time and your insight. Thank you, Ricky. This was a lot of fun.

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I'm going to have a link to more details in the show notes. It's with our friends at Bigger Pockets. Should be a lot of fun. Okay, lower interest rates mean that money moves more freely. Brendan Hughes, the author of Markets and Chaos, joins me to discuss the risks of having an unbacked currency in one area for investors to watch. If you're a little concerned about the level of money printing

in the United States. A lot of the case studies and chapters you talk about have to do with money printing, and we have that going on in the United States right now quite a bit. One of the big themes is that when countries print a lot of money and that money is not attached to anything, that can create catastrophic consequences. Let's focus on the U.S. because since the great financial crisis, according to the Fred data, the U.S. is more than two-xed its money supply. We've got inflation, but we don't have hyperinflation that's detailed in your book in a place like Zimbabwe. How have we avoided hyperinflation after printing trillions and trillions of dollars? Yeah.

So I want to take a step back for a minute because I think we need to revisit a really titanic moment in history. Everything or a lot of where we are today goes back to this critical moment in 1971, where the United States severed the link between the U.S. dollar in gold. And a lot of the loss of monetary accountability, not just in the United States, but in a lot of countries around the world, has to do with this. Because whenever in history, countries have tried to use unbacked paper money, there's always been a loss of accountability. And this time has not been every different, any different. So I just wanted to provide that as a

preface for this discussion. So in the 50-year period after 1971, when the U.S. dollar was severed from gold, the U.S. national debt soared 70-fold, and similar things have been going on around the world. So the next big moment was after the global financial crisis, and central banks around the world experimented with this ultra-easy monetary policy, and they said it would stimulate growth. But that never happened. And the pre-global financial crisis period, the average productivity per year was 2.3%.

And with the ultra-easy period, that diminished to 1.1%. And similar things were playing out in other countries. But really, what these ultra-easy monetary policies did was they boosted the markets for assets, such as housing, stocks, cryptocurrencies, like instead of stimulating. productivity, which was the goal. So I think that those are just some interesting things to think about. And so after the global financial crisis, which is getting to your initial question, between 2007 and 2017, the Federal Reserve printed about five times as many dollars as had been printed in the previous 500 years. And to your question, you know, why have we not

had hyperinflation like we had with Zimbabwe or some other countries. I think it comes back to the confidence in the government. To put it simply, people have more confidence in what the U.S. government is doing than what Zimbabwe did. And we can get a little bit more as to what happened in Zimbabwe once we get there. But a lot of it has to do with the confidence. I've referenced in my book, Germany in the 1920s, when they had hyperinflation and a difference between why they were ultimately able to quell their hyperinflation, whereas Zimbabwe has never been able to, you know, Zimbabwe has periodically introduced new currencies and it's never worked, as people had more confidence in the German government, and they ultimately accepted

the new currency. So my view is that's what's happening. here, and that's what's happened in some other, you know, more developed countries. You mentioned higher asset prices, higher home prices. Still, we can go to the grocery store and buy loaves of bread with our dollars and not worry about that price changing by the time we exit the grocery store. So even though we haven't stimulated productivity, we've gotten good stock market returns, why is it a bad thing that we've severed this link to gold and just gone to the full faith and credit of the United States government. Ultimately, when there is a loss of monetary accountability, it usually does not end well.

No, we haven't seen here or in some other developed countries, like a complete loss of faith in the currency or anything like that, but it can't be ruled out. If a country is constantly spending more than they're making, ultimately, that's not sustainable. Now, what is the point where it becomes unsustainable and people ultimately say, you know, I don't have confidence in what's going on? I don't know. But if you do have at least some link to an asset such as gold, it does provide for some degree of accountability. And throughout history, the classic playbook has always been to return to gold. I think that that's something that a lot of people with recency bias don't really understand

or think about. This period since 1971 is actually a highly unusual period. I mean, it's actually, there's never been, you know, an over 50-year period where every country in the world is operating on an unbacked currency. So this is really the unusual. like test period. No, I think we're still, I think the jury is still out as to what will happen. Now, this is a long test period, but sometimes it can just take a long time to see how things fully flesh out. You really like gold as a store of value. You're an investment advisor. Is that

something you use, whether it's physical gold or gold ETFs, is a store of value? Yes. Yes. I think gold and And some gold-linked assets, gold miners and things like that can be a store of value to extent. There's also some gold royalty companies. So I would view that is a more attractive store of value than cryptocurrencies. But I don't spend any time thinking about cryptocurrencies. No, I will provide some, I guess, food for thought.

on this topic, because it is something that is covered in my book to a decent extent. So regarding a store of value, gold has been, whether it's been used as a form of currency or as like a form of jewelry or something like that, it's been perceived to have value for thousands of years. Now, the first people who are thought to have used gold in their monetary system or the Lydians are around 600 to 700 BC, and that's in that they resided in what is now Turkey. And Rome implemented gold into their monetary system around 300 BC. So for thousands of years, whether it's been jewelry or people actually using it in their monetary system, gold has had value. Now, this is very different from cryptocurrencies. Bitcoin is believed to have been invented around

2009. Well, that isn't even a blip on the radar in the grand scheme of history. I just personally don't know how that's all going to shake out. But what I do know is that every time or most times that countries have had issues with confidence in the currency and things like that, they've always turned to gold. And I don't think that this time will be any different. Brendan, you mentioned gold royalty in that answer. What is that? What are you talking about there? Yeah, I mean, there are some gold royalty companies, like a company like Franco Nevada, they will pay an upfront amount of money and they'll get access to a stream. Like, say, they'll pay an upfront cash amount or in stock and they'll get access to 3% of the ongoing royalties from a given mine. And so they're not as susceptible to some of the things that gold miners are susceptible to.

Like, gold miners, they take on the risks of, you know, actually operating the mine and such. But the gold royalty companies also do have their own set of risk. But it's a much less capital intensive business, and it's an interesting concept. It's kind of a similar concept. I don't know if you're familiar with Texas-specific land. in the oil space. But Texas Pacific land is a company. They own eight acres out in the Midwest, and they get a royalty anytime oil is drilled on their property. Now, companies like Franco Nevada are different in that they don't own this land, and it's not just an ongoing royalty for

nothing. They're providing cash and things like Texas Pacific is a bizarre situation where they acquired all this land like 150 years ago. And then they're just, getting a check in the mail every time someone drills on their land. It's a very unusual situation. 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 anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.