Motley Fool Money - What Alphabet Wants

Episode Date: July 24, 2024

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

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We're between two waves. You're listening to Motley Full Money. I'm Mary Long, joined today by Asset Sharma, Asset. Lovely, as always, to have you here. Great to be here, Mary. So we're going to get to earnings from two big names in just a minute. But first, one of those big names is Alphabet. And they faced a pretty public rejection yesterday. So I wanted to hit that before we dove in. Last week, the company had made a $23 billion offer for Wiz, which is a cloud security. startup. That offer was nearly double WIS's current valuation, but yesterday, WIS walked away. Turns out they would rather be alone than couple up with old Google. So my first question for you on this fine Wednesday morning, what's WIS got that Alphabet wants? Well, number one, Mary,

they've got a cool name. It's the other end of the alphabet. It's a lot more appealing than Alphabet. WIS. It reminds me of the movie The WIS. Other than that, they also have a cybersecurity piece. That would play well with Google Cloud Services. If you're on Google's network, then you might as well buy into security services. Amazon Web Services does this as your has its own cybersecurity piece. So this would have been a nice little tuck-in. I say little just because Alphabet's balance sheet is so big. Tuckin acquisition. But you know, for WIS, when they examined the deal, even though the money piece was good, just the threat of antitrust coming in, the regulator saying, this isn't going to work. You get tied up

for a year or two years. Just look at Figma's experience with Adobe. That might not have been worth it for them. And I think also they got a little bit of encouragement from seeing the stumble that CrowdStrike had last week and said, look, let's head for an IPO and make some money there. This might be an opportune time for us. So you mentioned that WIS acquisition that would have strengthened Google's cloud business. But per yesterday's earnings, that segment seemed to be doing. just fine on its own. Nearly 30% increase in revenue for Google's cloud segment. So they raked in about $10.4 billion. Good amount of cash, but that still pales next to AWS and Azure,

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

So you're going to have to convince the customer that they can get a better experience, faster inference for cheaper with you. You do that by investing smartly, not just trying to build the biggest infrastructure you can. And Alphabet executives talked a little bit about this on the call, the fact that, yeah, their CAPEX spend is a lot bigger. It's 50% more than it was this time last year, but they don't see this indefinite march to never ending CAPX. What they want to do is to build the correct system.

And they've got an edge here, Mary, because they have a lot of in-house AI expertise. Really, they had a much more robust generative AI offering than Open AI did. It's just Open AI went public first, and the arms re-started. So I think it does look more about profitability than anything else. Cloud is not Alphabet's largest business segment. So, what did investors learn about Google's ad business from this call? Yeah, I mean, I think the ad business is surprisingly strong. So Google Search is a big digital advertising driver for Alphabet, and that was extremely

healthy. It's a huge chunk of their business. YouTube, which also looked healthy, actually showed a little bit of deceleration. So ad revenue from YouTube. And I wondered about that, because the trade desks, Jeff Green, has been saying for a long time At the end of the day, advertisers want to spend on quality content, long-form content. They think that there are more people that will buy their products if they place ads in, like, connected TV venues versus short-form video.

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

See what happens there. Yeah, when you mentioned KAPX spend and how, that has just increased so much as Google invests in AI. I'm seeing something interesting here, right? On the one hand, you have like this massive AI spend. And then the search results, you know, you mentioned that there's a lot to celebrate there. But something else to note is that, well, search revenue rose 14% for the quarter. Google network revenue was down from last year.

So that network revenue includes the banner ads that you see on websites. And the rollout of Gemini, an AI product, means that you visit fewer of those websites that pay for these banner ads. So Google is spending all this money on AI, but at the same time, it's kind of eating its own tail. Do you think that that cost is worth it? And if so, like, where does Google go from? Where does Alphabet go from here? What's next? Ads in AI search results?

Yeah. I mean, that's such a great question. And, you know, my dog knowledge is very small, but name me a dog that has a short tail. Poodle, maybe? Poodle? Do poodles have? No. I don't know.

I think we're both showing our dog ignorance here. We're going to get some, hopefully we'll get some angry letters from some dog lovers. I'm a dog lover, but let's put it this way. The tail is short. And what I mean by that, if you look at this whole business, right, the Google Search plus YouTube ads business was $50 billion this quarter, Mary. Google Network was about $8 billion. So Google Network is sort of like a third-party network.

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

Pug, which of those do you think Google most closely resembles? Right, right. Boston Terrier Pug in this analogy. You mentioned the Trade Desk and Jeff Green earlier. As you think about the future of AI as it pertains to Google, what are the ripple effects for other ad companies there? The Trade Desk is down almost 9% this morning. Pubmatic, I think, is down about three. Yeah, so these companies have had a decent run. I mean, Pubmatic had gone. down to 14 bucks a share and it's gradually come back. The Trade Desk has been having a pretty decent year. So we're seeing a confluence today of a few things. First of all, the market's very

soft because big tech earnings, I mean, this is one of them, were decent, but maybe not powerful enough to keep pushing this market to all-time highs. So you've got that bit of weakness there. And then there's a little bit of the softness in the YouTube revenue that I was talking about that I think folks are extrapolating. Now, for the Trade Desk and Pubmatic, long-term, that's those companies are pretty well positioned for this future in which Chrome, are you ever really going to deprecate in which those cookies go away? This deadline keeps getting pushed back and back. So some short-term noise here, nothing substantial for the future of the really strong competitors,

as you mentioned, the trade desk, Pubmatic, Magnite, etc. Speaking of deadlines that keep getting pushed back. So Waymo just removed its wait list in San Francisco, and it's getting another $5 billion. from Alphabet, its search engine Sugar Daddy. GM just said it was indefinitely delaying its self-driving shuttle. This is when the delays come in. The Tesla Robotaxy launch also got delayed a couple of months. It was going to be in August.

Now it's set for October. So when it comes to self-driving, and we'll talk more about Tesla's ambitions here in a second, but is Waymo the leader in this space? I mean, right now they are the de facto leader, right? They have the biggest fleet that's operating now that's in full mode. You can hail those Waymo taxis in several zip codes. The other thing is that Alphabet has been funding this, as you call, I think it's such a great term. As a sugar daddy for a long time, it's one of their bets that they have stuck with.

There are others that they've just peeled off from. Maybe they see that this as a sunk cost, so they really want to preserve their previous investment because it's so big in scale, they're willing to support it. And right now, there is no other competitor. We've seen other companies pull back. So de facto leader in this space for now, Waymo, yes. And I know you've got a very interesting question about another type of business that is poised to compete with Waymo in the future, maybe?

Yeah. So I promised two big names that we're reporting earnings up at the top. That other big name is Tesla, and its self-driving ambitions and the theme of autonomy. We're certainly a focus of yesterday's earning call. It's a big piece of that autonomy wave that they advertise as coming next in Tesla's future is robotaxies. So there's lots of talk about this yesterday. I don't doubt that robotaxies and like the cyber cab network that's often been promised.

I don't doubt that that's a cool concept. But I'm curious about the bull business case for it because I look at Uber and their market cap is about $141 billion. dollars, Musk has teased that this driverless taxi business could propel Tesla, which currently has a market cap of about $785 billion, to a market value of $5 trillion. So walk me through this, Asset. Help me understand how robotaxies help Tesla grow by over 400%. $500. Mary, I don't understand it either. So I cannot walk you through the bull case.

I'll say a few things here, though. I think, for me, this is a 12-quarter exercise, because, first of all, this isn't really a product that's widely available on the market. It has to go through regulatory review. We have to see how strong the demand is. We have to have a number of business quarters to see if the robo taxis have some unfortunate accidents, which crimp their market potential. We have to understand how the insurance industry is going to underwrite this thing.

There's so many unanswered questions. There's really no sense in making some $5 trillion business case by anyone except Elon Musk. I mean, he's an innovator and a showman in equal parts. So I mean, it's typical Elon. There's nothing new there. I will say like in general, like the business case will rest on the efficiency of the artificial intelligence, you know, the fact that without human drivers, the cost of such a service is greatly reduced versus a fleet service like an Uber.

you have human drivers. So I do think this nexus of technology, low maintenance of the vehicles, the artificial intelligence could be a decent margin business if it gets to scale, but you need a lot of scale. And right now, there's really no immediate data that anyone has that could project with any kind of reasonable certainty, this $5 trillion case. So let's skip that for now, is my suggestion. Let's put a date on the calendar two to three years from now, because that's 8 to 12 business quarters, and we'll talk when there are some numbers on the table. I'm not panning this service at all. I'm just saying that this feels very Elon Musk to me, and wait and see. Apart from Robotaxies, was there anything else on this call that really stuck out to you?

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

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

this next wave might look like. Musk said that Tesla's going to double down on Dojo, which is Tesla's supercomputer, and he wants it to be competitive with Nvidia. What does it cost to build a supercomputer Orsett? So the cost these days to build a viable supercomputer, if we're talking about the very latest thing, they start up around a billion dollars, because that's what it takes to string together several Blackwell complexes, Blackwell being NVIDIA's most advanced supercomputing complex. So at the scale, Musk is talking about, you're talking about several billions just to play. That's the cost of playing here, especially for the needs he has.

has between his humanoid robots, full self-driving, other types of training he's doing on his models. So I think what was maybe more to his point in the call was that they have to compete alongside Nvidia. So basically, they're buying Nvidia GPUs. They cost a lot, but they have so much already invested in this GPU complex. They have to keep buying. was sort of the subtext of what he was saying. It wasn't really about building a computer that would

be competitive with the supercomputers that Nvidia can build. And Nvidia built its own supercomputers because that's the test case to sell it to enterprise businesses and hyperscalers. I think what Musk was really saying is like we're sort of in bed with Nvidia. We love their product. It's great. It's helping us. But we can't stop purchasing this and we've got to now finish this project else we've lost a lot of money. That was a really subtle thread that I was a sort of surprised to hear running through there. Okay, we've got cars, we've got robotaxies, we've got supercomputers. Where do humanoids fit into all this?

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

just some more development issues. But within three years, maybe we see them commercially available. I could be wrong. It could be faster. But that's what I heard between the lines yesterday. Asset, that's about all the time that we've got for today, but thank you so much for the time for hanging out with me this morning and for filling us in on what's going on over at Alphabet and at Tesla. It's a lot of fun, Mary. Thanks so much. 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 Sport. The Range Rover Sport blends power, poise, and performance.

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Explore enhance offers at Rangerover.com. We just talked about two companies that have a lot to say to their investors. Up next, we look at one that's a whole lot quieter. My colleague, Ricky Mulby, checks in with full contributor Matt Frankel about Boston, Omaha, a holding company in billboards, broadband, and asset management with a lot of new questions. All right, Matt, when you were on for the, a segment a couple of days ago. I wanted to chat with you about Boston Omaha, which is sort of an asset holding company where there's been a lot of change. I would say now one of the more

controversial stocks in the full universe and one I know that you follow very closely. I spoke with Jason Hall about this fairly close to when one of its co-CEO's CEO's Alex Rozek left. But now I know that you're in a very different place with your relationship with the company. Your thesis on the company has changed. So, originally, this was a, you know, sort of an asset manager, owned a lot of billboards, building out some broadband, and you were betting on the CEO's ability to be capital allocators. How has the thesis changed since then with Boston Omaha for its stockholders? Well, it's not just Alex Rozick leaving. If you're not familiar, he was the one who's Warren Buffett's grandnephew. Like, if you ever heard of compare it to the Baby Berkshire, which I never really

loved that comparison, but he was the reason for that. In a way, it can be, I'll start with the positive, because I always like to say something positive about any situation. The net positive is that I like the one CEO model. I wish they would have done it years ago. Anytime you have two CEOs, you have two people agree on anything to get it done. And not to mention not just that, you have two CEO salaries, two CEO bonus structures. With one, it's a net positive for the business and getting things done and things like that. So that's what I'll lead with. with the positive. The reason the thesis is busted has nothing to do with Alex Rozick leaving. Okay. It's because the most exciting parts of the business are arguably gone now,

with the exception of Sky Harbor, which they own 20-something percent of Sky Harbor right now. But that's a publicly traded company. If I want to invest in that, I'll just buy this, you know, it's like saying I'm buying Berkshire Hathaway just for Apple. Like, why not just buy Apple in that case? So Sky Harbor, real quick, that's the, essentially they have airport. airport hangers where people park private jets. Yeah, so it's kind of fancy airport hangers. They took the company public during the SPAC boom, and it was actually one of the more successful SPACs that was done during that era.

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

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

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

time, especially during tough economic conditions. You really can't fault companies for not being able to execute. Their communication was just terrible. They started the built-for-rent fund, I think two years ago, maybe even more, when they said they're shutting down the asset management business in this year's annual letter was like the first we're hearing there's an issue. So that's really the big problem. The only reason I'm really excited about owning the shares right now is when I do kind of a back-of-the-napkin, like some of the parts valuation, I can't make a case that it should be a $13 stock. I just can't. I think, you know, it has some embedded upside in the business, and it's the market's total lack of faith in the management, understandably

so that it's trading for what it is. So that's really, my most exciting thing right now is it's a value business right now. We were talking earlier. You said that, you know, in my opinion, I was like, okay, the thesis changed when one of the co-CEOs left. You said the thesis changed two years ago, though. So what happened two years ago? Well, two years ago was when they started the, you know, separated Boston Omaha asset management as a standard, you know, the fourth business segment when they decided they were going to raise outside capital. And, you know, essentially said everything's fine. Every time they were asked about it, like, everything's progressing. We're happy with how things are going, things like that.

And that's really when the thesis changed. Because before two years ago, as you correctly pointed out before we recorded, they were a billboards, broadband, and insurance business. And now they're that again. They didn't have a SPAC before Sky Harbor started. They didn't have, you know, they had a small asset management business, but they didn't have, you know, a third-party capital business or anything like that. So it's like they changed the thesis, made it a much more exciting story. Investors bought it and rewarded the stock for it. I think it, you know, shot up to about $50 at one point.

And now the thesis is, it's come full circle, I guess, with one fewer CEO. So the communication challenges for Boston Omaha continue to roll on, I would say. They are having an investor day in Omaha. However, there's no remote streaming for it. It's only going on in person. This is something that I find myself unhappy about because I would like to be able to hear about what's going on without buying a plane ticket to Omaha. But, I mean, is this unusual? Does it signal anything to you?

It's not unusual, but they normally time it around Berkshire weekend. and so people are in Omaha anyway. So, to be fair, they've done this before. Originally, this year's meeting was supposed to just be streaming and not in person at all. And then a lot of shareholders push back and said, wait a second, we like having our annual meeting in person every year. It's one thing we look forward to. So they said, okay, fine.

But we didn't mean instead of the streaming option, we meant in addition to. Still do the streaming, but have some people in the room if they want to be. You don't need to get rid of the streaming entirely. So I'm hoping they'll reconsider. Adam Peterson, to his credit, I spoke with them on the phone about a couple weeks ago, and he said improving communication is going to be a big priority as going forward. He wants to do quarterly investor decks, which they never had. So I wouldn't be surprised if he says, okay, let's stream the meeting

because we don't want, you know, the 99% of investors who are not going to fly to Omaha, that we don't want them to feel like they're being left in the dark. I hope they do that. At this point, with Boston Omaha, as we look forward, what questions do you have? I want to see what Adam Peterson does over the next couple of quarters, because he's, if I had to put the two co-CEOs in baskets, I'd say he is the capital allocator, the one who wants to kind of compound businesses and things like that, and Alex Rozick is the entrepreneur. He wants to go into a new business line. He wants to see what they can do in build for rent

housing. He wants to explore all these different avenues. There's Adam Peterson's more the compounder. And so I think the right CEO remained. So I'm willing to give them a few quarters to kind of see some progress. But I want to see some progress if I'm going to stay invested in the company. Who's his great uncle though? Anyway, Matt Frankel, appreciate you being here. Thanks for your time on your insight.

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 ourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.