Prepare to peer into the crystal ball of technology's future as Clem Miller and Steve Davenport, dissect Alphabet's latest developer conference bombshell, the generative AI phenomenon Gemini. This episode reveals how Alphabet's AI brainchild is shaping up to be core to the evolution of Google Search, Android, and other Alphabet products, giving OpenAI a run for its money. We'll navigate the intricate dance of AI and hardware, examining Alphabet's budding alliance with NVIDIA and their homegrown Tensor Trillium chips. Stick with us to understand why these strategic moves by Alphabet could usher in an era where AI's reach is vast and unbounded, as we speculate on how this could redefine the competitive tech landscape.
Then, we pivot to dissect the shockwaves that a TikTok ban in the U.S. could send through the digital ecosystem, possibly catapulting YouTube Shorts and Meta's Facebook Reels into the spotlight. Clem and I scrutinize the contrasting tech competition philosophies of the U.S. and EU, offering our take on the EU's use of its competition policy to defend small businesses. We'll also break down Alphabet's current market stronghold, diving into its financial vigor and the audacious 'reach projects' that could redraw the boundaries of tech innovation. Get ready for a riveting evaluation of how Alphabet's integration of AI into personal tech could solidify its avant-garde status, and why this juggernaut remains an unshakeable presence in our investment portfolios.
Prepare to peer into the crystal ball of technology's future as Clem Miller and Steve Davenport, dissect Alphabet's latest developer conference bombshell, the generative AI phenomenon Gemini. This episode reveals how Alphabet's AI brainchild is shaping up to be core to the evolution of Google Search, Android, and other Alphabet products, giving OpenAI a run for its money. We'll navigate the intricate dance of AI and hardware, examining Alphabet's budding alliance with NVIDIA and their homegrown Tensor Trillium chips. Stick with us to understand why these strategic moves by Alphabet could usher in an era where AI's reach is vast and unbounded, as we speculate on how this could redefine the competitive tech landscape.
Then, we pivot to dissect the shockwaves that a TikTok ban in the U.S. could send through the digital ecosystem, possibly catapulting YouTube Shorts and Meta's Facebook Reels into the spotlight. Clem and I scrutinize the contrasting tech competition philosophies of the U.S. and EU, offering our take on the EU's use of its competition policy to defend small businesses. We'll also break down Alphabet's current market stronghold, diving into its financial vigor and the audacious 'reach projects' that could redraw the boundaries of tech innovation. Get ready for a riveting evaluation of how Alphabet's integration of AI into personal tech could solidify its avant-garde status, and why this juggernaut remains an unshakeable presence in our investment portfolios.
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Steve Davenport:
Hello and welcome to Skeptic's Guide to Investing with Glenn Miller and myself, Steve Ebenholt. In this episode, we're going to talk about Alphabet, still often called Google. Yesterday, Alphabet had a conference for its certified software developers. Alphabet rolled out a series of new products and product improvements. Glenn, can you share with us what was unveiled at the developers conference?
Clem Miller:
Okay, so Google, that is, Alphabet has a product called Gemini and that is their AI product. Think of it as being like the more famous open AI, which is affiliated now with Microsoft into the entire product line of Alphabet and also trying to create the capabilities technologically that allow Gemini to operate, so in terms of chips as well as data center technologies. So that's what they're doing, that's what the that's what the presentation was yesterday. The presentation was was absolutely awesome in terms of the ability of the uh, of essentially a new type of Google search search generative experience is what they call it which will provide all sorts of information on a multimedia basis and actually anticipate the questions that you want answered. So it's kind of, you know, take open AI but make it more sort of search focused, and that's what you get with the search generative experience of the new Gemini powered Google. That's interesting.
Steve Davenport:
Imagine this Gemini model and many of its specific versions would require a huge expansion in computer power. Has anybody thought about how ready the market is for any of these ideas, because it feels to me like we're going to shortage in terms of the chips we need for this type of technology.
Clem Miller:
Okay. So, steve, there are really two types of chips that are useful in this area. One are the graphical processing units, the GPUs, that are used basically to support the NVIDIA computer stack, and we've all heard about the GPUs. We've done some of these podcasts, or at least one podcast on NVIDIA and its GPUs, and what Alphabet is doing is they have a partnership with NVIDIA, like some of the other magnificent seven companies have. They also have partnerships with NVIDIA, but the real thing, the real big thing and different thing that Google is doing, that Alphabet's doing, is they have been developing their own chips and they call it the Tensor line of chips.
Clem Miller:
There's a they call it the tensor line of chips, and the last iteration of this, the sixth generation, is called Trillium, and and I think that's a play on trillions, because they want to be able to process trillions of of transactions, of information transactions, at any one point in time. So it's the Trillium chips and those are CPU chips and they are used in the data centers to produce, as I said, trillions of calculations, to support the Google Gemini model.
Steve Davenport:
It feels like we're looking for a whole new level of adjectives to describe this world of CPUs and transactions per second and decisions. Is Alphabet, meta, microsoft, and I saw recently that Tesla has a deal now with Oracle for using databases to try to help them with some of this decision making and servers and networks. Do you think that there is a clear leader coming out of this, or has somebody figured out the path forward ahead of the others? Or is this simply everyone is scattering in their own way to try to come up with their solution, but nobody really knows whether any of the solutions are particularly better or worse than the others.
Clem Miller:
Well, I think Steve, I think we're in the first or second innings for generative AI in terms of what it can do, and, to quote Mao Zedong, let a thousand flowers bloom. Right, I think that or was that Deng Xiaoping? I forget but anyway, let a thousand flowers bloom, the idea being that you're going to have all sorts of variations on generative AI that are being developed by all sorts of companies, and not just Magnificent 7 companies, but by a whole series of smaller companies as well. It's just, we hear a lot about the big companies, the big tech companies, but I think we're going to see a lot of those smaller companies develop very viable products and then perhaps be scooped up by the big tech company. I think, though, it's early innings. I think, right now, we're seeing somewhat different use cases for generative AI at the different big firms, and I think that, over time, really it's hard to say whether those use cases will harden into different paths for each of the companies, or whether there will be some more convergence of technologies and thus greater competition.
Steve Davenport:
It feels to me like we had this same thing when we talked about operating systems. When we had operating systems, we had a bifurcation right there was the Microsoft operating system and there was the Apple system, and then we had the cell phones and we had the iOS of Apple and we have Samsung and others. It feels like there's going to be an A and a B. When I look at this. I love your analogy to the innings, because to me everybody knows what a nine inning game is and when you know you're near the end of it and you know when you're kind of in the beginning of it. But when I look at this term artificial intelligence it kind of bothers me a little bit, because when you think about artificiality it means it's not real and in some ways we've been doing artificial intelligence for a while. Look at your tax returns. You look at some of the QuickBooks, your tax returns. You look at some of the QuickBooks. You look at some of the ways that we take information and information is assimilated for us using a set of algorithms or rules and the difference between that and generative AI. I agree there's a difference, but I also think that what we're really seeing here is just a continuation and so to go a little bit off track here, I'm having an artificial hip put in in the beginning of June, and so I said to myself gee, is this like a?
Steve Davenport:
When did this really start? The first artificial hip was put in in 1891. And we've had various forms of metal and metal, metal and plastic, ceramic all types of different materials used in this procedure for 100 years. And I look at it and say to me this is new, this is something that I need to understand, it's uncertain. And then I look at doctors and say they've been doing this for years, they've been doing this procedure. And so are we a little bit naive to say that artificial intelligence is really just arriving now, because it really feels like we've been finding ways to artificially supplement our lives, whether it's physical prosthetics or whether it's in trying to use software to solve real problems.
Clem Miller:
Yeah, so, Steve, you're the bionic, or you will be the bionic man soon. I will.
Steve Davenport:
I'm just trying to figure out if they can maybe put a chip in me and I'd start to become much more agreeable and easygoing and it would improve my investment results.
Clem Miller:
Well, I mean, speaking of that, you had this experiment recently that Musk had with his company Neuralink you probably may have seen that where they had to pull out the chip, but they put a chip in a guy's brain to allow this guy to move objects around on a screen just by thinking about it, which I think is kind of a crazy thing and, uh, I'm not sure I would want a chip ever put into into my brain, but it's uh, I imagine some people might, um, and of course it has some utility, or disabled people with prosthetics, and there's, there's people now who are able to help these people by perceiving the end of their fingers and be able to think about and and and achieve a sense of feeling from this artificial limb which, if we're getting to that point, does artificial, you know.
Steve Davenport:
Is it replacement? Is it right? Let's get back to Google.
Clem Miller:
Well, let's let me just say something first. I think generative AI is a category of the broader artificial intelligence. I know sometimes people just use the expression AI to refer to generative AI, but the point you're making, which I totally agree with, is that artificial intelligence AI, robotics just goes way beyond what we're seeing here with open AI and Google and the others in terms of this. Generative AI experience Goes way beyond that. It goes to the self-driving cars and so on.
Steve Davenport:
So let's talk about Alphabet's Waymo project. What do you think about how Waymo and the cabs will influence or? Are they a leader? Are they a follower? Is Tesla still Uber? Who is going to win in this space, and does it matter to?
Clem Miller:
us win in this space and does it matter to us? So, for those of you who may not know, waymo is the autonomous car company or autonomous car vehicle that Google has developed and it is now driving around the streets of a couple of US cities in a cab formation, taxi formation, and I would say it's still in kind of beta testing. It's had some accidents, although it would be very interesting to see data comparing Waymo's accident rate to the accident rates of basically human beings driving around those cities. We might be surprised to learn that Waymo is actually pretty good. But I would say to your question, steve, about Waymo versus Tesla, I think Waymo and Tesla appeal to different kinds of consumers.
Clem Miller:
I think there are people, especially in the big cities, who just don't like driving, who don't like being in the driver's seat.
Clem Miller:
They want to be ferried around as if they were in a bus or a taxi, and that's what Waymo does. For those folks, waymo has a great utility as a taxi. On the other hand, you've got folks who like to be in the driver's seat and they like to be assisted in their driving. They may or may not want to have something close to full self-driving, but at the very least they want to be in the driver's seat to monitor, uh, what's going on, uh, on screens and that's what. Uh, that's what tesla gives them. Um, I've had the opportunity to test drive a full self-driving Tesla and it was quite an interesting experience. I got to tell you that, in terms of weaving it out of crazy traffic, I thought I was going to die. But a lot of people in the front seats of those vehicles sort of like what they're experiencing, and so I basically see Waymo and Tesla as two different user cases, two different groups of consumers.
Steve Davenport:
You didn't mention YouTube. Obviously, this is the most successful video platform, except maybe for TikTok successful video platform, except maybe for TikTok.
Clem Miller:
Yeah, I mean, I would say that one of the things that we have to look at is this effort, already passed by Congress, to perhaps get rid of TikTok, at least in the United States, for what I would say to be geopolitical reasons more so than anything else. And you're going to have two beneficiaries to that. One is YouTube Shorts and the other one is Meta, that is, facebook Reels. But I think that YouTube Shorts is going to be the winner in that kind of competition if TikTok is forced to withdraw from the market.
Steve Davenport:
I mean, who knows, against the US, big tech has started to happen. And where do you think Meta Microsoft and where do you think Meta Microsoft and Alphabet stack up in terms of having a problem with the government actions?
Clem Miller:
Will one be more effective than the other in Europe with the EU, is much more, I think, troubling for the big tech companies than what we're seeing in the United States, and that comes from the nature, the different nature of EU competition and digital markets policies, digital markets being a relatively new rule in the EU, and what that difference is is that in the US there's a focus on horizontal competition.
Clem Miller:
By that I mean the US doesn't want to see big competitors buying each other and creating market concentration and there's less of a focus on big companies gobbling up smaller companies. In Europe it's the opposite situation where, yeah, I mean there's some concern about big companies gobbling each other up. I mean there's some concern about big companies gobbling each other up, but the bigger issue is bigger companies gobbling up smaller companies, making it difficult for smaller companies to do business and then ultimately absorbing them. And that's what the EU is very concerned about with respect to US big tech. They don't want US big tech to interfere in the normal, historical, traditional running of those economies, which, in Europe, has been focused more on small and medium-sized business.
Clem Miller:
So, clem, let's look at our mailbag and then, when you look at the quantitative, screens that I use and I'm not going to go into all the numbers here, but I look at growth and revenue growth. Earnings growth has been strong. Profitability and cashflow generation very strong. Lots of cash buybacks using the free cashflow generation very strong. Lots of cash buybacks using the free cashflow generation. Very strong. Valuation actually not that expensive. So I think that's a good thing. It's not crazy expensive like Tesla is or Nvidia can be at times, so relatively inexpensive.
Clem Miller:
In terms of how short sellers look at the market look at Google, I think that. Look at Alphabet. I should say short sellers have very little short interest in Alphabet, so that's good. And lastly, one of the things I look at are Glassdoor ratings for companies in order to determine employee satisfaction as a sort of a proxy for corporate quality, and the Glassdoor rating for Alphabet is actually pretty good. So employees are very satisfied with the company. So really across the board, it's really strong and I would say, if it has sometimes some weaker performance, I think you can expect that weaker performance to be turned around into stronger performance. So it's really a core buy and hold stock for me, yep.
Steve Davenport:
I agree with almost all the aspects that you said. I think that the question has been why has it kind of lagged? I think that the question has been why has it kind of lagged? I think that for a while it felt like it wasn't participating in the Magnificent Seven, and it has recently come back and started to perform better. But I believe that it's an integral part of the economy. I think it's an integral part of the economy. I think it's an integral part of technology and I think it's got good management in place to deliver on the project area that it has. And it also has some projects that are, I think, a little bit of what I like to see and call reach projects, where they're going down a path that could have huge potential, but they're one of the few people who could do that because they have the resources.
Steve Davenport:
So I like Google as an investment. It's been in our portfolios. It's in the space of communication services. I'd say it's probably our number one name. I think that when we look at this stock, we see something that has daily usage of individuals, and it feels to me like they're going to be one of the people who get into that first. Integration of AI for individuals not for businesses, but for individuals. I think they start to do things which will impact people's lives. Thanks everybody for listening to the podcast today. Stay tuned for another episode of Skeptic's Guide to Investing. We're doing other episodes on meme, stocks and the Fed, so please check us out and please let us know what you like and what you don't like, and we'll try to continue to get better.
