In this podcast, Motley Fool senior analyst Bill Mann discusses:
- Meta Platforms starting the fiscal year with a bang.
- The Reality Labs division posting an operating loss of (gulp) $4 billion.
- The current state of regional banks and the magic word he's seeing appear in the financial media.
How much of a threat is ChatGPT to Google parent Alphabet's business? In an excerpt from the most recent episode of the Stock Advisor Roundtable podcast, Motley Fool contributor Brian Stoffel talks with artificial intelligence expert Hamza Lebbar and Motley Fool CEO Tom Gardner.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on April 27, 2023.
Chris Hill: Meta Platforms, Mega stock pop. Motley Fool Money starts now.
I'm Chris Hill joining me in studio today. Motley Fool Senior Analyst and Newcastle United fan extraordinary Bill Mann. Thanks for being here.
Bill Mann: Big match today, big match this afternoon. I know you're excited for the average in the Newcastle tie-up this afternoon.
Chris Hill: I'm excited.
Bill Mann: Your excited at the 1.7 derivative.
Chris Hill: Exactly. Let's start with the stock of the day which is Meta Platforms starting off the fiscal year with a bang. Not only was first-quarter revenue higher-than-expected but it stops the streak of three consecutive quarters of revenue declining and shares of Facebook's parent company up 14% this morning. This was big.
Bill Mann: Congratulations to Meta to no longer being the worst-performing FAANG stock over the last five years. You've done it.
Chris Hill: Look, baby steps, right?
Bill Mann: If baby steps came in $10 billion increments, I'd say that that's about right. It bears remembering that this entire company was valued at $200 billion six months ago and as we speak, it's up about 14% today. Doing the math that's about $80 billion by itself, it has been a massive rerating and for the life of me, I can't figure out why if you take the $200 billion as being a reasonable valuation and the current valuation of $500 billion-plus as being reasonable. There's not that much in between what the company has actually done then versus now.
Chris Hill: No, I suppose that's true. Although I think a lot of this and this has been the case since the company went public. A lot of this is about the CEO and the direction set by the CEO and the language used by the CEO and Mark Zuckerberg has been talking for a while now. The language that is music to the ears of institutional investors on Wall Street. It is the language of we're going to rain in spending a little bit layoffs cutting cause that thing. Now, the reality labs division of mega-platforms which is the VR and AR, they managed to post an operating loss of $4 billion. It's not to say that they've cut costs across the board but this is, you're right. It's interesting to watch how, for lack of a better term, how hated the business was six months ago versus how beloved it appears to be right now.
Bill Mann: I love the fact that we're dancing around conspiracy theories as we speak. If you think about it six months ago, they basically said, OK, we have shrinking revenue but our operating expenses are going to go up to as high as $24 billion and now they come back and they say we're reducing our overall operating expenses and that, by the way, is where most of the gains that they are forecasting over the next year are coming from. It's almost as if the kitchen sink all of the bad things six months ago and now they're coming back and saying, well, it's not so bad. But by the way, the division that we named ourselves for at this point, those revenues declined 45% and we're losing we're losing $10 for every dollar in revenue that we make there.
Chris Hill: The metaverse stuff is, again to go back to the language that Zuckerberg is using its being deemphasized, at least from a public-facing standpoint. But as you said, you look at the actual numbers, they are what they are but-
Bill Mann: Are you suggesting that they named themselves ironically?
Chris Hill: I don't think that was the intention from the outside but on a more serious note, one of the other things that has happened over the last eight months or so and this is not just something Meta Platforms is dealing with. This is any business that is tied to advertising in any significant way. The softening of the ad market. Maybe the pessimism six months ago was overdone. But the softening of the ad market was not. That was a real thing and that continues.
Bill Mann: It was not overdone. But one of the things that met our recently pointed out was that as far as they have been able to figure every dollar of advertising. That spent at Facebook returns for those advertisers, $3.13 of gains which is still an astounding return. Like I'd love to be able to get that for most things in my life. Yes, the advertising market has perhaps soften. It's also perhaps shifted but it bears remembering that at Facebook, much of their advertising was smaller advertisers. They didn't have some gigantic Johnnie Walker campaign going across your runoff site. It was local advertising. It was small service providers. Very locally done and that advertising market is fine, especially with those kinds of returns. I mean, that's some of the best returns you can get.
Chris Hill: They continue to deliver on the main part of their business. I mean, in some ways, that is part of Meta Platforms that gets the least amount of attention and yet is the most important part they continue to deliver for the advertisers.
Bill Mann: No, I think that's exactly right and that's very well stated. Now I think that they actually went out to deemphasize what they were doing there and I think that if I were to psychoanalyze Mark Zuckerberg and their team it's because they had what they believe was a near-death experience, a decade ago when they were so far behind in mobile, when Facebook was primarily a desktop experience, and they'd miss the fact that the iPhone was revolutionizing how people interacted with social media. I understand perfectly why they would try to get out in front even if they're losing and by the way, four billion dollars, that may be a lot to you and me but as you view it as an R&D budget for Facebook, for Meta, it's nothing. I understand exactly why they would deemphasize the thing that's just chugging along because that's continuing to generate the free cash flow. That will make sure that they have sufficient fuel to make sure that they don't end up behind again.
Chris Hill: I want to shift to a completely different industry and that is the banking industry and specifically the regional banking industry and wondering where you think we are now in this story, now that we are just about two months in from what started with Silicon Valley Bank earlier this week. First, Republic continued to fall and something I'm starting to read a little bit and here a little bit on CNBC that I wanted to get your reaction to is the question of whether or not regional banks, the fear around regional banks has now reached its apex to the point where wait a minute, let's put aside First Republic.
Bill Mann: Because that's bad.
Chris Hill: Putting them completely side. But just regional banks as a group. Where do you think we are right now with them when you look at whether it's ETFs tied to regional banks, individuals' shares. The sell-off across the board has been probably what a lot of people, including you were expecting, do you think it's now to the point where it's hey, some of these are starting to look pretty interesting. If you're going to sell me this regional bank at this price.
Bill Mann: I've started to see the magic word that I look for which is that a sector is considered to be uninvestable and a couple of weeks ago on this show, I interviewed Howard Marks, billionaire investor and he said something that I completely different did not expect in a slightly different realm. He said, I've not all that interested in China but when people will tell me that it is uninvestable, that makes me wonder if there are things that I ought to be looking at and I have started to see the same things in this segment. It bears remembering that the regional banks, although they are a tiny fraction of the overall deposit base in this country and the overall lending base in this country. They are drivers of economic activity in whatever region therein, in a way that companies like Citibank and Chase cannot be. They are very fundamentally important. I don't tend to get all that excited about bags. If you think about it's a bit of a utility and then there's a risk-taking operations pin to the top of it and so sometimes the surprises and risk-taking are bad and they're so regulatorily restricted that the surprises are rarely good. But when you're going to tell me that a bank that has made as many mistakes as First Republic made and as many and as unlucky slashes many mistakes is Silicon Valley Bank made that that is going to tar the entire sector. I'm interested in looking at some of the best performances from that sector.
Chris Hill: Because I'm assuming when someone says X, insert name of company or industry is uninvestable, one of the interpretations of that is, this thing is going away completely. Now I'm not saying that. People are saying that with respect to this.
Bill Mann: Just in Chris Hill says banks are going away.
Chris Hill: I'm saying in some cases you could look at it, hey, that technology is going to become obsolete. Therefore, it is uninvestable. I'm assuming that is not the case that people are using that word around regional banks. But instead, as you indicated, this is just so toxic like now tell me when the smoke is clear.
Bill Mann: If you think about the social proof and we can take it on our level, but you can take it even going even into the institutional level. There is no one out there who's willing to risk their reputation on saying, I think banks are cheap. They just aren't. You cannot find the person who's out there making that statement, so you also have to figure flowing from that, that institutional investors are not necessarily looking to signal to their investees that that's the area where they are finding the most opportunity because always see is fear in the banking sector. Warren Buffett basically tells us that you should be greedy when others are fearful and the reverse, so it makes sense. You also have to remember that when he says when others are fearful, it may actually be that you are fearful as well. I mean, we're not robots. It makes perfect sense to me that this would be an area right now where we would want to look for opportunity.
Chris Hill: What's the next thing you're going to be watching over the next month and I'll point out that in 10 days or so we have the Berkshire Hathaway Annual Meeting. It's entirely possible that Buffett and Monger, during that Marathon Q&A session they do, will get asked about regional banks, certainly banks in general. Is that something we should be watching for?
Bill Mann: In fact, Warren Buffett or Berkshire Hathaway, I should say, sold almost all of their banking positions with the exception I believe only the exception that they retained was M&T Bank. Most of the rest of them are ones they had held for as long as the quarter of a century and they sold down substantially because they saw so much of the banks not really minding the store, like taking on a little bit too much risk in a time in which interest rates were going up at a clip that would make the balance sheets for banks to put them at risk. I think banks in some ways are going to be an interest rate game from here and a lot of people, because rates have just gone up so much, may think that they're going to keep doing so, but we know that that's not the case. It never has been the case. I think one of the more important things that we need to look for right now is an attenuation of interest rate rises and I think that then banks will get onto a much more solid footing.
Chris Hill: Attenuation. Could 50 cent worth it.
Bill Mann: I pulled that out just for you, my friend.
Chris Hill: Bill Mann, thanks for being here.
Bill Mann: Thanks, Chris.
Brian Stoffel: How much of a threat is ChatGPT to Google's business? That's just one of the topics discussed in the latest episode of the Stock Advisor Roundtable podcast. You've heard me talk about this show in the past and we decided to give you a chance to hear it for yourself. This is Brian Stoffel, the host of the show, talking with Hamza Lebbar, an expert in artificial intelligence, and Motley Fool CEO Tom Gardner.
Brian Stoffel: I want to just pivot for a second and talk about some of the companies that we might be investing in, in the Stock Advisor universe. Let's talk about some of the companies that are really in the need of this. I'll start out with Google because Google's answer to ChatGPT is barred. It's something that I think was made fun of when they tried to come out and show this tool being used. Because it didn't work as well as what people experienced with ChatGPTs. So my question is, and Hamza, maybe we can start with you and Tom, I wanted to get your thoughts on this. How much of a threat is ChatGPT to Google's business?
Hamza Lebbar: I think definitely ChatGPT is a threat to Google's business. But I rather see them as partners in a way that like the ultimate solution would be to have a combination of both. Like each one of them has pros and cons and exactly what I see, for example, Google they do give the references of the data they return. They do have also real-time data incorporated with all the algorithms they have. So this is something ChatGPTs does not have for now. ChatGPT is very good at summarizing the answers or going on in different places and getting the data process it and digest it for you and present it in a very good way. The perfect solution for me would be when the user has a specific query, just types it. Then we have as an answer, the aggregated, digested answer from ChatGPT with references to the arts, maybe websites, books or whatever, where this data comes from, where this answer comes from and also with real-time data. So it's a combination of both. It's like to me, I think of ChatGPT is the model that came to tell to Google, hey, you're missing out this part that is very good to have in a search engine and we do also see this already in Google, sometimes when you put a specific query, you do see that there is a specific answer highlighted from a given websites, so it is something like ChatGPT does not really the same. I do think that both solutions will merge to give birth to a more complete solution.
Tom Gardner: I have some deeper concerns about Google, but we should always start with just looking at their balance sheet and recognizing that they have $100 billion of that cash on their balance sheets. So this company has the resources to invest heavily and has already in AI obviously DeepMind if we remember AlphaGo, the documentary if you haven't watched it, it's now six or seven years old, but it's still highly relevant to watch, and understand what's happening and Google has been at the forefront of making these investments. I think the problem for Google is almost in the literature of Clayton Christensen, almost mapped out perfectly. I mean that in this regard, what OpenAI brings to the table is something that is not as reliable as Google. But it undermines Google's business model. Because if I can search for anything on ChatGPT that would replace a single search on Google, or 3% of my searches, or 8% of my searches, I'm doing it and that's taking ad revenue away from Google. Furthermore, it's in a way, starts to become a better experience for me on ChatGPT because ChatGPT is upgrading. ChatGPT 5 is expected to be released sometime around the end of this calendar year and there is at least some intelligent people presenting a thesis that it might pass the Turing test. In other words, the breakthrough, the acceleration of the potential exponential growth of the effectiveness of ChatGPT could be transformative much more quickly than we think already is in some ways, it's not interrupted by a bunch of sponsored ads.
Brian Stoffel: To be clear, the Turing test means that you would not be able to tell the difference between a computer and a human responding to you.
Tom Gardner: Thank you very much for clarifying that I already see, which maybe many have the individual on Twitter who took all of the audio of Steve Jobs and then connects it in so that you're gaining access to everything Steve Jobs wrote or said and everything that's ever been said about Apple or written about Apple and you ask Steve Jobs what happened with COVID at Apple? Steve Jobs used a very lucid in his voice exactly answer in a way that kind of passes the Turing tests, at least in a small way. Because if you didn't know that Steve Jobs isn't here anymore, you might think that's really Steve Jobs talking about COVID. To me, the threat to Google is that it chips away at search volume and that's the entryway of all their business cash flow. It's not stuck at GPT 4 it's moving, it's changing and is gaining relevance. It's the centre of conversations. So in a way, I think Clayton Christensen, for me, his methodology doesn't quite work as well for B2C companies, he actually thought Apple was really going to be undermined in 2007 because it'd be undercut with lower prices. But I think consumers are willing to pay up for the convenience and something cozy like Starbucks or Apple.
I don't think they always get undermined by Dunkin' Donuts and Android, etc. I don't think that happens B2C as much, but this is B2B, that's Google's business. I think that the ad volumes may start to shift as if ChatGPT finds a way to integrate that. So it's not a proliferation of sponsored ads for every search that you do where you know, I'm getting an economic meritocracy here in Google system. I'm not actually getting an interactive answer that's based on merit, and that's evolving quickly. So I think it is a threat to Google. I wouldn't be like selling all my shares of Google, but I definitely be watching to see what happens quarter-by-quarter now with their search volumes.
Chris Hill: If you want to hear the entire episode of the Stock Advisor Roundtable premium podcast, just click the link in the show notes. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
