Alphabet's Changing AI Narrative

In this podcast, Motley Fool analyst Asit Sharma and host Deidre Woollard discuss:

• Why the market is smiling on Alphabet lately.
• How Google's announcements show the company's AI ambitions.
• What Blackstone might buy next.

Motley Fool personal finance expert Robert Brokamp interviews Steve Chen, the CEO of NewRetirement, on what savers often miss about retirement.

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 09, 2024.

Deidre Woollard: Move over, Clippy. Gemini wants to be your new workplace brand. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Asit Sharma. Asit, how's your Tuesday going?

Asit Sharma: Spectacular, Deidre. How about you?

Deidre Woollard: Good, I like to hear spectacular. I think Alphabet might be having a spectacular day or week. They're very excited, they've got their Cloud Next event in Las Vegas this week. I'm getting a little bit of event conference fatigue of all of these big tech companies, they're coming out with these announcements. It was a big flood of partnerships and forecasts, but one of the things I find interesting is how the narrative has shifted on Alphabet. A couple of months ago everyone was, Nvidia's already won the race and everybody else's second and nothing that Google is putting out is working. Now that has really shifted, what's behind that?

Asit Sharma: Deidre, one of the things behind all this is that Alphabet has deep expertise in machine learning, in algorithms, in generative AI, they were really the seminal or one of the seminal forces that pushed generative AI along. It's just that, other companies like Microsoft, with their partnership with OpenAI, swooped in and brought it to a consumer-facing model. Google has the chops. It's just a question of getting that out in front of both customers and enterprise businesses.

Deidre Woollard: Well, that was really the interesting thing was that we knew that they had been working on this for years. Then, like you said, Microsoft and OpenAI got the jump. Then Bard felt a little flat-footed and didn't get a lot of engagement, but Gemini has really sped up. There were a few missteps at the beginning, but it seems like now Gemini is slowly being integrated into more and more things across all of Google's products.

Asit Sharma: There are some evidence that there may be a toggle switch in Android pretty soon where you can just flip into a Gemini-based environment. That's a pretty good line of defense against this one business risk for Alphabet that if we all start using this AI assistance, we're not going to go to Google anymore, which is a big source of their revenue. Being able to keep you within that search ecosystem by having you switch into a Gemini mode, I think is pretty smart. Also, we're seeing some things out with their conference today that Google is making Gemini a little bit more robust in terms of avoiding basic errors. Their platform, which is actually called Vertex AI, has been incorporating some lines of defense into misinformation. This is known as grounding in the AI business. The latest models of Gemini are a bit more grounded and tied to fact-based information, so traceable information sources. we've seen Bing do a little bit of this as well. I think that's going to be pretty good for restoring some confidence in this company. Gemini, again, is not the end-all and be-all of Google's expertise, but it is the most visible aspect of it for many people. It's good that we're seeing some upgrades to Gemini. Also, I'll note this latest upgrade, it's called Gemini 1.5 Pro, I think is going to be attractive to some enterprises because it's capable of understanding longer bits of information and presenting analysis, be it video, text, voice, etc.

Deidre Woollard: I know that some of the market is like, their last event was eight months ago. They didn't wait a full year. Maybe that means that we're going to see more announcements. One of the things that is interesting is, as you mentioned earlier, Google's primary business is still search cloud, is around 11% of the business competing against Amazon and Microsoft, but what advantages does Google have in the cloud space?

Asit Sharma: One is that it's got pretty deep expertise again in processing. It has ways to convince businesses that they have a better return on investment by staying within Google's cloud. I think some of the announcements we're seeing today are evidence of this. They're introducing a new chip, which is going to be Google's first ARM or ARM-based CPU. It's called Google Axion. I saw some news releases that this is an AI chip. What it really is an alternative to GPU processing. This is a central processing unit. It is designed with a very specific set of capabilities and instructions. It's really good for enterprise workloads in the cloud. They're going to test this out on YouTube workloads. That chip will be out later this year for enterprise businesses to test drive. But Google has an argument here that look, if you're spending money with us, whether it's AI or other parts of your business, this is an energy efficient chip. It is superior to X86 chips, which is a standard that Intel and AMD have in the marketplace. It's really going to help save you money. You can use it for generative AI, but you can use it for all the other great cloud stuff you get from us. It's important for Alphabet to bring forward some silicon based advantages like this. This isn't going to shift the world from NVIDIA GPU computing all the way to Google. But Amazon isn't trying to do this either, neither is Microsoft. All through these companies are trying to show that they have some compute solutions, so customers have alternatives to using GPU processing. It'll be a mix going forward for sure, but I like that Alphabet is showing its got a bit of muscle in this space as well.

Deidre Woollard: One of the things I'm thinking about is, I know Tim Beyers has talked about this too, is the multi-cloud environment and that now it's not just picking one partner, and it seems like Google might be positioned to benefit from that. I know in some of their announcements they talked about all of the companies that they're working with, so it seems like there's a race to get all of those Fortune-500, the big companies using your platform. But maybe it seems like they're using a bunch of different platforms. But one thing I'm wondering about is for you and I, for the people that are mostly experiencing Google through things like Gmail or Google Docs and things like that. We're going to see a lot more of Gemini in our daily work, aren't we?

Asit Sharma: Yeah, it's going to be popping up in a lot of places. I think the first wave of experience for some of us may be amazing because you may be an early adopter of generative AI and just will be really pleased with this. For others of us who want to take our time with the technology, it's going to be a little irritating. Get little wavy things at you as your devices saying hey, would you like to try Gemini to book this flight, etc. But this has been the business model of Google and Alphabet for a long time. We've seen this on our devices since we first started using the products. I do think we'll see that and for that matter, Microsoft is doing much of the same. If you happen to use Microsoft's Office, you've already seen the invitations to use their AI assistance. This is going to be something that eventually gets woven into the fabric of our work, but that first layer is going to be a lot of pop-ups and invitations to test drive the technology.

Deidre Woollard: Absolutely. Because it really is all about achieving critical mass of adoption and making it seamless rather than going to a generative AI location, it comes to you now.

Asit Sharma: Totally.

Deidre Woollard: Let's pivot. I wanted to talk a little bit about Blackstone. I didn't get a chance to talk about it yesterday. Blackstone made a big deal over the weekend. They're buying AIR Communities, which is an apartment REIT, the smaller one, but for 10 billion, which is about 25% premium on the last share price. Blackstone, no stranger to acquiring big REITs. They took out one of my favorites American campus communities in 2022. Part of it is, that they build up these massive funds. They're buying this with their real estate fund, which they raised 30 billion for last year. They make these smart investments, typical Blackstone stuff. But I'm wondering, this current regulatory climate seems like a little bit different. I'm wondering if that's going to put a little hitch in Blackstone's giddy up.

Asit Sharma: Maybe. I think actually, yeah. You've got a point there because they are the world's largest alternative asset manager live, they have hundreds of billion dollars to sling around to make acquisitions, to finance big deals, etc. But I seem to think that the Europeans Commission, their regulatory arm, and the justice department, all regulatory bodies of US government are just so focused on big tech right now. That seems to be what they wake up thinking about. It opens the door for an innovative company like Blackstone, which is buying and selling in a number of different industries, to make bigger acquisitions. One that might be under the microscope, if an Alphabet or an Amazon or Microsoft made the same acquisition and get by with it. You're totally though, onto something that the regulatory environment is sharpening up and governments are more than ever worried about monopolistic power because technology plays such a big role in today's acquisition. Companies that have already a lock on the market because of their patents and technological edge get swallowed up by bigger companies that also have locks on other markets. It's never a good look on the tech side of things, but you and I were chatting earlier today about just the variety of investments Blackstone makes. I somehow think this behemoth is maybe going to be able to cost after the radar for a while.

Deidre Woollard: Behemoth, I love that word because that's what it is. Let's go into rumor territory because there are two other Blackstone rumors that I find fascinating. The first one is that they're looking at Jersey Mike's. The famous sandwich shop of course, franchise model. They're looking maybe for about 8 billion. I loved the story of this when you and I were talking about it before about Peter Cancro. Started working for this sub shop when he was 14, bought it when he was 17. Turns this into this national chain. Maybe he's looking to cash out, maybe he's looking to do more philanthropic stuff. What makes a brand like this attractive to private equity?

Asit Sharma: I think it's in the keyword, brand. I think when private equity sees a business that has extreme customer loyalty has been able to scale over the decades, they understand that it's not a proposition that will erode quickly, so they can go in, make the tweaks they're used to. Some call it like hatchet work. Private equity has a bad reputation in the industry and I think some of that's earned. But they don't always do that. Sometimes Blackstone will come and use more of a scalpel approach to optimize operations, squeeze some more operating margin out of a cash-generative business like this, and be OK with it. I think that whenever you have that high customer recognition, that brand awareness, it's really attractive to private equity because it's hard to destroy that [laughs] overnight. If they make a mistake and cutting too much, they can ease back a bit and it won't take the business out of it step.

Deidre Woollard: One I find it interesting too, because we've had like cover IPO and we've had Chipotle had its big stock splits. There's very much interest in food. We always say, never bet against the American eater, and I think that remains true.

Asit Sharma: It seems to be like Renaissance time for food IPOs, doesn't it? We've seen tech IPOs triple down. There's not a lot going on there, but in the food space, wow it's booming. But this does show the power of certain concepts when they take off and they scale, and they have that magic formula that makes you want to walk by a certain restaurant to get to the restaurant you want to get to. Which isn't really my idea, but Ron Shaich's idea. He of course, is the long time former CEO of Panera Bread and it's now himself a public investor. Once you've figured out that magic formula, man, you can take that all kinds of places globally. It's not a recession-resistant industry and not every concept makes it, but the ones that do can have success for defined by decades just as Jersey Mike's we're talking about and for that matter, just back to Jersey Mike's for a second, an eight billion-dollar rumored acquisition if Cancro does sell to Blackstone. There's not a lot of places you can go to cash out when you get that big except for the public markets and private equity. If this deal is for real and matures, that might not have been his first choice, but where else are you going to go to raise to realize your eight billion in equity.

Deidre Woollard: Really good point. Their last Blackstone story, it's about the French skincare company L'Occitane. This one is different because they're not buying it and taking it private, but they may be helping the owner, which is an Austrian billionaire, Reinold Geiger, wants to take it private. Blackstone might provide the debt financing. This is interesting. It looks like this one is even closer to happening. This one trades on the Hong Kong Stock Exchange, oddly enough, and trading was paused it yesterday ahead of an announcement, terms haven't been finalized. But Blackstone, they've got about 200 billion in dry powder. They can really do a lot with debt financing in an environment where it's not the easiest time to get money.

Asit Sharma: I think so too, Deidre. Warren Buffett has talked about this for decades, the problem of getting really big. How do you keep making outsized returns once you're one of the biggest players in a certain market? This is something that's playing into Blackstone's hand. What I'm referring to, of course, is that this high interest rate environment. You have on one hand, private equity group, masters of collateral, masters of financing. Number 2, you've got companies around the world, bigger companies that may want to get off the public markets or may need some working capital or longer-term debt. Once you get to a size like close of 10 where the banks are going to be a little hesitant with this high-interest rate and maybe the quality of the collateral to lend you a bunch of money in a financing deal. Where else do you go? Again, the world's largest alternative asset manager, as you mentioned. A few hundred billion bucks in dry powder. I'm sure they can make a deal that's both parties will find amenable and it probably will be a complex financing deal. That's another advantage they have. They can deal it out in trenches. They can have some provisions for more financing at a later date. There's different claw-back provisions they can put into their debt. These deals are tailor-made for a bigger company like Blackstone that's trying to find where it can make its profit year in and year out, even as it's got so many billions that it needs to deploy to generate that return. I think this is such a fascinating company to study. They've acquired some companies that I like and thought were so investable. I believe they acquired Rover Group, which is the the pet sitting platform a few months ago, so you also see them taking out smaller companies that might have made a splash on the public markets if given enough time.

Deidre Woollard: Never take your eyes off Blackstone. Thanks for your time today, Asit.

Asit Sharma: Thank you so much, Deidre. This is a lot of fun.

Ricky Mulvey: Ricky Mulvey with Motley Fool Money here, I want to tell you about another podcast though called the Next Wave. AI is all the rage right now, and you may be feeling overwhelmed with the constant barrage of information. I know I have trouble keeping up with this stuff and I don't want to get left behind. The Next Wave podcast is going to keep you updated. Matt Wolf and Nathan Lands aim to be the chief AI officers for your business and hope you get ready for this upcoming wave of change. I checked out Matt's, YouTube channel. He does a good job connecting news and technical updates in AI to what you see on the user end. Like what more powerful datacenters mean for the videos you see from Zuora and why companies are rethinking voice authentication. The Next Wave is going to be a weekly show. You'll get Matt and Nathan's insights, and they're going to introduce you to other key players in this exciting space. Look, if you're curious about AI, you want to understand how to implement it in your business strategy, the Next Wave is a good podcast to add to your rotation.

Deidre Woollard: What assumptions are you making about retirement? Robert Brokamp caught up with Steve Chen, the CEO NewRetirement. A company focused on DIY financial planning at scale about what savers often miss about retirement spending and when they'll actually leave work. Quick disclaimer, our sister company, Motley Fool Ventures is an investor in NewRetirement.

Robert Brokamp: One of the first questions and it will have to answer if they use retirement calculator or even just meet with a financial planner is when do you plan to retire? What's your impression of how good workers are at predicting when they'll actually retire?

Steve Chen: I think everyone is ambitious. People say, I'm going to work till early mid 60s. Some of them love working there and keep going. That's what people tell themselves internally. If you pull them, that's what they'll say. If you look at the data, many people end up being pushed into retirement through illness, through being laid off, downsizing, or whatever in their late 50s and that can create this uncertainty. I don't think that a lot of people should anticipate that that could happen in build scenarios like what would I do if that happens? Then you could work part-time. I mean, I think a big insight is actually on the flip side, many folks are like, well, I need to keep working until I'm 70 or late 60s, but in fact, maybe you could go say you're making 130,000 a year or something, you've got a good income but you've saved and you're like, I need to keep making this money or whatever it is for a long time. In fact, if you work part time and you're making $50,000 a year and then maybe claiming social security like you could bridge yourself and it would be fun.

Robert Brokamp: You talked about doing the Roth conversions and you have suggested in the past that early retirement is a good time to possibly do that. That might be counterintuitive to a lot of people think I'm in retirement, I shouldn't be doing conversion because why is that a good time to be doing that?

Steve Chen: The Roth conversion strategy is for most people, especially Gen Xers and above, they've saved on most of their money and defined contribution plans that are subject to RMDs required minimum distributions. The whole thing is, you want to move those assets out of that vehicle into a Roth and you can do conversions in lower income year. You take the money out over age 59.5 where there's no penalty. If you have low income years and say you're going to have $20,000 of income or something, you're like, we have a marginal tax system. I want to put it into up to 22% or 20, whatever the interest income tax rates are. I'll take out 80,000 bucks a share, pushed my income up to this, and I'll keep it below certain marginal tax rate and then convert most of that into a Roth, which can then grow tax-free. There's also a bunch of a estate tax benefits to it as well. I also tell younger people that they should really consider a Roth because if you can get your money into that vehicle in your 20s and let it compound for 30 years, it makes a massive difference because it grows tax-free, comes out tax-free in the future. You're hedging out your future tax liability in a big way.

Robert Brokamp: The one thing I'll add about doing the Roth conversions is that of course, when you convert money from traditional Roth, that adds money to your taxable income, so it's not a free lunch. You do have to think about how it'll affects things like your premiums based on the Affordable Care Act or if you're receiving Medicare, because if you earn too much money, you'll have to pay for Medicare. There's a lot of moving parts there in terms of making that decision.

Steve Chen: That's one of the most popular parts of our platform is we have a Roth conversion explorer that lets you think through how I would do conversions across multiple years and solving for things like different rates of return that you're expecting, different you can solve for. You can say, I want to solve for lowest taxes, I want to solve for maximum estate value. I want to solve up to a certain tax rate. I want to factor in Irma. Medicare means testing. We've built all that and the way we do this is, and this is where you're going to start to see compute and AI emerge. What's so different is we won't let you frame up everything you've got. All of your savings and your home equity and income sources in one place, pensions, annuities, everything. Then we run a lot of simulations for you when you do this. What we're doing is we're basically saying, OK, what if you did this, and do you do like hundreds or thousands of simulations and then we pick the one that is the best fit for a strategy you're trying to pursue. That's the thing that's starting to happen. I think you're going to just see more and more of this where there's parts of planning where computers are great. There's parts where humans are great, but you're not going to do this stuff on a spreadsheet. You're not going to have access to AWS Lambda serverless compute that you can run this millions of simulations behind the scenes for billions, for millions of people every night. That's where we're headed with this thing.

Robert Brokamp: Let's talk a little bit about spending in retirement. The base case assumption whether you're looking at a retirement calculator or even most financial planners, is that your expenses will rise along with inflation in retirement. In your opinion, is that the right assumption?

Steve Chen: It's not, unfortunately. Well, unfortunately, or fortunately. I think a good way to frame this is there's the go-go year. The go-go year is a slow-go years, then a no-go years. If you think about your parents, hopefully, they're alive, but 60-70 are doing one thing, 70-80 doing something else, 80 plus, it's pretty different world out there for you. I think a lot of people they do over optimize for trying to solve for like, I'm going to have plenty of money when I'm 105. Well, you're not likely to be alive then. That's where things like annuities and stuff like that do make sense. You can hedge longevity by buying a deferred annuity. You could be, OK, in the unlikely event I'm alive at 90, I'm going to buy enough income so that with that and social security, I'm not going to starve to death. Then you can set your planning horizon to 90. This is where there's a shift that happens with people. Where as you approach retirement, you're like, man what is my one non-renewable resource here? Time. I really need to think about how to use my time really intentionally. Maybe a lot more time with my kids. I want to have better experiences. You also see your friends like, so and so had a heart attack at 65 and they drop dead and you're like. That's becomes a real thing and you're like, maybe this is, I don't want to be chained to my desk until I'm 65 or think that I will be. I want to take control earlier. Generally, the data on this is that you real, so your inflation-adjusted spending declines by about 1% per year as you go through retirement. Every 10 years it'll decline 10%. If you're spending $100,000 a year or drawing that down on top of social security. Say between you and your spouse, you get 50,000 on social security and you're like, I want to have $150,000 a year to live on. I'm going to draw 100,000 a year. Well, 10 years in, you'll be spending 135,000 on a real basis. Ten years past that, you'll be spending more closer in 120,000 bucks or something. You will need less money. That's what the data shows over time and that will dramatically change how much you need to save.

Robert Brokamp: That's the important point because if you assume a more realistic spending pattern, it means you don't have to save as much for retirement. It might mean you can retire sooner and enjoy some of that money. Or it could mean that in your earlier years of retirement, you should basically enjoy yourself a little more while you can because at that point, you're at the healthiest you're probably ever going to be, so you should enjoy it a little bit more on that. In the words of Dr. Michael Finke, a retirement expert, "Your first year of retirement is probably going to be your most expensive year." It comes expenses go down and my parents are alive. My dad is 85. I talked to him the other day, he says, I drive to four places. That's it. He's got four different stores he goes to and otherwise, he stays at home and takes care of his chickens and he's perfectly happy doing that.

Steve Chen: That's the reality. You use less resources unless you need significant care. I think that's the big unknown that you really need to think about and the children you'd need to think about. I also think that just thinking about your health is super important. Without our health, we worry about all these little problems, but as soon as you get unhealthy, you're sick, 100% of your energy is focused on getting healthy. You need to really invest in it. Just like you invest in your portfolio. But this is where walking, eating well, sleeping, stress management matter. If you want to be in one piece and be functional and get the most out of your health span, really being intentional about that matters at time.

Deidre Woollard: As always, people on the program may have an interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Quick programming note, we have a team or treat this week, so we'll be taken off Wednesday and Thursday from publishing new episodes, but we'll be back with the radio show on Friday. We'll see you then.