Separating Signal From Noise in the Metaverse

In this podcast, Motley Fool analyst Bill Mann discusses:

• Nvidia's (NVDA 0.95%) talk about hiring and costs.
• Apple (AAPL -0.02%) targeting the same iPhone production levels as last year.
• Why he's more concerned for Android phone makers than he is for Apple.

Motley Fool senior analyst Asit Sharma talks with Motley Fool producer Rickey Mulvey about separating signal from noise in the metaverse.

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 May 26, 2022.

Chris Hill: We've got the latest from two of the biggest companies in America, as well as a closer look at the metaverse. Motley Fool Money starts now. I'm Chris Hill, and back by popular demand is Motley Fool Senior Analyst Bill Mann. Thank you for being here.

Bill Mann: A vote of one to not nothing, which is a landslide.

Chris Hill: Long time listeners know that every once in a great while, I will have someone lined up for the show, and then something happens. Life intervenes. It's not important who it was, but in this case, the person who was lined up for today's show, their laptop melted down, so they're dealing with bigger issues, and so coming in out of the bullpen, my good friend Bill Mann. I do appreciate you being here. I want to start with Nvidia because this is another interesting day. We focus on the long term. It doesn't mean that, in the very short-term, stock movements can't be interesting to ruminate on. For those who missed it, the graphics chip-maker had good result in the first quarter. They said they're going to slow down their hiring, focus more on controlling costs, and after hours yesterday, the stock was down 10 percent. You and I are talking in the middle of the trading day on Thursday, and shares are up four percent. Do you think somewhere in between late yesterday and right now, enough people on Wall Street realized, "Oh, wait, this is a really good business with a really good leader." [laughs] What do you make of this?

Bill Mann: What are we doing? I love the way that you've introed that because I think that when it dropped 10 percent, I think it was a snap judgment based on the fact, at least partially, that Nvidia said that their guidance was going to be lower for the remainder of the year. They're guiding down about $500 billion. Almost all of that is in the form of loss of revenues to China and Russia, that's what they've said. So it should not have been a surprise, but I think you really saw a form of ready, fire, aim. It was a very good quarter for Nvidia. You're right that we don't tend to talk about short-term movements. Looking at Nvidia right now, it's a $446 billion company. It has been as high as $700 billion this year and as low as 400. So you're talking about a $300 billion swing in what the market perceives the value of Nvidia to be. Now, I don't know about you, but I consider a 300 billion to be quite a lot of money.

Chris Hill: As do I.

Bill Mann: Good. I don't want to make assumptions about your tax brackets or anything, Hill, but to me, $300 billion is a lot of money. It just goes to show why you should not take short-term movements seriously at all. It means that the market has literally no idea how to value Nvidia, except to say that this company is worth a lot of money, and it's done a lot of great things and still great things are expected of it.

Chris Hill: This is something we're going to continue talking about in a few minutes, but Nvidia now joins the list of large significantly profitable companies that are, to one degree or another, making moves to control their costs.

Bill Mann: Yeah.

Chris Hill: Whether it's Nvidia, Facebook, Apple, which we'll hit too shortly, have you seen enough from some of the largest companies in America to give you an indication of what the economy is going to be like for the rest of this year?

Bill Mann: I think that we are likely to go very quickly from the Great Resignation to the great layoff. It seems like that is coming down the pike. If you've got companies that have as much cash on their balance sheets, as Meta and Nvidia, saying we're going to control costs, then that is obviously a place that they're going to be looking at. That is, of course, I think a concern for the economy. You never want to see an environment in which people are laid off. In the case of Nvidia, I think probably most of their cost sensitivity is going to come in their gaming segment. This is the first quarter. I think Ever, as a publicly traded company, guaranteed one of our dozens of listeners, correct me if that is wrong, I think Ever, that gaming, was not the biggest segment of revenues for Nvidia. People are actually guiding that revenues from gaming will continue to be weak through the year, and I think that that's specifically where they will be looking to tighten up their reins a little bit.

Chris Hill: Let's move on to Apple then because Apple is planning to produce the same number of iPhones this year as it did last year, roughly 220 million. Similar to Nvidia controlling costs, this is part of how Apple's being viewed right now is they're being conservative, which I think makes a lot of sense. I'm wondering if you think they are being overly conservative, given how much money this company has.

Bill Mann: I'm not sure. Chris, I've done some math to prepare for this show. I figured out that 220 iPhone units, 220 million equals one unit for every 35 people on the planet. So whenever I think about these massive tech companies, I begin to wonder in the back of my mind if there isn't an efficient horizon for them, if there isn't a place at which they can grow no more because we are just not producing people fast enough. Now they're ordering less than was being presumed. But 220 million units of the iPhone for Apple alone for one year, that is a massive number, and it is still an incredibly profitable device for them. They mint cash off of the iPhone, both in the sales of the device, and in the sales of all of the ancillaries that go with having apps that they get paid for, and everything that they get paid for due to that ecology. But it has always been in the back of my mind that, at some point, the level of growth for the units themselves has to slow down just by virtue of the fact that we're just not creating people fast enough.

Chris Hill: Where do you think this is likely to go? This is, unfortunately for you, a little bit of a crystal ball question.

Bill Mann: [laughs] Hold on, let me shake mine. [laughs]

Chris Hill: But I do wonder, with all of these huge profitable companies making these announcements, one of the questions that always goes through my mind is, so what's going to be the move after this? I'm not really a chess player, but I know enough about the game to know you got to think a few moves ahead. I'm wondering where you think Apple is going next.

Bill Mann: It is important. Even though the iPhone absolutely dominates the cultural zeitgeist when we think about these devices, they are actually in a competitive market. So for Apple to actually hit 220 devices, by the way, this isn't a guide, this is the amount that they have asked their assembly partners to make. They're not guiding to this number. They're producing this number. For Apple to hit the same number that it had last year, and I think it's pretty safe to say that the amount of spending and the willingness for people to spend has switched from 2021 to 2022.

I would be much more concerned for their competitors, the Android manufacturers, most of whom are in China, which have already said that they are having a rough quarter. So I think whenever you see big companies like this that have a huge amount of cash, this is the type of environment in which they get to, in a way, extend their lead, and to throw their weight around a little bit, and to make things very uncomfortable for their competitors. That's what I think that we're going to see from Apple. The market has not overreacted to this story. Apple is actually up today. It's down from its high by about 25 percent, which is $600 billion, if I do the math right, which is again a lot. But at the same time, I think when you see a change like this in the environment, it actually favors the more powerful, the more well-capitalized of the competitors.

Chris Hill: I'm glad you mentioned the stock price because I was legitimately surprised. Again, Apple's shares were up two percent. That's not a huge number. I'm surprised it's up at all because this has been the type of market environment, particularly over the last few weeks where any type of slowdown is punished. Is the slight rise we're seeing because the stock has come down from its highs, or is it because this provides a level of certainty for Wall Street in terms of the most profitable device, the most important device for Apple?

Bill Mann: I think it's very much the latter. Again, in this environment for Apple to be saying, "Look, we're going to be producing the same exact amount that we did last year," a huge number of devices when we know just how much pressure and just how much their rivals are struggling, suggests that Apple is not about to give up its lead anytime soon in terms of being the most important manufacturer of smartphone devices. Ultimately, to me, I think that's why the market has looked at this, and said, "Well, duh. We aren't making people quickly enough too that Apple's going to continue to grow smartphone manufacturing at a 10 percent clip. That's not how things work." But at the same time, I don't look at this as being anything other than Apple having the capacity to extend its lead. Either way, wouldn't you love to have some Wall Street analysts just come out and say, "Well, duh." [laughs] Here's my question. Well, duh. Great quarter, guys. [laughs]

Chris Hill: If they follow that up, that's the one-two-punch I want to hear on the next conference call. Great quarter, guys. 

Well, duh. [laughs] We need a camera of Tim Cook reacting to that.

Bill Mann: That's right. [laughs]

Chris Hill: I want to see his reaction. Bill Mann, great talking to you. Thanks so much for helping out today.

Bill Mann: Take care, Chris. Thanks.

Chris Hill: Nvidia and Apple are just two of the companies investing in the Metaverse . At this point, we don't know what the Metaverse is going to be, but that's not stopping some investors from rushing in. What are the real possibilities that may emerge? With more, here is Ricky Mulvey.

Ricky Mulvey: The promises of the Metaverse, Web3, and the Virtual Revolution are big. One thing I'm finding challenging is trying to separate the signal from the noise. Joining me now is Asit Sharma, Senior Analyst and a contributing learner to The Motley Fool. Asit, I'm so happy to see you today.

Asit Sharma: Ricky thank you for having me. Looking forward to discussing some signal, hopefully, a little bit noise. [laughs]

Ricky Mulvey: A little bit. In a way this is just noise, but that's just a podcast joke. I had a conversation a few days ago with Mac Greer. He's a longtime producer at the Fool, and he said that one of the concerns he had about the Metaverse and investing there is that he see some parallels to the 3D printing phase from a few years ago. There is that promise you could print a ballpoint pen in your living room, everything machines would play a major role in our investment strategy. Are you seeing parallels there? Is that analogy broken? What's your take?

Asit Sharma: It's a spot-on analogy. Every few years we have a big theme that washes over the popular imagination. We have no end of investors, including myself, and probably yourself too, and probably people who are listening and trying to figure out, how do I benefit from this trend if this is going to have such an impact on society and the way we work, the way we play all that good stuff? The problem is that big themes rarely live up to their promise overnight, and the effect can be very prevalent. Oftentimes it takes decades and the investable effects dissipate before we can grab onto them.

Ricky Mulvey: To that point, I saw it was virtual real estate sales, so it's just plots of land, apartments in the metaverse that reached $500 million last year, which for context, that's about how much money the WD-40 company made. When I think about the Metaverse, and especially investing in it, the thing that concerns me is I see just a mad dash. I wonder if it's better to just be patient right now.

Asit Sharma: Patience is always a virtue in investing because our brains are so wired to think about today, this week, next week, next month. But investment results, they really play out over years. I think this example is so much fun, Ricky, because it shows us that human nature doesn't change. Technology changes and opportunities change. We had the Gold Rush in California, which is the analog version of this in the 19th century, where everyone was rushing to get in and buy land in California, so you could mine for gold, and the price of shovels went up. Millions of dollars, in those days, dollars poured into the state of California, and they're reaping some of the effect today. It wasn't an overnight success for tons of people. Most people lost money in that Gold Rush. The gold rushes keep coming. It's just where they take place. Now they're more virtual [laughs] than they are physical.

Ricky Mulvey: Sometimes, to use the Gold Rush example, it's the people who make jeans who end-up making money.

Asit Sharma: For sure.

Ricky Mulvey: One thing I have been thinking though is I want to look at these tech companies, but I have a difficult time because they're so complex. How are you thinking about investing in these compounders with a high-growth potential? For me, honestly, it's a company I own, and I should have done a lot more research when I invested in it, which is Unity Software.

Asit Sharma: When we were talking about this segment, Ricky, when you and I were throwing ideas out each other, you're describing Unity as a company with high-growth potential but a complex business model. I think this shows your sophistication as investor. If you've sunk a lot of money into Unity, maybe it shows your evolving sophistication [laughs] as an investor. I mean, I think Unity is a very interesting company with a lot of potential. But I will say this, for investors who look at complexity as a roadblock to investing, just as you might a real-world obstacle that a company has to face, you are, like, "I don't want to invest in company A because they have this merger coming up. I want to see how it does afterwards, so I'm not going to go all-in on this proposition today. I'll wait till that merger completes."

Complexity can be the same type of hurdle. In my experience, the more complex the business model, the more likely you are going to get one of two outcomes. A, the model ends up succumbing to the complexity, so the investment returns just aren't there, or B, in practical terms, that complexity gets converted into a long-term competitive edge. My favorite example is IBM, of course. I thought this was the 1950s, but I went back and looked before the show. In the early 1960s, IBM introduced the mainframe computer, which is, that decade's version of something like a Unity software, which has an incredibly broad platform to help game designers, to help digital artists monetize their creative output. That was a fine time to invest in IBM, but it was hard to see it in April of 1964. To me, it's almost that you invest with a starting small position in these types of high complexity, high-potential models, and it's an inverse to the complexity relationship as they become less complex, and you see the business results start to emerge, you can put more money in.

Ricky Mulvey: Generally, I believe in the continued digital transformation. Are you looking at the picks and shovels, the end-products, both, how are you thinking about it as an investor?

Asit Sharma: I think this goes back to what Mac was pointing out about the 3D printing space. It's hard to invest in the end-products just now wherever digital transformation is concerned, unless you're talking about companies that are providing the structure for digital transformation. You're looking at project collaboration software or automating business processes. Those look actually more like picks and shovels. I'm a believer in early in a big theme, invest in the picks and shovels because you can see those outcomes. They're a lot more visible versus going all-in in companies that I like, like Unity, like Roblox software, enabling those positions because it's rare for both that pure-play idea and a profitable business model to merge up at the beginning of the game, it takes time for both of those to synthesize and for everyone to be able to say, "This is an awesome investment. I'm going to invest in Amazon.com." It's 2003. I didn't get in the IPO a few years ago, but now it's the time, you can still make a lot of money being patient.

Ricky Mulvey: You had a great conversation with Matthew Ball on the podcast feed. You asked Matthew Ball what his dream was for the Metaverse, and he talked about the de-centralization. But I think it's very easy to get caught up in the technicalities of it. I think that, in the end, there are a lot of very cool things that are going to come from this digital transformation from the Metaverse. What's one dream that you have that you'd like to be able to be a part of?

Asit Sharma: I'm going to give mine and then I'm eager to hear yours as well. I have this dream that a really great novelist should be able to work with digital designers to show us what they visualize when they're writing their works. Now, when you read a novel that's a really special experience. It's an act of iterative creation. It's someone else's consciousness that's being introduced to your consciousness, and the story you weave, the visuals that you come up with, the move that you interpret out that novel is actually more important, I think, than just the writer's conception. You're merging two different consciousness together.

We get a taste of this right now when great writers work with movie studios, I'm thinking of the Harry Potter franchise, so you get some sense of what writers were thinking about. I don't want to replace the experience of reading a novel and having your mind's eye create the story. But it'd be such a fun adjunct to be able to see something as an author visualized, and we've got a great analog version of this. I think it's unique, maybe the only one that exists in the world. But the Nobel Prize winning novelist Orhan Pamuk has curated a museum in Istanbul. It's called The Museum of Innocence, that has objects he visualized from the time that novel is taking place. You can go toward that museum now and see objects as he saw them as he was writing this novel. To replicate something like this in a Metaverse experience, I think, will be a lot of fun. What's the investable takeout of that? It could go back to Unity Software or audit tests. The companies that are creating the kinds of tools that will make such an experience happen.

Ricky Mulvey: It's the way that great artists could merge consciousness between writer and reader, and in this case, it can also be a symbolic and virtual environment. For me. I guess, one dream I have, it's a little bit more simple. I am really excited for live sports. I think that's where you see a winner of something like Disney. I have family in Ohio, I have family in Australia and I think this is a way where you could imagine sitting at a Cincinnati Red's game or an NBA basketball game and spending time together is one thing that I'm particularly excited about. Moving on, I guess one question we've been talking about the metaverse a lot, digital transformation. What's one digital transformation that you're excited about, that you're watching, paying attention to, that doesn't necessarily have to do with the metaverse?

Asit Sharma: I'm actually piggybacking off of something that you wanted to talk about when we exchanged our notes. But that's OK because I think it's so fascinating. For me I'm interested in a company called DeepMind Technologies, which is a subsidiary of Alphabet, the parent company of Google. DeepMind develops neural networks. As these smart networks have a differentiation from what we normally think of as like machine-learning. Machine-learning is the model becomes smarter by watching data as it comes in, making its own assumptions. Neural networks at their best, they iterate by themselves.

They learn by themselves. I love to talk about two examples, DeepMind is responsible for AlphaGo, a Go playing computer program, and Alpha 0, which is a chess playing program. Alpha 0 was trained by just being introduced with a set of rules. It then played 44 million games against itself in nine hours and came out of that as a bad, blank [laughs] I experienced, challenged the best brute-force computing program of the time. One with some really fascinating examples of how to come at chess in ways we haven't thought of before. This really excites me, it's the potential for artificial intelligence to come up with insights into creativity that we just haven't considered. There's not a lot to monetize there. But you asked outside of the investable universe, what's attracting my attention.

Ricky Mulvey: I think there will be investable things, especially for companies like Alphabet, Gmail, NeuroMetrix work for example, which is every email ever written on Gmail is now being used to predict what you will write next, which is incredible and just because you know that's incredibly valuable, I don't know how to value that as an investor.

Asit Sharma: Ricky, there's a very interesting long-form article, I read. I still get the Sunday print edition of the New York Times, and in The New York Times Magazine insert a couple of months ago, there was an article called AI is Mastering Language. Should we trust what it says? I think you'd enjoy that, Ricky, or maybe it'll just scare you a little more.

Ricky Mulvey: I will check it out. Anyway, Asit, great chatting with you, and good to see you.

Asit Sharma: That's a lot of fun, thanks so much, Ricky.

Bill Mann: As always, people on the program may have 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. I'm Chris Hill, thanks for listening. We'll see you tomorrow.