In this podcast, Motley Fool analyst Asit Sharma and host Mary Long dive into the recent inflation report and talk through the latest AI offerings from Alphabet and OpenAI. Motley Fool host Ricky Mulvey and contributor Jason Hall talk about whether co-CEOs is ever a good idea.
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This video was recorded on May 15, 2024.
Mary Long: Her is happening and you're listening to Motley Fool Money. I'm Mary long, joined today by Asit Sharma. Asit, wonderful to have you here.
Asit Sharma: Mary, I'm excited to be here.
Mary Long: We've got some macro data that landed on our laps today. We're going to get to that. Also later on, we're going to talk about some AI updates from Google and from OpenAI, but again, let's start with the macro stuff. The April inflation report is out as of this morning. The idea upfront is that prices are cooling. Core CPI, which is the measure that excludes the more roller coastery stuff like food and energy, that rose 3.6% year over year. That is the lowest reading since April 2021. Is the Fed doing a victory lap?
Asit Sharma: Yeah, Mary. I think the Fed is doing a victory lap today, but let's not get ahead of ourselves. Don't picture a parade style lap around an F1 size circuit. Instead, picture Jerome Powell or your favorite Federal Reserve Board governor of choice, taking a brief happy dance around their office desk and then sitting back down and pulling the charts backup. This is just one month of data. Previous months we've seen inflation actually exceed expectations. I always say you need more than one point of data to make a trend but I think this does bump up the possibilities that we could have that September rate cut that the market has been asking for.
Mary Long: Asit, I have to ask, do you have a favorite Federal Reserve governor of choice?
Asit Sharma: No, I don't actually. I think Ricky had once tricked me into, I think it was Jerome Powell attending some rock concert.
Mary Long: Grateful Dead concert.
Asit Sharma: I still don't know if that was the real Jerome Powell. Since then, I've adopted a policy of being very noncommittal, very objective about anyone at all that's involved in monetary policy, lest I get more hate mail.
Mary Long: I'll also say, we're being corrected live. It was not a Grateful Dead concert. It was a Dead and Co concert.
Asit Sharma: Well, excuse me.
Mary Long: It was allegedly the real Jerome Powell. With this macro data, we get all this information, a bunch of numbers. What in that report are you paying closest attention to?
Asit Sharma: I think the thing that sticks out to me, I have actually said this a few times over the last year on Motley Fool Money, is that stubbornly high reading of shelter inflation. The shelter numbers include rent. They also include an equivalency to rent that homeowners pay. They include lodging like hotels, and other forms of third-party housing. That number just keeps pushing a little bit beyond the overall number. I think it rose 0.4% this month and is up 5.5% over the last 12 months. As long as that stays up, I think you've got one component there that is just going to be something the Fed focuses in on. I know they pay attention to that number and also it's a sticking point in the economy in general. When rents are high, when mortgage payments are high, that just cuts into everyone's disposable income so I'm keeping my eye on that one.
Mary Long: You're keeping your eye on that but broadly speaking, it sounds like markets were pretty positive on this data. The S&P 500 and the Nasdaq, they each hit all-time highs this morning and last I checked, the Dow was half a percentage point away from hitting its own all-time-high. All that said, can you put those claims into context a little bit?
Asit Sharma: Wait a minute, Mary. Aren't you reading notes from January of this year? JK, just kidding. We had such a strong 2023. Then in the spring, it felt like the market was limping along. We had those very concentrated weeks of selling. Now, you wake up and see that markets are back at all-time highs. It doesn't feel right. I'm thinking what's going on here? Well, what's happening is, the leaders are starting to lag. All those big tech companies like Microsoft and Amazon, and Meta that were leading the charge, and in fact causing many armchair quarterbacks that say this market is getting too concentrated, they've been taking a breather. Actually, we're seeing breadth in the market improve. One thing that I'm keeping my eye on is the S&P 500 equal weighted index. This is a version of the S&P 500 index that doesn't award weight based on market capitalization. It was trailing the S&P 500's sister index by a wide margin all of last year, in fact. When you look at the last trailing 12 months, the S&P 500 has returned about 28%, the S&P 500 equal weighted index has only returned 19%. That's because of all those big tech names and huge companies that have pushed their markets forward. But looking at the last few weeks, the S&P 500 equal weighted index is back, baby. It's almost equal to the S&P 500. What we're seeing here is the rest of the market is starting to participate in the advanced and that's actually good news for investors. It means that these gains could continue if this trend continues
Mary Long: I'm going to pivot a bit because we've gotten some big AI updates this week. On Monday, Microsoft's OpenAI hosted an event launching their latest version of ChatGPT and yesterday, Google hosted its annual developer conference. The theme of that conference, no one will be surprised to hear that it was basically all AI. I want to focus first on what this means for search because that was a big focus of what Google is talking about. Changes to Google's Bread and Butter, the search engine began to roll out to US users yesterday. Here's what those changes are. We get AI overviews, which are basically summaries that are going to appear at the top of search results and a new planning mechanisms. You can ask Google to help you make a meal plan and it will scrub different recipes for you. Or you can ask it to find a nearby gym with a solid intro offer. What's this mean for me the next time I Google something?
Asit Sharma: I think what it means for you and me, Mary, is two things. One is that we're going to have much more of a ChatGPT or Bing like experience. This is really a reaction to what it's like to search now on that search engine and large language model respectively, vice versa respectively. But I think it also means that we're just getting one step closer to putting a stake into the heart of traditional publishers and any content providers who benefit from an advertising model. What this means is that you don't really have to click through to go to a site that has that data. If the search engine is acting like a ChatBot, a large language model ChatBot, summarizing it for you, giving you a nice overview and giving you the assurance that, hey, I grabbed this from real sites. I didn't hallucinate this stuff and here's the sites I looked at. Why do you need to click through? Some people will but if I were part of a major publishing house and there are several rolled-up media companies with different acronyms, Ricky and I were talking about this recently, I'd be on the phone to some of these execs saying, hey, I use this stuff to see what I'm going to cook tonight too, but this is really bad for our business.
Mary Long: Yeah. As you said, this is a stake in the heart of traditional advertisers. What does that mean for Google's ad business?
Asit Sharma: Yeah. It's hard to pass out. They are a walled garden so in one sense, Google is doing its best to keep you on its site as your main site to search. Which does benefit their ad business but at the same time, it also makes it more difficult for people to participate in that ecosystem, for businesses to participate in that ecosystem if the results are going to be served up in summary format with attribution. It's hard to say. To me, I think it's too early to tell. Probably the bigger story to follow continues to be this movement toward a post cookie world. Google has its own solutions for privacy. There's a consortium of other advertisers and companies that are involved in demand side and the supply side of digital advertising that have these solutions, like 20 major ones. Probably the best-known one is The Trade Desk led, UID 2.0. I think that's the bigger story right now but gee, the the pace that AI effects business, it's hard to keep up with. I guess if we have this conversation in six months, it'll be all about what these search results meant and how that changed the landscape.
Mary Long: It seems like a lot of what Google is doing with AI is using it to improve things that already exist, that it already offers. I'm guessing that in the future, we're not going to get a specific breakout line on Google's earnings that says, oh, this comes from this RAI segment. Because of that, what will you be looking forward to gauge user interest in these improvements and to track the actual success of them?
Asit Sharma: I think seeing that the run rate of advertising revenue doesn't diminish too much. To see that Google keeps up its revenue cadence and margin cadence, it's really the easiest thing. If it does that, you know that the business isn't losing its sharpness at the margins, that Microsoft OpenAI, etc, aren't taking share at those margins. That might be the easiest way just to work backwards. Then look for the details. There are different sites that you can consult that monitor usage statistics as well. For those who are interested, you can go to some of those sites and just see what the traffic flow is like. But I think really for an investor, it's understanding that the business still is operating it incredible margins. It's throwing off its free cash flow and that's still been the case with Alphabet, the parent company of Google, over the last several quarters. If you work backward from the numbers, they're actually not yet really losing in this space. They just haven't made quite the splash in the consumers mind, in the brand presence that Microsoft has, OpenAI, Meta, etc
Mary Long: Perhaps a change to that last point. Another announcement from this conference was that of Project Astra. It's an AI assistant. It can run as a smartphone app and it's being prototyped as a pair of smart glasses.
Mary Long: You show Astra something through your video camera that can be a line of code, the view outside your apartment window, a bunch of dogs, and it will read that code, make suggestions to improve it, tell you what neighborhood you're in, come up with a band name for the dogs. If it sounds like Google Lens, it's because it is basically a souped-up voice and video-activated version of that. All that said, is this a game-changer for Google?
Asit Sharma: I actually think this is a small game-changer. Google's so big, it's not going to change their whole game. But this is something very interesting. Mary, when you and I were talking before the show, you had pointed out that you thought this was cool, and I do too. This answers, a fundamentally different question than traditional search has allowed. The traditional search is like, explain this to me. Give me the history of X. How do I Y? When did Z happen? All those types of questions. Project Astra answers a completely different question. What the heck am I looking at? Where am I? I point at an object. Here's an object, reverse engineer it for me, speaking to your example of code. I think this is very interesting and it really posits a future in which a lot of the reasoning that we have to do by ourselves can be instantaneously solved when trying to figure out where we sit in a context, it's very contextual. That's cool. I think this is something they can build on.
Mary Long: We can't, of course, talk about AI without mentioning OpenAI, which hosted its own event earlier this week, on Monday. At that event, the Microsoft-backed company unveiled ChatGPT 4o. The o, in case you were wondering stands for Omni. This version is app-based, which is new for ChatGPT. It's also incredibly conversational. It can change its tone, you can show it a video of yourself and it can decipher your emotions. It can analyze math problems through a video feed. I am not the first person to make this comparison, but it sounds and acts a lot like Scarlett Johansson's voice-only character in the 2013 Spike Jones movie Her. Another comparison you can't help but make is that between ChatGPT 4o and Project Astra. Based on the teasers we've seen and recognizing that these announcements were only made in the past two days. Are there any key differences between the two technologies that right now stick out to you?
Asit Sharma: The biggest difference that leaps out to me, and you mentioned it is just this conversational ability of ChatGPT 4o. You can direct it to change its tone to be more conversation and it really looks and feels like you're having this reasoned conversation with another party. It's less funny AI voice and more natural human conversation that you don't see in Project Astra because that right now is more focused on the image to text and other modalities. This is a modality that's really built to have a conversation with. In that sense, it's pretty cool, although many of the things the two technologies are trying to achieve are the same. You'd find out about the world through asking a question. Here, the question is geared to be voiced by a human. The fact that OpenAI, which has a lot of engineers who worked with Google's DeepMind. This has been an obsession of different people in the AI-industry going all the way back to the 1980s. Could we get to a point where we're not just making connections via algorithm, but we're producing answers in a way that seems very natural to a human. This starts to scrape the surface of that so that just looked to me like something which is almost like a Siri killer. [laughs]. We'll see. Just to drag Apple into this, what happens?
Mary Long: The conversational abilities of it are pretty impressive. You can ask it to sing for you, and there are videos in the demos which some of these things with Project Astra and with GPT 4o, are better experienced and seen than maybe they are described. I'll include links in the show notes to demos of each. But in one of the demos for GPT 4o, the demo'ers are asking it to be more sing song, to be more of this.
Mary Long: It's pretty amazing to watch the technology adjust itself accordingly. Asit, thanks so much for the time for talking, big picture stuff, and more personal stuff with me today. I appreciate it and talk to you again soon.
Asit Sharma: Thanks so much Mary. This was a blast.
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Mary Long: You just heard from Asit Sharma, an analyst on our flagship service Stock Advisor. When Asit's not talking stocks on Motley Fool Money, he's looking for and analyzing high-quality companies that can potentially beat the market in the long term. If you're interested in more commentary from Asit plus access to Stock Advisor, full stock scorecard, and our daily subscriber-only live stream. Visit www.fool.com/asit. I'll throw a link in the show notes for you too.
A week ago, Boston Omaha, a holding company touted as a baby Berkshire, had two co-CEOs. Now, one remains. Motley Fool contributor Jason Hall joins my colleague, Ricky Mulvey, to discuss how this shakeup changes the thesis for Boston Omaha investors.
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Ricky Mulvey: We're going to get into how the thesis around Boston Omaha has changed with Rozek's departure. But set it up, what was the original thesis for investors buying Boston Omaha stock? Like myself.
Jason Hall: It gets tossed around baby Berkshire. We're always looking for the next Berkshire Hathaway Company where you have really good capital allocators. [inaudible], Charlie Munger was the partner for Warren Buffett. They're taking your money as an investor in the company, finding great businesses to acquire, building great operating Holdings, subsidiaries that generate great cash flows, and then using those cash flows to go out and invest, buy more operating companies, but also buy Coca-Cola and American Express 30 years ago. Buy Apple, when it's trading for 15 times cashflows. Those things. We're always looking for the next one, and we thought that was the idea with Boston Omaha. That was a big part of the thesis. Interestingly enough, we throw the baby Berkshire thing in there. Alex Rozek who is the Co-CEO, who is no longer with the company, well, guess who his great uncle is. None other than the Oracle himself. We branded these guys very early as great young capital allocators, deep skin in the game. They're going to invest our money for us and they're going to allocate it well, and they're going to help us build wealth.
Ricky Mulvey: The results of their capital allocation skills are still an open question with not the best performance if you look on basically any time-frame. Co-CEO Alex Rozek is out. That takes away that Buffet comparison. But here's what bothered me about it, Jason. The press release came out a day after he left the company. I like to hear about CEOs leaving before they leave the company, so you know there's a nice little transition going on. I'm taking this as a red flag, are you?
Jason Hall: It's a yellow flag. I will say the timing of the press release really changes it a lot because it's very par for the course for this company. They're very quiet. Again. It's the inevitable Berkshire comparison. They just think similar. They don't do calls with analysts on a quarterly basis. They hold an annual meeting, they issue a press release, they drop their 10K and they dropped their annual report, and then they have a big deep, well-written annual letter to shareholders, kind of that similar model. It's not a surprise to me at all that this is how it unfolded. Again, I think part of it too is we have a CEO in place that was the CEO before this happened, he's just no longer the co-CEO. The hand and the rutter is the same, so there's less concern about managing through some period of transition where you need, maybe it's good for investors to know in advance of that, so you're not a little concerned about it. I'm not so concerned about the timing, but I'm very concerned about what does the future of the company look like as a result of this massive change in how they plan to allocate capital going forward.
Ricky Mulvey: Maybe I should put my red flag away. Maybe that was a little hyperbolic. I'm putting that away. I'm going into my [inaudible]
Jason Hall: It's going to be a yellow flag. Even two yellow flags.
Ricky Mulvey: This also begs the question of; you have two CEOs, you have one standing, one leaving. Why do you think Alex Rozek is the one taking the departure and Adam Peterson is the one who's staying put?
Jason Hall: I think there's a couple of reasons. If you think about it just from a structural perspective of Boston Omaha, the assets that it owns, the market value of it, it's trading for a discount to book value. Possibly that's a discount to the actual net asset value, the actual market value of those assets. There's questions because they have $190 million in goodwill, but I think the assets are probably worth more than the stock's trading for and interest rates have skyrocketed. If I'm Adam Rozek and I'm this hunter, that's going out there looking for acquisitions, looking to grow the business, that way, it's not an attractive vehicle for me if we're being honest. You have these existing assets that are in place, they're generating cash flow. It seems like Adam Peterson is more of the farmer. He's the one that wants to take those existing assets, leverage them as good as possible, take care of those assets, and then take the produce that they generate, the cash flows that they generate, reinvest back in the business. Acquire more billboards, bolt-on an insurance agency expansion, if that makes sense for the surety insurance business, expanded the new neighborhoods with the fiber network, not go invest in a start-up homebuilder. Let's give Rozek and Peterson both some credit.
They've had some successes in that way. You think about Dream Finder Homes and Sky Harbor. They invested some things that went public. They made a ton of money on those things. They still own some Sky Harbor, but they're completely sold out of Dream Finder Homes. Besides those things though, the core operations of the business so far hasn't been a cash cow, doesn't make sense for Rozek. Then you factor in this thing, that I think is even more important. Philosophically, Adam Peterson has a bigger economic interests in the business. They both own a similar amount of the super-voting, non-traded founder shares that they have. It's over 50% for Peterson, just a tiny bit under 50% for Rozek. But then, in the common shares that you and I can buy on the market, you factor those in, and Peterson has got a far larger economic interest in the business. Makes sense that he would be the one that would stay.
Ricky Mulvey: It could also be seen that the interest rates have affected this company, especially for someone like Alex Rozek who wanted to go out and hunt acquisitions. That becomes a little bit more difficult when the cost of capital rises.
Jason Hall: Yeah, it's a double-edged sword. Your stock is too cheap to use it as capital, and then capital is too expensive to use it as capital. Taking on debt is a real challenge. No matter how you'd learn to try to leverage and grow the business, it's a tough time. Margin of error is much tighter to try to make good acquisitions. There's a lot of reasons why that previous model is not best-served for this business at its current market value, discounted to stop to its book value. Here you go. Rozek's out.
Ricky Mulvey: You've mentioned book value a couple of times. What is what is Mr. Market saying about Boston Omaha by having its market cap trade below its book value? For those listening, it's just the assets minus the liabilities.
Jason Hall: The short version is, I think there's two things the market is saying. The number one thing that I think they're saying is you haven't shown us the growth. We don't fully believe in your business model because we haven't seen high high rates of return. I'm not talking about the stock price, I'm talking about returns at the business level, generating cash flow and earnings growth. You haven't demonstrated the ability to generate returns. We're not going to pay a premium for business that's not showing the ability to generate returns. The other thing that the market is saying I mentioned earlier, that 180- $190 million in goodwill. That's on the books. Goodwill is price that you paid above the market value of an asset to acquire that asset. Because you think it's worth more, or do you think it's going to generate additional profits for a long time. I think the market is probably also taking that goodwill and discounting it from what it thinks that the business is worth. Because, well, if you haven't generated returns, it's going to be very questionable about the price that you've paid for assets in the past being the right price. Put it together and you get a business is trading for a discount to market value. Again, I think that it's probably a discount that's an opportunity for investors if Peterson can deliver. Because if you look at the operating cash flows of the business, they've been OK. Not great, but OK. The market has questions for good reason. I think that's the main thing to remember.
Ricky Mulvey: We talked about the thesis at the beginning, which the company is going to use your capital to grow businesses and go out and build their own businesses, and things like billboards in broadband. The thesis has changed. You've written about this, where the goalposts have shifted. Now if you're buying Boston Omaha shares, it's a little bit less about the capital allocation and more about a bet on Adam Peterson being able to grow the businesses he already has.
Jason Hall: Yeah, that's exactly right. Again, we mentioned a couple of those early investments the company made that were big wins for companies that went public. But we haven't seen just to focus on the core business without the distraction of those external focused investments, and again operating in the long term through the interest rate environment we're in, where you really have to be more disciplined about how you allocate capital and be thoughtful about how you expand to live within your own means, to live outside of your own wallet and not going with your hat in hand to use somebody else's money. It's clear if you look at everything that's been said by management and the press release, if you look at the the filing that they did, they broke everything down. Peterson's laser-focused on that. He's very laser-focused on living within cash flows, being very thoughtful about future investments being within those core three businesses that their in. To me either way, I think about this right now is that because this is such a big change and it has happened so seemingly overnight, even though we got some signs that it was coming because they closed the asset management business and that sort of thing earlier this year. It's definitely proven time where Peterson needs to demonstrate over a few quarters of steady hand at the wheel, being mindful about costs, taking those cash flows, and being thoughtful about where you reapply them into the business to generate a positive return for investors.
Ricky Mulvey: Based on what you said, you think there might be a little bit of a discount going on with the valuation. It doesn't sound like you're a seller of Boston Omaha stock. That leaves the other two options. Are you treating this dip is an opportunity to buy? Are you a buyer or are you holding on? Are you waiting and seeing how Peterson's approach works out for this company?
Jason Hall: I think most investors, the best thing to do is give Peterson a chance to earn capital. I have a, I guess you'd say a full position for myself. That context is really important for what I'm doing. Anybody that's listening to this, think about what they should do. For me, it's time to hold and just watch and learn and let them demonstrate the ability to execute based on this new strategy. Some investors out there maybe if you're a little more out on the risk curve and you willing to take the risk that the business is trading for a discount to book value, but the assets probably aren't worth that much, so it's really a fair value right now to find out if we have the right operator or not. Nine years having a partner to bounce ideas off of them. Even though maybe divergent styles, that's a long time to no longer have that person in your corner. Probably most investors should just be waiting right now. I think that's what I'm doing. But more risk appetite investors may be an opportunity to think about the discounted asset. But again, I don't want to say turnaround because it's not really a turnaround. But discount with the caveat that well, could be a value trap.
Ricky Mulvey: Jason Hall, thanks for coming on, and I appreciate your time and insight on this.
Jason Hall: I'm glad to be on this. It was fun.
Mary Long: As always, people on the program may have interest in the stocks they talked 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 Mary Long. Thanks for listening. We'll see you tomorrow.
