In this podcast, Motley Fool analyst Asit Sharma and host Mary Long talk about abandoned acquisitions, AI, and robotaxis while looking at earnings reports from Alphabet and Tesla.
Then, Motley Fool contributor Matt Frankel and host Ricky Mulvey check in on Boston Omaha, a holding company that recently lost half of its CEO team.
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 July 24, 2024.
Mary Long: We're between two waves. You're listening to Motley Fool Money. I'm Mary Long, joined today by Asit Sharma. Asit, lovely as always, to have you here.
Asit Sharma: Great to be here, Mary.
Mary Long: We're going to get to earnings from two big names in just a minute. But first, one of those big names is Alphabet, and they faced a pretty public rejection yesterday, so I wanted to hit that before we dove in. Last week, the company had made a $23 billion offer for Wiz, which is a Cloud security start-up. That offer was nearly double Wiz's current valuation. But yesterday, Wiz walked away. Turns out they would rather be alone than couple up with old Google. So my first question for you on this fine Wednesday morning, what's Wiz got that Alphabet wants?
Asit Sharma: Well, number 1, Mary, they've got a cool name. It's the other end of the Alphabet. It's a lot more appealing than Alphabet Wiz. It reminds me of the movie, the Wiz. Other than that, they also have a cyber security piece. That would play well with Google Cloud Services. If you're on Google's network, then you might as well buy into security services. Amazon Web Services does this Azure has its own cyber security piece. This would have been a nice little tuck, and I say little just because Alphabet's balance sheet is so big tuck in acquisition. But, for Wiz, when they examined the deal, even though the money piece was good. Just the threat of antitrust coming in, the regulators saying, this isn't going to work. You get tied up for a year or two years. Just look at Figma experience with Adobe. That might not have been worth it for them. I think also they got a little bit of encouragement from seeing the stumble that CrowdStrike had last week and said, let's head for an IPO and make some money there. This might be an opportune time for us.
Mary Long: You mentioned that Wiz acquisition that would have strengthened Google Cloud business. But per yesterday's earnings, that segment seemed to be doing just fine on its own. Nearly 30% increase in revenue for Google Cloud segment. So they raked in about $10.4 billion good amount of cash, but that still pales next to AWS and Azure, which each did more than $25 billion in revenue in the first quarter of this year. Seeing that the Wiz acquisition is off the table now, what does success look like for Google Cloud?
Asit Sharma: I think that success looks like quality over quantity for Google Cloud. Sure, their business is much smaller than their two biggest rivals. But what they're thinking through is the cost of all this acquisition of server equipment of GPUs in order to serve up artificial intelligence over the Cloud. For them, it's not some arms race to just catch up in terms of revenue. At the end of the day, the customer is going to want to get the highest ROI on a Cloud spend that's infused with AI. You're going to have to convince the customer that they can get a better experience, faster inference for cheaper with you. You do that by investing smartly, not just trying to build the biggest infrastructure you can. Alphabet executives talked a little bit about this on the call, the fact that their CAPEX spend is a lot bigger. It's 50% more than it was this time last year, but they don't see this indefinite march to never ending CAPEX. What they want to do is to build the correct system. They've got an edge here, Mary, because they have a lot of in house AI expertise. Really, they had a much more robust generative AI offering than OpenAI did. It's just OpenAI went public first and the Arms started. I think it does look like more about profitability than than anything else.
Mary Long: Cloud is not Alphabet's largest business segment. What did investors learn about Google's ad business from this call?
Asit Sharma: I think the ad business is surprisingly strong. Google Search is a big digital advertising driver for Alphabet, and that was extremely healthy. It's a huge chunk of their business. YouTube, which also looked healthy actually showed a little bit of deceleration, so ad revenue from YouTube. I wondered about that because the Trade Desk Jeff Green has been saying for a long time that at the end of the day, advertisers want to spend on quality content, long form content. They think that there are more people that will buy their products if they place Ads in like, connected TV venues versus short form video. He's been tagging YouTube as a short-form video. Place for a long time. For most of us, it's the opposite of that. We've gone to YouTube for learning about things. If I need to change something under my sink, I'm going to go to YouTube. Well, really, I'm going to call a plumber because my previous results have been disastrous. But we're seeing this younger demographic flood into YouTube, and they're all into that short form content that feels very much like other social media TikTok Instagram, you name it. I think that degrades the advertising ROI for some advertisers. I'm really curious to follow YouTube search revenue for the next I don't know year or so, see what happens there.
Mary Long: Now, when you mentioned CAPEX spend and how that has just increased so much as Google invests in AI. I'm seeing something interesting here. On the one hand, you have like this massive AI spend. Then the search results, you mentioned that there's a lot to celebrate there, but something else to note is that while search revenue rose 14% for the quarter, Google network revenue was down from last year. That network revenue includes the banner Ads that you see on websites. The roll out of Gemini, an AI product, means that you visit fewer of those websites that pay for these banner Ads. Google spending all this money on AI, but at the same time, it's eating its own tail. Do you think that that cost is worth it? If so, where does Alphabet go from here? What's next? Ads in AI search results?
Asit Sharma: It's such a great question. My dog knowledge is very small, but name me a dog that has a short tail. Poodle maybe.
Mary Long: Do Poodles have? No.
Asit Sharma: I don't know. I think we're both showing our dog ignorance here. Hopefully we'll get some angry letters from some dog lovers. I'm a dog lover, but let's put it this way. The tail is short. What I mean by that? If you look at this whole business, the Google Search plus YouTube Ads business was $50 billion this quarter Mary. Google network was about $8 billion. Google network is a third party network. It's the banner Ads you mentioned, whereas the Ads that we see in and around Google Search, that's the monster part of this business. We see Alphabet experimenting a lot with ad placement around Google Search. Ads above the little AI summaries Ads below. It really hasn't hurt their business, if anything, it's enhanced it. I think what they're saying is, we'll sacrifice a little bit of that network revenue for third parties because it's so much smaller. We're willing to go there if we can keep growing this other piece and not just be totally taken out of our own game by generative AI.
Mary Long: We've got Ricky writing in live to share some short tailed dog options with us. Wiener Dog, Boston terrier Pug. Which of those do you think Google most closely resembles?
Asit Sharma: Boston terrier pug in this analogy.
Mary Long: You mentioned the Trade Desk and Jeff Green earlier. As you think about the future of AI as it pertains to Google, what are the ripple effects for other ad companies there? The Trade Desk is down almost 9% this morning. PubMatic, I think, is down about three.
Asit Sharma: These companies have had a decent run. PubMatic had gone down to 14 bucks a share, and it's gradually come back, The Trade Desk has been having a pretty decent year. So we're seeing a confluence today of a few things. First of all, the market's very soft because big tech earnings, this is one of them, we're decent, but maybe not powerful enough to keep pushing this market to all time highs. You've got that bit of weakness there. Then there's a little bit of the softness in the YouTube revenue that I was talking about that I think folks are extrapolating. Now, for The Trade Desk and PubMatic long term, those companies are pretty well positioned for this future in which Chrome, are you ever really going to deprecate in which those cookies go away this deadline gets keeps getting pushed back and back. Some short term noise here, nothing substantial for the future of the really strong competitors, as you mentioned, The Trade Desk, PubMatic, Magnet, etc.
Mary Long: Speaking of deadlines that keep getting pushed back. Waymo just removed its wait list in San Francisco and it's getting another $5 billion from Alphabet, its search engine sugar daddy. GM just said it was indefinitely delaying its self-driving shuttle. This is when the delays come in. The Tesla Robotaxi launch also got delayed a couple of months. It was going to be in August, now it's set for October. When it comes to self driving, and we'll talk more about Tesla's ambitions here in a second. But is Waymo the leader in this space?
Asit Sharma: Right now they are the de facto leader. They have the biggest fleet that's operating now, that's in full mode. You can hail those Waymo taxis in several ZIP codes. The other thing is that Alphabet has been funding this, as you call it I think such a great term as a sugar daddy for a long time. It's one of their bets that they have stuck with. There's others that they've just peeled off from. Maybe they see that this as a sunk cost. They really want to preserve their previous investment, because it's so big in scale, they're willing to support it. Right now there is no other competitor. We've seen other companies pull back. De Facto leader in this space are now, Waymo, yes. I know you've got a very interesting question about another type of business that is poised to compete with Waymo in the future, maybe.
Mary Long: I promised two big names that we're reporting earnings up at the top. That other big name is Tesla, and it's self driving ambitions and the theme of autonomy. We're certainly a focus of yesterday's earning call. It's a big piece of that autonomy wave that they advertise as coming next in Tesla's future is Robotaxis. There's lots of talk about this yesterday. I don't doubt that Robotaxis and like the cyber cab network that's often been promised. I don't doubt that that's a cool concept. But I'm curious about the bull business case for it because I look at Uber and their market cap is about $141 billion. Musk has teased that this driverless taxi business could propel Tesla, which currently has a market cap of about 785 billion to a market value of $5 trillion. Walk me through this Asit. Help me understand how Robotaxis help Tesla grow by over 500%.
Asit Sharma: Mary, I don't understand it either. I cannot walk you through the bull case. I'll say a few things here though. I think for me, this is a 12 quarter exercise because first of all, this isn't really a product that's widely available on the market. It has to go through regulatory review. We have to see how strong the demand is. We have to have a number of business quarters to see if the Robotaxis have some unfortunate accidents which crimp their market potential. We have to understand how the insurance industry is going to underwrite this thing. There's so many unanswered questions, there's really no sense in making some $5 trillion business case by anyone except Elon Musk. He's an innovator and a showman in equal parts. It's typical Elon, there's nothing new there. I will say in general, the business case will rest on the efficiency of the artificial intelligence, the fact that without human drivers, the cost of such a service is greatly reduced versus a fleet service like in Uber, where you have human drivers. I do think this nexus of technology, low maintenance of the vehicles, the artificial intelligence could be a decent margin business if it gets to scale, but you need a lot of scale. Right now, there's really no immediate data that anyone has that could project with any reasonable certainty, this $5 trillion case. Let's skip that for now. Is my suggestion. Let's put a date on the calendar 2-3 years from now because that's 8-12 business quarters, and we'll talk when there are some numbers on the table. I'm not panning this service at all. I'm just saying that this feels very Elon Musk to me and it's a wait and see.
Mary Long: Apart from Robotaxis, was there anything else on this call that really stuck out to you?
Asit Sharma: For me, the continued emphasis on AI is big, but more important to Tesla investors for the immediate future is the sort of quasi-promise that a cheaper vehicle is coming. This is really what Tesla, the automobile manufacturer needs to do. There are some amazing vehicles being put out by BYD and China. Now, they won't hit our market anytime soon because of tariffs, but it shows you where this industry is going. It runs toward lower cost affordability. Hybrid models, give that to consumers today who want to buy from a number of manufacturers. I think Tesla is really lacked in some ways. Now, they will make arguments that their entry level models, when you figure in all consumer credits are low cost of ownership vehicles, which they are. But to get a price tag that entices the average consumer. That's something I feel like Tesla should have done sooner. I was happy to see that at least they still have that in their sites.
Mary Long: If you buy a management story, Tesla is currently sitting between two waves. The first wave was the launch of the Model 3, the Model Y, and this next wave is all about autonomy and this next-generation vehicle platform. We already hit on the Robotaxis and part of the autonomy piece of this, but I want to dive a bit more into what else this next wave might look like. Musk said that Tesla is going to double down on Dojo, which is Tesla's supercomputer, and he wants it to be competitive with Nvidia. What does it cost to build a supercomputer Asit?
Asit Sharma: The cost these days to build a viable supercomputer. If we're talking about the very latest, they start up around $1 billion because that's what it takes to string together several Blackwell complexes, Blackwell being Nvidia's most advanced super computing complex. At the scale Musk is talking about, you're talking about several billions just to play, that's the cost of playing here, especially for the needs he has between his humanoid robots, full self driving, other types of training he's doing on his model. I think what was maybe more to his point in the call was that they have to compete alongside Nvidia. Basically, they're buying Nvidia GPUs. They cost a lot, but they have so much already invested in this GPU complex, they have to keep buying. That was the subtext of what he was saying. What really about building a computer that would be competitive with the supercomputers that Nvidia can build. Nvidia built its own supercomputers, because that's the test case to sell it to enterprise businesses and hyperscalers. I think what Musk was really saying is we're in bed with Nvidia. We love their product. It's great. It's helping us, but we can't stop purchasing this, and we've got to now finish this project, else we've lost a lot of money. I was a really subtle threat that I was sort of surprised to hear running through there.
Mary Long: We've got cars, we've got Robotaxis. We've got supercomputers. Where do humanoids fit into all this?
Asit Sharma: Funny thing is when we saw the first humanoid robots on stage when they were unveiled by Tesla's models, that is, they seemed really clunky. But I was intrigued because they're always taking data from their own movements, and that's being fed back into Tesla's neural networks. I think from the sound of it, we're probably I'm going to guess three years away. What I heard last yesterday was that Tesla's going to take the humanoid robots and test them in their own environment. Because that's how they can really get better. That sounds to me, again, typical Musk speak for. It's at least another couple of years out. I think they'll run into just some more development issues. But within three years, maybe we see them commercially available. I could be wrong. It could be faster, but that's what I heard between the lines yesterday.
Mary Long: Asit, that's about all the time that we've got for today, but thank you so much for the time for hanging out with me this morning and for filling us in on what's going on over at Alphabet and at Tesla.
Asit Sharma: It's a lot of fun, Mary. Thanks so much.
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Mary Long: We just talked about two companies that have a lot to say to their investors. Up next, we look at one that's a whole lot quieter. My colleague, Ricky Mulvey checks in with Fool contributor Matt Frankel about Boston Omaha, a holding company in billboards, broadband, and asset management, with a lot of new questions.
Ricky Mulvey: When you were on for the A segment a couple of days ago, I wanted to chat with you about Boston Omaha, which is an asset holding company where there's been a lot of change. I would say now one of the more controversial stocks in the fool universe, and one I know that you follow very closely, spoke with Jason Hall about this fairly close to when one of its co-CEOs, Alex Rozek left But now I know that you're in a very different place with your relationship with the company, your thesis on the company has changed. Originally, this was an asset manager, owned a lot of billboards, building out some broadband, and you were betting on the CEO's ability to be capital allocators. How has the thesis changed since then with Boston Omaha for its stockholders?
Matt Frankel: Well, it's not just Alex Rozek leaving. If you're not familiar, he was the one who was Warren Buffett's grand nephew. If you ever heard of compare to the Baby Berkshire, which I never really loved that comparison, but he was the reason for that. In a way, I'll start with the positive, 'cause I always like to say something positive about any situation. The net positive is that I like the one CEO model. I wish they would have done it years ago. Any time you have two CEOs, you have to have two people agree on anything to get it done. Not to mention, not just that, you have two CEO salaries, two CEO bonus structures. With one, it's a net positive for the business and getting things done and things like that. That's what I'll lead with the positive. The reason the thesis busted has nothing to do with Alex Rozek leaving. It's because the most exciting parts of the business are arguably gone now with the exception of maybe Sky Harbor, which they own 20-something percent of Sky Harbor right now. But that's a publicly traded company. If I want to invest in that, I'll just buy this. It's like saying I'm buying Berkshire Hathaway just for Apple. Why not just buy Apple in that case?
Ricky Mulvey: Sky Harbor real quick. That's essentially, they have airport hangars where people park private jets.
Matt Frankel: It's a fancy airport hangers. They took the company public during the SPAC boom and it was actually one of the more successful SPACs that was done during that era. Very great business, great economics, and good execution so far. That's the most exciting part of the business right now. The billboards, broadband and insurance are the focus going forward. Now sole CEO Adam Peterson has made that clear that he sees the best opportunities in just compounding those three businesses. Whether you like those or not, they do have great economics, they're not particularly exciting. The company's insurance and broadband investments specifically haven't really done anything to impress me yet. That's really the problem with those. The big thesis buster is the Boston Omaha asset management business. They had some big plans, and it was really exciting the story they were selling their investors. The first one was raising outside capital to start a built for rent real estate business. The idea was they would invest a little money, but they would raise third party capital, and if they were able to deliver returns for their investors, they would get a percentage of the returns. Like a baby Brookfield or one of the big asset managers or something like that. I like that because if these investments go well, it's an unlimited ability to generate capital without putting up a whole lot of their own. They were not able to raise pretty much any money for that.They went so far as to say, we're going to spin this off into a real estate investment trust when it when it reaches scale, and we see a $400 million opportunity to raise for broadband infrastructure. They weren't able to raise any capital and have since said they're winding down that business. It was a whole lot of investor money down the toilet and building that part out. I'm trying not to be too salty about it. But, they spent a lot of money hiring people to run it.
Ricky Mulvey: I understand because this is a company that as of this recording I own shares of, it's a company that I know that you are heavily invested in, so it's OK to be a little salty when leaders say, we're going to do something and then that doesn't necessarily pan out. Are you excited at all about what remains with the insurance billboards and broadband business?
Matt Frankel: Sort of. It's not just that they couldn't execute on their plans. That happens all the time. Especially during tough economic conditions, you really can't fault companies for not being able to execute. Their communication was just terrible. They started the built for rent fund, I think two years ago, maybe even more. When they said they're shutting down the asset management business, and this year's annual letter was the first we're hearing there's an issue. That's really the big problem. The only reason I'm really excited about owning the shares right now is when I do a back of the napkin, like some of the parts valuation, I can't make a case that it should be a $13 stock. I just can't. I think it has some embedded upside in the business. It's the market's total lack of faith in the management. Understandably so that it's trading for what it is. My most exciting thing right now is it's a value business right now.
Ricky Mulvey: We were talking earlier. You said that, in my opinion, I was like the thesis changed when one of the CEOs left. You said the thesis changed two years ago, though. What happened two years ago?
Matt Frankel: Well, two years ago was when they separated Boston Omaha asset management as the fourth business segment when they decided they were going to raise outside capital. Essentially said, everything's fine every time they were asked about it. It's everything's progressing. We're happy with how things are going, things like that. That's really when the thesis changed because before two years ago, as you correctly pointed out before we recorded, they were a billboards broadband and insurance business. Now they're that again. They didn't have a SPAC before Sky Harbor started. They had a small asset management business, but they didn't have a third party capital business or anything like that. It's like they changed the thesis, made it a much more exciting story. Investors bought it and rewarded the stock for it. I think it shot up to about $50 at one point. Now the thesis is it's come full circle, with one fewer CEO.
Ricky Mulvey: The communication challenges for Boston Omaha continue to roll on, I would say. They are having an investor day in Omaha. However, there's no remote streaming for it. It's only going on in person. This is something that I find myself unhappy about because I would like to be able to hear about what's going on without buying a plane ticket to Omaha. But is this unusual? Does it signal anything to you?
Matt Frankel: It's not unusual, but they normally time it around Berkshire weekend, so people are in Omaha anyway. To be fair, they've done this before. Originally, this year's meeting was supposed to just be streaming and not in person at all. Then a lot of shareholders pushed back and said, wait a second, we like having our annual meeting in person every year. It's one thing we look forward to so they said fine. But we didn't mean instead of the streaming option, we meant in addition to. Still do the streaming, but have some people in the room if they want to be. You don't need to get rid of the streaming entirely. I'm hoping they'll reconsider Adam Peterson, his credit. I spoke with him on the phone a couple of weeks ago. He said improving communication is going to be a big priority has gone forward. He wants to do quarterly investor decks, which they never had. I wouldn't be surprised if he says, let's stream the meeting. Because we don't want the 99% of investors who are not going to fly to Omaha, that we don't want them to feel like they're being left in the dark.
Ricky Mulvey: I hope they do that. At this point with Boston Omaha as we look forward. What questions do you have?
Matt Frankel: I want to see what Adam Peterson does over the next couple of quarters. If I had to put the two co-CEOs in baskets. I'd say he is the capital allocator, the one who wants to compound businesses and things like that. Alex Rozek is the entrepreneur. He wants to go into a new business line. He wants to see what they can do and build for rent housing. He wants to explore all these different avenues. Adam Peterson's more the compounder, and so I think the right CEO remained. So I'm willing to give him a few quarters to see some progress, but I want to see some progress if I'm going to stay invested in the company.
Ricky Mulvey: Who's his great uncle, though? Anyway. Matt Frankel. Appreciate you being here. Thanks for your time and insight.
Mary Long: 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 Mary Long. Thanks for listening. We'll see you tomorrow.
