In short
BG2Pod Episode 12 Summary: Tech Stocks vs the Rest; AI VC Bubble, Calcium CT Scan
Podcast Information
- Title: BG2Pod with Brad Gerstner and Bill Gurley
- Episode: Ep12
- Description: A bi-weekly conversation covering topics in tech, markets, investing, and capitalism, focusing this week on the presidential election's impact on public markets, AI, and healthcare innovations.
Episode Timestamps
- 00:00 - Intro
- 03:50 - Public Market Dispersion (Mag 7 + Consumer Stocks)
- 22:05 - AI Costs vs AI Revenue
- 47:25 - Calcium CT Scans
Main Discussion Points
- Public Market Overview
- Political Climate: The ongoing presidential campaign's impact on technology funds and market activities.
- Upcoming Republican and Democratic conventions signal heightened political engagement affecting market sentiment.
- 90 market days until the election; funds are aligning strategies accordingly.
- Market Performance:
- The "Mag 7" (top technology stocks) have seen a significant rise, with NASDAQ up 20% for the year.
- Concerns over potential market pullbacks due to political uncertainties and upcoming earnings reports.
- Active vs Passive Market Dynamics:
- Only 11-12% of large-cap tech trades are from active managers, highlighting a shift towards passive investment strategies.
- Despite the high performance of tech stocks, many hedge funds are currently underweight in growth stocks.
- AI Hype vs Reality
- AI Investment Landscape:
- Discussion around whether the current expectations for AI revenue match the investment levels, referencing insights from prominent firms like Sequoia and Goldman Sachs.
- Critics argue that the AI bubble may be driven by unsustainable hype, with a significant gap between expenditure on AI and realized revenues.
- Scaling and Investment:
- The episode highlights the debate on whether AI scaling follows linear or diminishing returns, with skepticism voiced regarding the long-term viability of investments in large models without direct returns.
- Healthcare Discussion: Calcium CT Scans
- Awareness and Adoption:
- Discussion on the importance of calcium CT scans as preventative care for heart disease, akin to mammograms for breast cancer.
- The episode emphasizes the significant number of women who die from heart disease compared to breast cancer, yet the latter receives more attention.
- Barriers to Standardization:
- Analysis of the political and economic factors preventing calcium CT scans from becoming standard care, highlighting insurance company disincentives and existing medical lobbies.
- Personal anecdotes from both hosts illustrate the potential life-saving benefits of obtaining a calcium CT scan.
Key Takeaways
- Investment Trends: The technology sector, particularly major players in AI, shows strong performance amidst a politically charged environment. However, the sustainability of this growth is questioned.
- Healthcare Advocacy: There is a compelling argument for making preventative measures like calcium CT scans more accessible, potentially saving lives by identifying heart disease risk early.
- Market Sentiment: A cautious but optimistic view is suggested for investors navigating the current landscape, advocating for a balanced approach to risk management in light of upcoming uncertainties.
Conclusion The episode wraps up with a reminder that the discussions are personal opinions and should not be taken as investment advice. Through the lens of tech and health, the hosts illustrate the complexities and potential futures of both sectors, urging listeners to stay informed and proactive in their decision-making.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00People talk about the military industrial complex. We may have created a healthcare industrial complex that really can't stop maximizing profitability and different ways of making money and not focus necessarily on the lowest cost best most preventative process. First, that would be my guess as a governor.
0:38Hey, Bill. Hey, Brad, how are you doing, man? Did you enjoy the summer? I, you know, it's a good start to summer. I was down in DC. I picked Lincoln up from an internship in DC. I guess just over a week ago now, you know, it was actually the night of the debate. We hosted a poker game on campus. We had a lot of people in the Capitol Hill and we had members in the game from both sides of the aisle and we're kind of watching the debate in the background. And it was pretty wild because, you know, we got through as we're watching the debate, you know, nobody was really surprised at what was happening.
1:12You know, the biggest surprise of the night is nobody was surprised. They're like, oh, yeah, like this is, this is, you know, the condition of the current president. And yet, you know, so I, we ended the night and ended the debate and I thought like there was not a lot to see here because we've been talking about this for months. And then of course, we had the fear of the last couple of weeks. You know, so that was good. And, you know, seems to me the last few weeks have been like all politics all the time, every, every, every pod, every show. You agree? You know, and I looked at the calendar where a few days away from the Republican convention, it starts next Monday in Milwaukee, which is really the kickoff of, you know, the, the final push in the campaign.
1:57The Democratic campaign I looked is five weeks from now in Chicago. So it's interesting. Sometimes they're closer. And this time they're about five weeks apart. And then I counted up, we have 90 trading days until the election. So 90 market days until the election. And so I thought, you know, maybe we kick off here talking about how funds are positioning, particularly technology funds in the public market are, are positioning ahead of the elections. Do you, do you believe people are weighing the elections as a critical factor in what they want to be doing, what their funds? For sure. For sure.
2:35But we'll get into that a little bit because I, you pushed me a little bit on, you know, how much markets are moved by active versus passive dollars, et cetera. And then of course, you and I have been talking about a lot of our friends are talking about. I think the biggest debate of the summer in it, in AI continues to be the thing. You've been talking about, I think for quite some time on this pod, which is, you know, is the AI hype ahead of the, ahead of the meat do you know, is there, is there beef on the burger? You've been making the case that, you know, the spending, I think, and some of the commentaries out in front of the AI benefits.
3:09And we've seen, and we'll dig into, I think a lot of articles out this week on this. And then finally, maybe, you know, it was about a year ago that I was talking about a topic near and dear to me, this calcium CT scan and why it should really be standard of care for people over 35. I sent you a video, you know, on, on some of the politics of why calcium CT scan, partly because of stent and partly because of other things. I didn't become the standard of care. And I thought, you know, maybe just as a little bit of a summer wrap, we'd revisit a couple of topics on that that have come up. Okay, sounds great.
3:48That's awesome. Do you want to lead us in? Yeah, I mean, tell us, tell us where you think the markets are right now. I, I agree with your point that politics have dominated the conversation so much. It's almost like people aren't even aware of whether the NASDAQs up or down in a given day or a given week. It's not really on people's mind. Tell us what you think is going on. And then I do want to dig deeper. There's a lot of data out this success that suggests consumer discretionary spending is dropping pretty precipitously. And I'd like to get your feedback on that. Yeah, well, let's get into it.
4:24I mean, it is, it is wild, right? Like AI stocks continue to perform really well, though, I think mag seven NASDAQs now up 20 % on the year. We have Mike Wilson, you know, of Morgan Stanley fame who called the 22, you know, crash, come out and say recently he thinks we're going to have a 10 % pullback ahead of the election. But yet the people who did the selling may and go away, that was a pretty bad idea because May and June and early July have continued to move pretty meaningfully higher. But you know, if you ask me to prognosticate on kind of what I think's happening, you know, listen, the market's pricing in now 60 % chance of a Trump victory.
5:07Right. And with that, they're pricing in the permanence of corporate tax cuts that we've talked about before represent 20 to 30 % of the earnings growth since 2017. So this is a really big deal as a reminder to everybody that the tax cuts that were passed in 2016 that went into effect in 2017 those terminate by design next year, unless they're renewed. So they terminate at the end of next year. And so that would be a significant headwind of markets. And so I think as, you know, as Trump is kind of surged in the polls. The permanence of those tax cuts have also come, you know, into focus. And then I think the other thing is the markets now pricing in a 73 % chance of a rate cut before the election.
5:59So we have two Fed meetings before the election. We have one on July 31st and we have one on September 18th. And the Fed's been dropping some breadcrumbs right referencing things like the slowing in the discretionary spending bill referencing the fact that we've seen a tick up in the unemployment rate, referencing, you know, the fact that core PC continues to roll over. It's given itself, I think, a window here to begin to cut rates. And remember, the market's most interested in that second derivative. Are we going up or are we going down? And I think the market's pretty well convinced that rates are going down.
6:36And so the economy is slowing, but it seems like a bit of a soft landing. And so that's the setup. And that's why I think we've seen such elevated performance out of big, you know, big cap tech. You know, but we have Q2 earnings starting in two weeks. And I think this is going to be a really important earnings season. You know, is it going to show acceleration, right? The reason stocks have been going up is because earnings have been beating. You know, will it again occur, you know, in this quarter, I think there's a chance that this may be one of the trickiest quarters where the expectations have now creep far enough ahead.
7:15There's going to be a little bit difficult for expectations to keep up with them. But I pulled a little bit of data, you know, courtesy of our friends at Morgan Stanley, Ashton Curtis, you know, he sends out this, this, this weekly email. You know, he had some data in there last week that I thought was interesting. So he said, may and June have been two of the top three largest months of tech selling since 2010. Right. So I feel like there's a view in the world that, you know, everybody's crazy about tech and everybody's crowding into tech. But here, I'm here's some data that supports the opposite view.
7:54So long short equity funds have been adding to their tech shorts tech exposure has fallen to the bottom desial over the last year due to outsized selling. And semi conductors and semi stocks have driven most of the net selling during these months. And overall hedge funds are more underweight growth than at any point Morgan Stanley has seen in the last 10 years. What do you think is causing that? Well, you know, we've had this huge run up unabated over the course of the last six quarters. And I think that people are just saying, listen, we've got uncertain elections coming up. We've got an uncertain earning season.
8:36The margin of safety is compressed. So whatever number of units of risk you want to have on, you're going to take a few of those units of risk off. Right. If you've been, you know, like we're having a good year this year, there's no need to be heroes over the course of the next. There's that money go, Brad. It's got to go someone. Well, you know, it's just gone into dry powder. You have more cash on the sidelines. You have more ability to buy on any of these pullbacks. And so, you know, I think you see that through some of this active selling, but Bill, you asked me a really important question and I sent you some data on it.
9:12You know, you said, how much signal is there in the fact that you and, you know, co -to and Tiger and other people, capital group, maybe buying or selling you said, what percentage of that action today is active versus passive. Do you see that chart? I sent you got it right here. And was that a surprise to you? Let me hear the your analysis on top. Well, I mean, you know, so basically what it shows is that about 11 to 12 % of the dollars in large in large cap tech think mag seven are quote unquote active dollars. So think long only and hedge funds. Yeah. So if you would have looked at this in 2010, that would have been above 20%.
9:55So clearly today fewer dollars that are being traded in the market. One out of $10 is what you would call a fundamental manager. Right. Somebody who's sitting there running numbers. And this is obviously higher for the max seven because they're so big. And so if you're buying an index, you're buying more of them than you would have on a on a percentage basis. I think that's I think that's probably true. And so I guess the point would be or you know, the pushback that you gave me is, yeah, these are interesting data points out of Morgan Stanley, but it may not tell the whole story because it fun flows continue to come in.
10:37Right. If people generally are saying we're going to we feel good about the markets. We want to continue to invest in our 401ks. We want to continue all of these dollars passively flow into these ETFs. And so fun flows have continued to be strong as markets have gone up. So there was this tweet, you know, that that you sent me, which is kind of the tale of two cities, right. And it's what you referenced earlier. If you look at consumer stocks from McDonald's to Nike to Lulu lemon, so far, Walgreens, Papa John's just in the last week, they all hit 52 week lows. Right. And then there's a group of stocks, which is casual dining stocks, which are, you know, really that min market, that min market to PF chain times.
11:26Exactly. Yeah. Exactly. And the Papa John's of the world that are down, you know, 30 to 40 % on the year. And remember, a lot of what happened here, Bill, is this is the poll forward that happened in 2021 because of COVID. We had huge build outs in these businesses earnings went from flat to really accelerating in these businesses. And everybody started valuing them at kind of peak multiples, like they were growth stocks. And then what we have now is oh, got a little dog action over there. What we have now is them really just normalizing, I think back to trend. And so, you know, I think we have a good chart here, courtesy of Goldman Sachs, which shows the earnings growth over the course of the last 12 months.
12:16So if you look at it for Microsoft and video Amazon Google meta, earnings are up 38 % over the last 12 months. And the stocks not surprisingly are up a lot. If you look at the S &P 500 as a whole earnings are, you know, roughly flat during that period of time. And if you look at, if you take out those text stocks, the other 495 earnings are actually down 5%. So that's the reason there's this massive dispersion in the public markets and the reason shorts have worked so well this year is you could be short hundreds of these S &P stocks that are actually down on the year and long just the mag 7 and you'd be having a terrific year.
12:59Is there is in your mind, is there a not an implication of this that is a question about the broader economy? I also saw a someone had tweeted out some credit card data and one of the things that was down year of year was travel a sector, you know, quite well. So is there is is is part of what's happening with these casual dining and these consumer stocks a lack of spending is that something you're worried about? First, I mean, listen, we everybody, if you look at folks other than, you know, wealthy folks in this country, they burned through their stimulus checks, right, their excess savings are gone.
13:45Credit card borrowing is hitting, you know, every single month, a new high. And so I think you're seeing the results, people are just having to make trade offs. And you know, travel happens to be one of the last things people want to trade off, right, they'll forgo the new refrigerator, they'll forgo eating out every night before they'll forgo their summer vacation. But yes, that's even being touched. So this is exactly what the Fed wanted to orchestrate, Bill, right, it wanted unemployment to go up. It's getting unemployment to go up. It's getting consumer spending to slow down. It's why they're in a position to cut rates.
14:22And the gift that the markets had really is that at the same time, like we would otherwise be talking about a recession, but we had this surge in infrastructure spending around AI, right, gave life to all of these technology companies. And one of the things that you know, we're going to put this chart in here, one of the things that you asked me is, you know, is the big PE, you know, names are they overvalued. And so I asked my team to go through an exercise, look at the peak multiple that they were trading not in 21, q4, 21, look at the trough multiple, they were trading not in 22. And then where are we today, right.
15:03So, you know, take apple, for example, it is peak in 21. It was trading at 28 times. And it's trough last in 22. It was trading at 22 times today, we're at 32 times. So we're above peak for apple. 32 times for P forward P. Yeah, okay, consensus forward P in the case of meta. Yeah, right. Through them all just because some people will be listening. Where are they? Yeah, in the case of meta, right, in 21, you were you peaked at 22 times, we troughed remember at 90 bucks a share in 22 at 12 times. And now we're back at 24 times. Okay. In the case of Google peaked at 24 times trough to 17 last year.
15:49Now back at about 23 times. In the case of Amazon, we peaked at 64 times. Right. In 22, it got as low as 46 times. Now we're at 33 times. So Amazon is actually as a multiple of earnings trading below where it was during those periods. And it's why because they've been cutting costs, et cetera, and driving earnings as growth is slowed. In the case of Microsoft peaked at 37 trough to 23 were back at 35. You know, so you get the point here. In the case I skipped in video 66 times was the peak the trough was probably the start of this year actually at 20 times. And now we're on consensus number back closer to 40 times.
16:37And so if you look at these, I think you can make an argument on both sides, Bill, we certainly are nowhere near the trough. But these don't this doesn't feel to me like the stuff that bubbles are made of, right. I can make an argument that you could these things could all be down 10 % in the next three months and none of them would be screaming buys right. Right. Well, none of them are in the territory where I expect that they would be down 30 or 40 or 50%. You know, they're not trading at hundreds of times sales like a lot of software companies, you know, we're at the end of 21. And so I think that, you know, as we sit here, I think it's a tricky moment.
17:21There may be an earnings air pocket in this quarter. I think it's there's less margin of safety in this quarter than prior quarters. We got the uncertainty of the election. So, you know, if I were playing from home and have a little less on, take a few units of risk off the table. But ultimately, I can paint a pretty bullish scenario for you, right. How do you, how do you, how do you frame the fact that, you know, it's the same thing we've been talking about for several quarters now where you've got these seven stocks that are performing right there performing from an earnings growth standpoint.
17:57From a cash flow free cash flow standpoint yet, you know, what we just talked about the rest, the entire rest of the market's not so what does that mean? Do you have to own them because they're the only thing that's working or, or is it scarier to, is there anything about the fact that the rest of the entire rest of the S and P isn't working that should cause concern. Yes, I think it should cause concern other than the fact that the Fed is in a very inviable position from a monetary policy perspective to cut rates and add some juice to the economy when it needs to. And I think that's what's going to happen, which is part of the bullish scenario, right.
18:42The market is saying there's a 73 % chance the Fed's going to cut rates and the reason for that is unemployment's ticking up and you have 490 stocks whose earnings are not growing. And that is a recipe for more economic distress if we don't get in front of it. How do you, if you're looking amongst the seven, are you, are you willing to be curious if you're willing to make a comment like which one and maybe with the backdrop that AI might be driving some of these, which ones feel safer to you here. It's a good question. Well, first to say we own them all. Okay. And, you know, the second thing I would say is altimeters peak exposure to these names was about 70 % over the course of the last 12 months.
19:33So we had 70 % of our dollars at one point in time in these names. Remember, at one point, I had 30 % of my dollars in meta alone off of the bottom. So we had a lot of these names. We've taken a lot of, you know, almost half of that off the table. Now we haven't redeployed it further out on the risk curve because for all the reasons you and I talked about, I'm nervous about things further out on the risk curve. But that's just, you know, drive powder. What I would say here is, you know, again, if I turned the tables on you bill and said, you and I've been doing this for a really long time. And do you think more money has been lost trying to time these things or made by timing these things?
20:18And my, my instincts here, or you can't just like totally be out of this market. If you have, you've missed a tremendous move over the course of the last six quarters. And the bullish case I was going to make to you is I think, you know, if the market, if the Betty market is right, there's a 60 70 % chance of a Trump victory set the politics of that aside. But that means you're likely to get a permanent tax cut at the same time that you're getting a reduction in rates. Right now imagine if you get a resolution to the conflict in the Ukraine. Now imagine if three or four quarters from now, some of these AI benefits start catching up with the software companies and their investments.
21:02Right. That is a highly constructive scenario that you would want to be invested against. And so, you know, like, I don't think you have to be all in all the time. But I think that's what this market is beginning to sniff out. And that's why, you know, after a blockbuster year for technology last year, you're having another good year this year. My quick reaction would be that meta is somewhat unique in the group in that if if there were a air pocket, you know, or something that came out of the LLM, AGI world, they're not really, I mean, they're playing with open source models, but they're not really dependent on it.
21:44And their core AI use cases and even LLM base that's driving their ad matching. And their content engine. So seems like seems like they get all the good without any of the risk. And anyway, for where it's worth. Yeah, I know I think listen, I think that there's a maybe good time to shift to this conversation about AI costs being way out in front of AI revenues and whether or not that constitutes a bubble. But certainly meta is, you know, however you want to define it, it's one of the most profitable AI companies in the world as is by dance TikTok. But, you know, you've been saying for some time.
22:26And who knows what I don't have a strong point of view on which candidate is more likely to follow through on something on TikTok, but that would obviously be a massive boom for Facebook and meta if it happened. No doubt, no doubt. That's a, you know, again, if we look at the calendar, that's something else that, you know, the clock's ticking on. I mean, shortly after the election, or I think shortly before the election, the ban is meant to go into, you know, affect. Now, I think it is in the court. So maybe there's a stay of execution there. But there are a lot of things that are, you know, potentially going to drop here.
23:07And that this election is going to have a lot of consequence on coming back to this topic of AI, you know, it's interesting to me. You and I have been talking on this pod. I remember when we went over the $2 trillion build out for in video over the course of next four or five years. And you asked the question some six months ago, what the hell do you have to have in terms of revenue on the other side of this in order to justify these investments. And over the last few weeks, a chorus of high profile firms have seemed to come out and say versions of the same thing, Bill. Maybe we just start there and you break it down a little bit.
23:46We go back and forth. But there was, you know, maybe the first piece that came out, David Conn over at Sequoia. You know, you've got Goldman Sachs with a piece modest proposal, how to piece McKinsey did some work that was all quite skeptical. But David Conn had this piece called, you know, AI $600 billion question. And then he said, the AI bubble is reaching a tipping point, navigating what comes next will be essential, right, effectively arguing that there's a big gap between revenue expectations implied by the build out and the actual revenue growth that he sees in what he calls the AI ecosystem.
24:29That sounds like a pretty stern warning to venture firms and entrepreneurs out there. Yeah. And look, look, the main point I was making was that the more you promise, the more you set up the risk that someone's going to start taking the other side of the argument. And so I'm not surprised that this happened mainly because there have been people willing to say the most outlandish thing or the most optimistic thing or this is going to go on forever, this is going to scale forever, it's going to solve every problem. No one's going to have to work again. We're going to have you be eye for everyone.
25:07Like these are pretty massive claims. And so, and I think the other big thing to keep in mind, I don't think we've seen really before in a techie. The ecosystem or tech cycle is this one is very capex forward. Like they are, and that's what's driving Nvidia, that's why Nvidia is the biggest winner in the whole thing. But the these this mag seven is spending on a capex level at an accelerated rate to anything they've done before. And so it all puts it out there what David did was simply try to aggregate the spend that was being put in place. And then and and think about that as supply and then say, what will it take for there to be demand on the other side to suck all this up.
25:59And it's a public link will put it in here so people can go read it. And I recommend people look through all this stuff because it's all super interesting. But he's having trouble adding up the other parts of the other side. And I think one reasonable question to ask is why would someone at Sequoia go out on a limb with a pessimistic view. We all know that the competition to get get into whether it's early stage mid stage or late stage deals is somewhat dependent on your ability to to be seen as an optimist and busy seen as someone that has a positive point of view. And so, you know, why why would someone take that that point of view and I did I reached out to him because I was just curious about it and his view which actually is somewhat sensible to me is if you let the markets run crazy.
26:53And I think that's the, you end up with a higher risk of a reset and I will also tell you having lived through what happened with soft bank and and the last cycle having crazy money in the market is not necessarily consistent with creating positive return for your venture capital portfolio. It can start to trend the other way if you end up with hyper competition. If you end up where every single player has $400 million which I think is true in the in the co pilot AI coding space. And so I think his intuition is let's keep things reasonable and let's keep the card on the tracks and let's not go out over our skis.
27:40I mixed a bunch of metaphors there. Okay, so so so let's just break it down a little bit because I think it's always difficult to know out of out of these arguments, you know, Sequoia is one of the biggest investors in AI right now they probably done more rounds than just about any firm and and so here's a firm that's doing a ton at what some might argue are pretty high valuations and some facts going Twitter and find a lot of these critiques. And at the same time they're saying but you know don't go out there and do too many deals. You know, it seems to me that you know was as I looked there of course it's what such is said at East meets West a couple weeks ago Bill investment always comes before the return.
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28:27And it's almost never perfectly matched in terms of timing right it's like it's impossible to think that it would be perfectly matched in terms of timing. I would argue here like we don't really see big rounds out of you know the soft banks and tigers of the world the people we see big rounds out of are you know the Microsoft and Nvidia's and Amazon's of the world. And you know meta is investing a lot of dollars and so yes I do see that you know there's no doubt that AI investments in the venture landscape are about the only thing getting done they're super hot the valuations are really high again I think we've been somewhat circumspect on a lot of those rounds simply because we think they're great companies just hard to earn a return from where a lot of these rounds are getting done.
29:19But you know my sense is that this is more a critique on you know a timing mismatch than it is a critique on whether or not we're going to get there like I didn't read anything in that article or the Goldman Sachs article that caused me to lose hope whether or not AI is going to be have a major impact. I think that would come let's let's transition to the Goldman so so in addition to Sequoia who you might ask why would they have an incentive to take a skeptical point of view Goldman put out a rather I mean it's a readable link that's like 30 pages I recommend anyone read it they can get a whole of it.
30:00I don't know what the current state of affairs are on research dissemination and we'll find out if we can post it but um they started with two people they had a professor from MIT and he took I think a pretty strong point of view said many people in the industry seem to believe in some sort of scaling law that doubling the amount of dating compute capacity will double the capability the models but I would challenge this view in several ways and he goes on to suggest he he doesn't believe in in kind of either linear scalability or exponential scalability and you know that gets back to a conversation we've had in the past like will when when when Sam says four five six seven and says oh they're all going to be as better than the one before is that real or not and I think it's a it's kind of a big outstanding question that's out there today and then there had a research who used to be a semi analyst um he came out and took a point of view very I think very similar to the Sequoia point of view that to build out of over a trillion dollars will need to have massive you know return coming off of it in order for this to have worked out and it gets back to this point of view and I think that we're putting all the cap acts up front and I push back on you a little bit and that whether it was the mobile wave or the internet wave like it didn't require this much betting on the cum you started to get some results right away that the and and and and and people were able to leverage technology I mean the internet had been built out over 30 years prior to when it actually kind of flourished and so there wasn't this like every player didn't have to put up some kind of a much money so so let me let me just a couple quick comments first we got an MIT professor saying I don't know if I believe in the scaling laws I think you have all the the best folks in the industry today from open AI to anthropic to you know Elon etc who have all said they were surprised to the upside by larger models leading to you know really breakthrough outcomes and in order to believe that professor you have to believe the Elon doesn't know what he's doing he just bought a you know is investing in a hundred thousand each 100 cluster just raised a ton of money to do it he clearly believes that there are upsides to scaling open AI you know Microsoft clearly believes there are upsides to scaling Google believes there are upsides to see so the folks on the field not the professors critiquing from the hours are spending their money because they see the benefits so I you know I I guess that critique doesn't hold a lot of water you know for me I think that of course they all also acknowledge like Jan LeCune has argued that this may not in fact be the path to AGI and we don't know how many more you know rounds of scaling are going to continue to lead to enough beneficial improvement to justify the incremental spend but most people I think on the field today would argue that we're not there yet.
33:17And then the second thing is it's not true to say that prior cycles didn't have big investment I mean by our analysis for example just Amazon spent over a hundred billion dollars on AWS invested for over eight years before they saw profitability in that business we know that reality labs was was you know willing to make you know a twenty billion dollar investment per annum for a debt decade in order to bring us virtual reality we think they brought that down and pivoted more toward AI but the fact of the matter is that we have companies that are printing cash multi trillion dollar businesses think of it like a nation state bill if you were a nation and you had surplus like these companies have surplus what would you do you would invest in your national strategic advantage and these companies are investing in the single greatest vector of potential advantage in the future and the fact that they all agree on that you know suggest to me you know coming at it from diverse points of view that there's probably some logic to the stuff that they're investing in and then finally I would just say I do see benefits granted I agree that there is hype that is running ahead of the reality but to the tune of you know three billion dollars open AI has people reaching in their pockets and paying real money including myself for their service and I do that rationally because I use it every day it's a great service now I'm sure people will come and compete and those prices may get driven down etc but I think we're still at the early phase then finally I'll shut up you and I both came on this pod and talked about FSD 12 I mean we're seeing breakthroughs and self -driving that you and I did not think three years ago we're possible because of model breakthroughs that have occurred now granted those may not be LLMs but it is still the same AI infrastructure that we're talking about in these chips that we're talking about that are unlocking those advantages so I just said you know the Goldman piece again didn't didn't hold except from saying don't get too over your skis well great do I agree don't get too over your skis but outside of that I don't I'm not really sure the argument that they're making well I would I would um I would definitely double click on one point you just made which is I do think that traditional AI models that live behind products like FSD 12 are very very different than LLMs for my point of view and um Those are the same things driving you know metas internal engines and if you have a problem that is Set up to be solved by that type of solution.
36:12I think you know There's unlimited potential and so I I buy into that I think the real question about scalability is specifically tied to LLMs and not point it pointed at AI They're in addition. There's so much interesting content came came out McKenzie also put out a piece that it was basically a bunch of survey work from organizations that have been playing around with AI and a couple of things I think really popped one People still have trouble right they have trouble with hallucinations they have trouble with errors um They they are making progress they're making progress in the areas we would expect customer service number one um Sales enablement a little bit number two and and it goes back to a point I just feel very strongly about which is LLMs are great at text they're horrible at numbers and um Even Kevin Scott on a podcast.
37:15He did ironically with Sequoia That's over this past week um he he made that point and so um There there is a need there I think there are a bunch of interesting questions. So let me lay out a few of them One does does the does the cap is the could the cap X -spin be ahead of itself which is What Sequoia mentioned and and what this the second piece of the goal of the piece is um is LLMs scaling Exponential linear or will it diminish and in addition to the MIT professor I mean there there are a number of people that have been around these problems for a long time Who believe that the LLM models will have diminishing return on stint and Clearly Dario doesn't think that he had a podcast out this week on good company.
38:12I would encourage people Sam doesn't believe that and Kevin Scott Clearly on this podcast he did with Sequoia. He's the CTO and micr saw Shares the enthusiasm that Sam and Dario do that this is just gonna go on forever Like we're gonna put more compute into more training and more data and LLMs are gonna get better and better and better And I think this an unproven point and you sound like you're in there camp. I'm I'm probably more skeptical I think that the way that LLMs work is actually set up for diminishing marginal returns, but we will see I hopefully will see very soon um, but but we haven't one of the reason we haven't seen is because things keep getting pushed out the amazing voice demo that we saw on The last open AI demo day um, they had talked about releasing the the voice product in two weeks and it's been Months, months, yeah, it's not out and people aren't even talking about when it's coming up And so anyway things do it.
39:20I think that's a big question another big question The tenet ad in the McKinsey piece and a little bit of the Goldman pieces How much of this is going to be cost reduction versus revenue creation? Yeah, and if it's only cost reduction is that enough Um, and and even in the cost reduction case I think some of the initial claims the clarinet case Modus proposal called a procreful the the the when you talk to people about how much benefit you get in encoding You know, it was originally like 40 % now 30 and 20 people have come off of their original claims So um, there's no question it's adding value, but I think and then you know, where are the revenue creation pieces?
40:04We do have some companies in our portfolio where they're charging more for the AI piece. That's revenue creation I think the more of that stuff we see the better um so No, I listen I and I would ask you It seems to me the greatest danger bill right like if meta invests a little bit too far ahead of of where the benefits are Right the stock will be down a bit And if Microsoft does the stock will be down a bit But you know, there's nothing there's nothing lethal to these businesses Right, they can move the training clusters over to inference that you know a lot of things they can do if some of these things change It seems to me very different for a venture back business, right and we see A lot of these venture back businesses right They raised billions of dollars out of the gate They were a lot they existed the beneficence of the capital markets And people have to be convinced that they're going to have revenues that give them payback And we saw another announcement this week that adept You know had sold or been parted out to amazon We've seen this with a couple other businesses You know that are effectively it seems to me like take unders.
41:18Did you have any perspective on that and it seems to me If there's real risk in the ecosystem the risk is to all of these venture back companies Because they're the ones who have to become self -sustaining the guys in the public markets These are trillion dollar businesses throwing off tens of billions of free cash flow a year You know if they waste a year's worth of spend right that's not a question of existence the way it is for the venture back businesses You're right look the adept thing is Which was Positioned by the press is similar to the inflection outcome There's no way that's a win for venture capitalist like i'm sure venture capitalist try and spin it And we heard some spin around inflection, but you know It's just not possible.
42:05I mean we need to be realistic like if you're a venture capitalist and every one of your deals Turned into one of these weird human acqua hires with a license deal back You're you're not going to generate Return for your portfolio like it's best case you're this company had raised 15 million dollars But how much are they gonna pay for the license deal and then you leave this thing kind of pseudo alive Like and then the people that are running it are you gonna demand a dividend on that amount or like how do you get like? There's no way this is Optimal or even even really something you should celebrate and um It is driven.
42:46I suspect by the The limitations on acquisition by the big players and so this is but but but but it's also It's just an alternative to a low price sale. It's not a win um and and and and i wonder You know if part of it is the founders raising their hand and saying and if you read depressively see put out it kind of says this Like they're kind of afraid to be on the field, you know Wait to your point right and and and when you put this much money in these companies and you Ray like i've said this A lot and i i'm sure i borrowed it from someone much smarter than me, you know valuations represent discounted future expectations They're not an award for what you've done in the past and so if you raise that a billion if you raise it Two billion if you raise it 14 billion this you have to accomplish To to live up to that expectation you just signed off on is really high and so you have to find revenue you have to find performance and Um and it may or may not be there and so i agree I mean, I think i think you phrased it the right way that this is where the risk lies and and and and and the playing feels difficult to understand I mean if you'd listen through all this content that came out even in the past two weeks The you know kevin's got me to comment very similar to one sand made a while ago, which is don't try and add Value just a little bit or don't even even set on this thing don't go do a small focused model on You know, let's say a particular vertical because we're gonna keep investing in the in the foundational model and it's gonna It's gonna be great at everything.
44:34It's gonna be great at the big stuff But it's gonna be great at that focused stuff and we'll run over you and so where are you supposed to go? Look if you can't focus and you can't add value, you know Sam said people are using only X percent of open -eye that you need to use 90 percent But what is it you're doing if you're using 90 percent of the other model? I don't know i don't know where you're headed As a start up. So it's a it's an interesting claim field Well, I think that um, I think it's well said and perhaps that if if we had to tease out a red thread That I think is actionable from all of these pieces the Goldman piece sequoia, you know, Mackenzie etc You know, it is just an acknowledgement that things have run up a lot that billions are getting invested in venture that we're back to high valuations that expectations are going up that public multiples are going up and You know, we're getting closer to a reckoning and it could fall either way But the distribution of probabilities make this a more challenging time for the you know for those venture companies that are lucky enough to raise at these High -price rounds up but but let me just shout out, you know one that you and I you know met with Bill Which is arvin from glean You know, here's an example of a company that i've talked to ten of their customers.
45:54They absolutely love the product They're getting You know real benefits. They would not want to give up the product You know, it's enterprise search meets AI Yeah, and I do think that there's a lot of real work getting done under the covers and I see with them Like I see with open AI with you know with some enterprises and with lots of consumers that feeling a magic That it really changed You know our friend Rich Barton said it's the one piece of software. He couldn't live without right like that's you don't hear that out of CEOs very often And so you know, I think kudos to the guys who are grinding and creating that but I do think that there are a bunch of folks I see a bunch of grifty right in the AI landscape right it's where you can raise money The raising money at high valuations.
46:48I do think that the mortality rate in AI is going to be very high And the winners are going to be Incredibly large and if this is all as big as we think it is This is going to play out over decades. This isn't going to play out over the course in the next ten days And you know again, I'll just repeat the warning such a gave me it east meets west You know, he's like I'm a total believer But I also am preparing the company that we may have to have a big drawdown between here and there You know if these things aren't perfectly sequenced and I think the whole ecosystem needs to be prepared for that Yeah, fair enough You know, I got a note the other day um That really impacted me and you know, I've been talking a lot about these calcium CT scans You know and just in the spirit of mixing it up a bit You know bill you heard me talking about them a year ago.
47:40You got a calcium CT scan So many folks I know have gone out and gotten one done And but this was a woman who said, you know, she got it done. She didn't think women were really at risk But I you know, she had heard me mention it enough time. She thought she'd get it done She got a score in the 900s. It really scared her she found a lot of plaque and blockage And so I did a little bit of digging and here was the thing that A stat that blew me away Five times as many women die of a heart attack each year in this country is die of breast cancer Five times as many women die of a heart attack in this country versus breast cancer And while the mammogram is appropriately and widely accepted as standard of care Right very very few women do a calcium CT scan Which I might argue or I've heard argued is the mammogram for the heart Right David Marin Dr.
48:38David Marin the head of preventative Cardiology at Stanford says it's the mammogram for the heart As a reminder to folks it's 150 bucks you can google um, you know, calcium CT scan you can get it done at any number of clinics and whatever towns you live in I've had hundreds of people over the course of last year text email and they just found things and eat You know, they they found either blockage or plaque or other Things that they didn't know were going on with their heart But even the folks who came back with the zero score say I'm so happy. I did it because I'm at ease Like I know what the situation is and we've all been trained to track this cholesterol Which is not predictive of heart health Right people people put you straight on medication off of a cholesterol score Thanks Thanks and by the way and I had and one of these mini pods I did with Marin he said That half the people right who have good cholesterol Have a bunch of plaque in their arteries Right and plenty of people who are in the red zone of cholesterol have no plaque in their arteries So wouldn't you just rather get to the source and say take a calcium CT scan just say do I have plaque or do I not have plaque in my arteries But Bill the piece the thing I wanted to talk about and I'll post this There's a documentary on YouTube.
50:04I would encourage people to watch called the widow maker Right and this refers to the artery which most often gets blocked and causes a lot of death But the this documentary painfully outlines the politics Behind the calcium CT scan And why the stent lobby and other forces including the insurance lobby appeared to have Prevented the calcium CT CT scan from becoming the standard of care And it was a really interesting part of that documentary bill was a battle that took place in the Texas legislature You have the head of several medical institutions You know that kind of went to war with the state of Texas because the state of Texas passed legislation Out of both houses that would have required the insurance Companies to cover the 150 bucks for these calcium CT scans.
51:03So this is just it's another interesting place if you have 45 minutes and you want to see how Government can get in the way of technology Um, and how a bunch of vested interests try to keep this from happening I would encourage you to watch it. We'll post we'll post the link what you're Deicist as to why the establishment is non -supportive of a low -cost Preventative scan Well, what I've been told by Heads of cardiology at Harvard and Columbia and Stanford and all the folks I've talked to right. I ask them all a very simple question What do you do for yourself your friends and your family? Just tell me your care standard of care for yourself your friends and your family and 100 % of them follow the same protocol Which is a calcium CT scan no later than 40 and if they have any signs of plaque They go on a statin to reduce their LDLs their bad cholesterol as low as possible um, and so I actually don't think the establish Establishment cardiologists Right um are against it.
52:16I think that there are some folks connected with various lobbyists, right the stent lobby Now there was there was a trial around stents bill a few years back called called the courage trial Which basically disproved That stents are actually that valuable what they found was that A calcium CT scan and medical intervention was at least as valuable as a stent So for example, I think today most people will not even have stents put in even if they find high You know rates of plaque. They'll just do it through statins etc but I you know It's interesting. I've asked them why they want to you know spend as much time with me as they have and they said because you can get the word out Right millions of people are losing their lives And it can all be prevented by taking a calcium CT scan But this thing this thing's cheap and fast So I don't think you really answered the question like what's the why would people be against it like what's the point of being against it?
53:17Yeah I listen I think the economic point for being against it is insurance companies don't want to pay for it um uh The the folks who are in the business of repairing the heart after the fact like those in the stent business Right, it's good for their business that you aren't preventing it medicinally um, and then finally I think Bill it's just never underestimate the inertia Of the way things are You know my mom 88 years old she goes to a doctor and I said mom why are you taking this medication? She said I don't know. It's just what the doctor tells me to take Yeah, I hear you. I I don't I don't buy into the insurance one just because I don't actually think insurance companies are Intrion cutting costs they make a percentage of what is spent and the more the merrier the more that's in there the merrier um I do think that the medical industry I listen to this podcast once I need to find it but um Where a gentleman argued that over 90 % of NIH grants go towards things that are potentially monetizable So either a product or a drug and that the NIH is less interested in funding things that might be um just Preventative behavior like behavioral things like what you eat or your diet or things that that don't lead to monetization and We may have created it with people talk about the military industrial complex We may have created a health care industrial complex that really um can't stop maximizing profitability and and Different ways of making money and and and not focused necessarily on The lowest cost best most preventative process first there that would be my guess as you'd go There are bunch of states that seem to require referral You know most people a lot of people don't even have relationships with the doctor This is particularly acute in poorer communities um And so you know if you want to get a referral you can simply google Referral calcium CT scan their tons of referral services on the internet cost you 20 bucks you get a referral But I would encourage you most Imaging centers, you know If you follow me on twitter at all cap you'll see just search calcium CT And you'll see people from almost every city in the country who've posted Where you can get them in their city the cheapest price you can get them in those cities There's a mobile unit up in in Seattle that does it for 55 bucks walk in no referral needed Bottom line is you know I have no no dog in this hunt except for the fact that I lost my father Way too early to heart disease in a situation that was a hundred percent preventable So I wanted to have this done for myself for my siblings etc I had a low score when I got the calcium CT scan done I went on a stat and it reduced my LDLs and I'm in control and I have the information and I can watch this long Tutently and I was shocked to learn some of these facts behind the scenes as to why it wasn't being treated as a standard of care and so You know if we can move the ball down the pitch just a little bit by Spreading the word out there It is simply one of the easiest things you can do and I think you should really Think of it as the mammogram for the heart and is seriously as we all take things like colonoscomies prostate You know exams mammograms etc This is the number one killer in the world by a long shot So the fact that we're not doing the preventative care on it makes no sense Good seeing you man.
57:08Yeah, great seeing you and thanks for doing it. Hopefully hopefully you save some of Just get her done. I'll talk to you. Take care. Bye As a reminder to everybody just our opinions not investment advice
From the publisher
Open Source bi-weekly convo w/ Bill Gurley and Brad Gerstner on all things tech, markets, investing & capitalism. This week they discuss the looming presidential election and its impact on public market tech funds, public market dispersion, AI hype versus reality, Calcium CT scans, and more. Enjoy another episode of BG2.
Timestamps:
(00:00) Intro
(03:50) Public Market Dispersion (Mag 7 + Consumer Stocks)
(22:05) AI Costs vs AI Revenue
(47:25) Calcium CT Scans
Available on Apple, Spotify, www.bg2pod.com
Follow:
Brad Gerstner @altcap
Bill Gurley @bgurley
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Shownotes:
AI’s $600B Question by David Cahn