Tech titans' AI strategy

0:10Michael Kramer from Mott Capital Management. Welcome back to Investing Experts. Michael runs an investing group called Reading the Markets on Seeking Alpha. And for those who don't know, should, the free articles that you write on Seeking Alpha is under Mott Capital Management, with two Ts. So you don't own NVIDIA right now, did you? Never have. You haven't? You haven't at all? No. Do you regret that at all? Or you feel like it just never spoke to you valuation-wise? You know, it's funny because in October of 2022, when the market was doing its thing, I bought Amazon, right? Because I had watched Amazon for years.

0:51I think I had written for years about how it was dead money. And it really was from 2020 through 2022. It was basically dead money. It did nothing. And even now it's kind of back to where it was. But if you bought it in October of 22, like I did, because the valuations made sense, it worked out. But I actually looked at both. I was looking at both NVIDIA and Amazon at the time, and I decided not to buy NVIDIA because of all the volatility that comes with that space. And Amazon, from a valuation perspective and the opportunities with cloud, really what would appeal to me. It's just like when I bought Microsoft in 2019 in that December, 2018, January, 2019 chaos that went on.

1:39I bought Microsoft because I thought it was a pure play on cloud where Amazon came with all the garbage that AWS isn't. you know, the low cost, the low margin business of online retail. And so, but when Amazon came down in 2022, I think it was around a hundred bucks when I got it, it made more sense from a valuation standpoint. And I looked at NVIDIA at the time and obviously there was no prospects for AI at that point. It was sort of just the cloud and I passed on it. And I chose to go with Amazon over Nvidia because I thought Amazon would be the better play from that standpoint. So I mean, I missed it.

2:20But at the same time, I don't know if I would have held it all the way to where it is today either, because the valuations make no sense. I know there's a lot of hype in it. The growth rate has obviously been incredible. But the law of large numbers typically dictates and suggest that these growth rates slow. And when you're paying really high multiples and valuations, the returns tend to not be so great. And so I don't really regret it. I kind of always learned that usually the first movers in these changes aren't the ones that necessarily come out on top. Think about Yahoo or AOL in the late 90s.

3:02You know, they're not even around anymore. And so, you know, but what came from it later was Meta and Alphabet and then Amazon's second rebirth, but that's only because they changed their model. So my feeling is that when the dust settles with this, we could very well be looking at a company that eclipses NVIDIA in that race. And so I'm kind of just keeping my eyes open right now for the next opportunity and how AI will evolve into our daily lives. And I personally have been planting seeds in my head and in my portfolio with how AI is going to be used in healthcare and drug discovery. And that to me seems much more promising and a much bigger deal than, you know, how an AI chatbot is going to be able to answer a phone call or replace a programmer.

4:02I think, you know, AI has a lot more promise in things like, you know, MRI imaging. You know, like I bought Illumina for myself in my portfolio in June of 2024 because of AI, right? I mean, if you think about AI, imagine being able to get a blood test and having this machine be able to basically, from a detection of blood or a detection of an image, be able to determine very quickly whether or not you have a risk of getting cancer. Because it's able to process and go through this information so quickly. I mean, that's obviously years away, but that's the way that I'm already thinking about it.

4:44Dan Rayburn, an expert in streaming and media. Welcome back to the show. It's great to have you back on Investing Experts talking to you on Seeking Alpha. Thanks very much for having me back. Yeah, since the last time we spoke, we were talking a little bit more just about sports. But as you can see from the 13 pages of notes I sent you just in the last 90 days of what's been taking place in the streaming industry, just across the major players, it's incredible. The industry just really never stops in terms of content bundling and pricing going up and new services being announced. We have two coming out later this year.

5:17So I eat, sleep, and breathe this every single day as an analyst. And even that is hard just to keep up on all the news. We did get some new numbers here from Amazon, which almost never gives out any numbers. And they're not great, but it's at least a little something. They said that their ad tier of Prime video now reaches more than 130 million US consumers, which is up from 115 million last year. Now, that's not how many Prime subscribers they have that we don't know, but not surprising that the number is higher for the ad tier because they're working on launching in Brazil, India, Japan, Netherlands, New Zealand, other locations around the world.

5:57Another number that's interesting here just for listeners to know is Netflix gave us an updated number, their upfront presentation in May. It's ad tier members in the US, so US only, spent 41 hours per month on Netflix. That's a big number. 41 hours. Jay Hatfield. Jay is CEO and Chief Investment Officer of Infrastructure Capital Advisors. Talk to us about if you would other tech stocks that you're focused on or that you're primarily focused on as earnings season starts to unfold further. Right. So these are two big holdings in ICAP, which is our large cap dividend fund. Most of the dividend related to these companies comes from writing short term covered calls.

6:45But we like Amazon a lot. It's very reasonably priced. We have a$300 target on Amazon, so very cheap compared to our target. We do see it growing in the 20 % range, not just because of AWS, but because, and we're talking profits here, not revenue. The profitability from the retail business is improving dramatically because now they have professional management, Andy Jassy. He's cutting costs, shortening delivery times, doing more advertising, which is in a way cost offset, cutting back on other bets. And so we think they're going to deliver that 20 % earnings growth. And it's also lower risk because half of it's Walmart and half of it's AWS or cloud type company.

7:34I'm Rob Isbitts, and my work at Seeking Alpha is under the profile Sun Garden Investment Publishing. I also lead the investing group Sun Garden Investors Club. I really do believe that the investing business has a shortage of great young analysts. I wanted to identify some of these upwardly mobile next generation investment pros. And I've introduced dozens of them to Seeking Alpha over the years. And today you're going to hear from three of the best, Julia Ostian,

8:05Joe Albano:Jack Bowman and Kenio Fontes. Hi everyone, thanks for having me here. The first thing I'm going to say is that I'm Brazilian and actually I started analyzing stocks in the Brazilian market about five years ago and that shaped a lot of my thinking because it forced me to pay attention to some risks like macro risks, currency impacts and mainly management and corporate governance. and over time I expanded my research globally trying to be as much pragmatic and holistic as possible. I believe everything in markets is dynamic so a stock that looked overpriced yesterday might become attractive tomorrow depending on narrative execution and valuation resets.

8:49Joe Albano:I focus more often on tech, but I look at all sectors when the opportunity is clear enough. My favorite part of the investment process is understanding the business itself. So the long-term strategy, the industry dynamics, how the company really makes money and how it can unlock more in the future, either by expanding sales or adding a new segment or expanding margins. Valuation and balance sheets, of course, it's very, very important, but they come after I understand the fundamentals of the business. Just giving a quick example, Amazon, I find it fascinating how I think about how their massive capex today, whether in logistics or cloud, will translate into revenue growth and margin.

9:45Joe Albano:Three things that I have more conviction today is probably that AI will drive not only revenue, but also expanding margins in a lot of sectors. the second one is about alphabet or google i think it probably will perform the market of their next three or four years in the medium to long term due to strong execution execution and attractive valuation and the third one is meta probably i think meta is likely to see revenue growths normalize and then it will potentially lead it to a modest multiple contraction. So I'm a little bit more bearish in meta. Julia, I want to go back to you. You are pretty stingy on strong buy ratings.

10:36And you're probably not the only one in this group that is. But you do have two that did stand out to you. One, the aforementioned Amazon. And the other is a little car company, although maybe they're not just a car company right that's what they say about the other you know car company uh tesla but that's uber so amazon and uber they stand out and you have a much higher conviction level on those than you do so if you can just kind of weave that into let's say the broader market view that you have because I think that's an indicator right there, right? That if you only have a couple strong buys, maybe it says something about your broader outlook.

11:30Yeah, that's true. So first of all, I wanted to say that I really connected to Jack's point about the market being overheated right now and that there is a strong possibility of that's not happening anytime soon. It's not changing anytime soon, I mean, because well when the government has the strongest goal to keep it up right I guess they will be successful in doing so but yeah basically I am not throwing around strong buys because of that because in my opinion US especially US market right now is overheated and And, well, I have no idea when it will change. I actually had an idea of going out, selling everything and keeping cash.

12:19But I realized that I will be just missing on every opportunity possible. So I decided not to do so. And basically, it connects to everything I mentioned before about the business. For these two companies, for Uber and Amazon, I currently see a mix of perfect timing, for example. long-term dominance which is really important to me both of these companies are the best in their spaces and they make a lot of money I really like it when businesses make a lot of money it's really important for me and I see a misunderstood opportunity there as well I mean for Uber I started buying it back when it was 60 dollars per share so I guess it kind of went up from there a little but still right now i see this company adding the stock of this company adding few dozens of bucks easily in some near future and for amazon for example first of all it has very strong advertising power i am fascinated by this business i am fascinated by the aws and how we took over basically like everything.

13:34I live in Israel. So we're like a high tech nation and I hear about AWS from everywhere. Basically, if you want to have a work in engineering, you must learn AWS. This is like a standard. Have you ever experienced Amazon as a consumer? Where you live? What do you mean? Like only retail, not I haven't used AWS services. Got it. So so unlike I would imagine Jack and me, I'm guessing that Kenny and Julia have not had the pleasure even multiple times a day of a an Amazon truck showing up and delivering to you what you forgot you ordered yesterday. today. This is something I think a lot of people kind of miss about the Amazon story, is that when you look at their revenue breakdown, right?

14:26Like they make more money from AWS, like we're talking about, than they do from Amazon Prime. Amazon Prime is a big money loser. But it built brand, it built name recognition and all these things that allow them to build AWS. But most Americans interact with Prime, not AWS, right? So that's kind of our like vision of Amazon is this big shipping company, even though most of their money comes from the cloud and software development, right? Was part of that the idea that the market allowed them to get away with that for the longest time? Again, here comes my advantage or disadvantage of age, relatively speaking.

15:08I remember when the biggest complaint about Amazon year after year was, well, they never make any money and a lot of it was because they kept throwing all the profits back into the business so Julia you were you were going to say yeah I was going to say that basically with the retail I was not aware I actually saw that they are making money from the retail inside of the US but I saw that they just turned profitable I guess last quarter from the retail in the world and I I mean, it's kind of crazy, right? We are all using Amazon like all the time. I have this app installed on my phone and it's like it's in use forever.

15:48And I could never have guessed that they are not making money from this. But yeah, this is actually it was another great point from Jack that this is so such a strong marketing effort, right? that this whole thing, this whole narrative that they were able to build around this company. I know for sure that in Israel, for example, once again, we're a startup nation or how they call us. People do learn AWS because of the actual Amazon. I am pretty sure it's like that. And I never had a chance to use AWS, but my husband actually has. and he says there is nothing even close to quality to this product.

16:38So basically it was my point why I think, in my opinion, Amazon is still a great, amazing buy. And although people are concerned about the valuation of Amazon, I am pretty convinced the growth and the future opportunities. For example, I wrote an article on Thunder Project Kuiper. And this future opportunity, in my opinion, is simply amazing. people are looking to invest in satellites, right? And in my opinion, there is no better player right now than Amazon in this space.

17:10Joe Albano:I must say in Brazil, we are experienced like some, I think it's almost near what Americans are experienced too. So we can order, buy a product and receive it in one day. So mainly in capitals. So the international expansion is working. Joe Albano, who runs TechCash, welcome back to Investing Experts. It's always great to talk to you. And I find myself consistently linking to your previous appearance on the podcast, talking about the different AI tiers, which has been really salient in my understanding of that part of the tech sector. And I know many other investors as well. So super happy to have you back on.

17:54The AI earning spending, we're hitting this, I don't want to call it an inaugural stage, but it's like we're hitting this first round of speed bumps where we've spent a ton since 2023 and more so in 2024 to kind of get everything off the ground. So now that's happened, we're moving into the maturity of these large language models, the next venture out in agentic AI, where it's going to start doing more complicated things more holistically, rather than just kind of large language model inferencing and prompting, you know, going to chat GPT or a lot of people, a lot of enterprises have gone with some automation for their customer service or things along those lines.

18:44Now, Agenic AI is built on a large language model as well, but there's a lot more components to that. You started getting into the reasoning models, which are the new hot thing now. So what we're seeing, the spend is a very high level thing, because you're spending money essentially on hardware to do all this. It's less clear where they're spending money on in terms of software and development on the stack itself. So, yeah, you see companies spending 10s, 20, you know, 50 billion dollars a year on AI CapEx. And you assume that's going to hardware, networking, data center, build out things to house these networks, cooling, electricity, powering all those data centers and servers.

19:34that's where the bulk of it goes but the key about who moves forward with it is going to be on the software level this was a big thing i talked about last year is software is really where the rubber meets the road and you're already you're already paying developers and software engineers to do development it's just now it's in a ai realm but there's no delineation on a line in between those things it's you're up it's up to management to kind of tell you where that delineation is. And most of them aren't going to tell you that. So if you see a pullback in spending, it doesn't mean that they're spending less time on AI or resources on AI.

20:12You may see further refinement of AI in terms of where it gets spent. Is it on large language models like OpenAI, where they're doing iteration after iteration of now we can create five minute movies based on a prompt, you know, something that's useful, but it's not pushing the AI world forward. They're going down a path that's maturing still, but there's new paths that are now, you know, starting with the agentic stuff where that's going to be the next inroad. And we're seeing a lot of that push with reasoning models, pushing that forward where it can think about something to itself, essentially, and create an answer or a decision and take an action based on that.

21:04So overall, we're going to see spending slow in terms of growth. Meta platforms is probably the only one that really has it down of where they should be spending and spending it well. I think a lot of larger companies had so many resources that they could just kind of throw it out there and be like, well, we need to spend on hardware. So let's just get the hardware installed and we'll figure out what we're going to, you know, create a product on and generate revenue on it later. Where I think Meta went the right direction, open sourced its large language model LAMA and let the world improve on it.

21:41Let everybody else create it better than just one company's capabilities or talent, but then use the improvements for themselves. and not make money off the large language model itself, but have it drive a product that actually is going to generate revenue. And for them, that's ad creativity. So you're going to create ads or allow their customers to, their advertisers to create ads using AI, right? Create an image or some kind of 30 second ad video. But more importantly than that, get better targeting of those ads in front of eyeballs and users and then better recommendation systems so that they stay on the platform longer.

22:23I think Meta has actually, I've seen a lot of people hate on Meta's ability with AI, but they're the only ones that have shown revenue growth behind it, laying off tens of thousands of people and accelerating revenue growth. Well, that's only coming from its AI capabilities and pointing it in the right direction, essentially having the weapon and knowing how to use it. Whereas I think with Microsoft and other clouds like Google, Microsoft, or Amazon, and those guys, Amazon not so much. I think Amazon's actually kind of second place behind Meta in terms of using their AI properly. But a lot of them just sell the capabilities and rent out space so that other people can use that hardware, where Meta is not in that business necessarily.

23:11So the spending, I think we can put too much emphasis on it now at this stage and read too far into it and not understand what's actually happening at a software level because that's several layers down from the big flashy headlines of more compute, more data centers and shareholders and investors scratching their head going, okay, but where's the return on this investment? I think Meta has actually gone in the right direction to do that. So yeah, I still understand and take in all of the AI spend that these companies are putting towards AI investments. But you have to start reading it a little different.

23:54You can't read it linearly like we have been for the last two years. It's now going to go into line items that we can't have granularity into essentially.

24:03Joe Albano:Just a reminder, anything you hear on this podcast should not be considered investment advice. This is for entertainment purposes only, and you should seek advice from a licensed professional before investing. If you enjoyed the episode, leave a rating or review on your favorite podcasting app. And we'll see you soon with a new episode.