Alphabet’s New Model & Novo’s Lawsuit

0:01Travis Hoium:The heart of earnings season starts today. Motley Fool and Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool and Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and our special guest, Jon Quast. Guys, earnings season really, I think today is kind of the day that marks the beginning. We've got Tesla, we've got Alphabet. Both of those stocks are either going to beat or miss their estimates and their stocks are going to be up and down. But that's not what we're going to talk about today. We're going to start with the news from Alphabet, and that is Gemini. Lou, they released a new model yesterday, Gemini 3.6 Flash, did not get a lot of positive reviews from the AI pundit class.

0:45Travis Hoium:What was your take on this? Was this a little bit too harsh, or what is going on with Gemini at this point?

0:51Lou Whiteman:First of all, throwing shade on Jamie Dimon and the big bank earnings. So there you go. But all right.

0:57Travis Hoium:Look, I mean, you know, big banks, not nearly as exciting as what's going on in tech right now.

1:03Lou Whiteman:Is it? I don't know. But but yeah, so it kind of, as you say, fell on deaf ears in part because the new super duper model, which I think that's what they're calling it. Right. Gemini super duper. The frontier model is delayed. But here's the thing. And I think we need to step into normie town here. OK, because, you know, for all of the talk about the frontier models and these cutting edge models, very few people know what's going on there and care. It's not the percentage that you would think if you scroll on Twitter. About half the global population is using AI, but the number of people using these frontier models, by some estimates, less than 10 percent.

1:44Lou Whiteman:So, you know, yes, the people who do care are the ones driving spending. So it does matter some if this Google model isn't the latest and greatest that people wanted. But increasingly, it feels like most of the revenue, most of the work is not going to go to and come from the frontier models. They're just too dang expensive. It's going to come from the most affordable, rational way to do the job. I think there's some cool things here. Alphabet's cyber tool seems very useful. It hunts and patches for vulnerabilities. I don't think that this is a big deal in and of itself. I think Alphabet's job is to just put out a model people are going to use.

2:24Lou Whiteman:It seems like that's going on and the rest of it is sort of just a, it's a fun geek off, but it's a geek off.

2:32Travis Hoium:Yeah, John, is that what you see here? Is this a battle of the geeks and the normies? No, I don't know about that. See, I think what's really happening here, I don't think that users are necessarily dissatisfied with Gemini 3.6 Flash. I think they are miffed that they don't have Gemini 3.5 Pro yet. And I really think what Alphabet is in danger of doing here is angering its high spend users. And that's not really a good thing because there are users who pay for Pro who were expecting Pro to be released in June because that's what the company said. We're gonna release Gemini 3.5 Pro in June. And they were expecting that yesterday.

3:12and instead what they got was 3.6 Flash first. And there are some things that this Flash version can actually do better than the top pro model right now. That's actually kind of a problem.

3:23Travis Hoium:Yeah, it is interesting that they, as some of these other labs, OpenAI and Anthropic in particular, are leaping ahead on the very, very bleeding edge. Lou, I want to end with this. Is this a case of some of these companies just maturing into what they're going to be long-term. Because we've talked a lot about artificial intelligence spend and all this kind of stuff. But as the business models are starting to form into shape, it seems like Anthropic is winning this kind of coding class, the agents, the people who are willing to put all this stuff together and do whatever it is they're doing with Fable.

4:02Travis Hoium:But then you got the regular people who are just using search and are going, oh man, these AI overview tools are pretty cool. They answer all my questions. And that's Flash 3.6 sitting underneath. So is this sort of Gemini and Google saying, hey, you know what? This is where our money is. Being a little bit faster, a little bit cheaper is going to be great for the bottom line.

4:24Lou Whiteman:I don't want to give them a total pass because the reason Pro isn't out there is because Pro doesn't work the way they want it to, period. They failed. Whether or not it matters for the business, you know, but it is a setback. And to John's point, the people who really care are going to be miffed. I'm not sure. I'd push back a bit, John, on you on the idea that the decision makers are miffed because Flash is supposed to use 17 percent fewer tokens and cost less per token. I think the actual decision makers might be fine with that, even if it isn't less as powerful. I think the big takeaway is if you would ask me two years ago who's winning, it would be opening high.

4:59Lou Whiteman:If you would have asked me a year and a half ago, oh, wow, Gemini is everywhere. This is so new. I know it's a terrible investor takeaway is we know nothing, but I think it is dangerous to read anything long term and in long term into any one of these announcements. We are still early days and we have no idea what's going to end up happening.

5:20Travis Hoium:When we come back, we're going to talk about the latest between two of the biggest GLP one makers in the world. You're listening to Motley The full hidden gems investment.

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6:29Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. One of the interesting headlines yesterday was that Novo Nordisk is suing Eli Lilly. These are the two big companies in the GLP-1 space. Ozempic is probably the one that you know, but you got Onjuro. There's basically four products that are relatively similar, but now we're getting to the point where Red or Trutide is coming. that could potentially be a trillion dollar drug, maybe going to be out next year. But John, this is a big lawsuit between two companies that are fighting over a lot of the same market. What was your takeaway from these two going to battle?

7:05Well, I think it may be a sign of just how desperate Novo Nordisk is getting right now. You know, Novo Nordisk's products, Wagovi and Ozempic, I think they do have better name recognition in the GLP-1 space. But Eli Lilly actually has a greater estimated market share at 60%. Now, you look at the sales trends for these two companies and Novo Nordisk expecting maybe a decline this year, whereas Eli Lilly expecting an increase. And so you look at where things are trending, you look at who has the market share, and you look at the growth rate projections over the coming years for GLP-1 drugs. It's a huge growth opportunity, according to many of the analysts out there.

7:48So Nova Nordisk clearly wants this space. And one of the interesting things here is that pricing is actually coming down. So the profit margins are getting squeezed a little bit on these GLP-1 drugs. That means that volume, sales volume really does make a difference. Market share makes a difference. And Nova Nordisk is losing right now. Eli Lilly is winning. And so I think it is getting a little bit desperate. it.

8:12Travis Hoium:And Lou, to be clear, they're they're suing over the marketing of Eli Lilly's products. This is always kind of one of the weird spaces in pharma is that you can make a drug or a product and you can, you know, sell it to customers, but you also have to market it correctly. And they're saying, hey, wait a second, you can't say this or that in your ads. So maybe maybe this is, you know, the kind of battle that we want is fewer ads.

8:36Lou Whiteman:Yeah. I mean, I'm all for that. Right. I'd like to join this as a friend of a court just to get, it might be my age, it might be the fact that I write baseball or watch baseball a lot, which is old people stuff, that the number of pharma ads, and do you always have to put a dog in them? That part's okay. But look, reading the suit seems like both sides are technically right here. Lilly is accurately giving the results of comparison trials, but oopsie, conveniently forgetting to mention that the trials are a bit dated now, that there's an updated Novo pill that does better in the trial. So yeah, this is in a way Novo is desperate, but also why not?

9:13Lou Whiteman:Just like we sort of talked about with AI, both sets of products seem to do the job. Effectiveness seems to vary by release. Like, you know, the latest model is the best model. So, you know, Lily's banking billions right now. Novo, you know, to the extent that we're talking about it, Novo's already won this and I don't blame them for going at it. This is It's a huge gold mine right now. They want to tap as much of it as they can for as long as they can. I don't know if this will win in court, but if nothing else, it's just got us talking about, hey, you know, Novo's got a new product out and it's a lot better than the old one.

9:45Travis Hoium:The thing that I think is interesting here is how much competition. I can't remember maybe back in the when we started to get different versions of Viagra, there was competition like this. But this space has gone from, OK, we're going to be able to charge$3 ,000 a month for these treatments to this is kind of just a consumer product at this point. You remember earlier this year, we had talked about Novo Nordisk sued Hims and Hers. That went away really quickly because Hims and Hers has a couple million subscribers. They need access to those people if they're going to have sales be declining. So this just seems like another sign that we're entering a new phase in this space where it's going to be, hey, what are the results and what is the price?

10:26Travis Hoium:That's something that pharma companies are not used to talking about all that much.

10:30Lou Whiteman:You don't remember the bathtub ads? What are the bathtub? No, I don't remember the bathtub ads. No, no, yes. Trust me, when those male pills came out, there were plenty of ads. Yes. In fact, there were Saturday Night Live skits about the number of ads. So, yeah. Look, I don't know if this is different. It may be on the scale, but I can even go back and remember statin ads when those came out. So this is increasingly the way the way pharma reaches. You know, doctors are in a real pinch here. OK, because doctors are going and trying to do what's best for the patient, but also it's a business. And so a patient says, hey, I heard about this.

11:12Lou Whiteman:Why don't you give me this? That can move the needle on whether or not you get a prescription. This is the quote unquote informing the consumer is how these businesses work, which I guess to Novo's point is, why it should be accurate information.

11:27Travis Hoium:Yeah, it will be interesting to see how the battle plays out, especially as more new products are coming to market. This is hardly the last new GLP-1, GLP-3, whatever you want to call them. From an investment standpoint, I think the valuations are interesting. Novo Nordisk trading for 3.7 times sales and just 16 times forward earnings estimates. That's what the market is showing you that growth slows. They don't really love that. Eli Lilly, on the other hand, trading for almost 15 times sales and 32 times forward estimates. So double the valuation or more, depending on which metric you're looking at.

12:02Travis Hoium:So definitely higher valuation. And Eli has been taking advantage of that by buying a whole bunch of potential products that will grow the company in the future. When we come back, we're going to talk about the latest in energy earnings. You're listening to Motley Fool, Hidden Gems Investing.

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13:50Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. One of the earnings reports that did come out this morning was from GE Vernova. I want to lodge my complaint for this being one of the worst named companies. And we don't even need to explain it. Apparently it has to do with green energy, but the real business is selling natural gas turbines, which we'll talk about. But but Lou, results came in pretty good. They almost doubled their free cash flow guidance for this year. You know, I heard comments about people paying a little extra to cut in line to get their gas turbines. This is the demand coming from data centers.

14:24Travis Hoium:What do you see in the results?

14:25Lou Whiteman:Yeah. So they'd love to talk about wind and renewables and all that. But right now, as you say, gas turbines are driving the bus. I was actually wind isn't doing too well right now. But that's something else. But yes, this is all about data center energy needs and all of that. You know, it's, I mean, Travis, great quarter. Stock is down. And it gets to the kind of awkward question. We've seen this with NVIDIA, with memory, and now energy, all these things. We all know what's going on here. Data center demand is off the charts now. Growth has been amazing. But there's two questions. For one, will it keep growing?

15:02Lou Whiteman:And that's where I, that question, I think investors are starting to say, okay, well, maybe it just plateaus. And that's fine for the business. That's great for the business, because as you say, cash flow is up, but it's not great for a forward-looking market that always wants growth. The other question with all of these suppliers is, do they have the capacity to meet that growth? And on that note, at least I think Vinova is trying, they're going to spend$11 billion across the business in CapEx over the next four years. That's not all turbines, but a lot of some of that, a good part of that is just to boost capacity.

15:35Lou Whiteman:By comparison, they were spending about a billion dollars a year in past years in CapEx. So they are kind of more than doubling in the near term. That does imply that they can kind of hit that backlog faster than they could at status quo. So that is somewhat good. But I think the real question here isn't, you know, isn't will it last forever? I think it can last for a while, but can it continue to grow from here? And that's where the market's sort of in a quandary.

16:03Travis Hoium:Yeah, John, this is one of those interesting spots because it makes sense that there's a ton of demand for energy, but we're asking this almost every day, is this time different? And in the energy space, it seems like we're gonna go back to some sort of normal. So is this sustainable, this level of profitability and free cashflow? Yeah, I mean, GE Vernova shareholders certainly hope that it's sustainable because as Lou pointed out, They are investing capital expenditures into increasing their capacity. And when you look at the turbines in particular, looking to increase that production capacity by 50 % by 2030.

16:39And so basically, they can't make enough turbines right now. So looking to be able to make 50 % more annually. And if the demand is there, then great. But if the demand goes back to whatever we call normal, that's actually kind of a liability. because now we have a higher operating base in our cost basis. And so that's kind of an issue. I will say when you look at the backlog numbers here, it's very, very promising for GE for Nova. So basically a$176 billion backlog right now. It's expected to increase to$200 billion by next year. This is a company that only has$40 billion in annual revenue. So a$200 billion backlog is remarkable.

17:21So that does bode well for shareholders.