The Internet Is Changing Fast

0:01Matt Frankel:The internet might be about to get weird. Motley Fool Hidden Gems Investing starts now.

0:11Matt Frankel:Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast. Joining me today are guest, longtime Fool contributors Matt Frankel and Tyler Crowe. Me and Tyler are switching seats today. But today we're talking about some mining stocks as well as a$15 billion move from Intel. But first, I want to talk about this bit of news. Earnings season, always a busy time, and sometimes things get lost in the commotion. One of the things that I feel like got lost was when Cloudflare reported its second quarter earnings on August 6th. Now, this is a top 10 ranked stock in the Motley Fool Hidden Gems universe, but the report was great.

0:54Matt Frankel:investors responded fine, but buried in the earnings commentary on the call, co-founder and CEO Matthew Prince was talking about AI agentic traffic on the internet, saying that for the first time, AI agents surpassed human activity on its network in May. And the company had projected this to happen already, but it's happening faster than its timeline. And then they went on to say that they actually expect AI agent traffic on the web to be 1000 times bigger than human traffic within the next five years. And growth is something that is so important to investing. It's something that caught my eye when I saw this statement.

1:40Matt Frankel:But Matt and Tyler, I want to get your reactions just first here. What did you think about this statement from Matthew Prince?

1:47Jon Quast:On one hand, I understand the logic, even though I think the 1000x figure might be a little bit too ambitious. The agentic AI traffic, it increased by about 18x over the past 12 months, and a thousand times in five years would mean roughly quadrupling every year for the next five years. So that would actually be a deceleration from what we've seen. There's also the case to be made that human internet traffic has a natural ceiling. We can only look up so much stuff. We can only perform so many tasks at a time. There's a reason that human-driven internet traffic has only grown at a low single-digit rate for about the past decade.

2:22Jon Quast:Agents don't have this natural ceiling. It only depends on the cost of doing the work and how many tasks we give them to do. Obviously, there's no limit to the latter there. Costs are falling and usage is rising. 1 ,000x in five years, as I mentioned, it could be a stretch, but the costs are certainly heading in the right direction. The token costs, They've dropped by an order of magnitude over the past two years, and we've seen roughly 100x increase in usage. So if that pattern of decreasing cost continues, agentic AI usage could soar. I don't know about 1 ,000x, but a lot higher.

2:55Tyler Crowe:I want to kind of compare this to that. If you double a penny every day for a month, we have like$5.6 million. I mean, yes, the math says it works out that way, and doubling early numbers like we've seen recently makes sense. but eventually that pace does become somewhat unsustainable we see this investing all the time you know the s curve of investing things accelerate and then they eventually decelerate we see it with companies revenue trajectories all the time look just because agentic web traffic is happening behind the scenes doesn't mean it's without cost and yes costs are declining but there is cost to it and there will be some inflection point where the compute costs for all this agentic web traffic Like, throttles growth.

3:37Tyler Crowe:Someone somewhere looking at their AI cost spending will need to see an ROI on this. And, you know, for all this bot traffic, that's what they're doing. Eventually, they're going to have to see a return. If they're not seeing it, they're not going to be spending on it because otherwise, what's the point?

3:51Matt Frankel:Well, it sounds like both of you then are a little bit skeptical on the 1000x number. And that's fair. If you believe that Cloudflare is blowing some smoke here, feel free to say so. But I do want to imagine here. I do want to project. I want to look into the future. Let's say by 2030, if at least this is directionally right, that the share of agentic AI traffic is going to continue to increase at a large rate compared to the human traffic. Will the internet look different in five years? And what changes would happen? What would be different from our perspective? What would it look like?

4:28Jon Quast:Like I said, I'm not totally sold on the thousand X figure or that it's going to be anything close to that. But let's just assume for a minute that that proves to be accurate. The main thing that I see that would be very different is how money is made on the internet. In Prince's comments, he correctly says that the general business model of the internet has been defined by advertising for almost three decades. And this could change. If 0.01 % of your views are going to be human, then why would you advertise as if humans were going to be looking at your page? So I'm not exactly sure what that might look like, but advertisers would need to figure out new ways to reach customers in an agentic world, maybe reach them through agents.

5:08Jon Quast:And the ways that publishers sell ad space based on impressions might not work well anymore if only one or two out of every 10 ,000 impressions is made to a human being.

5:18Matt Frankel:I mean, when you think about how much of the internet is built around this whole concept of advertising and being open in that way, I mean, that is actually a really profound change that would possibly be occurring there, Matt. So I appreciate you bringing that up. But Tyler, I want you to weigh in here as well.

5:36Tyler Crowe:I'm probably going to sound like a curmudgeon throughout most of this segment, but I am taking the under on this 1000x AI agent traffic. I mean, this really does sort of sound like Prince is talking his book because like obviously CloudFair would benefit immensely from exponential web traffic growth. It's not just what he's saying, but why he might be saying it. This, you know, a little bit of the incentives matter in these sort of statements. In terms of changing the internet, we've already seen this happen with mobile-friendly web pages and the explosion of search engine optimization for the past seven to 10 years.

6:11Tyler Crowe:We have that hamburger-looking drop-down menu. That's because we wanted mobile-friendly design. For search engine optimization, web pages are written for two audiences. You have the human, and then you have the Google's search engine algorithm. I mean, if you've ever wondered why a single online recipe page became a 10 ,000-word novella, They're witnessing like SEO nuclear arms race in full effect. Pieces are scored better with keywords and phrases without much penalty for length. You get to this point and Herman Melville, I'll be almost be like, eh, might want to cut that down a little bit. So projecting this agentic web search in assuming princes, I don't know, just directionally correct with what he's saying here.

6:50Tyler Crowe:We're going to get AI agent optimized web pages. If I'm building a site where I know so little of my traffic is human, why would I even build it for humans?

6:59Matt Frankel:That's such a good comparison on the shift that we made to mobile web. And that, of course, created lots of opportunities in the market. There were profound changes that happened to the internet and there were companies that made money and investors who won. And I think that's really what our listeners care about most here as we consider how the internet might be changing and the changes that we're already seeing. And so I want to leave this final question here for both of you, what opportunities might be created from a change in how the internet, if we are going to start building a web that is focused towards these agents, what might that create in far as investing opportunities?

7:38Jon Quast:If overall internet traffic is about to 1000x, I'm most bullish on the companies that make the infrastructure work. Like I'm talking about the companies that provide the power infrastructure data centers need. The cooling systems, which is becoming an increasing problem as they get more complex and dense. The heat island thing is a real problem. Other things that will likely surge in demand if that thousand X prediction is correct. But I would caution that even if we're directionally correct about this opportunity, you know, agentic AI really taking over internet traffic, the valuation of all these stocks still matters.

8:12Jon Quast:I mean, some of my favorite AI infrastructure companies are trading for pretty high multiples right now, especially for a value investor like me. As an example, everybody was 100 % correct that the internet was going to revolutionize the world in 1999. It took Cisco 17 years to come back to its previous high after the bubble burst. GE Vernova, Quanta Services, those are two companies that come to mind that I would love to own, but I'd probably wait for a more attractive valuation before you'll actually find them in my portfolio.

8:43Tyler Crowe:How about you, Tyler? John, I apologize in advance because I'm going to commit one of the worst sins in media. that I'm going to say I'm not really sure yet. I know it's happening. I'm still trying to wrap my head around the mechanics of it. I mean, yes, it does support the AI infrastructure build-out narrative, but isn't that already kind of baked into AI's potential in the current compute demand projections that we have out there? I mean, maybe this is just an added data point that the AI infrastructure build-out has that extra leg to stand on, and maybe we don't have to worry as much about like, oh, this is all super inflated because now we're starting to see some tangible things.

9:20Tyler Crowe:But to that like ad revenue business that you're talking about, I'm thinking almost like on a theoretical basis because we've seen companies like the Trade Desk get absolutely hammered because of Walt Gardens and the way that the advertising business has shifted. And this would seem to make it a lot worse. But there is going to be an opportunity for somebody like that who can discern between like a human and a clanker who's bringing your web traffic to your website. And if you can deliver ads for the right person, or if there is some sort of way to influence AI agents with not necessarily like the advertising that we think of today, but some sort of way to influence the way that AI agents make executive decisions based on what is presented.

10:02Tyler Crowe:there is probably some opportunities there as well. Again, this is like, to me, it's a little theoretical. I haven't really seen the effective business plan that executes this well. But again, why I'm struggling with this and why I'm saying I need to see more of what's out in the market available.

10:18Matt Frankel:Well, Tyler, I'll go ahead and forgive you because I think that humility is one of the most important traits a investor can have in saying, I don't know yet is intellectually honest. So I'll allow it.

10:28Tyler Crowe:Well, look, man, I said that on CNBC once like 12 years ago, and I haven't been invited back since. So I'm pretty sure you're not supposed to do it.

10:36Matt Frankel:Well, we'll invite you back on this podcast. But that's it for this segment. After the break, we're going to dig into some mining stocks. You're listening to Motley Fool Hidden Gems Investing. As an investor, I'm buried in data and making sense of it all is hard. That's where Claude helps me every day. I regularly give Claude a company's financial statements going back a few years and ask it to flag anything that looks like an outlier, line items moving in a way that didn't match the trend around them. It surfaced a lot of things I probably have skimmed past before. Things like expenses growing faster than revenue or margins quietly improving while the headline numbers look flat.

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11:59Matt Frankel:Welcome back to Motley Fool Hidden Gems Investing. So the Trump administration over the weekend making some big announcements regarding mining, and there are some mining stocks that are up today. I want to talk about this for a moment. There is, of course, a geopolitical angle here. The USA gets a lot of its minerals from China. Of course, it would like to be less reliant on that. And one of the things that appears to be holding our country back is the workforce. And so according to some reports, China graduates over 3 ,000 mining engineers annually. And compared to the US, the USA is far fewer at only about 170, fewer than 170 annually.

12:42Matt Frankel:And one of the interesting things here is that it's projected that perhaps half of the mining workforce, the educated mining workforce, is going to be retiring within the next three years. So labor seems to be an issue. The Trump administration committing$100 million to education. Just want to get y 'all's reactions here to that.

13:01Jon Quast:So we're going to switch roles. I feel like I'm going to be the curmudgeon in this section. The problem here isn't just tuition. It's that mining is a highly cyclical industry. Jobs can be in very remote areas. where nobody in the U.S. lives. And there have been stretches where it was impossible for new grads to find a job in the industry. Like I want to say the whole 2015 to 2020 era was really difficult for the mining industry. This is why there were about 1 ,500 people enrolled in mining engineering programs in 2015, and now there are fewer than 600. It's not that interest in high paying jobs has evaporated.

13:35Jon Quast:It's the industry's showed people that this is not as stable as you might think. Plus, when you say that half of mining engineers are set to retire within three years, it takes four years at least. Let's be realistic. Most people take closer to five to get through college these days. It takes four years to get a mining degree. So I'm not sure that timing really works as much as the Trump administration wants to say here. So I understand the national security angle. Same thing we've gone through with the chip makers, but I'm not sure this will do enough to attract thousands of new students. Tyler, bring us home with some optimism here.

14:09Tyler Crowe:Well, I mean, someone who spent eight years in college, that five years is a nice term. All I'll say is on the remote stuff too, though, I've spent the last seven years outside of the United States for my wife's work. And I'll say that working remote places certainly has its perks. You know, I can't be said that I'm not a wife guy because I'm definitely thanking her for doing that. Also, I'm being a little tongue in cheek here, but the threat of AI jobs apocalypse certainly helps making the case for this kind of work. right? Like be a professional that might get your job eaten by AI or I don't know, go work in Alaska for a little while.

14:40Tyler Crowe:We'll see if this has a tangible impact on employment and mining activity in the United States. I'm a little dubious. Mining is like the AI in the sense that no one wants to live next to a data center or tungsten mine. Let me give one example. I grew up in New Hampshire, neighboring state of Maine. Maine has one of the largest lithium deposits in North America, but state laws make it effectively impossible to build a mine to actually extract it. Whether that changes, we don't know. It could, but I kind of have my doubts because there's a lot of NIMBY that's involved with mining as well. There is a lot of things that need to happen for an American mining renaissance that doesn't seem to be in what this, these sort of like deals that we've been seeing happening.

15:20Tyler Crowe:It's going to take a lot more than just money and some new engineers.

15:23Matt Frankel:This isn't a topic I don't think I would normally highlight here for the podcast, but we did have Tyler subbing in today. And Tyler, of course, is kind of our resident expert when it comes to mining. And I think that's important because I don't think many of us really understand the business of mining, the economics of mining. I think a lot of us, such as myself, just see a$3 billion investment from the U.S. government and say that must be bullish for the mining stocks. But Tyler, I want you to just kind of temper us a little bit. Explain to us what we should be thinking.

15:58Tyler Crowe:Sure. So I'm going to, again, put on my cranky pants. And look, part of the announcement that we saw that was this$3 billion investment from the government, some of the education, some of the stuff. $1.4 billion of it is going to a startup that actually isn't in mining. It was$3 billion of that. $1.4 billion is a department of energy loan for a startup lithium ion battery company. It's not public, and it makes silicon anodes for batteries. Now, if you squint really hard, you might be able to make the case for increased mining, but that's for quartz and silica, which isn't exactly what we're talking about here with rare earth minerals and these super hard-to-extract things.

16:36Tyler Crowe:Silica and quartz are relatively easy. My word of caution. I sat on the editor desk of Energy and Materials for fool.com for a while. The one thing I guarantee we will see from this is a bunch of hopes and prayers mining companies go public. They will claim to have the largest reserve of XYZ mineral, and their investor decks will be stuffed with projected material demand and cost curves and all the stuff to get investors excited, but there won't be little in terms of what they will do as a business and profitability. More often than not, they are siren songs, and the chances of finding that one that actually becomes a revenue-generating, profit-generating entity is the same odds as a lottery ticket, And honestly, the returns on those aren't as good as lottery tickets.

17:20Tyler Crowe:I think honestly, better to just strap yourself to the mast and just sail past as best as you can. If it does end up making it as a viable mining company, it will hit some lull in the mining cycle because it's a cyclical industry. And maybe then it'll be a worthwhile investment. But investing in a bunch of startup mining companies that are just on hopes and prayers, I think you have better ways to spend the money.

17:43Matt Frankel:Well, I will definitely take advice from somebody who has spent a lot of time thinking about this, whereas I have not. Coming up after the break, Intel is raising some cash. You're listening to Motley Fool Hidden Gems Investing. They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead. This is the most advanced Range Rover Sport yet, a master class in uncompromised performance and unbridled agility.

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