The Trillion Dollar AI Question

0:04Travis Hoium:Could AI spending reach a trillion dollars by 2030? Motley Fool Money starts now.

0:19Travis Hoium:Welcome to Motley Fool Money. I'm Travis Hoium joined by Lou Whiteman and Tim Beyers. We're going to talk today about housing. We're going to have Lou and Tim cut some of their favorite stocks from a mini portfolio. Well, let's start with artificial intelligence. Morgan Stanley recently said that they expect global data center spending to increase from$307 billion in 2024 to$920 billion in 2030. Data center CapEx is driving companies like NVIDIA, Amazon, Alphabet, but they're not making enough cash to make that investment themselves. So Tim, when you see these huge projections, what do you hear?

1:00Travis Hoium:And do we actually have enough cash flow from these companies to spend almost a trillion dollars per year on CapEx? We do and we don't. And let's start with the we do. They are committing quarter over quarter, Travis, somewhere in the order of, and these are multiple companies, somewhere between 50 and a hundred million dollars every single quarter. That's extraordinary. I mean, it really is. I'm sorry. I said million. I meant billion. Like this is... Just a few orders of magnitude bigger. Yeah, it's a few orders of magnitude bigger. I mean, this is extraordinary amounts of money. So on the one hand, yes.

1:41But on the other, this is a market that is out of sync. It's completely out of sync. The build out of hardware is so extreme that the infrastructure to support all that hardware just isn't in place yet. And I know you've covered energy quite a bit over the years, Travis. And I just I don't see how you don't get to a point where there is a little bit of slowdown in the hardware build out. And then you do some catch up around energy infrastructure, around environmental infrastructure, around like city planning, you know, urban planning. Like, how do you get all of this done in a way that actually creates sustainable growth?

2:32That doesn't seem to be part of these projections. And I think that's one of the flaws here.

2:38Travis Hoium:It does seem like the numbers are just we're going to keep increasing this. And going from the ChatGPT moment that was in late 2022 to where we are today, that's been a massive amount of growth in AI spending in spending on things like NVIDIA's chips. But we're still kind of learning what these business models are, too. We talk a lot about chips, but there's more to it than this, than just spending money on, you know, these power hungry chips. What else are they going to be spending money on?

3:06Lou Whiteman:Yeah, you know, and with all respect to Morgan Stanley, and I do think that it's smart research. But, you know, humans, we are terrible at recognizing cycles, recognizing pendulums for being pendulums. So I feel like some of this is just kind of taking what we're doing today and assuming it into the future and not considering a swing back. So we'll see about the actual number, but we're going to spend a lot of money. I do think that at some point, Tim mentioned energy. We're going to have to spend money on ways to be smarter about energy consumption or building out energy. So that's part of it.

3:38Lou Whiteman:I do think, you know, we've seen all of this hiring, this poaching, maybe a shift from, you know, building up this hardware to getting the brains that know how to use it. I wouldn't be surprised if at some point, just instead of just pure hardware and all this data center spending, that even if we still spend a significant amount of money, the spending gets spread out in ways that we're just not seeing right now at the initial buildup.

4:02Travis Hoium:Tim, the way that you're talking about this reminds me a lot of the late 1990s and the telecom buildup. And there was sort of a dual bubble. We talk about the dot-com bubble. That was a dot-com stock bubble, but there was also a telecom bubble, which is basically these companies spending incredible amounts of money to build out the fiber that we still use today. I mean, Google bought up a bunch of that dark fiber. That's one of the reasons that they have as good at infrastructure as they have. What you're saying reminds me a little bit about, you know what? The numbers are just going up so fast.

4:32Travis Hoium:Demand is going up so quick. And we hear this from every AI related company that we're just going to keep building and keep building. At some point, there has to be a business model behind it. There has to be return on investment. If we're talking about a trillion dollars of investment, you got to have some profits coming from that. Most of these companies aren't profitable. So is that a good analogy for thinking about it? or is there a big difference in this build-out versus that telecom build-out? You would hope there's a difference. I don't know that there's a difference. And I think there is a genuine fight over the right economic model for AI, particularly any kind of commercial AI.

5:10And I think you have two ways to fight the portal fight. And what I mean by the portal fight is, I think we are getting to a point where the next interface for computing is likely to be a chat interface. It's likely to be some kind of, hey, chat GPT, do this thing for me or search for this thing or whatever it is. So some kind of chat interface. Now, you're going to have ChatGPT, Anthropic, companies like that that are native to the business of building up a chat portal. That's their primary economic engine. And they want to build things that make that chat engine economically viable. Then you have a competing idea, which is the search model, you know, the traditional web model, and then putting on top of that a chat portal.

6:08And that is Alphabet. That is Microsoft. That's even Apple with Siri. And those two ideas are going to compete. You know, there's going to be a real fight to figure out who wins in that model. And so there's going to be lots of trial and error here, Travis, between like, is it all going to be driven by advertising? Is it going to be driven by data access? Is it going to be driven by new tools to make different kinds of software that run from a chat interface? But those, you know, those different types of companies sort of converging to fight a battle to win the portal war, I think is something we're still in the infant stages of seeing that like it's barely started.

6:55But that's a big piece of this story that we aren't talking about yet. But I promise you in the next 18 months, we're going to be talking about it.

7:04Travis Hoium:I saw somebody compare the moment that we're in in artificial intelligence to the Motorola Razr moment. And that really stuck with me. That was my favorite phone in, I think, 2005. Yeah. But that was obsolete two years later, Lou.

7:18Lou Whiteman:I love that phone. This is such an important part of the AI conversation for us as investors to have. Because, Travis, to your point, a lot of fortunes were lost on that infrastructure buildup, but it was still value-adding over time. So, all of this money is being spent. I think it is adding value. There is a there there. This isn't just kind of crazy spending, but that does not translate. If history is a guide, that does not translate to every one of these investments will be a winner. And there will be, as Tim says, there will be a period of kind of figuring out who's the winners, who's the losers.

7:55Lou Whiteman:I think there could be a lot of winners that aren't spending the money, just kind of one using AI. I mean, just to use one example, MongoDB was up 30 % post earnings today on a huge surge of customers attributed to AI. There are going to be a ton of winners. They're going to be losers. And we are just so early. It's, if nothing else, you just don't put all your eggs in one basket here as an investor. Can I add something there, Travis? Just quickly, one of the things that's common about that, now we can't be sure that MongoDB is going to be a durable winner here. But one of the things that's true, at least today, about that MongoDB result is that they sit in one of the categories that historically, over time, as these sorts of you, you were likening it back to the dotcom bubble, the telecom bubble, the things that did endure from those periods, at least over time, it took some time to sort of wash away all of the excess.

8:55But the companies that didn't go away had real picks and shovels. They had real picks and shovels that they could rely on and build upon for the revolution to come. MongoDB is in that space. They're not the only ones. Data management, if we're an investor that's looking to profit from the time that we're in and the excess that we're in, please, for the love of God, don't just look at NVIDIA. Look for the picks and shovels. MongoDB might be one. We can't say for sure that they will be, but they might be one. Any company that is in successful data management is one to at least consider.

9:38Travis Hoium:One of the problems with the telecom build-out was the debt that those companies ended up taking on that increased the risk of their business. Tim, quickly, do you think right now we have Amazon, Microsoft, Alphabet and Meta generating almost$500 billion in operating cash flow? If that investment number does go above that, they're spending about$365 on CapEx. That's a projection for this year. They're using almost all of their operating cash flow on CapEx. In other words, are we going to get to a point where they're going to be going into debt to build out more AI solutions? They might, but I mean, they certainly have the cash flow to service that kind of debt.

10:19You could see it. But I think my prediction on this, I'll make a reckless prediction on this, Travis, you won't see that. You will see a relentless focus on efficiency first, because there is a software side of the AI equation that we just haven't, we haven't figured out yet. Right now, most of these models are very dumb. They use a lot of tokens. They just burn through all kinds of energy and almost indiscriminately that can't last. There is real engineering work that is happening and will continue to happen to make models, tools far more efficient. And you, I mean, I expect, Travis, that you're going to see a lot of focus on that at, you know, like in the, you know, the labs at AWS and Google Cloud Platform and at Microsoft.

11:11I just don't see how they get around that because, you know, ultimately, those companies want to see more software built. And if you want to build more software, you need better tools. And that just requires, there just is no way to get around the need for clever, efficient software engineering. That's just coming. Lou, what's the big picture here?

11:36Lou Whiteman:So, you know, the big picture I'm watching, we're talking about all this spending. And I mean, arguably, AI spending is keeping the whole economy afloat right now. I mean, I think that's a little bit of hyperbole, but not too much. The economist, venture capitalist, nature hiker, Paul Godorsky, great guy. He put out something last month that was really interesting. AI spending is about 1.2 % of GDP. That's higher than it was back in the telecom boom, higher than the internet. You have to go back to the 1880s, Travis, with railroads to find a time when one part, one sector had that large of a role.

12:14Lou Whiteman:at a time when we're talking about tariffs or the consumer looks pressured, is AI spending just kind of the only thing keeping us afloat? And if so, and some of these pressures do build or what could that mean? I can't answer those questions, but kind of as just a broader investor, those are the things that kind of, I don't know, they keep me up at night, but those are the things I'm really, really watching.

12:36Travis Hoium:We could talk about this all day, and I'm sure this will be a continuing topic, but we do need to take a quick break. And when we come back, we're going to talk about housing prices and the trends that we're seeing there. You're listening to Motley Fool Money.

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13:51Travis Hoium:Welcome back to Motley Fool Money. We got a reading from the Case-Shiller Index this week for July. This measures the value of home prices throughout the country and there's regions all over the country. Housing is always a regional sort of dynamic. But we are seeing declines in home prices, especially in some of the hotter areas like Florida. Housing is the biggest asset for most Americans. So Tim, what should we take away from the potential that home values are going down? Not a lot, but at least a little bit throughout the country? It's healthy. I look at this, Travis, and to me, it feels like a very healthy reset because we badly need more supply in this country.

14:36We just don't have enough and we haven't had enough homes for quite a long period of time. And when you inject supply into the market, you may see a little bit of pressure on pricing. Pricing comes down a little bit. If demand just keeps going unrelenting, then prices go way, way up. As supply comes into the market, prices go down a little bit. This feels like exactly what we need right now. So I'm very happy to see it. Now, what I'd be looking for is what kind of homes are we talking about here? Are we getting more planned communities? Are we getting more urban housing? I, in particular, think a bit of urban investment is probably the right thing.

15:23But because that has economic knock on effects, not that I don't, you know, like, hey, I live in a suburb. Suburban investment is great. But urban investment where there's a lot of businesses, there's a lot of concentrated economic activity. If you get some of this housing influx, right, new supply, Travis, then I think you may have some knock on effects that are very good. for the U.S. economy and very good for consumer-facing businesses. So I'm hopeful here, but I might be a little bit naive. What do you think, Lou?

15:57Lou Whiteman:Yeah. So I think healthy is a good word. I don't want to read too much into this. I think this is a sign of just things are getting back to normal. We had a huge price shock, housing slowed dramatically as we saw rates go up and just we weren't ready for it. I think what we're seeing of this data is buyers and sellers returning to the market. A lot of that added supply are just people who have been sitting on their home and are just now saying, okay, we just have to suck it up and sell.

16:23Travis Hoium:And that's because housing is a very sticky thing. Like if you buy a house and the interest rate goes up, you go, okay, I could double my mortgage payment by moving to a similar home, but that doesn't make any sense. It is sort of a strange business.

16:38Lou Whiteman:Well, here's the thing too that kind of is interesting, I think, because look, there's a lot of macro headwinds that are like new supply. Homebuilders are under a lot of pressure in a lot of different ways now between labor, raw materials, all that. I said, if we're just finally adjusting to the rate hikes, there's a lot of talk now of rates coming back down. I don't know. I mean, the conventional wisdom is that with juice sales, but does that set unrealistic expectations? Does that actually slow sales temporarily because we're just getting used to the status quo. We're changing again. And look, whatever the Fed does, I think everything going on in the world, all signs are the longer term rates and the mortgages are tied to the 10-year.

17:20Lou Whiteman:I don't know if a Fed rate cut really moves the 10-year and moves the mortgage rate the way in Econ 101 we were told. So if those headlines are there and people aren't seeing the mortgage adjustment, I have no confidence that this continues. I think there could be another different shock right around the corner, and then we'll have to adjust to that. Yeah.

17:45Travis Hoium:And first perspective on the 10 year, the 10 year yield has not changed basically since election day. It's basically flat. So I think there has been two rate cuts and another one rumored for September. The other thing I want to bring in here, and this comes down to some of the unemployment numbers that we've seen recently in the Fed talked about this in their Jackson Hole speeches that part of the issue with the headline number, the number of jobs added or not added in the recent revisions was that there's just fewer people in the labor market. And so that could help housing prices, but that's the other side of the supply and demand.

18:18Travis Hoium:Is there just, Tim, is that a piece of it that there's just fewer buyers in the market than there used to be, partly because of less immigration? I mean, that could be. I don't know. But I think Lou made an important point, so I want to double underline it here. This is very complicated. There are a lot of moving parts. The unemployment numbers are going to be important here. We are we have continued to see layoffs, Travis. So, like, I think the thing that I don't want and kind of I hope I'm not, you know, just just, you know, taking out of context what you were saying here, Lou. But the way I think about it is that if there's artificial stimulus that comes in at the wrong time, just when we're seeing a healthy sign come into the market, if you muck with that with more artificial stimulus, let's say like a poorly timed rate cut, you sort of start to lose some of the benefits you would get by seeing the market return to health.

19:21So I want the market to just be healthy.

19:25Lou Whiteman:Yeah, bottom line is, you know, as an investor, housing looks like even a bigger long-term trend to me than AI, but it's just, it scares me right now. I don't know how soon that comes.

19:36Travis Hoium:Well, next up, we're going to get to a few stocks that we like, or maybe don't like, in our game called Cut Down Day. You're listening to Motley Fool Money.

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20:13Travis Hoium:Learn more at schwab.com slash trading. Welcome back to Motley Fool Money. The NFL has just completed its cut down day. Rosters have gotten down to 53 players. So today's game that we're going to play is a little bit similar. I'm going to give Lou and Tim three stock portfolios, just three stocks in the portfolio. We're going to hopefully get through all four of these. They're going to have to cut one of their favorite stocks or foolish favorite stocks. So put on your best Dick Vermeule hat and shed some tears for some of the stocks that you probably love. The first portfolio is Foolish Favorites.

20:53Travis Hoium:Tim, I want to start with you because I know that you have a long history with a lot of these companies. Netflix, Amazon, and NVIDIA. If you own all three and you have to cut one from your portfolio, which one gets the boot? This is going to be very unpopular. Very unpopular. Oh, no. And it's going to be NVIDIA. NVIDIA's got to go. I'm sorry. I'm sorry, NVIDIA. I'm sorry, Jensen. And the reason NVIDIA's got to go is because this is a business that is highly cyclical. It has been an absolute stone cold winner and it could continue to be a stone cold winner. But for me, one of the ways that I practice portfolio management, Travis, is I don't want to sell everything off of a stock.