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BG2Pod with Brad Gerstner and Bill Gurley
BG2 with Bill Gurley & Brad Gerstner | NVDA, Chips, AI Compute Build Out, Impact of AI on Big Tech, Earnings & Macro Set-up | E03
BG2 with Bill Gurley & Brad Gerstner | NVDA, Chips, AI Compute Build Out, Impact of AI on Big Tech, Earnings & Macro Set-up | E03

BG2 with Bill Gurley & Brad Gerstner | NVDA, Chips, AI Compute Build Out, Impact of AI on Big Tech, Earnings & Macro Set-up | E03

BG2Pod with Brad Gerstner and Bill Gurley Go to Podcast Page

Brad Gerstner, Bill Gurley
22 Clips
Feb 22, 2024
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Episode Transcript
Would you rather have an assistant with the intelligence of like Einstein but they have no access to the internet and they don't know anything about your history or would you like to have an assistant that's just above average intelligence knows everything about you and they can use the
Okay, you would choose that.
Hey great to have you here in person to be I remember when you were right up this hill. Yeah, you guys were over here. So I had a couple thoughts this morning first. I got to take a ride in full self-driving 12. I was that it was mind-boggling. I think this is going to be a bit of a chat GPT moment for full self-driving but what it really it just reminded me of the magic of this moment Tesla rebuilding their models for how they do self driving around imitation learning and
This interesting stuff going on over there. Like, you know, I think they probably made more progress in the last 12 months than in the last seven years. Wow, in terms of in terms of what's going on there and it's going to be rolled out here. It's already rolled out to I think 5,000 people and so like people are going to start experiencing that and I think we're having more and more of these moments right because this substrate we're going to talk a lot about today AI. Yeah and just to compute like what it unlocks the second in prepping for this pod was how
bad you make my head hurt the you know, I was thinking about this. You know what I love about this pot is like it's a forcing function you and I talk all the time. You're always challenging me. We're always comparing notes, but now with a little bit of structure around it every couple weeks. We have to think about some topics today. We're going to talk a lot about think Ai and compute and chips and its impact on big businesses and honestly it I liken it to an athlete, you know, and they say in order to be
The best I can possibly be maybe Kobe. I want to practice against the best and no but it's like listen II the reality is it's like running 10 miles a day to get ready for a big game. Like it's like if you're in this business and you're not exhausted with the analysis, you're doing the thinking you're doing particularly at moments like these to try to gather this data and try to gather Edge, then you're probably not going to end up on top of the Heap.
So I agree and I think that having a topic or an idea that you want to fully
flush out and be able to talk about causes you to place a few phone calls. We've read a few PDFs and and before you know it you actually realize you've learned something you didn't know, you know, five days earlier. It's a you know, I think
the little you know, pull the screen back a little bit. I mean you and I talked, you know interacted 510 times a day over the course of last week on these topics and then we turn over a rock and we find more data more information. We share that with one another that leads to another conversation, you know.
Combined networks allow us to ask a lot of the smartest people in the world the questions we need to be asking to try to figure out this moment. So it's been a lot of fun but it does give me a bit of a
headache. Hopefully a good one. So so we remain we were main kind of in earning season. Yeah, and so what's happened in the past few weeks that you think's super important?
Yeah. Well, we have a lot of we have a few stocks that have run a lot met an Nvidia up 30 40
ain't even with the pullback that we had today. But the truth is the NASDAQ hasn't really moved that much. I mean, I think we're up three or four percent through today. If you look at the median stock, I think it's up about 1% In fact, I think we have a chart here just on the dispersion that we see in the NASDAQ, you know, and so remember last year was was like this risk on moment a mean reverting moment for all of technology and this year. We're really starting to see the winners and the losers.
Have some software companies that reported after the belt tonight that are down a lot because they're not seeing the a I pull forward that may be an Amazon or a Microsoft. So that's my first take away. My second takeaway is you know against these higher prices for some of these companies, you know, the backdrop looks a little bit more challenging. So we had a CPI print that came out last week that ran a little Hotter Than People expected the 10 years back up to 43. Remember at the end of the year. I think I had gotten down to 35.
Five and then we had what I thought was a really provocative tweet at the end of the week from Larry Summers where he said the next move by the FED could be higher now. Why is this so provocative? Well, the market is betting or sure. The only debate about the soft Landing is been when is the Fed going to cut right? And so you have Summers come out and say hey, I think the next move could be higher. That would be a shock to the
Mark was he being provocative or do you think there's real data that suggested that the soft Landing isn't a foregone
Well, listen, Larry was was spot on right in 2022. Okay, I think last year he he was a little bit too aggressive as to where he thought rates were going to have to go at the end of 22. I think he said maybe they could have to go to six or seven percent but I'm humble in the face that the future is unknown and unknowable like we don't know that's the truth of the matter. So as investors, we have to try to distribute this these probabilities and so if I go back
And look at this.
Real rates, right? So real rates. This is the restrictive - that we have in the economy. So this is effectively the interest rates. We have less the expected inflation rate in the future. There is high as they've been since the fall of 2007. And the last time they were higher than that was in the summer August of 2000. Okay. Now, what was the goat what was going on August 2000 and the fall of 2007. Well, the the economy was on a heater.
And the Fed was trying to slow it down. Okay, so that's the level that the FED currently has its foot on the brakes and every month that inflation comes down. If it does. Okay, then the restrictiveness goes up, right? So the FED if inflation is coming down then the FED does nothing and it's foot goes harder on the brake. So that's why pal is said we have to cut rate just to stay equally restrictive. So for Larry to be right, we would really have to see a reversal and
Relation, which I don't think many people forecast or C. But I think the important takeaway is this as investors. I know and you're already probably saying God, how did bread Sidetrack me on macro. I don't like to talk about this. You know, I often think about that famous saying if you don't do macro macro does you hmm But when I think about when I think about it in this moment, it's just to say stocks have run up a bunch at the start of this year. Okay. The backdrop is got a little less predictable. There's now this tug of war that's going on.
So I think we're going to have to see both of those things play out. And then of course this week the monster that comes tomorrow bill is Invidia. In fact that you know, CNBC is screaming every day. Whichever way Nvidia goes so goes the market now, I don't think it's quite like that but one of the things that I was thinking about in regard to this is because we were making a bet that a I was for real that training workloads were going to be large and that these inference workloads were going to kick in
And as investors, we often take let what we call this private Equity approach to the public markets, which is you know, let's get the big trends the phase shifts the super Cycles, right? You know, I think about you had me over to Benchmark. This is years ago. And you said Brad, will you come and talk about booking.com and the case you do at Columbia business school in the old Graham and Dodd class that I that I teach with Chris beg, you know on occasion and and the thing I try to teach the students in that class and why did all the
The list on Wall Street, Miss booking.com, right Miss paik Priceline. Now remember Priceline was a billion dollar company in the public markets today. It's 120 billion 120 bagger in the public market. I mean, there aren't many Venture capitalists. They ever get 120 bagger let alone a public market investor and the takeaway in the class is everybody and all the analysts on Wall Street were so focused on how many hotels were they going to add in the quarter right? There would be a lot of volatility around the number of
Elle's added in the quarter. Nobody really took the time Horizon to say in 5 10 15 years how much more the offline world is going to book their hotels online and how much bigger that's going to be. So often the short-term trading they would get the long term conviction. Right? But they would end up trading out of the position. So I look at Nvidia tomorrow and the honest-to-god truth is we have no Edge
on a quarter. We're on day to day
trading of these things. I think we do believe that the amount and we're going to talk about this later the amount of compute that's going to have to be
Old in the world is way bigger than than people than consensus estimates, you know currently forecast but I think tomorrow it's going to be really interesting what
could really move I mean, they're sold out right and their Productions known so it's just pricing that could be different,
correct. Well, I think there's so everybody every hedge fund every long only person they track all this data, right? So the coas data, you know, the order books the h100 data and I think what people are seeing and there's been some tweets about this. Is that the
Lead times on Nvidia H 100's are going down. So what might you think if the lead times are going down you would say. Oh the demand must be going down or the supply must be going up catching up with demand and you know, we've all been trained that every Supply constraint is ultimately met with a glut. Right? So everybody's just the wall of worry around Nvidia is when does the glom we've pulled forward all this training demand is dark fiber like in the year 2000, I think those things
Are not accurate, but of course, I have no idea what this means as to tomorrow. So I think they're just tons of questions about AI chips inference. How much of its going to be going on. I know we're going to hit on a bunch of that today. So, you know, we stirred the pot last week a little bit or two weeks ago by questioning the consensus view on Google which is that they're going to be a big AI winner. I think we called it the two trillion dollar question. I tweeted about it. Yeah. Yeah.
No, Mark suster chimed in and said, you know, I'll take the side that they're going to be in AI loser, you know, but why don't we dive in a little bit you had this good idea. Hey, let's look at these large cap tech companies through the lens. Are they winner or the loser from AI? Yeah. So
let's imagine that with Google, you know, and I wanted to back up a little bit and and borrow a framework from one of my one of my close friends and and someone that I think a lot of people have listened to and learn from
On investing Mike Mo besen and years ago shortly after I first met him he was teaching a class at Columbia and they start him in this guy Paul Johnson started talking about an acronym they titled cap competitive Advantage period and what they would do is they would take a company's market cap and they'd look at the trends in the company and they would back into the number of years into the future That Wall Street was telling you this.
Denis was going to have a competitive advantage and bye. Bye. Bye basically counting the number of years it would take in free cash flow to build into the market cap. And with the point did he made is that you know different businesses have different amount of durability. And so, you know, Coca-Cola might only have a three percent growth rate, but it might have a 40 or 50 PE because everyone is willing to bet that 75 years from now, you'll
We'll see Coca-Cola on show. Yeah, right, whereas, you know, you look at a company that all the sudden faces the innovators dilemma our faces disruption and this cap can close super fast and it has dramatic impacts on the market cap of the company. I remember when Blackberry first got in trouble the the devaluation just retrench. So aggressively that many people got fooled into thinking it was a value. Yeah because it was trading it.
10 times earning Yahoo! Same way. Yeah, and and and what was happening is the people in the know were saying this company's competitive Advantage just became quickly under about. Yes. I'm not sure on durables well, but you understand the point that I'm making
yeah oftentimes because we have a lot of high growth stocks in Silicon Valley and so they get assigned big multiples multiples are a byproduct of a couple things how fast you're growing because we're trying to forecast those free cash flows into the future, but also to the second point the durability because we have
Sign a discount rate. What's the probability that we're actually going to be able to collect those annuities sometime in the future. And so the less confidence we have about the future the higher the discount rate. And so even though you may have high growth we have to discount it a
lot and Mike has gone on I think the talk about optionality especially around tech company. Sometimes you have a platform position that increases the optionality you're going to be able to move into other fields. And therefore that would also be a positive but other people have questioned why these Tech
companies have high multiples at all because they're so susceptible to Tech disruption in which case you could argue the other side. But anyway, the reason I thought this would be an interesting way to talk about some of the large companies and AI we I don't think there's a single person out here that is arguing that AI is not some kind of fundamental base transition clay Christensen. Yeah, disruptive wave or whatever. And in fact, I think the number one way you could probably
Bleep commit hari-kari as a public company would be to on your earnings call say we think IA eyes full of shit, right? We don't want anything to do with it. And so everyone's forced to have an answer and I think you know one one example, that's pretty obvious to everyone is Microsoft. I think it became very clear to a lot of investors when they learned about an llm and what it was capable of and the fact it could help write code and then it could help you write a paper.
Were you know, and it could help you with creative Endeavors people looked at the Microsoft portfolio of assets, especially where they make money around the office suite right and said and and the developer Community where they also you know control a lot of the IDS that are used to program and they said oh this is easy Microsoft will be enhanced by this and I we should also add their their adeptness and moving quickly with the open a.i. Relationship and being they weren't there in front of this early.
Absolutely. And so all three of those things you go. Oh this their net winter and lo and behold, you know, their stock went up and they had multiple expansion.
Yeah. I mean II think that the first question we ask as investors is this thing real and what do we mean by real? What I mean by is the juice is worth the squeeze it cost me something to have ai if I'm a customer, right and is the productivity gains that I'm getting as a business worth it, right? So, you know, I was talking about Tesla, you know, start off the conversation well,
Well, if this model and this compute and and all of this capability allows me to develop full self-driving and to win the automotive Market because of that then of course the juice is worth the squeeze. I think if copilot allows my Engineers to be 30, 40 50 percent more productive than I'm replacing human beings with machines, of course that's worth the squeeze and so I would say that as we sit here in the
early, but I would even say to another way in the Microsoft case if you're not using their tool and you're programming without it your phone behind
Right and so it becomes, you know a tool that you have to have to remain competitive.
Yeah, and so, you know to me I we really try to look at it through the lens of is this company like if we look at their existing business is their existing business enhanced or attacked because of AI and then what new business opportunities do they have and and if we go back to Google for a second here because I think we it's kind of this iconic study because
The consensus view was that they were going to be a huge winner in AI Inlet. Let's step back for a second here 20 years ago, right the idea that you are going to be able to ask any questions immediately get information for free. Like Google gives us right was just beginning and the gains to humanity caused by the the revolution that Google really LED around information Discovery and how efficient and how quick they provided information Discover. It really just it changed the world in.
respect it moved Humanity forward back to Ridley's idea of ideas having sex right? Like it just allowed us to have more ideas collect more information exchange more information. I asked the team to do a little analysis like as investors. Like we're what do we think the right multiple should be for Google and like what what are the things that are inputs into that? So if you think about this Google does about 10 billion queries a day, right? So, you know a couple a couple queries are more than a query for every human on the planet and it has the most
Efficient system in the world for doing that I think if you pull up this tweet from vivec it'll show that the number of queries that are asked of Google has slowed down a lot, right? So they're growing at about 4% a year monetization is up a lot 13% more ads on the page. We've talked about that. Yep. And so you have a 17% kegger around search. And so the first thing that we just say is that the basing engagement even before a I had slowed down a lot because you're already at 10 billion queries a day.
So next we took a crack at a chart that says how many of those queries are going to become chat GPT like where he's okay. And so the black line here is kind of the number of queries that are information retrieval queries on Google and the blue line is the actual and the forecast by us for the chat GPT, like equivalent queries that are going to occur. Now what where do we get that information? Well first we know a little something about
about the number of queries on chat GPT, right and we know that open Ai and Google are working on the search integrated experiences. I think they call it s GE where they're going to have answers like perplexity in line with search. I think that Microsoft is now doing this with the rebranded co-pilot. So a lot of the information retrieval searches are going to be replaced with these chat GPT like serve searches and this is where it starts to get interesting.
Because two things kick in bill number one, it costs a hell of a lot more right to provide answers than it did to provide 10 Blue Links. So if you say like, what's it cost to provide template links? It's about a third of a penny or less per query. Now. What does it cost to do that for 750 tokens today? And of course this will go down over time, but it's 10x more right? It's four cents per query and then if you look at the refinement of queries that
Really going on. So a lot of times Bill what they do is they send back these 10 Blue Links and then they'll use that as their prompt right to re-query the engine. This could be up to 50 x more expensive to serve an answer a high-quality answer to the consumer versus 10 Blue Links. So your cost goes up a lot. Well, what about Revenue? So I asked the question on the other side. Well, we know that Revenue goes down. Why because I'm not clicking on all these ads on the page, right? And so Revenue per search likely goes
He's down. I think if you look at that in terms of what the gross margin is to Google, right the cost is serving going up the revenue coming down. I don't know you may take a 95% margin today on a business where you have 99% share your share likely goes down over time because you have people like chat GPT you have to compete with but worse yet. Your margin on each of those queries goes down over time. I don't know what it Nets out at 50s it 50% 60% now mind you for
To your copilot or meta Etc. That's a great business a 50% margin business. And you know, it reminds me what we've all said. So many times Google's margin is their opportunity. So the problem that for Google is they have to do this because their competitors are forcing them to do it. Okay, but it definitely is going to be a lower margin business and they're unlikely to have the 99% share. So everybody, you know has texted and emailed me. Yeah, but they've got YouTube and they've got Gmail and they've got gem
and I 1.5 and they've got all this up and I stipulate all of that is true. Okay, but the business that today produces the vast majority of profits for the company what percentage I mean listen, I think that search in YouTube produce over 100 hundred percent of the profits because they have a lot of money losing units in the business, but it's over 80 percent of the profits in the business. And so when you think about that now listen, they've got great management they can cut costs. There are lots of things they can do. I'm not saying this is going to occur overnight, but if you
I was talking with Clayton Christensen about the innovators dilemma and we were analyzing this business. This would really be case exhibit. Number one. Now, the irony of the innovators dilemma bill is most of the companies that face it. They know they face it. They know they face it. So the question is why don't they do anything
about it? I think some don't but okay, but in it in this case you I think there's no doubt that they
know of course they know. Yeah. So the question is there trying to thread the needle right? Can we somehow?
How modify this in a way where we continue to grow our quarterly earnings because just setting the platform on fire and retrenching in the public markets and doing all of that very very
very range by one thing that the the searches that are going away first or Wikipedia like searches. They don't have much monetization. So it doesn't it doesn't the revenue doesn't come apart right away, even though you might be losing search volume and and and and more importantly like people start getting addicted to the
Answer right away, which is very different from 10 Blue
Links. I think like the horse is out of the barn on answers, right like once consumers experience the magic of an answer. They're not going back to hunting and pecking for a roster for an athletic team through 10 Blue Links like that. You're just going to use it and all of this just reminded me of lastly of somebody tweeted out a grant them quote this week that I thought was pretty interesting. But it's this if you pull out this tweet from Charlie, he says the SP profit margins moved down to 10.6%
423 the lowest since Q for 2020 and that is the quote from Grantham. I love profit margins are probably the most mean reverting Series in finance. And if profit margins don't mean revert then something has gone badly wrong with capitalism. Right? I mean what's happening here with Google? It's not that this is anomalous right when there are big pools of prophets like exist in Google search capitalism has a way to
redistribute those people had given up late.
I agree. I like I like that blue in Microsoft had given up 100 percent prior to this new
bridge, right? That's why Sasha says you can if you're in technology if you run a company like Microsoft all the money is made in the two to three years around a phase shift. You cannot miss a phase shift. If you miss it, then you miss all the value capture for the next decade and I might argue with AI it's going to be even bigger value capture and disruption and it's going to last longer than a
decade one other thing. We don't know yet that I'm just being
It's in your thoughts on is what's the business model for this because right now the premium versions of perplexity and chechi BT have a dollar amount or a subscription this kind of looks like the in the Netflix type situation. So is it subscription or is it is it free? Do you want ads around your answers are not
well, I mean listen remember the disruptors.
They don't have to generate a lot of margin on this because they are no money on it today. So what do they have to do? They have to cover their costs? Yeah, and these disruptors want to see Google dance as Sasha said so the prop surprised when he said I was too but listen listen, the fire in the belly is exactly what you need. I think Sasha has founder level fire in the belly about this moment in time and I think he has it not just because he wants to see the stock price go up. I think he has it because
People like Sasha their post money and what they care about right now is moving Humanity forward and they understand that they've worked their entire careers to get to this place where we go from computers acting like calculators that are modestly beneficial to now computers helping us answer and solve the most perplexing and fundamental questions that we face. And so I suspect that they're going to underprice this if I were perplexity, I would I wouldn't have any ads in the thing right? No.
Need to put ads in it and I would attack and I would try to get share right and so it would be surprising to me if we don't see Meta aai and Microsoft and B dance and perplexity and all the others who are providing answer engines chat GPT coming at them below. Margin. Okay. Now, let's ask let's answer the question that I'm talking about the shorter term while everybody is fighting to gain share they'll price it so they cover their costs or maybe not maybe Microsoft's willing to eat it.
Here for a while and I continue like as of right now and I've played with all of them on the consumer side. I don't think anyone has a price perplexity came out as a lot faster. That was pretty cool. But when I just look at the quality of the answers, I don't I mean different searches one might be better than the other but I don't see anything that so holistically notable. Like I remember when Google search Damon like where I was I remember trying it.
Versus Alta Vista and yeah, I mean it was like you could tell like oh this is better. Right and I don't see that
right had that I did have that feeling of chat GPT
versus a traditional Google search. Oh, yeah. I mean you said among the answer about now you have you have four or five night Riley Riley back, you know companies competing in this consumer. They I space and there I don't see anyone yet. Now, I as I said on our last pot, I think if you get this memory memory, right it could change and since we
That open-air I published a release it says we're working on it. We're working on here comes memory, but the promise is right think pretty thin relative. Lll
explain to people again because I think this is so important you and I are in agreement that this could be the next 10x moment with GPT like experiences for consumers. So just double click again on what your understanding is of memory and why you think your sensibilities are that it's so important.
So I think there's two elements to this and one of
Them is a user expectation thing. And then the second one is a technical observation on the ladder. Well, let me let me get to that in a second, but on the user expectation thing, you know, it's funny. I key always go back to the movie her which I thought was just incredible but like you I think want to be able to talk to this thing and have it remember everything that you ever told it and if you had one that knew all of your emails all of your
Could remember your to-do list could route when you're about to meet someone that could bring up the last four times you met with them and the reminders you left yourself at that point in time, like you're talking to you know, we talk about the the programmers 30 percent productivity increase. This could be a human 30 or 40% Like if you have this thing in your head to just remembers everything. Um, so that's that and by the way, and I said this last time I think most people have just
Extrapolated agin to infinity and think it's going to do all these things but it's not doing it right now and you know this because you and I have been talking about this for a couple of months. Now, if you talk to the people that are at the tops of these firms and you say hey, why can't this thing? Remember everything I want - ooh, that's that's a hard problem. Exactly and it turns out that just because of the way this thing works it would literally have to retrain every night on each every
User and training costs are super expensive right now. It's trained on the Internet. It's regurgitating the Internet. It's not training on everything in your database. Right? And so there are people including open a.i. And all I think every want this is another one of those things. I think they're all aware of this and it but they don't know how to do it technically and you know, I invite anyone to come on the show that thinks they know how to do it. Technically if they'd like to correct us or whatever. I'd love or if there's
a startup that thinks they know how please come see us who write fund it and you and I talked about this. I mean
listen, I think open a I open the kimono a little bit. I think they're further out in front then they revealed but you know again I come back to this idea that I'm really lucky out here my assistant Brit. She's been with me for 15 years. She knows me longitudinally my likes my dislikes my family everything about my kids everything about hotels I've stayed at
Rooms, I want to stay in etcetera. So my expectation of her is that she can take offload a lot of that because she has all that prior history, right and
very human had that exactly do you
think about the productivity unlock for humans? If you give that for free to every human in their pocket and I'm convinced it's going to happen but one of the things I would suggest I had a really interesting conversation with some friends about Apple. Okay, because this is the giant right.
This is the thing in everybody's pocket. Nobody's talking about them, but they they have so much information about me. Okay, they have my contact list. They have my emails that might text. They have all these applications. And so one of the things I'll just drop out there I think a little provocative about what they may be doing.
Because I've read a bunch of stuff on Twitter about how they're building their large language model of their own. My sense is they're not doing that. Okay, my sense is in fact that if you think about it in the context of my assistant, right? So here's the metaphor. I give to you. Would you rather have an assistant with the intelligence of like Einstein but they have no access to the internet and they don't know anything about your history or would you like to have an assistant? That's just above average intelligence knows.
Everything about you and they can use the internet.
Okay, you would choose that right you would choose the and so think about what apple is going to do maybe more like a small language model like really understand all the language really understand everything about me really understand how I interact with all these applications and then when I have a deep problem, I need to solve they can sub-agent it out, right? They can send me down the path of chat GPT or send me down the path that Jim and I are send me to metal AI for an answer engine if I want to go down that path, but I think
That there's this layer on the top that's just a different architecture a different way of thinking about this that's going to be more like my assistant Brit. That's just steering everybody in the right direction. I think apple is superbly positioned to do this. But of course you don't want it to just you also want to be able to tell it things that you just to remember this or mark this dish are attached this to a note and and we've talked in the past about how an llm could be a user interface.
So you could imagine a small business starting with a CRM that is only voice. Right? Right. Say this customer this, you know and you just talk to it and you want it to remember right? But but that has to be
architect about this like, you know, Brett Taylor's new business Sierra. We're looking at a bunch of businesses in the space again, you and I are talking about it in the consumer landscape. Remember everything longitudinally about me. But what is a CRM? It's remembering everything longitudinally about your other your customers.
One thing I want to do just to wrap this up because I think that you and I are analysts and you know, I think oftentimes in our business people talk about it. Is this company good or is this company bad and I think one of the things you and I think about a lot is distribution of probabilities, and is it reflected in valuation? So if you pull up this chart we did which is the mang comparison. It just shows the growth rates and the multiples applied to Microsoft Amazon and video and Google and here all we did was take
Consensus number so these are not alternators numbers are numbers are higher for some and lower for others. But one of the things I just want to point out is that the top this is the 23 through 25 expected growth rates 14% for Microsoft 12% for Amazon 42% for NVIDIA and 11% for Google. So Google's already expected out of those four to be growing at the slowest rate. But then what's interesting if you come down here to the price to earnings ratio, right? You'll see that Google is
raiding at the lowest PE right 21 times 24 and 20 or 18 times 20 25 expected. So all the things that you and I just talked about Bill about growth rate and durability of free cash flows into the future. I would argue a lot of these are already discounted in the stock right people are already placing those bets and so one might take the other side of that and say yeah Brad. Yeah Bill. I know all those things to be true, but they can cut a lot of costs and do a lot of things and that could cause the multiple to go up but if you go to them
A line under that to the PEG ratio because this is one a lot of people want to ignore on a on a price to earnings multiple. For example, Nvidia is a lot higher but if you actually look at it on a PEG ratio this year, it's a much less expensive company. If you look at on 25 Peg ratios, it's just a little bit different. So there are two ways in which to look at Future price to earnings multiples ones growth adjusted right that tries to take growth out of the equation and just look at it and
In terms of strict valuation. So my big takeaway from this bill is we're not here to pick on Google. We're just to say this is an important case study to watch about innovators dilemma, and it's clear to me that investors are already discounting it that they have some of these headwinds coming and I think there may be an opportunity something. You know, I said the other day if they manage to thread this needle, trust me, I'll climb on board that bus because I think their tremendous costs they can cut all that business. There's a lot of fitness.
I can drive into that business and the real question is how are they going to drive down the cost of serving these inferences? And how are they going to monetize this in a
way that by the way, we you know, it's funny because I think they have other assets like you when you talked about Apple you said they have the handset. Well, you know Google controls the entire Android market, which is a big Market. Yeah, they have a competitor to Microsoft's office suite now they have historically not invested a lot in that.
That it's not a big driver of their revenue. They could they could all the sudden triple down, you know, they were ahead in type-ahead. If you remember like ice my kids use those products and I was always on the Microsoft and I can remember like it was finishing sentences for my kids. I was at right that was inside of Gmail. Yeah first. Yeah, and so they have assets that they could bring to the bear and I think you know everything you said about Apple is true like
Having the physical control of the physical device seems real to me like meta like the notion that my a I would live in my WhatsApp as a person. I like that doesn't feel intellectually perfect to me like it being in the phone. Yes bills perfect to write like this things with me all the time.
But let's talk about two things in that regard. So we talked about you talked about memory being a 10x chat GPT moment. So you said
He was one of these a 10x moments to you compared to Blue Links. If we got memory that would probably feel 10x.
Like by the way while you're there. I have to say one thing. They've got late to to valuation. Yeah, um one thing that drives durability going back to our competitive Advantage period is switching cost if I start relying on one of these things and as my memory and I don't have a way to pull that out and jump to something else. I'm stuck. Yes, like I am
Hook block stock, right which means higher multiple very very positive for the person that gets there. So I
think I'm looking for memory as a 10x moment the other 10x moment I'm looking for here bill is actions right going from answers to actions. And so let's talk about that for a second. Yeah, you know this company rabbit's been making some waves. They have their version one out. Yep. I saw I think Tony fadell tweeted the other day. Can't wait to get his hands on one. There's a bunch of cool demos online. We spent some time with the company and now the thing
That they have or that they talk about is a huge differentiator is what they call a large action model not a large language model larger action model and basically think of it like cursor control bill. So if I say, in fact we did this demo upstairs when they were visiting I said book an Uber going from but it was able to do it literally had trained on the behavior cursor behavior of people using these apps and it was able to book that without any other intervention by me so
I took two doing some research and said could Apple do this because Apple knows exactly what pixel I'm using on the screen to hit a book button on booking.com or on Uber or whatever the case may be. Now remember cup aarthi talked about this when he went to open a i the first time he worked on a project that he called world of bits and world of bits the iconic thing he tried to do there and I think this was maybe five or six years ago was to book a hotel.
Could he get an AI to book a hotel and he said at the time it was damn near impossible. He had to write all these very specific algorithms had to try to figure out what every booking page looked like and he said recently on Lex frieden and maybe a year ago. He said I think if I tried to do it now using the general capabilities that exist today, it would be a lot easier. So I think that Apple's working on this clearly startups like rabbit or looking on working on it. I think that is another 10x moment that's in front of us, which is
Go from answers where I'm just asking it for information to actions and once it can start booking my hotel booking reserving my restaurant and then I just say same thing do it again, right because it has a little bit of memory about my prior action. Those are really powerful on
there's a there's an element of this that's just a fancier version of screen scraping right? There's a there's a hack Enos. Yes to this do this notion and I've often said, you know
So why in the world are we writing in the self-driving world? Are we riding, you know millions of millions of line of code to infer the state of it of a traffic light. Like why don't we just broadcast the state of the traffic light and it would be it would be three orders of magnitude less code,
but guess what? I think we literally are going to bypass. I think if we had done that that also would have been intensive right? Because then we had to wire everything up to be morning. Well, here's where I think the world's going we met with these robotics.
Companies we meet with Tesla Etc imitation learning. Okay, they're not even going to know what the stop sign is or the traffic light is or the dog in the street. They're not going to write C++ for every one of those specific incidents. They're literally going to watch the behavior of the five starts human drivers for enough hours and they're going to
imitate already missing my point back on the on the on the internet side, which is is telling having the having the AI.
like move my cursor around and click and fill out things is is not the most no part efficient way to do this you would you would have apis, of course these different services and and a way to interact and that's going to be a an interesting Evolution and there's a number of startups working on this to on different ways to try and drive action and to you know, some of them will sit on top of browsers and
Do that or some of them might try and sit on top of your phone, of course Google and apple will stop them from doing
that. I totally agree with that. It's funny. I was asking our analysts right 10 billion queries a day on Google today. I say do the number of queries in the future go up or go down, right? And I had somebody if I starve in at perplexity said to me, well, the number of queries probably goes down because you don't have to ask it so many times it will just give you an answer and I said, what about the positive reflexivity once I get the answer I've got more questions, right?
Like as long as it's fast and it's producing the that information I actually think actions and memory will unlock more interactions because it's so much more valuable to me all start using it more and more for these future thing. And I
don't know it'll be interesting to see their you know, for a while. We've had the Alexa's of the world or whatever, you know do Integrations, right? And so the maybe the possibility existed if I'm an Uber customer and OpenTable customer that that did eventually I will tell them my
Favorite Horsham front end and they'll come to some agreement there so that they can pass my registration information through and at that all happen seamlessly, but there's a lot of work to do to make all that happen. Right?
I mean, I think there's a lot of agent to agent interaction that will go on an AI agent representing both of these parties, but what's interesting about the action model, you know, the hacking is that you talk about right? We're I imagine this will get solved by startups in some pretty happy ways to begin.
In but then it will ultimately likely be solved at scale in more elegant ways whether it's apis or agent agent interactions Etc. But we're starting to see real experimentation. And I've had some of the early prototypes of actions actually coming to pass and that feels to me like the next two big breakthroughs are going to be this memory.
And by the way I said this last time and and it's a subtle point, but I don't think Google unison.
Their issue in the in the disruption. I don't think Google has treated its Partners well in the search ecosystem and so there's a lot of angst there and a lot of mistrust and so if open AI or perplexity came along said, would you integrate and pass tokens that they might say? Yes, I think they're going to be more reluctant to do that with
Google. I mean at a minimum we know they would probably like more competitors in the game of sending them leads, right? So I mean
My I think just the fact that you're a smaller player that you can be another source of competition and they're not so dependent on Google for Upstream. Traffic is probably an advantage to you. Well, I know we're going to want to move to the topic of chips here in a second. But before we get there we touched on Microsoft we touched on Google we touched on Apple just by way of comparison and people have heard me talk about meta a little bit animatic wait in this regard. So again,
Way, we approach the analysis for all large cap Tech. We said is their existing business get better or worse because of AI and then do their new business opportunities get bigger. Okay. So in the case of meta unlike Google Google has this massive super profitable business that's under assault by answers and actions in the case of meta. We've seen their Core Business get better as a result of AI why because you're targeting videos now.
Now on reels you're targeting
happened Priya L alone knows already
happy it was starting to happen, but the big difference really I think between B dance and meta was that you Ming at B dance adopted an approach around Ai and gpus before meta did and I think I think Mark really made that transition about three years ago. You can see it in their capex spend but the big question was obviously had to spend the money before he got the results and so investors like us we're kind of holding our
At them were saying would this lead to better engagement? Well now we know it's lead led to massively better engagement and I'm not talking just on reals. This is on the core big blue Facebook product. This is on WhatsApp. This is on Instagram. So they have these big platforms that are benefiting from both more engagement and the targeting of ads remember this stock was at 90 bucks and everybody said Facebook's dead because Apple attacked Apple push through their changes that disabled their ability to really track
people into it and basically because of AI they've been able to backfill that monetization completely. Nobody thought no investors thought that was going to be the case 18 months ago. So their Core Business got a lot stronger now as we look ahead think about the new business opportunities that are in front of him and I'm just talking about the things that Mark Starr talked about on the call. Number one. They've got tens of millions of business customers that now they're literally creating these customer service agents for a
Agents for every single WhatsApp business now, we don't see that as much here in the u.s. Even though WhatsApp is the fastest-growing messaging platform in the US, but if you go to a place like India or Brazil people are transacting some of the biggest AI engines, right a I bought companies are being built on WhatsApp as a platform in Brazil and in India where they have tens of millions of customers already using them. So these have become platform companies that are enabling vertical and horizontal Bots and they're going to build their own they're going to build it for
Liberty's, they're going to build shopping agents that assist me buying things on Instagram. You know, I always see all these things. I like on Instagram, but it's a pain to actually buy the things on Instagram the one-click never got that easy now, I think you're going to see shopping agents that assist in doing that and then just think about this content creation Bill whether you're an Advertiser just think what we saw this week with Sora text to video. I mean now think of this in the context of an Advertiser trying to drive
Sure Creator or a Creator, right? So my son's our creator creators on these platforms. This is going to unleash monster amount of Creation in the world at lower costs. And so all of that I think benefits their Core Business you have these new businesses that they get to move into that. I just mentioned then of course, I thought another interesting thing from morning Brew. I think the Pod that Mark was on last week. He talked about the meta a eyeglasses that all my analysts have
Right. He said, you know most people they looked at Mark taking the video reviewing the Vision Pro from his couch and there's you know that got a lot of clamor on Twitter, but the fact of the matter is Mark said the way you ought to think of VR and AR really is as your desktop or your laptop, but the meta AA eyeglasses, he said think of as your phone right because I'm going to be able to text. I'm going to be able to call I'm going to be able to listen to music. I'm going to be able to order my Uber. I'm
To be able to do all these things from those glasses and I don't have to pull out this rectangular thing or I keep it in my pocket or whatever. I think that's why you're seeing such incredible demand for those and of course the form factors will change and it will evolve over time, but that's an entirely new line of business. So this is a company that spending twenty billion dollars a year on these other businesses that haven't been generating a lot of return and I think now the Mark is starting to assign some value to those
businesses, but we should be fair.
Right like cuz YouTube benefits from those same course dynamic or you talked about and if you're talking about unit of being the the the phone or the like apple and and Google already have 100% huge install base like yes, what four orders of magnitude to the number of Ray-Ban glasses, you know, not for
sure but I think the question is from where you are today, right? And so like I'll stipulate YouTube will be a better business in the future.
Content targeting will be better ad targeting will be better. Right? And as long as Google is able to backfill the core of search like we just discussed then it's going to be worth more in the future. There's no doubt about it. And of course in terms of just their basic research and development around AI what they did with Gemini 1.5 etcetera. I mean like these they have incredible talent and resources. The only liability is they have an incumbent business that is a monopoly business with Monopoly
profits has so that we can move on. Let's do it.
Fast drive by I'm going to do one on Apple and then yeah, then you do Amazon's again
as a reminder to everybody just our opinions not investment advice.
So for me, you know Apple You could argue they have the best asset in the world on this phone. And if you look at the user base of this compared to the Android user base, you know, it's just perfect right? Yes, and they they've been doing Siri for a while. And so you know what you connect those two things you say shit like they put a LM on top of the
They could get to all the data whether I assure you could give it permission to read your e-mails so you could literally get to all the data so that a massive positive now the - is they haven't been known for internet services. You look at Spotify relative to Amazon music series kind of been
it's been
terrible not evolving. Yeah, right like it's very much like it was the day it came out. Yeah, and so it would almost require a pivot.
Of like Mark did on cost and you'd almost have two feet em come out and say we're making a massive pivot. I'm not a hundred eighty degrees. We're going to be all in like like we're putting our best Engineers on this and until that happens. I think it's a doubters camp. Mmm. What up? Yeah.
Well, I mean clearly it's been an underperformer this year. I
mostly related to China
Market. Yeah, you have China Market, but you have all these
Concerns in the market going just as to what's the durability of Revenue going to be in the future you clearly have
but they have the assets. Imagine. If you took course like five of the top the I people I mean, I'm these companies and they were there I like they were there the way Tony fadell was there, you know early on for the iPod like if you had
that, you know, listen for the first time they have real Challengers whether it's a Humane a rabbit a met a eyeglasses these other things right? Like I'm just saying the door has been cracked on the
ecosystem. Syria is not evolved right? So they I think they're the first to acknowledge that I think they are going to try to disrupt themselves about that. I'm not sure whether we'll see a big breakthrough moment this year. I think we'll definitely see announcements this year about a eye on the edge running on the phone and and and all these other things and we'll start to see the start to crack the door on this to me the big breakthrough on Apple is if they can run a five ten billion dollar parameter model on the phone on the
Edge without consuming all of my battery which you know, there's a lot of talk that they're going to be able to do that. They can maintain some memory about me and then they can show me the early part of actions on this device. It will unlock a huge new device cycle. Okay, and that's what
drives this time. I was the one supposed to do. I'm gonna ask you a quick question. So on the e-commerce side of the business does AI helper hurt Amazon? Yeah. Okay and how
much yeah, I think I think on a either
They're too when I think about retail e-commerce, I think about it from two directions. First is Apple has been in the business of AI from a merchandising perspective. Just like Ali Baba has been for a long time. Yep. Think about the largest retailer in the world, right? Think about the way Macy's used to work. There was somebody at the store who would say we're going to show total black t-shirts today at the front of the line and Amazon today. Nobody knows why they are targeting Brad gerstner with certain things. It's up.
Box, okay, so they're using it but here's the thing. I think that is happening a bit to them on that front. And and by the way Andy jassy is getting fit they are tightening the screws on cost and all the other things but look at a company like Teemu. Okay, the Pim dodo and China owns that quickly became the largest Advertiser on Facebook its e-commerce sales are through the roof. Now what they're doing. I mean it's so incredibly clever. It's full stack AI so they don't even have inventory or merchandise. They literally go out and they they
at data from customers about what they think they will want. They can assess how many of those things do build and they literally are building it for themselves. So they vertically integrated this AI e-commerce business and then they're pushing it out the other end. And so I think there have been a lot of people in the US who have been dismissive but they've been shocked how big that business is come become in such a short period of time we're starting to see this out of tick-tock as well where they're turning into an e-commerce business. I think this opportunity sits in front.
A meta as well, so I think there's some orthogonal challenges but in terms of the core, I think their core continues to get better because of better targeting and an AI reducing cost think
about their customer care costs Bill. Do you have to move on it? Hit a double? Yes as quickly as
possible. Yeah. So I would say AWS at the end of the day these companies are in the business of renting a i services to end Enterprises, right and as much as we talk about Azure and Microsoft running the table today, here's the truth.
And we've seen almost no share shift from AWS to Azure as a result of open a.i. And if you would have asked me 12 months ago, I would have said jury's out as to whether or not that's going to happen. It didn't happen Amazon responded quickly enough. And here's the other thing, you know and sweetman's talk a lot about this term data gravity, right? It turns out all my data is in AWS so long as they have a decent AI solution. I'm going to stick with them because I don't have to move anything and I think they delivered
that listen to a podcast and Jesse was talking about
fact that they have proprietary chips for both training and inference and obviously as the AWS stack grew up. They had moved into networking chips. They moved into a lot of Technologies people wouldn't have thought about Amazon owning or designing. Do you give them in as big a transition? What do you give them any chance of being competitive in it from AI silicon perspective?
So I think the right way to think about it is not will they build a better GPU than Nvidia the right way to think about it is can they supplant part of the supercomputer write the entire system are there pieces that they can pull out and plug in or workloads specific workloads that they can serve with a lower cost to infrastructure because they're doing hyper targeting silicon all the way to model and I think the answer to that is yes.
Yes, but I still think they'll be one of the largest buyers of Nvidia gpus in the world because it doesn't replace that for a lot of really important work.
Well, do you also said that that I think would be good for the listeners to hear and you know, I don't want to overstate you know where Alexei is and we talked about Syria earlier, but he said that as Alexa got bigger that the training cost are tiny compared to the inference cost and he
Suggested and I may be this is me interpreting that the inference Market over time is going to be much more susceptible to you know, things that are lower power lower cost you all the things in that that aren't just performance from a from a silicon perspective and I totally believe that to be true and and and with that
we can move to the biggest headlines of the week. We finally got here which is this debate over the future of the
Uh compute build-out needed to support a I and O to your earlier point about valuation. How unique is this Revenue? How long does it last and so we have a couple of charts just a bit or tweets to bang through here to kind of contextualize this first Nvidia stocks up a lot but it's because the revenue of the prophets have greatly exceeded expectations. So this chart just shows what their data center market share has grown to in the year, right? The world is Shifting toward a i as a compute infrastructure and
And and they benefited one of the area's I think I tweeted about this that I think has been greatly underestimated this idea of sovereign demand and I tweeted this week, you know, I think Jensen was over in the Middle East meeting with several of the GCC countries over there. And I think what people still don't appreciate is there probably dozens of sovereigns who are trying to get into the Nvidia order book and that they view it as one of their top three National priorities to build out AI capabilities.
Yes, and I think the size you're talking about for some of these GCC countries is going to be competitors competitive with the hyper scalars itself. So in that context right when Sam Altman suggested and blew everybody's mind that he was going to raise seven trillion dollars to you know, build chips and don't know if he ever said and repeated over and over throughout a big number but I do think that we're talking trillions of dollars over the course of the next
For 25 years as we rebuild the world's compute infrastructure, and then finally Massa did not want to be left out and so he came out and said that he's going to raise a hundred billion dollars to build Fabs and chips to compete with Nvidia as well. You've watched the semi industry for a long time. Okay, and and more importantly just the Dynamics of supply and demand so just step back for a second. Right? What do you make of all of this?
I have some cynicism but that comes naturally to me. The first thing I would say is there they're all talking about raising money from the exact same people. So if I were those people I would just be a little careful because I think to a certain extent there's a there's a smell of loose money or that that's how I would yeah pretty because they're not they're not
saying they want to raise this money. Absolutely. They're saying they want to raise it from a very specific group in the Middle East. Yeah. So so that's one thing to I was struck when I read about Sovereign server stacked, you know, there needs to be a reason right? It would have to be about, you know, wanting to have control over certain amounts of information. It could be proprietary information to your country could be wanting to control Halal them's operate in that country, sir.
Reverse typically depreciate a bit like fish, you know, and and and now it's been true of D RAM and storage and all of us at fish fish like they last a day like yeah. Well, I mean, it's I'm being provocative obviously but people have talked about with that with those other like you would you wouldn't want to hoard any because what happens is, you know, the Next Generation comes along and I didn't goes down quickly. So I would just you know, there was a time at which
Microsoft was trying to convince the world that we'd all need it in tea server for every employee. And you know, when I heard that the first time I was like trying to give me like twist my head dude, so I don't know. I don't know if countries need service tax. Maybe. Um, like I said, I'd have to have those particular brains in my the second thing that just struck me in this gets more to to the Altman and the Masa quote is you know,
The idea that we're just gonna go compete with Nvidia like is pretty radical. There are already people competing with Nvidia and he's competing with Nvidia. Like there are other people that have somewhat of a head start like thinking see ya. So you're just gonna go do it. There's like that that's bold like it's not like chip design your bins. Oh, yeah an Intel obviously, but like it's not like chip design bins to
To disruption or like software does like this is hard stuff. Yeah, and then some of them and once again, I don't know that there was an exact quote but the idea that you're going to build a Fab and compete you're going to be with teams asset tsmc and Nvidia at the same time like no chance. Yeah, like no chance because like let's say let's say you got it. We all know how the math work the say you got a 20% chance of competing with either of them right like then you're down to four.
Like a pulling this off and by the way the time scale that you're going to need like it. I mean just read what we'll get into in a minute because we'll talk about like what it means to have a competitive Fab around the world. But TNT SMC is far far ahead of the competition and one of the reasons AMD has a higher market cap then until today is specifically because they got out of the fat business in bed on tsmc.
So I think I think it's really important to tease out those two things, right?
There's chip design right now. Obviously Nvidia is already designing for two to three generations ahead. I mean the series B is already taking orders in the order book likely to launch in Q3 of this year and you know is order of magnitude better than the H1 hundreds that are out there today. And