In this podcast, Motley Fool host Dylan Lewis and analysts Jason Moser and Bill Mann discuss:
- Why Walt Disney and Nelson Peltz were both winners in the company's board fight.
- Alphabet's rumored interest in marketing software provider Hubspot.
- Spotify's price hikes, the strength in Levi's direct-to-consumer model, and a true blank-check business.
- Two stocks worth watching: Cognex and WD40.
Wharton professor Ethan Mollick breaks down his four rules for using AI, and other tips from his new book Co-Intelligence: Living and Working with AI.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on April 05, 2024.
Dylan Lewis: We've got another rumored big tech deal and the latest set of price hikes hitting consumers. Motley Fool Money starts now.
It's the Motley Fool Money radio show. I'm Dylan Lewis, joining me in the studio Motley Fool Senior Analyst, Jason Moser and Bill Mann. Gentlemen, great to have you both here. We've got four rules for using AI, rising prices for music streaming and of course, stocks on our radar. We're going to kick off with a little bit of corporate intrigue though, straight from the pages of the TV show, Succession. Bill, we have some boardroom drama this week, Disney's board winning approval over activist Nelson Peltz. They will retain their seats. Bill, Peltz and his firm Trian Partners have been a thorn in Disney and Bob Iger's side. It seems like at least this chapter of the drama is finally behind the company.
Bill Mann: The Mouse does not play, does it?
Dylan Lewis: No, you can't mess around with the Mouse.
Bill Mann: No, this was a bruising defeat. They only got 31% of the votes after a very expensive, very out in the open dirty laundry proxy fight. I'm not sure that we should feel all that bad for Nelson Peltz and Trian Partners though, because they're up about 40% in the period of time in which they made the investments. I guess it depends on what you want. Ultimately, if you invest, you're looking to make money. Even though they failed, I think maybe they have gotten Disney to make some changes and maybe for the better.
Dylan Lewis: I was going to say that the reporting I saw from The Wall Street Journal said that Peltz made about $300 million on that $800 million stake. There's some legal fees in there, but I think [laughs] that's very decent profit for them to be making. Jason as we have the Board side of this settled. Now, Disney just needs to get onto the simple business of fixing its movie studio, fixing its streaming offering, and creating succession plan for CEO Bob Iger, simple stuff.
Jason Moser: It seems like we've got our success. [laughs]
Bill Mann: What do you got next?
Jason Moser: You're right. I think this is an important resolution in that it's one more of the side shows that's come to a conclusion over this company. They're dealing with all this stuff with DeSantis and Florida and now they've got Nelson Peltz to deal with. I think for Disney, what is better for the company, I guess is debatable. Would they have been better off with Peltz winning this? We'll never know. But it is important then that it gets past all of these sideshows and lets them get down to brass tacks in really trying to reinvigorate its creative outfield. Like you said, that's what this company is in the business of doing. It's creative output, I don't think it's arguable that they have really fallen flat over the past several years. Then when you add to that, questions regarding succession, what exactly is Iger's plan? It's still all pretty unclear. This resolution I think helps them get get back down to brass tacks, but they still have a lot of hard work to do as you noted.
Dylan Lewis: With that tough work ahead, I know I was talking with Asit Sharma earlier in the week. He remains a Disney bull and feels like there's a good outlook for the business. What's your take on it, Jason?
Jason Moser: Absolutely feels like there is a tremendous long-term opportunity for the business. You don't want to discount the power of the brand and the presence that this company has globally. That park's segment alone is virtually impossible to replicate. Even if you did, that's what people still want to go to Disney World. They still want to go to Disneyland. I think for them it's really going to be trying to figure out how to put all the pieces together in the content side, whether it's studios or streaming, and there's a lot of moving parts there. Lot of questions regarding ESPN still unanswered. Sports, as we know, is a tremendous opportunity there. They're dipping their toe into the sports betting markets there. I think there are plenty of opportunities. I think the key is they have got to get past Bob Iger and they have got to get someone in place who knows what they're doing and can steer this company forward.
Bill Mann: I'm a Disney bleurgh, I guess I would say. Obviously, none of the problems that you've spoken about have been solved from this point. They have huge operational issues to deal with, including streaming, it's a big question for them. They have, I guess you would say, lost in this current iteration of Disney+. Lots of questions that are upcoming.
Dylan Lewis: Going global, news out this week about a 7.5 magnitude earthquake hitting Taiwan. Shock was the strongest to hit the country in 25 years, resulting in over 1,000 injuries and several deaths. Bill in addition to the local damage, the tremor also briefly disrupted chip production or Taiwan Semiconductor. This story tends to highlight for me the global dependence on Taiwan when it comes to sophisticated chip manufacturing.
Bill Mann: Seems like a pretty big deal.
Jason Moser: Yeah, absolutely.
Bill Mann: Twenty-five years ago, and not that Taiwan Semiconductor didn't exist, but there was the entirely different regime. This was a potentially worst-case scenario and it really speaks to a lot of things and I'll have, I got my Geology masters on the artist formerly known as Twitter yesterday. I'm able to talk about this a lot.
Dylan Lewis: Armchair experts.
Bill Mann: I'm an armchair expert, exactly. I've done it. All of this is to say that in Taiwan, you have to tip your hat to the people and the building standards that they've put into place. Because Taiwan Semiconductor not only was back up and running a day later, and so was all of the companies that it is dependent upon and vice versa. But they've also come out and said that there would be no real hit to their full-year revenue guidance, which is incredible.
Dylan Lewis: We also saw some other news in chips this week. Intel for the first time breaking out results of its own chip manufacturing business. Their foundry business shares down 10% for the company this week after that first look because we saw $7 billion in operating losses for 2023. Bill, I think we know when it comes to manufacturing, building our factories and foundries, this is inexpensive, long-term bet. Do you feel like that's something you'd be willing to give Intel some leash on, given everything we just talked about in terms of regional dependence on Taiwan?
Bill Mann: Well, Intel has gone from being the dominant player in the chip industry to really an also ran. Some of it, you could actually point to the fact that they are trying to design and as well as manufacture, which is somewhat unique in the industry. Companies will do one or the other. Seven billion dollars lost on 19 billion in sales. That is tremendously negative for Intel. They have gotten some government largess and they're looking for more. They could pay their way through, but it will be on taxpayers dollars and not necessarily from Intel.
Jason Moser: Real quickly on Intel. The other thing to keep in mind, this is not something that's going to quickly it better. You are talking about these losses. They're guiding for these losses to peak here in 2024, but they're not even really looking to break-even until somewhere midway between this current quarter in 2030. That's a lot of years ahead. It just speaks to, I think the difficulty in really establishing this part of the business. For investors, really the difficulty in trying to project exactly what success looks like down the road.
Dylan Lewis: Before we go to break, so much for antitrust spooking big tech away from acquisitions, rumors out this week that Google parent Alphabet is interested in the digital marketing business HubSpot. Shares of HubSpot up 8% this week on the news. Jason, are you surprised to see Alphabet sniffing around here?
Jason Moser: I'm not. It feels like they're going to test those waters as long as they feel like they're going to be allowed to. Now, it does seem like something that regulators will have a field day with given when you look at HubSpot from a market cap perspective, at $32 billion market cap. But it's also worth noting that this is a company that generates about $2 billion in revenues. From a revenue perspective, it does seem like it could be reasonable. But then begs the question, is Google going to pay through the nose just to buy this business and is it worth it? Because HubSpot today, it's not profitable, no cash flow after you account for that stock-based compensation, at least trading around 15 times sales. What is Google is going to have to pay up to actually get this business and then furthermore, isn't going to be worth it? Given HubSpot's focus on inbound marketing, it seems unique. It seems like something that could be complementary to Google's model, but like Bill and I were talking about before, it really ultimately has come what a defensive move on Alphabet's part.
Dylan Lewis: Bill, when you look at the possibilities here with HubSpot being a part of Alphabet, lot of search properties here. As Jason noted, inbound marketing is their specialty. Where do you see this business potentially fitting in?
Bill Mann: I think this is defensive for Google as much as anything else they got to lawsuits out there right now from the Department of Justice for digital advertising and their search engine markets. There's also a big push in AI to take on a lot of those types of searches and that could impact their advertising. This to me, $2 billion in revenue is a drop in the bucket for Alphabet. To me, this is solely something that they're doing to shore up the battlements of the company itself in its core business.
Dylan Lewis: Coming up after the break, we've got a new trend on how people are buying an American icon. Stay right here. This is Motley Fool Money.
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Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis joining studio by Bill Mann and Jason Moser. A stellar week for Spotify shares, the company of 15 percent on news that it will be raising prices, again for subscribers in the United States and other markets, including the UK, Pakistan, and Australia. Jason, this is the second price hike we have seen from this business in recent history. They raised prices in the United States just last year. Are you surprised at the pace of this?
Jason Moser: No, I'm not and I tell you as a Spotify's subscriber, I don't even feel of those price. I don't know why, I had to look up actually what I'm paying for Spotify because we have the family plan, and it is just integral to all four of our daily life.
Bill Mann: What are you doing? What do you mean? Are you trying to get them to say, well, let's just keep praising it until Jason Moser complains.
Jason Moser: Keep it a secret Mann. I told Amazon they could double prime and I still pay it, but that was like 10 years ago. Listen, I mean, they're not going to listen to a dummy like me right. Now, I love this. They did something that reminds me you've had Disney started their streaming with Disney Plus. It was absurdly low priced, something like 599 or 699 and it gives them room to just incrementally raise those prices a dollar or two all along the way. For most folks that use Spotify, it's a pretty habitual behavior, is just start forgetting about exactly what you're paying to do through the subscription audits every once in a while there to remind yourself. When you look at the company itself, I mean 602 million monthly active users, 236 million of those are premium subscribers. Now, it is worth noting, they define premium subscribers as users that have completed registration and have activated a payment method. But premium subscribers also include all registered accounts in the family plan and the duo plans. It's all to say that 236 million premium stuff, that doesn't mean they're getting a dollar for every premium sub, but it could be close. Pay attention to that ARPU number to understand how much money they're bringing in per user. I think the bigger opportunity for this business longer term really it's an advertising and it's still only makes up about 13 percent of revenue today, so they've got a long way to go there. In 602 million monthly active users. That number keeps on growing every quarter.
Dylan Lewis: Bill, I thought the approach was pretty interesting here from Spotify because the company says the increases will help them cover the cost of the audio book program they launched into with their subscriptions that we'll start out as an entitlement, I think about six months ago. They are now increasing the prices to maintain that and saying, hey, if you don't want the audio books, you can keep your pricing the same. I think that type of feature pricing functionality is interesting. Maybe a little bit of a lens into what we can expect from Spotify in the future.
Bill Mann: Well, the biggest cost that Spotify has is royalty payments and so this audio books segment is a really big deal for them because the royalty payments are much lower on a per minute of usage than they are for songs or anything musical where you're paying for every three minutes of content. Nine billion out of 13.2 billion of their revenues went to royalty payments last year. This restructuring, I think in some ways it's almost more important than the actual rays of prices. They're trying to get their members to go down one path or the other and it really has to do with what they pay and how much Spotify has to depend on music royalties to make its business.
Dylan Lewis: Jason, Levi's earnings this week showing it's never good to bet against denim. Shares of the iconic gene maker up at 12 month highs following the release and really it seemed like the focus here, and what the market was incredibly excited about was the direct-to-consumer model that they continue to push into.
Jason Moser: Yeah, that's nice to see Levi's such a stayed memorable, reputable brand is Levi's. I'm still a Levi's guy. I'm it probably I'm on today. Jeans at home. It's it's nice to see that this is working out for them. What it made me think of immediately was just the other week we're talking about Nike. We're talking about Nike and how they're making these efforts into the direct-to-consumer and they took it a little bit too far. They saw a little success there in DTC, but it really impacted their wholesale business. With Levi, as it seems, at least like they're not witnessing that yet now revise obviously a much smaller company. I'd say unique compared to Nike, it a little bit more of a focus market and so I do understand wanting to focus more on that direct-to-consumer and that 48 percent of the business today versus about 42 percent from a year ago. Clearly, it's something that continues to develop positively for them. We're seeing gross margin expansion of 240 basis points from a year ago. I mean, I don't know that it's a business that I have on my list of ones that I want to own, but it is nice to see the business, they're making decisions and be rewarded.
Dylan Lewis: Bill, I think a lot of excitement with the Levi's results because now nearly half of the revenue coming from that direct consumer model, they have a little more control over. I think the thing that we all have to remember here is the wholesale side of their business means relationships with Macy's and Kohl's and I don't know that either of those businesses are necessarily lighting the world on fire.
Bill Mann: I feel like you guys are bearing the lead because in Beyonce's new album, there is a song called Levi's jeans and they were specifically asked whether there's been an uplift in revenues because the beehive is now more aware than ever that Levi's is pretty hip. There are absolutely changes that they're trying to make. They've actually let go 12 percent of their global workforce, the company is, is trying very hard to be a lean operation in a way that a lot of the branded companies that we think of haven't necessarily had to be, so denim is an incredibly competitive business, but I think that these are, if you'll pardon the pun, legs up.
Dylan Lewis: Love it. All right, we're wrapping this week's market news with a look at an unusual market debut. Last week, the Digital World Asset Corp closed its acquisition of TRUMP media and technology group, bringing former president Trump's truth social public at roughly a $9 billion valuation. Bill, this is a business that has four million in revenue in 2023, net loss of 58 million and the company came public, as I said it about a $9 billion valuation, stating the numbers here to have it very simple, but this is in a lot of ways the end of some of the SPAC activity and the Fervor that we had seen for such a long time and it seems like such a fascinating business. We've seen so many headlines about it. What is your take on this?
Bill Mann: I'm delighted that you call it a business, $4 million is about the same revenue as the average Shake Shack and not the company Shake Shack and individual Shake Shack. This business fundamentals do not matter. I think that this is probably the end result of the meme-stock change that we have seen in the market over the last couple of years in which companies are valued on vibes. I, as a fundamentalist, it's not necessarily a game that I really understand what those vibes are, what this company is being valued on. I know it's not on the revenues, it's definitely not on the non-existent profits, it's on something else and so I wonder if people who are investing in this company are really thinking about whether they're holding a business or whether they're holding something that is just meant to be, I hold it because I like it.
Dylan Lewis: Yeah, I was going to say Jason, SPACS are known as blank check businesses. I think this is a blank check business in the purest sense, even Post-spec, because we are looking at something that is a very simple bet on personality and ties to the former president.
Jason Moser: Yeah, well, I love that price divided but it's a multiple we need to incorporate into it's big.
Dylan Lewis: It's a little bit squishy, but we can get there. Yeah. I mean, this just at the end of the day, this is you got to look at the fundamentals of the business and it's not to say that they can't succeed, but social media itself is extremely competitive, very difficult markets. I don't really think they have a lot going there, but yes, it's tough one. Jason Moser, Bill Mann, we're going to see you guys a little bit later in the show. Up next, we've got to Wharton Business School professor Ethan Mollick on his tips for putting ARPUs for investors. Stay right here. You're listening to Motley Fool Money.
Welcome back to Motley Fool Money. I'm Dylan Lewis. We're firmly in the age of artificial intelligence, or as Wharton professor Ethan Mollick might frame it, co-intelligence. That's his philosophy on how humans can best work with AI, and it's the title of his new book out this April. Ethan joined me this week to walk through his four rules for using AI, the different angles that big tech companies are taking in the AI race, and how you can use tools like ChatGTP as part of your investing process. What I liked about the book, reading through it is, it was a great exploration of the space and a foundation, but also in a lot of ways, a very practical user guide for getting up to speed very quickly and going from, I don't know anything to beginner, to intermediate. I think that it's really useful for people in that sense. Knowing how quickly the AI landscape has changed, what was the process like for writing the book? Was it an accelerated timeline?
Ethan Mollick: I wrote the book and edited it through the end of December. I wrote it knowing GBD5 is coming and isn't out yet, but it will be in all of these other tools were coming our way. I did write it pretty quickly. It's my third book, but I couldn't have written it without AI. Actually, there's almost no AI writing the book, it's not AI writing. There's little AI segments but they're clearly marked. The interesting thing is, AI did all the other stuff that meant writing books horrible for me, on my behalf. If I got stuck on a paragraph, sometimes you work on a sentence for a long time. I'm like give me 30 words in this sentence that I'll use as inspiration. There was a lot of work showing that AI works well as a marketer and as a persona to market too. I asked it to read my book in various personas to give me feedback on what I was doing, and advice. I asked to summarize research papers that I turned into part of the paper. It was very helpful in accelerating this process, what AI does, the co-intelligence idea, it's an accelerator.
Dylan Lewis: I think that that tees up nicely for some of the rules of using AI that you talk about in the book. I want to run through them because I think there are probably some listeners out there that are avid users of ChatGPT and probably some other folks who maybe aren't as familiar or have never interacted with an LLM before. How do you structure how people should be using AI?
Ethan Mollick: I recommend forum rules to get started with. The first rule is, invite AI to everything you do. That basically nobody knows how AI is most useful for your field, nobody else. I think people are waiting for instructions. I talked to OpenAI all the time. I talk to Microsoft, I talk to Google, there is no instruction manual. Nobody has a book that they haven't shown here yet. There's no consultant who knows anything, nobody knows anything. The way to figure out what this does is just to use it a lot and see what it does. I strongly recommend just trying to use it for everything you legally and ethically can. Then the second piece of advice is that you should learn to be the human in the loops. The AI is really good at a lot of things we could talk about the studies and results on this but it's really on good innovation, it's really on good analysis, it invents most people. You want to think about what you are actually really good at because wherever you're best at, you're definitely better than the AI. I think that there's going to be a real benefit to thinking about what you want to do and what you want to delegate. The third principle and the book is one where I say, you treat the AI like a person and it's considered a sin in the world of AI. You're not supposed to anthropomorphize it, but the fact is it's trained on human language and human interactions. It works best when you work with a human. In fact, one of the mistakes we will make is they assume that software developers are the people who should be using AI but it's actually not, it's really managers, writers, journalists, teachers often do a much better job using AI because they can take the perspective of it as a person, even though it is it did that helps you do great work. The fourth is, this is the worst AI you're ever going to use, and we're in the early days of this revolution.
Dylan Lewis: You detail accompanies that have outright told our employees don't use AI and said that that is to their detriment, but I think there's also, it seems a risk of companies just falling behind in the industry because it's a tool that anyone can use for their jobs. Do you see companies that have particularly good policies when it comes to their workforce and AI?
Ethan Mollick: I've seen a wide variety of policies out there. The question is about organizational culture and approach. The most extreme version I know is IgniteTech, and they're willing to talk about this, where the CEO, realized GBD form is a big deal last spring and gave everybody in the company OpenAI access and said to them they have to use AI that month. They should experiment with it. Then he fired everybody who didn't spend at least two hours with AI that month but then offered $10,000 rewards, to whoever came with the best prompt at the end of every week. That's a pretty good indicator of how seriously you took this one way or another. I think there's a lot of models out there that people are following. I think that might be a little extreme for most organizations, but I think the idea of endorsing its use at the highest levels by high level people using it is pretty important.
Dylan Lewis: One of the things that, that was interesting in the book is it you talk about that people are maybe cagey or a little private about AI use, and that it's this thing where you're not sure if you should acknowledge that something was generated by AI. Can you elaborate a little bit on that? I thought it was just such a unique idea.
Ethan Mollick: I call this the secret cyborg problem, which is that, think about the incentives of the average worker in most companies. One, their AI policy is unclear. Am I using it right? Might I get fired for it? No one's ever really told me exactly what to use it for, and what might get me in trouble. Even organizations that are permissive. The second thing is, once I show people have written something by AI, will they stop respecting my work as much? Because they think I'm a wizard right now. There's literally this whole threat of Reddit people saying, I'm a wizard at work, what do I do, when they find out it's AI use? The third reason is that you might be worried that you get fired because you're now more productive or you are even worse, you're scab and all of your coworkers get fired because you've just shown they can do their work. Or maybe you're just assigned more work which sucks without compensation. Or you can't launch a competing start-up. There's lots of reasons why employees don't want to share the AI use. I spoke to someone who literally wrote the policy to ban ChatGPT use at a major bank, and she wrote it with ChatGPT on her phone because why would you go back to doing something by hand again?
Dylan Lewis: When you create those types of policies, people just subvert them in their own ways, anyways?
Ethan Mollick: People want to use it. It's called shadow IT spend. They'll figure out a way to use it. If your policy doesn't let them use it, that doesn't stop them from using it.
Dylan Lewis: One of the things I wanted to ask about is, you've spent a lot of time looking at the landscape. We see a lot of money pouring into AI. Amazon just increased their investment in Anthropic, I believe last week to $4 billion, it's a sizable bet for them. How should investors, as we're looking at these big companies making big swings in this space, be trying to get a sense of the success of these bets? Because in some ways it's so early still, and it's so hard to show meaningful progress but on the other hand, we're seeing huge dollar signs that are attached to these investments.
Ethan Mollick: First of all, there's a weird thing that we have to recognize, which is this idea of AGI, of a computer smarter than a human being, that can eventually lead to a super intelligent computer that can do anything. The large AI labs believe in this. They believe they're building AGI, they believe they're building the next few years. The consensus estimates of AGI and the betting markets are 2031. They're believing this. The one thing that I think a lot of analysts get wrong is they don't believe that the largest organization actually believe they're building a human replacement. They do. A lot of the business decisions at places like OpenAI, do not make sense on a standard analysis. They can harvest a lot more cash. Incidentally, I think their run rates are over $2 billion a year in revenue but they're not even trying, they're not making their product user friendly. It breaks 90% of the time. That's because they're spending every ounce of their energy and compute building the next version of the next training, the next model. You have to, first of all, believe that these people believe. You don't have to believe it, but you have to believe that they believe that this is possible, and that distorts investments.
You have to make a decision, then it also as an investor, do I think this is possible or not? Because if it is, that's a very different hedging strategy they're not, because a lot of what wins or loses an AI depends on how soon we hit a plateau in AI ability and how expensive it is to do that. There's a scaling law in AI the more powerful your system is, the larger your AI is, the larger your dataset is, the more expensive it is to train, so they're $10 million to train a free ChatGPT 3.5 class model now. At 100 million to 1 billion to train a GBD4 class model. Maybe 10 billion for a GBD5 class. There are efficiencies to be gained, no one's really worrying about those yet. The question is, if GBD5 or GBD6 continues to be 10 times better than GBD4 or whatever the previous version is, then it's going to be a winner take all market with just a couple of players who have the money and the compute. Follow where the computer chips are, there's only a couple of companies with the chips, that is, there's four of them. Anthropic is a pawn because they don't have their own computers, they train on whoever. OpenAI is enthralled to Microsoft. Google does their own training. Meta has its own strategy. You have to follow where the computer is, and you have to make a bet on what you think the future is going to look like.
Dylan Lewis: I think it's particularly tough for a lot of people who don't necessarily have that technical expertise to dig into that and follow along. What I find interesting, particularly in the case of a company like Google, is they are putting a position with AI, especially user-facing AI or more generative AI applications, where they have to disrupt their own business in order to be where people are using it. OpenAI made such a humongous splash with ChatGPT and it seems like everyone else had to catch up. The implications for Google's business model was pretty clear right away. This is how people interact with information. Do you feel like the incumbents in tech are willing to make those big shifts that will affect their business?
Ethan Mollick: Look at Microsoft dance. It's crazy to watch this organization go all in on generative AI everywhere. Google has been slow off the starting line, but Gemini 1.5 is really impressive. I don't know what their plans are for ad revenue, but they have to move, the game started. What happened when OpenAI released ChatGPT was, that stuff it'd be kicking around for a while behind closed doors, and the decision to release it kicked off a war. Again, if you believe that this is the future, then the companies have the purest strategies we've ever seen. Meta's job is to act as a spoiler. It's releasing these open source versions to make sure nobody else wins because they think their applications are the best. They already own the social networks. They own the metaverse. This will help them boost that. Google is trying to build its own internal projects better than anyone else to organize information and connect all your Google products together and presumably do ads better. Microsoft is just spray painting everything with OpenAI stuff right now and adding AI to everything. Amazon is trying to figure out what it wants, to be a vendor or not. There's a lot of stuff. Apple, we have no idea what it's doing. This is kicked off a wall and nobody really knows if this business model is going to work. I think this is a boom and not a bubble but there are parts of it that will be a bubble too. We don't know the answer to that either.
Dylan Lewis: In a practical sense for our audience of investors, you talk about a study where people used AI to look at conference call transcripts and are looking for perceived risk and the volatility that may come from a company based on what's inside the transcripts and the discussions between management and analysts. What are some other ways you could see an investing audience, especially a beginner investing audience with AI harnessing tools like ChatGPT?
Ethan Mollick: There's a whole bunch of different ways of thinking about this. One of the big misunderstandings I have when I talk to financial folks, is that the definition of AI changed fairly dramatically before and after ChatGPT. Before ChatGPT it was about how do we build models that analyze lots of data and then give us results. By the way, that's absolutely turnover finance. It's very funny when I visit a hedge fund or something, they already were disrupted by AI. I go visit the trading floor of a multi-billion-dollar plus fund and it's like three people in a cubicle farm at the end of the day where it would have been like a wall of people screaming. It's a very different thing and it's all algorithmic. That's what we used to mean by AI. It was about the algorithms and mashing. The algorithms and the big companies could afford to hire the quants and the quants would build the tools and the tools would do the trading and that was a whole angle. Then there was all kinds of analysis being done with proprietary models. GPT-4 and other models are pre-trained, that's what the P in GPT stands for. They know a lot of things about the world already but they also act more like people than like miracle machines. I think there's an important thing people who are thinking about AI and finance need to realize, which is that the definition of AI has changed dramatically. When we talk about AI prior to the ChatGPT, we would talk about AI as a prediction tool for math. You could give it a trend line and we'll tell you what would happen next. It can predict where you've had given all the data about what people buy or watch on Netflix and give you recommendations of what to watch.
That powerfully changed finance. When you go to a trading floor today, it's three people at a computer. It's not a giant room full of people screaming and yelling. There's just a lot less traders, there's quants now who build algorithms and algorithmic trading is a big deal and the decisions are being made at the speed of light. That change is already happened in finance. I think people when they use a system like ChatGPT, they have that model in mind but that's not how large language models work. Large language models are pre-trained, they're not magically taking all this data and making decisions. They work like a person. If you ask a person to pick a stock, that's like asking GPT-4 to pick a stock. It's not actually going to do an amazing job but it will Google some stuff and look at a spreadsheet and then make something up for you. What it is good at though is in pieces of that. For example, the AI is very good at doing sentiment analysis. It's a very hard problem to solve, like are newspaper articles good or bad? That's a hard thing, you'd have to hire people to go read them through because the machines were never that good at it. The AI can look at 10,000 articles and tell you whether the sentiment change happening. It can do a good job explaining to you why a product works or not, or whether news articles are good or bad. It's much more of a co-intelligence or assistant than it is a magical tool. One of the mistakes I see, especially amateur investors making is assume that AI is particularly knowledgeable about investments and it just isn't. It's not going to have a secret insight that you didn't have.
Dylan Lewis: Listeners, how are you putting AI to work? We want to hear from you. Shoot us a note at radio@fool.com. Coming up next, Bill Mann and Jason Moser return with a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money.
As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis joined again by Jason Moser and Bill Mann. We've got stocks on our radar coming in a minute. But first, this week was National Burrito Day. If you missed the official celebration on Thursday, you can catch up this weekend. Jason, I know you are a home cook of burritos. You like making them at the house and he tips for people as they're putting them together.
Jason Moser: I like making everything. I think the key is you just got to make sure that you get those burrito tortillas. You got to steam them. You got to get them pliable and flexible. Too many times have I seen people just skip that step and they're just splitting those skins all over the place. Amateur Hour. It's all about the prep.
Dylan Lewis: It really is. Bill, what about you?
Bill Mann: I'm Just loving the thought about a makeup burrito. You missed the official day? It's OK. The burritos won't care. Just just jump on.
Dylan Lewis: I don't know what to make of this but I went and got a burrito from a place that i don't go very frequently on National Burrito Day, not even realizing that there's National Burrito Day. I don't know if I was inceptioned into having my burrito but I'm happy to celebrate again this weekend even though I didn't miss the opportunity. Let's get over to stocks on our radar. Our man behind-the-glass, Dan Boyd is going to hit you with a question. Jason, you're up first. What are you looking at this week?
Jason Moser: I've been digging a little bit more into Cognex ticker is CGNX. They are in the business of machine vision. They built hardware and software. They can see and do all sorts of automatable tasks, mainly manufacturing and distribution. Its largest industries by revenue that it serves are automotive, logistics and consumer electronics. You get all of the tailwinds in those. Now they are pursuing, I think the ultimate opportunity in Industry 4.0 or something that's also referred to as the Industrial Internet of Things. The same thing really is the Internet of Things. Everything is becoming more connected. Everything's talking to each other. In the commercial and enterprise opportunity there is massive. I think the interesting thing about this business, they've been at it for over 40 years. The former CEO or the founder of the business, Bob Shillman founded the company back in 1981. He has a PhD from MIT in computer science and artificial intelligence. This guy was doing AI before it was even cool. You got to like a lot of what they're doing. They are running into some headwinds, I think, just as is being concentrated in some of those markets. I think EVs in particular, we're seeing some headwinds there that have impacted the business and I'm trying to get to the bottom of whether we can see that catalyst reignite itself.
Dylan Lewis: Dan, a question about Cognex ticker, CGNX.
Dan Boyd: Cognex seems like a galaxy brain play here [laughs] But their first vision system was called DataMan and that's just a funny in a bad way name for something.
Jason Moser: Well, they call their employees Cognoids, pretty strong culture there at the company.
Bill Mann: The best annual reports in existence, they did one that was literally a cartoon [laughs] it was a comic book and fantastic.
Dylan Lewis: Bill, I appreciate that you're pumping up Jason's radar stock, having to then pitch your musicown.What are you looking at this week?
Bill Mann: Look Dylan, I know what I've got it. This is the meme-stock of Beanstox. I am interested in seeing what WD-40 does when they report next week, they report on Tuesday. This stock is trading at a PE of nearly 50. It has been on an extraordinary run. WD-40 really doesn't need much in the way of introduction for everyone except for Dylan, who we learned, does not have a can of it at his house because it does everything. They make the WD-40 silicone spray, they also make lava soap. That's their business. It's very simple but during COVID, this company caught a bid and has gone wildfire. They need to back it up with their earnings report.
Dylan Lewis: Dan, I'm expecting a comment and not a question here on WD-40.
Dan Boyd: It's the most useful product in existence, Dylan. It's a gimme at this point.
Dylan Lewis: It's science. At the risk of asking a question, I don't need to ask, which one's going to AirWatch this weekend?
Dan Boyd: I'm going with WD-40 going to nobody's surprise.
Dylan Lewis: To nobody's surprise, it's a winner. It's in every household. Bill Mann, Jason Moser, appreciate you guys bringing your radar stocks. Dan, appreciate you weighing in. That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.
American Express is an advertising partner of The Ascent, a Motley Fool company. Ally is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Bill Mann has positions in Walt Disney. Dan Boyd has positions in Amazon and Walt Disney. Dylan Lewis has positions in Spotify Technology. Jason Moser has positions in Alphabet, Amazon, Apple, Nike, and Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Bank of America, Cognex, HubSpot, Microsoft, Nike, Spotify Technology, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool recommends Barclays Plc, Discover Financial Services, and Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
