Chapter 1: What is the main topic discussed in this episode?
Google back in the AI lead. Motley Fool Hidden Gems investing starts now. Welcome to Motley Fool Hidden Gems investing. I'm Travis Horn. I'm joined today by Rachel Warren and Lou Whiteman. And guys, the big news yesterday in the market and the technology was Google had their I.O. event. Lou, I'm sure you watched the whole thing, didn't you? I.O. ? This was a very interesting presentation.
They announced a whole bunch of different things, throwing spaghetti at the wall. That said, it seems like they are pushing forward with their really good models, depending on who you are, and then also changing their products a little bit. We... thought, or a lot of people thought, a few years ago, hey, 10 blue links are going to be dead.
Chapter 2: What were the key announcements from Google I/O?
Google's in real trouble. Now we're seeing some updates to Google itself, the Google website that's going to incorporate some of these AI tools. Their Flash 3.5 model is getting really good reviews. As long as you aren't a coder, we'll maybe talk about that in a moment, but
When you looked at this, it seems like they're kind of playing a card that nobody else can play with their vertically integrated stack, with their consumer focus. Sure, they're not going to win where Anthropic is, but their prize may be even bigger in the end. Is that the right way to think about it? Kind of.
From the top, we need to do a disclaimer here, okay? These events are designed to impress. And maybe with the notable exception, if you're an investor, you should mostly ignore these. That day when Steve Jobs stood up on stage and said, we invented the iPhone. Yes. that day you probably as an investor should have listened.
But for the most part, investing off of these events and taking this as gospel is a bad idea. It doesn't make it mean it's not worth talking about. It does show where they're going, but we shouldn't take any of these product demos or announcement too seriously. If announcements were products
We'd all be at parties with Bella Ramsey right now, knowing who we're at the party with because of Siri, right? I mean, that commercial, I don't think that has aged well in all relative reality. They're not the only one. But if anything, you know, I don't know. So my takeaway here is I think what you said is right.
Of all the AI companies we talked about, Alphabet is the one with the most ways to win. And truth be told, we don't know what AI will look like in five years. We don't know whose next model is the best model. We don't know how much consumers or enterprises they're going to be using AI. We don't know to what extent or how.
So the one with the most, I guess, irons in the fire and the most ways to win is probably the one that should be the most attractive to us. And I think Google, if nothing else, at this event made the case that they have a lot of irons in the fire and a lot of ways to win.
Rachel, one of the things that stuck out to me is that they seem to be looking at artificial intelligence kind of differently than a lot of these other companies. You've seen Anthropic has always been focused on coding. That was always their secret sauce. OpenAI has kind of been forced to move in that direction because that's where the money is.
So they're following Anthropic towards that pile of money. And they're, by the way, losing market share in ChatGPT to Gemini, who now has over a billion monthly users or 900 million monthly active users, over a billion using the AI mode in search. But it seems like one of the takeaways is that their world models, Omni is what they talked about. I don't think we can try that one yet.
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Chapter 3: Is AI becoming mainstream for everyday users?
But they're trying to build this... world where you can put anything in and then get anything out, which is very different than the other successful companies today. Is that the right strategy? And we're not technology people, but it seems like the kind of thing that I could see myself or my wife or even my kids using more than I could anthropic to write code.
I do think that that's the point, right? I mean, so much of what we have seen from that core business, right, the search business, it's consumer facing. And I do think that is sort of the driving nature behind a lot of these rollouts we're seeing, right? A lot of what we've talked about with AI and specifically with Alphabet's approach has been sort of you know, the smart chat bot, right?
Gemini, you type a question in a box, get a response back. So I want to talk about a few of the things that they introduced. You know, I don't think this moves the needle right now, but I do think it speaks to their broader strategy. And I think if you're an investor, you're interested in this business, it's important to understand where they're going.
So that Gemini Omni that you mentioned, it's this basically world model. It doesn't just look at text. It can look at video. It can listen to live audio. It can understand complex code all at the exact same time. And the idea is that it can generate accurate, realistic content. It's even coming to YouTube Shorts. So the goal is to help creators edit their video.
They paired this with their new Gemini 3.5 engine, which I think we'll talk about in a little bit. It starts with a 3.5 flash, and basically it's supposed to process responses four times faster than prior Frontier models. They unveiled Gemini Spark. They're calling this a 24-7 broadcast.
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Chapter 4: What are the implications of Google's AI advancements for investors?
personal AI agent, right? We've been talking a lot about the growth of agents and what that can mean for consumers and businesses alike. So unlike a chat bot that tells you how to do something, Spark actually does it for you. So it connects to your Gmail, your Google Docs, about 30 different third-party apps like Adobe, Uber, Dropbox.
So you can imagine telling it to say, find a flight confirmation in your email. check your calendar, calculate the driving distance and so forth. And then the final thing is they gave their core search engine a major facelift, the biggest one in about 25 years, because they have integrated all these models right into the daily queries. They actually added a feature called Ask YouTube.
So I think a lot of this is consumer facing. We're going to have to see what the adoption looks like. But having so much of this built into these platforms that millions of people use every day, I think is actually a really genius approach to Alphabet's world of AI.
Lou, I want to end this segment on this. We're going to stick with Google, IO, and what the implications are in the next couple of segments. But we've been talking a lot and asking questions about what's the actual payoff from artificial intelligence, especially as these companies spend trillions of dollars to build out this AI infrastructure. One of the things that really stuck out to me is that
Flash 3.5. So the new model, you can actually use this today. If you go into Gemini, you can use Flash 3.5. I've found it to be pretty useful, but it is significantly more expensive than previous models to be exact 22 and a half times more costly on a per token basis than Flash 2.0. So we've heard a lot of these companies talk about where compute constrained, meaning demand is higher than supply.
I have always wondered if demand is actually higher than supply, why aren't you raising your prices? Google actually did it. Is that a sign that we're moving to this, hey, we need to actually make money on all this compute phase? Or is this just, yeah, we don't necessarily want to be the anthropic of the world, but we want to get our pound of flesh here.
Maybe. Here's what strikes me about this is, and we'll get into consumer versus enterprise in a second, but I think that this shows maybe that just getting all of the consumers isn't the way to go. Yeah, I think pushing towards profitability, we have to at some point, right? We don't need just profitability. Historically, these companies had double digit return on invested capital.
Look at the invested capital that they are putting into this project to get double digit returns on that, to get even like, you know, mid-teens like they've done before. Prices need to go significantly higher from here. I think that at least they are looking at that or experimenting with it.
And I think it's probably safer to experiment with the consumer than it is right now, necessarily the enterprise. So maybe, I don't know though, if we're at the verge of just the floodgates opening and prices really hitting reality now, I think it's going to be subsidized for a while longer.
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Chapter 5: How does Google's AI strategy differ from competitors?
And it does look like you're winning this. But look, that is backfill for them. That's holding serve. That's not growth because they are the ones that were seen as vulnerable. Where the thesis has changed is it's not Alphabet will be destroyed by AI. because search will be destroyed by it. It's alphabet can hold serve. So yes, this is good.
This is especially important for alphabet since they are, they were the leaders in the clubhouse. So they need to retain, but I am hesitant to make too much of it just because I think this is just, we're in a very long process of retraining the consumer or maybe redefining the internet and what the internet is. And again, Yeah, the one with Chrome is winning.
I don't know if that's a shock or really investable.
Yeah, I will note that on the coding side, which is where Anthropic has really gained market share and grown a ton over the past year, it does not appear that at least 3.5 Flash is going to be taking market share from them anytime soon. That's been the early reaction. On other areas, it does seem like 3.5 has been a little bit better to quote a tweet from Aaron Levy, who is the CEO of Box.
Financial services, significantly better. Public sector, healthcare, and life sciences. 3.5 Flash is significantly better than some of their older tools like Flash 3. So it does seem like there's improvements, but not necessarily equally distributed in the world of AI. All right, I want to also talk about
Something that I think was very interesting and they've been talking about for quite a while, which is hardware. And glasses is something that I think we're moving to a world where we can see that some sort of AI augmented reality glasses are the future of hardware. How long that adoption curve takes is maybe up for major debate.
But Rachel, they did announce some partnerships with Gentle Monster and Warby Parker. Very interesting that Warby Parker's stock plummeted yesterday.
Right.
Because I think people were so unimpressed by these glasses. I mean, those were actually glasses. To be honest, I feel like I could have designed those.
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