Weekly Brief #27
Google's winning AI strategy...Netflix’s NFL deal, Warren Buffett’s secret holding, OpenAI co-founder resigns, Meta under investigation by the EU, Microsoft ordered to pay $242 million, and more.
Good morning investors 👋,
Happy Friday and welcome or welcome back to the 27th Weekly Brief.
The meme stock craze resurfaced this week after Roaring Kitty, the main person involved in the original rally, posted a meme of a gamer moving forward in his seat. This meme didn’t mention any stock, yet sent GameStop and AMC shares flying up 200% over the course of two days until later dropping.
In other news, U.S. Fed Chair Jerome Powell said on Tuesday that he expects inflation to continue declining through 2024 as it did last year, causing new highs across the stock market and making the Dow cross 40,000 for the first time. In fact, even the Bank of Canada’s meeting on June 5 might result in the first rate cut in over four years.
Let’s get into it.
In this issue:
🔍 Google is winning in AI
🏈 Netflix’s NFL deal and a popular ad tier
🇪🇺 Meta under investigation by the EU
FEATURED STORY
🔍 Google is winning in AI
Google (GOOG) is just one of those decade-old, trillion-dollar tech giants mostly known for search. Yet contrary to popular belief, Google is not just a search company; they own and operate a growing list of products and services, including Android, YouTube, Google Cloud, Chrome, and Gmail. These products make up just under 50% of Google’s total revenue and hold leading market shares in their respective industries.
In the stock market, most investors nowadays consider them to be a boring, old, dying company. “They’re losing market share to ChatGPT and Bing” is the main argument. But believe it or not, Google is winning in AI.
Google’s AI strategy
When it comes to AI, most of the market is full of secondary players. These players would include Adobe, Salesforce, Intuit, and even Coca-Cola, who are all using AI to improve their products (and their stock prices) but are not actively creating or developing it.
Then there are the primary players. Along with just one main competitor, OpenAI, Google is at the forefront of actively developing AI. With the release of GPT-4o and its demo this week, the world saw OpenAI crowning themselves the leader of the future AI assistant market.
However, here’s what many are forgetting:
Unlike OpenAI, Google is a massive infrastructure company, has much more user data to train their models, and has been developing AI for over a decade. Google is pushing hard to compete with ChatGPT via Gemini, as well as competing with Sora via Imagen 3, and is near or on par with OpenAI in the assistant space. But Google’s main focus, and their main competitive advantage, is incorporating AI into their product suite.
Google is focusing on a vast number of areas to implement their developed AI, incorporating it into Gmail, Google Workspace, and Google Cloud. By leveraging their services and search dominance with their AI model, Google is getting consumers used to Gemini over competitors, which could potentially hurt ChatGPT in the long term. Though, the way things are playing out, and from the results that are coming to light, Google is setting the groundwork to become a leader in AI over the next decade1.
Valuation:2 Analysts expect Google to grow at 19.70% over the next half-decade. Assuming Google grows at this exact rate, using a simple DCF model with a discount rate of 15%, Google’s median terminal multiple of 29.71, and a 20% margin of safety, we can estimate that Google’s fair value per share is $137.19 or a ~27% premium compared to the market price of $173.88 at the time of writing.
FINANCE
a. 📈 Warren Buffett’s secret holding
After being given permission to keep it confidential for three quarters, Warren Buffett’s Berkshire Hathaway has now reported a $6.7 billion stake in global insurance company Chubb. By the end of Q1 2024, Chubb became Berkshire Hathaway’s ninth-largest public equity holding, with nearly 26 million shares as of March 31.
Chubb has over 40,000 employees across 54 countries, $225 billion in assets, and reported $57.5 billion in gross written premiums for the full year 2023. Chubb also reported increases in net income and core operating income to $2.14 billion and $2.22 billion, respectively, for Q1. Chubb’s stock price rose as much as 8% following the report.
b. 👨⚖️ Microsoft ordered to pay $242 million
Microsoft was ordered by a federal jury in Delaware this week to pay $242 million to patent owner IPA Technologies for a infringing on virtual-assistant software via Microsoft Cortana. A jury found that Microsoft’s voice-recognition technology violated IPA’s patent in computer-communications software.
This verdict was later approved by a judge. Microsoft argued against the verdict and plans to appeal soon. (IPA Technologies has also sued Google and Amazon over its patents, with Amazon defeating their lawsuit in 2021. The Google case is currently ongoing.
BUSINESS
c. 👾 OpenAI co-founder Ilya Sutskever resigns
Ilya Sutskever, OpenAI’s co-founder and chief scientist, who was involved in an internal conflict, is now officially leaving the company. Sam Altman, the CEO of OpenAI, announced the news on X.
This resignation is yet another addition to the complicated internal dynamics drama at OpenAI, especially following previous ‘complications’ involving Sam Altman’s firing and ousting from the board. Sutskever also mentioned he’s now working on a new project, which he plans to share details about soon.
d. 🏈 Netflix’s NFL deal and a popular ad tier
Netflix will now start streaming NFL games this season, including two Christmas Day matchups: the Kansas City Chiefs vs. the Pittsburgh Steelers and the Baltimore Ravens vs. the Houston Texans (presumably only in the U.S.). The deal spans three years, starting in 2024, and will cost Netflix $150 million.
This deal marks Netflix’s first significant foray into live sports, further solidifying the NFL’s strategy to reach broader audiences while increasing Netflix’s competitive moat. The games will also be available on broadcast TV in local team markets and on the NFL+ mobile app.
More Netflix news: Netflix also reported this week that their ad tier is now home to 40 million monthly subscribers, (nearly double the 23 million the company reported in January) and announced the launch of its own in-house advertising platform coming in 2025.
POLITICS
e. 🇪🇺 Meta under investigation by the EU
EU regulators are currently investigating Meta Platforms' Facebook and Instagram for potential breaches of EU online content rules related to child safety. If they find anything, the result is ‘hefty fines,’ as the EU puts it.
The investigation stems from concerns that the platforms have not properly addressed risks to children, such as the stimulation of behavioural addictions and a broken algorithm pushing inappropriate content. This adds to Meta’s allegations of election disinformation, which could result in fines of up to 6% of their total annual revenue ($8.09 billion) for Digital Services Act violations.
f. 🤝 Vladimir Putin meets with Xi Jinping
Chinese President Xi Jinping and Russian President Vladimir Putin recently met together in Beijing, a sign of growing relations between the two most poweful rivials to the United States and its allies. The partnership between the two countries, reflects a ‘concerted effort by both countries to challenge the U.S.-led global order’ (per Reuters).
The two issued a joint statement criticizing the U.S., accusing it of Cold War mentality with actions that threaten regional security. The visit ended with celebrations marking 75 years since the Soviet Union formally recognized the People’s Republic of China.
📚 Book of the Week
Note: I don’t recommend books that I haven’t read or that I would never read. The books I recommend are books I have already read or that I will eventually read.
The Most Important Thing Illuminated — Howard Marks
Book Description:
Howard Marks, the chairman and cofounder of Oaktree Capital Management, is renowned for his insightful assessments of market opportunity and risk. After four decades spent ascending to the top of the investment management profession, he is today sought out by the world’s leading value investors, and his client memos brim with insightful commentary and a time-tested, fundamental philosophy. Now for the first time, all readers can benefit from Marks’s wisdom, concentrated into a single volume that speaks to both the amateur and seasoned investor.
Informed by a lifetime of experience and study, The Most Important Thing explains the keys to successful investment and the pitfalls that can destroy capital or ruin a career. Utilizing passages from his memos to illustrate his ideas, Marks teaches by example, detailing the development of an investment philosophy that fully acknowledges the complexities of investing and the perils of the financial world. Brilliantly applying insight to today’s volatile markets, Marks offers a volume that is part memoir, part creed, with a number of broad takeaways.
Marks expounds on such concepts as “second-level thinking,” the price/value relationship, patient opportunism, and defensive investing. Frankly and honestly assessing his own decisions--and occasional missteps--he provides valuable lessons for critical thinking, risk assessment, and investment strategy. Encouraging investors to be “contrarian,” Marks wisely judges market cycles and achieves returns through aggressive yet measured action. Which element is the most essential? Successful investing requires thoughtful attention to many separate aspects, and each of Marks’s subjects proves to be the most important thing.
“This is that rarity, a useful book.”— Warren Buffett
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— Jacob
Today’s featured story was inspired by this video from Joseph Carlson going in-depth on Google and its AI strategy as well as its competition with OpenAI.
Valuation is subjective, take with a grain of salt. Make sure to conduct personal due diligence, including on stock valuation.