Should You Invest in Microsoft or Google’s AI Race?

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Clapham discussed Should You Invest in Microsoft or Google’s AI Race?. Here’s an excerpt from the episode:

Steve: Not every other asset price. Euro stock market seems to continue to disguise. Why are stocks so strong? Tell me.

Tobias: It’s a handful of them. It’s not all of them. It’s a handful. It’s that Magnificent Seven that are unique. Google, Microsoft, Netflix, they’re all pretty stunning businesses. I don’t think they can get overvalued, but the underlying business doesn’t. There’s no obvious reason why those businesses aren’t going to keep on growing. They get ahead of their valuation. It’s not like the old Exxon would be 40% of the market and that was pretty. It’d be top heavy when it all got into the oil and gas right at the top of the cycle. But then they probably are pretty stretched, those Magnificent Seven. What do you think?

Steve: Well, I’m slightly puzzled. I own some of them, so I’m wondering about what I should do. You always look at things, you always think, “Well, I don’t feel comfortable. What’s the market think?” You don’t want to get out too early because people are still very enthusiastic and very bulled up. You look at Alphabet and you look at Microsoft, they can’t both win this AI war or maybe they can. It seems to me that people have assumed that Microsoft is a clear winner because OpenAI is a clear winner. That isn’t obvious to me because I think Google have some excellent technology in this area. They bought the UK company that was the AI expert. I’m sure they’ve got a huge amount of resource that they put into it.

But it’s not obvious to me that Google Search continues its monopoly. I think that’s far from guaranteed. It’s not hugely valued. I think last time I looked it was on 19, 20 times earnings. And people were saying, “Oh, isn’t it cheap?” I said, “Well, actually I’m not sure that it is cheap,” because there’s quite a wide range of outcomes, quite a wide range of probabilities for Alphabet, that 18 months ago would have been much, much narrower, so you had much more confidence. So you would imagine that this stock should have been quite significantly derated. It slightly puzzles me that more people weren’t asking that very obvious question.

I don’t know what the answer is, because when it gets into these deeper technological discussions, I find myself a bit at my death. I’ve learned from bitter painful experience and my wallet has the losses to prove it that when I don’t understand, I’m very likely to lose money. So I’m just looking at my Alphabet position and thinking, “Well, I probably should have something else.” But I haven’t yet exited, but I think it’d be highly unlikely that I’d be here. If we had this conversation in 12 months’ time, things highly unlikely that I’d have the same exposure to it.

Tobias: Yeah, Bill Gates had that observation in the late 1990s that, because of this obsolescence risk that can happen overnight in technology that they should probably trade it at lower multiples actually than a typical business. It’s funny how we’ve definitely ignored or forgotten that lesson. I don’t know, if when we’ll be potentially reminded but something to think about.

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