- OpenAI, Anthropic, and more sound the AI alarm.
- A safety problem or a business fundamentals problem.
- Consumer discretionary stocks: Value or value trap?
- AI is accelerating drug discovery.
- Mailbag: How important are dividends?
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Tyler Crowe: AI leaders are looking for the brake pedal. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe. Today, I’m joined by longtime Fool contributors, Rachel Warren and Travis Hoium, doing a little bit of a mix-up. There has been a fair share of “we need to slow AI development“ chatter out there. But this past weekend, that conversation appeared to hit a fever pitch. We had several employees leaving Anthropic and OpenAI over safety concerns. Now both Sam Altman and Dario Amodei are calling for the slowing down of development of frontier models lest they go out of control, I think was the words that Sam Altman used. Even the CIO of the hedge fund Bridgewater Associates was on podcasts over the past week, talking about human extinction, and the probability was higher than 10%, which is silly if you think about it, or startling depending on how you want to look at it. This isn't anything new, but it does appear to come at a very specific time where both OpenAI and Anthropic are on the precipice of IPOs and spending on these businesses is getting tougher to swallow, especially at the frontier level, where the bulk of their spending is going. The cynical view, at least to me, is that all of this slowdown chatter comes at a time when they want to slow down spending more than anything else without disrupting business growth.
I want to pose the question to both of you. On a scale of AI will be the death of us we need to slow down, and we're trying to middle this spending versus growth challenges of business, where do you land on the spectrum here?
Rachel Warren: Honestly, I think the truth is probably somewhere in the middle, but I do tend to take a bit of a more cynical view to what we've been hearing. I want to talk about why. I think there’s a lot of calculations going on behind the scenes, and I don’t think that means that there aren’t real, justifiable concerns about AI safety and the constraints, or lack thereof, of some of these frontier labs. But I also think you have to look at the math behind all of this. You talk about OpenAI and anthropic. You're moving out of the easy bunny venture phase. These are companies that are anticipating to have huge entrances into the public markets, where they're going to face a very different level of scrutiny than they have in the private space.
Infrastructure spending has become a real black hole. You look at OpenAI's internal projections, which were reported not that long ago by the information, they're expecting a $14 billion loss. 2026, they could have cumulative losses of about 44 billion by 2028. Think about how a single next-gen data center runs about $35 billion on its own. This is not something that Wall Street is necessarily going to be forgiving on. Talking about Anthropic for a moment. We have heard for a while now from Dario Amodei. He's been spending almost the last year warning the industry to slow down.
Meanwhile, we also saw a report from the information that Anthropic has locked in $517 billion in compute commitments. That's 14.8 gigawatts of capacity. It's enough to rival just for scale a dozen nuclear reactors. They're funding that obviously with revenue. They have their confidential IPO pipeline. A lot of that is going to Alphabet, Amazon, Microsoft, SpaceX. The outside voices that are making this case as well have a lot of ski in the game. We had an interview with Greg Jensen that we saw from Bridgewater in recent days. He's not a neutral bystander. He was one of the earlier investors in both OpenAI and Anthropic. He's the one that was telling Bloomberg on a recent podcast there's a 30-60% chance of a catastrophic AI disaster in the next few years. Bridgewater's own SEC filings show that it's been building up positions in video Broadcom, Amazon. We're seeing this push for regulation in compliance costs, but it's more likely to just price out the open-source community and the small players who can't afford the legal overhead. The biggest labs can absorb it. I think the risks are very likely real. I'm more inclined to believe that there are justifiable concerns there. But I also think the loudest voices calling for caution are the same people holding the largest stakes; you have to question what the motivation is.
Travis Hoium: We're in such an interesting time with this entire debate, and from an investment perspective, we're talking about trillions of dollars in many multi-trillion dollar companies that are involved here. This isn't something that we should take lightly. As I reflect on the weekend, it was so interesting to see, first of all, the leaders of these labs almost all agree with what Dario wrote. That was a little bit stark to me and it felt a little bit coordinated. I don't know whether that's good or bad. But I also came away thinking that all of these things can be true. They can be really worried about safety. Critics can be correct in that they're just trying to pull the ladder up and get regulatory capture so that they can build a mote around their business. Everyone can also be wrong about all of those things.
These companies are crying wolf a little bit because they've been doing this for years. Dario Amodei has been one of the biggest critics, and yet he started a company that is now arguably in the lead in AI development and also thinks that this is going to lead to some terrible. There's a lot of cognitive dissonance going on here, and the history of technology says that something bad will probably happen. We just don't know what that is. When the Internet was invented, we didn't necessarily think that was going to lead to more isolation and mental health issues among younger people, but this is where we are today. The root cause and the cause and effect is unknown here. I think that's the real challenge is that it's almost like these people are saying, hey, you got to protect me from myself, because if I continue to develop this, I'm going to do something really bad.
One of the things that's most resonant to me is that there are laws in place for a lot of these things. If you build a product that goes out and hurts people or steals things, it is your fault. I almost wonder, too, if after this hugging face incident, my understanding is that there were laws broken. There were felonies committed and is OpenAI. We just seem to be glossing over that. If the next big thing is suddenly financial institutions are broken into and these AIs steal money, are people going to go to jail, and that's what they're worried about? It all is a very interesting and complicated push and pull of many things that are probably have threads of truth but are not completely true.
Ultimately, we're investors here. Something bad is probably going to happen. The question is going to be, then what are we going to do? Because, especially in the U.S., we don't typically act first. We act after the thing happens, and that's probably I can go back to the great financial crisis anything in the last 20 or 30 years, at least. That's just the way that I think it's probably going to play out. I think that's what regulators are looking at. That's what the president says, as well. A lot of uncertainty, but take these risks very seriously, but also ask questions about who is bringing them up.
Tyler Crowe: I got to say, hearing all of this, I feel like reading the S-1 for anthropic and OpenAI of seeing in the risk sections like, our AI agents might commit felonies, and we don't know if it might happen. I don't normally read the entire risk section line for line, but I might have to if this is what we're going to find. But you guys touched on a point I want to drill down a little bit deeper into here. You're talking about this little bit more, the idea of regulating AI development, stuff like that. It really feels like the Silicon Valley playbook that we've seen before, where it's this land and expand role of like you saw with Google, where it dominated search, or Meta, where it started to dominate social media. Then what ends up happening is regulations come down. Think about GDPR in Europe. Or something along those lines where the regulatory burdens are put up, and it's the idea of trying to make it more fair. But what ends up happening is these giants are the only ones that can handle the regulatory compliance to make it happen. I am curious to get your specific point, do you think this may actually just be like a regulatory thing? It's like we have pushed ourself far enough ahead of other people that we want to drop the drawbridge now and then use the regulatory advantage to our benefit, or is this more like the money side of it?
Travis Hoium: I think it's a nice happenstance that it also is to their competitive advantage if the ladder is pulled up. I don't necessarily think. Anthropic in particular, but I think all the AI developers, in general, this sounds crazy. Again, we're an investing podcast, but there is much more of a religious view to this in a lot of ways because they don't really know how this thing works. They can't explain to you why AI is doing the things that it's doing. There is this ineffable view that they have of this technology that they're developing. That's why I think they're very serious about being concerned. Oh, by the way, if it happens to help our business, that's a nice byproduct.
Rachel Warren: Look, the genie is out of the bottle, so to speak. I think there's multiple ways to look at this. I think I was pretty clear about. I have a cynical take in the sense that I think a lot of this unity that we're seeing among the leaders of these frontier labs goes back to the reality that the bottlenecks are their concerns about growth as they enter the public markets and trying to set expectations. But I do also think that we see that these leaders are talking about a technology that they have helped to create and develop that is rapidly outpacing their ability to control and even fully understand it. That creates a very difficult paradigm to unlock, because how do you regulate something that is evolving and learning so quickly?
At least in the short term, the answer is, you have to pull the brakes a bit. You have to scale back development, to understand how to regulate it. If they are watching somebody's recent incidents, obviously, the hugging face one is one of the most prominent. There could be a real concern about what liability could look like for these businesses moving on to the next three, five years and beyond. I think it's both to their benefit and of course, more broadly for the benefit of mankind for there to be regulation, but that is a much more difficult type of technology to actually set real legal guardrails around than what we've seen come out of Silicon Valley in the past. I think that is part of why this is so challenging.
Travis Hoium: Tyler, I just want to bring up one quick thing. I wonder if something happened at one of these labs that we don't yet know.
Travis Hoium: We didn't know about the Hugging Face incident until long after it happened.
Travis Hoium: Is there a reason that all these people who seem to be fighting each other to lead the AI world? Why are they suddenly all on the same page? Just bringing that up.
Tyler Crowe: Waiting two months from now for the big news drop. He's like, there was an oops at OpenAI or something like that. Something that we're all going to be following, and not exactly the most cheaper way to start your Monday is, hey, AI might kill us, but maybe it's just for regulatory compliance purposes. But I promise we're going to do a little bit more of a palette cleanser here in the next segment.
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Tyler Crowe: AI dominates the headlines, especially this conversation. You go to any news website today, and it's all about AI coming to kill us all. I wanted to just shift the focus a little bit and just some of the investing trends, I wouldn't necessarily say outside of AI, but outside of directly the OpenAI, Anthropic discussion of trends in the investing world that you are following right now that, through the end of the year, you're like, I think something big could happen. I think there's a major momentum going on here, and I think more investors should be paying attention to what's going on here. Travis, I want to start with you. What are you most excited about?
Travis Hoium: Excited. I guess you said what are the things that we're looking at? The consumer is something that I'm really looking at, and I don't know if it's reason necessarily to be excited because some of the data that we've seen coming out from earnings, even just anecdotally, little things are maybe not as positive as we would like to see. With the market where it is at or near all time highs, with all of the spending that's going on in AI, I have to wonder how much of the economy is being held up by that AI trade. As I look at particularly shoe and apparel stocks have gotten absolutely hammered this year. Restaurant stocks have not done well because same-store sales comps are rough. Margins are getting squeezed because they have no pricing power.
Now you have gas prices continue to rise, and it doesn't seem like that's going to be ending anytime soon. I'm keeping an eye on the consumer, because I think the market is thinking about two things right now: the AI trade and the consumer. The consumer has fallen by the wayside because the AI trade just overwhelms that. But if that AI trade does slow down, and then we find out we have a weak consumer underneath, that's probably not great for investors. But that said, I'm finding a lot of really interesting opportunities because some of those stocks that have been beaten up are trading for 10-15 times earnings. If you can find companies that are going to be able to grow long term at those prices, this is actually an interesting time to start building position.
Tyler Crowe: Certainly connected to that is the idea of the housing market, too, it would be the one I'm going to be watching is because the idea of home equity loans and things like that are almost like a thing of the past because the interest rates are prohibitively expensive, and everyone's looking at the housing market and being bummed out. You can imagine why that might start to have some trickle-down effects into the consumer as well, in some of the more discretionary purchases they’re making. I’m looking at a chart right now, and consumer discretionary is the worst-performing sector right now on the market. It's down 5.3% year to date, while things like energy and tech are up 28, 30%. Certainly not the most interesting so far this year, but again, a lot of cheap stocks that could be compelling. Rachel, what are you looking at?
Rachel Warren: I am very excited as I see what's happening with AI as it pertains to healthcare, to put a little bit of more positive follow-up to our earlier discussion. This is a space where you're not maybe seeing as much of the flashy use cases of AI that we do in other industries. What AI is doing in healthcare, is it is really helping to refine and optimize the long health processes of drug development, discovery, optimizing clinical trials. It's not replacing doctors and scientists. It’s helping companies develop, commercialize, manufacture, and optimize, really the entire timeline from drug discovery, to approval, to getting it into the hands of patients at a much more favorable rate. You have to think about how the average drug can take over a decade, a couple billion dollars on average to bring a drug to market, 90% fail in later-stage trials anyway. AI is really being used as an automation and data engine to attack a lot of the bottlenecks that have historically made drug development so slow.
You can see that everywhere, from the big pharmaceutical companies that are leveraging AI models behind the scenes to biotech companies that are much more upfront about the use cases for which they're finding value in AI. Moderna is a great example. Obviously, they're working on their cancer vaccine with MRC. This has been something that's gotten a lot of attention from investors recently. They have their own system called Maestro that helps orchestrate these personalized vaccines. It reads a patient's tumor sequence, it predicts the best immune response. Krystal Biotech is another really interesting company. They make reducible gene therapies for rare skin disease, and they are using AI and machine learning to run real-time quality control in their production lines. Seeing the way this technology shows up in really practical use cases as someone who is following AI broadly, but is also a healthcare investor, that's really exciting and I think it creates a lot of opportunity for investors.
Tyler Crowe: Rachel, one thing I've seen in the healthcare space and Chatter, I guess you will, and you can see it in performance of stocks too, is contract resource organizations, Medpace Holdings, Iqvia Holdings, companies like this. They're the worker bees of the healthcare industry, ones that actually conduct a lot of clinical trials for start-up biotechs and things like that. There has been a thesis that AI is going to kill them because it takes away that drug discovery side of the business. But I’ve also heard the counter that says, if drug discovery is booming because we’ve been able to get so many out of drug discovery through AI, doesn’t that just make all this clinical trial work that much more productive, or not more productive? But there's just going to be that much more of it because we have that many more candidates. Where do you land on that spectrum? Are we seeing the death of the CRO because of AI, or are they going to be absolutely booming because they have to conduct all these clinical trials?
Rachel Warren: It really depends on the individual CRO. There was a lot of fear around this, especially, I would say, a year ago, and well into 2024 and 2025. Again, it really depends on the organization. Historically speaking, CROs would make money by billing for the number of people typing data, monitoring sites, red lining contracts. In a day and age where very user-friendly AI tools are optimizing a lot of these processes behind the scenes for healthcare organizations. Obviously, those types of wrote administrative tasks that's not as necessary. We've seen some biotech start-ups that have actually delayed signing some of their CRO contracts. But because AI is accelerating the early-stage drug discovery process, which is one of the most time-intensive phases of developing a drug, we are seeing a lot of opportunities for these more tech-fluent CRO organizations. I think that that will continue to be an opportunity for the businesses that step up. There are certainly some of these old-school mom-and-pop organizations that may not stand up to the test of it. But companies like Medpace, for example, are a very prominent global CRO. They have a lot of proven relationships with players in the space. I think that companies like that are going to be just fine, but something to watch for sure.
Tyler Crowe: Coming after the break, we're going to hit the mailbag.
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Tyler Crowe: Everyone, reminder, if you want to get a question into us, email us at [email protected]. That's podcast with an S. I also put the email in the show description, so you can get it there as well. Today's comes in from James from Atlanta. He's a huge fan of the show, been listening since COVID, and loves what we do. The question is, we'd love to hear everyone's thoughts on how you view dividends, both in the return calculation and the company's messaging. I see the role they play in energy stocks. He mentioned ExxonMobil, Chevron, been doing it for a long time, growing dividends here. I struggle to see the value of a growth stock paying one. He uses Disney, Google or Alphabet more specifically. As I would think that the capital could be better spent on capex and business growth rather than dividends. What do you land on the spectrum here? Should these growth companies like Alphabet and Disney not spending dividends and probably be spending on business growth or is there value into the dividend?
Travis Hoium: One of the things you have to look at is a company is trying to communicate with investors, what investor they want to attract. When you bring up two interesting examples, Alphabet would be a case of, hey, we got so much cash. We got to return this somehow dividend, I guess. Disney is a different story where they want to have dividend investors as part of their investor pool. When you look at, what are the pools of investors, that's an area that they want to play historically. I think something that you need to think about is that part of this is communication with investor. With that said, I would love to lobby for regular dividends.
I think one of the things that we get stuck on with dividends is they always have to go up. They always have to be consistent. That's not the way the business works. If you own a private business, you have a great year. You just pay yourself more this year, and maybe don't pay yourself as much next year if it's not such a good year. We should do that in public markets. But that said, one of the things that I think about dividends is it's actually a lot of times a sign that a company doesn't have as many investment opportunities as they once did. You don't see young companies paying dividends. You don't typically see high growth companies paying dividends. It's much more mature companies. If you're looking at dividend stocks, just understand where those companies are on their investment phase, make sure the underlying business is solid, because if it isn't that dividend isn't solid, you risk the future dividend cut, which then again goes back to the first thing I said, which is the investor pool, maybe shifts because they cut that dividend, and now your stock starts to drop and it's a downward spiral. Make sure that underlying business is good. If it is, if they pay a dividend, fine. If they don't not really something that I worry about. But at the end of the day, whether you're looking at dividends or not, make sure the business is on solid footing because that's ultimately the most important thing.
Rachel Warren: I think that's right. Just injecting cash back into the business doesn't necessarily create more growth. I like when I see a business that is flush with cash, rewarding investors in the process. It's a discipline signal; it's telling you that a company isn't going to hoard cash when the balance sheet can afford it. They're rewarding shareholders. Obviously, as an investor, it's cash in your pocket on a schedule. That's something that can be really favorable for reinvestment, just to grow your overall returns with time. That obviously, dividends open up a stock to a much bigger buyer base.
A lot of the funds, a lot of the conservative pension money are mandated to only hold dividend pairs. More demand can meet more support under the price. Now, obviously, dividends can be less tax-efficient than buybacks, for example. It's not a guarantee. Even Disney paused its dividend during the pandemic briefly. That can happen, but as a general rule, when you see companies that have an immense baseline of profits and cash, they have a favorable dividend payout ratio. They're able to support that long-term payout to investors. That can be great if you have a diversified portfolio and you're looking for extra ways to generate capital. As someone who likes growth stocks and also likes dividend stocks, I tend to include both types of businesses in my basket of holdings.
Tyler Crowe: Travis, I think that might be one of the first times I've ever heard you advocate for American companies to act more like European companies with irregular dividends.
Travis Hoium: There's a Melco Crown. I don't know if that's still the name. They've changed their name a couple of times, but they actually do this, where they think they pay out 50% or a third of their net income as a dividend, so the dividend goes all over the place. But it makes a ton of sense. It just makes sense to not get stuck in this position where you go, oh, my gosh, this company that I own has a 7% dividend yield, but they're paying more than their net income and their free cash flow and dividend. That's nuts.
Tyler Crowe: I interviewed a CFO in the oil and gas industry once, and I proposed that idea of an irregular dividend. I was like, you could pay a penny a quarter and then just pay excess what you think is distributable. He's like, I would get murdered in the capital markets if I ever tried to do that.
Travis Hoium: Winners arts does this. There are examples out.
Tyler Crowe: But you have to establish a track record with the market and be like, this is what we do. If you haven't done it before, you're probably going to get in trouble with the market when you do it. That's all the time we have here today.
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, do don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards, and it's not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. See our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of The Motley Fool team for Travis, Rachel, and myself. Thanks for listening, and we'll chat again soon.
Rachel Warren has positions in Alphabet and Amazon. Travis Hoium has positions in Alphabet, Moderna, and Walt Disney. Tyler Crowe has positions in Krystal Biotech. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Chevron, Iqvia Holdings, Krystal Biotech, Medpace, Meta Platforms, Microsoft, Moderna, and Walt Disney. The Motley Fool has a disclosure policy.