Berkshire Reveals Its Google Thesis & Why They're Buying More

In today's video, we are going to be discussing the new FTC lawsuit that was launched against Amazon, specifically with their advertising platform because the FTC is seeking damages up to $20 billion. This sounds like another really big legal overhang with another one of the hyperscalers like what just happened with Meta. So, I'm going to run you through what is going on, what are the claims in the lawsuit, what are the rebuttals, and really how this impacts the stock and investors. Then we are going to look at all of the new launches and releases from Meta with their new AIS because they have been shipping like crazy and the stock seems like it is starting to respond well. So I'm going to go through all of the new launches and discuss them quickly. Then we are going to wrap up the video by watching a quick interview from Greg Ael where he discusses why Birkshshire Hathaway invested so much money into Google and really what their investment thesis is. And this is an interview that came out this morning. So, there is a lot that we need to discuss in today's video, but before we get into it, I'm happy to let you know that this video is sponsored by Hamilton ETFs. Hamilton is Canada's largest independent ETF provider with over 18 billion in assets under management now. And I specifically want to highlight their QMVP ETF, which launched on January 20th of this year. QMVP tracks the selective Hamilton Champions US technology index which was designed to identify tech champions. These are the most profitable companies by gross profits whose businesses are also driven by technology. The index that QMVP tracks has produced substantial long-term returns as well with a 21.2% 2% compounded annual growth rate since 2006 versus 17.7% for the technology sector index. QMVP was built around three core principles which are an emphasis on profitability, core US tech exposure and managing concentration risk by keeping the positions between two and 6% with a quarterly rebalance. It gives investors exposure to 25 US technology companies, including the Magnificent 7, has a 0.19% management fee, and is for investors who want reduced concentration risk. Here you can see all of the holdings within QMVP, with the top ones being Microsoft, Apple Amazon Broadcom Nvidia Google and Meta. And you can see that these positions are much more equally weighted than the S&P 500. If you would like to learn more about QMVP, then make sure to head to hamiltonetfs.com. And thank you to Hamilton for being a longtime supporter of my channel, and for sponsoring today's video. All right, so now let's dive into the video and let's get started with the FTC lawsuit against Amazon, what they're suing Amazon for, really what they're saying Amazon did wrong, and then Amazon's rebuttal that they put out on their website as well. There is a lot of reading between these two articles. So what I have done is created a quick Daniel pron slideshow of all of the highlights that investors need to know. So let's take a look at the first slide now. And this one is what the FTC says Amazon did and how they are coming after and what they are coming after Amazon for. So the first one is secret price overrides where Amazon quietly would swap in a higher price so it could charge and make more money on advertising. They're also claiming that Amazon told its advertisers that it was running a second price auction when it no longer was. The next one is concealment and cover-ups where they're saying that Amazon was raising advertising prices and said it was due to demand and not manipulation. They claimed that Amazon was using Prime Days and holidays to hide the biggest ad pricing markups that Amazon was doing on their end again to make more advertising revenue. The FTC estimates that $20 billion in extra charges was pulled from over 1.2 million different businesses. The FTC also claims that these costs were passed on to consumers who ended up paying more for their items. So, at the end of the day, the FTC is also saying that consumers were harmed by having to pay higher prices on Amazon. And the last one here, which seems like the biggest one in the FTC case, is that Amazon manipulated its advertising auction, being both an auctioneer and a bidder to push up bid prices and make more money. Essentially, Amazon was seeing who the top bidder was, then trying to outbid them to continue pushing up the bid and generate as much revenue and profits as possible on their advertising platform. So, now let's move on to the next slide, which is Amazon's rebuttals to these key claims. The first one is that there was no harm to shoppers and consumers. As the FTC even says, there's no proof that consumer prices went up due to increased advertising costs. So, this one seems like it's going to be pretty much a mute point. Then, Amazon said that winning bids fell because Amazon has implemented a higher focus on relevancy. not just showing the highest bidding advertiser, but showing ads based on what the consumer is looking for. And again, the winning advertiser, the winning bid is not always the one that's actually being shown. Amazon also makes the point that buyers adjust their bids on results, not on what Amazon's rules are. So, if advertisers are not seeing as much of an ROI on their bids, then they watch that in real time. They're not spending a million dollars on Amazon's advertising platform and then just letting it run itself, right? These are teams of people who are checking in every single day to make sure that their bids are working, they're getting an ROI, and they change their bids as they see fit. And this is what advertisers do, right? So, the claim that buyers were kind of blindsided here and didn't know what was happening is kind of false, it seems, or at least that is what Amazon is saying because they were watching. they should be watching every day and they should be happy with the prices that they're paying and they set their own bids at the end of the day. Amazon then says that there has been no harm to advertisers because ad prices haven't risen above the rate of inflation for years while advertising conversions have continued to consistently improve. Basically, Amazon is saying that the price per conversion has actually been coming down for advertisers consistently. Amazon says that it also runs a standard auction that is normal across the industry. They're not doing anything that its own competitors do not do. Then lastly, Amazon is claiming that the FTC is cherrypicking a handful of emails that seem damaging. Out of the 1.5 million pages that they have viewed. So on the grand scheme of things, there may be a few emails that look like they are damaging, but across the whole, it's a very small portion and they're being taken out of context essentially. So now let's move on to the next slide which talks about the potential outcomes here. So the first point here is that the FTC says that it's coming after tens of billions of dollars in damages. There's also 22 state attorney generals who have joined the case and are looking for the same damages. However, there will likely be a settlement in the range of $2.5 to $5 billion based on the historical FTC allegations and settlements that Amazon has done. And as we just saw with Meta, the headline numbers are usually not what happens in reality, and they usually don't even come close to it. I mean, as we talked about in previous videos, Amazon was being sued for up to 1.4 trillion in fees and fines. And they ended up settling for about 12.7 billion paid over the next decade. So, these headline numbers like to create fear. They like to be overblown. And what actually happens at the final settlement date is usually not nearly as dramatic. However, in my view, the biggest cost would be Amazon having to change its advertising algorithms and bidding strategies, which could harm pricing, revenue, and margins at the end of the day. So, just like what happened with Meta as well, I actually think that the biggest potential cost here could be a change to algorithms and how the platform works, not necessarily a billion dollar fine or anything like that. So now let's move on to the fourth and final slide which is a summary and me explaining why I am continuing to buy Amazon because Amazon has been one of the top stocks that I have been buying in the market over the past couple of months. So my first point here is that the fines and the settlements are not the real danger to Amazon. Amazon can easily absorb tens of billions of dollars in fines. I mean, this is a company doing over $150 billion in operating cash flow on an annual basis and growing tremendously. So, even if there is a settlement or a fine in the tens of billions of dollar range, it's not going to derail Amazon long term. It's going to be annoying, but they're going to get through it and the business is going to be just fine. As I recently said, I believe that the real risk is the algorithm and the advertising business needing to make changes. Advertising is a huge fast growing and very profitable business for Amazon. But in my opinion, even if Amazon does need to make some changes, I imagine that they would still have a highly profitable and high demand advertising business. Amazon has so much traffic and so many resources to figure this out. And I don't think that its advertising business is going to be derailed long-term because of any potential changes that they may need to make. And I mean, think about it. If sellers were not happy with Amazon's advertising business, then they wouldn't be spending so much money on it and it wouldn't be growing so quickly. So advertisers are clearly seeing a positive ROI and are spending more and more money on Amazon's advertising platform. So for myself, any weakness that Amazon stock sees is ultimately a long-term buying opportunity. And as I said, I have been buying a lot more Amazon shares in the market, especially as this lawsuit has caused the stock to sell off a little bit more. I recently made a video on my channel fully dedicated to my Amazon thesis and why I think that it is one of the clearest buys in the market right now. So, if you want to see my full investment thesis with my DCFS, then I would recommend going and watching that video as well. But overall, I don't think that this is changing the thesis on Amazon or its long-term fundamentals. So, if the stock wants to sell off in the short term, then again, I view it as a long-term buying opportunity and that is exactly what I have been doing. So, now let's move on to the Meta discussion because, as I said, there has been a lot of updates coming out with Meta that I want to share with you. All right, so the first screenshot right here is kind of funny to me because it shows that people are projecting that Meta is going to overtake Google to become the largest advertising business in the world. They're also projecting that Meta will generate 316.4 4 billion in advertising revenue by 2028 versus Google's 298 billion. But the main takeaway here is that for some reason on social media, I am now seeing so many posts saying that Meta is going to overtake Google in terms of advertising revenue this year. And why I find this funny is because I have been saying this for months here on my channel. And as you know, if you're a long-term viewer of my channel, I track all of the advertising businesses after every single quarterly report. I track Google's advertising revenue, Meta, and Amazon to see the trends, how quickly they're all growing, which business is adding the most advertising revenue. And for the past while, I believe over the past about 18 months, Meta has been the fastest growing advertising business by a pretty wide margin. And you can clearly see in this graph that I continue to update here on my channel every quarter that Meta is closing the gap to Google's advertising revenue and it's closing pretty dang quickly. And ultimately I believe that Meta is doing a great job continuing to attract advertising dollars and for a while now they have been growing and attracting the most advertising dollars out of Amazon, Google and Meta. All right, let's move on to the next screenshot now. And this one is a report that came out saying that Meta could launch its first consumer agent called Hatch sometime within the next few weeks. Hatch is said to be a highly personalized agent that can complete tasks for users like booking appointments, shopping online, or even finding you a dog sitter. Hatch will be able to complete tasks for users of Meta's apps, which means Meta is trying to launch a personalized AI agent for over 3 billion people across the globe. It's also speculated that there will be a subscription offering with speculation of it being up to $200 per month on the top tier subscription. So, if this is all true, then it could open up a huge new revenue stream for Meta and get them really diving into the subscriptions business. Moving on to the next screenshot. This one comes from an industry expert in the advertising space. And here they said that they believe business agents will become part of the overall advertising spend too. This is because the agents will work on behalf of the businesses to help answer customer questions and ultimately close sales. This person also believes that AI agents will become a multi-trillion dollar industry. And this expert has a panel of around 300 advertisers and the ones using Meta's AI agent pilot are up to 45 from 30 not that long ago. So they have seen an increase within their own 300 advertisers of about 50% who are starting to use Meta's AI agent platforms. They also say that more of their larger businesses are starting to use it too. So it seems like adoption is growing and the businesses are liking Meta's AI business agents that are specifically running in WhatsApp. And I believe that this is a good initial response from an expert in this industry. All right, moving on to the next screenshot. This one is a chart that I found that is circulating on X right now and it's Meta's revenue per employee. And you can see that this metric has doubled since the first quarter of 2023. So Meta is generating a significant amount more revenue on a per employee basis, which does suggest that it's gaining efficiencies and revenue from using AI and leveraging AI. I believe this suggests that Meta's AI ROI is there. And over the long term, I do believe that its margins will continue to expand over time because they are generating so much more revenue on a per employee basis. And I believe that eventually this is going to lead to operating efficiencies down the line. All right, moving on to the next piece of news. Mark Zuckerberg on X also announced that Muse code is now out of beta and people can go and start using it. This is Meta's coding model and it puts Meta in direct competition with Anthropics Claude and OpenAI's Chat GPT coding models. We'll have to see how this goes over time, but it sounds like they will be charging subscriptions for their coding models too, which could be another revenue stream and get them further and further into the subscriptions business. Moving on to the next screenshot, Meta also launched a new audio model which transcribes voice and it is right at the frontier. It is literally the leading voicetoext model right now. The chart that you're seeing on your screen is essentially an error rate. So the lower the number, the better it is and the less errors it has from transcribing voice to text. And you can clearly see that Meta is now leading here. So their new Musev voice transcribe is right at the frontier. Moving on to the next screenshot. This one shows us where Meta's new Muse image generating model sits in terms of performance versus price. basically quality versus price. And you can see that Meta's new image model generates highquality images for only 1 cent. The quality to price is now at the frontier and is leading as well. And you can imagine how this model would be beneficial for Meta's advertising businesses and helping small businesses generate advertisements to then use on Meta's platforms. And all around, Meta is launching new models that are either at the frontier or right near it. and it is launching new models seemingly every day, at least based on what I'm seeing on my X feed. On top of that, Meta is also launching a lot of new subscription offerings for businesses and consumer agents, image generation, and coding models. These are all brand new revenue streams for the business that it can distribute to its over 3 billion daily active users. And in my opinion, Meta's stock price is not factoring in any of this future revenue potential because it's already discounted relative to the existing business with Meta trading around an 18 forward price to earnings ratio. That's ultimately why I have continued to buy so much Meta over the past few months and make it a larger portion of my portfolio because I do not believe that I am paying for all of the future potential upside that we have talked about. again simply because I think the current existing business is already discounted in the market today. All right, now let's move on to the final segment of this video where we watch the quick interview of Greg Ael and him discussing Birkshshire Hathaway's Google investment. So I'm going to play this clip for you and then I will talk about the highlights afterwards. uh relative to the uh alphabet position. Warren initiated that uh probably close to 15 months ago or a little bit more. And uh so we initiated the p the the uh the initial purchases in Alphabet. We continued or he continued and we discussed it then and continue to discuss it. uh initiated a variety of purchases and then I want to say in late May I received the call uh on a Sunday morning to see if we wanted to particip participate in their upcoming equity offering. uh uh really no terms or amount were set and I said well I'd get back to him right away and uh very much consistent with how we managed Berkshire but also how we uh the governance around it I called Warren and I said we had a significant opportunity to invest in continue to invest in Google but in a in a with a significant block uh discuss the size uh they hadn't set the size but recommended that we consider 10 billion and Warren Warren and I discussed the size. We discussed the size of discount uh and I'd recommended 6 12% discount and we were comfortable with that and we went back to them and and highlighted we would be interested in a a block on those terms and then ultimately uh consummated the transaction. >> Why do you like Alphabet? I think from the fund just from a real high level obviously we don't discuss the underlying specifics of any of the concepts and and and around any of our equity investments but the one thing that is unique with Alphabet and I guess we do see this across our other businesses but number one obviously uh we all are seeing and feeling the impact of AI so we knew it was going to have a significant impact on on America and and and businesses is we have a lot of visibility from within our companies as to how we're using AI, what type of benefits it's delivering. So that brought uh incremental interest and then uh we saw Google as a significant player. Now there's a lot more to Google than what I just said and why we like it. But those were the fundamental reasons as to why we uh took a serious look at uh at Google and now have uh um a significant investment in it. >> So the key takeaways that I got from this clip are that Warren Buffett initiated the Google position about 18 months ago, but also approved Birkshar buying another $10 billion block as part of Google's new share offering. Bergkshire is also seeing AI benefits within its own businesses. So they have the conviction that AI adoption will continue and more businesses will leverage it because they're seeing the returns again on their own companies. So Greg and Warren Buffett wanted in on that thesis and they chose Google as their investment to do so. Now, in my opinion, this is bullish for AI overall because as Larry Frink and Bruce Flatt have been saying, they're seeing huge benefits from AI within their portfolio of companies, too. But those benefits are still constrained to the largest companies with the most vast resources because AI is still relatively expensive even for a small or medium-sized business to fully benefit from or try out. So as AI continues to become cheaper, more businesses will use it, adoption will grow and demand will increase. That is basically the thesis of AI. Now, as AI continues to become cheaper, demand will grow. And then it becomes a question of which businesses benefit as demand does continue to grow. Now, while we're on this topic, I do have a couple more charts that I want to show you. So, this first one that I've been seeing circulating around is the LLM token expenditure index. This is basically the cost per token or essentially the cost to use AI. And you can see that the cost per token is down by about 50% since June of this year. So just over the past couple of months, the cost per token has fallen dramatically and has been cut in half. And I have been seeing a lot of people online saying that this is a huge bare case for the AI trade because if AI token costs are going down then companies like AWS and Google Cloud are going to see headwinds because they provide the tokens right they are the compute. So if compute is cheaper then those businesses are not going to make as much money which is true on a per token basis but you also want to take a look at the net token growth. how many tokens are actually being consumed and that is exactly what I have in this next screenshot. So token usage is up 25x in the past year and 2x over the past month. So think about that. If the per token cost has declined by 50% over the past couple of months, but the token usage is up 2x month over month, then it means that over the past month alone, token revenue should still have doubled or close to doubled. And in my opinion, this is the thesis that as AI continues to get cheaper, adoption will continue to grow, playing out in front of us in real time. It's just like electricity. If electricity was extremely expensive, then it wouldn't be in every single home. But since electricity has become so cheap over the past like 100 years, now everyone can use electricity and the adoption is massive. And I think that's the better outcome. I think the better outcome is adoption being huge and everyone having access to these tools and being able to benefit from them. And I also believe that this is the scenario where the hyperscalers like AWS can make the most amount of revenue and profits long-term. So this is the thesis that I am actually invested in is tokens getting cheaper and as they do AI adoption continuing to grow and it seems like that's kind of the thesis that Warren Buffett and Greg Ael have with Google as well. But with that being said that's going to wrap up today's video and as always if you enjoyed the video then please remember to leave like on it. And if you're new here and you want to see more content like this then please consider subscribing to the channel as well. Thank you so much for tuning in. I truly appreciate your time and I hope to see you again in my next video.