Microsoft (MSFT) has launched a full frontal assault against Google (GOOG, GOOGL) with its generative artificial intelligence bot ChatGPT.
The golden age of artificial intelligence is starting.
In The Arora Report analysis, artificial intelligence is a $1 trillion market.
Over the next five years, artificial intelligence may offer investors an opportunity to generate a fortune. However, many investors will lose their shirts; as without sophistication, it will be hard to make money.
Bard is Google’s answer to ChatGPT.
Investors have been selling Alphabet stock on the assumption Bard is inferior to ChatGPT. Alphabet has lost billions in market cap.
Google has several edges that investors are ignoring.
The podcast shows you how to quickly analyze the numbers.
Investors who will make money tend to have the following characteristics:
Investors who will lose a lot of money tend to have the following characteristics:
Dr. Natasha Arora
Hello, friends. I’m Dr. Natasha Arora here with Nigam Arora. Microsoft has launched a full frontal assault on Google. We have not seen such a clash of titans in the last several years. There are great implications for investors. Now, friends, before we get into ChatGPT versus Bard, I suggest you first listen to the podcast “ChatGPT: Potentially The Most Important Breakthrough Since The iPhone”, if you haven’t already done so. Google’s parent company Alphabet has lost over 160 billion in market cap in the few days leading up to this recording. It all has to do with the recent buzz around artificial intelligence chatbots. ChatGPT from OpenAI made a big splash recently catching people’s attention and imagination. Microsoft has spent billions of dollars supporting ChatGPT. Now, Google’s answer came in the form of Bard. At first, it seemed like Google had a shot with Bard, but then Bard gave a wrong answer in a presentation in Paris. investors concluded that Bard is nowhere near as advanced as ChatGPT, and a massive selloff in Alphabet stock ensued. Now, Nigam, is the 160 billion loss in a few days justified? For the sake of this discussion, let’s assume Bard truly is inferior to ChatGPT.
Well, Natasha, you asked a $1 million question, but this is really a $1 trillion question here thinking $160 billion loss in a few days. I can give you a pretty simple answer, but our objective here is to help our friends. I’m going to be very purposeful and show friends how to do fairly simple math and think about these things. it doesn’t take big computer models or anything like that. And the reason I want to do that is artificial intelligence is that $1 trillion opportunity. Fortunes are to be made. And based on decades of my experience, there’s no doubt in my mind that some people are going to lose a lot of money. Other people are going to make some, and the difference comes down to who has a better understanding. We have to understand the numbers to answer your question. Again, with the assumption, and I’m glad you had the assumption, you said, let’s assume Bard truly is inferior to ChatGPT. Let’s expand on that and say slightly inferior, not a lot inferior, slightly inferior. What happens? Getting to the numbers, the global digital ad market is $500 billion.
About 40% of it is either search or fairly directly related to search. That brings us to about $200 billion. Now, that includes China. Google is not present in China. Chinese search market is about $25 billion. It’s growing fast, but right now, $25 billion. So, we take that out. then we are left with $175 billion market that Google is competing. Google controls 93%, and that is $1 63 billion a year. Why is Microsoft attacking with this frontal assault? Well, let’s start with Bing. That’s Microsoft’s search engine. The market share, it is only about 3%: 3% for Microsoft, 93% for Google. That tells us where our starting position is.
So Bard, ChatGPT, they’re all generative artificial intelligence. The question that has not yet been answered is how well generative artificial intelligence can be monetized. In the present day algorithm search, search engines provide links. Advertisers advertise in search results hoping the user will click their link. But generative artificial intelligence is different. It provides full answers. So far in ChatGPT, there are no links and there appears to be no need for links. Now, if your inquiry is answered by an artificial intelligence bot and the bot gives you good full answer, there’s really no need to click at the links. Today when we go to Google, we click on links because we’re trying to find an answer. Now, Google has used some artificial intelligence. For example, it could give you information, it could give you time of the day.
In some country, currency conversions where it gives you a full answer and you really don’t have any need to click the links in some cases. But in some cases, you do. If you want to say what time is in India right now and ask that in Google, it tells me the time in India right now. So, I have no reason to click any link. I already know the time in United States. But now let’s say I say, what are the flights? What are the direct flights from New York to Delhi? It’ll show me a few flights, but then I have to click around and I probably don’t trust those flights and I think I can get a better deal or a better schedule. So, there’s a link clicking. Travel is one of the biggest revenue generators for Google because of search. It’s in spite of Google trying to give an answer. But if this generative artificial intelligence is so good that you don’t click, then there’s no need for links. I’ve thought about it. I think there may be a need for links because one of the disadvantages, the way at least ChatGPT is structured so far is how do you trust that information? You don’t know where it’s coming from. Does it have biases or inaccuracies?
I think there will be demand to have some references, just like when you read a scientific paper. Or you’re reading a Supreme Court opinion and they’ll have 1, 2, 3, 4, 9, the references where they came up with all this sort of stuff. Something like that may come up down the road, but if you’re reading a scientific paper, unless you’re really into the subject matter, you’re not going to click on those references of citations, and you probably won’t click on those citations in the Supreme Court opinion, either unless you yourself are trying to prepare a brief or you have a case like that. The population at large just doesn’t click on citations. how do you monetize it? Well, you could read it like a magazine article or a newspaper article, and you could put a link or a display ad somewhere in between the copy.
But they do not command the same dollars. And the reason is, when it is an ad in a search, that’s intent. Meaning who’s searching, planning to do something right then, and Google can charge a lot of money for that. Now in ChatGPT where there’s a complete answer, yes, the person who’s looking at that is searching for that answer. And you could put a little ad in there. So there’s some value to it, but it’s not clear how it’s going to be monetized. Let’s assume the total value of the link clicks goes down by 25%. That has two parts to it. One is the number of clicks goes down, and the second, the dollars you get per click goes down.
$175 billion market for search ads outside China, 25% of that is $44 billion. We subtract that $44 billion from $175 billion, it’s $131 billion. Essentially the search ad market goes down from $175 billion to $131 billion. Now Google has 93% market share. Again, we are describing a scenario where Bard is inferior to ChatGPT. And in that scenario, let’s say Google’s market share goes down from 93% to 80%. If I multiply $131 billion, that’s a reduced market size by 80%. That comes to $105 billion. Remember we just said that Google’s ad revenue from such is $163 billion. In this scenario, it comes down to $105 billion. That’s a reduction of $58 billion.
Now, valuation is very complex. Lots of factors enter into it. But let’s do something very simple here. Again, Google trades at about four times its revenues. If it loses $58 billion of revenue, we multiply that by 4, that’s $232 billion. In the scenario we just talked about, Google can lose $232 billion worth of market cap. And Natasha, your question was, is the loss of $160 billion in market cap over a few days justified? I just shared the math, a scenario where the loss should be $232 billion, assuming the scenario is correct.
Dr. Natasha Arora
That makes a lot of sense. There are also other factors that can cause even more market cap loss. Let’s look at the cost of responding to search queries using large language models in the same way that ChatGPT and Bard are doing versus the present-day algorithmic search. Let’s say 25% of queries on Google are answered by Bard using that large language model. Google’s cost will go up by several billion dollars. And Nigam, you’re always ahead of the curve and have a simple way of explaining complex calculations. Can you share with our friends a simple way of estimating the higher cost for Google?
Sure, first thing I want to say is we just don’t know enough right now. So, we’ll make assumptions. If you remember our last podcast on artificial intelligence “The Most Important Breakthrough Since The iPhone,” we talked about it took 10,000 NVIDIA GPUs to train ChatGPT. We were estimating that because of ChatGPT, NVIDIA is going to sell several billion dollars worth of GPUs. Those are just the chips. So this generative AI needs a lot more computing power. So, you’ve got to spend more money on computer hardware and then the software to run and the data centers, and then engineers to maintain and so on and so on. And the networking. So, there are a lot of costs that go up.
The amount of costs that goes up depends on how much computing you’re doing. How much computing you’re doing, to some extent depends on the length of the answers. Are the answers going to be 10 words, 25 words, 50 words, 250 words? I have not taken time to break down what the queries are, and ChatGPT is new. They haven’t published any data. But in my own tests, I was really surprised. The questions I was asking, and granted, they were more complicated questions, ChatGPT answers were 200 to 300 words. Of course, in some cases, what time is it in India right now? I mean, it’s not many words. But if you ask a more complicated question like, “I’m having a fibrillation in my heart and what’s my prognosis?”
Then you get a big long text and so on. We can do that right now, but down the road, maybe we’ll trust it enough and say, okay, I want a flight from New York to Delhi. I want a direct flight and I want to leave preferably between this and this hour and get there between this and this hour. I’m going to fly first class and book me a flight and then book me a hotel close to the airport, has to be a five-star hotel. And the Bard says, okay, and then Bard comes back with here’s your schedule, hotel booking, and all that. Click to confirm. Now, that’s going to take a lot more computing power. But anyways, again, I just start looking at it, we know the number of queries Google gets, and assuming 25% of those are handled by some bot, even if answers are not 200, 300 words, an average answer is 100 words, you’re talking about $5 to $10 billion more in cost. That’s pretty significant. And remember, there’s no additional revenue. Your revenue is also declining at the same time.
Dr. Natasha Arora
Let’s run with that for now. Let’s say Google is spending $5 billion to $10 billion more to respond to queries using Bard. That means its earnings are also going to go down by $5 billion to $10 billion. This will be an additional big hit to the market cap. Nigam, do you agree?
Oh, definitely yes, Natasha.
Dr. Natasha Arora
Also, if Google is disrupted to that extent, it’s PE is going to go down. As of this recording, Alphabet stock is trading around $94 after the ChatGPT related drop of course. Based on what we have discussed and a quick calculation I just did, Alphabet stock could easily drop below $50.
Yeah, that’s scary, especially if you hold Alphabet stock or even if you don’t hold it, Alphabet has such a big weighting in so many ETFs that you know investors are holding. Yeah, doing a quick calculation, and I agree with you that in the scenario we talked about, Alphabet stock can drop below $50. Now we were ahead of the curve, so it’s now that Alphabet stock is dropping and everybody’s concerned about and so on. But before all of this started big time, in advance, The Arora Report addressed a threat to Google from ChatGPT. Our buy now rating for those was no, and we changed the buy zone to $70.36 to $78 .68. Now a lot of people bought when the stock recently started falling and the bought above $100, but our buy zone was lower. The buy zone is quite a bit above the $50 we just talked about. But there are other factors that enter into the picture we just discussed that one scenario.
Dr. Natasha Arora
Nigam, can you share with us how reality differs from the hypothetical scenario that we’ve been discussing and how that led to the present buy zone?
Sure, there are several factors. When we determined our buy zone, there’s a fairly complex standard criteria we use. And Natasha, as you know, we worked on this Alphabet buy zone together. And in addition to our very analytical criteria, then we have to look at the numbers in the future and look at not just one scenario. We look at various different scenarios with fairly high probabilities, and then we say, okay, we adjust each scenario of probabilities, and then we come up with a buy zone. That’s what we did. We know a very negative scenario that we discussed. We discussed numbers, Alphabet or Google stock can fall below $50. Now there are positive factors too, and let’s talk about a few of them. The biggest one is human nature. Humans are slow to change.
There’s a lot of inertia. We’d like to keep on doing what we have been doing. If you’re used to going to Google for your searches, and let’s assume for a second that Bing is superior, how many people are going to overnight stop going to Google and start going to Bing? Some will. I know some like you and I will, quickly we’ll just adapt. But the vast majority of people, they’re not going to do it. Some of them probably have never heard of Bing, and the searches they’re doing are nearest restaurant or I want to go to a website of nearest such as such restaurant to see if they’re open, things like that. Tt’s really not going to matter. I mean, you’re not looking for better answers and there won’t be any reason to go from Google to Bing or anything else.
Dr. Natasha Arora
At this time, the way Bing is implementing ChatGPT, it’s set up as a separate option. The users have to click on it. ChatGPT is not integrated into the regular search results. And Nigam, this goes to your point. Most people just put search terms in the search box or the address bar and hit enter. They’re not used to choosing how the search is done. So, I agree with you that Google has some time to counter this threat from ChatGPT because of the inertia in people’s habits. Now, let’s shift gears a little bit. The T in ChatGPT stands for transformer. Transformer is a technology developed by Google. Can you shed some more light on it?
Yeah, Natasha, you made a great comment. And then you’re asking a great question. So just a comment on your comment, so to speak. I would love to see Bing integrate with ChatGPT in such results, but that’s not what they did. They simply put a menu item on the top, if you want ChatGPT to answer your question. And again, I don’t know how many people go to Google today, how many people look at a menu on the top and click on it. Most people just put in whatever the research term is as you said, and the results come in and they have no reason to go to the top menu, do something. Now, I think I did that too a long time ago, and I got into the habit of going to the menu for a very specific reason, because often we are driven by news and we’re trying to figure out what’s going on with certain stocks and if something has happened and so on. So often when I go to Google, I want to see what’s the news over the last one minute, or what’s the news over last 30 minutes or an hour or whatever. I’m used to going to the menu and clicking, but most people aren’t. Now to your question, you’re right.
T in GPT stands for transformer, which is a Google technology. Google made it open source and then OpenAI, and some of the startups capitalized on it. And now Microsoft put investment in OpenAI and they have a good strategy, coming with a consumer facing product like ChatGPT. Whereas even though Google had the technology and Microsoft didn’t, now Microsoft is ahead of it because they had the right strategy. Now, Google has been playing around. They used artificial intelligence in their maps products and some of the Google answers you get and so on. But they never really focused on consumer facing application where you could directly interact with artificial intelligence and know that it’s artificial intelligence.
Because right now, Google Maps shows you something, and you don’t know if it is artificial intelligence or it’s just pretty conventional programming or whatever is going on. Microsoft got ahead, but let’s not forget that Google has a very strong bench in artificial intelligence. They bought a company called DeepMind, and I had talked about this before. It’s a British company that Google bought in 2014 for $500 million. And if I recall, they had no revenues or very little revenues, and Google paid $500 million. I think DeepMind has about 1000 employees, all focused on artificial intelligence. And then there are so many other artificial intelligence teams scattered around Google. My prediction is that over time, Bard will catch up with ChatGPT and the chances are in the end, the quality of the answers is not going to be the determining factor as to who wins and how they win.
And the reason again is for most queries, it really doesn’t make a lot of difference. But let’s talk about it. It’s very interesting. If you are a divorce attorney and you want to advertise on Google, and you are in certain important city, big cities, and you want to be your ad to be number one, you may need to pay $300 for that ad, like $300 per click. Remember, that doesn’t get you a client. That’s somebody who clicks and comes to your site. $300. that’s a lot of money that Google makes. If somebody just wants to say, I want to know the nearest divorce attorney, and Google right now comes up with 8-10 answers there, and somebody’s ad comes up there, artificial intelligence is not going to make any difference.
Now, if the question is show me the most successful divorce attorney near me. Show me which divorce attorney is rated higher by other divorce attorneys and so on, then maybe the answer, the quality of the answers makes a difference. But I, again, don’t know, maybe people’s search habits will change. Steve Jobs used to say, “Well, build it and they’ll come because they don’t know they need it.” And he’s right. We didn’t know we needed an iPhone until he built it. So once people see, maybe then people say, “Hey, I want a divorce attorney who’s rated highest by other attorneys.” But today, people don’t search by that. People say, “Hey, show me the divorce attorney near me.” So, it’s hard to say how all of this works out. So the bottom line is, I think Google is going to catch up in quality, and even if they don’t catch up, I’m not sure how much difference that makes in terms of quality.
Dr. Natasha Arora
That would indicate that all the momo crowd buying in Microsoft is a bit premature.
Well, I would agree with that. Again, we talked about numbers. We always need to know some numbers, very simple ones. Microsoft trades at the trailing PE of 29 and the forward PE of 25. Now, Nadella, Microsoft’s CEO, has said, the next couple of years are going to be hard, and I think that’s true. They’re probably going to be hard. And then now Microsoft is spending all this money on ChatGPT. So, I wouldn’t be surprised that the earnings estimates are too high. And if that’s the case, the forward PE of 25 may not prove to be right. Microsoft may be trading in a forward PE of 27, 28, 29 today. And that’s a very expensive stock for a large stock like Microsoft. I know people get excited. They got excited with ChatGPT. They start running up Microsoft stock.
ChatGPT is not generating any revenue for Microsoft right now. It’s probably not going to generate significant revenue the next year. They just get excited. And now Microsoft actually did a masterful job. for example, when Microsoft did this dog and pony show and ChatGPT, that was led by Satya Nadella, the CEO. When Google did its dog and pony show in Paris, it was unimpressive. Google’s CEO Sundar Pichai wasn’t there. They made a lot of mistakes. It just was ridiculous what Google did. Right now it’s a lot about sizzle. The steak may be the same, but the sizzle is what matters lots of times. And Nadella did a very masterful job. He talked about the market share.
He talked about $1 billion, more than that. That if he gains 1% market share in search, he gets a $1 billion. People are like, “Oh my God, 1% he gets a$1 billion.” $1 billion is not a whole lot of money when you talk about a $2 trillion company like Microsoft. Think about it. If you and I get a few more dollars., then we get another $10, $20 or even $10,000, it just doesn’t make any difference. So, it it’s like that.
Dr. Natasha Arora
Google has other advantages in mobile searches. Can you share them with our friends?
Sure. We talked about the positives. We talked about people being slow to change, but let’s look at mobile. Let’s separate desktop and mobile. Desktop, Microsoft has a big presence. They always keep on trying for you to change from your Chrome browser to Edge. They’re always trying to say, “Click here, we’ll revise your settings,” and there’s no need for it. It’s a nuisance. When you accidentally click on it, you search engine gets changed from Google to Bing, and then you got to go to the setting and change it back to Google and so on. Microsoft plays a lot of tricks on desktops, and in spite of that, they really have only 3% market share.
But on mobile, it’s dominated by only two. Android and iOS, iOS owned by Apple, Android owned by Google. Google controls Android, and Apple uses Google searches. Right now, Google is 100% in control of mobile searches. And mobile searches are 60% of total searches. So ChatGPT or not, Bard being inferior or not, nobody can take away from Google those 60% of mobile searches that are happening today, no matter how hard Microsoft tries. Now you could download a Bing app and install that on your computer, or on your phone and so on. But how many people are going to do that?
Now, we got to be a little bit concerned about Apple because Apple is a dark horse here. So most people don’t realize that Google needs Apple to not be in the search business. My last information is that Google is paying Apple about $15 billion to not have its own search. That’s a lot of money. And there are antitrust suits against Google and so on. There’s some question, can you pay like Apple to not do something and Apple doesn’t do it. Is that anticompetitive? Are there antitrust issues and so on. And most people don’t realize, even the Apple stockholder doesn’t realize about 20%. And you know how many billions Apple makes. So 20% of Apple’s profits, that’s a large amount. That’s coming from Google.
If the payments from Google weren’t there, profits go away by 20%. Now, some of that gets replaced. And it’s not a search, it’s Google Maps and all other Google stuff. Will Microsoft go after Apple? If there’s a bidding war, who pays Apple more money? Or Apple may say, “Hey, we can do better. We’re going to have our own iBot, iChatbot or whatever they’ll call it.” So, we don’t know. And that’s why I think it’s very important for investors to not get locked in to one opinion or another, especially on a field that’s emerging so rapidly. And then you have to be ready, you have to understand what may happen. And when something happens, you have to be able to analyze, and then you can act or make a conscious decision not to act.
Dr. Natasha Arora
We take into account many factors, including Google’s dominance and mobile searches, the inertia in people’s habits, and that led us to the updated buy zone for Google. It’s important to remember friends, that buy zones are determined with a 70% probability of a fill in the next 120 days.
Yeah. It’s a changing landscape. And we’ll be updating buy zones as needed.
Dr. Natasha Arora
Friends, as it is often the case with the markets, this is a fluid situation and we’re keeping a close eye on it. The buy zones will be updated as appropriate as we get more information about this changing landscape. Now, Nigam, I’m sure our friends want to know what prudent investors should consider doing if they own Alphabet stock. What are your thoughts?
It depends if it’s a long-term position or a tactical position. It’s very important for investors to differentiate between strategic positions and tactical positions. We are constantly giving guidance on that. And if you’ve read it, it is always present at the bottom of the Afternoon Capsule. And the reason we just don’t put a link or put the actual words because our own experience has shown that, especially for newer members, that’s just extremely important. Otherwise, newer members come in, they don’t read it, they don’t look at it, they go six months, a year, and then all of a sudden, they write an email. “What is it that you’re talking about?” Or “What is a strategic position?” So basically, they spent a year without taking advantage of some basic concepts that are very, very helpful. Before Google stock fell as much as it has, we gave a signal to take partial profits on a tactical position. So, that’s a good call. But from the strategic position, the very long-term position, right now, the call is to hold as long as it’s in a well-diversified portfolio.
Dr. Natasha Arora
Based on the buy zone, should investors who are not in Google be buying Google here?
No. We see a lot of investors are now rushing in with a buy the dip mentality. “Google fell, Google’s a good company, let’s buy it.” And actually, I’m beginning to see in some portfolios, Google is becoming a very large position. It’s disproportionately large, and that’s just not smart. So our buy now rating is no for those following the Good Way, and for those following the Best Way, the buy zone is lower. So no, I would not start a new strategic position in Google right now.
Dr. Natasha Arora
How about Microsoft? Should investors rush by Microsoft because of ChatGPT?
I know a lot of people are doing that, and I know it’s difficult for investors because they see their friends doing it, buying Microsoft headlong in large quantities. But our Buy Now rating is a no for those following the Good Way. And the buy zone for those following the Best Way is quite a bit lower.
Dr. Natasha Arora
As you said, Nigam, it’s hard for many investors to wait. They see all of the excitement about artificial intelligence. They see their friends rushing to buy Microsoft, but The Arora Report gave a signal to do the opposite of what everyone else is doing. That’s not uncommon. The Arora Report gave a signal to take partial profits on the Microsoft tactical position.
Well, remember, our goal is to maximize profits from the markets over your lifetime. And if you want to do that, you just have to bring sophistication. And sometimes when the hype is too much, you want to take advantage of it. You don’t want to join the hype; you want to sell into it. That’s why our call was to take profits on a tactical position. And so far, the call has been good. In the pre-market, they ran Microsoft stock to $278. It has pulled back to $262 as of this recording. And of course, by the time friends, you listen, who knows where the price will be. It’s a very volatile market. But considering the amount of hype, considering how large Microsoft is, considering how expensive it is, if you could sell it about $270 or so which was happening at that time, $278 was the high.
That was a good time to sell because of the tactical position, and we probably will build another tactical position in addition to our long-term strategy position when the stock comes down. And that’s the way to take advantage of all the volatility. With good companies like Microsoft, you hold a core position, you hold it for years and years and years, then you take advantage of the volatility, up and down moves. When there’s too much hype, too much strength, you sell into it. And when some news comes in, we don’t know. let’s say Sundar Pichai, Google’s CEO, I’m sure he is awake, but he wakes up in the sense of how Google screwed up here. And for a company like Google, it’ll be very easy to do a good, polished presentation, which is led by the CEO just like Satya Nadella did at Microsoft.
And they do a great presentation and they ask the bot questions. I learned from a lot of attorneys along the way. Well, you never ask a question that you do not know the answer to. And a company like Google, with all the talent they have, it won’t be hard to orchestrate a presentation, where the questions are controlled and don’t allow the audience to ask questions. And so, it’s a great presentation. So, what will happen now? Everybody who bought Microsoft at $278 or about $270 or whatever, they’re going to start selling Microsoft. And let’s say they drive Microsoft down to whatever level that would be when the time comes and then we’ll say, okay, start a trade around position or in general, start a tactical position or whatever. So, when everybody hates Microsoft, you buy it.
When everybody loves Microsoft, you sell it. That’s how you handle tactical positions. But you take advantage of the long-term compounding by also holding the core position. Now, you don’t want to depend only on the long-term position because things can go horribly wrong. Think of General Electric, the most admired corporation in the whole world. Look at what happened. The stock tanked and tanked. IBM was going to go to the moon, and it was going to the moon. And then look what happened. And then remember Eastman Kodak? Print people, film people. Xerox, once a darling of Wall Street. people said, “Hey, I bought Xerox. I’m going to hold it for 50 years.” Young people said, “I’ll never sell it. My kids will then inherit my Xerox stock.” Look at what happened. So, you can never predict very long term. So, you want to control the quantities and should never be afraid of selling the long-term position if there is a signal. But right now, I wish to hold Microsoft long position, just like Google.
Dr. Natasha Arora
The Arora Report also gave a signal to take partial profits on the tactical position in Alphabet. Now, Alphabet stock has since pulled back. signals on the tactical positions in both Alphabet and Microsoft worked out pretty well. So Nigam, let’s zoom out for a minute. Why is search so important to investors?
It’s not just about Google and Microsoft. This podcast is very important for anybody who wants to make a fortune from artificial intelligence. We’re going to do several podcasts, and each podcast is going to set up building blocks. So, think of Lego blocks. So, each podcast is a Lego block, and you get them over a period of time and then build using all of them. Search is the largest in the single most profitable category in tech. It’s so important. Let me repeat.
Search the largest and single most profitable category in tech. For example, it may surprise some investors to learn that Google makes more profit from searches about the Windows operating system than Microsoft makes from Windows Excel. Microsoft is the developer of Windows. So how could Google make more money out of Windows than Microsoft? Because there are so many advertisements related to Windows or the tools, and if you have any trouble, because everybody’s always having some trouble with Windows, what do you do? You go to Google and you search. Even the companies that don’t offer anything about troubleshooting Windows or a solution to the issue, they know that people search Windows. so they have some landing page, and they rank pretty high in Google, and they’re driving traffic to their website from Window searches.
So, you got the largest category and you got the most profitable category. As Nadella said, 1% of the market share makes a $1 billion. And we know it’s more than that. It’s a $175 billion market. So, 1% is really $1.75 billion. So if you could get 10% of that market, that’s $17.5 billion a year. And it’s a very profitable market because other than computing and whatever your engineering costs were, it’s not that you’re buying some inventory and opening stores. You don’t have those costs.
Dr. Natasha Arora
Let’s talk about the big picture beyond Microsoft and Google and why this podcast is so important in helping investors develop the right background to be successful in the golden age of artificial intelligence.
Let’s look at two numbers. First, online advertising is $500 billion. Search outside China is $175 billion, but overall online advertising is $500 billion. And all of that is going to be impacted by artificial intelligence. And Google plays are in double click, and they’re big in ad tech. As a matter of fact, the Justice Department, along with state attorney generals recently filed a lawsuit saying they’re monopolizing it. And even if you’re going to Google’s competitor and buying ads, a lot of times you’re going through Google’s technology. and Microsoft is trying to displace Google. So, it’s a $500 billion market that is at stake. And there are so many companies in ad tech. There are so many companies that are doing actual advertising. They’re a lot smaller than Google. And all of those companies are going to be impacted and the new ones coming up.
So, the ideal for us would be if we can identify stocks early on like Apple. Our average on Apple is $4 and some cents because why did we buy them and say buy Apple and hold on? We held onto the core quantity, and then we traded around it because of the iPhone. The iPhone was a great deal. I mean, it was just was a breakthrough. Again, I don’t know if we’ll have opportunities to go from $4 to $150, but there will be opportunities to buy at $10 and go to $30 or $40. And the task over the next few years is to identify those opportunities and get into those early. But you don’t want to tie up all your money. I think that’s a big myth that has been created that you have to be 100% invested all time. Not really. You want to have cash, so that when opportunities come along, you can capture them. The biggest thing that I hear from investors, and I’ve dealt with thousands of investors and money managers over the years. I cannot remember about Apple. So, nobody says that now because everybody’s bought Apple now. But two or three years after we bought Apple stock, I heard from one money manager and he says, “I saw your signal. I saw you held on to the core quantity. I saw you sold some tactical positions, made money on those back and forth.” And actually, and he did some analysis going back and he said, “Well, if you just held onto all of the Apple you initially bought compared to what you did, Nigam, if you held onto a core quantity and then you sold some of it at the peaks, near the peaks.” And we were fortunate actually a couple of times to sell right at the peak. Once we sold prior to the peak. And then Apple lost 50% of its value. And then about 5% before the low, we started buying again. He did some calculations and he said, “Your returns on Apple are twice as much as buy and hold.” But he said, “I’m so sorry I missed Apple.” And I asked him, “Why did you miss Apple?” He said, “Well, because we were 100% invested. I had no money to buy anything.” And I understand that. And he says, “We looked at it and we looked at all of our companies, everything we want, we loved it, we didn’t want to sell it. And then some of the things at that time were losing money. We didn’t want to sell them at a loss. We wanted to hold on.” It’s a lot easier if you can have some cash always. And right now, on your cash, you can get about 4.5%. So, it’s a little easier to hold cash too.
The second is artificial intelligence by itself is a $1 trillion market. And we got to be careful. An example is Buzzfeed (BZFD). we talked about it in one of the posts. Everybody rushed in to buy it. Now, if we cut it as a trade before we start moving with the upgrade, we didn’t catch it, then we catch a lot of things before they start moving up. But this one, we didn’t catch it because it moved so fast.
And very frankly, I had a fairly negative opinion of Buzzfeed. So, it was not on our screen where we were watching. Buzzfeed is a publisher and the stock was pretty high, had fallen down, lost a lot of money. So everybody rushed into it. Now you look at what the average buy was over the last few days, and now the stock has pulled back because hype pulled down. An average investor is losing 20% to 40% somewhere on Buzzfeed in a few days. So, you have a 20% to 40% loss for the action of getting on board and jumping on the hike. friends, you don’t want to do that. We want to help you not do that. Now if I could buy Buzzfeed at $0.50 as a low-price stock, yeah, but will I buy it at $3? No.
Dr. Natasha Arora
Nigam, you’ve seen so many of these cycles. What is the main difference between investors who make a lot of money and investors who lose a lot of money?
I see three characteristics common again and again, both in private investors and also money managers and investment advisors who do very well. They take time to develop in-depth knowledge. They’re not going, well, let me just do ETFs or let me do just this private fund. So if you’re an investment advisor again, I see two clients. Some of them take time and others are basically selling some products. And the same with private investors. Some do take time. Like if you’re listening to this podcast, you are taking time. You’re a great investment advisor. You’re a great investor because you’re taking time to learn. So, they take time to learn, and then they’re able to act better because they have a background. The second thing I’ve seen is people who are very successful understand the difference between strategic positions and tactical positions, and they’re able to separate them out.
And the third, they try to be ahead of the curve. And that’s one thing at The Arora Report that we try to do, and we’ve been very successful at it, to help our members stay ahead of curve. I will ask the difference between two investors. So, let’s look at investors who are not so successful. The biggest thing I see is they buy into the hype. As a matter of fact, we have a little image at the bottom of our feeds. This is biggest failure trade, and we call it helter skelter trading. Here’s something, I give an example. Oh, BuzzFeed is going up, rush and buy the stock. “Oh my god, what did I do? I can sell it and take a loss.” I also see people who are successfully chasing the price. There are a lot of times we have chased the price because maybe we didn’t catch it early.
And sometimes it does make sense, but most of the time, I would say 80%, 90% of the time, changing the price, it’s just a wrong move. You just lose money. There’s something called reversion to the mean price. You do come down and evergreen strategy I talk about in the 50 different strategies we diversify by. You wait for the price to pull back. You don’t chase it. So 80%-90% of the time that’s the right strategy. But once in a while, there is a reason. But that reason can’t be the price is running up. That reason has to be something fundamental. Something is changing. Going back to the iPhone. Oh, Apple has iPhone. Nobody else has iPhone. So even if I buy Apple a bit higher, it’s okay. So, there has to be some fundamental reason.
The other difference I see is people who don’t do well, they don’t have any risk controls. And the biggest thing I see, which I think is the problem, is a lot of times people just justify losing money with something. Oh, well this is going to come back. Stocks always come back. They’re not diversified. They just don’t have those concepts. They just buy whatever they want. Now the money managers and investment advisors obviously are more disciplined. They don’t ignore position sizes, and they are diversified. But a lot of times, I see them just hanging onto something because they kind of fell in love with it, that they just don’t have great risk controls. Lastly and probably the most important, I see people who are not being successful not even having a concept of strategic versus tactical.
Dr. Natasha Arora
Friends, the golden age of artificial intelligence is starting. A fortune is to be made, and many pitfalls are to be avoided. The key to success is in developing in-depth knowledge. We are planning a number of podcasts on artificial intelligence to make it easy, simple, and enjoyable for you to acquire the knowledge you need. Thank you for listening. Goodbye. Until next time.