E165: Vision Pro: use or lose? Meta vs Snap, SaaS recovery, AI investing, rolling real estate crisis

I think that case studies had been written about how tilted the governance is in SNAP. I think the point is that they basically have infinite to zero voting power over common shareholders, so there's no real feedback loop, and I think that that has probably adversely affected the types of people that traffic in their stock.

I guess Zuckerberg has 60% of voting control, whereas Evan Spiegel has 99%. So Snap is more egregious. The difference is that Zuckerberg is listening and Spiegel is not. The reason why Snap is doing poorly is not because its revenue has deteriorated... if you look at operating expenses, they went from 3 billion to 4 billion a year. And that is why their operating income or operating loss went from a $700 million loss to a $1.4 billion loss in two years.

So they generated $35 million of free cash, and they used $1.3 billion to compensate employees beyond their OPEX. So that means that they paid employees 40 times the free cash flow that was generated for shareholders during the year, which is also equivalent to 10% of the enterprise market value of this company.

The other advantage that Meta has is because they're so profitable, they have the resources to go big in AI.

You get all this option value at Meta, which you don't get at Snap. There's all this infrastructure that they can leverage, much like Amazon did with AWS, into things like cloud, AI tools for third-party developers, third-party applications. And then obviously, Meta is the biggest advertising platform next to Google in the world now.

They were like, OK, we're just going to use AI to optimize ads. And supposedly, the AI optimization of ads, I was talking to somebody on the inside, they said, yeah, we got it all back. We gained it back. We've got massive AI advertising optimization going on.

which makes YouTube data repository 300 times larger than Common Crawl, which makes it bigger than anything else that anyone else has... if Google gets its act together and leverages the data repository at YouTube, it is an insurmountable moat that will only continue to extend because the quality of the YouTube experience and the network effects continue to accumulate for them. So I think it's the most valuable asset in the world today based on this thesis that AI value is going to accrue to the data owner.

What Google also has is Google Docs and Gmail, things that people say privately. So they have another data resource there that they can tap

And this is where, going back to my speculation a couple months ago, kind of gets revisited, if you're actually talking about a two-third write-down on the value in these funds, most of that being pension funds, you're not going to see governments let that happen. You're going to see the federal government. There's going to be some action at some point... there's going to need to be some sort of structured solution to support retirees and pensioners, because that's ultimately who ends up holding the bag in this massive write-down.

I mean, Janet Yellen is going to bail these folks out. That means you won't bail out the banks themselves, but you'll bail out the creditors, obviously. The people holding the bag. They'll get bailed.

I've always felt like when Apple comes into the race, that's the starter's pistol. And I think this is it because I've heard the same thing from everybody. You have to try it. It feels like different than Oculus and some of those versions that came out previously. And they have the app ecosystem.

It's a proof of concept. It's not like a regular Apple product that is a mass market device that tens or hundreds of millions of people are going to buy. But it puts them on a path to where they can iterate and keep making it better.

Yeah, it's definitely like buying a new computing device, but people felt the same way about the iPad... I think they're going to sell $100 billion of Apple Vision Pros. Not this version, but this version plus the next version probably over the next. I would guess for them to get to $100 billion in sales, it'll take them less than five years.

I think that you guys are right that it's gonna be successful in terms of revenue. What I'm asking is a more societal question, is do you guys actually think it's better?

Is that we've re-baselined these businesses. So now what would have looked like just a massive miss over the last two years now looks like a beat because we've just completely reset expectations. Is it that or is it that the economy is actually expanding and we can count on some reasonable growth rates?

But now we're seeing quarter over quarter growth. So growth is re-accelerating. Growth is higher than it was. So is it going to get to where it was? That probably will take some time, but it feels like the problems in the ecosystem work themselves out, and now we're back to growth again.

With the market ripping, and you now got a really efficient company, you're like, hey, can we spend a little bit on SaaS to make the remaining employees even more productive? OK, maybe that's a reasonable discussion. And then people are playing ball in terms of negotiating prices.

But I don't think that the adoption of software is going to slow down. It certainly seems to be reaccelerating.

So you have a classic developer network effect where you've got OpenAI aggregating hundreds of millions of consumers because they perceive that chat GPT is the best. Then you've got developers wanting to reach that audience. So they build custom GPTs on the OpenAI platform. That actually gives chat GPT more capability. And that's something that open source can't easily catch up with.

OpenAI is three different businesses. OpenAI has a closed model that's trained on the open Internet. I think economically it's going to be very hard to sustain that unless they start buying all number of apps so that they can get some fine tunes that they control that are proprietary to them... I think they're all going to converge to the same quality in the next probably 12 to 18 months.

Paradoxically, on the other side, we have this incredible market for developers, which is, gosh, there's not enough homes. I think we need 7 million more homes, and the demand is off the charts for homes, yeah?

Yeah, I mean, I think you're basically right.

I keep trying to explain residential is not a great market either because interest rates have spiked up. So there's not a vacancy problem. Multifamily developers are still able to lease the units. They're still able to rent. The problem is their financing costs have shot through the roof.

The problem now is that an engineer can be hired to build the replacement, and so it creates price compression. So the SaaS company can no longer capture that much value, because the savings is actually less than that, because the enterprise might say, hey, I'm going to hire someone, and instead of spending $60,000 a year on your software, I'm going to allocate a quarter of an engineer's time to build that software, and it's going to replace that cost.

More competitive, right? We're moving into a hyper-competitive market, especially with AI.

The perfect analogy of EC2 and S3 in 2024 is the token per second provider. Now, there you have to double click and say, OK, well, what does a token per second provider need to do to make a lot of money? And I think the ultimate answer is you need your own proprietary hardware.

And I think he's very compelling in arguing why some of the big cloud providers today that are offering infrastructure for AI model training and inference are going to be challenged if someone can build full stack and do it successfully.

when half of that debt is held by banks and thrifts that, as we've talked about, have such a close ratio to deposits that you can actually see many banks become technically insolvent if the debt starts to default

So I would say that there's a huge amount of equity that's been written off. But in addition to that, there's a lot of debt holders who are in trouble too. And that debt is held by regional banks. So these commercial loan portfolios are significantly impaired. That's what we saw with Community Bank of New York is that their stock cratered when they reported higher than expected losses in their commercial real estate portfolio.

China has 50 million homes ahead of schedule. 50 million additional supply that can house 150 million people. So as acute as our issues are, the China issue might be much, much seismic.

Not to say that it's not going to be a revenue generator, but I think that you could just as easily, frankly, instead of impacting Apple's revenues, you can probably go along the makers of SSRIs, pot, here comes a spread trade, pot, Bumble and Tinder, and you'll get to the same place economically.

And then what I'm hearing from a lot of executives is cutting these highly stock comped executives who also have big cash comp, cutting them, putting lieutenants in charge, and then moving more jobs to other locations where people don't expect stock based comp... So as everybody optimizes these businesses, I mean, Facebook even did a dividend.

So my refined thoughts today are sort of what my initial guess was when we started talking about AI a year ago, which is the picks and shovels providers can make a ton of money. And the people that own proprietary data can make a ton of money.

I think foundational models will have no economic value. I think that they will be an incredibly powerful part of the substrate, and they will be broadly available and entirely free... But I think open source models will basically crush the value of models to zero economically, even though the utility will go to infinity, the economic value will go to zero.

Most of the tests show that OpenAI is still ahead of the open source models. I think even people in the open source movement will tell you that OpenAI is, call it six months ahead... Nonetheless, if OpenAI just maintains a little bit of a lead over open source, then it could... It could basically win the vast majority of the call it consumer search or consumer GPT market.

it just seems that at least the residential market can find a bottoming sooner because you can reset prices every year, but commercial just seems like a melting ice.

That's why even categories like multifamily, where you don't have a vacancy problem, there's strong demand, those properties still don't make sense... But for all the people who are refinancing now, who are coming up this year, last year, next year, they're in deep trouble. And that's why there's a rolling crisis in real estate, is because the debt rolls over time. It's not like everybody hits the wall and has to refinance at the same time.