Bing with ChatGPT: Google ‘scrambling to provide’ AI search capabilities, analyst says

Hennessy Technology Fund Portfolio Manager Josh Wein and TECHnalysis Research President and Chief Analyst Bob O’Donnell join Yahoo Finance Live to discuss the expectations for Big Tech earnings, investor confidence, and the outlook for AI.

Video Transcript

- We are getting plugged in into the sector-- the tech sector, excuse me. As some of the biggest players are gearing up to report their quarterly results next week in technology, joining us here with insights on what investors should keep a lookout for in the coming week, we've got Josh Wein, who is the Hennessey Technology Fund portfolio manager, along with Bob O'Donnell, TECHnalysis Research president and chief analyst. Great to have you both here with us teeing up tech earnings.

And, Bob, I want to go to you first here on this. Is artificial intelligence and a mention of that or a nod to how that is going to be this revolutionary technology that's embedded within a company's solution or search engine, is that enough to be a search engine savior over the course of this earnings period?

BOB O'DONNELL: Well, not over the course of this earnings period, Brad. But, look, obviously, things like generative AI and the impact that has had already are going to play themselves out over the next several quarters. All right, none of this stuff happens overnight.

But there is no question, if you look specifically at search, right, I mean, you've had Google dominating search for decades, frankly. And Microsoft comes along and really starts to rethink search with what they're doing with the ChatGPT-influenced Bing. And people all of a sudden are like, wait a minute, that is a better way to search. I'm getting answers. And, of course, Google is scrambling to provide similar capabilities.

So, I mean, the challenge for investors is, look, near-term, it's going to be tough. Everybody knows this next quarter is going to be tough. But if you're thinking longer term, and these are longer term trends, there is some huge potential impact here from a lot of the players who are involved and big question marks, frankly, from the customers or the big players who are not yet involved or don't have a clear strategy around generative AI.

- Josh, I want to bring you into this because yes, the big picture of AI notwithstanding, companies got to get through this year. And this year for many of them is going to be challenging, right? We've already seen those challenges. We've already seen a lot of job cuts and whatnot.

And I know you don't make your investment decisions based on a quarterly reporting basis. That said, I know you're going to be watching the numbers. Is this going to be a lousy reporting season for big tech?

JOSH WEIN: Yeah, I mean, I think it's going to be-- Julie, I think it's going to be a fine season relative to other sectors. I think technology is still one of the few sectors that's expected to report some measure of earnings growth. But as for things like AI, I mean, I think it's interesting. We own Meta in the Hennessy Technology Fund. And they've certainly stumbled a little bit.

I mean, Meta is a great company generating great returns on capital and all of that. But AI, as exciting and as impactful as it is, I think for a lot of companies, especially the ones that can capitalize on it, like Meta, I think it's been an enormous distraction to the extent that there's been a lot of hiring and a lot of big plans that they've had to unwind to some degree.

So I think, ultimately, it's-- I think what I listen for is maybe more the users of AI and not the companies that are generating AI software or AI algorithms. I think it's the users. It's kind of like the picks and shovels versus the gold miner. Maybe buying the picks and shovels companies is the way to go there.

- Josh, kind of further down that thought process, too, for these companies, how do you see them monetizing generative AI? What is the currency that's really going to drive the business model, the revenue model on the other side of this that they're going to be reporting on over time?

JOSH WEIN: Sure. Yeah, I mean, I think a lot about AI and as the consumer sees it, booking hotel reservations and travel and customer service applications of AI. And those have been around for a few years. I think that maybe more meaningful are large enterprises of in any sector that we've seen, especially in technology, companies, these enormous layoffs.

And what has come to light is that a lot of workers were hired in anticipation of the need for them. And they were underutilized or not utilized at all. And I think with AI, I think, ultimately, it displaces a lot of workers that were of a lot of value. And now AI can help answer questions or write code or whatever it may be.

So I think AI is monetized by companies buying algorithms, buying software, and displacing human capital. I think that's the silver bullet, for better or worse.

- I mean, Bob, at the same time, does AI function as a convenient excuse in two ways? One, things aren't going so great at the company. Oh, but we're doing AI, right? And secondly, even if yes, AI might replace some workers, although it seems early that that's going to happen on a larger scale, but at the same time, can it provide an excuse in some ways? Oh, we're using AI and we're also going to cut all these jobs?

BOB O'DONNELL: Yeah, well, Julie, I mean, look, there's a ton of AI washing going on already, right? And we're going to see a lot more of it through this earnings period, the next earnings periods. So let's be clear on that.

And, look, the other thing is I think it's important that, as you pointed out, look, companies got to get through this year. And what I think we're seeing is a sense of, hey, what I need now are products and services that help me immediately. And generative AI is the one exception, I believe.

But so what are the things that I can do right now? And so the basic fundamentals around things like cloud computing, right, we've got Amazon, Google, and Microsoft all reporting next week, all of which have the biggest plays in cloud. I think you're going to continue to see that cloud computing growth moving apace. Has the rate slowed down? Sure, it's slowed down because we're hitting the law of big numbers here.

But if you look at the overall evolution of computing, there's still only a fraction, 25%, 30% of computing workloads have moved to the cloud, which means there's a ton that haven't. Now, not all of them are going to, to be clear. But there's still opportunity there. And those are practical things.

And as companies make these job cuts, they're having to be more productive with the people that are there. They're having to come up with new processes that allow them to achieve what they want to achieve. And a lot of that is going to be done through tech. So I completely agree. I think tech overall is going to be something that's going to continue to benefit because we've seen what it can do.

There was an interesting comment in the IBM earnings from a couple of days ago that their CEO said, which is, look, people are-- they're not canceling projects. They're delaying projects, right? They're being practical and focused on it. And I think that's an important thought to bear in mind as we work through these tech earnings.

The other last point I'll quickly make is there's, obviously, going to be a big difference between consumer tech and commercial tech. So companies like Apple that are very consumer tech focused, I think it's going to be tougher for them in the near term than the enterprise-focused companies because we are seeing companies-- businesses, that is-- spend money to try and solve these challenges to have and figure out what they can do with the smaller workforce that they now have.

- Josh, with all of this, I mean, before there was generative AI, there was-- we were talking about this time last year, I think, the metaverse. Before there was the metaverse, there was NFTs. Before there was NFTs, we were talking about-- and tokenizing everything with NFTs, we were talking about blockchain. So, all of this considered, how do companies who are looking to explore AI solutions, generative AI solutions, and be able to profit from them and create margins, how do we keep this from just being the next Kool-Aid that's out in the street?

JOSH WEIN: Right. I agree. I mean, yeah, there's always something that everyone is talking about in earnings calls. And it comes all of a sudden. And then it lasts for a while. And then it passes. Yeah, yeah. And it used to be 3D television or something like that.

- I've got mine.

JOSH WEIN: And what's become of that? So yeah, I think it-- I think-- I don't think it's a fad, but I think the conversation and the narrative around it is a fad. I think that, ultimately, we're still so early in this. And what we haven't even seen yet is the idea of regulation around AI. And certainly that's coming, I'm sure. Regulators want to regulate.

So I think it's very early. I think we probably aren't talking about this too much in six months. But it will still exist. There will be a lot of R&D around it. And it's here to stay. You can't put the genie back in the bottle.

And so yeah, it's exciting. I mean, I think everyone should be excited about the prospect of it. But yeah, it's going to become another thing that everyone has, everyone uses.

- Indeed. All right, thanks, guys, looking forward to next week and getting all those numbers. Josh Wein is Hennessey Technology Fund portfolio manager, Bob O'Donnell, TECHnalysis Research president and chief analyst. Thanks, guys. I appreciate it.