In the latest edition of "Good Buy or Goodbye," Defiance ETFs CEO and CIO Sylvia Jablonski joins Yahoo Finance to wade through the buzz and focus on which companies may have better success than most with artificial intelligence. Jablonski labels Alphabet (GOOG, GOOGL) as a "Good Buy" for 3 reasons: It's cheaper than the other Magnificent Seven stocks, it has a great potential revenue stream from Gemini AI, and has the potential growth of $2 trillion within the next decade.
I'm here with Defiance ETF CEO and CIO Sylvia Jablonski. Sylvia, great to see you in this capacity. Welcome to "Good Buy or Goodbye." I feel like, it's a game show when I say it like that. But, you know, obviously, we're talking about some good ideas here for investors. So let's talk about first your good buy, and that is Alphabet within AI here. Let's go through your investment case. Obviously, looking at the past year of chart, it has already done quite well. But it's still, according to your first point here, cheaper than the other Mag Seven stocks.
So we know that Microsoft came blazing all forces go, and they kind of won the race this year for 2023. I think that arguably Google is going to catch up next year and sort of take over. And because they lead in ad sales, they can use their generative AI bots to help with customer service, to help craft better ads, and essentially capture their already existing audience and generate revenue potential from AI.
JULIE HYMAN: Yeah. I think that's a really interesting point about all of the different areas and lines of business that Alphabet touches, where this could be an effect. And we're talking about a big mark-- I mean, all of the estimates that are out there are very lofty in terms of how big AI is going to be.
SYLVIA JABLONSKI: Yes. And so if we think about AI having a kegger of 20% or so for the next 5 to 10 years--
JULIE HYMAN: Compound annual growth rate for those who don't know.
SYLVIA JABLONSKI: Yes, in the next 5 to 10 years, that's a massive opportunity. But actually, the two trillion that I refer to here is for the cloud business. So they had 23% year-over-year growth in cloud. They're behind Amazon and Microsoft, but they're certainly catching up. And if you think about all of this, with all of the data and storage, we often talk about AI and it's just kind of like this one word that we all focus on. But you need supercomputers, you need quantum computers, you need cloud services, you need cybersecurity. And so Google, again, plays in that space. And I think the cloud, playing in that $2 trillion, will help the company grow.
JULIE HYMAN: Yeah. That's something we were just talking about with the semiconductor analyst actually, all of the training power and chips. And that then speaks to the cloud outsole that's going to be necessary to power all of that activity.
SYLVIA JABLONSKI: Exactly.
JULIE HYMAN: All right. Let's talk about a potential risk, though, for Alphabet and to the upside for the stock, or actually you've listed a couple of them for us here. And one of them is that Gemini doesn't work out how they want.
SYLVIA JABLONSKI: Yeah. And these debuts have been super interesting, because some of them are shock and awe. And then all of a sudden, you go back and review how they set the AI tool to work and respond to the particular question. It's like, you know, it leaves you wanting a little bit more.
But, yeah, any of these AI bots or generative AI technologies could actually fail. If they do fail, that's, you know-- and they kind of fall below Microsoft again and fall below Amazon again and whoever it might be. That's an overhang. Macro, just uncertainty. You know, I don't necessarily think this is going to happen. But if we're worried about a recession, if we're worried about any change in the inflation game here, then companies spend less essentially.
But 70% of the S&P 500 companies apparently are already using some of Google's cloud services. So if they can capture that group for AI that's a great opportunity, too. And, yeah, the last business spending would go with the macro overhang.
JULIE HYMAN: Yeah. It would be difficult to see, though, if you already have cloud spending pulling back, if you're using that capacity, I guess, unless your clients don't need it or something along those lines. Before we move on to your goodbye, do you hold Alphabet?
SYLVIA JABLONSKI: I do hold Alphabet.
JULIE HYMAN: OK. So you have a position on Alphabet. Now, let's get to your goodbye, what you're saying farewell to. And this one is Adobe, which is an interesting one for multiple reasons, not least of which is that it canceled a big acquisition this week. But we'll get to that. First of all, the company recently came out with an outlook. And you and many other folks found it underwhelming.
SYLVIA JABLONSKI: Yeah. So in their last earnings announcement was actually really good. You know, they were up kind of 10% to 12% in different categories year-over-year in their services. They're arguably one of the leaders in creative software technology. But their outlook was sort of left a lot to be desired. I think they came in at about $21.33 billion. The Street was expecting about $21.73 billion. And they haven't really monetized AI to the extent that they're talking about I. So, you know, we sort of want to see a little more growth.
I think-- and by the way, I'm not like picking on this stock, because that last chart that you showed is phenomenal, right? This is like a take, it's not like goodbye because you're terrible. It's like goodbye, take your gains, right, and put them somewhere else.
JULIE HYMAN: I like that, a different spin on goodbye. Well, let's talk about another catalyst that happened for the stock is that the company canceled its acquisition of Figma. Now you could argue strategically there's fallout. There's also the fact that it's going to have to pay a $1 billion breakup fee for that or canceled merger fee.
SYLVIA JABLONSKI: Yes. So, you know, there's two ways to look at this one. They free up that money, that $20 billion. But they lost $400 million of potential revenue. They have to pay that billion dollar fee. And I think that they're just-- and they also wanted to take over to wipe out one of their competitors, right? So I just think that there's going to be some noise with that billion dollar fee. I think that they're going to have to shake things out and refocus what their plan is to fully develop their AI technology because of this.
And so 2024, I think, is going to be a shakeout year for them. And then I think, you know, '25, '26, going forward, growth potentially continues. But near term, I'm just-- I think they've, you know, kind of hit their peak. And valuation-wise, we're talking about 52 versus Google's 25.
JULIE HYMAN: Gotcha. All right. And there's one more thing you're watching, and that's what insiders are doing. And there's a chart that you brought us that shows the insider sales. We've seen the likes of CEO Shantanu Narayen, who's been among the folks who's been selling shares.
SYLVIA JABLONSKI: Yeah. And so there's two ways to look at this, too, right? So I think if we-- a lot of times, insiders sell because the stock price is really high, right? And they're trying to generate their own profits and income and things like that. But if you look at this graph here, it's just-- there's just been like a consistent level of selling through the last year or so. And I just think that oftentimes insiders, they're closest to the business and they kind of know some. So I do think that maybe the lack of confidence from insiders is telling of a potential interesting thing to look at anyway.
JULIE HYMAN: Well, something to be aware of, certainly, when we look at that. And then what would be the risk? What could end up going well for them in 2024?
SYLVIA JABLONSKI: Yeah. So I think-- I think that they are the leader in creative software. So I think if they don't have any issues with the FTC about subscriptions, they have these super expensive subscriptions, they have a captive audience. And so then if they roll out the generative AI, I do think that they can expand on the revenues they already have. They can take that $20 billion and put it into Firefly. They can put it into trying to capture a larger audience. They're going to have to kind of fight against Microsoft Paint, which is now going to be another generative AI software.
But overall, look, their margins are good. Their balance sheet is good. It's a well-run company. It's hard to argue that, you know, they're going to fall off a cliff here.
JULIE HYMAN: And do you have any position in Adobe?
SYLVIA JABLONSKI: I do not.
JULIE HYMAN: OK. All right, Sylvia, let's sum up what you have told us today. So your buy is Alphabet. You're bullish because it's cheaper than the other Magnificent Seven stocks. And you see AI revenue potential from Gemini and projected growth at 2 trillion in the next decade, particularly when we're looking at the cloud engine for Alphabet.
And your goodbye is Adobe. At least in the near term, you do see some headwinds in 2024, an underwhelming outlook, $1 billion payment to Figma because the merger did not go through, and you're seeing insiders sell the stock. So that's to sum up. Sylvia Jablonski, thanks so much.
SYLVIA JABLONSKI: Thank you for having me.
JULIE HYMAN: We really appreciate it. That does it for "Good Buy or Goodbye." We're going to be bringing you new episodes three times a week at 3:30 PM Eastern. We'll be right back.