Dan Niles, Niles Investment Management founder and portfolio manager, joins CNBC's 'Squawk on the Street' to discuss outlooks on Alphabet as the company reaches a $3 trillion market cap.

The release of Open AI's ChatGPT has accelerated the development of artificial intelligence and warnings about its impact on society.

Rise of AI

Dan Niles, founder and portfolio manager at Niles Investment Management, shared his perspective on Alphabet's prospects in artificial intelligence. He argued that Google's access to extensive free data, particularly from YouTube, gives it a significant advantage in developing advanced AI applications. Niles pointed to the recent success of Google's apps, such as Nano Banana and Gemini, which have surpassed competitors like ChatGPT in app store rankings.

Niles also discussed the broader AI landscape, noting that companies with large data troves and strong cash flow, such as Meta, ByteDance, and Microsoft, are likely to be the long-term winners. He expressed skepticism about OpenAI's ability to sustain its growth due to its lack of diversified revenue streams and heavy cash burn. Niles cautioned that, as the AI market matures, only a few dominant players will emerge, similar to past technology cycles.

Dan Niles: Google will have best AI app in the long-term

Let's bring in Niles, Investment Management Founder and Portfolio Manager, Dan Niles. Dan, let's start with Alphabet, actually, because the stock's also up about 4.4 percent. I don't know if you know any particular reason for that move this morning, but overall, sort of curious to get your take, given it wasn't that long ago that everybody was worried about their monopoly in search, particularly being eroded by the likes of ChatGPT. Yeah, I look at Google for the long term and I go, I think they're going to have the best app in terms of AI, because if you think about it, what makes an AI app smart? It's data. Well, they've got the most free data in the world because of YouTube. And so if you think about what's the most expensive thing to create, it's video. And so if you look at big products, they have like VO3 or Nano Banana, which is why the stock is up so much today, because they hit number one on the U.S. free app store on Apple over on Friday. And they passed ChatGPT. That's why the stock's up a lot. You combine that with the fact that it's trading at a market multiple at 25 times. You've got Meta up at 27 times, PE, and then you've got the AI names in the 30s. And the stock has a long way to go, especially given that antitrust remedy was way better than any of us ever imagined. They can pay to be the default search engine. They don't have to go ahead and spin off any of their divisions. I mean, they're in great shape when you look out over the next five to 10 years, I think. Yeah. Rumors of their demise may have been quite exaggerated. What is it? Number one, Nano Banana. That's the one that's number one? Yeah, it's the number one. It pushed Gemini past ChatGPT. So that's really driving this. What I think you're going to hear more talk about in a year or two, though, is their video app VO3. Now, you can only produce about eight seconds of videos today, but this is the worst it's ever going to be. And so that's going to give them a massive edge, especially given they've got all that YouTube content to train on for free, whereas other people like OpenAI, they don't have free user generated content that they can train on. So, yeah. Now, I don't know if you're an investor in the private markets, but it does take me to OpenAI for a moment. Not one of the names we mentioned, obviously, doesn't trade publicly. But do you think at a half a trillion dollars, perhaps, that that is overvalued given the competition you see being potentially won or if not joined very significantly by the likes of Alphabet? Yeah, I think OpenAI is going to have a lot of problems when you look out five years from now for two reasons. Number one, the guys are competing with, which is Microsoft, Google, AWS. They've got massive cash flow generating businesses in other areas that they can use to fund all of their AI development. With OpenAI, they don't have any of that. They're planning on burning $115 billion in cash through calendar 29. I don't think they're going to be able to burn that because I think the private markets are going to start shutting them down as we get out a few years from now. But the biggest issue is the winners are going to be the ones that got massive troves of free data they can train on. So who are those companies? ByteDance has TikTok, so all that data. Meta has got Instagram and Facebook itself. Google's obviously got YouTube. And then on the corporate side, everybody has a Oracle database, right? Over 60 percent of S&P 500 companies. So they're in great shape. And then Microsoft with Office has got a great stronghold as well. So those are the dominant companies, I think, when you look out three to five years from now, either because they've got tons of consumer data. So they're going to dominate in consumer AI or you're hammerlocked with corporations. So you're going to dominate in corporate focused AI. And I think the companies that aren't in either of those two buckets are going to have a huge problem. I mean, just to follow up on that, I know a lot of the training, I mean, you know, models have been run. You know, inference is obviously one of the key things, not to mention products. I mean, ChatGBT has been incredibly successful on the consumer basis. Some would argue they've already won to a certain extent. And then obviously moving in the enterprise, many would say it's way too early to write them off in terms of all the different things they can move into. By the way, whether it's social and competing with meta and on from there, Dan. Well, that's true, but how are you going to fund it? You got to go to you have to you got to raise a lot of money. You got to raise a lot of money. Now, the revenue growth is pretty significant. Let's not forget. I mean, they're losing a lot of money, but they are, you know, triple digit revenue growth right now. Absolutely. But we've seen in the past with technology companies, the guy who's out first isn't necessarily the guy that wins. Right. I think we all remember Netscape. We remember Yahoo. You can go back to cell phones. Right. Nokia had dominant market share at 40 percent of the total market. You had Motorola, then you had RIM, BlackBerry, the CrackBerry. Remember that you had MySpace and social media. And so I think I'm a big believer that the market's not going up 20 percent a year forever. Right. I live through a one or two at a certain point. If you look back over the past three years, including this year, you will have had from the big five companies, you know, which is the three hyperscalers plus Matt and Oracle. They will have spent eight hundred twenty five billion dollars in CapEx over the past three years. The industry probably about one point two trillion. It's not too early to say, hey, am I getting any return on that? And if you look at the poster child for that, which you could argue was Salesforce with this whole agentic A.I., the stock was at an all time record high in twenty twenty four. It hit a fifty two week low in August because as that MIT study said, ninety five percent of the companies that have been investing into A.I. have seen zero percent return. It's probably an exaggeration to some degree, but at a certain point, the market's not going to say much like in nineteen ninety nine when it said every company that said they had an Internet business. People are going to start saying, all right, who are the names that are going to start to dominate and it's not going to be 10 names. Right. So the question is, where are you in that process? And I think we're getting closer to that as we get into twenty twenty six.

HBO's medical drama, "The Pitt" beat out heavily-favored Apple TV's "Severance" for outstanding drama series at the Emmy Awards. Meanwhile, Apple TV's "The Studio" walked away with 13 awards and broke the Emmy record for the most wins by a comedy in a single season.

Los Angeles

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U.S. Secretary of State Marco Rubio arrived in Israel on Sunday to meet with Prime Minister Benjamin Netanyahu and other officials amid the nation's recent strike in Doha, Qatar, and intensified attacks in Northern Gaza.

Jerusalem

Israel hosts U.S. Secretary of State Marco Rubio

Over the weekend, tens of thousands of people marched through London in a rally billed as in support of free speech. Many of the chants and speeches at the rally, which was organized by a far-right activist, were protesting against immigration.

London

Thousands in London march in rally organized by far-right activist

U.S. and Chinese officials concluded a first day of talks in Madrid on their strained trade ties, a looming divestiture deadline for Chinese short-video app TikTok, amid Washington's demands that its allies place tariffs on imports from China over its purchases of Russian oil.

Madrid

Global Tariffs

U.S., China begin trade talks in Spain as TikTok deadline looms

Police are searching for a motive in Wednesday's killing of conservative activist and influencer Charlie Kirk. Authorities say interviews with family and friends of the 22-year-old suspect suggest he could have been radicalized in the dark corners of the internet.

Orem

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U.S. Secretary of State Marco Rubio said ahead of the trip that he will be seeking answers from Israeli officials about how they see the way forward in Gaza. Rubio's trip comes after Israel's attack on Hamas leaders in Qatar that upended efforts to broker an end to the conflict.

Middle East Conflict

U.S. Secretary of State Marco Rubio in Israel for talks

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San Juan

U.S. sends jets to Puerto Rico amid escalating tensions with Venezuela

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Washington

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Tel Aviv-Yafo

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NATO announced plans to beef up the defense of Europe's eastern flank on Friday, two days after Poland shot down drones that had violated its airspace in the first known action of its kind by a member of the Western alliance during Russia's war in Ukraine.

Warsaw

Ukraine Invasion

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Protests broke out in Chicago on Saturday against President Trump's immigration crackdown. A group of Catholic clergy led what they called a "People's Mass" outside the Great Lakes Naval Base. The base will also be used by Immigration and Customs Enforcement as a staging area for deportations.

Chicago

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More than 100,000 people took to the streets in London on Saturday, in what's believed to be the largest anti-immigration protest in British history. Organizers called it a "Unite the Kingdom" rally.

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More than 100,000 people marched through central London on Saturday in a 'Unite the Kingdom' demonstration against immigration organized by far-right activist Tommy Robinson. Police said a number of officers were assaulted.

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A former chief justice has been sworn in as Nepal's interim prime minister. For many people, Sushila Karki's appointment promises change. Days of violence and anti-government protests left at least 51 people dead.

Kathmandu

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Culiacán

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The man accused of killing conservative commentator and activist Charlie Kirk is being held without bail in a Utah jail. Meanwhile, vigils and memorials across the country honored Kirk as his widow made her first public remarks since his death.

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New York

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In Tunisia, the humanitarian aid flotilla for Gaza is set to leave Tunis. About 40 boats will try to deliver aid to the Palestinians under blockade. In Tunisia the departure was not easy, as two boats from the flotilla were subject to reported drone attacks.

Tunis

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Brazil's Supreme Court has sentenced firebrand ex-president Jair Bolsonaro to 27 years in prison for coup plotting at the end of a landmark trial that divided the nation and drew U.S. fury.

Brasilia

Brazil's ex-president Jair Bolsonaro sentenced to 27 years in prison

Israeli Prime Minister Benjamin Netanyahu signed an agreement to push ahead with a controversial settlement expansion plan that would cut across land that the Palestinians seek for a state. "There will never be a Palestinian state. This place is ours," Netanyahu said.

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Doha

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Ryan Routh, accused of attempting to assassinate former President Trump in South Florida last year, is representing himself in court. As the trial opened, Routh forfeited his chance to deliver an opening statement, setting the stage for proceedings.

Dan Niles: Google will have best AI app in the long-term

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Rise of AI