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- [00:00]
San Migueo
Foreign.
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Tim Byers
What'S the big deal with big techs or listening to potly fool money? Welcome fools. I'm your host Tim Byers and with me is longtime rule breakers teammate Rick Benares and my supernova odyssey teammate San Migueo. Guys, how we feeling today? You good? Caffeinated I hope.
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San Migueo
Doing well? Very caffeinated, Absolutely.
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Tim Byers
Okay, very good. Today we're looking back to look ahead with a review of last week's big tech earnings. But first let's start with any macro themes you both saw from the big tech reports. And I'll, I'll kick us off with a couple things here. There, there seem to be three big prevailing themes and I pulled this from our internal Alpha sense tool. Relentless scaling of all of the AI cloud infrastructure. So a big one on this. Microsoft will increase total AI capacity by 80% this year and double its data center footprint in two years. That seems large bit of legal headwinds here. Apple has an antitrust lawsuit that they're dealing with. And then finally capital intensity. And boy is there a lot of capital intensity. Amazon has a plan for 2025 cash CAPEX guided to 125 billion and that won't be the end of it. I mean really, that won't be the end of it. Rick, what do you got for me here? What's going on here?
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Rick Benares
Yes. So basically you're having this great situation where I mean if you are a big tech company where the rich keep getting richer, you continue to see the Mag 7 or in this case the Big Tech 5, whatever we want to, this group continue to be outpace the S&P 500 which itself is outpacing the Russell 2000. So if you're an investor and you were picking like small stocks because you thought, oh, I got to start small, that's where the money is. It's been completely different. And you're seeing like with these big AI deals that are happening, they're just exchanging money amongst themselves. But they have the means, they have the money and they have the resources to turn something as simple as AI years ago into something that's just basically a monster game changing technology today.
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Tim Byers
I mean, Sam, me, how, how do you see this looking at the, the big tech landscape, what's what either surprised you or interested you coming out of these, these massive earnings reports last week? Yeah.
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San Migueo
You know, so you, I'm kind of seeing like a bifurcated economy where you have, you know, these big tech companies, you know, spending a lot of money, making a lot of money and really pushing for this AI stuff and they're in pretty strong positions to do so. But then you have the consumer and consumer discretionary companies that are struggling. You had Chipotle, which is a non tech talk a little bit about some slowness and some weakness with their consumer. Amazon's talking a little bit about a squeeze consumer and their retail business. So while you have the big tech companies thriving and spending, you have the consumer, you know, maybe less so thriving and spending a little less so big.
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Tim Byers
Big tech is, is, is big isolated at, at the moment here.
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Rick Benares
Yeah. Can I argue, Tim, that.
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Tim Byers
Yeah.
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Rick Benares
Is a tech company because how do they roll those burritos? There's no way all that food fits into like a rolled tin foil, aluminum foil wrapped burrito. I'm sorry, that's, that's magic, that's wizardry.
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Tim Byers
I, I, I will tell you, I think that Guacamole is biotech in and of itself. So I fully, fully agree. All right, let's move on to the, the earnings themselves and what we're going to do is focus on some of the outlier things that we saw in each of these reports. And Sandme, why don't I start with you here on, on meta. What really stood out for you?
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San Migueo
You know this, I'm really curious to dig in a little bit more on this joint venture with Blue Owl Capital. You know they announced that they're, they're doing a joint venture to co develop a Louisiana data center campus. And you know some of the structure and the way they're doing this, it's, it's going to be off balance sheet and that always worries that before. Yeah, seriously, that is something that I have experienced at a prior company. As I worked we had, you know, I, for those you don't know, I worked at Lehman Brothers and we had off balance sheet mortgage companies. So if I, I need, I say more.
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Tim Byers
Yeah, that worked out great. Yeah, I, I, I hope there's, there's less to this than it seems like this, this would be one of those that I'd, I'd like to just believe that what we're really going to get is just an interesting joint venture, but I really wish it was, it was on the balance sheet. All right, Rick, let's keep moving here and go on to, to Alphabet. Alphabet had a, had a heck of a quarter and investors seem to like it. What did you like or dislike?
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Rick Benares
Yeah, I liked the fact. So here's a fear and I have never shared it with you, Tim, or anyone. I sort of kept it internally because I didn't want this to happen. But every time I'm on Google and I put out a search result, I'm starting to get these nice AI responses giving me the answer I wanted. So I'm not clicking on ads, I'm not clicking on sponsored search results, I'm not clicking on anything. I'm not diving into all these companies that invested in SEO. And I tell myself, well, Alphabet has to feel the pain. They're going to feel this in advertising, they're going to feel this in other places, but they haven't. Again, $100 billion quarter, record quarter for the third quarter, and this is a year ago. There was some voting elections, related spending on the ad market that could have propped up results. But the company's doing well. It's defying all these things and clearly just another major player in cloud that's really raking it in in many different levels.
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Tim Byers
Yeah, I mean, they are saying that backlog for their cloud business was up 82% year over year. That is extraordinary. And the backlog is apparently now 10x the current annual cloud revenue there. So maybe we're going to see some big things from GCP here. All right, let's move on to Microsoft. San me. What stood out for you here?
- [06:25]
San Migueo
Their other income swung to a $4.1 billion net loss from their stake in OpenAI. And that was surprising. And it's, it's, it's, you know, you see some of the other companies, Amazon, Alphabet, making some money from their investments in anthropic Microsoft, which has had a huge stake in, you know, OpenAI has been involved with them from, for a long time, is not making any money.
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Tim Byers
Yeah, I mean, I, it's really hard to understand what exactly is going on here. OpenAI is in full court press, spend it all as soon as we get it mode. And that is having some tail risk, I guess for Microsoft. It's a bit surprising. They also absolutely went through the roof with their capex 34.9 billion. That was up significantly and about 50% of that spent on GPUs. They have a big checkbook and they're writing a lot of checks. But Rick, we mentioned before we got to this section, Amazon, $125 billion. What else can we say about Amazon? I mean, this was another amazing quarter for these guys.
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Rick Benares
Yeah, amazing indeed. And when you see, oh, 13% sales growth, that's not very impressive until you realize that three years in a row they've given us 9%, 12%, 11% growth. These back to back quarters of 13%, you know it may not seem like a lot but Amazon is slowly, gradually starting to pick up momentum. It's like an old car that's just starting to pick up speed here. And you have the case here where it's international growth, obviously it's outpacing US growth was 11% international a little better. But obviously AWS, their web hosting business, which is becoming a larger player growing faster than the E commerce business quarter after quarter and more importantly just margin wise, it is such a cash cow the way it makes so much money that it's helping the whole company. So really a dynamic quarter that really defies the seemingly ho hum top line growth numbers.
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Tim Byers
This is so interesting. There's two quick things on, on Amazon that I wanted to add to this. Rick. Yeah, I mean you make a great point. Amazon re accelerating is fascinating. They also had just a, you know we just talked about, Sam Meat was Talking about the OpenAI hit to Microsoft and Scrapic gave Amazon a $9.5 billion one time gain from revaluing that investment. That is extraordinary. Now that was non operating income but clearly the market thinks that anthropic is a whole lot more valuable. But the most fascinating thing I thought was that for aws, Amazon decided beginning January of this year to reduce the useful life of their servers and networking gear from six years. The amount of time they used to depreciate their networking and server gear from six years down to five. That is very rare. You almost always see it that those useful lives being extended, not reduced. But that's telling you, I think that Amazon is going to be spending a lot of money to keep refreshing its gear.
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Rick Benares
All right, so, so, so it's not just the workforce that's being reduced in Amazon is what you're saying?
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Tim Byers
No, not just the workforce. All right, all right Samit, take us home with Apple here.
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San Migueo
Oh, if I may say one quick thing about Amazon that I think is sometimes under underappreciated with the whole big tech stuff is that they're the ones that has the deepest ties to retail and the consumer and the data that they're getting from that and the way they're piecing together some of these like different businesses that they have is powered by a lot of that. So it's almost like the retail is like a loss leader for all the other businesses that they're doing. And I think they're putting together these pieces and I feel like sometimes they're playing 3D chess sometimes.
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Tim Byers
I mean you might not be wrong. It's certainly true that they are Exposed to so many areas of the economy, including to the consumer economy. And then they're the biggest participant on the back end in this big tech AI cloud. They're the biggest player there. So they stretch all the way across that value chain. Apple's no slouch though. Apple is a big, big company. Tell me what you thought about the, the Apple Report.
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San Migueo
You know, Apple is, is, it's, it's interesting because tariffs are going to definitely be an interesting part of, of their business. You know, they do sell some of these phones. Phones is really the biggest business. What I worry about with Apple, which is probably a lot of people worrying about is, you know, they're making commitments to investments as well. But are they falling behind in the AI race and how are they going to be able to really capture the fact that everyone's walking around with a device that could have embedded AI that could really be powerful for them and it's something that they could create a service from? Their services business has grown for many, many years. They always had the hardware which no one else really had. And then they added on services which started to really grow. It's 100 billion plus annual revenue stream growing faster than hardware. So how are they going to, how are they going to tie everything in?
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Tim Byers
Yeah, we don't have really good insight into what Apple is going to do to get, to get themselves to become a major player in the AI space. Everybody else is making really big portal investments and I really would have expected by now that the Apple AI portal, which really is supposed to be Siri, would be better than it is, but it hasn't gotten there yet. All right, coming up next, we're going to make some big tech reckless predictions. You're listening to Motley Fool Money.
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- [12:55]
Tim Byers
We're back with reckless predictions. And we call them reckless predictions because I mean, we don't know. We make predictions, but we don't know. I mean we're, we're basing this on, on what we can see and what we can observe in the moment. And the whole point of making reckless predictions. And before I go to you on this, Rick, I'm going to kind of tee it up this way. The point of making a reckless prediction is to give yourself a frame for how you're going to look at a market. That's what you do a reckless prediction for. So if you, you kind of have a sense of what you're looking for and then when your reckless prediction goes wildly wrong and you see how it went wrong, then you start learning things. So it isn't the, it's great when we're right, but it's also okay when we're wrong. So Rick, with that, you know, you don't have to be exactly right here, Rick, but give it to me. Go crazy. What's your reckless prediction here?
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Rick Benares
All right, I'm going to make a prediction that may not seem so reckless, but then I'm going to embed kind of a deeper prediction within it. And I think that the MAG7, which is six tech stocks and a car driving stock that has a high in tech, so it's almost a big tech index. All five talks we talked about are part of the big MAG7 will be no more within the next three years. And to me this is an easy prediction because I remember when Fang was a thing and then Facebook changed its name and then Google changed its name and then the letters didn't work and then the N. You tell someone that wasn't around 10 years ago and Fang was a thing, they may say, oh, N is Nvidia. No, is Netflix. So everything changes over time. And I think you're sort of seeing that with the Mag 7, that it's this whole kind of thing that eventually it's not going to be seven, it'll be a smaller number, different number. But my bigger prediction within that is that I think within five years there is going to be a major player in AI that isn't even on anyone's radar right now. And no, I don't know who that is. I'm going to take the easy road out. But I see already that you're seeing, I mean, Nvidia, they have sort of an ASML esque lead in AI. So I'm not going to say someone's going to topple them, but I think there'll be a major player then. You're sort of seeing it happen just this past year alone. The reason why Chinese stocks like Alibaba and Baidu are doing so well is because they become, they're filling a void in China of these AI. Chips and data centers that needs to be built out while there's trade tensions happening with the US market. Not that I think one of these two will be the big leader, but it wouldn't surprise me of either an international name or maybe an unlikely name that just happens to have a lot of resources. Maybe even the Apple that we were sort of ridiculing earlier on its inability to make it happen, that it's now even part of that Google Pixel 10 ad where it's like the Vanilla Pro and they're making fun of it for not being able to have a good AI interface. Maybe Apple becomes that major AI play, but I think it'll be unexpected and I think it'll happen in the next five years.
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Tim Byers
I like it. All right, Sam Meat, what do you got?
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San Migueo
All right, I think, I think I have one that might be coming out of nowhere. So I talked a little bit about the bifurcated economy. You have the tech companies with their, their cloud businesses and their corporate businesses, AI businesses doing well and then you have cautious retail. So one of those, which you have Amazon, I think they're about to unify both of those through their long running joke of a cash burning business, Alexa, which they're rolling out. Alexa plus which are they're calling ambient AI strategy. I think that might be successfully bridging the gap between consumer enterprise businesses where AI will start managing users homes, order their groceries, book their services all powered by like AWS AI and it kind of creates a kind of a new brand new high margin subscription and services layer. They'll kind of become Amazon's next little big line of business and they could help them get it to a valuation of 4 trillion.
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Tim Byers
Okay, all right, that, that is a, that is a big prediction. All right. I, mine may be fairly small then in, in the grand scheme of things here I'm saying big tech R and D expense will start to scale faster than capex in the next three years. What I end up the. Just to put that in perspective, there are companies that have been nearly doubling their capex over the past couple of years. Amongst these big techs like it has been outrageous. Alphabet for example I think was over over 80%. Just ridiculous. But I think the reason for this is simple. At some point there's going to be a more pressing need for software driven innovations in a number of areas. A lot of lower level code work is going to be done with AI assistants, but experienced developers are going to get heavily involved and they will be paid handsomely for the work. My embedded reckless prediction here, which I don't think is really all that reckless. But distinguished AI engineer is going to become a common title among Silicon Valley's big tech elite. If you've been around Silicon Valley and you know anything about that culture, distinguished engineer is something that like that is the title. If you are a techie in Silicon Valley, becoming a distinguished engineer at one of those big companies, I think distinguished AI engineer is going to become a serious thing and it's going to pay a lot, a lot of money. All right, coming up next, we're going to preview tomorrow's show. You're listening to Motley Fool Money, cold.
- [18:17]
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Tim Byers
Quince.com motley all right, coming up tomorrow you will have Emily Flippin, Jeff Santoro and Jason hall talking about reformed rule breakers. How about that? I mean, I'm fascinated by that title already. So Jeff and Jason and Emily are going to be doing an earnings roundup. It's going to be a focus on these reform rule breakers. Three different earnings takes for Spotify, Shopify and and a third mystery stock that we're gonna let you tune into the show to get the reveal. But be sure you tune in tomorrow for Emily, Jeff and Jason. And thank you for tuning in today for our big tech earnings review. Thanks to my friends Rick and Sanmeat. As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Rick Benares San Migo. Our engineer is Dan Boyd and our producer, Anan Chuck Balu. Tim Byers. Thank you for tuning in, Fools. See you again next time.