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- [00:01]
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- [00:46]
Ed Zitrin
from the Goldman Sachs trading floor. In 10 minutes or less, investors and analysts share timely analysis on the week's market activity. The Markets podcast from Goldman Sachs.
- [00:58]
Scott Devitt
Listen now.
- [01:01]
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Ed Zitrin
Money Market Map.
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Scott Devitt
If money is evil, then that building is hell.
- [01:25]
Karim Bousta
The show goes on.
- [01:32]
Ed Elson
Welcome to Prof. G Markets. I'm Ed elson. It is July 23rd. Let's check in on yesterday's market vitals. The S&P 500 and the NASDAQ declined. The Dow was flat. Brent crude climbed above $95 per barrel for the first time in nearly six weeks as both the US and Iran escalated their attacks. The yield on 10 year treasuries increased and finally Google and Tesla shares fell after both companies reported earnings. We will get into those reports later. Okay, what else is happening? The big AI spenders are increasingly turning to debt and a lot of it turns out to be hidden. A Nikkei Asia investigation found that five tech giants, Alphabet, Microsoft, Amazon, Meta and Oracle are carrying roughly $1.65 trillion in debt that doesn't show up on their balance sheets. That's more than the $1.35 trillion they actually report, meaning the debt we can't now bigger than the debt we can. Meta's off balance sheet debt is roughly three times its reported debt and Oracle's has ballooned about 30 fold in four years. It's all legal, but it raises one big question. What happens if AI demand isn't as strong as investors are betting? Joining us to discuss this question, we're speaking with Ed Zittran, author of the where's your Ed at? Newsletter and host of the Better Offline podcast. Ed, thank you for joining us, I just want to give you some context. Yesterday I was talking about Oracle on this show and I was talking about how they're increasingly relying on debt to finance their data centers and how it's becoming kind of borderline unmanageable and that's why their credit rating is getting downgraded and their borrowing costs are exploding. They're kind of being sent into this downward spiral. Up until this point though, it has been my understanding that the debt in the AI ecosystem has been relatively contained to a handful of companies like Oracle, but that it hadn't infected the bigger names. Which is why I was so alarmed to see this reporting from Nikkei which says there's $1.7 trillion of hidden debt that we haven't been seeing, that we haven't been looking at. You've just written a huge piece on this. You investigated these numbers, you did a sweeping analysis of all of this. What do we know about debt in AI and how is it that so much of it appears to be hidden?
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Ed Zitrin
So there are several factors here with the hyperscalers. The reason they're able to do that is because they found this interesting accounting treatment that Ernst and Young claim is a red flag in matters case where when you build a data center, it's not like you, as the company say, I'm going to buy all the stuff, I'm going to get the debt for this. And here we go. They make a special purpose vehicle or a variable interest entity, which is basically an SPV where you don't own as much. So for example, with Hyperion, I think investors like Pimco and Blue Owl own 80% of it and Meta only owns 20% of it. Despite Meta being the only client. The person that's going to fill it full of GPUs as well, I think. I think they're moving some across their assets, despite them being the obvious, despite Meta announcing it and saying this is our data center, because they don't have full ownership of it, it's not counted as something they put on their balance sheet. They will have it, I think within operating leases when it starts paying. But the thing is, this is the entire AI data center industry. Every one of them are these SPVs that people pull money into. The SPV owns the debt. The SPV often owns a lot of the risk though, through non recourse loans, which means that technically you have to go after the assets of the SPV before you go after the company. But nevertheless these things own the risk. They own the GPUs they pay investors not out of anything other than the revenues from the data centers. Which leads to the important point of what happens if the revenue for the data center isn't there? How do investors get made whole? And the answer is they do not. And the only reason this is not considered a problem yet is it hasn't actually happened. Like the data centers have not been built at the scale that would have to happen for the revenue not to
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Ed Elson
flow in what actually is an spv. And this is important because you say that These data center SPVs are the AI bubbles equivalent of CDOs, which of course were the financial instruments that basically sparked the great financial crisis. You say that that is our equivalent today. So what actually is an SPV and why are they so popular?
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Ed Zitrin
So to be clear, a CDO is slightly different. It's holding mortgage bonds and stuff, but they are the same kind of financial instrument that will cause genuine harm to the markets in the world. So an SPV is basically a company. It's a company, it has people, people that technically are on the board of directors, you can do that. But really it's just a holding entity for money and stuff. And so when they build a data center, that SPV raises, raises the debt. That SPV holds the debt. That SPV buys the GPU as it builds the data center. And when the money flows into it, the SPV is the one that pays out to contractors, that pays the OPEX costs. And there's a cash waterfall even where it goes. Paying opex, paying investors and then paying, paying the people that own it. In theory, if there's more money than there should be, that is not going to happen. But nevertheless, these things are so dangerous because they are being sold as stable infrastructure like commercial real estate or residentials, and just saying, oh, it's physical land, it's good, it's great. But the problem is, and the critical difference is that data centers are nothing like a regular mortgage and they're nothing like commercial real estate. These are complex financial operations, both in the construction and the ongoing costs. And then there's the important thing of you need revenue to actually get paid out of them. And because they're all project financing, which just means they exist to finance a project, there is no other money for them to pay people out. Unless like the company on the other end, a core weave in Oracle or what have you isn't on the hook for those payments, basically the client is. And if the client is, say, I don't know, OpenAI and can't afford to pay it then investors who have invested in these SPVs and well, they're kind of shit out of luck. And the problem is when I say investors, I mean anyone who's involved in private credit right now. And private credit is well funded as I'm sure we'll get into by pensions, retirement funds, insurance funds, teachers, pensions, cops pensions, all this different stuff. We are all involved in private credit whether we want to or not.
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Ed Elson
I just want to read you a quote from Amanda Yacon of, of Bloomberg. And you quoted this in your piece. She made this comparison to Enron. She said quote, Enron exploited US accounting rules to hide from invest and lenders hundreds of millions in debt. It had bundled into off balance sheet entities obligations that contributed to one of the biggest corporate collapses in US history. And what you are describing right now is that there is a trend among the big tech companies, Meta, Microsoft, Amazon, Google, Oracle, they are creating these shell entities, these SPVs seemingly to hide literally hundreds of billions of dollars of debt that they are issuing in order to finance their data centers. In other words, they're showing us in their reporting and in their earnings like here's, here's everything we've built. But then they're hiding all of the borrowing that they took on to build all those things that they're kind of bragging about in their, in their reporting. That does seem to be a very, very similar link I guess. Could you expand on that on how this has come to be and potentially how this might unravel.
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Ed Zitrin
So I want to be clear that other than Oracle, I don't think these companies die. But I will say it's kind of hard that Nikkei piece, it wasn't clear if they were saying there was 300 billion or $1.6 trillion of hidden debt. It was a very weirdly written piece. But let's say it's a trillion or so of of off balance sheet there. That means that there's a trillion dollars in loans that we just don't. We ha. We actually cannot really quantify outside of media reporting. But I must be clear, it's not just hyperscalers doing it. It's coreweave, it's iron, it's nebius, it's Nvidia. In some cases it's whoever is building a data center is using these shell corporations as a mean of, of obfuscation ownership and also obfuscating risk as in basically handing off the risk to investors. And even though there are some that are recourse loans, even if there's a up the chain, you could eventually company. At that point you would have sold off all the GPUs. So you'd be screwed either way. But the larger point is, yeah, this is a corporate scandal. This is a huge scandal. This should be front page news everywhere. This should be a shareholder riot. But because we live, as you put it well on my show, in this cult of worshiping the wealthy, we just kind of put it to the side. This is a significant risk to these companies though. This is a real problem. Google, we're talking. Just as Google's earnings came out, they narrowly missed on search revenue. Their other businesses are slowing down, down. It's happening across the board. So their businesses are going to slow down just as these massive debts creep up. And let's say they have ways of getting out of these things. The investors will still be screwed. The investors involved will still be screwed. And if they cancel these projects, I imagine they'll pay off investors to a point. But anyone involved is going to take a loss. And then this spreads out like these are, this is the good news. The fact that the hyperscalers have these, these are the good SPVs. These are the ones that I think might survive. The problem is every single data center is through an spv and every single investor who's invested in a data center has invested not in the data center itself, but in the potential revenue it brings in. And the problem there is that is dependent on there being 15 or more times the AI compute demand than currently exists.
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It's.
- [11:38]
Ed Zitrin
It's genuinely terrifying when you start quantifying it. And people are way too flippant about this stuff. They say, oh, it's not as bad. Oh, it's not as bad as the great financial crisis. It's still a great financial crisis that this happens. It's still horrifying. And it's everywhere.
- [11:54]
Ed Elson
You write, quote, much like a subprime mortgage, AI data center debt is being poorly underwritten, virtually uncollateralized and issued to projects that have extremely low likelihoods of repayment, all based on flimsy information and hype driven mania. End quote. Sounds like a provocative statement, but I actually think it's pretty much factual and correct. I think one thing that isn't in that statement when we make the comparison to the great financial crisis is the fact that a lot of that poorly underwritten debt, that virtually uncollateralized debt was obfuscated and hid in a way to the point where ratings agencies and investors and traders didn't even know what was happening because it had been so well Hidden in the markets. It had been so, well, kind of complexified. I guess. My question to you, do you think that this is the same situation where investors, ratings agencies, I mean, we know that S and P just downrated Oracle's debt. So clearly they have some semblance of an understanding of what might be going wrong here. But is it your view that this is not being priced in that investors literally don't know what is happening in terms of the debt that is being issued among many of these companies?
- [13:20]
Ed Zitrin
Let me tell you the tale of private credit. So private credit in the last few years has gone on a tear, merging with or acquiring insurance companies and retirement funds. Apollo bought Athene while they merged with them. Blue Al bought Cuver. They're. I forget who the others are. But nevertheless, Blackstone's infrastructure fund is funded by retirement funds. The problem is, is a lot of the SPVs are funded by private credit. That private part is the lethal part. S and P doesn't rate private debt. No one does other than the private credit fund. So there was a story in the information a few months ago that said that Blue Owl decided to invest, I think up to $10 billion in Stargate Abilene after 10 minutes. How much due diligence do you think we can get done in 10 minutes? Probably not very much. This is standard for the SPVs. So while people will say, oh well, the ratings agencies failed here, actually no, the SEC failed here. The elite, like the insanity of private credit, which is basically a multi trillion dollar shadow banking system, is what's propping this up. For the most part, the debt raised for these SPVs is coming from private credit. You look at Corewave, it's coming from private credit. When it comes from the banks, the banks themselves, SMBC and MUFJ out of Japan, that there's like they're just funneling the debt straight in. So much of this is coming through institutional investors that are funneling money through private credit that the ratings agencies aren't even involved and the ratings agencies don't. The only reason they did it with Oracle is Oracle has predominantly raised its money via bonds, except for the fact that a lot of their private projects are SPVs and the SPV raises the debt. And it's this situation where in theory, like I think the Michigan Data center they're building is a recourse loan, so you can go directly after Oracle. But that's the thing. Even in that situation, there are these legal barriers that if every data center is exploding, will make it hard to litigate at scale or at least hard to pull down who's actually responsible. And we don't like if you are anything touching an athene or a cuvet or any other insurance company, it is worth checking where the money's going. I think alliance actually invested in a Cyrus one bond. And the thing is these bonds get rated somehow they get rated as junk. But because insurance companies are now effectively run by private credit funds, I don't give a crap. It's like yeah sure, because of this giant lie. And this giant lie is that data centers are the equivalent of investing in power plants and factories. That they're AI factories when in fact what you're investing in is a very large like town sized building or siri. A campus that is full of depreciating GPUs for an industry that has not proven it has the demand. And I mean my estimate for actual AI compute demand is about 100120 billion a year. The I did the maths and it's something like if they build all 130 gigawatts of it load. So the actual operational GPUs that they say is in planning based on Sightline Climate, we will need $1.68 trillion of annual compute revenue just to pay for them all. And they'll have to pay consistently because if you stop paying consistently, the loan covenants with the SPVs break. And the crazy part about this is the global software industry is less than $800 billion. So we're just gonna magic up another software industry. And to be clear, what I am saying sounds radical. I think you kind of said this already. It sounds like a. Oh scary thing. Oh it's alarmist. This is just very basic maths. This is Sightline Climate said 190 gigawatts of of capacity was being was in planning or under construction PUA of 1.35 which is just the energy efficiency 130gigawatts $12 million a megawatt. It really, this is simple mass that anyone could do. And the thing is even if I, even if it's just half of that, we still don't have enough demand. And so we're in this weird situation where this risk is now spread everywhere to the point that because it's private we actually do not know how far and it's within the insurance companies. It's different to how AIG collapsed. It's just smaller. It's smaller little bits. But the other problem is that AI data centers are so expensive they cost 500 million minimum probably several billion. So instead of having millions of or hundreds of thousands of subprime mortgages that collapse in a kind of slow boil over time, it's going to be a 500 million, a 6 billion, a 2 billion, a 1 billion collapses. And each time one of these happens, that's a massive markdown with a private credit fund, but also a bunch of investors who have lost money and have no recourse beyond, I don't know, selling all the GPUs in a market that will become saturated with them.
- [18:01]
Ed Elson
It's the recourse point that is getting us into such dangerous territory here. I mean, it's one thing to make a, to sell equity on a speculative bet about the future, in which case people know what they're buying into, we know what the risks are. It's another thing to finance an extremely speculative business through debt and then to hide that debt. Because I mean, if this doesn't work out, we're not just talking about equity going down here, we're talking about bankruptcies, we're talking about defaults.
- [18:36]
Ed Zitrin
There's also one, one other problem, which is the reason that insurance, insurance and retirement funds invest in private credit is because they need yield, they need ongoing yields. So if these data centers do not pay out, we have retirement funds and insurance premiums that cannot get paid. And I'm sure they have some buffer, I'm sure they have other assets. But it, I mean, it doesn't have to be an AIG commercial paper level collapse for this to be systemically damaging. And after this, there is no more yield to be found, I guess, other than treasury bonds, which are going up now, yay. But when they go down, I don't know. But so it really is. And what sucks is most people have no idea about this. Most people don't realize that like the California pension fund is invested in blue out like these are. It's everywhere. And it's not just in America, it's across the board. You've got, I think the Dutch pension funds in data centers, cdpq, which is the Quebec pension fund, they invested, I think in a core weave data center. Like this is everywhere. And I'm, I'm furious at the fact that it's so ill, it's so rarely discussed. But also people are so quick to being like, oh, it's not as bad. Oh, it's not as bad. Not as bad is still bad.
- [19:59]
Ed Elson
All right, well, we're gonna have to continue this conversation another time. I'm gonna have to let you go. But it is fascinating stuff, and I do encourage our listeners to go read your article. It's extremely rigorous and gets at a lot of the issues that we're talking about. Ed Zitrin is the author of the where's your Ed At? Newsletter and host of the Better Offline podcast. Ed, Always appreciate your time. Thank you.
- [20:23]
Ed Zitrin
Thanks for having me.
- [20:28]
Ed Elson
After the break, a breakdown of Tesla and Google's earnings and for even more markets insights. You can subscribe to my weekly newsletter, Simply put@simply put. Prof.gmedia.com. Support for the show comes from Apple News plus Apple News plus has everything you're into, all in one place. Over 500 publications covering the topics that matter most to you. Thousands of recipes from celebrated food publications around the world, local news from all 50 states, sports coverage from across the globe, audio stories you can take anywhere and daily puzzles exclusive to Apple News plus, all of it curated just for you new subscribers. Try it free for one month at News Apple Slash Learn Terms Apply.
- [21:22]
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- [22:25]
Ryan Reynolds
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- [23:00]
Ed Elson
We're back with property markets. Tesla just reported earnings and Wall street was disappointed. Ahead of earnings, Tesla had reported impressive delivery numbers for the quarter, up 20 year. That gave investors the impression that Tesla's worst quarters were behind it. This time last year, the company was reporting a 13% decrease in deliveries. But the company's second quarter earnings told a different story. While revenue beat analyst expectations up about 26% year over year, profits fell 5% over the same period. And the quarter's free cash flow came in about $1.1 billion. In the red, the stock fell more than 3% after hours and is now down roughly 25% from its peak. So here to break down Tesla's quarter, we are speaking with Karim Bousta, co founder and Managing partner at DVX Ventures and former Vice president at both Tesla and Lyft. Karim, thank you for joining us. The interesting story here, you got decent delivery numbers, especially compared to last year. Revenue was up, but profits down. What went wrong here on the bottom line?
- [24:15]
Karim Bousta
I think what we're saying with this published results should not come as a surprise for anyone who's been understanding and following what's been going on with Tesla for the past, I'd say 18 to 24 months. Essentially what's been happening, we've seen declining sales for several quarters in a row, but more importantly, we've seen declining market shares. And even in this quarter, where for the first time in a few quarters, Tesla has been able to report increasing sales number, you have to look at this in the context of a growing EV market, where the market overall has been growing faster than the sales number that Tesla has been reporting. So that's one factor which confirms what we've been seeing for the past few years, which is Tesla has a fundamental issue on the automotive side, which is essentially the vehicle lineup. The product lineup is becoming old. It has not been able to renew it. There's been a refresh of the Model Y last year, but it's still based on the same platform that launched almost 10 years ago now with the Model 3 and then the Model Y. So there hasn't been real innovation, both from a product side and technology side, that would have allowed for the company to catch up on the market share losses that they've been seeing and at the same time continue improving the margins. It's actually been the opposite. The margins have been eroding we're seeing it in the results that have been reported this quarter. All this comes down to the lack of innovation and new products and fundamental platform launches that we haven't seen for the past few years. And that's in the context of a competition that has been increasing with all competitors catching up to where Tesla was even six or seven years ago and creating great products with better margins, better production systems than what Tesla has been able to accomplish. So all this to say I'm not surprised by these results. It's all coming down to what we've been seeing in the past few quarters and everything is coming into place. When you look at the lack of innovation and new breakthrough products on the
- [26:34]
Ed Elson
product lineup side, the Tesla Bulls will say, what about the Robotaxi? They will say, what about Optimus, which is the humanoid robot? What would you say to those people? Are you convinced by those products? And do you think that that is going to work for the company? If the existing product being the car itself is deteriorating as a business?
- [26:58]
Karim Bousta
That's indeed the bet that Elon and, and Tesla Bulls are making, that there is going to be an evolution, a transformation of the company that is going to evolve from an EV car manufacturer to a Robotaxi robotics company, AI driven company. That's a great strategy and great vision. Now you have to look at the fundamentals of, okay, what are these products going to look like? If you take Optimus, the humanoid robot, for example, there are a number of questions that people should ask. What is really this product? What problem is it addressing? What market does it really have? Where is the demand going to come from? Even assuming that you solve these questions and these problems, then there's the other question that is, are you going to be able to make this product? It's a brand new product, brand new supply chain, brand new design. There's no history at Tesla, there's no experience building such a product. There's no track record of being able to ramp a supply chain and a production system at that level, the level of complexity that is required and the quality and the cost, et cetera. So when you look at these new lines of business that Tesla is betting, that Elon is betting the future of Tesla on, you look at a dozen fundamental questions that need to be answered positively with the ability of the company to address and solve all of them. So a lot of question marks, in my opinion, with regards to these new lines of business that are supposed to be the next wave of growth for the company.
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Ed Elson
I mean, the Stock is down 15% year to date, it's down almost 25% from its peak, but still, it's a $1.4 trillion company. It's trading at nearly 350 times earnings. Is all of that optimism still based in expectations around the humanoid robot and the Robotaxi? And if so, is it too optimistic? Are people putting too much faith in this idea that all of those questions are going to be answered well by the company?
- [29:26]
Karim Bousta
So I will add one more challenge that Tesla has to overcome that is often underestimated or that we rarely talk about. If you look at what has made Tesla successful in the past, and the same applies to SpaceX, by the way. So fundamentally, this Elon's vision, Elon's aspirational vision, the way he puts the vision into a strategy, but then to make the strategy actionable and to execute the strategy. Tesla's success came from the talent and the hard work of hundreds, thousands of highly talented people. And these people used to come to Tesla and help Elon work. And I was one of them a few years ago, attracted by the magnitude of the challenge, by the boldness, the ambition, and also by the fact that some of these problems were extremely hard to solve. And that's what typically attracts talented people and ambitious people. They want to work on the hardest problems. So being able to attract and attract these kind of people has been fundamental in Tesla's successes in the past. Exactly the same thing at SpaceX. Now, the difference compared to five years ago, eight years ago, where Tesla had to solve incredible problems and challenges, is that by now most of these people are gone. They're working on other things. They're still innovating and solving hard problems, but they're doing it somewhere else, not at Tesla anymore. I know that really well, because with my team, we're all ex Tesla people. We launched a company, a company creation platform. We launched 17 companies in the past few years, and there are literally hundreds of these people that are now applying their talents in other places. So the question, one of the questions that I'm still asking about Tesla now is now that all these people that made the success of Tesla possible in the past, that they're no longer there helping Elon solve these problems, how is the company going to do that? So if you look at the robotaxi business, for example, the company has to solve the autonomous driving, which is the first priority. But even if they are able to do that and catch up to the levels of service and safety that Waymo, for example, has achieved, then they have to create a business out of this and creating a business, a robotaxi ride hailing business is something that took Lyft and Uber a decade to figure out how to position the cars. So there's always a way availability, how to maximize the revenue utilization per dollar invested. All these things that Tesla is going to have to figure out. So large number of questions and challenges to overcome. And there's this thing about the talent pool that has made Tesla successful in the past that has not been replaced. We all know about the exodus and all these brilliant people that have lessee in the past few years. That's what gets me a bit concerned. And at the same time, we've seen over and over again that Elon has been able to figure out a way to overcome these issues and come up with new solutions. So that's why it's hard for me to answer one way or the other. But I'm just looking at the number of challenges that they have to solve and in the end they're at some point running out of time just because the competition is very active and progressing and moving very fast. Waymo is moving much faster and growing much faster than Tesla is at this point. So Tesla is going to have a massive catch up to do. And even on robotics there's tens and if not hundreds of companies that are actively working on it, making the competition and the space really hard to win it.
- [33:34]
Scott Devitt
All right.
- [33:35]
Ed Elson
Kerryn Booster, co founder and managing partner at DVX Ventures and former vice president at Tesla and Lyft. Karim, we really appreciate your time. Thank you.
- [33:44]
Karim Bousta
Thanks for having me.
- [33:47]
Ed Elson
Google just delivered another blockbuster earnings report. Revenue jumped 24% year over year to nearly $120 billion. That was fueled by explosive growth in cloud revenue, which surged 82% from a year ago. Net income quadrupled to $112 billion. And Gemini saw monthly active users grow to 950 million, up 20 from February. But Google's AI push is coming at a cost. The company is spending so aggressively that free cash flow swung into negative territory for the first time ever, ending the quarter at negative $5.9 billion. And capex guidance for 2026 was raised to $205 billion, up from 190 billion reported in April. The stock dropped more than 4% during the earnings call. So joining us to discuss Google's earnings, we're speaking with Scott Devitt, senior research Analyst at Rosenblatt securities. Scott, good to see you. Thank you for joining us. This was pretty good on the revenue side. Not just cloud, I would add. I mean search revenue also Growing pretty substantially up 17%. I'm always kind of amazed how that number keeps going up. But it seems like that was all overshadowed by the amount that they're spending on AI and the negative free cash flow. That seems like a big deal. What do you make of it?
- [35:19]
Scott Devitt
You have the stock reactions and then you have what's happening in the business. With Alphabet it's been such a substantial move in the stock over the past 12 to 18 months that some of this is just, just the digestion of this reality of how good the business is doing right now. And if you look at in a search business you mentioned up 17%, that business was thought to be left for dead 12, 18 months ago because of AI. And on that base that the company has to be growing that 17% also be growing YouTube 13%, building out waymost capabilities. This company is rearchitecturing their entire business as they have this exploding cloud business that's attached to the company now as well. I mean that was up. The cloud business was up 82%. So the major nit I think is the fact that as you mentioned free cash flow, flip negative, they're going to need more capital to grow the business. But when you get to the other side of this investment cycle, Alphabet's going to have rebuilt the entire company and have a multi hundred billion dollar cloud business on top of it. And so when they into harvest mode, I think the stock starts to show much stronger returns after it digests this kind of window of time of this kind of recovery period, the last 18 months and now the reality setting in, that's going to be expensive to build what they're doing.
- [36:46]
Ed Elson
Just looking at YouTube search, they're traditional businesses, they're bread and butter. There is no question they continue to excel. But just from my personal perspective it does seem concerning how aggressive they are getting with the AI spending with the data center building. And there was some news that we were just digesting earlier which I wanted to get your reaction to this was some reporting from Nikkei Asia where they found that there is a lot of debt that isn't being reported by some of the tech companies like Google, Meta, Microsoft, Amazon, Oracle, that they are taking a lot of their debt and issuing it through SPVs, which is basically off balance sheet debt. And to be clear, like there's not a lot of clarity into any of this. But I'm wondering if, if you consider that to be a concern for these big tech companies, the amount of debt that they're seeming to be more interested in issuing at this point and then also the possibility that there's a lot of this happening off the balance sheet and the questions that raises of the sustainability of how much they're spending.
- [37:59]
Scott Devitt
So less concerned about the efforts of Alphabet and Amazon and Microsoft in that area, but some of the newer entrants that are being more aggressive with financing. And I think that the smart companies for a period of time can only operate as well as their, they're less smart competitors in terms of the way that they structure the growth of this. And so I think the risk is just the proliferation of competitors and some less disciplined than others that has the risk to drag down even those players that are disciplined, which I put Alphabet in that basket as well as Amazon and Microsoft and Meta. But there's a lot more companies providing these services now and some like Meta that never provided cloud based services before that are now getting into the business business. So from that standpoint it's definitely worth monitoring. There's a possibility that you get to the point where this build out goes too fast and that lack of discipline ends up getting paid for by the great companies as well. And that's something we pay a lot of attention to. I will say with Alphabet here, I think they're doing everything that they need to do as a company to be well positioned in this AI world where when you re architect the entire company through this process, you're limiting the number of competitors that are going to exist in the world in the next three, five, ten years. So when we get to the inevitable other side of this, there's just going to be less competition. If you're a small company competing in advertising and content and otherwise there's almost zero chance you can compete with these companies with the amount of money that's
- [39:44]
Ed Elson
being spent just on the cloud. Revenue that grew 82%. I mean $25 billion, huge, huge numbers. Do we know much about who those customers are? And I ask that because one thing that I've been trying to monitor is how much of the revenue is coming from an OpenAI and an Anthropic. And I get essentially how reliant these companies are are on a small subset of companies. Do we know much about the diversification of that revenue?
- [40:19]
Scott Devitt
It's concentrated and those are two key components of it. I would say in addition, with Alphabet now you have the selling of the TPUs to third parties that's beginning to show up in revenue as well. So I don't want to say it gets polluted because that's not a bad thing. But that's a driver of incremental growth and somewhat of a contributor to the acceleration. But the company did say that the cloud business accelerated even without that. And that's also going to be a big driver of the business in coming years. I mean, this is now on kind of a run rate path. If you look at the current quarter plus the rate of growth, about $100 billion business this year. And then if you look at their backlog that they have as a company, the baseline for the next two years is north of 150 billion. So there's so much growth here. If one player falters, then that can have an effect. But if one player falters and the demand for AI stays constant, then it will be manageable. And that we may be seeing, one, if someone that's in a leadership position now that that changes and two, if demand for AI holds up. Otherwise, I think those are topics that ebb and flow in the day to day media as well.
- [41:36]
Ed Elson
All right, Scott Devitt, senior research analyst at Rosenblatt Securities. Scott, we really appreciate you joining us. Thank you.
- [41:42]
Scott Devitt
Thank you.
- [41:46]
Ed Elson
Okay, that is it for today. Tune in tomorrow for our conversation with Noah Smith. We discuss the AI bubble, the rise of inequality in America, the fertility crisis, the national debt and lots, lots more. Don't miss it. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profit Markets from Profit Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.
- [42:30]
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