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- [00:00]
A
Welcome back to the rundown interview edition. Today we are talking to Jason Helfstein, the head of Internet research at Oppenheimer. Jason covers many big tech stocks, including Amazon and Google, which both reported earnings this week. So in today's conversation we talked about those two companies, why they sold off despite solid earnings, why investors are worried about the massive capex spending and if any of these companies might cut back on spending. I really enjoyed Jason's perspective. I think you guys will as well. All right, let's get into it. I want to start with the big tech earnings. Of course, you know, we had Google report this week, Amazon report this week, Microsoft last week. And there's been a similar narrative here where, like where these big tech companies report solid numbers but yet the stock sells off and a lot of it has to do with the heavy capex spending. So I want to turn it over to you. Is Capex just not cool anymore? Jason, Is that, is that, is that what's going on? Like, is the market just having sticker shock right now?
- [00:59]
B
I mean, some of it is a sticker shop. The absolute numbers are just so much higher than what people expected. I mean, you're talking about doubling CapEx on a base of, you know, 100 million. Like 200 is like the new black, basically. But the problem is that the payoff is two, maybe three years down the road and that's what investors are struggling with. It's not that, hey, you know, if Google says we're going to spend money, we can get a return on it via search or via, you know, a cloud, it's when, right? And then Amazon, it's even further when. So really that is, that is the issue. And we can talk about some companies, you can make an argument that the payoff comes sooner than later, but really I think it's the duration risk. And by the time the duration happens, by the time we get there, will the world need this much AI capacity? And I think that's, that's like one of the questions that people are asking themselves.
- [01:54]
A
So why is that, why is that the concern now? Because this was always the case, even last year. And I feel like over the summer, you know, last year these tech companies could announce the biggest capex number in the stock would rally. In fact, the bigger the better. But now all of a sudden, is the market just kind of like, well, wait a minute, why is the market waking up to like the realities and like wanting an ROI now? Why is there, why do you think, what do you think is driving the sentiment shift?
- [02:18]
B
It's because the numbers are getting so big. Like when you're using all of your free cash flow for two years, like literally Amazon will use all of their free cash that they generate from the business, right, Very profitable business for the next few years to fund the payoff in 27 and 28. That is eye opening, right? So now look, you know, they have the cash to do it, right? They don't really need to be dependent on the outside financing markets. Whereas like you're seeing it, other companies who are dependent on the outside fancy markets are kind of running into issues. So I, I think it was, it went from okay, you have a whole lot of cash, you're going to spend a good chunk of that and like half your free, you know, half your free cash flow to the, like you're going to basically spend all of your free cash flow and dig into your cash reserves pretty significantly for something that we won't necessarily see the payoff for, you know, two years plus.
- [03:12]
A
Well, let's start with Amazon since you brought them up. So I think they, they're reporting $200 billion in capex, which is higher than all the other Max 7 companies and their free cash, their cash from last year was like what, 120, 130 billion. So they're going to have to actually maybe borrow money to make up that gap between their, the cash they generate from their operations and how much they're expected to spend in 2026. Is that what's driving your concerns as well for Amazon?
- [03:42]
B
Amazon we're still outperform. We did take our price target down, but that was mostly like, you know, our, our current price target on the stock right now is 260 and it, you know, kind of, you know, under 200. That's kind of plenty of upside. So yeah, it's kind of unrelated I guess. What else, what I'll say is yes, like, so when you add the higher capex, you have to depreciate it, right? So you're like, okay, we're going to spend $200 billion next year. That 200 billion, let's say you have to take a sixth of that your expenses every year for six years. So that depresses your margins until you start to see the positive revenue from that. But that revenue doesn't show up for, you know, they would say 18 to 36 months. I would like to like think of more of 18 to 24. But the point is that is like far in the future of when investors like to go, hey, what's the company worth on next year's earnings, right. You have to start to say like, well what's it worth on 27 or 2028 to, to factor that in? So that's really what it is. And I'll say like when I look at where the street estimates came or came out this morning, as far as the institutional analysts, you know, they're looking for something like 20% AWS growth the next two years. We're at 30%. Right. And like to me this is just math. Like you go, this is how much you're spending, this is how many gigawatts you get. This is the revenue per gigawatt. Yeah, like the price, the, you know, the pricing could get weaker as the market gets more competitive. But like within a range you get the numbers and it's almost like the, the, the analysts are just struggling to like they're afraid of letting their numbers go up. And then the, the buy side, the institutional buyers are like, hey, like we generally have agreed with these like kind of spending cycles. But like what? You guys don't agree with us? So listen, I think this is the kind of thing where everyone's gonna look at everybody's numbers over the next few weeks and be like, wait a second, if there are folks that are like kind of comfortable and my clients are saying yeah, like yeah, if they spend $200 billion, like why wouldn't they grow 30% albeit it's going to take time to get there, that you'll see numbers go up. So I think Amazon could self correct, I think as a stock pretty easily within the next few weeks because the core retail business is doing great. Double digit retail, the margins are fine. You know, listed on the near term AWS, they accelerated 4 points. They gained more dollar share sequentially than Azure the last 2 quarters which was not the case for the prior 3, 4 quarters. And then they did gain basically the similar dollar share as Google Cloud, which we'll talk about because that was actually quite bullish for Google. But yeah, we think Amazon as a stock should be fine. Just I think people need more time than overnight to process the numbers because it's quite complicated.
- [06:21]
A
You know, my theory is on this. So you're right. Like I was surprised to see the reaction in the stock today because of like the acceleration in, in aws. I'm like, wow, the fact that they're accelerating, growing at the fastest rate in three years, very impressive. I feel like it might have to do with Andy Jassy. I feel like maybe the street just isn't as confident with Andy Jassy leading the ship. He doesn't have the same level of aura as like Bezos obviously, or even some of the other guys. Sundar at Google and Satya at. At Microsoft. Maybe that's silly, but I really think there's something about Jassy and he's like an unproven leader in this situation and they just, the street might not trust him.
- [07:02]
B
So I'm gonna kind of disagree in that.
- [07:04]
A
Okay.
- [07:06]
B
Bezos was not on the earnings call for many years actually prior to Jassy kind of becoming CEO was just the CFO who did the earnings call. And you could say it was a little more like just kind of question and answer and like very tactical. We ask model questions or this, this. Whereas now they're kind of. It's more of let's put a story out there and then we'll take a limited amount of questions and you know it. So. So yeah, I would say, look, Jassy is the person who created aws. So like, which, you know, he created one of the greatest businesses to ever exist. So I think you can't take that away from him. And when he became CEO, they were already overspending, building out the fulfillment centers, kind of in the middle of COVID when they kind of got false signals that like they thought the commerce business was going to be much bigger because of COVID pull forward when in fact, like, oh, people will go actually back to buying certain things in stores and et cetera. So yeah, like, I actually, I think it's not that. And I will say on, you know, as far as, you know, Sundar at Google, they. A period of time people were like calling for his head, so.
- [08:10]
A
That's true.
- [08:11]
B
Listen, it's easy to blame a CEO. You go through these waves. I think at the end of the day, Jassy will vindicate himself. You know, look, I think that he's, I think he's being ve. Like he's literally sent the call last night, look, this 200 million is. 200 billion isn't like, you know, like blue sky. Like we literally can see the exact return on investment. Now he's not telling the street what it is we. Right. And it probably wouldn't be a bad idea for Amazon to host like an analyst day and literally like lay out like, here's the five year plan, here's the return on investment. Now maybe they don't want the competitors to see it. It's been many years.
- [08:47]
A
Or they don't know.
- [08:49]
B
I know, I think it's wrong. I think they absolutely do know now they don't know. Like, does it take 18 months to get a data center out? Like maybe it used to, now it's 24 months. Maybe they're worried it's going to go to 36 just because of all the backlogs. Maybe pricing comes out. So there's timing. I don't think they know quarter to quarter, but I think if you're looking at over the next four to five years, I, you know, unless like everybody's like way wrong on the adoption of AI, I think they actually know with pretty high certainty.
- [09:17]
A
I that so yeah, I'm going to be watching that for sure. But yeah, I just found that interesting where Amazon was the worst performing MAG7 stock over the last 12 months. And I just, I'm just trying to make sense of that. And that was a silly theory that I came up with.
- [09:28]
B
Well, I will say this. And they did. Here's the rub for Jazzy. He was late to recognizing the importance of AI. So Google was always first, right? They were like, they created the transformer model. They were always like at the leading edge of machine learning. You know, Microsoft like smartly listened to, you know, Sam Altman when he's like, you need more capacity for me. They're like, okay, like you. Now Microsoft could say like they saw it too, but like, I'm gonna kind of believe that like ultimately Microsoft had a deal with OpenAI and they kind of trusted his signal, they were providing and Amazon kind of just didn't see it. And so they had this like, very successful, we'll call IT Legacy Cloud AWS business that wasn't necessarily based on GPUs and AI and it's doing great. And yes, competition like had been increasing and they were kind of doing their best to fend off Azure and fend off Google Cloud. But then AI hit and literally they could not move fast enough or spend the money fast enough to catch up. But now I, you can make an argument like you could see them catching up and so they've kind of made up for like some of their past mistakes.
- [10:36]
A
Well, let's, let's, let's pivot from Amazon to talk about a company that seems to be the leader now when it comes to AI, which is Google. You recently upgraded the price target for Google after their earnings. And so I want to, I want to start there. What do you think makes Google's AI story different than Amazon's story? Because very similar. I mean, obviously Google's cloud is going faster, which we're going to talk about. But what do you, what, how do you see those two companies be different?
- [11:01]
B
Sure. So I mean Google basically is seeing the quickest return on investment because they basically have, we'll call it two and I'll call it two and ultimately it'll be three different businesses. Right. So you have a search business that relies on compute to do a better job answering your search questions and matching the advertising. Then you have the Google Cloud business that provides the same compute that businesses can buy that Amazon AWS and Microsoft Azure sell. Right. And then the third stool is going to be AI, Right. It's going to be Gemini. And the idea of it, that's both a model that enterprise customers can use and then ultimately a consumer tool. And we'll talk about it. But they should be in the pole position to have like the best consumer assistant. Everyone get all freaked out, excited about claudebot. Now we're calling it something else.
- [11:53]
A
Open Claw.
- [11:54]
B
Open Claw. Right, because we don't want to, you know, you don't want to violate an anthropic trademark there. But ultimately Google Alphabet is in the best position to ultimately provide that to the consumer and in kind of an easy and safe way. So. But what that allows them to do is move their computer from their different businesses. Right. Whereas you know, effectively Amazon has two businesses. But you can argue like how, you know, compute intensive is retail. It used to be very, you know, relative, it was in the past more, but now it's a very small percent of their compute. Right. Whereas like Meta has one business. Right. But Google kind of has two, kind of going to three and then potentially going to four. Right. Like if you separate Gemini between consumer and enterprise. And so as a result of that, again you saw on a dollar basis, gcp, Google Cloud actually generated the same increase sequential in dollars as Amazon did, which is pretty amazing and more than Microsoft. Right. So you could say that, you know, okay, Google Cloud is now taking share from Microsoft and cloud. On top of that you had search accelerate. And then there's, you know, what they're spending relative to the free cash they generate is like not as impactful. Right. They still have positive free cash. Like we're still forecasting in the next few years that they're going to generate, you know, positive free cash per share, whereas the other companies are going to eat up all of their free cash to fund. So yeah, so you can make an argument that right now Google right now is kind of in the best net near term position.
- [13:34]
A
That's a very interesting point that you made though where like the more and more compute that Google brings on. All the investment that Google make, they're saying that they can deploy it across like their entire business, whether that's for YouTube, whether that's for search, whether that's for cloud. And like they can see a return on that investment way quicker because of that, instead of having to wait for, you know, demand or whatever.
- [13:56]
B
Well, you could argue they've been constantly building too, right? Like they, you know, again, the biggest rub to Amazon is they just almost, they weren't leaning into building centers fast enough and they kind of got it. It just took them a year to kind of fix it, whereas Google never really stopped. And then again, their business is fungible. Like, they can kind of maybe you move search compute away from countries of the world that maybe don't monetize particularly well because you want to allocate it to Gemini corporate customers who are willing to pay you big bucks right now.
- [14:29]
A
That's a great point. Now, speaking of search, like, like you mentioned search was up. Was it 17%? Which is, which is wild. Like search is accelerating, right? And I mean, not Too long ago, nine months ago, 12 months ago, everyone's like, oh, search is code, Google's code. They're dead, Chad. GPT is going to take all the search volumes. The fact that search is accelerating is like, mind blowing. Do you ever see that? Do you ever see that slowing down? Do you, do you, do you still see the search business to be a threat or to be under threat at all in the mid to long term?
- [14:59]
B
I mean, look, the search business needs to become the, you know, chatbot agentic business, right? Like, it's a transition. So the idea is that, you know, okay, most of the revenue at 70%, almost all of it is like coming from what we consider traditional search, right? You go to Google, you ask a question, there's a blue line, right? More and more people are then, like, they're looking at AI overviews. You're just starting to see some ads. And then, then over time, and then it's AI mode, right? Ultimately, search becomes AI mode, right? Like at some point you go to Google and literally it is AI mode, right? And then it's like, okay, how they'll, like, you'll find video, different things. We'll, we'll see. But like, so the question is, how successfully can they manage that transition? So from blue link search to AI mode and then, and then Gemini will, you know, we'll see. Like, maybe they're going to call Aimo Gemini at some point, you'll rebrand that and then it'll be like, okay, I could have Gemini as an app on my phone versus Gemini Search. But like you will literally just, it'll be instead of saying Google it, you'll Gemini it, right? Like can they make that transition? So that's from an ad standpoint that, that, that, that's the key over the next few years.
- [16:10]
A
Well, I mean I think they're doing a good job of like showing better results in this, in the AI overview. I mean I use it all the time now. But, but that can they make it as profitable, right? Like the search business is the greatest.
- [16:19]
B
I think there's no question they can make it as profitable.
- [16:21]
A
Can you talk more about that?
- [16:22]
B
Because they told you, right, they've said that users who use AI mode, they ask their, you know, they put in longer questions, right? So like they can tune your answer better and then they ask follow up questions. So like if you're, especially if you're thinking like searching for like a product or a vacation or a service, like ultimately if they can match you with the best service at the bottom, that click that brings you a service is that much more valuable to the advertiser because you have a higher chance of converting and therefore they can charge them more. And they've already trained advertisers how to think about their business this way, right? Like that's how performance advertising. So yeah, I think it's, and I mean they've given you stats, right? They basically talked about. The point is they said on the earnings call that everything around AI is driving more search engagement. And that's a positive.
- [17:15]
A
Yeah, I mean that's true. And, and so I mean I, I think, I think it was that but also like the growth in Gemini, right? Like the growth in Gemini just is just insane. What 750 million monthly users now they're still behind Chat GPT.
- [17:29]
B
But yeah, yeah, we all look at the market share, right, and they've been gaining share against Chat GBT and I think that's probably like say from a near term stock perspective that's probably the biggest like factor that you know, if Chat GBT launches a new model which then they put into OpenAI, launch a new model they put into Chat GBT and then they start to show more of a positive inflection in users user share that that will hurt Google. But I mean do keep in mind on Android those numbers are heavily influenced by Android because you know they do a good job of like getting you to open up Android Gemini on Android more where like it would be Very interesting. Like you look at the data on Apple, right Where you have to like more proactively download Gemini onto like Apple products which they're seeing good traction but that, that to me is more indicative of the success.
- [18:23]
A
That's a good point. But also like Google has the advantage compared to Chat GPT where like they have this money printer ad business.
- [18:29]
B
Right.
- [18:30]
A
And, and so I wonder how long they're going to keep Gemini ad free to continue to take market share from ChatGPT because ChatGPT says has said they're bringing ads to their platform. So then may maybe Google will kind of delay their ad strategy on Gemini to keep it to try to continue to gain market share.
- [18:48]
B
Well I think that's right and because they don't need to, right. Like it's first they're not even fully penetrated with ads on AI overviews then it's get ads to AI mode, then maybe you move the whole thing to AI mode, right. And then at some point yeah it'll all be Gemini. But the point is like there's no rush, they don't need the money again 17% growth, they're doing just fine. Whereas chat GB, you know OpenAI like I, I think investors want to see like where, where does the revenue come from? Right. And so I want to, I want.
- [19:15]
A
To zoom out a little bit and talk more big picture. So we've seen, we've seen these companies accelerate capex. The market reaction hasn't been so great this time. Do you in. Do you think it's possible some of these big tech hyperscalers scale back their capex at all? Do you think maybe Q2, Q3, they come out and say you know what, we're going to cut 1020 than we expected. You don't think that's going to happen at all?
- [19:37]
B
No, I can't. I mean like they have to, I.
- [19:40]
A
Mean I don't know.
- [19:41]
B
You let it. Well the only reason the numbers remember they got annual and we guessed at the quarterly impact right. So it's entirely possible supply chain delays. Like you know, maybe the quarterly build is slower because like you didn't get a data center to bring on right. Like you couldn't get the power etc so it's entirely possible that like maybe the cadence but like I, I don't see any of these companies. The only company who could maybe do an about face would be Meta. Whereas if they launched whatever the newest version of their frontier model is and if it kind of falls flat then everyone's gonna be like why do you need to spend this much money if you can't produce like a frontier model, why don't you just use Claude or use Gemini or you know, you know, etc. So they would be the only ones, in my opinion, that cold pull back the rest of the companies because they are again, are running data center hyperscaler businesses to sell tokens. Like they're not going to pull back in the next 12 months.
- [20:37]
A
They're not going to get the CFO. CEOs aren't going to get the little queasy from the stock price correcting.
- [20:42]
B
1520. They have like there is a spreadsheet. Each of these companies, they were literally like for every dollar we put in Capex, this is what the profit is in two to three years, like within like a very high degree of certainty. Now again, the only reason that won't be there is if three years from now the amount of usage of AI compute ends up being like way less than what everyone forecasts when everyone's just talking about there's an absolute shortage of capacity right now.
- [21:10]
A
Okay, gotcha. I mean that's, I think, I think that to me is like the biggest. Everyone says that like, yeah, there's no way they're going to scale back Capex and I want to believe that as well. But I mean I just, you know, people can do weird things, especially when like the, the markets start turning. So it'll be interesting to see what happens. Do you have, do you have a couple minutes for an Uber question? If not, we can, we can have. Okay, so you cover Uber as well. They recently reported and you downgraded the stock, right. Or did you cut price target? Price target.
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B
You reduce the price target, like right, $15.
- [21:42]
A
So you cut the price target, but you still. Yeah, yeah. You still have an outperform rating on it. I'm looking at it right here. So I just want to kind of talk through Uber. You know, a lot of people think that they're going to be disrupted by the future of Robo taxis and all. And you know, with, with Waymo expanding like crazy. So I just want to turn it over to you. Are you concerned about that when it comes to Uber being disrupted or. I guess I put a simply put, what is it about Uber's business that makes you the most nervous and, and what are you most excited about?
- [22:10]
B
Sure. So the reason we cut our price target was we had to take our profit estimates down. So the reality is like, you know, the business is not running as profitable as we had previously thought. Most of that has to do with them leaning into Uber one membership growth and just other promotions to drive usage. And so I mean it did pay off. Uber, they had 46 million Uber members. Uber one up 55%. I think that's probably faster than any other subscription models probably growing right now. So yeah, Uber one completely working. And then the way they generally get people to sign on is they largely target you through food delivery and once they get you to like sign off you can get like deals on rides, free upgrades, cap surging, et cetera, et cetera. And then they're trying to change user behavior. But yeah, so, so that was specifically the numbers. But look on Robotaxi, you know we call that a terminal risk. Like, like it's far in the future but everyone acknowledges robo taxi will happen. The big debate, big debate will be do you have one or two companies who run away with the technology, does it become commoditized? And you're going to have 10, 20 companies. Every automaker will be able to produce a self driving car at some point in the future. And therefore if you can aggregate all of that supply to the consumer Uber, you end up doing well. And like what we already know today is that in markets where Waymo is on Uber it's way more profitable like on a per car than if Waymo just tries to use it itself because it can't, it can't kind of fill all the capacity. Right. And even as simple as like okay, like would you have it do food deliveries or something like if there's no demand for rides and okay, but like you know, and again there are doordash they could go work with them and try and they are right, but like the idea of like if all the technologies in one place does Uber ultimately pull that off seamlessly better than anybody else? That's kind of the debate and I think you know, Uber said they will be in 15 cities globally with Robotaxi again with you know they're obviously not partnering with Tesla but with Waymo and then kind of call it, you know, multiple other partners. I think they just announced this morning we ride in the Middle East. They're going live with I think was 1500 cars. I think 15 000. I don't remember the exact number but so it's coming. So I think Uber's a contact where if you're patient you will get paid. The stock is you know, inexpensive on current valuation. The business is generating a lot of cash flow, it's growing. Very nice. They basically said u S growth will accelerate mostly because they're getting a reprieve on insurance rates in California and they can then pass that on I lower prices and they know when you lower the price for Uber rides, more people use it. But yeah, like look, we fully expect you're going to get more positive announcements at a Waymo, more positive announcements at a Tesla. You'll probably see some foreign companies try to bring cars here as well. But ultimately we think Robotaxi will end up being a commodity. Like it's not going to be controlled by one or two companies. It's going to be like a ubiquitous technology. It's, it's just taking the later entrance longer because they don't have the learnings. I mean look at it. Way more started first, they right now have the perceived safest product. Right. Tesla was like second. They now perceived to have the second. Right. And so just give it time. I think Uber is just a stock where you give it time, you'll make money. Yeah.
- [25:37]
A
And if it does become a commodity then Uber has, I mean they, they, they control the demand. Everyone's going to get on there and.
- [25:42]
B
Then, and then like you're not going to go to check four apps, right? Like if you're leaving a sporting event, you're the aggregator that's busy and you like, you're not gonna go check four apps and then project. You're just not gonna do that. Right. You're gonna ultimately go to whatever app that you trust is giving you the fastest, cheapest ride.
- [26:00]
A
I also feel like like robo taxis fill in perfectly when it comes to like, you know, usually when it comes to ride demand there's always a surge. Whether it's a surge, you know, in a certain time of day or at a concert or, or sports events like Uber kind of can fill in that surge by with the robo taxis and like you said that probably results in the highest profitability of these robo taxis like they're seeing in the markets where Waymo is on Uber. Right. They're probably seeing the highest return. So it's a very interesting company to watch and I look forward to your research on it. So Jason, thank you again so much for coming on talking and you know, hopefully, hopefully get a little bit of break now now that some of the.
- [26:34]
B
Major, major mid cap next week, it's not over. Earnings season lasts about six, six weeks.
- [26:41]
A
That's true.
- [26:41]
B
So I guess we get happy. We're not, it's not all within four or five days but yeah, the earnings is not over. So more to come.
- [26:47]
A
I know, I love it. And I appreciate your your commentary on it. Thanks again for coming on.
- [26:52]
B
Sure, thanks.
- [26:52]
A
Have a good one. Well, all right guys, hope you enjoyed that conversation with Jason Helstein. You know, my favorite part was how Jason broke down how Google is likely to see a quicker ROI on their AI investment because of all the businesses that they they have. I also like this take on Uber and what happens to them in a future of Robo taxis. Let me know in the comments on Spotify and YouTube what you thought about today's conversation. And while you're at it, consider giving us a five star rating on Spotify, YouTube, Apple, wherever you listen to your podcast. All that engagement really does help us out and it helps other people find the show. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow.
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C
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