Episode summary
Google Stock After Earnings: Is AI a Threat to Search?
Summary
The host argues that last week’s selloff in Microsoft, Amazon, Google, and Meta says less about the end of the AI trade than about how expensive the build-out has become. He says the key questions for hyperscalers are spending and the return on that spending, and he points to strong cloud growth at Amazon, Microsoft, and Google as evidence that demand is still there.
The bigger shift, in his view, is funding. He says CapEx is now outrunning internal cash generation at three of the four companies, with Alphabet posting negative free cash flow of $9 billion, Meta’s CapEx exceeding operating cash flow, and Amazon burning cash over the last 12 months. Microsoft is the exception because it remains cash-flow positive, which he finds notable.
Alphabet is the most worrying stock in the group because its core search business faces a direct AI threat. The host says Gemini has crossed a billion users, but he frames Google’s situation as the classic incumbent’s dilemma: defend search or cannibalize it to compete. Even so, he says he still owns Alphabet and is comfortable owning dominant businesses around 20 times earnings over a multi-year horizon.
Key takeaways
- The host says Amazon, Microsoft, Google and Meta still show strong cloud demand, with AWS up 39% to $46 billion and Google Cloud up 103% to $30 billion.
- He argues the main story is rising CapEx, with Amazon expecting more than $220 billion next year, Microsoft about $170 billion, and Meta about $220 billion for 2027.
- He says three of the four hyperscalers are now spending faster than they generate internal cash, while Microsoft remains the cash-flow positive exception.
- The host sees Alphabet as the most exposed to AI disruption because search is its core business and AI could chip away at that dominance.
- He says the selloff has made the Mag 7 look historically cheap to long-term buyers, with many names around 20 times earnings.
Notable quotes
“what you want to look at here are two things when you're looking at these hyperscalers. Number one is their spending and number two is the return on that spending”
“Amazon, AWS, their cloud business, grew 39% to $46 billion, fastest growth in nearly 5 years”
“Microsoft Azure, their cloud business. Microsoft discloses Azure revenue in dollars for the first time, always a good sign”
“Google Cloud, revenue rose, wow, 103% to $30 billion with operating income of $11 billion more than tripling in a $500 billion backlog”
“AI is obviously a threat to search”
How the episode opens
Good morning. This is Dylan Jovine with Behind the Markets, happy Monday. Today is Monday, November 2nd.
I hope you all had a good Halloween. It was my last Halloween with my daughter before she goes off to college, but it was a good one. Saturday was a lot of fun and I'm grateful for it.
Very bittersweet time in my life in that way, but this is the nature of things, isn't it? Anyway, today I'd like to talk about the thumping that we took last week in the markets and frankly in our model portfolios and in my personal portfolio. You know, whenever I take a good thumping in business or in the markets, I'm reminded of the Shirelles song, "Mama said there'd be days like this.
There'd be days like this, Mama said. It was one of those weeks, you know. So, it's interesting because, you know, Microsoft, Amazon, Google, they all reported last week.
The week before that was Meta and we got thumped in IO events, but that's another story. We've updated that. But, you know, what does it tell us about the AI buildout?
I mean, basically what you want to look at here are two things when you're looking at these hyperscalers. Number one is their spending and number two is the return on that spending. They are spending a ton and their cloud business is growing a ton.
Holy mackerel. They're getting a return on investment. Amazon, AWS, their cloud business, grew 39% to $46 billion, fastest growth in nearly 5 years, almost a $184 billion annualized run rate and the operating income was $17.8 billion.
So, there's a lot of profit margin there, very profitable business. Really very good backlog reached $578 billion. Microsoft Azure, their cloud business.
Microsoft discloses Azure revenue in dollars for the first time, always a good sign.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai threat to search
- hyperscaler capex
- cloud growth
- free cash flow deterioration
- gemini user growth
Companies and tickers mentioned
- AMZN
- MSFT
- GOOGL
- GOOG
- META
- Amazon
- Microsoft
- Meta
- Alphabet
Watch the episode
Watch “Google Stock After Earnings: Is AI a Threat to Search?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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