Prof G Markets
00:16:37 · S7, Ed Elson
[00:16:37] S7: Black Friday is around the corner, your biggest chance to grow sales this year. Don't wait. Realize is Taboola's advertising platform for businesses, letting you launch campaigns on top premium websites beyond search and social. Add Realize to your media mix and scale this q four. And as an exclusive offer for podcast listeners, new customers get $700 credit back. Just search Realize Podcast on Google or use the promo code podcast 26. Don't miss out on this limited time offer. Terms apply. [00:17:17] S4: We're back with Prof G Markets. Earnings from Alphabet, Amazon, and Microsoft flooded in last week, and investors were not happy with the results. Despite a pop after reporting, Microsoft ended the week down 2%, and Amazon and Alphabet closed down 411% respectively. The selloff spread to the rest of tech as well. The Nasdaq one hundred is now off more than 10% from its peak early last month, putting it in correction territory. All in all, the biggest AI and chip stocks have lost about $5,000,000,000,000 in market value over the past month. So why are tech investors selling? Here to break it down, we're speaking with Deirdre Bosa, founder and host of Deirdre Bosa Live. Deirdre, good to see you. So AI and chip stocks have lost about $5,000,000,000,000 in market value since the beginning of October. This has been a pretty dreadful month and certainly week for practically every name in tech right now, even the companies that seem to report earnings. I guess let's just start with your overall reaction. What is going on right now?
00:18:30 · Deirdre Bosa
[00:18:30] S8: It isn't like we haven't been here before. Earlier on in the generative AI cycle, markets have become anxious. They've started to think, okay. We are spending all of this money, hundreds of billions of dollars, trillions even on this AI build out, but where is the return on investment? Right? Like, when is this AI spending going to pay off? And I think we're in another one of these moments, but at the same time, what's different this time than maybe what we saw a year ago or in the past is that the balance sheets of some of the healthiest, safest companies in the world are changing. So something that, you know, I look at and pay really close attention to is how much debt is being issued now. Right? And this was sort of a neo cloud thing that's been happening over the last few years. Neo clouds are, you know, the companies that are serving GPUs and AI infrastructure to other companies. But of course, you have the hyperscalers as well, right, which is Amazon, Google, and Microsoft. They have typically had essentially fortresses as balance sheets. Right? They have a huge amount of free cash flow, and they've been able to fund their build out, but something has changed this year. They've actually been tapping debt markets more. So just to put this in perspective, this is total AI linked debt issuance. Numbers come from Bank of America. In 2025, it was nearly $400,000,000,000. This year, it's gonna be about $655,000,000,000, and next year's forecast is going to be $1,000,000,000,000. So this is just a huge change in how we're actually financing the build out. It means that companies, not just the Neil Clouds, but some of our healthiest, biggest, safest companies are relying more on borrowing. So the timing matters more. This question of the payoff for all of the spending becomes all the more pressing because those debt payments, they are due whether or not the AI investments are paying off. So it leaves less room for mistakes, Ed, and it makes any kind of slowdown more painful. And something that you hear a ton of people in the industry say is that demand is enormous. We can't even satisfy the amount of demand we have, and we're supply constrained. But I think what that misses is the whole timing of this. And when you involve borrowing and the debt markets, that becomes a lot trickier, riskier, and timing matters all the more.
00:20:45 · Ed Elson
[00:20:45] S4: And it seems as though... I mean, just looking at some of these news and Google negative free cash flow, Amazon, negative free cash flow. Meta, negative free cash flow. I mean, the only hyperscaler that that isn't negative on a on a free cash flow basis right now is Microsoft. But even for Microsoft, the the number is going down. I mean, who knows where we'll be next year? It seems as though the only way this works is if everyone goes out and raises a shit ton of money, essentially. That's the way it's gonna work. And so if you have... I mean, you said a trillion dollars in debt issuance. You've already got rates rising. You've got yields rising seemingly across the board. You've got the S and P lowering its credit rating outlook for Meta, which just happened this month. I mean, do... Can they even raise that much? Is that becoming sort of the question at this point?
00:21:37 · Deirdre Bosa
[00:21:37] S8: I mean, that is... It's an interesting question. Right? Because you look at the bottlenecks in AI and you think about power. Right? That is a constraint. Chips are a constraint, but capital is increasingly a constraint when you're trying to fund this enormous build out. You're right that only Microsoft has said that it can self fund next year at the same time. Last week it priced in $25,000,000,000 of bonds. So even sort of the companies that have been holding out and saying that we're gonna fund all of this ourselves are tapping debt markets. And you're right. When you bring in rising interest rates, this makes this all the more trickier. And I wanna bring up something that people here talk about. It's this cone of uncertainty. Right? It's very relevant when you think about the build out and when it's going to pay off. So you have to commit the money now, even though the further out you look, the less certain you are about demand, costs, and those returns. Borrowing really adds fixed payments to that uncertain future. And at the same time, Ed, when you talk about the companies that reported last week, their core businesses are slowing. So I don't wanna say that this is just a debt and borrowing story that makes everything more urgent. But the core businesses you saw from Alphabet, right? A few years ago, we were talking about Alphabet cannibalizing itself, but it had AI overviews. It was gonna figure out this advertising piece. That actually hasn't happened yet. When you take a look at Amazon, it wants to be seen as sort of this AI company. But again, its core business isn't as healthy as investors would like it to look to say, okay. You can spend all of this money on the AI build out. So, I think that that is also playing out, and that's what the market is looking at. That's why you're seeing, these huge declines because investors are focused on the core businesses. But I will also give you the counterpoint. Do you want me to Yeah. Do that now?
00:23:28 · Ed Elson, Deirdre Bosa
[00:23:28] S4: Please. [00:23:28] S8: The counterpoint is just as interesting. There's this chart that I posted from the Financial Times, and it pulls on, you know, other data sources, but it shows that this free cash flow, squeeze shows that it's actually supposed to be temporary. So you can see that the hyperscalers... We'll talk about them for a moment. Amazon, Microsoft, and Google, the hyperscalers that are spending the most on this build out are eating into their free cash flow. As you mentioned, Ed, some of them is gonna go negative, but by 2030, that is all supposed to come back. This is Wall Street consensus estimate. This is not my estimate. Wall Street actually expects that Google, Amazon, Meta, and Microsoft are gonna be generating more than $600,000,000,000 in combined free cash flow by 2030. So if you believe those numbers, this is like an insane buying opportunity.
00:24:19 · Ed Elson
[00:24:19] S4: Yeah. And this seems to be part of the crazy thing about this moment in time is that everything, the entire market is... And your expectations around this market are based on projections that are way out in the future that actually no one can say with any real certainty, which means massive upside risk and also massive downside risk. And the two are kind of pushing and pulling against each other. I guess, you know, the thing that's so interesting, usually, I don't actually care that much about market sentiment because usually the way we try to think about on this show is like, what are the fundamentals? How is the business actually looking? And then everything else is noise. But now that we're in this moment where in order to actually fund their own business goals, they have to depend on the capital markets, and they have to go out and raise raise this money, which means that actually they're now dependent on sentiment in a lot of ways. They need investors to feel good about the AI story. Otherwise, they're not gonna be able to go out and raise the amount of money that they actually need to raise over the next few years. So just as we start to wrap up here, you know, you cover a lot of this. You're you're actually in San Francisco. You're, like, interacting with a lot of these people. You just spoke with Jensen Huang the other week. What is the sentiment like right now? Is... I mean, we've had the euphoria stage. I can't tell if we're in doomma stage or if people are still feeling optimistic. Like, what is the sentiment in your view?