00:02:59 · John Coogan
[00:02:59] S0: it. Cool. So Google stock is cratering. It's down 12 and a half percent. Earnings miss, rare. And here are the results. So revenue. Consensus was 100 and 128,000,000,000, came in at a 127.6. Like, only a third of a percent miss down. But to the negative, you usually want to be beaten, these consensus estimates. Earnings per share, not nearly as good. 30% miss. They were expecting $3 a share, $30.01, came in at $2.12. And so there was a little bit of nuance there because some of the earnings miss was related to owning SpaceX stock, which traded down in the interval, and so they had to take a little bit of a write down on that. But even if you factor that out, so that was an 8,700,000,000 loss that they technically took on the equity investments. That reduced EPS by 55¢. And so even if you exclude that impact, EPS still would have been $2.67, still below the $3.01 that Wall Street was expecting. So you can you can factor out that nuance and still get to a place where something went slightly awry. There's a lot of good stuff happening, a lot other worries, and that's why the market is reacting the way it is. So the first key takeaway is that cloud is just a monster business. There was very interesting reporting years ago in 2018 that back in 2017, Larry Page had considered pulling the plug on Google Cloud. He was like, we're competing with AWS. There's two executives that were sort of fighting at the time. There's too much going on. Maybe we shouldn't even be in this business. Maybe we shouldn't even do cloud and have a cloud platform. Well, that it's a completely different world today because cloud is so important to the business. Revenue doubled to $30,700,000,000 Operating profit tripled to $11,100,000,000 Operating margin is at 36.2%. It's a fantastic business. If it were independent, it would be worth an incredible amount of money. Hundreds of billions, maybe a trillion dollars right there just in that value. And so, Google and Alphabet truly has become this diversified portfolio of bets. Search is just one of them. They got YouTube. They also have cloud, obviously. So, the cloud backlog now is $561,000,000,000 of companies, labs that have gone to them. We just saw this with OpenAI buying cloud and TPUs. There is a lot of demand for their services. And what's interesting is that you can look at that number $561,000,000,000 that's ton...
00:05:26 · John Coogan
Is that over ten years, you know, we saw in the Anthropic s one, some of these contracts go out, you know, till Years. 2033, 2036. But 55% of that cloud backlog is expected to be recognized as revenue within two years. So even though you have this big number, you're getting half of that 275,000,000,000, something like that, over the next two years, that's pretty quick for a business that did 30,700,000,000 in revenue. You're getting two fifty coming really fast. So that should be driving valuation upwards. Search advertising though, growth slowed. Last quarter was 17%. This quarter came in at 12%. AI is accelerating query volume, so they are seeing a ton of token production. You see that when Sundar steps on stage and shows the progress of their models, the diffusion of Gemini models. Query AI mode is actually taking share. People are using it in place of the default search, not really by their choice a lot. It just sort of pops up a lot of the times. But it monetizes less effectively than traditional searches right now. Now, what's interesting is that at the end of the day, it's a person asking a question and getting a bunch of pixels on a screen. And if you're on your phone, it's a vertical screen that's, you know, nine by 16. Right? Square for some. Square for some if you're on the Duo. You're Mark Garman. You're Mark Garman. But at the end of the day, as a as a... If you're Instagram, you want to monetize every pixel that you're showing the person while they're on Instagram. If you're Google, when someone asks a question, you want to monetize every pixel with ads and that's what has happened with Google Search over the past decade, right? There was a time when it used to be a very clear call out for one sponsored post at the top and now it's been, you scroll the whole first page and it's all ads. AI mode isn't that. AI mode might have some monetization going on, but it's not every single sentence is a sponsored ad just yet. They got to get there. They're not going to talk about that because that's rough and that's complicated. But it's going to be a hard road to figure out exactly how do we monetize the full response. Everything that we're showing to the viewer should have a lot of things, a lot of links and and and offers and brand messages that are monetizable, paid for, bidded auction style to really maximize every view that they get.
00:07:53 · John Coogan
And so that is the is the coming challenge, but, you know, they've been doing this for twenty plus years. And so that is the path that they're on. The last thing, Google is spending $200,000,000,000 on AI infrastructure this year. 2026 CapEx guidance, dollars 195 to $2.00 $5,000,000,000 right in that $200,000,000,000 range. They are also signaling that they will expect that they expect a significant increase in 2027. Q3 spending alone was 51.4. So they're already on their $200,000,000,000 run rate, and next quarter should be higher, following quarter should be higher, etcetera. So let's go. And then the last thing is that Gemini crossed a billion MAU, monthly active users. The first party AI model, the API is doing 32,000,000,000 tokens a minute. Hard to say what that means in the modern era because there's so many models that are more token efficient and really just getting stuff done, getting answers, satisfying users is what matters. But it's up 40% quarter on quarter. Clearly, they're serving more models. More people are using them. And then, of course, they announced Gemini four Carbon, the newest frontier model, the day or before earnings, two days before earnings, sort of trying to reassure investors that they are still on the frontier, that they're... That the benchmarks look good and that the adoption will come and more importantly that they are vertically integrated. So even if they don't show up on the ramp data and the open router data, just having the frontier model internally is super valuable because it will drive YouTube, it'll drive AI search, it'll drive internal workloads. All... There'll all be all these things where they aren't going outside for costs and they will be vertically integrated.
00:09:40 · Jordi Hays, John Coogan
[00:09:40] S2: Yeah. Seems like it's gonna it's gonna be incredibly strategic to be able to get Frontier Intelligence at Yeah. 90% low, you know Exactly. Lower than market prices. [00:09:49] S0: Exactly. Exactly. And then there's a whole bunch of other interesting things. They can fine tune their own models. They can optimize them for their infrastructure. What do you... The model that works in Google search, it does feel different than a Claude model or a GPT model because it needs to be really fast because people expect that from the AI search results. And then on YouTube, you expect something different. You expect something that can piece... Can crawl over all the transcripts of YouTube with no, you know, robot block up, no captchas and whatnot if you're asking for extra context. So lots of lots of optimism there, but rough day in the market at least. [00:10:30] S2: And a little bit rough for Berkshire, who their sort of blended price per share of their recent $10,000,000,000 investment is around $350 per share. They did some part into Class A, some into Class C, down pretty dramatically from that point. Alphabet now sitting at $280 a share in just around six months. [00:10:58] S0: Got it. Well... [00:11:00] S2: And, yeah. It's like the OG Google bear case is like rearing its head again. Yeah. [00:11:05] S0: Right? Yeah. That's right. [00:11:06] S2: And, you know, they've been... It became sort of There was a viral thread. I'll try to find it. What are [00:11:15] S0: talking about from levels.io maybe?
00:11:15 · John Coogan, Jordi Hays
[00:11:15] S0: talking about from levels.io maybe? [00:11:19] S2: This was... Basically this guy, July 23, Max Anderson says, As someone who has personally spent 500 ks a month on Google Ads for years, I can tell you with certainty this revenue growth in search is artificial and extremely unhealthy for Google's business long term. He goes on to make a bunch of points, which have been refuted in different ways, but Sattrini brought it up yesterday. The souffinator at the time pushed back on a lot of this, but either way, it just felt like search was already perfectly optimized. I think I was bringing this up probably over a year ago. Have you actually paid attention to a Google search recently? Where it's like, for certain queries, it's hard to find an organic result, right? Where it's like ads at the top, first three results are ads, then you have maybe one or two organic results and then a bunch more ads.
00:12:12 · John Coogan, Jordi Hays
[00:12:12] S0: I mean, have have you... Do you understand the structure of, like, finding a mattress on Google? It got so crazy that, first off, there would be Google Shopping callouts that are also paid for. There would be a, Google Shopping widget. Then there would be three or four sponsored results. So the links would be, you know, specifically this brand, specifically this brand, just directly brand keyword advertising. But then you'd go down and you get to mattress review sites that were like... And they'd all been purchased by the various mattress companies. So, like, there was actually no where to to end up. There was nothing that you could go to. There was no, like, Wikipedia. And and, yeah, it's been it's been crazy, but but this stuff's just sticky. People are just in their Yeah. Flows still. So that's why you only see, like, slight deceleration. It's not like falling off a cliff or anything like that. [00:13:02] S2: Yeah. Anyway. One other interesting detail. So Microsoft had earnings as well. Yeah. CapEx came in at $38,370,000,000 Estimate was $45,900,000,000 So Google was $51,360,000,000 Estimate was 55,700,000,000 This wasn't because they didn't want to spend the money, it was because of delays. So they're like, they're trying to spend Powered shell delays. Yes. Just a variety of