00:00:00 · S0, S1, S2, S3, Michael Gapen, Gil Luria, Ed Elson
[00:00:00] S0: You know that feeling when too many things fall through the cracks? Monday.com was built for that gap. The AI work platform where people and agents work side by side to deliver more together. Create your first Monday agent today at monday.com. [00:00:15] S1: This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed sponsored jobs. Get a $75 sponsored job credit at indeed.com/podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed sponsored jobs. We just moved into our new house and I didn't realize just how close we were to the neighbors. That's when my friend told me about blinds.com. [00:00:53] S2: Blinds.com isn't a medication but it can improve how you feel about your home. Customers who shop at blinds.com experience excellent customer service from consultation to installation. Side effects include increased privacy and better sleep. Talk to your partner today and see if blinds.com is right for you. [00:01:09] S3: Shop Black Friday all month long at blinds.com. Don't miss huge deals dropping every week. [00:01:20] S4: Money market's met. [00:01:21] S0: If money is evil, then that building is hell. [00:01:24] S5: Show goes up. The [00:01:26] S6: price of never watch [00:01:27] S5: the show sell.
00:01:27 · Gil Luria, Ed Elson
[00:01:27] S5: the show sell. [00:01:30] S6: Welcome to Prof G Markets. I'm Ed Elson. It is October 29. Let's check-in on yesterday's market vitals. The major indices climbed following the Federal Reserve's interest rate decision. More on that in a bit. The yield on ten year treasuries rose. Brent crude remained elevated around $114 per barrel on news that The US may strike Iran again after the midterms. And finally, Oracle shares popped 11% after the company projected a return to positive free cash flow in 2029. Okay. What else is happening? Microsoft and Google both reported earnings yesterday, but investors had very different reactions to the results. Microsoft beat expectations with revenue up 19% year over year. The company also disclosed Azure revenue in its earnings statement for the first time, revealing that its cloud business grew 48% from a year earlier. Shares jumped as much as 5% in after hours trading. Google's earnings, meanwhile, disappointed investors despite posting 25% revenue growth in the third quarter. Advertising revenue fell short of analyst expectations, and the company reported a decline in free cash flow. Shares dropped as much as 11% following that report. Here to break it down, we're speaking with Gil head of technology research at D. A. Davidson. Gil, thank you for joining us. I'm more interested in Google, but let's start with Microsoft, and then we'll get to Google. What stood out to you?
00:03:10 · Gil Luria, Ed Elson
[00:03:10] S5: That it was a clean beat across the board. So not only was the Azure business great, it accelerated from 43 to 48%. This is a $120,000,000,000 plus business. Those are tremendous growth rates at better margins. But also the rest of the business, the non AI business performed well enough that that translated to overall revenue beat, earnings beat, better guidance than expected, a clean beat and raise, which is why the stock is up, and importantly, is the company that still has positive cash flow. Can't say that about Amazon, Google, and Meta. It is true about Microsoft. And right now, that's what investors wanna hear. [00:03:51] S6: That's what I was gonna bring up, which is their free cash flow is still positive. Cannot say the same about Amazon or Google or Meta, which it... That statement in and of itself is quite striking. But it came down significantly, down 27%. Basically, they're spending ridiculous amounts on data centers, but not so ridiculous that their cash flow is negative. I guess talk more about their their spending plans here when it comes to AI.
00:04:25 · Gil Luria
[00:04:25] S5: So what Microsoft does slightly different, it's different than Amazon and slightly different than Google, is they've been relying on overflow capacity from Neo Clouds. So they don't need to build all the data center capacity to meet their customer needs. They just need to build enough that they have good visibility. So they're making fifteen year commitments on a significant portion of their build on, but then they're saying, you know, that doesn't meet demand right now. Let's go get some of the compute elsewhere on short term contracts with these neo clouds that we can still provide what our customers want, but we don't have to spend as much on CapEx. Not to mention the fact that they just have a more profitable business. So the combination of those two things means they can stay free cash flow positive. The reason that's important is that that means they don't have to go to the capital markets. Right? We saw Google with a debt raise and an equity raise. They're still issuing stocks in an out of the market offering. We saw Meta sell stock, and and they're gonna have to borrow, and they're doing special purpose vehicles. Microsoft doesn't have to engage in that. They have positive cash flow even if it is lower, so they don't have to raise capital again. That makes them look better. They're all spending a lot, but Microsoft's doing it a little bit more responsibly, and and sometimes that's all you need to get the credit from investors.
00:05:47 · Ed Elson
[00:05:47] S6: You say it makes them look better. Do you believe that it is better? That it that it that it puts them in a genuinely stronger position? Because that seems to be... To me, that seems to be the big question and the most important question, which is, like, where's the money gonna come from? And if you have to raise it from someone else, which is what we're seeing with Meta, and I'm looking at Meta, which got... Gotten crushed this week, That's kind of a problem, especially if the money for whatever reason dries up. I don't think it will in the case of big tech, but we have seen a lot more pressure on some of those smaller names like the NeoClouds. It seems like Microsoft is in a genuinely stronger position than the rest of the hyperscalers.
00:06:30 · Gil Luria, Ed Elson
[00:06:30] S5: Yes. Absolutely. And and and part of it is that they they have thought... They they have a much more thoughtful approach. Again, they're taking some longer term investments, some shorter term capacity. They're limiting themselves to what they have. Again, they're still expanding their biz... 48% growth in Azure, but still accelerating on a $120,000,000,000 business. Still tremendous growth. It's drawing other revenue. That's important because Microsoft on top of the AI compute is also selling a lot more enterprise software, a lot more infrastructure software, a lot more application software, bumping up the tiers for companies that use Windows and Office products. They're leveraging AI to do that so they can have the resources and they can just draw the limit to say, you know, let's not spend more than what we have. We're generating a lot of cash flow. This is a good return. It's helping the rest of our business. But if we don't spend more than we have, we don't have to borrow. We don't have to be beholden to the capital markets, which we've now seen what the capital markets are doing to Meta. Microsoft doesn't have to engage in that. [00:07:36] S6: Okay. Let's shift to Google. So Google revenue was up 25%. Cloud revenue was up 103% is what I have here. The stock immediately tanks. What are investors reacting to?