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?
00:07:54 · Gil Luria
[00:07:54] S5: It's not the cloud business. Cloud business is doing great. To your point, doubling. And again, doubling to $120,000,000,000 is a lot. Part of it is TPU sales now. A lot of it is the momentum in Anthropic. Talked about Anthropic decelerating, but still added a lot of revenue. And a lot of that goes in referral fees and compute fees to Google Cloud. So that part of the business was great. If that's all they reported, stock would be up. It's the other part. It's that core advertising business. We have long been worried that that business would be negatively impacted by AI. And it is Google Search that was the big weakness. If people stop Googling and start GPTing, that means less ad sales. And they've been able to assuage those concerns for the last couple of years and keep nice growth rates within Google Search. But this quarter, it appeared to abruptly slow down. They're talking about having tough comps, but that's an abrupt slowdown that nobody expected. And sound... And now investors are gonna ask themselves, is it happening? Is the shift to AI now now mean that that very... That the most lucrative business Google has ever been in, which is selling search ads, is that business gonna be impacted? That's why you're seeing that big step down in the stock, is that that's the core cash generator. If that's suffering, and by the way, it's not the ad market that's the problem. Meta accelerated growth to the high 20s last week. Meta is now growing more than twice as fast in the digital advertising business than Google. They're gaining a lot of share. The concern seems to be specifically about what Google is doing in in search advertising.
00:09:42 · Ed Elson, Gil Luria
[00:09:42] S6: Do you believe that that is what is happening? Do you believe that, And to be clear, it's not that the the search revenue is is falling, but the growth is is slowing down. And part of me thinks, well, this is a gigantic business to begin with. A slowdown in growth, I'm not necessarily that surprised by, but do you think that it is genuinely a reflection of people are not using the product as much because they're using other products. They're using ChatGPT. They're using Claude. They're using all of these things that everyone was so afraid would eat Google's lunch at some point. [00:10:20] S5: It's too early to tell. Right? One quarter [00:10:23] S6: Okay.
00:10:23 · Ed Elson, Gil Luria
[00:10:23] S6: Okay. [00:10:23] S5: I don't think investors need to panic about it. It's just this was the the raw nerve that got exposed when ChatGPT came out. When ChatGPT came out, we all jumped to the conclusion that this is going to happen. It didn't happen for the subsequent three years. That's why we're very on edge about the possibility of this change in behavior impacting their advertising business. But you're right. They're still growing. It's one quarter. No need to panic. But it is something that that is very much top of mind because, again, that's where a vast majority of the profit comes from from Google. That is the engine. That is where they had overwhelming share. Remember, we all used to Google. 90% plus share in the search market. In the chat market, there are two. ChatGPT is the number one chat, and then it's Gemini, and now we also have a digital assistant category, which is very adjacent, and Muse took the lead there. This is the concern, is maybe it is happening, and Google's done a good job of selling a lot of ads in the AI flow, but maybe at some point that's not enough because they are losing in that behavior. People are changing their behavior, and maybe that's just accelerating right now.
00:10:23 · Gil Luria, Ed Elson
[00:10:23] S5: I don't think investors need to panic about it. It's just this was the the raw nerve that got exposed when ChatGPT came out. When ChatGPT came out, we all jumped to the conclusion that this is going to happen. It didn't happen for the subsequent three years. That's why we're very on edge about the possibility of this change in behavior impacting their advertising business. But you're right. They're still growing. It's one quarter. No need to panic. But it is something that that is very much top of mind because, again, that's where a vast majority of the profit comes from from Google. That is the engine. That is where they had overwhelming share. Remember, we all used to Google. 90% plus share in the search market. In the chat market, there are two. ChatGPT is the number one chat, and then it's Gemini, and now we also have a digital assistant category, which is very adjacent, and Muse took the lead there. This is the concern, is maybe it is happening, and Google's done a good job of selling a lot of ads in the AI flow, but maybe at some point that's not enough because they are losing in that behavior. People are changing their behavior, and maybe that's just accelerating right now. [00:11:41] S6: What about the CapEx? It jumped again. It hit more than $51,000,000,000 in the quarter. It's up from 45,000,000,000 in the previous quarter. Free cash flow is negative again, but now we're at negative $9,100,000,000. That that jumped out to me. Is it significant in your view, the amount that they are technically losing on a cash flow basis to build these data centers?
00:12:13 · Gil Luria
[00:12:13] S5: Yes. Because it means that they'll have to go back to the capital markets if they keep it this way. Let's not forget. Last quarter, they told us and they just... When they reported, they repeated that they're gonna increase CapEx significantly next year. We're all taking that to to mean that they're going from 200 to 300. That's a lot of capital they're going to have to raise. And the capital is available to them. When we talk... This isn't core weight. Right? That people will be willing to lend to Google. People will be willing to buy Google shares in the market, but still that's pressure. It's pressure on the yield that they're gonna have to pay. It's pressure on the share price. The more they use cash, the more they have to raise. That's gonna be on investors' mind as well. One of the interesting things that they said was we are now starting to offload because we we can't handle all the demand. So again, Microsoft started this strategy three years ago and is now much better positioned to manage its cash flow. Google now realizes that it has to do it as well and is reacting by offloading capacity. That means lower margins, which again feeds into these concerns about the core business.