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.
00:13:25 · Ed Elson
[00:13:25] S6: What do you make of these share sales, these equity issuances, these debt issuances? Because it seems like this AI trade is increasingly becoming... Or these companies are becoming increasingly dependent on someone that isn't them, specifically the capital markets. And, you know, that's okay so long as there is real demand in the capital markets. And it appears there is. We can look at Meta's share sale where my understanding it was five times oversubscribed, and it, you know, it worked. They they they wanted to go out and raise, I think, $8,595,000,000,000 dollars, and they were able to do it. But at the same time, you're opening yourself up to this vulnerability, which is like, we're no longer self sustainable on this path. We require help from you, from investors. We need you to fund us via issuing shares or via issuing debt. And I guess the the logical next question as we enter this next chapter is how long can that go on? Like, at what point could the music stop and investors say, we don't wanna do this anymore? And when that happens, I mean, they're screwed. Right? Is that is that too is that too much to say that?
00:14:47 · Gil Luria
[00:14:47] S5: It depends on who you mean by vague. So, yes, capital is finite. It hasn't seemed like it so far. A lot of capital's flown into building out the AI ecosystem, but it is finite. In fact, Meta pointed this out in their filing last week. They said, hey, look, we need to go get capital before it's all gone. SpaceX raised a lot of capital. Anthropic's gonna raise a lot of capital in three weeks. And now Google went out and got a lot of capital. Meta's going in. It's finite. There's only so much equity and importantly, debt investors are willing to fund this build out. So at some point, not everybody's gonna get a piece and some parts of the capital markets may actually already be seizing up, right? That's what we saw with some of these higher CDSs and very high yields on some of these outstanding bonds is that it is finite. Some parts of it may be seizing up, but Microsoft's gonna be fine. They don't need capital. Amazon, Google, Meta, still investment grade. Can probably raise as much as they want to a point. It's everybody else that you have to worry about. Oracle talked about the fact that they've changed their plans, that they're now only going to raise 20,000,000,000, $1,010,000,000,000 in in equity, and 10,000,000,000 of of debt. That's not because they don't need a lot of capital. It's because they have to go to plan b. Plan b is bring your own chip. Plan b is vendor financing. And and because they are recognizing that the the capital is not as available as it used to be. Once you start getting past them in the value chain, in the food chain, and you get the ankle biters like CoreWeave, I'm not sure where the capital is gonna come from.
00:16:36 · Ed Elson, S1
[00:16:36] S6: Gil Luria is head of technology research at D. A. Davidson. Gil, always appreciate your time. After the break, the Fed's path forward. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com. [00:17:04] 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.