00:04:37 · Carol Massar, S3, Ed Ludlow, S2
[00:04:37] S0: Right. And it goes to that bigger question, right? [00:04:40] S3: We still think about this company as a search engine company. And how is AI changing it? Is it giving it increased ROI to some extent, right, on its main business? Like whether or not they're seeing the payoff from all this investment. It kind of is as simple as that. [00:04:57] S4: Yeah, I would say, like, you know, search grew 12%. Yeah. But search revenues did not grow 12%. What's up with that? Pretty simple. I would also say, like, there's another part of the business, which is advertising, right? And advertising also missed by, like, well above $ 1. 5 billion as well. So, like, something's going on there in the advertising broadly. [00:05:19] S2: But those two. [00:05:21] S0: Yeah, sorry. [00:05:22] S4: Yeah. [00:05:23] S2: Those two businesses inextricably linked. I mean, I think that the challenge here is like, to me, this seems existential. I mean, where was a business we cover about this a year ago? Julia Love worked on this story, and it was all about how Alphabet was trying to adapt Google and search for the next generation. We spoke to a small business owner last week who has had to completely change her business, and it's getting killed as a result of the changes that Google has made. She's now trying to optimize for the LLMs. Christina Stembel of Farm Girl Flowers. That's right, because there's search queries. Because the search queries are not leading to her business. So I'm just wondering if there's a link there, Carol. [00:06:02] S0: Yeah, I think it's a good question.
00:06:02 · Carol Massar, S3, S2
[00:06:02] S0: Yeah, I think it's a good question. [00:06:05] S3: Investors are certainly weighing in. [00:06:09] S0: We continue to see Alphabet down more than 7.5%. [00:06:12] S3: Just to recap, we're talking with our Ed Ludlow, host of Bloomberg Tech, as he continues to pore over the results. Alphabet, the headline reporting quarterly sales and profit that fell short of expectations. a sign that the company is failing to generate enough return to justify its massive investments in AI. I mean, still a lot. [00:06:33] S0: $ 111. [00:06:33] S3: 2 billion were sales, ex-partner payouts for the three months ending September 30th, but it was still below or just below. [00:06:41] S2: The $ 111. [00:06:41] S0: 3 billion that analysts had projected. It's costing a lot. [00:06:46] S3: Again, the narrative that has changed in the last three years about where's the payoff on all of this. And let's just remind everybody on Microsoft, continue to watch that one as well. It's up about 4.3%. Microsoft reported better than expected cloud revenue, suggesting the company continues to reap the benefits. of its massive investment in AI. [00:07:05] S0: What's the difference? [00:07:06] S3: None of these companies are exactly the same here, Ed. I mean, but we tend to kind of put them all in the same bucket, these hyperscalers, but they all have different core businesses.
00:07:06 · S3, Ed Ludlow, Carol Massar, S2
[00:07:06] S3: None of these companies are exactly the same here, Ed. I mean, but we tend to kind of put them all in the same bucket, these hyperscalers, but they all have different core businesses. [00:07:16] S4: Okay, free cash flow. I mean, going into these earnings print, that is the comparison that you make. So in the quarter, Alphabet had negative free cash flow of $ 9. 1 billion, which actually shows worsening free cash flow from last quarter was just under $ 6 billion. Compare and contrast, kind of fun. Microsoft had free cash flow of almost $ 19 billion. And if you just take those hyperscaler names or the Mag7, and you look at the stock, their performance since last quarter's earnings, or year-to-date, the best performers are those throwing off cash, Nvidia, Apple. The worst performers in the stock market are those with negative free cash flow. And so you can't take like the search miss in isolation with Alphabet. You have to look at all of it. And so the cloud growth is amazing, astonishing. The spending we know about, but now, you know, Wall Street has this high bar where it's looking at the negative free cash flows. And that also is a factor in this reaction. Microsoft has good free cash flow. [00:08:19] S0: I'm going to give you props. [00:08:20] S3: You said it on surveillance this morning with Tom and Paul, just saying that Wall Street is increasingly, they care about free cash flow, right? You're these publicly held entities. [00:08:28] S0: You're spending a lot of money. [00:08:30] S2: People are looking.
00:08:30 · S2, S3, Carol Massar
[00:08:30] S2: People are looking. [00:08:31] S3: And investors can be fickle for each specific story, but they're increasingly, they care about this stuff and we're seeing it play out. [00:08:38] S2: Hey, Ed, I want to talk a little about the other business over at Alphabet. And forgive us for sticking on Alphabet, but this is the one. [00:08:45] S0: That really has my attention. Are you talking about YouTube? [00:08:47] S2: No, I'm talking about the CapEx coming in below estimates at $ 51. 36 billion. And Ed already mentioned the growth of cloud. Google cloud revenue grew 103% in a different world, Ed. And by a different world, I mean a different quarter. Those two things that I just read would be greeted by investors sending shares the other way.
00:08:47 · S2, Ed Ludlow, S3
[00:08:47] S2: No, I'm talking about the CapEx coming in below estimates at $ 51. 36 billion. And Ed already mentioned the growth of cloud. Google cloud revenue grew 103% in a different world, Ed. And by a different world, I mean a different quarter. Those two things that I just read would be greeted by investors sending shares the other way. [00:09:13] S4: Okay, but this is what I mean by you can't take any of these data points in isolation. So CapEx in the quarter was actually slightly below expectations. I think it was like 51.4 billion, right? But if you just take where they are nine months into the year, Alphabet spent about $ 132 billion. They guided that for this year. CapEx will be in the range $ 195 to $ 205 billion. That's a lot. A year ago, in any given quarter, Alphabet was spending like $ 25 billion. Now that obviously is tracking way ahead of that. So the cloud growth is there and growth in the operating income from it as well. But again, balance it against the spending commitment and how deeply that is putting them into free negative free cash flow irrespective of their operating cash flow and i'm not i'm not an accountant or forensic guy by any means but yeah i think that's the math people. [00:10:07] S3: Are doing but you gotta keep looking at it but he plays one on tv he does play one on tv he does it pretty well he does it pretty well all right ed ledlow uh you know we always appreciate you jumping on with us and walking through these earnings uh no one like you uh Ed Ludlow.
00:10:07 · S3, Carol Massar
[00:10:07] S3: Are doing but you gotta keep looking at it but he plays one on tv he does play one on tv he does it pretty well he does it pretty well all right ed ledlow uh you know we always appreciate you jumping on with us and walking through these earnings uh no one like you uh Ed Ludlow. [00:10:21] S0: He'll be continuing to cover this. He is the host of Bloomberg Tech. [00:10:23] S3: Catch them and catch him and his team on Bloomberg Television at 11 a.m. [00:10:27] S0: Wall Street time.