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21:05I'm sorry. I was surprised by that number, too. That says a lot. I guess if I'm honest about it, no.

21:14Carol Massar:Fair enough, which is what we want. We love the honesty. Hey, let's get to what has been a trade. depending on the company reporting the AI spend and AI trade. Some have been punished. Some have been not. Any logic to it in your view? Yeah, I think so. We're going through a free cash flow desert. So there's no question that the level of investments is higher than we all thought, you know, a month ago at the beginning of the year and certainly a lot higher than we thought a year ago, nobody that I know of, and I didn't, forecast this amount of CapEx spend by the major hyperscalers, the four companies you mentioned earlier, Amazon, Meta, Google, and Microsoft.

21:58So I understand the market's hesitation. And what it means is that free cash flow is going to be tested. And Amazon's going to have negative free cash flow this year, first time since 2022. I think Google's going to be positive cash flow. I think Meta is. But these huge amounts of CapEx spend are challenging that free cash flow generation. And investors are right to be concerned. What investors should also, though, focus on is what are they seeing in terms of ROAI? Like, what kind of returns are we getting? So, you know, Google is ramping up its CapEx by 90 billion. That's actually the biggest dollar increase.

22:29But what they gave you this last quarter was an acceleration in search growth was the fastest that they've had in four years. What they also gave you was almost 50 percent growth in cloud revenue and 150 percent growth growth and cloud backlog. That is all generated or in large part generated by AI. So there's an example here of a return. And by the way, Google had record high operating margins in the last quarter. Amazon just gave you 24 % search, I'm sorry, cloud revenue growth, AWS revenue growth, fastest in four years, also with very consistent margins and the backlog jumped by more than they've ever had in a single quarter, something like$40 billion.

23:08So I'd argue that there is an ROAI for these companies. I can make the same point about Meta. And I think investors just need to be able to work through this free cash flow trough year. If I'm right, that it's the trough year, and you're going to have accelerating growth that'll take you into 27. I think that sets up these stocks, given their current valuations, very well. So Amazon right now is down just about 7 % as we speak. You've got an outperform rating on the company,$285 price target. Andy Jassy said yesterday that the money would predominantly go to the company's AWS. Most of it would be for AI workloads.

23:44He said, quote, I think this is an extraordinarily unusual opportunity to forever change the size of AWS and Amazon as a whole. We see this as an unusual opportunity and we're going to invest aggressively to be the leader. Is he right? Well, he's right that they're investing aggressively. He's right also that almost certainly this is a huge opportunity. I mean, the market certainly thinks so. We wouldn't be going through Sassmageddon or whatever, you know, this sell-off in software stuff. Yeah, Sasspocalypse. We wouldn't be going through that if the market didn't think that some of the innovations they're seeing out of OpenAI and Anthropic weren't potentially, you know, dramatically negative for these names.

24:30Now, the market may be overreacting, but the market is reacting. And then I just, you know, ask you all to step back a little bit here. Have we seen material improvements in the products and the services that we use because of GenAI? And I think if we're honest about it, the answer is yes. You know how much search has improved, like as a product, as an experience, how much better it is. The things you can do now, this is like your Google moment of 15 years ago. Like what was life like before Google? It's kind of hard to remember. I think we're gonna have that same moment. Like what was life like before generative AI?

25:01When you can, you know, and we're just, we're still scratching the surface. Like we haven't, we still haven't had the task, you know, we haven't circled to the task. Like I'm, you know, great, you've given me all this information about a Hawaiian vacation package, but then put it all together and book it for me too. Like make that. And then, you know, I really want a personal digital system. I think we're all going to have one, you know, in three to five years. By the way, Gemini personal intelligence has sort of become that for me already in a pretty short period of time. And the ability for this to improve people's productivities, you know, their lifestyles, if you will.

25:34I just think that these are their ability to educate themselves, train themselves, learn new skills. I think it's extraordinary what we're seeing. And so, yeah, I believe in the cycle. I'm sure there's going to be overbuilding during it, but I believe in this cycle. And I think there's a couple of companies that are really going to come out financially much better because of it. And I think these are three or the four of the companies that can do it.

25:56Carol Massar:That's where I wanted to go because reading in this kind of winner takes all or most, winner takes most kind of view out there. And that's why these guys are all doing a mega CapEx spend, Meta, Microsoft, Amazon, and Alphabet. Are they right about that? And I do wonder, like, will there be one leader or is it going to be enough that all four of these, Mark, are companies we will continue to talk about five years from now, three years from now, 10 years from now? That's a tough question, Carol. I think we'll be talking about them. The question is whether they're going to be materially larger from here or not.

26:33The advantage that they have is that they already begin with these massive bases of users and businesses and applications. And so you're taking productivity enhancements, productivity dramatic improvements to massive retail, advertising platforms, entertainment platforms. And my guess is that these large platforms are going to be a lot better. They're going to be more efficient. They're going to have higher margins. they're going to have higher revenue bases than we would have thought three years ago. Yeah, the CapEx in 2026, the investments are greater than we would have thought two years ago.

27:10If we're honest with ourselves, the revenue bases are also bigger than we thought. And the profit pools, not free cash flow yet, but I think that's going to snap back next year. Profit pools are going to be bigger than we would have thought two or three years ago. Mark, we've talked about where you're optimistic and some of the winners, but where are you not optimistic when it comes to this spend? Who ends up losing as a result of this CapEx spend and of this investment? Well, companies that aren't able to make this shift, the one company, the one set of companies I've wondered about are the travel companies.

27:42This is an information intensive transaction. I think it lends itself to an agentic solution. I think the average person would have spent three hours planning an annual summer family vacation. I'll think about all the things that go into that decision and then the booking and then the checking and checking out alternatives and flights and blah, blah, blah. And I think this is wonderful opportunity for Argentic solutions to really sharpen that to make the whole planning booking process a lot better. Booking.com, Expedia and Airbnb better be effectively and successfully investing in Argentic travel and having their own agentic agents on their sites.

28:24Because if they don't, then those are companies that I think are going to be, could be dramatically smaller three to five years. And you do cover those three companies too. So you know, are they, do you think they're doing a good job as of now? I think so, but I haven't seen the proof yet. By the way, nobody's really put together a great agentic travel experience yet. It's TBD. You know, look, you can use ChatGPT and Gemini, but you know, you come up with great for travel planning, but you can't, you can't like, then you still got to go somewhere to do the booking. Somebody's going to put all that together.

28:55I just don't know who's going to do that first. But I think there's a decent chance that Expedia and Booking will do it. But then I step back and think about valuations across these names. And if you're telling me that I'm going to get Expedia at 15 times earnings, Booking at 17 times earnings, Amazon and Meta at 20 times earnings, hey, I'm in. You know, I think those are very reasonable multiples. In fact, I think they're pretty dislocated. So I think a lot of the fear is already in these stocks.

29:23Carol Massar:Yeah, I was just looking at Expedia. It's down about 17 % year to date, and you've got booking down about 18%. I'm not saying that there's a clear connection, but just putting that out there. Mark, just got 30 seconds. As we go through this, I mean, there's going to be stops and starts, right? Because we are very early in when it comes to this AI spend and build out. Well, you're right. Yeah, we are still. Agentic Commerce, there's some interesting examples. I love what I'm seeing out of Amazon with Rufus. But I want to see more Rufuses out there. Rufus can still improve materially. So I think we're still early.

30:01But I want to see people closing the loop in terms of the information and the transaction. You want agentic task agents. There are not enough of those yet. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

30:18Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna. And I asked him, how can companies use AI to its fullest potential to create smarter business?

30:34Carol Massar:My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind. If anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah. Wow. So we are not asking our clients to be the first experiment on it. We say you can leverage what we did. We're happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology.

31:20It's getting people to accept that there's a different way to do things. To listen to the full conversation, visit ibm.com slash smarttalks.

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33:18Carol Massar:You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. We're talking about Bitcoin. It's kind of a special edition of Drive to the Close because Bitcoin reclaimed almost all losses registered during Thursday's crypto market meltdown. Largest since the collapse of FTX roiled the market just a little over three years ago. Yesterday, we spoke to Nobel laureate Paul Krugman about the sell-off. Here's what he had to say. A lot of people saw Bitcoin as being the next gold.

33:55And it turns out that in the face of doubts about stability, doubts about politics, the next gold turns out to be gold, not Bitcoin. I think it's a big wake up for people that maybe this isn't actually going to be an enduring asset. If you ask what, when people make price forecasts for Bitcoin, I always wonder on what basis. Yeah. It's not like you could do a price earnings ratio on this thing because there's no earnings, no services. It's all just pure faith. A lot to unpack there. Nobel laureate Paul Krugman on Business Week yesterday. That was yesterday. This is today. We've got Bloomberg News executive editor for crypto payments and digital finance strategy, Stacey Maria Schmel.

34:36Actually, yeah, you're everything. I'm just giving you new titles.

34:39Carol Massar:Can we just make her crypto queen? We just want you to stay in this. She's a criminal. Oh, sorry. No, okay. Don't call her that. So, okay. That was yesterday. This is today. First things first. We saw the sell-off. Why the recovery today? There's a phrase that folks like using, which is dip buying, which essentially says Bitcoin hit a threshold at which folks were like, okay, there's no way this is reasonable. But the problem for people who like to do fundamental analysis and just, you know, going back to what Krugman said, is it's very hard to do fundamental analysis on an asset that's been defined by like momentum trading for so long.

35:18Carol Massar:You know, our colleague Zeke on the investigations team put out a Businessweek newsletter saying, like, why did Bitcoin fall? Because prices fell. And that can feel like a tautology. But so much of this asset class in this industry has been defined by narrative. And so many of the big spikes up have been driven by like events. Right. So it's the introduction of crypto ETFs or the election of President Trump or then President Trump saying we're going to have a Bitcoin reserve. And we've really been lacking those kinds of narrative-driven, positive events for the past several months. Does any of the trade that we're seeing as of late, Stacey, kind of say to you that, okay, because we've always said, like, what is it still?

35:59Carol Massar:Does it help kind of tell the picture or maybe say, okay, it's just this thing that people like to play around with? Like, you know, whether or not this is going to be so disruptive and really something bigger in terms of our financial system going forward rather than just a kind of a play thing. So if you go back to 2024, a phrase that was very popular was people believe in the underlying technology, right? This idea of the blockchain. And actually coming into 2026, that has really become actually mainstreamed in a very different kind of way. You have major Wall Street investment banks saying they're looking into things like tokenization and, you know, putting assets on the blockchain.

36:34Carol Massar:You have a number of different companies, including Stripe, making big bets on stable coins. You know, you have multiple different governments saying this is something that we need to take seriously. So I think there's been this shift in the narrative that the only way to get exposure to this technology is Bitcoin. And now people have many other options. And not all of those options are you can invest in them through like the straightforward mechanism of I'm going to hold a token. So I think some of this repricing actually reflects the sort of the changing maturity of the market itself. You have more ways to play how you might feel about the prospects of this technology than merely buying and holding its largest, most liquid token.

37:15That actually makes a lot of sense. What surprised me about yesterday's move is if you think back to sort of the last big decline, it was this cross-asset plunge in equities. we had the meltdown of FTX. So there was concern about this big player melting down. There was no external event yesterday that was really tied to the plunge. I know that's happened before in the history of Bitcoin, but it's like that felt a little different because the size of the industry is so much bigger. The market cap of the asset is bigger. Why was there no sort of catalyst?

37:56Carol Massar:There's a few things that we're paying attention to. I would say there's been no single explicit catalyst. But, you know, there was a similar thing happened a few months back, October, when it was like, oh, like normal Monday. And suddenly you're like, whoa, why is the screen a sea of red? And at that point we heard, OK, so some people's positions got tripped and that started a chain of liquidations. Right. So like a price was activated and margins got called and people started selling to meet those margins. there have been other times when it's like actually there are certain parts of digital assets that are like increasingly correlated with AI and because you know you've had companies that used to be I'm a Bitcoin miner now they're like I'm a data center provider and I'm striking deals with Google because the infrastructure that we have can also power the AI revolution so when you have you know negative sentiment to AI because everybody's like I need a billion dollars of capex like like that has a read-a-cross effect so we've moved from an asset class that was positioned as not correlated with anything to an asset class that's actually increasingly correlated with lots of different kinds of things in interesting ways.

39:02Carol Massar:At the same time that within the asset class itself, you've had this fragmentation into, okay, the most liquid traditional tokens, Bitcoin and Ether and Ripple and so on. Then you have like the stable coin play, then you have the most speculative part of the market, the meme coins, the doges, etc. And then you've got the products built on top of those things, like the ETFs, like the strategy and other types of digital asset treasury. So I think what we're also seeing is having to be much more sophisticated about the niches that we're analyzing because it's no longer just one story that's driving everything.

39:35Carol Massar:So a smarter market perhaps is where we're going? I think that's the hope. Yeah, no, but we're kind of like understanding maybe where there is super potential in terms of growth. The folks who I've spoken to who are the most bullish and optimistic are also the ones who have a kind of sense of irony about it because they're like, you know, one of the reasons that stablecoins, et cetera, are taking off is because the investment banks who were supposed to be the enemy, right? If you think of going back to like the white paper, like Bitcoin was invented in rejection of the sovereign states and the traditional financial system, that's really brought a totally different perspective on large chunks of what people are interested in.

40:17Did, has what Bitcoin has done over the last year killed the narrative that it is digital gold?

40:24Carol Massar:According to the gold people, yes. Well, they are gold people. You know, I think the idea of it being a safe haven asset has always been a little bit challenging because it's really tricky to maintain the idea of it being a safe haven asset when it has like such high beta performance when people are selling risk, you know? So it's like, okay, if people are selling risk assets and Bitcoin is also going down, it's like that doesn't quite qualify as a haven. But I think ideologically, what folks were really talking to is like they really wanted this to be something that was removed from other parts of the financial system.

40:58Carol Massar:And really what we've seen over the past couple of years with, you know, all of these different exchanges and like the U.S. really embracing crypto in a very different way is that it's almost become much more institutionalized. This is the Bloomberg Businessweek Daily podcast available on Apple, Spotify and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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