Alphabet’s brutal day on the stock market

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0:32Good morning from the Financial Times. Today is Friday, October 30th, and this is your FT News Briefing. Amazon's growth figures disappointed investors, and Google's cash flow sent them fleeing. So investors are reacting to this change in thesis for the company. It's no longer a cash generative business. It's a debt heavy and cash burning business. Plus, what's next for the European Central Bank now that its president says she's stepping down? I'm Mark Filippino, and here's the news you need to start your day.

1:13Investors are not happy with Amazon's latest earnings report. The company's shares fell in after hours trading yesterday after it posted figures. Sales at its cloud computing business rose more than Wall Street expected, but overall revenue last quarter was kind of disappointing, and Amazon is forecasting underwhelming sales for the Christmas period. Investors want to see strong growth at Amazon to justify how much money the company is spending on AI. Amazon plans to devote$220 billion in capital expenditure this year. Most of that will be on advanced chips and data centers. And it looks like last quarter's growth just wasn't enough for investors.

1:58Amazon wasn't the only company that was punished for spending a bunch on AI without the revenue to back it up. Google's parent company had a brutal day on the stock market. Alphabet shares dropped almost 13 % yesterday. It's the second biggest daily drop in market value in Wall Street history. Here's how the FT's San Francisco bureau chief, Stephen Morris, explains it. There has been huge amount of scrutiny on the sheer amount of money that so-called hyperscalers, Google, Amazon, Microsoft, and Meta, have been spending on AI, with the market really looking for any signs that they're overspending and that the vast sums are not translating into new revenue.

2:39And Alphabet's earnings report this week showed evidence of that. It spent more than$50 billion last quarter on AI, largely on data centers, chips, and training new models. And what we saw this week was an indication that Alphabet's core search and advertising business is slowing down. And it's not just slowing down. Executive has admitted that it's being cannibalized by its AI products. Google is finding it harder to serve adverts to people in so-called AI mode or AI overviews, as opposed to its traditional list of links. then investors are starting to be concerned that Google's cash cow is under threat.

3:16But lots of big tech companies are spending a scary amount on AI. So why did investors react so harshly to Alphabet? What was different about Google was that it's traditionally been a very cash generative business. It just throws off tens of billions a quarter that it can be used to return to shareholders via dividends or stock buybacks. But what we've actually seen for the past two quarters, for the very first time since it went public in 2004, was it burning cash, i.e. spending more than it earns. It's also raised a huge amount of debt, totaling about$100 billion now. And it previously ran basically zero because it made enough cash that it didn't need to go to debt markets.

3:55So investors are reacting to this change in thesis for the company. It's no longer a cash generative business. It's a debt heavy and cash burning business. So it's all about the cash flow. But Stephen says that we shouldn't be signing Google's death warrant just yet. There were some bright spots in the earnings. Google's cloud business doubled its revenue. It's the fastest growing cloud business out there. And it's closing the gap with the market leaders, Amazon and Microsoft. If you talk to executives at Google, they're still very confident in the trajectory of their business. They're still generating$125 billion in revenue in a quarter.

4:31They have billions of loyal customers to which they can distribute AI products. They have a fast-glowing crowd business. They have YouTube. If you look at their share price, they're actually still up 2 % over the past 12 months. So this is a correction, but I wouldn't say it's anything existential or terminal for the company, which is still poised to be one of the big winners from AI. That's the FT's Stephen Morris in San Francisco.

5:01One of the UK's most valuable AI startups is making a pretty big bet. Nscale is banking on a massive US data center project to underpin its public listing. Here to talk about what's going on is the FT's Kieran Smith. Hey Kieran. Hey Mark, good to be back. Good to have you. So tell me a little bit more about Nscale and this reporting that you've done about a site that's underpinning its IPO in West Virginia. Yeah, so with both my colleague Ryan McMorrow in San Francisco and several others, we've been looking into this site in West Virginia. It's called the Monarch Compute Campus. Now, this site is pretty crucial to N-Scale, which is a so-called neocloud.

5:40It's a data center operator that unleashes capacity to hyperscalers at Microsoft and Anthropic for computing power, to put it in layman's terms. Now, the reason that this site is so important is because of the$103 billion in total contracted revenue that Enscale published in its IPO document in September, around$45 billion is coming from this one site. And that's one contract with Anthropic. So the pressure on Enscale to get this site up and running, fulfill that contract, is pretty immense for investors as this company gets ready to try and list in New York later this year. Yeah, but one thing that it has going for it, as I understand it, is that it has a lot of big names on board.

6:21Kieran, can you tell me a little bit more about that? So to give you a bit of an end scale 101, this company is, if you can believe it, just over two years old. In March, the company was valued at$14.6 billion in a funding round, which saw NVIDIA, Nokia and Dell put around$2 billion into the company. At the same time, former Deputy UK Prime Minister Sinek Clegg and former Meta Executive Sheryl Sandberg joined the company's board. Now, those are pretty big names to join a company that's a little over two years old. Since then, Sandberg's been pretty involved, according to our reporting. He's found that she's helped appoint several senior figures at the company and has taken on a role as an advisor to the CEO.

7:01That's all part of a preparation to get the company ready to scale and list. Kieran, there have been some nervousness about whether companies will be able to deliver on their promises given how much money they're spending on AI. How does that play into N-Scale's story as it goes public? Yeah, so I think this is a really topical point, especially with the sell-off in many of these stocks in recent weeks. I think the big problem here is the sheer amount of capital needed to roll out many of these sites. For instance, the campus in West Virginia, just the first stage of which, an EY report commissioned by N-Scale estimate will cost around$69 billion.

7:40Now, to put it into context with N-Scale's balance sheet, it made a loss of around a billion dollars in the first half of this year on revenues of just$141 million. So securing financing to build these sites is extremely important to getting these up and running. Many investors are starting to question the timelines of companies and projects all across the world. However, the people that I speak to say that N-Scale is adamant that it does remain on its timeline to list as very committed to doing so at the valuation that it was targeting of 35 billion. CFT's telecoms and tech correspondent Kieran Smith in London.

8:16Thanks so much, Kieran. Thanks, Mark.

8:23The European Central Bank decided to keep interest rates on hold, but that wasn't the big news from yesterday's meeting. It's that ECB President Christine Lagarde announced that she will step down early. She's now set to leave in February, nine months earlier than initially planned. During her time at the central bank, Lagarde has overseen a debt crisis, the first war on the continent in decades, and massive trade tensions with the United States. So what will her departure mean for the ECB? That's the question I want to put to the FT's chief economics commentator, Martin Wolf. Hi, Martin. Hi. So you've actually met Lagarde.

9:00What was she like? I would say It's more than having met her. I know her rather well. I met her in the 90s. I think she was agricultural minister after a very distinguished legal career in the United States. Then I continued to know her when she was finance minister of France during the financial crisis, and then when she was managing director of the IMF. And then, of course, I've known Meta, interviewed her quite often for the FT during her period as the president of the ECB. So this is one of the policymakers in the world that I know really very well. Yeah, it sounds like almost every step of the way of her very impressive career.

9:42What is your read on why she's stepping down from her role at the ECB nine months early? Well, the honest answer is I don't know the details because I haven't yet interviewed her to talk about it. There are some obvious reasons. There's been a lot of talk about the possibility of another job, basically being the chairman at the World Economic Forum. Whether anything will come of that, I don't know, but that's certainly in the conversation. Another reason, which I think could be very important, is that she would like to give the governments of Europe, as they are today, including French President Emmanuel Macron, the ability to decide on her successor before the possibility of some relatively far-right politician becoming the head of government in one of those countries.

10:35France is the most likely important case. So that might be another reason for her to do so. And she could well feel as well that European policy is rather well established and she's not abandoning her post in a difficult situation. Any one of or all of these three reasons could be the truth. What are you looking out for next when it comes to the ECB? Well, obviously, the most important thing is that they have a competent, widely respected president who will be able to keep the institution functioning successfully. But of course, beyond that, can the ECB handle the next round of difficulties? In France, there are huge fiscal deficits, very high bond yields.

11:25and, of course, the president of the ECB and the ECB will be absolutely the forefront of dealing with that. And that could be immensely politically difficult, depending, of course, on who the next president of France is. But at the moment, that president is most likely to be Marine Le Pen on the far right. Martin Wolf is the FT's chief economics commentator. Thank you so much, Martin. Thank you. Tomorrow, you'll hear more from Martin in this feed, the next installment of his podcast series, Martin Wolf on the World will publish right here. You can read more on all these stories for free when you click the links in our show notes.

12:03This has been your daily FT News Briefing. Check back next week for the latest news from the Financial Times. The FT News Briefing is produced by Safiya Ahmed, Sonia Hudson, and Josh Garadoyon. I'm your editor, Mark Filippino. Our video producers are Zachary Alfred and Dennis Golan. Our show is mixed by Alex Higgins and Sam Giovinco. We get help from Vanessa Brown, Michael Lello, David DaSilva and Gavin Coleman. Our executive producers are Charles Bell and Topher Forges. Flo Phillips is the FT's global head of audio. And our theme song is by Metaphor Music.

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