Big Tech Earnings and Reckless Predictions

0:05What's the big deal with big techs? We're listening to Potley Fool Money.

0:20welcome fools i'm your host tim byers and with me is a long time rule breakers teammate rick minares and my supernova odyssey teammate san mcdeo guys how we feeling today you good caffeinated i hope doing well very caffeinated absolutely okay very good today we're looking back to look ahead with a review of last week's big tech earnings. But first, let's start with any macro themes you both saw from the big tech reports. And I'll kick us off with a couple things here. There seem to be three big prevailing themes. And I pulled this from our internal AlphaSense tool, relentless scaling of all of the AI cloud infrastructure.

1:02So a big one on this. Microsoft will increase total AI capacity by 80 % this year, double its data center footprint in two years. That seems large. A bit of legal headwinds here. Apple has an antitrust lawsuit that they're dealing with. And then finally, capital intensity. And boy, is there a lot of capital intensity. Amazon has a plan for 2025 cash CapEx guided to$125 billion, and that won't be the end of it. I mean, really? That won't be the end of it? Rick, what do you got for me here? What's going on here? Yes. Basically, you're having this great situation where, I mean, if you are a big tech company, where the rich keep getting richer.

1:52You continue to see the MAG-7, or in this case, the Big Tech 5, whatever we want to call this group, continue to outpace the S &P 500, which itself is outpacing the Russell 2000. If you're an investor and you were picking small stocks because you thought, oh, I got to start small, that's where the money is, it's been completely different. You're seeing with these big AI deals that are happening, they're just exchanging money amongst themselves, but they have the means, they have the money, and they have the resources to turn something as simple as AI years ago into something that's just basically a monster, game-changing technology today.

2:27Samit, how do you see this, looking at the big tech landscape? What either surprised you or interested you coming out of these massive earnings reports last week? Yeah, you know, so I'm kind of seeing like a bifurcated economy where you have, you know, these big tech companies, you know, spending a lot of money, making a lot of money and really pushing for this AI stuff. And they're, you know, in pretty strong positions to do so. But then you have the consumer and consumer discretionary companies that are struggling. You know, you had Chipotle, which is a non-tech, talk a little bit about, you know, some slowness and some weakness with their consumer.

3:05Amazon is talking a little bit about a squeeze consumer and their retail business. So while you have the big tech companies thriving and spending, you have the consumer, you know, maybe less so thriving and spending a little less. So big, big tech is is is big isolated at the moment here. Yeah. Can I argue, Tim, that is a tech company because how do they roll those burritos? There's no way all that food fits into like a rolled tinfoil, aluminum foil wrapped burrito. I'm sorry. That's magic. That's wizardry. I will tell you, I think that guacamole is biotech in and of itself. So I fully agree. All right.

3:50Let's move on to the earnings themselves. And what we're going to do is focus on some of the outlier things that we saw in each of these reports. and uh sammy why don't i start with you here on on meta what really stood out for you uh you know this i'm really curious to to dig in a little bit more on this um joint venture with blue owl capital you know they announced that they're they're doing a joint venture um to co-develop a louisiana data center campus and you know some of the the structure and the way they're doing this it's it's going to be off balance sheet and that always worries me before yeah yeah That is something that I have experienced at a prior company.

4:34As I worked, we had, you know, I, for those of you who don't know, I worked at Lehman Brothers and we had off balance sheet mortgage companies. So if I need, I say more. Yeah. That worked out great. Yeah. I hope there's, there's less to this than it seems like this. This would be one of those that I'd like to just believe that what we're really going to get is just an interesting joint venture. but I really wish it was on the balance sheet. All right, Rick, let's keep moving here and go on to Alphabet. Alphabet had a heck of a quarter and investors seem to like it. What did you like or dislike?

5:12Yeah, I liked the fact. Here's a fear, and I have never shared it with you, Tim, or anyone. I kept it internally because I didn't want this to happen, but every time I'm on Google and I put out a search result, I'm starting to get these nice AI responses giving me the answer I wanted. I'm not clicking on ads. I'm not clicking on sponsored search results. I'm not clicking on anything. I'm not diving into all these companies that have invested in SEO. I tell myself, well, Alphabet has to feel the pain. They're going to feel this in advertising. They're going to feel this in other places, but they haven't.

5:42Again,$100 billion record quarter for the third quarter. This was a year ago. There was some voting, elections-related spending on the ad market that could have propped up results, but the company is doing well. It's defying all these things. And clearly, just another major player in cloud that's really raking it in in many different levels. Yeah. I mean, they are saying that backlog for their cloud business was up 82 % year over year. That is extraordinary. And the backlog is apparently now 10x the current annual cloud revenue there. So maybe we're going to see some big things from GCP here. All right.

6:21Let's move on to Microsoft, Sam. What stood out for you here? their other income swung to a$4.1 billion net loss from their stake in open AI. And that was surprising. And it's, you know, you see some of the other companies, Amazon, Alphabet, making some money from their investments in Anthropic. Microsoft, which has had a huge stake in, you know, open AI, has been involved with them for a long time. It's not making any money. Yeah, I mean, it's really hard to understand what exactly is going on here. OpenAI is in full-court press, spend-it-all-as-soon-as-we-get-it mode, and that is having some tail risk, I guess, for Microsoft.

7:09It's a bit surprising. They also absolutely went through the roof with their CapEx,$34.9 billion. That was up significantly, and about 50 % of that spent on GPUs. They have a big checkbook, and they're writing a lot of checks. But Rick, we mentioned before we got to this section, Amazon,$125 billion. What else can we say about Amazon? I mean, this was another amazing quarter for these guys. Yeah, amazing indeed. And when you see, oh, 13 % sales growth, that's not very impressive until you realize that Three years in a row, they've given us 9%, 12%, 11 % growth. These back-to-back quarters are 13%.

7:52It may not seem like a lot, but Amazon is slowly, gradually starting to pick up momentum. It's like an old car that's just starting to pick up speed here. And you have the case here where it's international growth, obviously, is outpacing. U.S. growth was 11%, international a little better. But obviously, AWS, their web hosting business, which is becoming a larger player, growing faster than the e-commerce business quarter after quarter. And more importantly, just margin-wise, it is such a cash cow, the way it makes so much money, that it's helping the whole company. So really a dynamic quarter that really defies the seemingly ho-hum top-line growth numbers.

8:26This is so interesting. There's two quick things on Amazon that I wanted to add to this, Rick. I mean, you make a great point. Amazon re-accelerating is fascinating. They also had just a, you know, we just talked about, Sammeet was talking about the open AI hit to Microsoft. Anthropic gave Amazon a$9.5 billion one-time gain from revaluing that investment. That is extraordinary. Now, that was non-operating income, but clearly the market thinks that Anthropic is a whole lot more valuable. But the most fascinating thing I thought was that for AWS, Amazon decided beginning January of this year to reduce the useful life of their servers and networking gear from six years, the amount of time they used to depreciate their networking and server gear from six years down to five.

9:25That is very rare. You almost always see it, that those useful lives being extended, not reduced. But that's telling you, I think, that Amazon is going to be spending a lot of money to keep refreshing its gear. So it's not just the workforce that's being reduced in Amazon is what you're saying? No, not just the workforce. All right. All right, Samit. Take us home with Apple here. If I may say one quick thing about Amazon that I think is sometimes underappreciated with the whole big tech stuff is that they're the ones that have the deepest ties to retail and the consumer. And the data that they're getting from that and the way they're piecing together some of these different businesses that they have is powered by a lot of that.

10:10So it's almost like the retail is like a loss leader for all the other businesses that they're doing. And I think they're putting together these pieces. And I feel like sometimes they're playing 3D chess sometimes. I mean, you might not be wrong. It's certainly true that they are exposed to so many areas of the economy, including to the consumer economy. And then they're the biggest participant on the back end in this big tech AI cloud. They're the biggest player there. So they stretch all the way across that value chain. Apple's no slouch, though. Apple is a big, big company. Tell me what you thought about the Apple report.

10:51You know, Apple is, it's interesting because tariffs are going to definitely be an interesting part of their business. You know, they do sell some of these phones. Phones is really the biggest business. What I worry about with Apple, which is probably a lot of people worrying about is, you know, they're making commitments to investments as well. but are they falling behind in the AI race and how are they going to be able to really capture the fact that everyone's walking around with, with a device that could be, have embedded AI that could really be powerful for them. So, and it's something that they could create a service from their services business has grown for, for many, many years.

11:30Like they, they always had the hardware, which no one else really had. And then they added on services, which started to, you know, really grow. It's a$100 billion plus annual revenue stream, growing faster than hardware. So how are they going to tie everything in? Yeah, we don't have really good insight into what Apple is going to do to get themselves to become a major player in the AI space. Everybody else is making really big portal investments. And I really would have expected by now that the Apple AI Portal, which really is supposed to be Siri, would be better than it is. But it hasn't gotten there yet.

12:13All right. Coming up next, we're going to make some big tech reckless predictions. You're listening to Motley Fool Money. At Amazon now, more than 50 % of the purchases are delivered with less storage, for example in paper-tout or without additional storage. If your neighbor also plays guitar, we deliver you your new ear-to-the-air with sound-true in the storage of the store, based on Amazon-Daten of the year 2025 in the EU.

12:53know. I mean, we're basing this on what we can see and what we can observe at the moment. And the whole point of making reckless predictions, and before I go to you on this, Rick, I'm going to kind of tee it up this way. The point of making a reckless prediction is to give yourself a frame for how you're going to look at a market. That's what you do a reckless prediction for. So you kind of have a sense of what you're looking for. And then when your reckless prediction goes wildly wrong and you see how it went wrong, then you start learning things. So it's great when we're right, but it's also okay when we're wrong.

13:34So Rick, with that, you don't have to be exactly right here, Rick, but give it to me. Go crazy. What's your reckless prediction here? All right. I'm going to make a prediction that may not seem so reckless, but then I'm going to embed a deeper prediction within it. I think that the MAG-7, which is six tech stocks and a car driving stock that has a high in tech, so it's almost a big tech index. All five stocks we talked about are part of the big MAG-7, will be no more within the next three years. To me, this is an easy prediction because I remember when Fang was a thing, and then Facebook changed its name, and then Google changed its name.

14:11The letters didn't work. Then in the end, you tell someone that wasn't around 10 years ago and Fang was a thing, they may say, oh, and it's NVIDIA. No, it's Netflix. So, everything changes over time. And I think you're sort of seeing that with the Mag 7, that it's this whole kind of thing that eventually it's not going to be seven. It'll be a smaller number, a different number. But my bigger prediction within that is that I think within five years, there is going to be a major player in AI that isn't even on anyone's radar right now. And no, I don't know who that is. I'm going to take the easy road out.

14:39But I see already that you're seeing, I mean, NVIDIA, they have sort of an ASML-esque lead in AI, so I'm not going to say someone's going to topple them, but I think there'll be a major player then. You're sort of seeing it happen just this past year alone. The reason why Chinese stocks like Alibaba and Baidu are doing so well is because they're filling a void in China of these AI chips and data centers that needs to be built out while there's trade tensions happening with the U.S. market. Not that I think one of these two will be the big leader, but it wouldn't surprise me of either an international name or maybe an unlikely name that just happens to have a lot of resources.

15:15Maybe even the Apple that we were ridiculing earlier on its inability to make it happen, that it's now even part of that Google Pixel 10 ad where it's the middle of Pro and they're making fun of it for not being able to have a good AI interface. Maybe Apple becomes that major AI play, but I think it'll be unexpected and I think it'll happen in the next five years. I like it. All right, Sam Meat, what do you got? All right. I think I have one that might be coming out of nowhere. So I talked a little bit about the bifurcated economy. You have the tech companies with their cloud businesses and their corporate businesses, AI businesses doing well, and then you have cautious retail.

15:51So one of those, which you have Amazon, I think they're about to unify both of those through their long-running joke of a cash-burning business, Alexa, which they're rolling out Alexa plus, which are they're calling ambient AI strategy. I think that might be successfully bridging the gap between consumer enterprise businesses where AI will start managing users, homes, order their groceries, book their services, all powered by like AWS AI. And it's kind of creates a kind of a new brand new high margin subscription and services layer. They'll kind of become Amazon's next little big line of business and they could help them get it to a valuation of$4 trillion.

16:34Okay. All right. That is a big prediction. All right. Mine may be fairly small then in the grand scheme of things here. I'm saying big tech R &D expense will start to scale faster than CapEx in the next three years. Just to put that in perspective, there are companies that have been nearly doubling their CapEx over the past couple of years amongst these big techs. It has been outrageous. Alphabet, for example, I think was over 80%. Just ridiculous. But I think the reason for this is simple. At some point, there's going to be a more pressing need for software-driven innovations in a number of areas.

17:16A lot of lower level code work is going to be done with AI assistance, but experienced developers are going to get heavily involved and they will be paid handsomely for the work. My embedded reckless prediction here, which I don't think is really all that reckless, but distinguished AI engineer is going to become a common title amongst Silicon Valley's big tech elite. If you've been around Silicon Valley and you know anything about that culture, distinguished engineer is something that like that is the title. If you are a techie in Silicon Valley, becoming a distinguished engineer at one of those big companies.

17:53I think Distinguished AI Engineer is going to become a serious thing and it's going to pay a lot, a lot of money. All right, coming up next, we're going to preview tomorrow's show. You're listening to Motley Fool Money. Have you ever gazed in wonder at the Great Pyramid? Have you marveled at the golden face of Tutankhamun? Or admired the delicate features of Queen Nefertiti? If you have, you'll probably like the History of Egypt podcast. Every week, we explore tales of this ancient culture. The History of Egypt is available wherever you get your podcasting fix. Come, let me introduce you to the world of ancient Egypt.

18:41All right, coming up tomorrow, you will have Emily Flippen, Jeff Santoro and Jason Hall talking about reformed rule breakers. How about that? I mean, I'm fascinated by that title already. So Jeff and Jason and Emily are going to be doing an earnings roundup. It's going to be a focused on these reformed rule breakers, three different earnings takes for Spotify, Shopify, and a third mystery stock that we're going to let you tune into the show to get the reveal. But be sure you tune in tomorrow for Emily, Jeff, and Jason. And thank you for tuning in today for our Big Tech earnings review. Thanks to my friends, Rick and Sanmeet.

19:29As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Mottlet Fool editorial standards and is not approved by advertisers, advertisements, or sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Rick Minares, Sanmiteo, our engineer is Dan Boyd, and our producer is Anand Chakabalu, Ted Byers. Thank you for tuning in, fools.

20:08See you again next time. One.