Google Doubles Down on Spending as AI Fear Returns

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1:45Ed Elson:Today's number, five. That is the official Rotten Tomatoes score of the new Melania movie, making it one of the worst movies of the decade. Critics have called it a shameless infomercial, they've called it two hours of endless hell, and they've even compared it to Nazi propaganda. However, they all agree it was better than the Emoji Movie. Money market's mad. If money is evil, then that building is hell.

2:13Rohan Gaswami:The show goes on! The folks in there have watched the show! Show!

2:19Ed Elson:Welcome to Prof G Markets. I'm Ed Elson. It is February 5th. Let's check in on yesterday's market vitals. The tech sell-off dragged on for a second day, pulling the Nasdaq down 1.5%. The S &P also declined, though the Dow managed to climb. Uber fell 5 % after reporting softer-than-expected guidance and naming a new CFO. AMD was among the worst performers, suffering its steepest drop in seven years after disappointing earnings. And finally, Bitcoin also carried on its slide towards$72 ,000. OK, what else is happening? Google's fourth quarter earnings beat expectations with annual revenue topping$400 billion for the first time ever.

3:05Ed Elson:It was also the company's second consecutive quarter of more than$100 billion in revenue. That was largely driven by strong growth in its services and cloud divisions. Its cloud revenue grew 48 % year over year. However, the company spooked investors with plans to spend$175 to$185 billion this year. That is at least$55 billion more than forecasted. That would nearly double its capex from 2025. The stock initially fell as much as 7 % after hours, but it quickly recovered. Okay. Here to help us break down these earnings, we're speaking with Scott Devitt, Managing Director of Equity Research at Wedbush Security.

3:44Ed Elson:Scott, good to see you again. Hey, Ed, how are you? Doing very well. We want to dig into these earnings here. Beat expectations,$400 billion in annual revenue. Just mind-blowing at this point. Let's just start with your initial reactions to these earnings.

4:01Jared Holz:The growth is very strong. Search was up 17%. So the search business alone, that's almost$300 billion of revenue. And that business is accelerating. So the infusion of AI overviews into the search results have definitely benefited the platform. In addition to that, you know, the cloud business grew almost 50 % in the quarter. Expectations were over 38 % growth. It did 48 % growth. So that's on the positive side, and the growth is outstanding. With that, the company's going to be spending like crazy next year on CapEx. So this year, I should say, $175,$185 billion of CapEx. They effectively almost doubled CapEx in 25.

4:45Jared Holz:They're almost doubling it again. So it's front-footed growth, but the market has to digest periods where companies are spending so aggressively ahead of revenue and operating profit. And I think you're seeing some digestion. You've seen it in meta. You're seeing it in alphabet. But these are the right investments to be made. And when we get to the other side of the spend, I think there's going to be quite nice returns for these companies.

5:11Ed Elson:The stock fell as much as 7 % in after hours and then it quickly recovered. We'll see how it moves throughout the day. What do you make of the market's at least initial reactions? Was there anything in the earnings there that was concerning investors? Perhaps it is that CapEx number? It's the CapEx number. I mean, the market is very skittish right now around AI and you've seen software companies,

5:40Jared Holz:you know, multiples collapse. And so we're just at a, you know, I think a bit of a pause in this cycle where investors are reevaluating how they should be thinking about the growth prospects and the offsetting spend. And so I think that this alphabet, you know, kind of narrative feeds into that. So the initial knee-jerk reaction off of that significant CapEx number, the$180 billion is relative to$120 billion was the consensus estimate for 2026. And so you get that knee-jerk sell-off, and then I think investors go back and say, hold on a second, this is very positive for the long-term prospects of the business.

6:19Jared Holz:We have to digest this a little bit, but growth here is outstanding. I mean, that 40 % growth in the cloud business is pretty amazing.

6:28Ed Elson:Yeah, 48 % sort of blew my mind too. I just would love to get your sense of what Wall Street's consensus is at this point on massive CapEx. Because, you know, throughout the year last year, these gigantic CapEx numbers seems to be a real problem. Whenever you reported CapEx, that was a lot higher than people thought that Wall Street expected. It usually meant that there was some level of drawdown in the stock, at least initially. It seems that that's kind of flipped, depending on who you are. I mean, Meta had a big CapEx announcement recently. This one from Google is probably the largest we've seen of any of the hyperscalers, at least this quarter.

7:12Ed Elson:What do investors think about these kinds of numbers at this point? Is this something that makes them feel excited about AI or is this like, uh-oh, we're in bubble territory?

7:24Jared Holz:Well, I'll tell you, for the infrastructure companies, it definitely validates the numbers that have been thrown around by companies like NVIDIA and otherwise in terms of that the spend is real. That's one point. I think stock performance tends to be best in harvest mode. So on the back of an investment cycle, when an investor can see the returns and the associated growth that comes in the back of an investment cycle, it tends to be when stock performance is best. You have this$180 billion number by Alphabet. You have$125, I think, by Meta. Amazon's current estimate is$155 for$26. I wouldn't be surprised at all if it's closer to where Alphabet is.

8:04Jared Holz:And so we're ending this period where, you know, 2022 was kind of a year of discipline and that continued in 24. You started to lose it in 25 and now we're getting back into investment mode again. And so with that, I think, you know, expectations have to be a little bit more tempered that returns will still be decent, but you have to climb that hill. And then, you know, the harvest period on the spend is probably 27, 28. So you're looking at like a three year horizon on these stocks.

8:29Ed Elson:You mentioned earlier that what's happening in software, software stocks just getting absolutely killed right now. You know, everything from Salesforce to, let's see, ServiceNow. I mean, all of the enterprise SaaS companies, their multiples are kind of collapsing right now, largely because of AI, but it's not totally clear what's happening. Can you just tell us what's happening in software right now and why these multiples are falling?

9:01Jared Holz:So investors are concerned about a few things. One is that the software companies are predominantly seat-licensed businesses. So to the extent that there's fewer seats because there's less labor required as companies incorporate AI, then that's not good for the business models. In addition to that, though, it's that AI itself with some of the features that Claude, which is Anthropics product, has been launching, displaced the software companies themselves. I think that, um, I think there's some justification to it, you know, for why the multiples have come down. But I think what you're going to find is, um, you know, this, uh, this industry is changing, evolving.

9:42Jared Holz:You're going to have some Macy's border circuit cities that get cleansed through the system because they weren't great businesses to begin with. And then you're going to have some software companies that incorporate AI features and functionality that validate their competitive position and do quite well. But, you know, again, you're looking at probably a one to three year period of investors figuring that out. Right now, the initial response is sell everything. And then I think investors will parse through it and then you'll get winners and losers. So it's going to be a different software world, you know, in the future, but it doesn't mean that they're all losers.

10:18Yeah.

10:18Ed Elson:The reaction from the market, at least from my perspective, has been kind of reactionary, where it's like, it does seem that there isn't a lot of clarity on which companies are well-positioned, perhaps, for an AI-enabled world. They're basically saying, as you say, sell everything. To me, that spells potentially a buying opportunity, just the level of dislocation that we're seeing. I was wondering if you would agree with that as well.

10:43Jared Holz:Well, you know, the market hates uncertainty. So it's been many years since we've had this level of uncertainty in so many of these companies in terms of what the future holds. We had a good 10, 15 years where all the same companies went up every single day and everybody knew who the winners were. And now we're trying to resort the landscape to determine that again. And so uncertainty leads to, I think, lower multiples for a period of time. And buying opportunities to the extent that you find the right company. sorting through the rubble in software companies, I think, you know, can lead to some success, but with patience, because it's going to take some time to figure it out.

11:23Ed Elson:All right, Scott Devitt, really appreciate your time. Thank you. Thanks again, Ed.

11:35Ed Elson:Earnings season just revealed a clear winner in the GLP-1 battle. Eli Lilly's fourth quarter earnings blew past estimates with revenue up 43 % year over year. The company also raised its 2026 guidance to$80 billion, projecting 25 % sales growth this year. The stock closed up 10 % yesterday. Those results came in stark contrast to its rival, Novo Nordisk, which warned that 2026 sales and operating profit will both fall. Novo Nordisk cited its pricing deal with Trump to lower drug costs as the main reason for their decline. However, Eli Lilly signed the same deal, but they expect volume growth to offset the pricing pressure.

12:15Ed Elson:Novo Nordisk stock closed down 18 % following its earnings. Here to unpack these earnings, we're speaking with Jared Holtz, healthcare equity strategist at Mizuho. Jared, thank you for joining us on Prof G Markets.

12:30Scott Devitt:Thanks so much for having me. Appreciate it.

12:31Ed Elson:So, Eli Lilly and Novo Nordisk both report Eli Lilly closes up 10%. Novo Nordisk crashes down 18%. Take us through these earnings. Why is there such a difference here?

12:48Scott Devitt:You got one company growing very meaningfully in Eli Lilly and really seeming to not be losing any momentum. If anything, the business is getting stronger. And on the other hand, you've got Novo Nordisk that, for so many reasons, is seeing revenue degradation already in just the third year where these obesity treatments have been on the market and FDA approved. So I think they're just going down two very, very distinct different paths, one in a very positive way and the other not.

13:25Ed Elson:What is the reason behind this revenue degradation, as you put it, at Novo Nordisk? Like, what's the issue? They've got the hot product. Why aren't things working?

13:34Scott Devitt:I think the biggest piece that I can really identify is that on the injectable side, which is obviously the lion's share of this market until the orals really get going, is only about 30 to 40 percent depending on the day, right? So, like, already they're seeing their market share slip to about a third of the market. And then I think the unfortunate thing for them is that they've got two things going on. One, they've got this conversion to the oral therapy, which is very significant in terms of volume, but at a fraction of the price, right? The introductory price for this market is only about$150 a month.

14:10Scott Devitt:That's down from, you know,$300,$400,$500. And then the second thing is that semaglutide is already on the IRA list. So they're seeing price degradation and they're seeing market share challenges. Both are going on simultaneously. I mean, it's just a recipe for a very challenging near term. um you know the hope here is that you know the the pipeline and and some of the things that they're doing strategically will will get them to a better place but it's going to take a while

14:34Ed Elson:the weight loss pill seems to be an important part of the story here my understanding is uh novonordisk has the pill ready to go and they're selling it they're selling those subscriptions eli lily is working on theirs but they're still waiting for approval as an observer i'm looking at what's happening, I'm like, okay, Novo Nordisk is way ahead on the next generation of GLP-1 drugs. But I guess the market isn't as excited about that. What do you make of what's happening in the oral race?

15:06Scott Devitt:Yeah, I mean, I think they're excited for sure. I mean, it's going extremely well. I mean, I think the company has already put 200 ,000 people on this oral pill, and it just came out at the beginning of the year. So after four weeks or so, you've got almost a quarter of a million people that have either tried it or are on it. That's pretty amazing. Again, a lot of these patients are cash pay. We don't know how long they're going to stay on the medication for. They're working on higher doses or stronger doses to increase the weight loss. And then the pricing, again, is$150 a month, roughly. So I think on one hand, you can say, okay, well, this is an incredible first step they've taken, but the financials behind it are not as impressive.

15:56Scott Devitt:And then for Lilly or for Glipron, I believe will come sometime in the second quarter. Maybe the pricing is a little bit better. I think the street's very enthusiastic and intrigued by what happens when Lilly enters the market, not only for them, but for the entire space. And so I think there's probably a faction in the market that sees Novo as the first mover, but Lily the winner eventually. That's pretty much exactly what's happened on the injectable side.

16:24Ed Elson:Something I found crazy, this Novo Nordisk stock is trading at$47 a share now. That's basically the same price that it was at in 2021 before the whole GLP-1 craze, which seems kind of insane to me. My instinct is it's being a little bit over-punished. I mean, it's down more than 40 % the past year, Eli Lilly up more than 30 % in the past year. Would you agree with that characterization?

16:52Scott Devitt:I agree. I think it's unbelievable what's happened to the company and to the stock. To sit here four or five years out and see the stock basically where it was trading five years ago and almost 10 years ago. I mean, we're almost at a decade low. Part of me feels like they would have been better off going in a different direction altogether and not even pursuing obesity if this is where we knew they would come out over the long term, right? And so, yes, I share the same feeling. I think it's wild to kind of consider. And then on the other hand, you've got Eli Lilly that's a trillion dollar market cap company gaining 90 or so, maybe even more than that, 90 billion just today.

17:36Scott Devitt:It's fascinating, truly. So, yes, agree.

17:40Ed Elson:Okay, Jared Holtz, healthcare equity strategist at Mizuho. Jared, appreciate your time.

17:44Scott Devitt:Anytime, thanks.