Google Goes All-In on the AI Arms Race

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0:58Doug O'Laughlin:store like right now. See who? Nope, unavail. The only thing I want to see are the prices just lowered on tech home and all my must-haves. Wait, you want to shop Walmart with me?

1:12Gil Luria:Alrighty,

1:13Doug O'Laughlin:I think I can fit you in.

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1:38Ed Elson:Shop Virtuo up exclusively at Nespresso.com. Today's number, 47.6. That's how many hours of sleep the average American gets each week. Today's other number is zero. That's how many hours of sleep Michael Saylor got last week.

2:08Ed Elson:Welcome to Prof G Markets. I'm Ed Elson. It is February 11th. Let's check in on yesterday's market vitals. The S &P 500 and the Nasdaq declined on weaker than expected retail sales data for December. Financial stocks also dropped after Altruist released an AI tax planning tool. Charles Schwab fell 8 % and Raymond James fell 9%, meanwhile the Dow notched its third record close. Spotify soared 15 % after reporting record user growth and tripling profits from a year ago. And finally, Paramount sweetened its hostile offer for Warner Brothers Discovery. It offered to pay the$2.8 billion termination fee that WBD will owe Netflix if the deal falls apart.

2:54Ed Elson:WBD stock rose more than 2 % on that news. Okay, what else is happening? Google just executed one of the biggest corporate debt offerings in history. On Monday, the company priced its largest ever US dollar bond sale, raising$20 billion across seven different maturities. That deal drew more than$100 billion in investor orders, one of the most heavily subscribed order books ever for a corporate bond sale. The next day, Google raised another$11.5 billion in sterling and Swiss francs. The sterling deal included an ultra-rare$1.4 billion 100-year bond, which attracted close to 10 times the amount offered in investor demand.

3:36Ed Elson:All in, Google raised nearly$32 billion in debt in less than 24 hours. The borrowing spree came days after the company announced plans to roughly double its CapEx for 2026, and the spending surge extends across big tech. Amazon, Google, Microsoft, and Meta plan to spend a combined$660 billion in AI infrastructure in 2026. That is up 60 % from 2025. Okay, to help us break down this debt offering from Google, we're speaking with Gil Luria, Head of Technology Research at DA Davidson. Gil, Good to see you. Good to see you. So Google just raised nearly$32 billion worth of debt in less than 24 hours.

4:22Ed Elson:One of the largest debt offerings in a really long time. Take us through this. Why does this matter? What does this mean for Google?

4:30Doug O'Laughlin:There's tactical and strategic aspects to this. So part of this is treasury management. Google has plenty of cash. They probably have$80 billion of net cash. They can cover all of their CapEx needs with the cash flow they have from their traditional advertising business. But they're choosing to borrow money to create more capacity. This is very low-cost borrowing for them. And it aligns them with where they need the cash. Sometimes you have cash in one country and you actually need another. And so a lot of this is tactical, treasury management. Some of this is strategic, though. But let's not forget that Microsoft, Amazon, Google, OpenAI, Anthropic, Meta, Elon are all in this big competition to be the biggest winners in AI, which is going to be a very expensive competition that many of them believe is going to be winner take all or at least winner take most.

5:28Doug O'Laughlin:They believe that because their existing markets are like that. So what they're trying to do, and Google is doing this by issuing a 100-year bond, is to say, we're in it for the long haul. We are going to spend as much as it takes to win. And they're not the first ones to do this. Mr. Zuckerberg at Meta signaled the same thing by increasing his capex continuously and by paying tens of billion dollars for talent. I forget, he paid$14 billion to hire Alexander Wang. So we're having this kind of signaling in the market by these really large players that are saying, you know what, we're going to outlast everybody.

6:09Doug O'Laughlin:You should blink before we do.

6:12Ed Elson:Is this of concern at all? The fact that, you know, we know that they're spending all of this money on CapEx and it just exploded. We just learned in their previous earnings, they're going to spend$660 billion on AI infrastructure in 2026. Something we've been saying a long time is, you know, that's a lot of money, but this is money that they have. Now we're seeing these gigantic debt offerings, which is basically them saying, no, now we need to borrow money to do this. Is that a concern or is this kosher?

6:43Doug O'Laughlin:I would say that it's a concern for whoever loses. Whoever wins, all this CapEx will have been a great investment. If there's any losers in that group that I mentioned, they're going to be stuck with a lot of infrastructure that they're going have to sell at a discount. So that's the concern. But in terms of borrowing, especially if we're talking about Microsoft, Amazon, Google, and to the extent Apple ever gets into the game, they have so much cash flow, so much cash on hand that them borrowing is more a flex than anything else, right? Banks always prefer lending money to companies that don't need to borrow.

7:23Doug O'Laughlin:And this is a great example of that. Google doesn't need to borrow, which is why it's so easy for them to borrow a lot at a very inexpensive price. And again, signal to the market that they have a lot more capacity than just their cash flow, which, by the way, is huge anyway.

7:40Ed Elson:The market's reaction was, you know, tepid. The stock was down a little bit after the debt offering. Very different from what we saw last week when Oracle made the same move. and you saw just a giant crash in the stock down around 9%. Is that markets telling us we think Google does have the capacity to borrow right now and we don't think Oracle does?

8:04Doug O'Laughlin:Yeah, Google has the cash and the cash flow to support paying back that interest for a very long time. By the way, Google has been down the last couple of days. There's starting to be a reversion to the mean, right? Google is multiple is now in the 30s. Microsoft and NVIDIA in the low 20s, in spite of the fact that the growth rates are similar, and I would argue Microsoft and NVIDIA are just as well positioned in the AI race. So, we're starting to see a reversion to the mean. Oracle is very different. Oracle really painted themselves into a corner. They committed to an infrastructure build-out that required them to raise a lot of capital in order to execute.

8:45Doug O'Laughlin:They don't have excess cash flow. They're really stretched right now. But the good news is it looks like they will be successful in the raise, which means they'll be able to deliver. And if OpenAI can raise their own$100 billion by the end of the quarter, which is the most important thing in AI right now, OpenAI will be able to pay for that Oracle capacity. And we can all breathe a sigh of relief for Oracle, which, again, really was in a little bit of a bind.

9:11Ed Elson:Yeah, we should mention, I found this fascinating, you guys over DA Davidson, you upgraded Oracle to a buy, which is interesting because you're one of the people who's been kind of sounding the alarm on the position that Oracle has found themselves in over the past few months. Take us through the upgrade on the stock. Why have you regraded to buy?

9:33Doug O'Laughlin:Yeah, so we sounded the alarm when the stock was$345 trading 45 times earnings, and OpenAI looked to be losing momentum. What's happened since then is, first of all, Oracle stock went down to 143, 18 times earnings. And then OpenAI, very importantly, a few things happened there. One is OpenAI started to focus. Instead of being spread too thin, making promises they can't keep, and trying a lot of different things, they're refocused on their frontier model and on ChadGPT, which you can tell by the fact they're starting to advertise. Second thing that happened is because Google made such a splash with Gemini and just reported really good earnings this week, that really scared Microsoft, Amazon, and NVIDIA, which means they're very likely now to give OpenAI that $100 billion.

10:26Doug O'Laughlin:And then finally, OpenAI is probably pretty close to introducing another model that'll be another leap forward, should become the state of the art again. So if OpenAI has a state-of-the-art model, is focused on the business and can raise the capital, then it will be able to pay all those bills that we were worried about. So that's what's changed. Oracle's stock price went down a lot. People were expecting OpenAI to not be able to deliver. And because OpenAI has gotten their act together, now it looks like OpenAI will be able to pay those Oracle bills. And again, bail Oracle out of a very tough situation.

11:05Ed Elson:The other thing, just before we let you go, that I want to hear from you on, the SaaS is dead, software is dead thesis, which really played out last week. All the software stocks got absolutely crushed. We've seen a little bit of a rebound this week, not fully or not totally equally distributed across the software stocks, but as a whole, tech is rebounding, software's rebounding a little bit. But where do you stand on this debate at this point? People said last week, software is dead. AI killed it. Where do you stand today?

11:44Doug O'Laughlin:AI is a major disruptive force in all of technology and the whole economy and specifically for software. What happens when you have major disruptive forces is that excellent companies and good businesses execute well and win. And companies that are not very good and not very good markets end up falling by the wayside. That's true in software as well. But what happened the last couple of weeks is that all software stocks sold, regardless if they're in the first or the second category. And we love that because that's what creates opportunities. I've been a software analyst for a long time. I've always resisted putting revenue multiples on any company, including software companies.

12:23Doug O'Laughlin:We don't have to anymore. These companies are now trading on free cash flow, on their actual profit. And you had an opportunity last week to buy unbelievable companies like Snowflake and Datadog at 35 times cash flow, Microsoft at 20 times earnings because of this onslaught on all of software that, again, ignores the fact that Datadog, Snowflake, massively big winners in software, Microsoft, massively big winner in AI. but the sentiment against software was so negative that really good companies that are executing well and are well positioned for AI were selling alongside companies where the disruption may actually hurt them even though they have some years to execute.

13:08Doug O'Laughlin:I understand that part. But again, I love the opportunity to buy companies growing 15, 20, 30 % on a multiple of cashflow. We've never had that and that's a great opportunity for investors.

13:19Ed Elson:All right, Gil Luria, Head of Technology Research at DA Davidson. Thank you, Gil.

13:24Doug O'Laughlin:Thank you, Ed.

13:26Ed Elson:After the break, why memory chip prices are soaring. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

13:48Doug O'Laughlin:This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed Sponsored Jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, Sponsored Jobs have four times more applicants than non-sponsored jobs. So go build your dream team today. with Indeed. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hey, Kara Swisher here. I want to let you know that Vox Media is returning to South by Southwest in Austin for live tapings of your favorite podcasts.

14:25Doug O'Laughlin:Join us from March 13th through the 15th for live tapings of Today Explained, Teffy Talks, Prof G Markets, and of course, your two favorite podcasts, Pivot and On with Kara Swisher. The stage will also feature sessions from Brene Brown and Adam Grant, Marquez Brownlee, Keith Lee, Vivian Tu, and Robin Arzon. It's all part of the Vox Media podcast stage at South by Southwest presented by Odoo. Visit voxmedia.com slash SXSW to pre-register and get your special discount on your innovation badge. That's voxmedia.com slash SXSW to register. Really, you should register. We sell out and And we hope to see you there.

15:12Doug O'Laughlin:This is what President Trump had to say about why the United States is at war with Iran. We sought repeatedly to make a deal. We tried. They wanted to do it. They didn't want to do it. Again, they wanted to do it. They didn't want to do it. They didn't know what was happening. Not the best explanation for a war of choice, sir. I'm personally a do-my-own-research kind of guy, but let's ask AI why we're at war with Iran. Chat? The United States attacked Iran in 2026 because it claimed Iran posed an imminent threat, particularly due to Iran's advancing nuclear program and missile capabilities, and aimed to reduce Iran's ability to project power in the region.

15:56Doug O'Laughlin:Wow, that was a better explanation. Thanks, chat. Fitting that AI was more clear than the President of the United States, because it turns out the United States is using AI to fight the war in Iran. The future of war is AI, and that future is now here. You can find out whether or not you should be freaking out over in the Today Explained feed.

16:23Ed Elson:We're back with Prof2Markets. Memory chip stocks are on a relentless tear right now. Shares of the three industry leaders have soared in the past year. Samsung is up 200%. Micron is up 300%. SK Hynix is up 340%. All of the memory chip stocks are soaring. And the reason is because AI data centers are devouring memory chips, leading to shortages across the rest of the tech industry. Meanwhile, shares in Qualcomm and ARM declined after they warned that these memory constraints could cap smartphone production. Apple's quarterly earnings were clouded by the same concern. So what are these memory chips exactly?

17:07Ed Elson:And why are they so precious right now? Well, to answer these questions, we're speaking with Doug Laughlin, president of Semi Analysis. Doug, thank you for joining us on Prof2Markets.

17:19Gil Luria:Thanks for having me. More than happy to answer whatever questions you guys have.

17:23Ed Elson:We have plenty. So chip stocks are soaring this year, memory chip stocks, that is. Can we just start with the basics here? Like, what do memory chips actually do?

17:36Gil Luria:So, like the word implies, memory often stores something for recalling later, kind of like how our memory works. Now, there's two key styles of memory, which is DRAM, which is non-persistent, meaning it works while it's plugged in. and there's something called NAND or actually there's also hard drives as well, but for most people really care about DRAM and NAND. Now NAND is non-persistent, meaning that you can unplug it and it will still hold your information. So when you turn off your computer, all your files are still there, that's on NAND. But when you turn on your computer, most of the time it's using faster memory, which is called DRAM.

18:14Gil Luria:So those are the big categories of memory and there's actually kind of this newer category called HBM, called high bandwidth memory, but don't want to get too into weeds too quickly.