How Leverage Turned An AI Boom Into A Crash

27:11It's all of these products that we are presenting to young people as if they are a legitimate financial product that is very complex and sophisticated. And if you can figure out how to do it, then that means that you're smart. And a lot of people get lured into this stuff. And so I think we could be doing a way better job of describing to people what it really is. Another example would be buy now, pay later. It's a little different. But what we had when that industry exploded was you had these companies going around and saying, hey, this isn't credit. We know that you guys don't like credit cards.

27:46We know that you guys don't like debt. This is a new thing where you buy it now, and then you just separate the payment up into little increments and you pay it later. And this was the story that they told us. They said that we were the debit generation. We don't like credit, so we prefer to do buy now, pay later, which is literally the definition of credit. And eventually, our regulators kind of stepped up, but honestly, it was a little bit too late. And they said, you need to be clear with people about what your product actually is. It is credit. It is debt. It is leverage. It is not a form of debit.

28:21It is not just taking it out of your checking account. So it's issues like that. I think we need to be a lot more serious about making sure that people know exactly what they are buying, what the risks actually are. We could actually put these warning labels. Another example would be events, contracts, in the prediction markets? Are we going to step up and start explaining to people what these instruments actually are? But we've decided, no, we don't want to do that. Or at least this SEC has decided they don't want to do that. So I think there's a lot of work that is to be done. I have another angle on this South Korea story, which I think is very interesting.

29:03But before I do that, I'll just get your response.

29:05Scott Galloway:I agree with everything you've said. Don't tease us. Don't be Rachel Maddowing me.

29:13Well, when you think about why has this happened, why are all these young people flinging their money into these leveraged ETFs and then praying that the stock goes to the moon and then being upset when it crashes to the ground? If you look at South Korea on a demographic basis, there are few nations in the world that are experiencing a loneliness crisis more severe than South Korea. You look at their marriage rates, which have declined 40 % in the past decade. You look at the fertility rate, which hit 0.8 last year. It's the only OECD nation with a fertility rate below one. you look at what the local governments are doing where they're actually paying people to get married now i don't think it's a coincidence that they're suffering the same loneliness crises that we're starting to see in america and also seeing the same sense of financial nihilism that is becoming pervasive among young people such that they are levering up on these names uh and praying and hoping that that it'll take them into a state of financial security and success.

30:22I think the two are definitely linked. I think South Korea is ground zero for the problems that we're about to see in America.

30:29Scott Galloway:I think that's really insightful. And I hadn't connected those dots. And it seems pretty obvious the way you lay it out that that's got something to do with it because 3 % of Americans, I don't know what is in South Korea, but 3 % of Americans have a gambling problem. It's 10 % of young men. And one of the most beneficial things for a young man, if not the most beneficial thing, is a relationship. And one of the most beneficial things for a young man in a relationship is, quite frankly, guardrails. And that is, what the fuck are you doing? I thought we were saving for a house, right? Or no, you know, don't take these kinds of risks with our money.

31:07Scott Galloway:And sometimes it's the opposite, right? Not as often, but people check each other when they're in groups. There's not only a wisdom of groups, there's a wisdom of relationships where you check each other. And the fact that fewer and fewer young people are connecting, and it sounds like the trends are... Also, if you're expecting a child, your risk profile goes down. You think, well, maybe I shouldn't be in this five-to-one levered fun because I've got to rent a place with a second bedroom. So there's definitely something. Also, relationships are hard, but they give you a lot of dopa. They give you a lot of upside.

31:49Scott Galloway:They keep you busy. And when you're lonely and looking for a dopa hit, I mean, and I'm addicted to this. When I used to buy options or sell calls, it's fun. And, you know, the more time you have or, you know, or the less time you're spending on kids or just focusing on work. And so what do you have? Fewer guardrails, a greater risk profile, fewer people to keep you in check. And quite frankly, you're probably just bored and looking for some entertainment value. But I think that's a really insightful comment. I hadn't connected those dots. Yeah. And hoping that this is the way that you're going to get rich.

32:25And then maybe if you get rich, then that will mean you get a relationship. I mean, if we just look at the relationship inequality in South Korea specifically, specifically only eight percent of the men in the bottom decile of earners in south korea are in a relationship currently and in the top decile it's around four times higher so there is clearly a connection in south korea and probably just in the world between financial success and romantic success um and i think that a lot of young people in south korea similar to what we're seeing in America. They think, I'm not going to be able to afford a home.

33:03I'm not going to be able to afford a life. I can't get to where I want to be by just continuing to work the current job I'm in and continuing to do the wage treadmill. And so I need to figure out a way to get 2 ,000, 3 ,000, 4 ,000 % returns. And this is my ticket to doing it. And for maybe like a handful of people, it works. And then for the rest of them, we're seeing this in the statistics, for the majority of the people who take that risk, it ends up being literally ruinous. And I think nothing tells that story more than the funeral riz that we're seeing outside the National Assembly Building in Seoul.

33:42Just one final point. This is rising in America. You look at US-leveraged ETFs, they've jumped from$120 billion in AUM in April to more than$200 billion today. It's up nearly 70 % in just a few months. The number of US leveraged ETFs has more than doubled since 2025. And more than half of them are single stock ETFs. It was the exact same thing that got South Korea into trouble. So it'll be really interesting to see how this plays out in the US. I think the same trend is happening, but it's almost like we're maybe a couple of months behind South Korea, or at least we're less concentrated than South Korea is because of how dependent their stock market is on those two names in particular.

34:25But the same trends are beginning to happen. And I think it can only end badly.

34:32Scott Galloway:Leverage is risk. It's not a strategy. And I agree with you that, I mean, what you basically said, the cross way of connecting with Doxner on Cosby is a lot of young men think that leverage is going to get them laid. And that is, a story as old of time, only 40 % of men throughout history have reproduced, 80 % of women. And men don't have the right to reproduce, and women aren't obligated to service men. But the reality is a minority of men have had the opportunity to find a mate and to reproduce. The greatest innovation in history, which is not GPS or AI, but the American middle class, gave a lot more men agency to build a home and, quite frankly, attract mates.

35:15Scott Galloway:that is a uniquely Western post-World War II phenomena. 75 % of men in the West have had the opportunity to reproduce. And when men feel as if they don't have the, and unfortunately because our society has become so much about the idolatry of money and we've created a system with weaker social safety nets, you're kind of unviable in the eyes of a potential mate. I mean, essentially relationships have become a luxury item. And we're regressing to the law of the jungle where the world is basically Porsche polygamy, where a small number of men, through luck or hard work or inheritance, get all of the mating opportunities.

35:53Scott Galloway:And from 45 to present in the West, we gave a lot more people the opportunity to have mating opportunities by reinvesting in the middle class. And when we have this sort of income inequality and the general public decides we'd rather have a super class of billionaires and giving more people an opportunity to be millionaires, you end up with returning to the way the world has been through the majority of history, and that is a small number of men have all of the mating opportunities. But the problem is those types of societies collapse on themselves because those men get very angry and upset, and a strong man takes advantage of that anger and invents wars or starts blaming people or saying the enemy is within.

36:33Scott Galloway:So this is, I like this framing, but this is a story as old as time. And again, I don't think we fully appreciate that the middle class is this incredible innovation that requires investment and is not a self-occurring or it's not a self-healing organism that's a natural part of history. A middle class and the majority of people having the opportunity to find someone to love and have children with, that's the anomaly. That's the exception to history. And by the way, it's fucking wonderful and a huge achievement on our society. And it's worth investing in. We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube and Spotify and wherever you get your podcasts.

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40:41We're back with ProfG Markets. Big Tech reported earnings last week. We got earnings from Microsoft, Amazon, Meta, and Apple. The winners were Microsoft and Amazon. The losers were Apple and Meta. Meta shares plunged 8 % after earnings. Apple shares plunged 7%. Meanwhile, Microsoft and Amazon were up 16 % and 14 % respectively. Scott, I'm going to jump right into these earnings because there is so much to get into here. And I think we should probably start with the winners. Headline numbers on Microsoft revenue really strong, up 18%, net income up 31%. They beat on earnings per share. You know, that's good.

41:25But I think the numbers that actually matter are the AI numbers, because in this market, AI is the only thing people care about. So their cloud revenue was up 43%, which is really strong. That's the money that they're making, sell and compute. their productivity and business processes market, and that houses their Office 365 product and also Microsoft Copilot. This is the segment that was supposed to get crushed by AI. That is up 14%. So some strong growth there. They also reached over 30 million paid seats on Microsoft Copilot. There are some nuance there that we could get into, but free cash flow is down, down uh not negative but down it fell 23 percent uh it's pretty good compared to google's free cash flow which of course turned uh negative and also compared to amazon which we'll get into which also turned negative but the market was really excited about this and the stock has been rewarded pretty pretty massively your reactions to microsoft's earnings scott like it was it was nothing

42:30Scott Galloway:short of staggering. And I think I got to think the reaction to the markets around Microsoft and Amazon make them make for each of them some of their best single day gains in history. And they're both sort of proved the thesis that if you can point to actual revenue from AI, co-pilots 30 million paid seeds, AWS growing 37 percent, its fastest clip in five years, the market rewards you up 16 and 14 percent. And Meta sort of is the opposite. And that is, if you spend billions on AI with no clear monetization story and Wall Street stops giving you the benefit of the doubt, the market is starting to stop giving you the benefit of the doubt is the way I would put it.

43:14Meta's free cash flow fell 91 % down to$784 million with zero explanation or visibility into what they expect the payoff to be.

43:25Scott Galloway:People are starting to say, okay, is this investment or is it faith-based spending? and the the real thing the tell buried in the amazon numbers that i don't think the market has digested yet is that 53 billion of their 63 billion in net income came from their anthropic stake and if you strip that out the beat is mostly mark to market gain on private investment not operating performance and also a similar story at alphabet 87 of the combined amazon alphabet net income traced back to Anthropic and SpaceX gains. So it's really weird. These companies are beginning to trade less on earnings and more.

44:10Scott Galloway:People are starting to try and price their VC portfolio marks. The Apple earnings were really interesting. The problem is in demand. iPhone sales were up 22%. I just think that's staggering. I wouldn't have guessed that because I thought the latest iteration was just sort of meh. And that's a June quarter record, right? So record increase in iPhone sales. The issue they're having is supply. The quote unquote, Tim Cook's hundred year floodline on memory pricing is Apple for the first time in a decade, not fully controlling its own cost structure. You know, supply chain has always been, in my view, their competitive advantage.

44:49Scott Galloway:And that's sort of new territory for a company whose supply chain command gave people the sense that they were the controlling feature in the supply chain and they aren't able to control the memory prices. And then where I'll wrap up here, the real story under the story here where you'll see articles next week is that markets able to absorb these numbers is CapEx. Alphabet spending up to$205 billion, Amazon$220, Meta$145 billion, and Apple spending$11 billion. And so I think one of the reasons Apple's had a pretty decent run-up is that everyone else is betting the company on AI infrastructure, and Apple's betting the company on not needing to, which I actually think is the right bet.

45:39Scott Galloway:And we'll find out in 18 months who was right. But I was sort of blown away by, I wasn't surprised on some of the numbers here. I was surprised, I was blown away by the market's response, especially to Amazon and Microsoft. What are your thoughts, Ed? I think the CapEx story is definitely one of those stories underneath the stories. And I think that's something to keep track of. in the case of Microsoft, their CapEx was unchanged for calendar year 2026, which I think the markers are pretty happy about. And then as it relates to the next 12 months, they basically just said that the CapEx would go up.

46:22And that's all they said. They didn't really give a dollar amount, which is Gil Luria said when he came on the show last week, was kind of them sort of playing it safe. They're saying, yes, the AI thing, we're still investing in it, but we're not investing in it like crazy. And I think that was something that the market responded to quite well. I would just say on the AI ROI question, because this is the big question, like how are you going to monetize your AI investments? It's clear that Microsoft is doing it through their cloud business, selling the compute to AI companies. It's clear that Amazon is doing that too.

46:59The trouble is how much of that is going to two companies, specifically OpenAI and Anthropic. And the answer is we don't know because they won't tell us. What they have told us, what Microsoft told us, is that they told us something about their remaining performance obligations, which is their future revenue coming down the pipeline. In January, they told us that half of those remaining performance obligations were tied to OpenAI. This quarter, they told us that the 82 % growth they were registering in their remaining performance obligations would have been 25 % if it weren't for OpenAI. So they're telling us in so many words that they are pretty dependent on OpenAI, but we're still not getting a clear sense of exactly how dependent they are.

47:49And I think if we really wanted to understand these businesses, then the big tech companies would tell us this is how much of our revenue in this quarter was derived from two companies, specifically OpenAI and Anthropic. Maybe we throw SpaceX in there, too. And the reality is that Microsoft is the one that's been given us the most disclosure on this front. Amazon has told us nothing about it. Google has told us basically nothing as well. We really don't know how much they are reliant on these two companies or these three companies, which, as we have said before, those are companies that are losing tons of money.

48:27And it's not really clear how sustainable this business model actually is. Which brings me to something you mentioned, which I think is the realist story of the stories, which is the fact that in the case of Amazon specifically 85 percent of their net income was derived from their stake in private companies specifically Anthropic and now OpenAI and in the case of Google that number was 87 percent but for Anthropic and SpaceX and so the paper gains that these companies are registering in their private AI investments, and who knows how they're valuing these companies, are now being funneled into the bottom line of their earnings.

49:14And the real problem is when you look at the price-to-earnings multiples of these companies. Because you look at Amazon, which is on a tear right now, the stock's up 20 % year-to-date, uh google uh is up around 11 year to date and yet their multiples have come crashing down so amazon's pe multiple right now is 19 times earnings last year it was 32 and so you look at that valuation multiple and you think oh my gosh amazon is really cheap right now and i'm sure that a lot of investors have looked at that multiple and gone wow now's a great time to buy amazon look how cheap the valuation is. Look at the S &P, which is on average trading around 25 times earnings.

50:00Amazon is at 19. What that number isn't telling you is the extent to which the private investment in Anthropic is juicing the net income, which literally tripled last quarter because of that investment in Anthropic. And the same goes for Google as well. So this is the new problem that we're really starting to see based on these reports here, which is that we now need to create a new price-to-earnings multiple that reflects the real multiple of these companies. We now need to create a PE that subtracts out their private investments in Anthropic and OpenAI and SpaceX, because those private investments are distorting the most fundamental valuation metric that exists in markets, and that likely many investors are basing their portfolio strategies around.

50:54So we're getting some very murky territory here. By the way, we did the analysis. If you took out those investments, Amazon's real PE would be 30 times earnings and Google's would be 31 times earnings. So they're actually a lot more expensive right now than the valuations would imply or the multiples would imply. But this gets to what we've been talking about with the SPVs and the trouble with the forward earnings. where OpenAI just comes out with these contracts and says, this is how much we're going to make and spend over the next several years. Point being, traditional metrics have been compromised by AI, and it is becoming increasingly difficult to get an actual understanding of what these companies are worth.

51:34Scott Galloway:Yeah, you're just saying, I think that analysts have an obligation, and good analysts will do this, to have kind of venture-adjusted earnings, right? And those earnings do, that money does flow back to shareholders, but it's a sugar high. It's not anything structural about the business. Maybe they would argue, well, actually, given our position in the marketplace, we're going to have future opportunities to make these types of investments. But that is kind of empty calories from a street standpoint, because it's great for the time being, but we can't count on that money. The lessons I take away from this are the following.

52:11Scott Galloway:So I have an investment in an AI adoption company called Section. And Section works with big corporations on how to upskill their employees for AI competence, so to speak. And one of the things, one of the learnings from them is that Microsoft's co-pilot, their AI offering, is not considered one of the frontier models. It's not considered one of the better models. At the same time, Microsoft 365 co-pilot has over 30 million paid seats, meaning that Microsoft has one of the largest revenue-producing AI products in all of tech. And that is, I think the business lesson here is, okay, having the frontier model, the best model, is important.

52:57Scott Galloway:What's profound is your ability to get mass adoption. And I just see the narrative right now from Microsoft salespeople in the field. Well, we're already in the enterprise. You've already checked us for bugs and security risks from AI. Yeah, maybe we're not quite as good, but you know us. You love us. We've got billing set up. It integrates into the rest of your Microsoft workflow. This is just plug. And by the way, we're Microsoft. We're scared. We're a public company. We're the least likely ones to have a hugging bear like whatever it was, AI jailbreak within your company from our AI. You really want to trust all these little AI companies that might have a better product, but we're Microsoft.

53:44Scott Galloway:And it's, I mean, it's just, these companies have such an advantage with their installed base. Microsoft probably has the most consistent recurring revenue business in the world. Something like 97 % of the global 10 ,000 corporations have a monthly recurring revenue relationship with Microsoft. And then the other takeaway for me was the technology will outlast these valuations. The internet outlasted the crash of 2000. And I think that AI will outlast what I think is going to be a crash in these valuations. The place I think valuations will actually increase as it relates to AI are two places.

54:32Scott Galloway:autonomous. I'm in LA. I've been taking Waymos. I'm just fascinated. I think we're hitting a tipping point where autonomous vehicles or autonomous ride hailing is about to go parabolic and Alphabet has 5 ,000 operational autonomous vehicles. I think Tesla has 24. And the amount of data they're collecting to trust, AI as it relates to autonomous is a big winner. And then And the second place is AI as it relates to industrialized robots. And that's where I think Amazon is going to really, really register incredible benefits. And then the other what I'll call AI bet that's going to pay off is not betting.

55:14Scott Galloway:And that is I think Apple's taking the same approach to AI they took to search. And that is they're saying, OK, you guys fight it out and enter into this capital war. and we're just going to wait in the background and figure out a way to charge one of you an enormous licensing fee for access to our billion consumers. But never missing an opportunity to pat ourselves on the back. What was our big tech stock pick for 25, Ed? Google. It was Alphabet, and I think it was up 68%. It was the best performing big tech. What was our big tech stock pick for 26? Amazon. So let's just review year-to-date stock movement.

55:51Scott Galloway:Meta's off 15%. Microsoft's down 5%. Alphabet's up 12%. Apple's up 12%. And survey says Amazon year-to-date is up 15%. It's the number one performer as of this morning in big tech. This is all, I find it all super interesting. And then the final takeaway is the following. For all of the shitposting, not you, but I do about big tech and its harms, these companies are so incredibly well run. their ability to balance what to let flow to the bottom line in return to shareholders in the form of earnings or stock buybacks with what is the right level of forward-leaning investment based on the ecosystem and the market and what the markets will register or not register.

56:38Scott Galloway:These companies are just so incredibly well-run. But I think the concern is that that's not true anymore. I mean, Google's free cash flow is negative. Amazon's free cash flow this quarter is negative. Meta is spending tens of billions of dollars on data center infrastructure. And I mean, you look at why did the stock plummet? It's because Mark Zuckerberg did not have an answer as to how he's going to generate a return on those investments. I mean, we saw the reporting about how he's going to build a cloud business. And he was asked point blank. He didn't discuss the cloud business. He didn't address the reports about how Meta was in talks to sell its compute to Anthropic.

57:23He simply avoided the question. And that's exactly why the stock tanked. Now, I think that there's an open question as to whether these guys are geniuses when it comes to CapEx. And they are geniuses when it comes to managing the balance sheet. But that's certainly not a given at this point. And it's certainly the thing that markets are trying to digest and trying to ascertain. I mean, Zuckerberg has an okay track record. Like, he's clearly a great founder and a great business person, but he did have the metaverse. And he did lose$80 billion on that thing, and he did change the name of the entire company on a pipe dream and a vision of the future, which did not come to pass whatsoever.

58:11So, I mean, I think this is an open question for a lot of these companies. And I think for me, I do think we are getting to a place where you do want to see more responsible spending. You don't want to see free cash flows turning negative. I mean, considering the amount of money that these companies are generating to begin with, the idea that you would spend all of that. And then, as we're now seeing, issue debt to finance these plans. That, to me, does seem irresponsible. And I think the only company out of the list here for whom I feel probably better about in terms of how they are managing their AI risk would probably be Microsoft, whose free cash flow is coming down, but it's still positive and they're still in a better position.

59:02I thought you were going to say Apple.

59:03Scott Galloway:Apple's mostly on the sidelines in terms of AI cash. Yeah. So, so Apple, I have a slightly different view. Apple, I'm actually not even putting into this list because it's just a completely different company now. I mean, they are firmly not in the AI race. They have been rewarded for not getting into the AI race. And yeah, that, that, that's what investors are excited about. I have a slightly different view on Apple, which we can get to. I'm not so bullish on the company, uh, at the current price at least, but as it relates to the AI companies, this is an open question for sure. So I would argue as if I were on the board of these companies, like use the word irresponsible.

59:43These companies, what they're doing is the following, but on a, Apple decided, all right,

59:50Scott Galloway:Zuckerberg's going really big into headsets, into a consumer device. He's probably wrong. All the data shows he's wrong, but let's take one or$2 billion, throw it at a headset, get Tim Cook on the cover of Vanity Fair. And if he's right in this whole new world of spatial computing is the next thing, we need to be letter D when we find that out, not letter A and be flat-footed. I think these companies on an exponential level have said AI may be the next thing. And the level of spend that warrants is up for debate. And that's what you're saying, that the level of spend is out over its skis relative to, And to be fair, it felt good lost yet.

1:00:30Now I'm like, what are we doing here?

1:00:33Scott Galloway:Well, to be fair, the market is turning from will AI work to will AI pay? That's the question, right? Having said that, I think their level of CapEx and whatever you want to call it, the efficient frontier of investment. These companies are such cash volcanoes, Ed, that if AI ended up being a giant head fake or the CapEx does not justify the short and medium term return, they're fine. I mean, Anthropic and OpenAI go out of business or go down 90 % and they get bought by one of these companies. But these companies have to play aggressively in this field. And quite frankly, they could see all of their capex, all of these companies that we're talking about here, because we're not talking about Anthropic or OpenAI, all of these companies could see their capex go to zero.

1:01:20Scott Galloway:It would impair their stocks for 12, maybe 24 months, and that's it. So now, are they spending too much? Okay. I think there's a solid argument that they may be. They have to put a lot of chips down on this AI number. They cannot get caught flat-footed. And the amazing thing about being a monopoly in your respective field, whether it's social or e-commerce or search or enterprise software, is that they can afford to take these types of bets. And if it doesn't work out, you know, it's going to be a bummer for several quarters. But the bigger bummer, it's sort of like when Janet Yellen said, they overdid the stimulus in America around COVID.

1:02:09Scott Galloway:And she said the risks of overdoing it were much less than the risks of underdoing it. And I would argue that the CFO and the CEOs of these companies say, Apple's taking a different strategy per your comments. But the rest of them are saying the risk of underdoing AI and being the company that got displaced because we didn't bet in the future versus the risk of having, you know, to take huge write downs over the next six, eight quarters. And then we're back to the fucking cash volcanoes we've always been. That's a good risk. Yeah. What the efficient frontier or the right place on that line is, I agree with you.

1:02:48Scott Galloway:That is now people are starting to say that curve is too steep right now. But these guys, it's good to be king. They can make these kinds of bets. And if they don't work, they're still fine. We'll be right back. And for even more markets content, please sign up for our newsletter at ProfitMarkets.com. Thank you.

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1:06:24We're back with Prof G Markets. All of that anxiety that I am expressing about overdoing it, overinvesting, that's all being reflected in current prices. And I think a decent argument to make is to think, OK, let's imagine that AI just disappears, that the AI thing doesn't work at all. Open AI goes out of business if that's the case. Anthropic goes out of business if that's the case. A lot of the names that have become very popular during the AI boom maybe won't go out of business, but certainly their businesses will be really, really harmed, perhaps ruined. For big tech, that's not the case because big tech was still king before AI.

1:07:10So I think an interesting question to consider is how did the market price these big tech companies before the AI boom? And the answer is, we went back and looked, the multiples were higher. So you look at Meta at the beginning of 2023, just a few months after ChatGBT was launched, Meta was trading at 31 times earnings. It's currently trading at 20 times earnings. So it has been the market. It is not an AI winner based on the multiple. the market has decided that this is a real problem and they are they are certainly pricing in the risk when it comes to meta microsoft is down from its uh multiple at the beginning of 2023 uh technically amazon and google are also down but again we need to make those adjustments because of the weirdness because of their net income but if you look at amazon if we find the real PE, it's 31 today.

1:08:09It was 79 at the beginning of 2023. Google is up a little bit. So Google, you could argue, is priced a little bit expensively. But the outlier is Apple. It's trading at 38 times earnings today. January 2023, it traded at 21 times earnings. So the market has attached a premium to Apple simply for not engaging in the AI race. And the question is, do you think that makes sense? I would argue it doesn't. I would argue, sure, maybe they've not gotten involved in this big contest of who can build the most amount of data centers, and maybe that's good. But what I would like to see from a company like Apple is, here's what we're investing in instead.

1:08:59We're going to take this other route. And it's not going to be AI. And instead, what they've done is they have literally done nothing. And for some reason, the market is communicating to us that they believe that there are huge growth opportunities for Apple. But to me, I don't know what those growth opportunities actually are. I don't think it's growing their share in the smartphone market, because the only way they could do that is to reduce prices. They already have a fifth of the global market, and they can't do that right now because memory prices are going up. You could say, oh, they'll build the headset, but the headset was a giant flop.

1:09:31I don't think that's going to work. They're not building a car anymore. Like, I don't actually know how they're going to grow into the multiple that they are currently commanding, which is why I think that actually Apple's the most overvalued of all of them. And you could argue they made the right call, maybe, by not getting into AI. But it's like, well, what are you getting into? Are you just going to rest on your laurels and sit around?

1:09:56Scott Galloway:Well, resting on their laurels has been the right. People have been shitposting Tim Cook for decades around not getting into other products and get into the car. And they decided, no, it's not working and they pulled the plug on it. I think their discipline around basically saying the iPhone is the most profitable product in history and continues to be the ultimate signal of wealth and utility, of wealth, aspirational value, the billion most important people in the world have one thing in common, and that is to use iOS. And so your point, and I think it's a valid one, is that Apple trades in terms of a P in multiple as if it's a growth stock and it's a mature company.

1:10:37Scott Galloway:But what they would say is the following. Mature, bitch, our revenue is up 16%. We've managed to increase revenue on one of the largest top-line tech companies in history, 16%. We are a growth company and deserve a growth multiple. The other thing that is different about Apple— Do you think that sustains? I agree it's phenomenal. Like, the fact that they've been able to grow the iPhone revenue the way they have double digits pretty consistently, like, it's really impressive. But do you think that that lasts for the next 10 years, say? Okay, is it sustainable? I think Apple is the ultimate indicator of wealth and creativity.

1:11:19Scott Galloway:And what you have globally with demographics and productivity is that income inequality is infecting every nation. And that is the top 10 percent of every nation, even now in China, is starting to aggregate more and more of the spoils. And it used to be once you go into the middle class, you buy a car, you get air conditioning and you start buying beef. Once you get into the top 10 percent, you buy an iPhone. And I think there are going to be millions, tens of millions of people in India and Indonesia and other growth markets, Southeast Asia, that the first thing they do is they buy an iPhone.

1:11:56Scott Galloway:Also, it is a little more resilient, much more resilient to the vagaries and unknown wild west of software, specifically AI, because of all these companies. Look at all of the things they offer. Maybe with the exception of Microsoft Office, you would say the most enduring thing and the hardest thing for any of them to replicate is hardware. And that is none of these companies have been able to produce anything that doesn't get. I mean, what is it? The Microsoft tablet, the Amazon Fire Phone, the what was it called? Facebook's portrait computer hardware. Apple and the iPhone, in my view, have the biggest moats.

1:12:38Scott Galloway:China is flooding the market with open-weight LLMs that pose a real threat to the AI components of these companies. You know, a lot of people were saying Atlassian posed a real threat to Microsoft. Did it or did it not? What's the competitor to Apple's hardware? Do I think Apple's probably overvalued right now? Probably. I'm not selling any stock, though, because if there's one company in 10 years that I think will still be producing a product that has gigantic margins and be the ultimate, the best bet, the biggest moat in all of these businesses right now are probably Amazon's warehouses. Agreed.

1:13:17Scott Galloway:Number two and number one would be the iPhone. I just think that's going to continue to gush your money for a long time. I totally agree with that. But to me, that is an argument as to why their current business and their current market share is protected. To me, it's not an argument as to why it's going to grow. And I look at that multiple, and I think what the market is saying is that it's going to grow dramatically over the next several years. I agree. I mean, and by the way, they have accomplished all of the things that you have described. Like, they have 20 % market share of this global smartphone market.

1:13:56So all of those rich people, like, they've already got them. And to me, if you want to grow that business, now you have to actually go not to the rich people, but you have to go down the income stream. And to me, I don't think that they should do that because I think that they should protect their positioning as the premium luxury product in hardware. But I could see that becoming a potential route that they want to take. And it could look like it looked like for Nike, where Nike decided, OK, let's lower prices to expand our market. And it had a bad impact on the brand. And that was a problem.

1:14:32So I agree with you that they have the things that you've described, they have crushed and no one's coming close. I just don't know how they grow. and i think the only way that they do it at least commensurate with the multiple that they are currently commanding is if in the next couple years they come out with the new iphone of the next generation like a hardware product so incredible um that it it it extends into an entirely new market i think that's what they thought that the apple vision pro would be and maybe it's what they thought that the car would be at one point and agree props to them for just sunsetting that and recognizing this isn't our ball game.

1:15:15We're not going to play in this. I think one potentially good thing for the Apple Bulls would be the new CEO, John Ternus, is a hardware guy. So maybe the plan is like he's going to come up with something incredible. But I just don't see it right now. Um, and I, I think you, I think you're praying on John Tarnas to be a genius for this to work out.

1:15:43Scott Galloway:Yeah, I would, I would describe this as less praying and more rational. And I want to acknowledge the PE may be ahead of itself. And also on Amazon, the PE, even, even stripping out the returns on its investments at a PE of 30, it's, it's historically traded at an average of 55. I mean, because of its growth and its excellence. So it actually, I don't want to say it looks cheap, but it looks like it's the best value it's been in a while. Again, they're saying that the stat that just absolutely, I find staggering is they're planning to double their retail revenues by 2033 without one single incremental hire because see above AI and industrial robots.

1:16:22Scott Galloway:You compared Apple to Nike. I don't think that's an apt analogy. Look at the substitutes for Nike. I wear on running. My sons love Adidas. There's Hoka. My sons just went and spent a ridiculous amount of money to buy shoes that look like they've been worn for a year from this company called Golden Goose that I had never heard of. There are a ton of really outstanding. I used to wear Puma for a while. There are a ton of outstanding substitutes, really viable substitutes for Nike. What is the really viable substitute for an iPhone? Yeah, no, it's true. And you said it has to produce new products.

1:17:02Scott Galloway:No. The global economy has to produce new middle class and upper middle class consumers. Because the 100 or 200 million new middle class consumers that India is going to produce in the next 36 or 48 months, what do they do when they go into the middle class? Do they get a paid LLM? Maybe, maybe not. They all buy a fucking iPhone. So as long as we believe the global economy is going to push more people into the middle and upper middle class, Apple is good as gold. There's no substitute. There's no – you want to buy a nice car. Oh, my God. You get rich. Well, okay. There's BMW, Mercedes, and Porsche and Audi.

1:17:45Scott Galloway:No, there's not. Have you seen what the Chinese market is doing to luxury automobiles? There's so many amazing options right now. I want to send my kid to an elite college. Well, he needs to go to Chicago. Well, okay, he could also go to Wash U, MIT. Name a premium brand with this type of aspirational value, these types of margins, these types of self-expressive emotional benefits that doesn't have a ton of competitors. It all roads lead to one place, Apple. I don't know. I don't know if they, I mean, we'll see. This is an interesting one. I just don't. You're a doubt. They're already at 20 % global smartphone market share.

1:18:30If we're saying that they're going to do it by selling more iPhones, I think that's going to be. Again, misleading, Ed.

1:18:36Scott Galloway:20 % of hardware sales. What is their revenue generation they sit on top of in terms of app and e-commerce? What percentage of dollar volume flows through the iOS operating system? I don't have that number in front of me. I don't know the number. I just know it's the majority of it. No, the majority of their revenue is iPhone. It's selling the iPhones. They also, but the majority of purchases done on, in the e-commerce ecosystem, the majority of money that flows through for any app, any paid app, is flowing through iOS. It has a 20 % market share, but that's misleading because, quite frankly, the 20 % of the world that owns, like, the iPhone are the people who matter.

1:19:13The 20 % of people who have iOS have 110 % of the influence around the world.

1:19:21Scott Galloway:that 20 % number is misleading. I'm just looking at the services revenue. They did$54 billion in iPhone revenue, $30 billion in services revenue, which by the way, missed. And I think that's why the market was upset about this because I think they wanted to see what you're saying, which is like the services segment is how they grow. And it's, I mean, it's up 12%. It's not, it's pretty good. but I'm skeptical, but this is what the markets are. We have different opinions. It's a weighing machine. We'll see. I just want to say, I hear you and I understand and empathize. You disagree. I'm listening.

1:20:05Scott Galloway:I'm listening. I'm listening. Okay, let's take a look at the week ahead. We will see earnings from Palantir, AMD, Pfizer, Eli Lilly, Spotify, Disney, Uber, Snap, and SpaceX, which I cannot wait for. We will also see the U.S. employment report for July. Scott, do you have any predictions? In the month of August, we're going to see a half a dozen forced sales events based on the downward trajectory of AI stocks and the leverage. And it's not to say that the party's over. It's to say that, you know, if you don't get leverage puts you flying at Mach 3 at 50 feet of altitude, meaning if you hit a bump or an air pocket, you might die.

1:20:53Scott Galloway:And I think there's a lot of people skimming along the surface at Mach 2 right now with leverage. And this downward trajectory, I just got to think all over the world, there are margin calls and people scrambling who trying to hold on to their assets that aren't going to be able to. This bump is going to, you know, Buffett says, you know, when the tide goes out, we see who's swimming naked. The way I would describe it is these people are going 200 miles an hour and they're hitting their first speed bump and we're going to see who has airbags. So the prediction is in August, a half a dozen, quote unquote, fairly significant headline for selling events from companies that we mistook leverage for IQ.

1:21:40I like that. I think that's a good prediction. My prediction in the first part is a quick victory lap on Microsoft because as I said on this podcast, I bought after the SaaSpocalypse at 400. I bought again after the second SaaSpocalypse at 380. Stocks up to 460 after those earnings. So I'm up more than 20 % on that trade. But the thing that people will say is, well, what about Meta, which you also bought and it just got crushed after earnings. Yes, it did. The good news is that I bought at the low. So I'm down like 1 % on Meta. But my prediction is that this is the bottom for Meta. I think that there are some very real concerns about the company, about how they're building AI, about the debt that they're taking on.

1:22:24But all of that is being reflected in the price right now at 20 times earnings. I don't see how Meta goes much lower than this. So I think that this is the bottom for Meta.

1:23:04Lifetimes

1:23:10You help me In kind reunion

1:23:21As the world turns And the dark flies

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