Meta’s AI Promise, Microsoft’s Disappointing Beat & Why Google Should Spin Youtube

25:57We're back with Prof G Markets. Most of the Magnificent Seven reported earnings last week bringing AI demand and spending into sharper focus. Google and Microsoft both reported cloud revenue growth above 30%, beating expectations. But while Google's stock rose, Microsoft's fell as the company advised its overall revenue growth would slow in the current quarter. Meanwhile, Meta's stock also fell after the company missed expectations on user growth and warned that its AI expenditures would continue to increase in 2025. So I think let's just start here. A lot of tech earnings telling slightly different stories.

26:38Let's just start with what Wall Street thought about these earnings. So for Google, Wall Street was very happy. Revenue grew 15%. Cloud revenue skyrocketed. And the stock rose 4%. And I think the main story with Google is there was nothing that you could really fault the company for in that earnings report. Everything was going well. Microsoft and Meta, on the other hand, Wall Street was not so happy with. And it's a very similar story that we've seen before in tech, which is the top and bottom lines were very strong. They beat expectations at both companies. But there was just one tiny little pimple on the earnings report for both of them.

27:17And for Microsoft, it was that their guidance was a little bit soft, not as strong as Wall Street wanted. And for Meta, the user growth was slightly weaker than expected. 3.29 billion active users versus 3.31 billion expected. I should remind you that's daily active users, so it's still pretty incredible. As a result, Microsoft stock fell 4 % and Metastock fell 3%. So I think the summary with these earnings here is that it's very strong overall, but again, incredibly high expectations for these companies. Let's just start with your headline reactions to the tech earnings that have come in this week.

27:56What you said was really prescient and insightful a few months ago, and that is the expectations are now that you're going to blow away expectations. So Meta actually, the revenue and earnings beat expectations, increasing 19 % and 35 % respectively. But investors were disappointed by weaker-than-expected daily active user growth. And also, I think the thing that freaked everybody out is when Zuckerberg wasn't threatening to spend tens of billions of dollars in mixed reality headsets. He was promising and he did it. And he kept spending well beyond any evidence that this was working. And when Zuckerberg says, no, we're going in on AI and get ready, folks, hold on to your hats, it kind of spooked, I think, his investors a little bit.

28:43just because, you know, relative to the earnings and the revenue beat, the revenue and earnings were amazing here. And at the same time, let's go to the other end of the spectrum. Everyone's sort of waiting and anticipating SNAP to start a death rattle. And even though their sales jumped 15%, not as much as the other guys, their stock was up 10 % because the expectation, People are sort of, when people listen to a Meta call, they're waiting to see just how fucking amazing it is. When people listen to a Snap earnings call, they're kind of a little nervous. Like, is this the quarter that Snap announces that Meta is just putting them out of business?

29:26And the expectations here have gotten so crazy. And I know I'm jumping around a lot, but let's talk a little bit about Microsoft. They also beat revenue and earnings expectations. The stock was off 4%. in after-hours trading on weaker guidance. Good CEOs, sandbag guidance. You always want, in my opinion, under-promise and over-deliver. And when you start getting desperate or you're worried about losing your job, you start over-promising and under-delivering. Their total revenue increased, get this said, 16 % off a huge number. That means that they found another$8 or$10 billion per quarter in incremental revenue.

30:04And also the revenue mix is getting more solid because their cloud offering, Azure, revenues were up 33%. And that is a business with incredible margins. And 12 points of growth came from AI services. So in sum, this was just striking. And the only wrinkle here, the thing I would offer that I noticed, and we've been talking about this a lot, is that if I were to ask you, what comes to mind when I ask you who is the leader in the streaming market? Who comes to mind? Well, you know my real answer, but I think the average person would say Netflix. That's right. But it isn't, right? It's YouTube. And YouTube's combined ad and subscription revenue over the past four quarters has surpassed$50 billion.

30:58So Netflix is at$37 billion over the same period over the last four quarters. So YouTube is a bigger streaming network, bigger revenue. I'd be curious what the growth rate is there. I'm not sure they break it out. But if you applied the same multiple to YouTube, you'd have a half a trillion dollar market cap company. And I wonder if there's opportunity for Alphabet to cut a deal with the DOJ and among other things in their remedy trial, say, look, what if we spin YouTube? But across all of these folks, whether it was Reddit, which looks like it's becoming a truly big tech company, Meta, all of them, Snap showing that we're still here.

31:40Snap's like, hey, don't forget us. We're still here. We're still growing. We're still doing really well. And the other guys, the big guys, the alphabets, the Metas of the world are just still on fire. Yeah, a lot there. Yeah, we'll start with YouTube. I just want to re-emphasize that number you said. $50 billion in revenue in the past four quarters compared to Netflix at$37 billion. With the same multiple, YouTube would be a half a trillion dollar company in market cap. It'd probably be higher given the margins and given the growth rate. But if it were broken up into its own company, which you have just suggested, I just want to point out, it would be one of the top 20 most valuable companies in the world.

32:26It would be more valuable than Oracle. It would be more valuable than MasterCard. It would be more valuable than Johnson & Johnson. And yes, of course, it would be more valuable than Netflix. So I mean, we've discussed why we believe YouTube is basically the most underrated asset in the market right now. I think this should really drive it home for people. It's something that people don't seem to talk about that much. And I think, to your point, it's a little bit of the conglomerate tax. It sort of gets lost in the noise because of all of the other things that Google is doing. But this is just a juggernaut in the entertainment space.

33:03I am just fascinated by this business of YouTube, and they continue to crush it. One of the other things you pointed out there is the idea that Meta, you know, they spent really big on the metaverse, and it freaked everyone out. And now they're spending really big on AI. And so the numbers are, Meta is raising its CapEx forecast for 2024 to between 38 and$40 billion. And that is slightly freaking the market out. They don't love how much that expense line is going to grow. Having said that though, all the other tech companies are doing it. So over at Google, their CapEx rose 62 % from a year ago to$13 billion.

33:49Microsoft is doing it too. Microsoft's CapEx doubled from last year to$20 billion. And this is just for the quarter. The ultimate business strategy has become capital as a weapon. Mark Zuckerberg goes, we have access to cheap capital, so I'm going to outspend you. I mean, there's kind of three or four. No one can keep up with these guys except each other. The biggest companies in the world that aren't big tech can't make these types of investments any longer. They're spending more money on, you know, on GPUs than Exxon spent on oil exploration at their peak. I mean, so just some data here. Microsoft, Meta, and Alphabet will spend more than$150 billion on CapEx in 2024.

34:31And more importantly, Microsoft, Meta, Alphabet, and Amazon account for roughly 40 % of NVIDIA's sales. So what we're seeing here is a dynamic where, you know, NVIDIA is pretty much propping up the stock market. We've all kind of identified that. And NVIDIA's entire top line is being propped up by the CapEx spend of Microsoft, Meta, Alphabet, and Amazon. So in a way, that CapEx number is the most important number in the entire global stock market right now. We should all care a lot about how much they're spending. But as you mentioned, the competitive aspects to this, the idea that they're all ramping up spending, I wonder to what extent this is becoming a little bit of a big dick contest.

35:23where if you're Mark Zuckerberg and you're seeing, you know, you're seeing Sundar Pichai invest billions and billions into this space and you've decided to get into the space too, I wonder to what extent they're just going to start outbidding each other, not because it necessarily makes sense for the business, but because they don't want to be caught out and they don't want to look to the world like the loser or like the coward who wasn't down to double down on AI. And, you know, maybe I'm not giving them enough credit, but I could certainly see if I were in their position, how I could get caught in that dynamic.

35:59Google's doing it. Microsoft is doing it. So we better do it too. Well, I think correctly, in hindsight, it looks like the stimulus plan during COVID that the Fed and the White House overdid it. They spent more money than was needed. And Janet Yellen, when faced with that question, did you overdo it? She said, we decided. She said, yeah, we probably did. But at the time, the analysis was it's much riskier to underdo it than overdo it. And I think that's how these guys are approaching AI. And that is, if they overdo it, they spend too much, that's not the same risk as being the company, one of the big tech companies that had all of the assets, all of the IP, all the customer interface, but got bested and saw their stock lag.

36:45everyone else is because they underinvested in what appears to be the most seminal technology trend of the last 20 years. So I got to imagine that, okay, we need 10 billion. The range of requisite CapEx to meet our plans is somewhere between, I don't know, call it 20 and 30 billion. You got to think the CEO says with a stock at an all-time high with access to cheap capital, I'm not going to be the CEO that missed on AI. You say 20 to 30 billion, here's 32. We'll be right back. And if you're enjoying the show so far, hit follow and leave us a review on ProfG Markets.

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39:04We're back with Profit Markets. so meta's revenue jumped 19 to 40.6 billion dollars it's that's its record revenue staggering number and you mentioned earlier about revenue mix you know you the point that microsoft has done a really good job of diversifying its revenue which makes it that revenue a little bit more stable they're able to weather a storm that's a great it's a great reason to diversify your revenue so i'll point out there's one side about meta 96 of their revenue still comes from advertising. So they're not in a very strong position from a longevity perspective, but it sort of highlights just what a juggernaut this advertising business is.

39:50The fact that this company is one of the top 10 most valuable companies in the world, and it's all just from all of that advertising. You talked about how they've been getting into AI, which has been massively increasing their ability to accumulate users and also monetize those users. I'm just amazed that Meta is worth this much and making this much money. And it's still just a pure play ad business. I just thought that was quite fascinating. I mean, these companies combined probably have ad-driven revenue growth of somewhere between, I don't know, $20 and$40 billion in incremental ad growth. And I had dinner the other, a week ago with this iconic broadcast anchor.

40:35And this is someone who likely, I don't know what this person makes, but I imagine it's tens of millions of dollars, household name, outstanding at what they do. You have to tell us. No, I can't. I can't in this instance because we're good, good friends and I don't like to prostitute my relationships. I'm imagining it's Anderson Cooper and I'll just let you not comment. What I will say is it wasn't Anderson Cooper. I have a second friend. I have a second friend now on the media ecosystem. Anyways. Oh, Tucker Coulson. Got it. Okay. Me and Tucky? Yeah, we fisted each other and we were screaming out the ghost of Rick Santorum.

41:08I don't know where I got that name. That's an image. That's an image. Anyways, and he said that every contract renewal that's coming up across the biggest anchors, the biggest stars in broadcast television, the conversations are going something like this. As you know, it's a stressed ecosystem. We know you are making$10 million a year. now we're going to pay you three and a half. And it's directly correlated to these earnings because the economy is growing 3 % a year and all of these companies are growing 18%. Ad spending is not up 18%. This has become a bit of a zero-sum game. And that is, say ad spending is up because it's a strong economy, say, okay, fine, it's up 5%.

41:52Ad spending isn't up 15%. So that incremental 10 % is coming from somewhere else. And I can tell you where it's coming from. It's coming from, generally speaking, ad-supported media that isn't one of these guys. And so whereas if you hosted, you know, the ultimate morning show program, right, and they were just printing money, they could pay Hoda, you know,$7 or$10 million a year. And now they're like, Hoda, we love you, but revenues are down 30%. Profits are down 60%. We're going to pay you too much. It's like, fuck that. I'll just go drink white wine all day, You know, also just more generally speaking, I have spoken to two individuals.

42:32You know, I like to think I'm trying to be good about my word and I'm coaching young men. I've heard I've had two men reach out to me and ask to speak to me. And they've both been men who are my age, who are both very successful in the media market. And they've either quit or been laid off. And they have no idea what to do right now. because the motion picture and television market in Los Angeles, and generally speaking, the media market, is really strained if you're not working for one of a handful of companies that are just killing it. And it strikes me that these folks haven't connected the dots.

43:07There is real pain on the other side of these revenue numbers, and that is it is a terrible time to be a CBS or an MTV. Does anyone even remember what MTV is? or newspaper revenue is off 80 % in the last 30 years. You know, billboards, drive time. If it wasn't for the election, local news stations would be just gone. Yeah, that's a great point. And you think about the other beneficiaries of that revenue growth. Where is that advertising going? It's going to the people who are creating content on Instagram and on TikTok and on YouTube. Those are the beneficiaries. Granted, they're not getting multi-million dollar contracts, but the reason you're seeing those millions getting shaved off of the Anderson Coopers of the world is because, frankly, it's going to the Scott Galloways of the world and people are a lot less famous than you.

43:59People who are creating content on Instagram, who are making videos, who are commentating on things in the news. There are thousands, probably millions of these people out there who are making a living and who are making real money by creating on the digital platforms. And what I just can't wrap my head around is how those people continue to not be taken seriously by the mainstream media. It's been almost like mainstream media just sort of covers their eyes and pretends like they're still in their heyday. Well, what's happening is we're seeing the social media companies having this explosion in growth.

44:35And meanwhile, legacy media is completely drying up. Well, it's really interesting. So election night, and I'm bragging right now, but I was asked to appear on a variety of cable networks, right? They want to bring in, they go for 12 hours straight. They have a lot of time to fill. So they're like, oh, bring in the guy on Young Men. Just tell him not to tell dick jokes, right? So almost every network called and said, do you want to come on election night? And the one I chose, I'm going on Amazon with Brian Williams. And that's kind of telling, right? It used to be going on CNN or Fox or CBS or ABC because those are the high prestige.

45:11Now I'm like, no, I'm going with the new guy. And today on Pivot, we interviewed Margaret Brennan, who I just think is so talented and sober. And as I was listening to Margaret, I thought, she's going to get hired by YouTube or Amazon, and she's going to be positioned with the right technology in the right format in one of these mediums. And she's going to drive so much more economic value for the parent company and herself. And even our little podcast, we just started posting our videos on YouTube. We're now making$40 ,000 or$50 ,000 a month in incremental ads from YouTube just by putting our stuff on YouTube.

45:50Not to mention all the stuff that's happening on Instagram where you'll post an Instagram Reel and it'll go viral. And then you'll get speaking engagement requests. I mean, the flywheel is up and running. It's flying. Yeah, in social media. One of the things I've learned over the last 10 years, we're in an attention-based economy, full stop. If you can command attention, you can get revenue. Otherwise, the person running the firm should be let go. And what you want to find is companies where there's a delta between the two. So newspapers used to get 30 % of the advertising and they were getting 10 % of the attention.

46:25You knew they were in trouble. And the web was getting 30 % of time and had 8 % advertising. You knew those two were going to true up. Right now, the greatest delta in terms of attention to revenues is podcasting. Total consumption is up 15 % or 20%. And revenues are solid and growing, but they're nowhere near the attention. And in addition, I think if you collapse that with the following, and that is there are very few ways or increasingly fewer ways for an advertiser to reach you. You're the great white rhino for advertisers. And that is at the age of 26, you're what I would affectionately refer to as stupid.

47:10And that is you're in your mating year. So you'll spend 150 bucks on that stupid crewnet shirt you're wearing. You'll join Soho House. You'll spend$7 on coffee. You, on the other hand, would never do any of these things. No, no, I'm much more down to earth, Ed. I'm much more down. By the way, did I tell you about the Global Express I flew back here from Miami? Anyways, I'm not nearly as superficial as you, Ed. Anyways, but advertisers love young people because they're stupid and they're in their mating years, so they will spend a ton of money on high-margin products trying to attract a mate. They are the ultimate target.

47:46And the problem is MSNBC's average viewer is aged 70. MTV is like 52 or 54. And you or your cohort is listening to podcasts. So you not only have growth and attention, but you have growth and attention across a group that is increasingly difficult for advertisers to reach. So I think you're going to see, in one of my predictions, I'm doing predictions, I think that podcast revenue is going to grow faster than every digital platform's revenues, maybe with the exception of TikTok, who align and claim their numbers are lower. But I think you're going to see next year revenues, ad revenues grow 25 % plus.

48:25I think 2025 is going to be the year of podcasts busted open by these election or candidate interviews, attention, and advertisers are figuring out the media landscape is dramatically shifting under our feet. Let's take a look at the week ahead. We'll see the Fed's interest rate decision for November. We'll also see earnings from Palantir, Novo Nordisk, Airbnb, and Paramount. I doubt we will care about any of that because we'll have bigger fish to fry tomorrow. Scott, your predictions? Well, look, it's the election, Ed. I'm predicting that Vice President Harris is going to win the election. The gambling markets say that it's two to one in favor of Trump.

49:11You correctly pointed out that that might be skewed because of these markets over index young men who are much more biased towards Trump. A lot of people think these markets are being manipulated to send a signal of confidence around the Trump campaign. I also want to recognize I have huge confirmation bias here. I'm very emotionally caught up in this. I could not get over. I was happy to get back to London. I don't know if you've noticed it, and maybe you don't notice it when you're in boiling water, but I cannot get over how tense things are. I wonder, and again, confirmation bias here, that people are just fucking exhausted and think, how can I take some of this temperature down?

49:54And distinct of the policies, distinct of whether, you know, perfect is not on the menu. I think a A lot of people are going to go, you know, I'd just rather not go back to that shit. So anyways, my prediction, simply put, is that it's not only going to be a Harris win, but I think it's going to be a decisive win. And all of the odds and all of the data say that that's unlikely. But anyways, in sum, I'm predicting that in January of 2025, we're going to inaugurate Vice President Harris. People forget how much it sucked, not from a policy perspective, but from just a day-to-day discourse perspective.

50:31Having that guy plastered over the news, people freaking out about him 24-7, every single conversation is about politics and about how the US is in decline. And whether or not you believe any of that is true, are you really down for that to just dominate your life all day, every day for the next four years. That to me is just, that was the big nightmare of the Trump presidency is how I just, we could never escape him. We had four nice years of some kind of boring politics. And I really hope that we can have four more of them. My favorite thing about Senator Bennett, I did a fundraiser at my place for him.

51:16And he said, they said, what would you be like as president? Someone asked me, he's like, I'm going to be the president you never hear about. And I thought, Jesus Christ, wouldn't that be refreshing? I absolutely love that. He said, I want to be the president you don't think about. I'm going to do the job. I'm not going to say incendiary things. I'm not as charismatic as some of these other people. I'm just going to be the guy that gets the job done. Anyways, I hope that the guy that gets the job done is a she. And I really hope that when I move back to the U.S., it feels less tense, less anxious, that we keep this economy going, that young men recognize that their default operating system should be one of protection, and that I genuinely do believe that women are under threat here and that men don't recognize how much this could affect us.

52:04So I'm hoping, I'm hoping and trusting that some of these things enter people's brains as they enter the voting booth. And I'd also just like to highlight, I acknowledge that a lot of people don't come to this podcast for politics. I endorsed Harris in my newsletter, No Mercy No Malice. We had the greatest number of unsubscribes we've ever received. And as I've said before, there's no point in having economic security and people who love you unconditionally if you can't speak your mind. And also to all the people who unsubscribed, I just want to tell you a full refund is coming your way. Why don't you read us out, Ed?

52:36This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Jessica Lange is our research associate. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for our Unpack on the Election with Anthony Scaramucci only on the Prof G Markets feed.

53:12In kind reunion As the world turns And the dark flies In love, love, love, love