Magnificent 7 report

0:05Pushkin. Just in the last week or so four of the largest companies in the world have reported quarterly earnings. Alphabet, Meta, Microsoft, Tesla. Today, we're thinking about the Magnificent Seven, those four and three more. We're rethinking the whole category. This is Unhedged, the Markets and Finance podcast from the Financial Times in Pushkin. I am Rob Armstrong coming to you from Unhedged World headquarters in beautiful and unseasonably warm New York City. I'm joined today by a new colleague, John Foley, who is the new Lex writer here in New York, covering technology. He's a man of deep wisdom and wide experience.

0:56Welcome to the show, John. Thank you for having me, Rob. So I propose that we take these in descending order of size. And I talked about the ones that just reported, but let's talk about the big daddies first. NVIDIA and Apple are both$3.5 trillion dollars, numbers so large I can't even conceptualize them. Where are we at on those two? Those two are the easy ones to start with. This story is all about AI. It's all about who's spending what and who's making money. And Apple and NVIDIA are the two that probably it's easiest to say that they're making money out of real stuff. These are the two that sell objects, which distinguishes them from the others that we're going to talk about.

1:39And the object with NVIDIA we talk about is they're selling the shovel in the gold rush, to use everyone's favorite metaphor. Everybody wants to be an AI. And to be an AI, you've got to buy bits of kit from NVIDIA. You have to buy silicon. You need data centers with chips. And the chips are made by NVIDIA. And all of the other companies that we're talking about basically, to varying degrees, are buying stuff from NVIDIA today to build these enormous data centers. I find NVIDIA the scariest stock for a number of reasons. It's run up in the last five years, something like 2 ,600%. It's like, when does the gold rush end with them?

2:17You're kind of guessing either when do people stop trying to super invest in AI? Or when does somebody else have a chip that's almost as good as an NVIDIA chip? So their monopoly is broken. That is a great question. And there are companies that are trying to build chips that are decent rivals to NVIDIA. They're just not doing very well at the moment because chips seem to be one of those businesses. The more you do, the better you are. And NVIDIA, which kind of got where it is by accident, it used to make these chips that were used for graphics, basically. Yes. It was a video game chip company.

2:50It was a video game chip company. And then they didn't even discover. Other folks discovered that these chips were perfect for the kind of repetitive calculations that you need to do AI. And NVIDIA is now, as you say, a$3.5 trillion company. But there are companies that are trying to nibble away at the edges. They're just not making much of an impact. It's weird that the two biggest of the Magnificent Seven, NVIDIA, is by far the fastest growing. You know, it's just, you know, like sales over the last three years are like plus 60 % a year, 70 % a year. The other biggest company, Apple, same market cap, is by far the slowest growing.

3:26So it's going along at single-digit growth levels, and it's worth$3.5 trillion. It's sort of an interesting contrast. And if you think that NVIDIA is the purest play investment in AI right now, Apple is kind of, in very broad terms, it's like the opposite of that. I mean, it's obviously deeply connected to the fortunes of AI through its handsets, through its smartphones, which will all be AI enabled. But at the same time, it's not investing quite as much in these kind of very speculative large language models. Like Meta, Alphabet, Microsoft are kind of tossing tens of billions of dollars into this pot, hoping that something will come back in future, but not really knowing for sure how much that's going to be.

4:03Apple at least is, like we said, selling objects admittedly at a slower rate than NVIDIA. You can kind of see a world where this turns out to be a brilliant strategy for Apple in that they're like, we'll let you guys cut each other's throats for a few years. And whoever comes out on top, we'll let you put our AI onto our handsets, which everybody uses. So you're going to have to deal with us. And so they kind of can reap some of the investment without having to make it. Yeah. And we'll still buy their pretty items. Yeah. In a couple of years, we'll know if that was the brilliant strategy. Yeah.

4:36Moving on at$3.2 trillion, Microsoft. Investors seem to be a little disappointed with their earnings. The stock is down. It was last night and the stock is down a couple of ticks this morning. What's going on there? Lunacy is what's going on here. I have to say for Microsoft, it's the first quarter, strangely. Their year starts at a funny time. But they came up with what actually looked like really good earnings. They had very strong earnings growth. Their revenue is growing very quickly. their cloud, their Azure server cloud product is growing at 33 % a year. You know, if you invested in Microsoft five years ago, you would have tripled your money now.

5:14Oh. But there were these kind of tiny disappointments. But the disappointments, the short-term disappointments are things like as you're growing at 31 % next quarter instead of 33%, for example. Yeah, it's crazy. Like, there is still a lot to be very positive about in these results. It's often not appreciated what incredible things happen when you are growing at a rate like that. When you're growing at 30%, you're doubling like every two and a half years. Right. Right. You know, it's like what that can create financially is just an incredible set of dynamics. They're doing okay. You are paying up for it.

5:50There are 33 times earnings and their total growth is in that kind of mid-teens range. So if you include all the other products. So you're not getting all this growth for free exactly. By contrast, say Alphabet isn't like 20 times earnings, it's a bunch cheaper. But man, it is still an incredible growth story at Microsoft. Yeah, other stuff going on at Alphabet, and I'm sure we'll get to that too. But 33 is not crazy if you think that Microsoft has such a sort of chokehold on the market for corporate software. Yeah, no, I think that's right. I just feel like of these seven companies, they are one of the most entrenched.

6:27You know, like when, you know, I always use this metaphor, but after the apocalypse, when there's only cockroaches, the cockroaches will be running their office software on Microsoft products. Nothing can dislodge them. They might have iPhones as well. They might have iPhones, but that is going to be what it is. Okay. We're moving briskly onward. So disappointment at Microsoft, but disappointment from a point of extremely high expectations. Moving down to the smaller companies, both Alphabet and Amazon are about$2 trillion companies. Which would you like to talk about? Well, so Amazon, at the time that we're recording this, has not reported its results.

7:10People will be focused on Amazon Web Services, which is the cloudy kind of bit. The equivalent of Microsoft, as it were. And it seems that analysts are expecting growth of about 20 % there, which is, again, for a huge company is no mean feat. Alphabet, we have those numbers. Again, like Microsoft, the numbers were really good. And actually, the market was a bit more favorable towards Alphabet. Yeah. And the thing with Alphabet is that Alphabet obviously owns Google. Alphabet is developing its own AI models. Gemini is its big AI product. It's also starting to integrate them into the stuff that the advertising and search that it does on which it has effectively a monopoly.

7:51And so it's kind of showing. And actually, this is a theme for the whole sector that all these companies are now trying to show that AI is actually doing stuff, that they're making money from actual real AI things, that it's not just like a kind of weird tech bro fantasy world. Bet on the future. Yeah, exactly. And so they're all coming out. What's been interesting this quarter so far is that they're all coming out with these little snippets, these factoids about things that they're doing with AI. Google is quite good at that. The one that stuck out to me was the fact that a quarter of the new code that they're producing is now written by AI, which obviously sucks if you are a developer who spent the pandemic going through boot camp to become a coder.

8:28But it's great for Google and it's great for their investors. You know, Meta, which we'll get to, too, has had lots of little snippets. Just lingering on Alphabet slash Google a little bit, I think it's interesting that it is now and almost always is on most valuation metrics the cheapest in the group. And I don't know why you think it is. One explanation that is often given for this is ultimately they are in a cyclical economically sensitive business. You know, ultimately what makes all the cash? There's a lot of technology. What makes all the cash there is selling ads. Yeah. And advertising spending is cyclical.

9:07Absolutely. So you're exposed to the economy. So that goes. Investors like stocks that are steady earners. There might be a little more cyclicality. But I wonder if that's kind of the whole story, why this stock is cheaper. I think that is part of it. There is also some other stuff that is quite hard to quantify, like the worries about a breakup. Obviously, Google is facing various antitrust challenges. It doesn't seem to me like Google is going to be broken up in any meaningful way. And they will just appeal and appeal and appeal. And they have lots of money to spend on lawyers. Lawyers. Meta, though, Facebook is also advertising reliant.

9:38Yeah, they're sensitive too. And we'll get to them in a second. But one word about Amazon. They do have, I mean, my favorite thing about Amazon, both as a consumer and almost as an investor, is they do have this very real world business of bringing things to your house that you want. And I use it a lot as a consumer. And the thing that's nice about that business is that it's not a bet on the future. It's a low margin, capitally intensive business with actually good returns. And it's meatiness, it's real worldiness is a huge competitive advantage. Like whatever happens to the world, I'm still going to get crap sent to my house.

10:18And it's probably Amazon that's going to be sending it. Yeah. And these two businesses are kind of not mutually exclusive by any means, but you can have one without the other. Yes. If everything goes wrong in AI, Amazon will still be a big retailer that ships stuff you don't need to your house. I don't know about you, but I need all that stuff. Okay, now we are approaching the smaller companies. Meta, one of my favorite stock charts. Mark Zuckerberg spends a year or two rattling on about the metaverse, whatever that is. He cuts his stock in half, but he's gotten religion and the stock is more than back.

10:57What's the story? What's the comeback story there? Meta typifies for me the real story about AI, which is about massive, massive investment in things that don't yet exist, but might be amazing. Yes. And Meta's stock stumbled a bit after it came out with its earnings for this very reason. So it came out with earnings that were great. Everything's really good. Growth is really rapid. Revenue is good. It's getting more efficient. Margins are going up. But Zuckerberg also said, I'm paraphrasing, but he basically said, you investors aren't going to like this, but I'm going to spend a metric ton more money on AI.

11:37I'm not going to tell you how much, but it's going to be a lot more. But it's going to be whatever. It's a number that you are not going to like. He literally, that was the gist of what he said. And investors don't like that because these valuations are all very vibes based at the moment. We're talking about these kind of short term disappointments. And Meta had a couple of tiny disappointments. I think analysts are saying that the user growth was not quite what they – for next quarter is not quite what they want. But we're talking about 3.3 billion users. So, again, lunacy to think that that is a significant valuation driver.

12:09How enduring do you think their social media businesses are? Facebook, Instagram, you know, I don't know if they even make money from WhatsApp or whatever. But are these businesses in danger of disruption by the next big thing? So the thing that would suggest that's not a worry is just the sheer size of the universe of people who are using their products. So if you think about the number of people who are using Facebook, just a Facebook app, it's not easy, but it's possible for Meta to shovel those users into its other products. So it's launching things like Threads, which is the kind of Twitter X alike product, which now has 275 million users.

12:49Yes. Once you're in that universe, they can point you in different directions. And it's very difficult for others to really get a look at it. I think Facebook is really good at social media. It's channeling a lot of its AI investment into making the feeds that you see more sticky. Addictive is not a word they would use, but it's definitely a word I would use. And that's actually working. And one of their factoids from their earnings was that people are spending 8 % more time on Facebook as a result of the AI curation of the feeds. So they're getting better. Bad news for them, bad news for humanity.

13:21Yeah, bad news for our brains, bad news for our attention spans. Right. Great for meta investors. Great for meta investors. But the investors are struggling to really buy into that at the moment because a lot of it is so uncertain. The financial returns of it, I should say, are quite uncertain. All right. We have just run through, John and I, the six largest publicly traded companies in America and I think the world. There might be some like Chinese bank or something globally that's bigger somehow. We are going to skip to a sad little company that's not even worth a trillion dollars, namely Tesla.

13:53However, on the way to Tesla, we are going to pass and wave at a company that is larger than Tesla, which is a little conglomerate called Berkshire Hathaway that has utilities, railways. Makes cowboy boots, doesn't it? Yeah, makes candy, makes running shoes. One interesting thing about Berkshire Hathaway that we should note in the current context in passing is that it used to be about a third Apple shares. They had this huge bet on Apple, but they've actually been making it smaller lately. They've been selling Apple shares. I don't know why, but this is interesting. So wave at Berkshire Hathaway in passing and we arrive at Elon Musk's car and robo-taxi and robot company Tesla.

14:45They had a good quarter and the stock went up. What do you think? So if Tesla were a car company, let's imagine that it were a car company, it would be doing quite well. And what we saw from its earnings was that the car business is actually doing pretty well. It's growing. It's growing. It's doing the things investors would want it to do. The thing about Tesla, though, is that it isn't really a car company. Elon Musk is not really even pretending it's a car company anymore. The valuation, which is, last time I looked, about$750 billion, is definitely not that of a car company of Tesla's size.

15:18So Tesla is now an enormous VC-style bet on something. I think robotics, also maybe AI a bit, sort of in a kind of indirect way, because AI will power a lot of the robots and the robo-taxis. I'm going to force you to give the bull case on this huge VC thing. And I'm going to do that by giving you the bear case. So first of all, the car company is in trouble eventually because it's not going to be the low-cost producer of electric vehicles. That's going to be one of these companies in China. That's problem number one. Number two, on the robo-taxi business, they're miles behind Waymo in terms of their technology, which is owned by Google.

15:58and on the robot business, I don't want a robot. They're creepy. I don't want one of these human-shaped things skulking around my house menacingly. Strangling you in the night. Exactly. So tell me why I should put my money into this massive VC fund led by a mercurial genius. So one reason is that the robotaxi business, while the technology is different from the technology Waymo is using, and they have many regulatory hurdles to jump in order to be allowed to drive around on the streets of the cities that we live in. That doesn't mean that it's necessarily the worst technology. Tesla's approaching this in a slightly different way.

16:41And it could, we'll see, we'll see, it's all up for grabs. No one, you know, Elon Musk says things, promises things, and then they don't happen. We will see. But certainly the idea of robo-taxis is a very compelling one. Musk is talking about turning the whole national fleet of Teslas, global fleet, I guess, of Teslas, into a robo-taxi fleet. The idea being you buy your Tesla when you're not using it instead of just sitting in your garage. It drives around picking people up and you hope that they don't drop a Big Mac in the back seat and spill the shake, shake, shake all over your dashboard. But in theory, this is a really interesting idea.

17:17You get paid so you can use the money cleaning your car. Yeah, exactly. So there's that. Optimus, this humanoid robot from Tesla. I, too, worry about Optimus killing me in my sleep. But it's certainly an interesting idea of human-like androids that can do stuff that we need them to do. I dread this world that we're heading into. But you can see that it could potentially happen. And it's plausible that Tesla is further ahead on this than any other big company that is currently investing in it. So Musk has agreed with other people who've said that robotaxis could be a$5 trillion business for Tesla.

17:53He's also agreed with people who've suggested that Optimus, the robot, could be worth more than$10 trillion. Put those together. And even if the car company goes to zero, you've got a$15 trillion company. Yes. Which would instantly go to the top of the list of companies we've been discussing today. Elon Musk is full of hyperbole. He acts weird. But he has been known to get a lot of things done. You know, he makes things happen. and we will make some things happen after the break.

18:32Welcome back. This is Long and Short, that portion of the show where we go long things that we like and we go short things that we don't like. John, would you like to buy or sell something? I would like to buy, not in a strict investment sense, but I would like to buy Reddit. I'm just obsessed with it. So do you skulk around there? All the time. Yeah. What kind of things do you learn on Reddit? Just what do I not learn on Reddit? Like everything, there are so many hot takes. You can also learn anything. You can like science stuff, recipes. But I'm also fascinated by the business model where basically people just do work for free moderating these subreddits.

19:14And then Reddit makes an absolute pot of money out of advertising and selling the data. It's so uncapitalist. What's your favorite subreddit? And what happens there? Public freakout. Wow. Is that just people screaming? Yeah. It's where people post videos of people who've reached their Michael Douglas falling down moment. And they just freak out. And it's awful. It's so painful to watch, but it's also completely... I've had a couple of those moments. I hope no one was filming at the time. I am also going to be long something. I am long consumer sentiment. There's been a narrative out there that American consumers, American households are very down about everything.

19:53And I spent yesterday talking to people who run the big consumer sentiments surveys and they kind of walked me through it. And they pointed out sentiment is not that great, but it's getting a lot better. And depending on how you cut the data, Americans actually feel OK. basically if you don't mention the word inflation and you ask people, how's your job? How's your income? How do you expect things to go next year? As long as you, you know, inflation is this big monster in the background. But if you keep the conversation on other topics, on how things are right now, Americans feel okay. And on that note, we hope our listeners feel okay.

20:36And we will be back to enlighten you further on Tuesday. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.