Speaker 1: A zone media.
Speaker 2: Greetoms and salutations. It's me ed Zetron and it's better offline.
Speaker 2: That's right. We are back with Prof. G. Markets ed Elson,
Speaker 2: and we're here to talk about the naughty little buggers
Speaker 2: and the magnificent seven, primarily the Big four, but really
Speaker 2: the big three, the Amazons, the Googles, and the Microsofts
Speaker 2: of the world. Ed thank you for joining me again.
Speaker 3: Thank you so much for having me. I'm very, very
Speaker 3: excited to be here.
Speaker 2: Yeah, so tell me. They just reported earnings, and as
Speaker 2: you well know from the conversation we just said, I
Speaker 2: got some points to make about it. But when you
Speaker 2: brought me through how they did.
Speaker 3: On their earnings, absolutely, So let's just run through what
Speaker 3: we learned on Microsoft Microsoft, and we saw pretty good growth.
Speaker 3: Billion dollars in revenue up eighteen percent. Amazon similar story,
Speaker 3: two hundred billion dollars in revenue up twenty percent. Meta's
Speaker 3: revenue increased twenty eight percent. I mean, on its surface,
Speaker 3: this was pretty good. Yeah, you just look at the numbers,
Speaker 3: even the net income which exploded for many of these companies.
Speaker 3: But of course that's not really what matters here. What
Speaker 3: really matters is how is the AI trade actually working out.
Speaker 3: There are two main questions that we really want to
Speaker 3: understand when we look at these big tech companies. The
Speaker 3: first question is how much revenue did you generate from
Speaker 3: your AI business? Specifically, that's what we really want to
Speaker 3: know the answer to. And then the second question is
Speaker 3: how much of that revenue came from two relatively unstable
Speaker 3: companies financially specifically open ai and Anthropic. Those are the
Speaker 3: two questions I want to know the answer to. I
Speaker 3: know you want to know the answer to. We didn't
Speaker 3: get those answers. They didn't really tell us, and what
Speaker 3: they did tell us was not very helpful, kind of
Speaker 3: papering over the reality, which makes you think maybe the
Speaker 3: reality is something that they don't really want us to see.
Speaker 2: So that's the funny thing as well, Like before we
Speaker 2: get to the meat of what you and I both
Speaker 2: know we're going to discuss, there was also these weird
Speaker 2: massive equity gains, So the net income part of earnings
Speaker 2: is now not super useful because in all three cases
Speaker 2: of Amazon, Google, and Microsoft, they all posted massive equity
Speaker 2: returns based on the increasing value of open ai and
Speaker 2: their shares of either or both open ai and and Anthropic.
Speaker 3: Right, Yes, yeah, a wrinkle in there that I'll address,
Speaker 3: But we'll start with Amazon and Google. The answer to
Speaker 3: that question is yes, Amazon's net income so their earnings
Speaker 3: exploded two hundred and forty five percent. That's crazy growth,
Speaker 3: more than tripled. Google's exploded two hundred and ninety eight percent. Again,
Speaker 3: crazy growth. How did that happen? What's going so right?
Speaker 3: What could we dig into it? Exactly? The answer in
Speaker 3: Amazon's case is that eighty five percent of their net
Speaker 3: income came from unrealized gains in their stakes in Anthropic
Speaker 3: and Open AI. So essentially, they basically looked at that company,
Speaker 3: they said, Okay, I guess it's worth this amount of money.
Speaker 3: I guess it's worth a trillion dollars, and they marked
Speaker 3: that up and then that was reflected in their earnings.
Speaker 3: And then in Google's case, eighty seven percent of their
Speaker 3: earnings came from their unrealized gains in their stakes in
Speaker 3: Anthropic and SpaceX. So those earnings of those companies you
Speaker 3: can't really take seriously because they're not reflecting the fundamental
Speaker 3: underlying health of the business. They're reflecting the optimism associated
Speaker 3: with the valuations of these AI startups and these frontier labs.
Speaker 3: So that's the first problem is the earnings themselves are
Speaker 3: not really reliable in Amazon and Google's case. We'll get
Speaker 3: to Microsoft in a second. The other problem is that
Speaker 3: that then funnels down into how we value companies. Specifically,
Speaker 3: one of the most important valuation metrics in investing is
Speaker 3: the price to earnings multiple. That is how we figure
Speaker 3: out how expensive or cheap a company really is. We
Speaker 3: look at their earnings, and we look at the price
Speaker 3: of the stock, and we compare of the two match up. Now,
Speaker 3: as of the end of last week, which is when
Speaker 3: I did this analysis, Amazon was training at nineteen times earnings.
Speaker 3: Google was trading at seventeen times earnings. The S and
Speaker 3: P the overall market currently trades it around twenty five
Speaker 3: times earnings. So if you were to look at those
Speaker 3: multiples on Amazon and Google, you'd say, oh my gosh,
Speaker 3: these companies are crazy cheap. It is time to buy.
Speaker 3: But of course we know that actually, no, those multiples
Speaker 3: have been massively skewed and compromised again by those unrealized
Speaker 3: gains by those paper games.
Speaker 2: And just to be in this state earning like that.
Speaker 2: Comparison is always based on net income.
Speaker 3: Yes, it's based on net income is equivalent to earnings,
Speaker 3: so we look at their pe multiple and their way down.
Speaker 3: I mean, you look at last year. Amazon was trading
Speaker 3: throughout the year at around thirty two times earnings. Google
Speaker 3: was trading around thirty one times earnings. So you look
Speaker 3: at nineteen and seventeen, you go, oh, my gosh, what's happened.
Speaker 3: They're so cheap. They're really cheap right now. That's not
Speaker 3: the case. So what we have to do if you
Speaker 3: want to actually get an understanding of how to value
Speaker 3: these companies is you need to subtract out the gains
Speaker 3: that they have registered in open ai, anthropic and SpaceX.
Speaker 3: You need to create basically a new metric. And we
Speaker 3: did that and we found that the true multiple for
Speaker 3: Amazon when you're just for that is actually thirty times earnings,
Speaker 3: and for Google it's thirty one times earning. So no,
Speaker 3: these stocks are not cheap right now. Now a lot
Speaker 3: of people will say, well, are you factoring in the
Speaker 3: fact that maybe there is some value in those companies
Speaker 3: and did you put that in the numerator? Blah blah blah.
Speaker 3: There are a lot of nitty gritty things that we
Speaker 3: need to do, And the answer is no, we didn't.
Speaker 3: But that's the kind of a now is that Wall
Speaker 3: Street needs to be employing right now. And the trouble
Speaker 3: is the more that we see these stakes in these
Speaker 3: little AI startups and these businesses, and the more that
Speaker 3: it starts to skew the actual earnings of the companies,
Speaker 3: it makes it a lot more difficult for us to
Speaker 3: actually value which companies are cheap, which companies are expensive.
Speaker 3: And of course it is in that complexification and in
Speaker 3: that obscurity that bubbles arise. This is the problem that
Speaker 3: we saw in the financial crisis. It's the problem that
Speaker 3: you and I have addressed when it comes to the
Speaker 3: data center SPVs. It's not necessarily that the SPVs are illegal.
Speaker 3: The problem is that they are hard to track, they're opaque,
Speaker 3: They're not reflected on the balance sheets of these companies,
Speaker 3: which means that Wall Street and the underwriters and the
Speaker 3: investors when they look at the data, they're not looking
Speaker 3: at data that really tells them the reality of what
Speaker 3: is going on. So that is the problem with the earnings.
Speaker 3: That's the problem with the pe multiple. I will pause
Speaker 3: there and we will get to Microsoft, which actually didn't
Speaker 3: have to report an increase in their in their earnings due.
Speaker 2: To their I thought they had an anthropic bit that
Speaker 2: did that three point two billion dollar game there.
Speaker 3: Sorry, yes they did do anthropic, but when you look
Speaker 3: at I mean, anthropic is a smaller investment for Microsoft.
Speaker 3: Their big investment is, of course, open Ai, which did
Speaker 3: not show up in their net income. Their net income
Speaker 3: rose by about thirty percent. If we were to look
Speaker 3: at the open Ai steake, you would think that it
Speaker 3: would explode by around three hundred percent, like Google's earnings exploded.
Speaker 3: That didn't happen due to an interesting gap accounting principle
Speaker 3: which I can get into in a moment if you'd
Speaker 3: like me to do it now, why not?
Speaker 2: Why not go into it?
Speaker 3: All? Right? So why didn't Microsoft's net income explode? Why
Speaker 3: wasn't their stake in open Ai reflected in their earnings?
Speaker 3: And the answer is that their investment in open Ai
Speaker 3: is so significant that because of stupid accounting laws and
Speaker 3: gap principles, they are required to report that that stake differently.
Speaker 3: So instead of reporting the alleged value of open Ai
Speaker 3: in their earnings, instead, what they have to do because
Speaker 3: their stake is so large, and so I guess the
Speaker 3: law says you need to report this differently. Instead, what
Speaker 3: they have to do is they have to report their
Speaker 3: share in open AI's profits. But of course open ai
Speaker 3: has no profits. So that's actually why Microsoft had to
Speaker 3: take a six hundred million dollar hit on their earnings
Speaker 3: to reflect their share of Open Eyed losses in the
Speaker 3: second quarter. In the second quarter, so in a funny way,
Speaker 3: when accounting laws require you to report your AI investments correctly,
Speaker 3: it actually reveals that these big tech companies are actually
Speaker 3: losing money from AI. But when the accounting laws have
Speaker 3: loos and they're flimsy, it allows them to say, oh,
Speaker 3: I made money on this stuff. So it's an interesting
Speaker 3: wrinkle there. And yes, their anthropics stake, they were able
Speaker 3: to kind of bs that in their earnings, but they
Speaker 3: weren't able to do it with Opening Hour, which is
Speaker 3: why they took that six hundred million dollar hit. If
Speaker 3: we just play this out over the next quarter, in
Speaker 3: the following quarter, what we can start to see is
Speaker 3: that actually these investments are not as sexy as the
Speaker 3: as the net incomes on Amazon and Google would make
Speaker 3: them see.
Speaker 2: And the other thing with Microsoft that I found interesting,
Speaker 2: and I mean I'm a curious little criticism went and looked.
Speaker 2: They mentioned they had annualized revenue, sorry, annualized run rate
Speaker 2: for AI and Q three fiscal twenty six, which was
Speaker 2: last quarter. Just for the listeners, their fiscal year begins
Speaker 2: on July first of the year beforehand, so their fiscal
Speaker 2: year twenty six begun July first, twenty twenty five. It's annoying.
Speaker 2: But their last quarter they said, oh, we're here, thirty
Speaker 2: seven billion run rate for AI, and in this quarter
Speaker 2: they didn't, right, they just didn't mention it. And I
Speaker 2: think what it is is the I don't know, Ben
Speaker 2: from the Ben and on Me show once said the space
Speaker 2: it's like the way to understand the stock market is
Speaker 2: imagine the thing that would piss you off the most happening.
Speaker 2: So there you go, because it's so frustrating seeing everyone
Speaker 2: saying the AI bet paid off, the AI bet paid off.
Speaker 2: Look number go up so big even though they gave
Speaker 2: us less information this time, they are obfuscating the information.
Speaker 3: Yes, exactly. If AI were going as well as a
Speaker 3: lot of people say it's going, then you would expect
Speaker 3: these companies to simply report their AI revenues and brag
Speaker 3: about it. But instead they don't do that. Instead, what
Speaker 3: they do is they report their compute revenue, which, to
Speaker 3: be fair, is growing, but that was a business's business
Speaker 3: that existed long before AI. That's not their AI revenue.
Speaker 3: And when they do report their AI revenues, they usually
Speaker 3: report it in arr their annual revenue run rates.
Speaker 2: And Amazon actually did that in this quarter. Instead it's
Speaker 2: a twenty five billion dollar run rate, which is two
Speaker 2: point oh eight billion dollars. But he's the other thing
Speaker 2: that people seem to miss as well. You know what
Speaker 2: also happened in this quarter anthropics compute spend accelerated because
Speaker 2: it's revenue. It's revenue accelerated, like it's a very obvious
Speaker 2: like between. So this quarter would refer to what's it's June,
Speaker 2: May April, right, Yeah, that is that's when Anthropic, I think,
Speaker 2: claim they hit thirty billion annualized run rate, like they
Speaker 2: are spending so much more in compute than their actual revenue.
Speaker 2: I wouldn't be surprised. And this we'll get into if
Speaker 2: most of this run rate came from Anthropic and Open
Speaker 2: Ayes spend. But again, jingle jingle, the keys are here.
Speaker 2: Look at the run rate, look at it.
Speaker 3: Back to it. I think just for just for your
Speaker 3: orders to understand why run rate is a bullshit metric.
Speaker 3: I mean this is sort of like this is the
Speaker 3: classic metric that is reported by startups where their their
Speaker 3: revenue is very choppy, and so what they'll do is
Speaker 3: they'll pick their best month and then they'll just times
Speaker 3: it by twelve and say, this is how much we
Speaker 3: are expected to make over the course of the year.
Speaker 3: I'll just like point out with my business. You know,
Speaker 3: my podcast generated double the revenue in June that it
Speaker 3: generated in May. We had a really good jem Now
Speaker 3: I could just annualize that number. I could just times
Speaker 3: it by twelve and say, oh, that's how much money
Speaker 3: we're going to make this year. But of course that
Speaker 3: would be bs and I'm not going to do that
Speaker 3: to you. I'm not going to lie to you. But
Speaker 3: this is what they are resorting to instead of just
Speaker 3: reporting how much money they actually made off of AI. Instead,
Speaker 3: what they do is they pick a random month and
Speaker 3: then they say, oh, if we times it by twelve,
Speaker 3: then that will be a good number. And that's what
Speaker 3: they are starting to report. It's very but that was
Speaker 3: very yesie, yeah it is.
Speaker 2: And that's the one that Microsoft declined to report this month,
Speaker 2: which means likely that. So the thing is, I'm guessing
Speaker 2: that they're referring to a month within the quarter, but
Speaker 2: we actually don't know. We don't know if it's thirty days,
Speaker 2: twenty eight days, we don't know if it's four weeks
Speaker 2: times fifty. We truly don't know what it'd be like
Speaker 2: four weeks time thirteen. It's just they never disclosed this.
Speaker 2: But I think it's just a failure of the media
Speaker 2: and analysts on this one, because I feel like if
Speaker 2: these companies felt any pressure to actually be honest with
Speaker 2: their investors, they I don't know, would do anything other
Speaker 2: than this.
Speaker 3: Yes, well, I think it's actually interesting. Meta is an
Speaker 3: interesting example of this. Meta is one of the few
Speaker 3: companies where the analysts are actually trying to ask management
Speaker 3: the tough questions because it is so obvious what the
Speaker 3: problem is. The problem is that their free cash flow
Speaker 3: is declining. It's down ninety one percent, and the reason
Speaker 3: that it's declining is because they're spending just godgantuan amounts
Speaker 3: of money on this AI infrastructure. Now, for the other
Speaker 3: companies who are doing that, they already have these cloud
Speaker 3: businesses like Google Cloud like aws like Microsoft Azure, and
Speaker 3: so Wall Street kind of understands generally how they are
Speaker 3: expected to generate a return on building all of those
Speaker 3: data centers. Wall Street can stomach that with Meta, it
Speaker 3: hasn't been outlined whatsoever. You and I talked about this.
Speaker 3: They later kind of folded and admitted that they were
Speaker 3: just going to build their own cloud business. That was
Speaker 3: what we thought was going to happen. But when the
Speaker 3: analysts asked Mark Zuckerberg point blank what the actual plan
Speaker 3: was in terms of ROI, how are you actually going
Speaker 3: to generate a return on all of this AI data
Speaker 3: center spending? He didn't give them an answer. He didn't
Speaker 3: distress the cloud plans. He didn't address any of the
Speaker 3: reports about how Meta was in early talk to cell
Speaker 3: compute to Anthropic, which I know you have covered at length.
Speaker 3: He basically just avoided the question. And I think that
Speaker 3: tells you something about Mark Zuckerberg and the extent to
Speaker 3: which he gives a shit. He doesn't really, he doesn't.
Speaker 2: Can't believe he literally cannot be fired.
Speaker 3: That's right, which is back to the governments exactly.
Speaker 2: I mean, it feels like we're in the golden age
Speaker 2: of grift like it feels like we're just in an
Speaker 2: era where the only reason this is happening is because
Speaker 2: they know they can get away with it. There's no
Speaker 2: it's not like. I've read multiple I would say, like
Speaker 2: five different articles on Meta, Google, Microsoft, Amazon and their
Speaker 2: earnings and the only reason anyone is slightly critical of
Speaker 2: Meta is because their revenue growth wasn't as good as
Speaker 2: it is it was expected to be. That's the only
Speaker 2: reason it's not. It's not like analysts are point blank saying, hey,
Speaker 2: you haven't told us what your AI strategy is, you
Speaker 2: may have wasted that. They're not being blunt with them.
Speaker 2: They're just like, hey, hey, Mark, when you get around
Speaker 2: to it, would you mind telling me why you spend
Speaker 2: like like two hundred three hundred billion dollars and you
Speaker 2: want to spend one hundred and forty five billion dollars
Speaker 2: this year? When you when you got a minute, don't worry.
Speaker 2: I know you're busy.
Speaker 3: I actually disagree with you on that. Meta keep pushing them.
Speaker 3: I think I think that this has been recognized by
Speaker 3: the market by Wall Street. Took them a while, I'll
Speaker 3: give you that, but I think that in the case
Speaker 3: of Meta, they actually are starting to ask those questions.
Speaker 3: And I think the problem is that the other companies,
Speaker 3: because they have those cloud businesses, they're kind of refusing
Speaker 3: to ask the tough question, or not even the tough question,
Speaker 3: the obvious question of to what extent are you dependent
Speaker 3: on Open and Anthropic two companies which are losing gargantuan
Speaker 3: amounts of money, two of the most unprofitable companies in
Speaker 3: the history of companies. And that's literally a fact. You
Speaker 3: can look up the list of the most unprofitable companies
Speaker 3: ever and you'll notice if you do the math, Open,
Speaker 3: Aye and Anthropics should be in that list. So I
Speaker 3: think that they are not doing that homework, that hard
Speaker 3: work of digging into the numbers and asking that difficult
Speaker 3: question when it comes to especially when it comes to Google,
Speaker 3: and especially when it comes to Amazon. But I do
Speaker 3: think that they are worried about Meta's total lack of
Speaker 3: interest in laying out how they plan to generate any
Speaker 3: returns on this whatsoever.
Speaker 2: Well, that's the thing though, I will push back again
Speaker 2: a Meta. Sure they are asking the questions, but they're
Speaker 2: not point blank saying, hey, you've not shown it. They're not.
Speaker 2: And even the media, the media is absolutely not like
Speaker 2: they're saying, oh, there's concerns over AI spend a few
Speaker 2: higher than usual. That's strange. It's this kind of like plodding. Ah,
Speaker 2: I guess maybe we should find something out. And the
Speaker 2: analysts are pushing these questions now. But as we speak,
Speaker 2: and in two days this will come out, so we
Speaker 2: know it's down again. But MAT has already recovered six percent. Today,
Speaker 2: it recovered a couple percent. It's already on course to
Speaker 2: recover all of the losses. So it's not like anything changed.
Speaker 2: But as we discussed before we got on here, there
Speaker 2: are some analysts who have tried to work out or
Speaker 2: have estimated the actual concentration of revenue for Amazon, Google
Speaker 2: and Microsoft for open AI and anthropic spend. And as
Speaker 2: we were just discussing, so Ross Sandler over at Berkleys
Speaker 2: he estimates that seventy three percent of all Amazon's AI
Speaker 2: revenues in both twenty twenty six and twenty twenty seven
Speaker 2: will be anthropic and open AI's compute spend ChRI.
Speaker 3: It is completely an openly number.
Speaker 2: Insane. It is insane. So I found this a couple
Speaker 2: of days ago. I'd been working on it and I thought, well,
Speaker 2: it can't be that bad elsewhere except the look at
Speaker 2: ubs of Stephen Jews As he said this back in
Speaker 2: so barcleays Is back in March. Stevens was in June
Speaker 2: and he said that forty sorry, it's twenty seven percent
Speaker 2: of all Google Cloud revenues, so not AI revenues. All
Speaker 2: Google Cloud revenues for twenty twenty six are estimated to
Speaker 2: be open AI and anthropic, and then forty four percent
Speaker 2: in twenty two twenty seven. That is completely fucking insane,
Speaker 2: Like that is just this is this is to me
Speaker 2: such a huge scandal, And I mean I could also
Speaker 2: mention that well that there's also a Wells Fargo report
Speaker 2: that says that Microsoft's same deal seventy three percent is
Speaker 2: anthropic and open AI have their AI revenues Michael Churan
Speaker 2: over there. And it's like, I feel like I'm going
Speaker 2: a little insane because when you read these numbers, you're like, oh,
Speaker 2: these are from major investment analysts. How are they not
Speaker 2: calling like, hey, mister Fargo, mister Fargo, I read these numbers,
Speaker 2: and you should really check these out because we might
Speaker 2: be in trouble. And I think and friend of the
Speaker 2: showcase goa really helped me nail this down. I think
Speaker 2: it's these people are only capable of thinking two quarters
Speaker 2: in the future. Like they they can think of twenty
Speaker 2: twenty eight. They can think of twenty twenty seven, but
Speaker 2: they can only do so in terms of the last
Speaker 2: two quarters. Number has gone up. Open Ai and Anthropic
Speaker 2: are still solvent, so number will keep going up. It
Speaker 2: isn't a problem that the revenue is centralized because number
Speaker 2: keep going up. But to me, this is potentially one
Speaker 2: of the largest corporate scandals in tech history. Maybe I'm
Speaker 2: being dramatic, but this is We're talking over nine hundred
Speaker 2: and ninety billion dollars of capex now, and most of
Speaker 2: it is for these two companies that can quite literally
Speaker 2: not afford to pay unless one of those three companies
Speaker 2: gives them the money.
Speaker 3: Yes, this is a huge, huge problem. And you were
Speaker 3: saying that the analysts weren't and the media weren't doing
Speaker 3: their job in terms of asking meta questions about having
Speaker 3: going to generate a return. I sort of pushed back
Speaker 3: on you on this one. The silence is deafening from
Speaker 3: the analysts and from the media. There is a very
Speaker 3: very obvious concern when it comes to the businesses of
Speaker 3: the largest and most systemic companies in the world, the
Speaker 3: companies on which the portfolios of every America are entirely predicated,
Speaker 3: on on which the entire stock market relies on. And
Speaker 3: that is how much of your business depends on two companies,
Speaker 3: Open AI and Anthropic. And you are one of the
Speaker 3: few people who has been doing significant work into uncovering
Speaker 3: that answer. And you have looked into some of the
Speaker 3: research that has come out of Wells Fargo, Barclay's ubs.
Speaker 3: And we should give those analysts credit for crunching those
Speaker 3: numbers and doing the work of figuring it out. But
Speaker 3: the numbers are insane. Open and Anthropics seventy four percent
Speaker 3: of Microsoft's AI revenue. That is very, very unsustainable. We
Speaker 3: talked about diversification in markets, the importance of having a
Speaker 3: diversified portfolio. The same thing goes for business. You want
Speaker 3: to have a diversified revenue streams that indicates strong, healthy,
Speaker 3: sustainable growth. None of these big tech companies have anything
Speaker 3: close to diversified revenue streams when it comes to AI,
Speaker 3: and so you have to ask the very obvious question,
Speaker 3: what would happen if one of those two companies Open
Speaker 3: A and Anthropic went under. And you also have to
Speaker 3: ask the question, what is the likelihood that one of
Speaker 3: those two companies, open Ai and Anthropic could go under.
Speaker 3: What is the likelihood that they would not be able
Speaker 3: to make good on those payments that are propping up
Speaker 3: the growth of these big tech companies, specifically when it
Speaker 3: comes to their revenue. And the answer is it's actually
Speaker 3: pretty fucking high. Yeah, because you look at the financials
Speaker 3: and they are ugly, as you've talked about at length,
Speaker 3: and we can get into but I want to pass
Speaker 3: it back to you now.
Speaker 2: The thing is a fun story. A couple of days ago, Amazon,
Speaker 2: they were meant to give open Ai another thirty five
Speaker 2: billion dollars if they went public or reached the AGI.
Speaker 2: Well none of those, none of those, none of those
Speaker 2: things happened, of course, but they still gave them the
Speaker 2: thirty five billion dollars a couple of days ago. And
Speaker 2: that's crazy. That's a really crazy number, especially because that
Speaker 2: is well, let's just go and have a look at
Speaker 2: these numbers in rossandle Barclays. That is, so thirty five
Speaker 2: billion dollars is roughly let's see, Yeah, it's a little bit,
Speaker 2: it's around how much AI revenue Amazon has made this year,
Speaker 2: so forty point one nine five Actually yeah, yeah, it's
Speaker 2: a three point four billion dollars less sorry, more than
Speaker 2: Amazon is estimated to make on AI this year in
Speaker 2: totality including open Ai and Anthropic spent. So that's good,
Speaker 2: just handing themselves money, just handing it to open AI
Speaker 2: and Anthropics so they could hand it back. They already
Speaker 2: gave five billion dollars to Anthropic, They already were on
Speaker 2: course to give them another twenty billions sometimes this year.
Speaker 2: Google already give ten gave ten billion dollars to Anthropic
Speaker 2: this year has another thirty billion. They ow, this is
Speaker 2: not a real This is not a real economy, is
Speaker 2: not growth. No one's actually doing business here. It's just
Speaker 2: people handing money to each other and being like, yep,
Speaker 2: look how profitable we are. Even though that does not
Speaker 2: even doesn't seem like it's exploding margins either, it doesn't
Speaker 2: seem like it's having much of an effect at all.
Speaker 2: But what's really concerning is everyone's excited about these companies
Speaker 2: because of their cloud growth, and it's really beginning to
Speaker 2: look like most of that revenue growth is coming from
Speaker 2: this spend. Yes, which is terrifying.
Speaker 3: It's almost all of it is coming from those two companies. Earlier,
Speaker 3: you said that them not reporting that their revenue is
Speaker 3: coming from open Ai and Anthropic alone, that that is
Speaker 3: something of a scandal. I think that is just irresponsible.
Speaker 3: I think of it less of a scandal. The part
Speaker 3: that I do think is a scandal is the circular
Speaker 3: financing aspect of it. It's the fact that those two
Speaker 3: companies are also the two companies in which big tech
Speaker 3: invested billions and billions of in order to keep them afloat,
Speaker 3: and that is the only reason why those companies are surviving. Yes,
Speaker 3: it's Silicon Valley and venture investors, but a lot of
Speaker 3: that investment is corporate investment coming from big tech. It's
Speaker 3: coming from Microsoft, it's coming from Google, it's coming from Amazon.
Speaker 3: And so the idea that the largest customers, the customers
Speaker 3: that are driving the majority of these companies' revenue growth,
Speaker 3: are also the companies in which those companies had invested
Speaker 3: in that is a very very obvious conflict of interest,
Speaker 3: at which point it starts to get into actual scandal territory.
Speaker 3: I don't think that calling the circular financing epidemic, I
Speaker 3: don't think calling that a scandal is overkill. I don't
Speaker 3: think that's a stretch too far. I think it really
Speaker 3: is a scandal, and I think it's actually shameful the
Speaker 3: way Jensen Huang has talked about it, where he was
Speaker 3: asked this question about the circular deal making and he said,
Speaker 3: I don't think it's circular at all. He simply denied it,
Speaker 3: and he didn't come up with an explanation as to
Speaker 3: why it wasn't circular. He didn't come up with any
Speaker 3: real excuses. He just said, no, that's wrong, bs, I
Speaker 3: don't like what you're saying, and then he just moved on.
Speaker 3: And that is a real problem. That's when you start
Speaker 3: to see that actually, these these executives either are either
Speaker 3: they're just blindly ignoring what is happening, or they are
Speaker 3: actually lying. I mean, I think that it's it's reasonable
Speaker 3: they assume that Jensen Wong told a lie when he
Speaker 3: said that he didn't think that what they were doing
Speaker 3: was circular, just to like go back to the question
Speaker 3: of would open eye go under, because that's that's the
Speaker 3: real life, that's how this.
Speaker 2: Goes down, yes, And that's that is also a point
Speaker 2: that people are now readily discussing. It's no longer fringe
Speaker 2: economic theory from a crazy person called Aird. It's now
Speaker 2: something that people want to discuss and are worried about. Yes,
Speaker 2: I think, but it's like yeah, but they discuss it
Speaker 2: in this way that is like I don't know, like
Speaker 2: if a neighborhood restaurant shut down, like it's like, oh,
Speaker 2: you know, yeh, you know, these things happened. Business is tough.
Speaker 2: I wish I was kidding, but I've tried to talk
Speaker 2: to reporters about this and try to be like, hey, look,
Speaker 2: this company is really holding up the earth. Yeah, like
Speaker 2: they are quite consequential to the future revenues and multiple companies,
Speaker 2: and they're like, yeah, but you know there's other demand.
Speaker 2: And that's the thing. When the big thing that the
Speaker 2: piece I'm working on will be out by the time
Speaker 2: this goes out, says is like, yeah, the other problem
Speaker 2: with seventy three percent or so of AI revenues for Google,
Speaker 2: Amazon and Microsoft being open AI and anthropic is and
Speaker 2: just be clear, this progresses over the years of estimates.
Speaker 2: It's not like they say, okay, demand will even out.
Speaker 2: That suggests that there isn't demand for AI. Just rit
Speaker 2: large that there is not demand, at least not at
Speaker 2: the scale that's been promised, and definitely not at the
Speaker 2: scale that will saytiate all of these data centers get
Speaker 2: it's not possible when you look at these numbers. And
Speaker 2: this is not me just being like, oh, I work
Speaker 2: some stuff out with some markles. These are actual financial analysts.
Speaker 3: Yeah, and these are Yeah.
Speaker 2: It's genuinely terrifying because it's it's not just how bad
Speaker 2: it will be and yes, we'll get back to open
Speaker 2: eye dying in a second. It's the fact that everyone's
Speaker 2: kind of just looking at it and be like, as
Speaker 2: all right.
Speaker 3: So I think, yeah, I think it was really the
Speaker 3: actual philosophy was revealed in your Bloomberg interview. And you know,
Speaker 3: I don't mean this disrespectfully to the interview. I thought
Speaker 3: it was actually a great interview, and I thought they
Speaker 3: did a really good job. But I forget her name,
Speaker 3: but the interviewer said something that said something quite important
Speaker 3: to you, where she said, I just want to make
Speaker 3: sure you understand. I just want to make sure we're
Speaker 3: all on the same page here. The people who run
Speaker 3: these companies are very smart people. And that was the
Speaker 3: beginning of the question which would go on to say
Speaker 3: something like, are you really sure about all of this?
Speaker 3: And I think that is the hesitancy that you're seeing
Speaker 3: when you talk to media outlets, when you go to
Speaker 3: the New York Times, And I think that's the hesitancy
Speaker 3: among all of us, which is that to say that
Speaker 3: this company might not actually work out, which is not
Speaker 3: an insane thing to say by any stretch of the
Speaker 3: imagination when you look at their financials and when you
Speaker 3: look at their numbers. But to say that it might
Speaker 3: not work out is to say that the people who
Speaker 3: are running that company and the people who are investing
Speaker 3: in that company aren't the smartest people in the world.
Speaker 3: And today that is a bold thing to say. It
Speaker 3: is a bold thing to say that Satie and Adella
Speaker 3: might not know what he's doing. It's a bold thing
Speaker 3: to say that Sam Altman might not know what he's doing.
Speaker 3: It's a bold thing to say that Mark Zuckerberg might
Speaker 3: not know what he's doing, which is quite crazy to me,
Speaker 3: considering that just a few years ago he spent more
Speaker 3: than eighty billion dollars trying to build the Metaverse, which
Speaker 3: was a total failure, total dead on arrival. He renamed
Speaker 3: his company to Meta because he thought that this was
Speaker 3: the future. He was so so wrong about that. So
Speaker 3: the idea that these people can't be wrong, or that
Speaker 3: they can't spend money incorrectly, or that sometimes they might
Speaker 3: actually not be great capital allocators, that is total lunacy.
Speaker 3: It is a total fantasy. But for whatever reason, people
Speaker 3: don't want to believe that. People get uncomfortable when you
Speaker 3: start to suggest that. And that, I think is why
Speaker 3: people get uncomfortable when you say the things that you say,
Speaker 3: because it suggests maybe these guys don't know what they're doing.
Speaker 2: Well, it's that. And also, let's just let's just say
Speaker 2: this right now, looking at the Barclay's numbers in front
Speaker 2: of me, open AI dice tomorrow. That is, let's look
Speaker 2: at it. Twenty eight percent of Amazon's AI revenue next
Speaker 2: year gone goodbye, just evaporated, and indeed twenty seven percent
Speaker 2: for the next two years as well. If anthropic can
Speaker 2: open air if one of them dies, what that's like
Speaker 2: twenty percent let's see open aiyes, a well, it looks
Speaker 2: like about twelve point five billion dollars of Google's twenty
Speaker 2: twenty seven AI revenue just like gone evaporated and otherwise
Speaker 2: their other AI revenues are pretty flat. It looks like
Speaker 2: Vertex Vertex kind of increases, but again that's through selling
Speaker 2: anthropic and open aies models. It's I don't think people
Speaker 2: realize that there's a great charts coming in this article
Speaker 2: as well. How much of AS yours revenue as well
Speaker 2: is just open aiy spend And it's let's see, let's
Speaker 2: take let's take a look at this chart of as
Speaker 2: your revenue as well sixty two percent. Let's see, Yeah,
Speaker 2: it's about seventy two percent, sixty eight to seventy two
Speaker 2: percent in fiscal year twenty twenty six, and as much
Speaker 2: as seventy four percent in twenty twenty seven. If these
Speaker 2: companies die, they lose most of the AII revenue evaporated.
Speaker 2: And that's not including the amount of money that comes
Speaker 2: through as your AI renting out their models. Yeah, like,
Speaker 2: and people are just like, yeah, you know, if that happens,
Speaker 2: there'll be more demand. I have this guy who's a
Speaker 2: very well meaning guy. He's on Twitter. He's a semi
Speaker 2: conductibuller analyst. You always respond and say, look, all useful
Speaker 2: compute will be bored, All useful compute will be bored.
Speaker 2: It will always be born. And I'm like, yeah, but
Speaker 2: if open ai dies, it is the largest consumer of
Speaker 2: AI compute. What happens that, well, it'll get bored. Yeah,
Speaker 2: And it's just insane to me. It is genuinely bonkers
Speaker 2: to me that no one like I guess, I guess
Speaker 2: what it is taking a step back is looking at
Speaker 2: what you said as well. Is it's they don't want
Speaker 2: to follow the argument to the logical endpoint because it's
Speaker 2: all of these smart people were stupid, that's right, and
Speaker 2: also everyone was wrong, wrong in a way that he's
Speaker 2: going to be very difficult to back out of.
Speaker 3: That's right.
Speaker 2: And also that they will like to just let's be clear.
Speaker 3: Yeah, that's the problem now. So I'm in total agree
Speaker 3: with you on all this. I want to take things
Speaker 3: to their logical conclusion further and I'm going to say so,
Speaker 3: but I don't know if you're going to be that
Speaker 3: excited about what I'm going to say. That's fine because
Speaker 3: when I think about this, what would actually happen if
Speaker 3: AI were to basically just die, if open Ai actually die,
Speaker 3: and if Anthropic actually died. And I think there's a
Speaker 3: good reason to believe that, which we can get into
Speaker 3: we can get into their financials and just rehash them
Speaker 3: because they are very important. They're systemic to the ecosystem.
Speaker 3: But I sometime I like to think, Okay, what would
Speaker 3: a world look like where the AI thing just didn't
Speaker 3: work out? And I have to say a lot of
Speaker 3: that anxiety actually is priced in right now when it
Speaker 3: comes to big tech. And I just want to point
Speaker 3: you to the pre Big Mornings multiples. Yes, the price
Speaker 3: to earnings multiples of big tech at the beginning of
Speaker 3: twenty twenty three. I went back and looked at this.
Speaker 3: This was right before that AI trade took off. If
Speaker 3: you look at the price of earnings multiples, you look
Speaker 3: at Microsoft, it was trading at twenty six times earnings.
Speaker 3: Amazon was trading at eighty times earnings. Meta was trading
Speaker 3: at thirty one times earnings. If you look at the
Speaker 3: pe multiples today, and by the way, I looked at
Speaker 3: this as of last week, at the end of last week,
Speaker 3: right after they've reported their earnings, so they could have
Speaker 3: changed by now, I'm sure they have. Microsoft's multiple is
Speaker 3: lower than it was. It's at twenty five, not that
Speaker 3: much lower, but it is lower Amazon. Amazon's is significantly lower.
Speaker 3: And this is the real pe, the one that I adjusted,
Speaker 3: not factoring in their investment gains, on their and their
Speaker 3: anthropic and opening. I stakes it's trading at thirty times earnings.
Speaker 3: That's lower, and Metas is significantly lower. It's trading at
Speaker 3: twenty times earnings compared to thirty one before the AI boom.
Speaker 3: So I think one thing that we should recognize is
Speaker 3: that in some places, in some areas of the market,
Speaker 3: I think there are people on Wall Street who are
Speaker 3: actually quite anxious. I think there are a lot of
Speaker 3: people on Wall Street ed who are reading your newsletter.
Speaker 3: I truly believe that, and I think that that perspective,
Speaker 3: the bearish perspective, and the acknowledgment of how this could
Speaker 3: all implode. I don't think that it is completely driving
Speaker 3: the market. I think there's more optimism than there is pessimism,
Speaker 3: but I do think that it is somewhat being reflected.
Speaker 3: And that is to say, if this all were to
Speaker 3: blow up, I don't think these stocks wouldn't crash. They
Speaker 3: would certainly crash, but I do think that it wouldn't
Speaker 3: be as horrible as it might have been, say in
Speaker 3: two thousand and eight, when the housing bubble was truly
Speaker 3: elusive to almost everyone. That is my conjecture, and I'm
Speaker 3: sure you might disagree with me on it, but I
Speaker 3: do think we should recognize the extent to which there
Speaker 3: is some anxiety that is beginning to be reflected in
Speaker 3: some asset prices.
Speaker 2: So one pushback, yeah, and I think it's a critical one,
Speaker 2: is that even though the price thre earnings and all
Speaker 2: that reflects a little bit lower and it's showing some anxiety,
Speaker 2: it still is a price factored into which factors in
Speaker 2: the idea that these companies will keep growing. Yes, And
Speaker 2: I think that that is a critical problem because I'm
Speaker 2: not sure, at least in the case of their cloud businesses,
Speaker 2: whether these companies are growing anymore when you remove open
Speaker 2: AI and anthropic right, I don't think it like I'm
Speaker 2: not just talking like. I don't think Microsoft, Google, Amazon
Speaker 2: and Meta. Though I think Meta could die in ten years.
Speaker 2: I've thought that for a while. I think that they're
Speaker 2: just bits falling apart. But I don't think they're dying.
Speaker 2: I think their stocks are going to get their asses beat.
Speaker 2: But the problem is going to be not just that
Speaker 2: AI didn't work. That's what's going to be the first problem.
Speaker 2: The second one is when they go, right, well, open
Speaker 2: ai isn't paying you anymore, and suddenly your your revenues
Speaker 2: are down and your growth has slowed. Hey, Google Cloud
Speaker 2: has stopped growing. It's stopped growing pretty much at all.
Speaker 2: It's in fact, it looks kind of flat. What's the
Speaker 2: deal with that? And it's because Anthropic and open AI's
Speaker 2: computees compute spend was propping up the growth. So while
Speaker 2: Wall Street might be saying, oh, well, if AI doesn't
Speaker 2: work out, I think what they mean is that they
Speaker 2: think AI won't work out and be the next big thing,
Speaker 2: but there will still be big revenue generating businesses from this,
Speaker 2: which is not the case. I went and looked at
Speaker 2: the Wells Fargo estimates and Turin and what's interesting for
Speaker 2: Microsoft is that in fiscal year twenty twenty seven, so
Speaker 2: the next year, they estimate the Microsoft three sixty five
Speaker 2: copilot will make ten billion dollars a year in and
Speaker 2: your revenue, which is pathetic. Yeah, that's like a a
Speaker 2: what like a third of intelligent cloud. It's le I mean,
Speaker 2: it's a little bit less than they estimate the as
Speaker 2: your AI will make, which is predominantly made up as
Speaker 2: selling open AIS models.
Speaker 3: I mean, they said one of their bragging points on
Speaker 3: that earning score was that they have thirty million copilot
Speaker 3: paying copilot us. Yeah, but what they don't really talk
Speaker 3: about is the fact that that's part of a larger
Speaker 3: enterprise bundle, which only makes up about eight percent of
Speaker 3: their total Microsoft three sixty five subscribers. So basically what
Speaker 3: they're telling us, they're trying to brag. But ultimately I
Speaker 3: read that and I go, oh, so you only converted
Speaker 3: eight percent of your user base. That was the share
Speaker 3: of your users who are down to try this AI
Speaker 3: product that you say is going to change the world.
Speaker 3: So to that point, I don't think that the strength
Speaker 3: that they are projecting in their consumer AI business is
Speaker 3: anywhere near what they'd like us to believe.
Speaker 2: Well, on top of that, the Wells Fargo estimates estimates estimates,
Speaker 2: someone will get me on that one. In the comments,
Speaker 2: they only estimate that they made three point eighty five
Speaker 2: billion for the entire fiscal year twenty twenty six from
Speaker 2: three sixty five copilot. The know the thing with thirty
Speaker 2: million paid seats. They're discounting this to Tim bucktoo, like
Speaker 2: this is this is being their discounting it to hell,
Speaker 2: and I mean pretty much anything like like pretty much
Speaker 2: anything that Microsoft cells has discounts, especially when it comes
Speaker 2: to Microsoft three sixty five. But again, the hogs lapped
Speaker 2: it up. They love their slop. They love being given
Speaker 2: a new big number so that they can interpret him
Speaker 2: when they again, not really sure what these analysts were doing,
Speaker 2: because I don't know. Again, I think I've said this already,
Speaker 2: Like if I was working at Wells Fargo and I
Speaker 2: had these numbers, I would be calling my boss's boss.
Speaker 2: I'd be like, hey, guys, hi, we have a problem. Because,
Speaker 2: like I said earlier, it's not just that Microsoft, Google
Speaker 2: and Amazon have pathetic AI revenues outside of open AI
Speaker 2: and anthropic It's that if they have pathetic revenues, if
Speaker 2: they as the largest holders of AI compute, as with
Speaker 2: the ones with the best pricing power, with the best teams,
Speaker 2: ostensibly with the most experience building AI data centers and
Speaker 2: providing AI compute, if they can barely scrape together what
Speaker 2: like what like, let's see, so it's seventy seventy three
Speaker 2: seventy four percent of so like they have this meager
Speaker 2: little little shrivel of their AI revenues is from diverse revenue.
Speaker 2: If that's the case, then there is not demand for
Speaker 2: a compute. It's not that there's only a little. It
Speaker 2: means there's none. It means there's actually, like there is
Speaker 2: a couple billion. Because again, when you look at the
Speaker 2: other providers, Core Weave, who are their biggest customers, Anthropic,
Speaker 2: Meta and open Ai. Who's Iron's biggest customer? Microsoft? Nebuis Microsoft?
Speaker 2: What's Microsoft doing with AI? Not very much? Not actually
Speaker 2: very much at all. They are providing compute to open
Speaker 2: ai and conning people into buying Copilot. Yeah, it's just
Speaker 2: it's astonishing because this is bigger than them. It's bigger
Speaker 2: than them. It's the one hundred night gigawats of planned
Speaker 2: data center capacity. It's all of these data centers being
Speaker 2: built everywhere. I it like I'm stuttering because it's like
Speaker 2: the ramifications of this at everything I've kind of feared,
Speaker 2: which is that AI demand does not exist at scale,
Speaker 2: and most of these data centers don't go paid for.
Speaker 2: And that's even if Anthropic and open ai like succeed
Speaker 2: in surviving past twenty twenty seven.
Speaker 3: Well, I think you said something important earlier about the
Speaker 3: growth and that is if if this AI thing doesn't
Speaker 3: work out. It's not as if Microsoft and Amazon and
Speaker 3: Google and Meta won't have a business anymore. They had
Speaker 3: a business before AI, and the business was pretty big
Speaker 3: and doing pretty well. What it does mean is that
Speaker 3: these companies won't actually be growing anymore. They won't be
Speaker 3: growth companies. And I think this gets to the heart
Speaker 3: of what AI has been all about, and that is
Speaker 3: that the big tech companies in late twenty twenty two,
Speaker 3: when chat GBT was released to the world, they suddenly realized,
Speaker 3: oh my gosh, innovation is happening without us. There are
Speaker 3: other companies on the scene, there are other technologies, and
Speaker 3: we don't have a part in it. And so they decided, Okay,
Speaker 3: what are we going to do. We're going to do
Speaker 3: whatever we can to take whatever semblance of technology exists
Speaker 3: in that company and then bolt it onto our own companies.
Speaker 3: We're basically going to inject that optimism into our own
Speaker 3: faces as if it were botox, to convince the market
Speaker 3: that we are in fact young again, that we are growing,
Speaker 3: that we're hot, that we're innovative, and that you should
Speaker 3: come and put your money in us because we're not
Speaker 3: just a company that's going to continue to generate cash.
Speaker 3: We're a company, We're a generational company. We're a company
Speaker 3: that's going to significantly increase profits at an exponential rate
Speaker 3: over ten twenty thirty years. That is the story that
Speaker 3: they wanted to tell the markets, and they wanted to
Speaker 3: tell it so desperately that they were willing to actually
Speaker 3: go and invest in those companies like open Ai and
Speaker 3: Anthropic and also SpaceX, which we haven't mentioned that much,
Speaker 3: but it actually plays a role in all this, and
Speaker 3: then have those companies come back and then buy our chips,
Speaker 3: give us back the money, and then we're going to
Speaker 3: use that and use that as a story to tell
Speaker 3: the world that actually we're young again, that we are growing.
Speaker 2: And everyone by proxy to spend money on ai compute
Speaker 2: to compete with our exact compete with us in with
Speaker 2: the companies that we invest in.
Speaker 3: We will obliterate our balance sheets in the process. And
Speaker 3: that's where things are getting get really ugly. But is
Speaker 3: that really start to lose cash and we're starting to
Speaker 3: see it Amazon negative free cash flow, Google negative free
Speaker 3: cash flow as of this quarter. But that's really what
Speaker 3: they're doing here. They want to be young again. But
Speaker 3: if you look at these companies, these companies are old.
Speaker 3: These are mature companies. Their heyday is behind them, but
Speaker 3: they don't want to believe that. They want to live forever.
Speaker 3: They are the Brian Johnson's of the world of technology.
Speaker 3: And so I think, what's going to happen if this
Speaker 3: thing doesn't work out. I think there's a highlightlihood that
Speaker 3: it won't because of the financials of opening iron anthropic
Speaker 3: and how dependent the whole world has become on them.
Speaker 3: I think what will happen is the companies won't go
Speaker 3: under the big tech companies. I think what will happen
Speaker 3: is Wall Street will look at them and they'll say,
Speaker 3: you're not a growth company. You're a mature company. And
Speaker 3: that means that we're going to assign a mature multiple
Speaker 3: to your earnings. We're not going to have the days.
Speaker 3: I think that'll look like something in the range of
Speaker 3: fifteen to twenty times earnings. So that's why, by the way,
Speaker 3: Meta I'm not so worried about, because Meta is actually
Speaker 3: in that range. I think if you look at the company,
Speaker 3: I think Wall Street is looking at it and saying,
Speaker 3: this is a company whose growth prospects are unlikely at best.
Speaker 3: So I'm not so worried about Meta. The companies I'm
Speaker 3: more worried about is a company like Google trading above
Speaker 3: thirty times earnings by the way. A company that's gotten
Speaker 3: way out over at skis from a multiple perspective, which
Speaker 3: is really surprising to me is Apple. And I think
Speaker 3: that's because people have actually gotten nervous about the AI
Speaker 3: trade and so they said, Okay, Amazon still has cash
Speaker 3: on the balance sheet. Apple is trading it nearly forty
Speaker 3: times earnings. The way that they have been able to
Speaker 3: dupe the market into thinking that they are a growth
Speaker 3: company when they haven't come out with a new product
Speaker 3: in ten years, and the ones that they've tried to
Speaker 3: come out with and tried to sell have completely flopped.
Speaker 3: They canceled the Apple car, the Vision pro was a
Speaker 3: total disaster. I mean, that's that's very clearly not a
Speaker 3: growth company.
Speaker 2: But I think that's the quest funny thing is with
Speaker 2: Apple as well, is that they've managed to keep going
Speaker 2: by just not blinking on the AI trade. Except the
Speaker 2: AI trade fucked them over because of the increasing cost
Speaker 2: of ram right, because of everyone buying into I mean,
Speaker 2: that's the other thing. It's like the increasing this is
Speaker 2: the other So actually this is a good bridge from
Speaker 2: what you were just saying. The other problem with this
Speaker 2: as well is yeah, you're saying these companies will be
Speaker 2: assigned growth like the multiples associated with old, old, boring companies.
Speaker 3: Wearing old mature.
Speaker 2: But again I don't think that factors in a the
Speaker 2: fact they're not growing, but b the fact that they
Speaker 2: have hundreds of billions of assets. Now they're just burdened
Speaker 2: with debt endless debt. Microsoft has been kind of smart
Speaker 2: in the amount of debt it's taken on. It's nowhere
Speaker 2: near as encumbered. But who knows at this point. But
Speaker 2: Google's done a massive equity sale or they plan to
Speaker 2: do a massive equity sale.
Speaker 3: The more on tilt they get in order to pursue
Speaker 3: this botox future of being young. Again, this is the
Speaker 3: more dangerous, the more dangerous that the larger the threat
Speaker 3: to their entire existence becomes. So I will agree with
Speaker 3: you if they continue down this road of I'm not
Speaker 3: just going to pay for the botox with the cash
Speaker 3: that I already have in my bank account. I'm going
Speaker 3: to take on significant amounts of debt, significant amounts of
Speaker 3: leverage and margin in order to pursue that dream because
Speaker 3: I'm so obsessed with pursuing it and I need to
Speaker 3: do it because I have to be young again. If
Speaker 3: they take that to its end, to its logical conclusion,
Speaker 3: as you say, then yeah, we can start talking about
Speaker 3: will these companies implode? And I think Oracle is an
Speaker 3: example of a company where they have done that. They
Speaker 3: have genuinely done that, and its prospects are genuinely terrifying.
Speaker 3: We're starting to see it with some of these other companies.
Speaker 3: We're starting to I was shocked that Google was willing
Speaker 3: to come out with a quarter of negative free cash flow.
Speaker 3: I was shocked that Amazon was willing to do that.
Speaker 3: So it does appear that they're starting to lose their
Speaker 3: marbles on this front. They're so obsessed with the mission,
Speaker 3: they're so obsessed with the AI future that they are
Speaker 3: actually acting irresponsibly. But I don't think that we're quite
Speaker 3: there yet. I think the signs show that they're going
Speaker 3: to continue to do this. I mean, if they continue
Speaker 3: to load up their balance sheets with debt, who knows
Speaker 3: what the future will actually look like. But this is
Speaker 3: so far that they're not quite in a place where
Speaker 3: They're fully going to collapse and implode, would be my
Speaker 3: read of the situation at present.
Speaker 2: I fully agree. By the way, I don't actually think
Speaker 2: the Big Three collapse. I think Meta is already on
Speaker 2: the down spiral. I think they really I think their
Speaker 2: product is collapsing, and the things that I continually hear
Speaker 2: from that company suggests that, like the culture is screwed.
Speaker 2: But nevertheless, for the short term, at least the next
Speaker 2: five years, I think that they will be fine. They're
Speaker 2: not going to have a fun time of it when
Speaker 2: this ends again, when it comes through like logical end
Speaker 2: points in the way that people don't want to discuss them.
Speaker 2: Oracle is now spending all of its revenue, just more
Speaker 2: than its revenue on AI capex, just for open AI.
Speaker 2: And I mean, the New York Times just just fucking
Speaker 2: ripped me off, by the way, Like there is a
Speaker 2: sentence in there about fallen Angels that is like bordering
Speaker 2: on identical to my piece. Fucking New York Times. Man,
Speaker 2: if you're listening from the Times, go read the Oracle piece.
Speaker 2: Go read my fallen angel bit from the open Aye bubble.
Speaker 2: You tell me if I'm crazy. But nevertheless, people are
Speaker 2: having this conversation like, Wow, Oracle, they're kind of unprofitable.
Speaker 2: That's not good. Wow, that's not good. But then they
Speaker 2: stop short of saying the thing that they don't want
Speaker 2: to say much like everyone else. Now when to talk
Speaker 2: about this bit, which is, yeah, if Oracle doesn't work
Speaker 2: out the AI trade, it dies. Yes, It's revenue has
Speaker 2: been flat for fifteen years adjusted for inflation, it has.
Speaker 2: The crazy thing is I wrote about this a couple
Speaker 2: of weeks ago. The crazy thing about Oracle is that
Speaker 2: they actually would be on the decline already, but whenever
Speaker 2: they slow down, they buy more companies. They use the
Speaker 2: quiet companies. They're like, they're really strange.
Speaker 3: Yeah.
Speaker 2: But nevertheless, though, no one wants to talk about the
Speaker 2: fact that Oracle will die. And honestly, seeing these numbers, yeah,
Speaker 2: Oracle will die.
Speaker 3: It's it is a it is a genuinely it is
Speaker 3: a genuine possibility. It's it's not over high. But it's
Speaker 3: not dumerism, it's it's it could genuinely happen. I think
Speaker 3: we should give credit to one group of people who
Speaker 3: actually do seem to be pricing in that possibility, and
Speaker 3: that is the credit default swap traders. Oh yeah, whichever
Speaker 3: ones have driven those CDs is up to where they are.
Speaker 3: I don't know where they are.
Speaker 2: And that's just exactly the listeners that's just betting on
Speaker 2: whether Oracle will die. It specifically betting on whether it
Speaker 2: will defeat default on its debts.
Speaker 3: Yes, whether it's the insurance that you pay on the
Speaker 3: on the possibility that it will default, and the price
Speaker 3: of that insurance is going up. People are beginning to
Speaker 3: realize in that market, specifically, that the possibility is real,
Speaker 3: that it could actually happen. And I mean, I think
Speaker 3: there's a question as to again whether they're too late
Speaker 3: on that. Weren't the signs there before? Couldn't we have
Speaker 3: started to see this coming not today, but six to
Speaker 3: twelve to eighteen months ago. And I think that would
Speaker 3: be the contention of your readers and your listeners who
Speaker 3: have been hearing about this from you for a very
Speaker 3: long time. And then suddenly everyone decides, oh, maybe it's
Speaker 3: a problem. Maybe we'll start to write some articles on this,
Speaker 3: maybe we'll start to see those spreads widening on the cdswats.
Speaker 3: But we should give them their props. You know, some
Speaker 3: investors seem to be acknowledging the situation.
Speaker 2: Yeah, well, you know what, Ed, I think that's actually
Speaker 2: a good spot to end it. People can find you
Speaker 2: on prof G Markets what you're working on at the moment,
Speaker 2: because you should write up that botox thing. It's an
Speaker 2: incredible idea. It's a banger. Please run with it.
Speaker 3: That'll be my next newsletter. Let's see. I'm working on
Speaker 3: a newsletter where we're talking about what happened in South
Speaker 3: Korea last week. That'll go out on Tuesday of this week,
Speaker 3: so that's tomorrow. I don't know when this episode will
Speaker 3: come out, but if you want to come follow my work,
Speaker 3: go to Profty Markets. We're on YouTube. I cover the
Speaker 3: markets every single day of the week, or at least
Speaker 3: Monday through Friday, and we talk about everything. We have
Speaker 3: people on from all walks of life, from different sides
Speaker 3: of the market. We try to have bulls on, we
Speaker 3: try to have bears on, and we'll certainly be having
Speaker 3: ed Zeitrin on in the future as well, because we
Speaker 3: love them and we love this analysis.
Speaker 2: We love the heads. All right. You'll find me on
Speaker 2: the monologue this week as well. Haven't worked out what
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