Expense-focused investors are a bit concerned about that: Callahan on Meta's big AI investments

Here's a detailed summary of the YouTube video transcript:

Key Concepts

• Earnings Reports: Financial statements released by public companies detailing their performance over a specific period.
• EPS (Earnings Per Share): A company's profit divided by the number of outstanding shares.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets like property, buildings, and equipment.
• Superintelligence: A hypothetical artificial intelligence that possesses intelligence far surpassing that of the brightest and most gifted human minds.
• AI (Artificial Intelligence): The simulation of human intelligence processes by machines, especially computer systems.
• Revenue Growth: The increase in revenue a company generates over a period.
• Expense Growth: The increase in a company's expenditures over a period.
• Ad Impressions: The number of times an advertisement is displayed on a user's screen.
• Ad Pricing Growth: The increase in the cost of advertising.
• Recommendation Algorithm: A system that predicts user preferences and suggests relevant items or content.
• Azure: Microsoft's cloud computing service.
• Constant Currency: A method of reporting financial results that excludes the effects of foreign currency fluctuations.
• RPO (Remaining Performance Obligations): The total value of contracted revenue that has not yet been recognized as revenue.
• IPO (Initial Public Offering): The process by which a private company can go public by selling shares of stock to the public.
• Core Search: Google's primary search engine business.
• Tensor Processing Units (TPUs): Google's custom-designed hardware accelerators for machine learning.
• NVIDIA Data Center GPUs: Graphics Processing Units manufactured by NVIDIA, used for high-performance computing and AI tasks.
• Canadian Data Center Proliferation: The expansion and growth of data center infrastructure in Canada.
• Market Breadth: A measure of the number of stocks participating in a market advance or decline.

Earnings Season Overview and Company-Specific Analysis

The discussion focuses on recent earnings reports from several major tech companies, with a particular emphasis on Meta, Microsoft, and Alphabet, and touches upon Alta Gas. The overall sentiment for the earnings season, despite some individual disappointments, is presented as generally positive, though with a note of caution regarding market breadth.

Meta: Concerns Over Expense Growth and "Superintelligence" Ambitions

• Key Point: Meta's stock is experiencing pressure due to a miss on EPS and significant concerns about accelerating expense growth, particularly related to its pursuit of "superintelligence."
• Details:
  • Barometer Capital Management, an investor, had previously owned Meta and sold it intraquarter due to worries about future expenses.
  • Mark Zuckerberg, Meta's CEO, stated that the company will spend "no matter what" to achieve superintelligence, with timelines ranging from a few years to seven years.
  • The potential payoff for achieving superintelligence is described as "quite large," but if not achieved, the core business is expected to grow into the compute infrastructure being built.
  • Investors are concerned that expense growth is outpacing revenue growth, reminiscent of Meta's situation in 2021, which led to negative share price performance.
• Core Business Performance:
  • The core advertising business is described as "very healthy."
  • Ad impressions grew by 14% year-over-year.
  • Ad pricing grew by 10% year-over-year.
  • These two factors sum up to the revenue growth number.
  • The ad business constitutes 98% of Meta's revenue.
  • While a preference for modest impressions growth and higher pricing growth exists, there are "no issues" with the core business itself.
• Future Outlook and Investor Sentiment:
  • Mark Zuckerberg's expectation of accelerated spending next year is a negative for expense-focused investors.
  • This increased spending is seen as potentially beneficial for other AI-related companies like Nvidia and AI infrastructure providers.
  • There is skepticism about whether investors are convinced by Zuckerberg's "superintelligence" bet, which involves creating computers smarter than humans.
  • Meta is benefiting from AI investments through improvements in its recommendation algorithms, contributing to pricing growth in its ad business.
  • However, the significant costs associated with AI engineers and infrastructure are a concern for some investors.

Microsoft: Strong Cloud Growth Amidst Minor Stock Pressure

• Key Point: Microsoft's earnings are strong, particularly its Azure cloud business, but the stock is experiencing minor pressure, which the analyst views as a non-issue.
• Details:
  • Barometer Capital Management owns Microsoft and has "no issue with the numbers."
  • Azure, Microsoft's cloud business, reported 39% year-over-year growth in constant currency.
  • This growth is significant given Azure's large base, now representing an almost $100 billion annual revenue run rate business.
  • Investors reportedly would have preferred 40% growth, but the analyst dismisses this as "nitpicking."
  • The core business across all three segments is performing strongly.
  • Microsoft's investment stake in OpenAI has been clarified, with OpenAI planning an IPO.
  • OpenAI is committed to spending $250 billion on Azure, which Microsoft reports as RPO (Remaining Performance Obligations), indicating expected future revenue.
• Analyst Perspective:
  • The analyst believes the stock's current dip is "no problem" and the chart "still looks really strong."
  • Microsoft remains a long-term holding for Barometer Capital Management.

Alphabet: Soaring on Strong Core Business and Cloud Innovations

• Key Point: Alphabet is performing exceptionally well, driven by a strong core search business and significant positive developments in its cloud division, particularly concerning custom AI chips.
• Details:
  • Alphabet is a "biggest position" for Barometer Capital Management.
  • Core Business:
    • Core Google Search grew by 11%.
    • YouTube showed strong growth of 15%, exceeding the 10% expected.
  • Cloud Business:
    • Google is providing customers with NVIDIA data center GPUs, including the GB300s.
    • A key development is Anthropic's ability to use Google's custom chips (TPUs - Tensor Processing Units) on Google Cloud.
    • TPUs are custom chips developed by Google in conjunction with Broadcom.
    • Historically, Google did not allow external companies to use TPUs, keeping them for internal use.
    • The ability to win business from large language model companies on TPUs opens a new "growth vertical" for Google Cloud.
    • This could lead to accelerated growth in Google Cloud, which is seen as "really nice to see."

Alta Gas: Nuanced Earnings and Sideline Stance

• Key Point: Alta Gas's earnings report is described as "messy" and "nuanced," leading Barometer Capital Management to remain on the sidelines.
• Details:
  • Alta Gas is not a historically held name by the firm.
  • The stock chart appears to be "rolling over."
  • Investors may be concerned about missing EPS expectations, partly due to expectations related to a settlement.
  • The firm prefers other names for exposure to potential Canadian data center proliferation.

Earning Season Theme and Market Breadth Caution

• Key Point: The overall earnings season has been "quite good" with beats over expectations and positive stock reactions, but a significant concern is the "too narrow" market breadth.
• Details:
  • Despite Meta's disappointing results, the season has been characterized by positive performance.
  • A "word of caution" is issued regarding market breadth, which is described as "too narrow" and setting records for its limited advance.
  • The analyst would like to see the market broaden out before becoming more constructive on the overall market going forward.
  • The current price action on a given day is not surprising given this narrow breadth.

Conclusion

The earnings season has largely been positive, with strong performances from Alphabet and Microsoft, despite Meta's challenges stemming from high AI-related expenses. Alphabet's strategic move to offer its custom TPUs on Google Cloud is a significant development that could drive future growth. While the tech sector shows resilience, a critical concern for broader market optimism is the narrowness of market participation, indicating that a smaller number of stocks are driving overall gains. Investors are advised to monitor market breadth for a more constructive outlook.