Google Just Dominated Big Tech Earnings!!

Key Concepts

• Hyperscalers: Large-scale cloud infrastructure providers (Alphabet/Google Cloud, Microsoft Azure, Amazon AWS).
• Capex (Capital Expenditure): Funds used by companies to acquire, upgrade, and maintain physical assets like data centers and AI chips.
• TPU (Tensor Processing Unit): Google’s proprietary AI accelerator chips.
• LLM (Large Language Model): Advanced AI models capable of understanding and generating human-like text.
• Backlog (Remaining Performance Obligations): Contracted revenue that has not yet been recognized as income.
• Vertical Integration: A strategy where a company controls multiple stages of its supply chain (e.g., designing chips, building models, and providing cloud services).
• Recommender Systems: AI algorithms used by platforms like Meta to suggest content and ads to users.
• TCO (Total Cost of Ownership): The purchase price of an asset plus the costs of operation.

1. Alphabet (Google) Performance

Alphabet demonstrated strong growth, particularly in its cloud division, which grew 63% year-over-year.

• Cloud Revenue: Google Cloud now accounts for approximately 18.2% of total company revenue, up from 12% two years ago.
• Strategic Advantage: Alphabet is highly vertically integrated, developing its own AI models and its 8th generation of TPU chips. This allows them to build capacity faster than competitors.
• Non-Operating Income: Alphabet reported $37.7 billion in non-operating income for the quarter, largely driven by successful long-term investments in companies like Anthropic and SpaceX.
• Chip Sales: Alphabet is beginning to sell its proprietary TPUs to select customers, including AI labs and financial institutions, creating a new revenue stream.

2. Cloud Competition: AWS vs. Azure vs. Google Cloud

The video highlights a shift in the cloud landscape:

• Growth Rates: Google Cloud (63%) is currently outpacing Microsoft Azure (40%) and AWS (28%).
• Backlog: Google Cloud’s backlog has reached $460 billion, signaling massive future demand.
• AWS Strategy: Amazon is seeing an acceleration in AWS growth. They have secured major partnerships, including a deal with OpenAI, allowing OpenAI to run models on AWS. Amazon also noted that if their internal chip business (Tranium) were a standalone entity, it would have a $50 billion run rate.
• Microsoft’s Position: While Azure’s growth is steady (38–40%), the market reacted negatively, potentially due to a lack of growth acceleration compared to its peers and concerns over past under-investment in data center capacity.

3. The Capex and Supply Chain Dynamic

A critical point of discussion is whether increased capital expenditure is actually buying more compute power or simply covering rising costs.

• Inflationary Pressure: Much of the recent increase in capex is attributed to the rising cost of memory (HBM - High Bandwidth Memory) rather than an increase in the volume of chips purchased.
• Supply Chain Constraints: Companies like SK Hynix have seen 60% revenue growth due to price hikes. The speakers note that labor and material shortages are allowing suppliers to charge premiums, impacting the "real" value of the massive capex spending.
• Nvidia’s Role: Despite the rise of proprietary chips (TPUs, Tranium), Nvidia remains dominant because it uses its strong free cash flow to "stronghold" the supply chain, securing the majority of HBM capacity.

4. Meta Platforms: The "Attention" Business

Meta’s stock dropped 10% despite 33% revenue growth.

• Business Model: Unlike the hyperscalers, Meta is an "attention" business. Its AI investments are focused on improving its recommender systems, which directly drive ad revenue.
• Challenges: The company reported a rare decrease in daily active users, attributed to internet outages and geopolitical tensions in the Middle East.
• Optionality: Meta is viewed as having high "optionality" (e.g., AI-powered glasses), though investors remain skeptical of the high costs associated with their "Super Labs" AI team.

5. Synthesis and Outlook

• The "Easy Button": Alphabet is viewed by the speakers as the most robust long-term play due to its full-stack integration (chips, models, and search distribution).
• Market Sentiment: The market is currently punishing companies that show any deceleration in growth, even if the numbers remain high (e.g., Microsoft’s 40% growth).
• Risk Profile: There is a lingering concern that the current AI buildout mirrors the telecom bubble of the early 2000s, where exponential investment eventually hit a wall.
• 10 Trillion Dollar Race: The speakers debate whether Nvidia or Alphabet will reach a $10 trillion market cap first. The bull case for Nvidia rests on its innovation speed and supply chain control, while the case for Alphabet rests on its diverse, vertically integrated business model.

Notable Quote: "Microsoft made them [Google] dance for a 30-second song... that defensive approach created both defensive and offensive [strategies] for Google that they’re seeing the rewards of now." — Jose Naharo