Chapter 1: What significant events are impacting the financial markets today?
What a day in financial markets and technology markets. There is a ton of news today. Gur Gavin summed it up well. A huge day tomorrow. He's posting this yesterday. 10 a.m. Canada interest rate decision. 2 p.m. This is Eastern Time. USA interest rate decision. That is in. Fed held rates constant. So sort of a nothing burger, I guess. Not the best news.
I think some people were hoping for a cut, but everyone sort of expected this.
Chapter 2: How is the Federal Reserve's interest rate decision affecting tech stocks?
It met expectations. But the news is that just five minutes ago, the Federal Reserve has kept interest rates on hold at a range of 3.5% to 3.75% at Wednesday's meeting. And Jerome Powell is giving a speech in just 30 minutes at 2.30 Eastern. Then at 4 p.m., Google earnings, Amazon earnings, Meta earnings, and Microsoft earnings. it is a massive debt.
And no big deal. No big deal. They only represent just under 20% of the total market cap of the S&P 500. Let's go. All reporting within.
But people are optimistic. Semi-analysis put out a note this morning, according to YC, yield Chad, expecting hyperscaler CapEx to be revised upwards and beat street expectations as hyperscaler cloud revenue is accelerating. And they are seeing positive ROI on cloud investments. I can sort of go through my earnings preview. It's a tech earnings quad kill today. And the big question.
is just how is the AI build out going? Obviously the CapEx numbers were huge. We saw the first time ever we've seen a $200 billion number from Amazon last quarter, but everyone's up in the, is there even a word for, triple, it's like, what, 11 digits or something like that?
100 billion.
A lot of digits. Everyone's spending at least 100 billion these days, at least if you're in the MAG7. But financial performance has actually been strong even in sort of legacy areas such as search, Google search is growing, e-commerce sales, Amazon core business is growing, enterprise software seats, Microsoft 365, we're gonna have more news on all of that.
Even though all of those businesses, they're working, they're chugging along, the big question is around durable revenue tied to AI infrastructure, because you have this matching problem. You spend a bunch of money, there's depreciation. When do you actually get the cashflow back? How durable is this revenue?
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Chapter 3: What are the expectations for major tech earnings reports?
What are the moats around this revenue? What do growth rates and margins look like in this new era of something that looks maybe a little bit more like a railroad business, an oil business, as opposed to something like you build a website, people just show up and it's 80% margin, which was the dream of the previous software era we're going into.
an entirely different era, but it is very exciting and we're getting a lot of data today. So everyone has seen cash flow from these hyperscalers to Nvidia, to power companies, to data center builders, but everyone's wondering what's the exact conversion cycle to higher revenues and higher profits? What's the pathway there?
Because you don't want to just be drawing down on cash endlessly, eventually you stop making money entirely. So let's start with Google. Google has the most fully integrated AI stack, arguably. They have consumer distribution. They got model training with DeepMind. They have custom chips with the TPU and a bunch of product services where they can stuff AI features. Google Workspace.
Google Workspace. Underrated. Search, YouTube, Android, Cloud, they can deploy solutions all over the place. And so the flywheel should be spinning very, very quickly. The key question that investors are asking is, does AI change the unit economics of search too quickly? Does AI do LLMs, do AI search overviews, Gemini generally?
Are they able to monetize those results fast enough to offset any potential declines in search ad revenue? And so people will be looking for how is search monetizing? How are the new AI? disruptors monetizing. But there are tons of places to pick up growth, even if growth does slow down in the core search business. Tons of opportunity in cloud.
But the question, again, is AI overviews in Gemini, are they expanding search usage? Are they increasing ad ROI? Or are they compressing the model, the financial model? Microsoft is also coming off a strong quarter. Honestly, everyone's coming off strong quarters. Everyone's doing very well. Revenue's up 17% at Microsoft with Cloud, which includes Azure, M365, some LinkedIn stuff.
It's a big bucket. Microsoft Cloud's growing at 26%. But if you dive in and you double click on Azure, Azure is growing at 39%. And of course, Azure is a bigger lever on CapEx, which is run rating around 150 billion, not bad. The biggest number in the Microsoft earnings is RPO remaining performance obligations. Last quarter, it was listed at $625 billion, up 110%.
That was the eye-popping number of the last earnings. About 45% of that is coming from OpenAI, but they have lots of other partners that have signed on for really long compute contracts. And that is starting to show up in the financials saying,
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Chapter 4: How are AI advancements influencing tech company valuations?
Hey, we're spending all this CapEx, but we have this RPO and we have these deals signed where companies are, it's not just us that we're forecasting some really high growth here. The entire industry is forecasting high growth.
And so we have done deals to justify the CapEx that we're spending right now, even with depreciation, which seems like a less of an issue than people thought it was since H100 still seemed to be monetizing just fine, but we can go into that. So Microsoft has the cleanest read on enterprise AI monetization, which I think is something people have been really looking for, looking for numbers.
They know that, you know, subscription, LLM, chat apps monetize at a decent rate, that the margins at a lot of these companies are okay, the token, the APIs are working. But what is it? actually mean to deploy AI into the American economy, into everyday businesses, into large scale businesses. All of those businesses are on Microsoft overwhelmingly.
And so there are a ton of data points that can help you understand how AI is flowing through the a global economy, but also the American economy. So what are we talking about specifically? Azure growth, how much cloud hosting is going on, gross margins for Microsoft Cloud. That's very important. Are you seeing cloud compression?
Because if you go to your Microsoft Cloud provider and you say, hey, I'm gonna, this Teams thing, I'm paying a lot of money for it. I actually vibe coded something. You gotta give me a discount. That would show up in cloud margins. Will it show up? I don't think it will, but we'll see. I think it's going to be fine. Copilot adoption and ARPU. How much are they actually rolling these out?
Are they actually getting incremental spend? Are companies willing to send more of their hard-earned dollars to Microsoft for better AI services, better features, copilots? Then M365 seat growth. That's a really important one. Are people adding more seats? Are they hiring? Like we've seen some layoffs in big tech, but how is the overall economy doing? How many more seats are being rolled out?
Again, with the question of like, does your AI agent need a seat? And so you have more seats or does your AI agent replace 20 seats? And then you only have one seat and you have 20 agents. They're all logging into the same M365 seat. These are like more long-term questions, but we're getting an early read today. GitHub co-pilot momentum.
This will all paint a picture of what is happening with AI adoption in enterprises broadly. Interestingly, co-pilots at Microsoft, it hasn't been the most hyped product. GitHub co-pilot early, very, very early to the party. Huge run rate, rocketed up to 500 million ARR very, very quickly. But the horse race has always been, you know, Windsurf Cognition and Cursor and Codex and Cloud Code.
And like the battle has been the startups for the most part. Gemini has been in there. GitHub Copilot has felt like it hasn't been dominating the narrative, but we're going to find out, is it still growing? Because the market is really, really big.
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Chapter 5: What is the significance of cash flow in the context of AI investments?
It's possible that everything's growing, even if there's, you know, a horse race back and forth between the leading labs. There will be a bunch of other questions answered around, How nuanced is the diffusion adoption question? So Microsoft has an incredible go-to-market team, an incredible go-to-market motion, enterprise sales motion.
And so is there an advantage that they have that they can press GitHub Copilot, even if it's not the sexiest product next to whatever's hot this week? Can they get that into people?
Yeah, you look at Slack and Teams, right?
Same thing, yeah. Yeah, Slack was definitely like the hot one, the hyped one, and Teams wound up doing very well. And so, we'll get a stronger read on what's going on there.
And then, of course, that M365 seat growth will tell us a lot about what does the future look like for seat-based enterprise software, the SaaS model broadly, because if all of a sudden that's falling off a cliff, well, it probably doesn't look good for other seat-based SaaS companies. For Amazon, everyone wants to see strong AWS acceleration to justify the Mag7 topping CapEx numbers.
They got it at $200 billion in CapEx in 2026. So expect a lot of focus on AWS revenue growth and margins. Q4 was healthy, though. Net sales up 14% for Amazon, AWS growing at 24%. The sneakily huge ads business over at Amazon grew 23% to $21.3 billion. They're almost making... $100 billion a year just on ads. That's remarkable. And that's a lot of cash flow to fund CapEx and other AI initiatives.
And so operating income overall was $25 billion for last quarter. And they generated free cash flow of $11.2 billion, so still huge cash flows, they're obviously drawing down on those and that 11.2 billion number was down because of increased AI spending. So if AWS accelerates, all the CapEx looks like buying scarce capacity ahead of demand.
Like they will be GPU rich or just compute rich generally. at a time when it's good to be GPU rich and compute rich and they will look like geniuses. So people are hoping for a strong AWS acceleration. Consensus for AWS revenue is around 36.7 billion with growth in the mid 20% range. but the market's really hoping that it starts with a three.
Everyone's hoping for 30%, something like that, at least this year, at some point. Re-acceleration would be a treat for the market. Lastly, meta. Meta's an interesting spot. Super clean Q4. Nothing really to prove today.
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Chapter 6: How does Microsoft plan to leverage AI for enterprise growth?
All of that needs to be put to the side in the face of just AI is already working for meta and their ads platform.
Let's get an update on Reels.
Yeah. I mean, they're absolutely crushing it. So 3.58 billion DAUs, daily active users, and they grew the ad business a ton. And so the revenue overall grew 24% to almost 60 billion last quarter. Ad impressions rose 18%. Average price per ad rose 6%. Family of apps operating income was 30.8 billion, which makes losing 6 billion at reality labs like quaint. It's just like, who cares?
It's totally worth taking a side bet on the future of devices, and maybe you get a platform out of that. It makes a ton of sense. And so CapEx was $72.2 billion last year. The guide this year is somewhere between $115 to $135.
I think we might see that tighten up today because it's a little bit wider than some of the other hyperscalers that are targeting, but clearly a near doubling, almost doubling of CapEx. What are you laughing about?
There's one possibility where he goes, you know, he blows it out.
250.
We can't. We can't. We can't count that out. We can't count that out. I mean, he's got mirrors and space. They came out with a solid model. Yeah. He's putting mirrors in space. Yeah. He wants to be a player.
Yeah. Yeah. Yeah. I mean, a lot of focus is on the new meta models, but all of that. it just financially, at least in the quarterly earnings, like it will just take a backseat to what's going on with the AI in the ad placement, ad monetization funnel, because that's where Meta makes so much money. And so the question is how much more juice will AI bring to the ad business.
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