Chapter 1: What is the main topic discussed in this episode?
Welcome back to the Rundown, interview edition. Today, we are talking to Jason Helfstein, the head of internet research at Oppenheimer. Jason covers many big tech stocks, including Amazon and Google, which both reported earnings this week.
So in today's conversation, we talked about those two companies, why they sold off despite solid earnings, why investors are worried about the massive CapEx spending, and if any of these companies might cut back on spending. I really enjoyed Jason's perspective. I think you guys will as well. All right, let's get into it. I wanna start with the big tech earnings, of course.
You know, we had Google report this week, Amazon report this week, Microsoft last week. And there's been a similar narrative here where like, where these big tech companies report solid numbers, but yet the stock sells off and a lot of it has to do with the heavy CapEx spending.
Chapter 2: What are the latest earnings results for Amazon and Google?
So I wanna turn it over to you. Is CapEx just not cool anymore, Jason? Is that what's going on? Like, is the market just having sticker shock right now?
I mean, some of it is a sticker shop. The absolute numbers are just so much higher than what people expected. I mean, you're talking about doubling CapEx on a base of $100 million. $200 is like the new black, basically. But the problem is that the payoff is two, maybe three years down the road, and that's what investors are struggling with.
It's not that, hey, if Google says we're going to spend money we can get a return on it via search or via, you know, a cloud. It's when, right? And then Amazon, it's even further when. So really, that is the issue. And we can talk about some companies, you can make an argument that the payoff comes sooner than later. But really, I think it's the duration risk.
And by the time the duration happens, by the time we get there, will the world need this much AI capacity? And I think that's like one of the questions that people are asking themselves.
So why is that the concern now? Because this was always the case even last year. And I feel like over the summer, last year, these tech companies could announce the biggest CapEx number in the stock would rally. In fact, the bigger, the better. But now all of a sudden, is the market just kind of like, well, wait a minute. Why is the market waking up to the realities and wanting an ROI now?
What do you think is driving the sentiment shift?
It's because the numbers are getting so big. Like when you're using all of your free cash flow for two years, like literally Amazon will use all of their free cash that they generate from the business, right? Now, you know, they have the cash to do it. Right.
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Chapter 3: Why did Amazon and Google stocks sell off despite solid earnings?
They don't really need to be dependent on the outside financing markets. Whereas like you're seeing it, other companies who are dependent on the outside financing markets are kind of running into issues. So I think it was it went from, OK, you have a whole lot of cash. You're going to spend a good chunk of that.
And like half your free, you know, half your free cash flow to the like you're going to basically spend all of your free cash flow. and dig into your cash reserves pretty significantly for something that we won't necessarily see the payoff for two years plus.
Well, let's start with Amazon since you brought them up. So I think they're reporting $200 billion in CapEx, which is higher than all the other Mac 7 companies. And their cash from last year was like, what, 120, 130 billion.
So they're going to have to actually maybe borrow money to make up that gap between the cash they generate from their operations and how much they're expected to spend in 2026. Is that what's driving your concerns as well for Amazon?
Amazon, we're still outperform. We did take our price target down.
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Chapter 4: What is the significance of CapEx spending for big tech companies?
That was mostly like, you know, our current price target on the stock right now is 260 and, you know, kind of, you know, under $200. That's kind of plenty of upside. Yeah, it's kind of unrelated. I guess what else what I'll say is yes, like, so when you add the higher capex, you have to depreciate it, right?
So you're like, okay, we're gonna spend $200 billion next year, that 200 billion, let's say you have to take a sixth of that your expenses every year. for six years. So that depresses your margins until you start to see the positive revenue from that. But that revenue doesn't show up for, you know, they would say 18 to 36 months. I would like to like think of more of 18 to 24.
But the point is that is like far in the future of when investors like to go, Hey, what's the company worth on next year's earnings, right? You have to start to say like, well, what's it worth on 27 or 20, 28?
to factor that in so that's really what it is and i'll say like when i look at where the street estimates came or came out this morning as far as the institutional analysts you know they're looking for something like 20 percent aws growth the next two years we're at 30 percent right and like to me this is just math like you go this is how much you're spending this is how many gigawatts you get this is the revenue per gigawatt yeah like the price the you know the
the pricing could get weaker as the market gets more competitive but like within a range you get the numbers and it's almost like the the the analysts are just struggling to like they're afraid of letting their numbers go up and then the the the buy side the institutional buyers are like hey like we generally have agreed with these like kind of spending cycles but like what you guys don't agree with us so listen i think this is the kind of thing where everyone's gonna look at everybody's numbers over the next few weeks and be like wait a second
If there are folks that are kind of comfortable and my clients are saying, yeah, if they spend $200 billion, why wouldn't they grow 30%? albeit it's going to take time to get there, that you'll see numbers go up. So I think Amazon could self-correct, I think, as a stock pretty easily within the next few weeks because the core retail business is doing great, double-digit retail.
The margins are fine. You know, listen, on the near-term AWS, they accelerated four points. They gained more dollar share sequentially than Azure the last two quarters, which was not the case. for the prior three, four quarters. And then they did gain basically the similar dollar share as Google Cloud, which we'll talk about because that was actually quite bullish for Google.
But yeah, we think Amazon as a stock should be fine. Just I think people need more time than overnight to process the numbers because it's quite complicated.
You know what my theory is on this? So you're right. I was surprised to see the reaction in the stock today because of the acceleration in AWS. I'm like, wow, the fact that they're accelerating, growing at the fastest rate in three years, very impressive. I feel like it might have to do with Andy Jassy. I feel like maybe the street just isn't as confident.
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Chapter 5: How do investors perceive the long-term returns on AI investments?
Here's the return on investment. Now, Maybe they don't want the competitors to see it. It's been many years. Oh, they don't know. No, I think it's wrong. I think they absolutely do know. Now, they don't know, like, does it take 18 months to get a data center out? Like maybe it used to. Now it's 24 months. Maybe they're worried it's going to go to 36th.
just because of all the backlogs, maybe pricing comes down. So there's timing. I don't think they know quarter to quarter, but I think if you're looking at over the next four to five years, I, you know, unless like everybody's like way wrong on the adoption of AI, I think they actually know with pretty high certainty.
I that. So, yeah, I'm going to be watching that for sure. But I just found it interesting where Amazon was the worst performing Mac seven stock over the last 12 months. And I just I'm just trying to make sense of that. And that was a silly theory that I came up with.
Well, I will say this and they did. Here's the rub for Jazzy. He was late to recognizing the importance of AI. So Google was always first, right? They were like they created the transformer model. They were always like at the leading edge of machine learning. You know, Microsoft like smartly listened to, you know, Sam Altman when he's like, you need more capacity for me. They're like, OK, like
Now, Microsoft could say like they saw it too, but like I'm going to kind of believe that like ultimately Microsoft had to deal with open AI and they kind of trusted his signal they were providing and Amazon kind of just didn't see it. And so they had this like very successful, we'll call it legacy cloud AWS business that wasn't necessarily based on GPUs.
and AI and it's doing great and yes competition like had been increasing and they were kind of doing their best to fend off Azure and fend off Google Cloud but then AI hit and literally they could not move fast enough or spend the money fast enough to catch up but now I you can make an argument like you could see them catching up and so they've kind of made up for like some of their past mistakes.
Well, let's pivot from Amazon to talk about a company that seems to be the leader now when it comes to AI, which is Google. You recently upgraded the price target for Google after their earnings. And so I want to start there. What do you think makes Google's AI story different than Amazon's story?
Because very similar, I mean, obviously Google's cloud is going faster, which we're going to talk about, but how do you see those two companies be different?
Sure. So, I mean, Google basically is seeing the quickest return on investment. because they basically have, we'll call it two and I'll call it two and ultimately it'll be three different businesses, right? So you have a search business that relies on compute to do a better job answering your search questions and matching the advertising. Then you have the Google Cloud business
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