00:00 Speaker A
Well Big tech taking center stage. Microsoft, Alphabet, Meta reporting earnings on Wednesday followed by Apple and Amazon on Thursday. Together, they represent a huge slice of the market, saying the tone for stocks into year end. We’re breaking down the three most important things to watch heading into these earnings. And joining us now we got Gil Luria, head of Technology research at D.A. Davidson. Gil, always great to see you. So big tech earnings on deck, Gil.
00:30 Speaker A
Uh Big tech investors have plenty of questions about valuations, about the AI spending boom. Maybe uh maybe let let’s start there, Gil. Let let’s start on this question. AI boom, AI bubble. I’m sure you’re getting questions from clients about that, Gil. What are you telling them?
00:54 Gil Luria
That as far as the companies that report next week go, there’s no bubble. Microsoft, Amazon, Google and Meta are spending most of the capital expenditures on AI, but they’re doing it to match demand. Their customers are committing to long-term contracts to buy compute capacity, to do AI, and they’re doing the right thing by expanding that capacity.
01:21 Gil Luria
One of the things they’re doing though is leveraging other people’s capacity. So Oracle or Core Weave, they’re they’re creating new special purpose vehicles that are off balance sheet. Meta’s doing that. And that’s where you’re going to start seeing more of the bubblicious aspects of this. The the parts where tens of billions of debt
01:46 Gil Luria
are funding CapEx away from these companies. But what our companies that we’re talking about, Microsoft, Amazon, Google, Meta, their investment is very prudent and and they’re just leveraging this uh this huge demand for to deploy capital in AI, to reduce their own capx, to reduce their own need to borrow money. So they’re being very savvy for them. This is a good investment.
02:08 Speaker A
What do you make, Gil of questions about this sort of circular web of investments? You’ve seen this, right? So Nvidia will invest in Open AI, Open AI then commits to Nvidia’s chips. That does get some people a bit concerned. I’m I’m curious how you think about it.
02:30 Gil Luria
That is the unhealthy part of the behavior. That is Nvidia that could be selling all of its chips to these four big companies, saying, well, we actually want to expand the market beyond that. We want to stimulate demand beyond our core customers to extend the cycle. So they’re creating these related party transactions with again, with the likes of Open AI and Oracle and um, and uh, and uh,
02:59 Gil Luria
uh, Core Weave and Stargate and, um, and so those, that’s the unhealthy behavior we’re seeing, especially since that part is being funded by debt with very high leverage. And we’re just getting started. We’re maybe tens of millions of dollars of debt into this process, but Oracle’s talking about another 38, and Meta’s talking about another 27, and Open AI is talking about $400 billion dollars of
03:31 Gil Luria
of debt that they want to raise to build the to build these data centers. Let’s not forget, for as excited as we are about the AI roll out and how useful the tools are and how transformational they’re going to be, it’s still a speculative investment in assets that are very short-lived. Nvidia’s chips are phenomenal, they may not get the same return in three or four years that they’re getting now.
03:55 Gil Luria
So, again, the large companies are are making the healthy part of the investment, but there’s a lot of unhealthy behavior happening around that.
04:05 Speaker A
You all you do cover Meta and Alphabet, Gil. So I’m also curious to get your take. High level, the ad market and the search market. How healthy and resilient do those markets look heading into these prints?
04:22 Gil Luria
So they’re doing well. Last quarter Meta grew 22%, Google only grew 12%. That could narrow a little bit as we comp the elections. Meta’s growth will probably decelerate a little bit. Google is probably going to hold on. So Meta is still growing faster, but the the uh the gap between the two will probably narrow. But there’s the elephant in the room, which is OpenAI hasn’t turned on advertising yet.
04:54 Gil Luria
So the big digital advertising platforms are Meta’s, Google’s by dance, Tik Tok. And the one that has all the users but is not selling ads yet is OpenAI. At some point, OpenAI is going to turn on ads and that’s going to take share from the other three, mostly from Google. Hasn’t happened yet, it’s not going to happen this quarter, but it’s something to look for especially as we get into next year.
05:22 Speaker A
I want to finish here Gil, your thoughts on Apple as well. Uh, we saw this wave of positive headlines on Apple early this week, Gil, and I’m curious what you made of that. At just how how strong you think Gil, this iPhone cycle is looking.
05:43 Gil Luria
I don’t think we know, and we may not even know after Apple reports. This is the the really early stages until we get through the holiday season, we won’t know how healthy of a cycle it is. We examine the product. We didn’t feel like it was compelling enough to drive a large upgrade cycle, but the a lot of the data points are pointing to that, which is why the stock has done so well. We are at a point where Apple is the most expensive on earnings
06:11 Gil Luria
of this group, in spite of the fact that even in a strong iPhone upgrade cycle, their growth will be the lowest. So there’s a lot of excitement built in, they say anything disappointing next week, the stock could pull back.
06:26 Speaker A
US and China trade tensions Gil finally, very quickly here. Listen, also in focus, Trump and G meeting next week. Um, how much of a risk are those tensions for the kind of big tech names we’re talking about here or is that now priced in here?
06:44 Gil Luria
It’s mostly priced in for Nvidia, because let’s not forget, Nvidia, the the one that’s not reporting next week, is the topic of all these conversations. And they they have very little sales to China at this point. They may get them back, they may not. For Apple, it it’s adds a lot of volatility, but again, that’s mostly embedded here. But those are the two that are going to be mostly impacted.
07:03 Gil Luria
There’ll be a relief if we can come up with something constructive with China, but realistically speaking, that’s not going to happen. We are in a slow process of decoupling from China, regardless of the geopolitical outcome of these negotiations. Apple is pulling production out of China, Nvidia is moving production out of Asia. We are pulling away from China one way or another.
07:22 Speaker A
Gil, always great to have you on the show, my friend. Enjoy the weekend.
07:28 Gil Luria
Thank you.
