00:00 Speaker A
With 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, setting the tone for stocks into year end. We’re breaking down the three most important things to watch heading into these earnings.
00:23 Speaker A
And joining us now, we got Gil Luria, head of technology research at DA Davidson. Gil, always great to see you. So, big tech earnings on deck, Gil. Uh big tech investors have plenty of questions about valuations, about the AI spending boom.
00:43 Speaker A
Maybe um 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?
01:04 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.
01:34 Gil Luria
One of the things they’re doing though is leveraging other people’s capacity. So Oracle or Coreve, they’re they’re creating new special purpose vehicles that are off balance sheet. Meta’s doing that.
01:49 Gil Luria
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 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 CAPEX, to reduce their own need to borrow money.
02:31 Gil Luria
So they’re being very savvy for them this is a good investment.
02:35 Speaker A
What 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.
02:59 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 be 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 uh coreve and Stargate and um and and so those that’s the unhealthy behavior we’re seeing, especially since that part is being funded by debt with very high leverage.
03:38 Gil Luria
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 of debt that they want to raise to build to build these data centers. Let’s not forget for as excited as we are about the AI rollout and how useful the tools are and how transformational they’re going to be. It’s still a speculative investment
04:11 Gil Luria
in assets that are very shortlived. Nvidia’s chips are phenomenal, they may not get the same return in three or four years that they’re getting now. 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.
