Dear Reader,
I hope you all had a good Halloween.
It was my last one with my daughter before she goes off to college.
Saturday was a lot of fun, and I’m grateful for it.
It’s a bittersweet time in my life, but that’s the nature of things, isn’t it?
Today I want to talk about the thumping we took last week.
In the markets, in our model portfolios, and frankly in my own portfolio.
Whenever I take a good thumping, I think of the old Shirelles song “Mama Said.”
What the Hyperscalers Told Us
Microsoft, Amazon, and Google all reported last week.
Meta reported the week before.
With these companies, you want to watch two things.
Their spending, and the return on that spending.
They’re spending a ton.
And their cloud businesses are growing a ton.
Amazon’s AWS grew 39% to $46 billion, its fastest growth in nearly five years.
That’s almost a $184 billion annualized run rate, with $17.8 billion in operating income.
Backlog reached $578 billion.
Microsoft disclosed Azure revenue in dollars for the first time.
You can always tell somebody is proud of what they’re doing when they disclose it.
Azure came in at $33 billion, up 48%.
Google Cloud rose 103% to $30 billion, with $11 billion in operating income and a $500 billion backlog.
I’d treat Google’s 103% with some care.
Part of it is sales of its new TPU chips, which makes it partly a hardware story.
Hardware sales go up and down more than cloud services do.
Still, wow.
So far, it looks like they’re getting a return on that spending.
Spending Even More Next Year
And they’re guiding higher.
Amazon expects CapEx of more than $220 billion next year.
Alphabet says CapEx will increase significantly.
CNBC estimates $300 billion, but that’s an estimate.
Microsoft has been more restrained, at about $170 billion.
Meta is guiding to about $220 billion for 2027.
The people running these companies see so much demand that they’re building the infrastructure.
They’re also trying to monopolize the future.
If they build faster and use their vast resources to get these centers up, they own what comes next.
They know it, and they’re blocking competitors from the left and the right.
The Big Change: Funding
The big change this quarter is how they’re paying for it.
CapEx has outrun internal cash generation at three of the four companies.
Alphabet posted negative free cash flow of $9 billion.
Meta’s CapEx was $34.9 billion against $32.8 billion of operating cash flow.
Amazon’s trailing twelve-month free cash flow was an outflow of $42 billion.
Microsoft is the exception.
It’s staying cash flow positive, and I’m very interested in how it pulls that off.
Why They All Got Thumped
All of these stocks got hit last week, for different reasons.
Amazon and Alphabet looked soft in their core businesses.
Microsoft and Meta looked great in theirs.
Amazon is a retailer, and consumers are struggling a bit with tariffs.
Alphabet is the one that concerns me most, because its core business is search.
AI is obviously a threat to search.
On the positive side, Gemini crossed a billion users.
On the negative side, the question is always whether AI starts chipping away at search dominance.
That’s what we call the incumbent’s dilemma.
It’s a classic business school case study, and I was talking about it with my team this week.
An incumbent always has barbarians at the gate.
The question is whether it builds what it needs to compete, which might mean destroying its own bread and butter, or fights to defend it.
That’s very difficult.
But Google has a lot of runway in the rest of its business.
I still own my Alphabet.
I haven’t changed my opinion that this company will be fine.
I’ve made a lot of mistakes in my life.
One I won’t be making anymore is getting shaken out because of one quarter.
One quarter does not a business make, especially one this powerful.
Playing Chess
Something interesting happened during the turmoil of the last two months.
Institutional investors went long a lot of the Mag Seven.
You can see why.
These are dominant companies at about 20 times earnings, which is roughly a 30% discount to normal.
Many of them are in official bear market territory, down 20%.
I’m not playing checkers here.
I’m playing chess.
I’m thinking about what this looks like in two, three, or five years.
I’m okay with a little turbulence.
I own a piece of businesses building infrastructure that will be foundational and important for a very long time.
There’s nothing sexy about it.
It’s not a fast money play.
It’s a business play on infrastructure, and I feel very comfortable with that.
I don’t day trade anything, so I’m cool with it.
That’s my update on the Mag Seven earnings this month.
Amazon, Alphabet, Microsoft and Meta are guiding to hundreds of billions of dollars in CapEx next year.
I’m comfortable owning the businesses doing the spending.
But there’s another way to own this build-out.
Own the company that gets paid when they spend it, whoever ends up winning.
Amazon, Google and Microsoft each design their own chips now.
Every one of them is built on the same underlying architecture.
One quiet company owns that architecture and collects a royalty on the chips built with it.
Get the name and ticker here>>>
Have a wonderful day.
I’ll see you tomorrow.
“The Buck Stops Here,”
Found this helpful? Share it with others.
Written by Dylan Jovine