It was only two weeks ago that Deepseeks sparked an AI sell
off. The whole idea behind this sell
off is that AI's becoming so efficient that we don't need
compute, we don't need these expensive GPU's.
Well, this week all three hyperscalers reported their
earnings and all three of them confirmed the same thing, that
gigantic amounts of CapEx spend on AI infrastructure is still on
the menu. Satya Nadella said that they're
going to spend $80 billion in 2025 on CapEx, primarily for
artificial intelligence infrastructure.
Sundar Pichai of Google noted that they're going to spend $75
billion on CapEx, well above investors expectations.
The big boss of AI CapEx spend, the company that has the biggest
cloud server by far, is Amazon. Everyone awaited their report
yesterday and Andy Jassi came in far above expectations.
And now they're saying that they're going to spend $108
billion in 2025 on CapEx. Andy Jassi gave a lot of context
and nuance into what to expect. Now.
Each of these companies sold off after their report.
Microsoft, for example, is down 1.6% on the year to date.
They had strong year to date returns until the report.
The report wiped it away. The same thing with Google.
As soon as investors heard the amount of CapEx they were
spending, Google traded down 5% and another 3.4% today.
Amazon shares a similar story, down 4% today after earnings.
It's holding up a little bit better.
Amazon, again was up 10% and now it's only up 4.5%.
Why are investors selling down these stocks, wiping away their
year to date returns? Because of the CapEx spend.
Investors are concerned about this CapEx spend and the returns
to expect from all this spent money.
What we're going to be doing in this episode is getting a little
bit of context into whether or not this CapEx is good or bad,
whether it's going to make these companies richer and investors
richer, or whether this is the chase to the bottom at a point
in time where these companies get lower return.
We'll be going over all of it in this episode.
Now we also have some other news.
Expedia Group reported their earnings yesterday.
It was up 18%. Now I don't own Expedia Group,
not a lot of people own this company, but there is a decent
amount of people that own Booking Holdings and Expedia
Group is like a mini earnings report for Booking Holdings.
So we'll look at Booking Holdings and see the read
through to this company. And then finally, we also got
some exciting news. We have another validation,
another endorsement from Bill Ackman on Uber.
As of today, he reported that he owns 30.3 million shares that
they've been buying early this year.
I'll be going over Uber giving some thoughts on Bill Ackman
entering into this position and what I plan on doing in the
future. So as always, we have a ton to
get into in this episode. Let's go ahead and jump in now.
First of all, I do own all three of these companies, but one of
the major reasons I've been invested in these companies
since the beginning is the cloud, the public cloud story,
which has shifted over time to an AI story.
So let's go ahead and talk about the public cloud for a minute.
We have three different companies here, Microsoft,
Google, and Amazon. These three companies form the
massive majority of the public cloud right now.
The largest of the three by far is Amazon.
Another important thing to mention is out of the three,
Amazon and Google are more transparent with how big their
cloud actually is. Now, Microsoft's cloud is a
little bit more ambiguous. They're not at the same level of
transparency of breaking out their cloud like Google does
with Google Cloud or Amazon does with AWS.
Microsoft groups theirs in with a couple other things which
makes it a little bit more opaque, but either way we know
by some level of accuracy through deduction that Microsoft
is by far in 2nd place ahead of Google behind Amazon.
What does this public cloud do? The public cloud is a place that
other companies use for storage, compute, databases, load
balancing, servers, security, and now developing applications
on top of IT and artificial intelligence as well as a host
of other tools. But an easy way to summarize
this is the public cloud is basically like taking almost all
the IT needs of an organization and having all of that trouble
of running server racks, of having security, having
redundancy, having server capacity which can transfer data
across the world seamless for every customer.
All of that's taken care of by these public cloud companies.
Now, Jeff Bezos realized this before anyone else.
He realized that they're not going to live in a world where
every individual organization tries to become an IT company
and host all the data themselves.
And even though some will stubbornly stick to that
antiquated model, most companies are going to move away from
that. They're going to use IT as a
service, which Amazon was early to start.
After Amazon got an enormous head start in this, Microsoft
realized that this should have been their game.
They thought that they were the tech company.
How did Amazon get to this before Microsoft?
Once Microsoft realized this, they started to build their own
cloud and they used their massive distribution network,
already having a lot of business with the Fortune 500 companies
to integrate their cloud into their substantial offerings.
So Microsoft had the advantage, even though they weren't first
place, they had distribution, and that's how they were able to
grow Microsoft Azure at a rapid speed.
It was primarily through migration.
Google had been working on artificial intelligence and
algorithms before anyone else. That's one of the key parts of
their algorithm for YouTube and for Google Search.
Google also had distributed servers across the world to host
Gmail, to host Google Search, to host YouTube.
They already had all the infrastructure in place.
They just never thought about lending it out like Jeff Bezos
did. So Google as well jumped into
this race knowing that they could try to play catch up.
And that's what Google's done. They've played catch up in some
ways. They've had to negotiate
specific deals with start up companies, even invest in them
in order for them to use Google Cloud.
But Google has managed to make this a profitable business and
it is a very profitable business.
Not only do each of these companies grow the cloud at a
rapid speed, if we look at Google's, for example, it's
growing rapidly, 30% year over year growth, but it's highly
profitable. This has been one of the best
ROI businesses in existence. The cloud business requires
immense amount of upfront CapEx, a lot of capital to build out
the infrastructure for customers.
And that started off with a -, 62% margin at its worst margins.
Then it's steadily hiked up over time.
The most recent quarter, it came in at 17 1/2 percent.
So now Google Cloud moved from being highly unprofitable to
highly profitable and it's not going to end here for Google.
Amazon Web Services is currently at roughly double the margins of
Google Cloud. And again, Amazons Cloud is much
bigger to begin with. So at bigger scale, the margins
seem to be going up with Microsoft.
We don't have quite as much clarity with this again, but we
can assume that it's highly profitable.
Even Satya Nadella has said that he's not going to make these
investments unless they get a return for the investor.
So as it turns out, hosting the world's IT infrastructure is a
decent business. It has immense growth, high
amounts of lock in of customer and immense scale.
So companies like Amazon, Google, and Microsoft not only
have user growth with their cloud business, they also have
high lifetime value with these businesses using these clouds
typically for the entire life of the business after they sign up.
To describe the cloud hosting business as exceptional is an
understatement. It's by far one of the greatest
businesses to ever exist, and that's why all the companies
with this scale and the capacity to be able to do it entered into
this market as quickly and aggressively as possible.
Now you may be wondering, if it's so exceptional, then why
are investors concerned about additional spend and investment
in this exceptional business? Over the past week, all of these
businesses have been expanding on their cloud business,
specifically with artificial intelligence.
The main thing out of Google's report that rattled investors is
the announcement that it will significantly expand capital
expenditure in an effort to maintain any competitive lead it
has an artificial intelligence sector.
In the announcement of their fourth quarter results, Google
said they expect to invest approximately $75 billion in
capital expenditures in 2025. As Reuters pointed out, most
analysts had expected Google to grow capital expenditures to 58
billion. Those are sizable differences.
Investors expecting only 58 billion and they come out with a
number of 75 billion. This isn't just a modest
increase in capital expenditure. This is a massive step change.
And Microsoft said the same thing.
They're stepping up CapEx by over 45%, a massive rise in the
AI CapEx. And then we have Amazon, who we
also had expectations for rising CapEx that was already baked
into the price and the earnings. But all of a sudden, Amazon hit
us with a number that we didn't expect.
Amazon plans to spend $100 billion this year to capture
once in a lifetime opportunity in AI.
Most investors were expecting a modest rise, maybe $90 billion.
But Amazon says we are going to spend 26.3 billion in CapEx in
Q4. And I think that is reasonably
representative of what we expect on an annualized CapEx rate
that's around $104 billion per year.
So we're A above $100 billion, again catching investors off
guard. And the reason the big step up
in CapEx catches investors off guard and causes the stock to go
down is because spending on CapEx does have some immediate
implications. First of all, the way that we
look at a company's value long term is through free cash flow.
Free cash flow is calculated by the cash from operations minus
capital expenditure. The more CapEx you have, the
lower free cash flow you have, at least in the short term.
So Google's free cash flow has hovered around the same area of
around $70 billion per year. If they were not increasing this
CapEx spend, their free cash flow would rise dramatically.
The same thing can be said for Amazon.
Going into 2025, my prediction, my analysis was that Amazon
would have around $70 billion of free cash flow.
Yet here they are only generating around 50 at the
peak. So they're not even close.
They're $20 billion away from my estimate.
And the reason why is rather clear.
Amazon is investing far more into infrastructure and CapEx
than previously estimated. They've changed their direction,
and investors are nervous about this.
Wall Street is selling off the stock because of it.
So in this situation, we have 3 massive cloud computing
companies all in agreement that they need to dive in deeper and
build out more infrastructure that will cost 10s of billions
of dollars of incremental spend on CapEx above what was
previously estimated. Investors are nervous about this
because of the immediate impact on the financials and because of
the predictability of the long term returns.
And that's where that brings me to framing this question of
whether or not these companies are better off or worse off with
this spend. I think it's important to give a
little perspective on how I view CapEx or any big investment that
a company's making. I typically try to focus on
companies that are capital light, that's preferably
companies that don't require immense amount of CapEx spend to
be able to run their business. The companies that can run super
efficient like MasterCard, S&P Global, Moody's, FICO, those are
the Holy Grail. They're companies that can make
high returns without any investment.
That almost seems unfair. There's only a few companies
that can do that and they're ones that have monopolistic
networks. So that's the ideal situation,
high returns without significant capital expenditures.
Again, although it's my preference to have capital light
companies and can earn high returns, I don't invest in only
companies that have no CapEx or have no reinvestment needs.
For example, one of the best investments I've made is
Netflix. I'm up a lot on this company and
they have significant reinvestment needs.
They have to build out a content library and constantly be
reinvesting into it. So I don't believe you should
never invest in a company that requires significant investment.
What it really comes down to is how risky those investments are
and your expected return you're getting on the reinvestments the
company's making under the unattractive attributes
category. I say that I don't invest in
companies that have a risky reinvestment.
They have high amounts of CapEx or R&D with unpredictable return
on investment. The reason that I was willing to
invest in Netflix knowing full well that they spend $17 billion
per year on content was because I believe they were going to get
a predictably high return on that spend.
And they are. They're generating $7 billion
per year in free cash flow due to the spend on content.
In most cases, a business does need to have some level of
reinvestment, and it's not a matter of how much reinvestment
it needs, it's a matter of how unpredictable it is and what the
expected returns are. The calculation here is very
simple, and it works the same for every company.
Companies that earn high returns on their reinvestments, they
should reinvest as much as possible.
Companies that earn low returns on their reinvestments should
avoid reinvesting as much as possible.
A company like Amazon reinvesting back into AWS has
earned significantly higher returns than the cost of the
investment, the cost of the capital, whereas other companies
like AT&T buying Warnermedia and other companies have owned very
low returns on those investments.
So they should never have done them in the first place.
They destroyed shareholder value.
The combination of earning high returns on invested capital and
investing a lot of capital leads to significant performance.
So when I look at Microsoft and Google and Amazon, even though a
lot of investors are reacting super concerned today about the
step up change in CapEx spend, the real question here is not
that they're spending this additional money.
It's if they're going to earn predictably high returns on this
additional incremental spend. And they've given us some hints
on the earnings call. Google noted that a big part of
the reason they're increasing spend on their cloud service is
that so far they've seen demand outweigh available capacity.
They said, quote, we exited the year with more demand than we
had available capacity. They have customers right now
demanding greater spend on all of their infrastructure.
And Amazon noted the exact same thing.
They said their internal forecasts and every bit of data
they have shows there's much greater demand from their
customers, customers and new customers for this
infrastructure. So they're investing on a very
predictable basis of future demand.
The investments in this cloud infrastructure are not risky and
unreliable. They're highly predictable.
And all three of these companies are in agreement that they have
significant demand in the future and they need further capacity
to fulfill it. So in terms of how I feel after
these earnings reports for all three of these companies, I
believe the fair value and intrinsic value of each one has
increased. And for Amazon, I think it's
closer to 260. I think all of these companies
should be meaningfully higher, while at the same time investors
are selling them down. So as far as I'm concerned, this
is a buying opportunity for all three of these companies.
The one that I think is the most fair valued is Microsoft.
It's trading closest to its range.
I think that Google is still meaningfully undervalued,
especially after this trade down and I still believe that Amazon
is meaningfully undervalued. Again, both of these companies I
own significant stakes in, but I think the future is brighter
today than it was before this earnings report.
And the fact that they feel so confident in reinvesting into a
very predictable CapEx investment with expected high
returns should make investors more bullish, not less.
Even Andy Jassi on the earnings call said.
I think that both our business, our customers and shareholders
will be happy medium to long term that we're pursuing the
capital opportunity and the business opportunity in AI.
I'm in agreement with that. Outside of just Amazon Web
Services, Amazon is also on track with everything they're
doing, reinvesting into all aspects of their business. 8 out
of 10 times they come in at the higher end of their guidance
range and they're still growing incredibly fast for a company
doing as much revenue as they are, Amazon is officially at a
higher run rate of revenue than Walmart, making them the highest
revenue company in the world. They're optimizing their
delivery fleet, building out automated warehouses with
artificial intelligence and robotics.
They're building out drone delivery.
They're putting satellites in the air similar to Starlink.
This company has so much opportunity and optionality.
And right now it trades at a 36 Ford PE ratio, a 29 PE ratio on
next year's earnings. So I think Amazon is a buy
today. I continue to hold my full
position. Now moving on, we get to the
news that Expedia Group reported their earnings yesterday.
This is a company that I don't think there's that many people
invested in, at least that I talked to.
It's a company that has struggled to grow because it's
mostly confined to the US market.
But it is a little bit of a read through from Expedia into
Booking Holdings. Booking Holdings is a company
that I am invested in. I have a large stake in this
company, so I am interested to some degree in Expedia.
Now, I won't go through all of it, but just to highlight a few
things. Expedia's reporting on travel,
generally speaking, they reported a strong Q4 result with
double digit growth in room nights, gross bookings and
revenue. The CEO noted that they had
better than expected travel demand in Q4.
And then in terms of future outlook, they said they're
growing their gross booking range to around 4 to 6%.
The results were strong for Expedia.
Now, Booking Holdings is a much stronger company than Expedia.
They've capitalized on the European travel market, which is
much more segmented and in need of an aggregator.
And that's why Booking Holdings today is up 2 1/2 percent.
It's doing well in a red market. I already expected a strong
report from Booking Holdings this quarter, but the Expedia
report further solidified it. Now moving on, we get to the
news that Bill Ackman has revealed a new position in his
portfolio and that is none other than Uber.
This is really exciting to see. I'm actually happy about this
because it's just a fun thing when a big time investor,
someone that's very public, someone that has a history of,
of really good returns, buys a position in a stock you own,
It's just a really fun thing. It validates your position.
It, it creates a little bit more opportunity for discussion.
And in some cases, Bill Ackman will also release really good
research on the company. Now, he's done this before.
In fact, one of the companies he entered into was Netflix.
Netflix was one of my highest conviction picks before Bill
Ackman entered into it. But having him enter into the
position when the company was in question, when things were
uncertain, gave a bit of validation.
It felt good to have him be part of the group and be part of the
the shareholder members for Netflix.
So I felt a little bit validated with him being there and as well
as entering into the position, Bill Ackman released really good
research on Netflix. I thought it was spot on.
In fact, everything he said in his original research of Netflix
was correct. Now with Netflix, we know the
story. Even though Bill Ackman did
incredible research on the company when first initially
entering into the position, unfortunately, he got cold feet.
He sold out after a really bad quarter at almost the complete
low of the company. He sold Netflix at a stock price
of $220 per share, and he lost around $300 million on that
position. It was such a sad thing.
I so wish he didn't sell Netflix.
It would have been such a cool thing had he just kept in the
position or even better yet, doubled down.
Netflix would have been a crown jewel.
Currently in Bill Ackman's portfolio.
So that was a big bummer for me when he sold, but I understand
it. He became a little bit nervous
about the future and decided to jump ship.
Now, regardless of the mishandling of the Netflix
situation, I believe that Bill Ackman is an incredible investor
and overall he makes some mistakes like any other
investors, but he's had good performance in aggregate with
his portfolio. And generally speaking, I really
like the research he does on companies.
So I'm excited to see when he dives into Uber technologies
more. But here's what he said so far.
Beginning early January, we begin acquiring a position in
Uber. Today we own 30.3 million
shares. I've been a long term customer
and admirer of Uber, beginning when Edward Norton.
I believe that's the movie actor.
Showed me the app in its early days.
I was also fortunate to be a day one investor in the company
through a small investment in a venture fund.
While a great business, Uber suffered from erratic
management. The CEO, Dara has done a superb
job in transforming the company into a highly profitable and
cash generative growth machine. We believe that Uber is one of
the best managed and highest quality business in the world.
Remarkably, it can still be purchased at a massive discount
to intrinsic value. This favorable combination of
attributes is extremely rare, particularly for large cap
companies. We will have more to share about
our thinking on the company shortly.
So right there, he lets us know that he's going to release one
of his Bill Ackman presentations on the company's fundamentals.
And I love diving through those. I'll be going through it as well
on this channel now. Uber's up around 10%.
It was up around 4% before this news and then another 6% when
Bill Ackman released this. So it's having a great day, but
Uber's a rather volatile stock at trades.
It's up and down pretty erratically over time.
I want to share a few thoughts on Uber generally speaking.
I've talked about this company a number of times and have
continually highlighted that I believe Uber does well in nine
out of 10 scenarios. That's the equation.
That's where I put this company. I think in nine out of 10 cases,
this one does really well. So the odds of Uber investors
making money, I believe is really good.
When the odds are either equal or working against you.
That's gambling. An investment in Uber is not
gambling. You're more than likely going to
make money. Another thing that I want to
comment on, investors will look at this move today.
They'll see the 9% and they'll think, Gee, I, I want to get in
this company. I'd like to follow Bill Ackman,
but I just need to wait for a dip.
I need to wait for it to go back down so I can feel like I'm
getting a deal. And I think that's the complete
wrong way to look at these moves.
We know it's up 21% year to date, but Uber is flat.
It's only up 7% over the entire previous year.
If you're buying it today, you're not buying it at some
significant spike. You're not getting a terrible
deal. And furthermore, as investors,
we shouldn't be looking at the historical price to determine
whether or not we're getting a good deal.
It's true that Uber is up a lot since the lows of early 2020,
but Uber is far more profitable, far bigger today, far more
established than it was during this time period.
The risk has gone down substantially.
Every key performance indicator of Uber shows substantial
growth. The revenue is growing at 20%.
The monthly active users on the platform grew to 171,000,000
last quarter. That's percent.
This isn't just a ride sharing application.
It's like a fully blown massive ecosystem similar to a social
network. In the last 90 days, Uber
completed 3.07 billion trips, 3 billion with AB Comparing the
scale that Uber operates at this something like Waymo currently
is like comparing a drop in the ocean.
Even though Waymo and Tesla can potentially scale up over time,
there's going to be significant challenges and hurdles in that
type of heavy CapEx scaling before it gets anywhere.
They're close to a $3 billion trips per quarter.
Stocks don't have memories. And as we look at the price of
Uber compared to the valuation, we see a company trading at a 30
PE ratio growing earnings rapidly, a 23 PE ratio on 2026's
earnings. So the PE is going down
dramatically year by year because the expected growth rate
is so high. When we look at the free cash
flow yield, Uber trades at a free cash flow yield in line
with the S&P 500, but it's growing its free cash flow per
share far faster than the S&P 500.
The big question for this stock is how it's going to handle the
robo taxi developments that will happen over the next 10 years.
That is a major concern to the terminal value of this company.
And we've had some more clarity and at least more explanation
from the leader of the company on what he expects with the
developments of Robotaxi that there's still belief.
Even though Waymo's doing 150,000 a week, which I'm still
thinking is not all that big, that there is an existential
threat from autonomous vehicles away from you, and that that
could be some sort of overhang where people are saying I'm
scared, well, I think. Autonomous introduces both
uncertainty and a huge opportunity for us.
If we look at the US market for example, we think autonomous
alone in the US can be a trillion dollar market and the
tech is definitely get there, getting there, but the
commercialization is going to be much more challenging, right, to
be able to deliver autonomous at scale.
For perspective, we're doing 33 million trips a day, right?
Those are the kinds of scale that we operate at.
Did you catch that? He just said we're doing
133,000,000 trips per day. Now again, I want to reference
where Waymo is at, which I'm very bullish on Waymo.
I think they're doing a great job.
They're doing 150,000 trips per week, 150,000 trips per week,
compared to 33 million per day. But what he goes on to explain
even further stresses and emphasizes the difference in
scale and operations of what Uber is doing and a bunch of
stuff. Has to come together first.
The regulatory environment has to get there, right?
And it's national regulation, state regulation, city
regulation. It's going to take some time
because regulators need to get comfortable with this new
technology that's operating in the streets.
Cost of a mistake is is really high. 2nd, what you need is a
superhuman safety record. Like the opportunity that you
have with these robot drivers isn't just to be better than
humans. They could be multiples times
better than humans. And I think the industry should
take that opportunity and increase the bar on safety
appropriately as a result of this incredible opportunity.
Third, you need to mass produce these cars affordably, right?
It's not about 100 cars or 1000 cars.
You need hundreds of thousands of cars.
That is going need to take a while and the OEM industry is
definitely taking notice. They're investing, but you know
these vehicle platforms takes years to develop.
Then once you have the vehicles, you need to operate them on the
ground. Fleet operations.
It's a ground kind of game. We're very familiar with that.
We already have fleets all over the world.
And then you need really high utilization because the cars are
expensive. You need to operate them at high
utilization both during peak times and during trust as well.
The only way you bring all that together this commercialization
is with Uber and the AV industry.
It's going to take a while. As that time passes, you're
going to see a lot of autonomous players coming in with these big
transformer models. With the deep seek moment that
we that we saw the development of this technology is going to
be cheaper and cheaper and cheaper.
But we think that with the safety promise and with a
partnership like ours, we can build autonomous to be a very,
very good whether it's. Assessing demand, fleet
management, navigating local laws, Uber is a key ingredient
in all of that. So the way that Uber's
positioning themselves is to be at such significant scale that
they are going to be a requirement to work with to make
autonomous vehicles successful and profitable.
And an attempt to circumvent Uber will be very difficult to
compete with their scale. Whether you're a robotaxi or
not, the story behind Uber is a good one.
Massive network effects, dominant scale combined with a
low valuation. And if investors can work their
way past the threat of robotaxi, an autonomous vehicle, the stock
will meaningfully move higher. So I'm still considering whether
or not I should enter into a position, whether or not I
should follow Bill Ackman into the SPY and make some money on
Uber. I think in most cases, investors
that buy here are going to make money, and I don't say that
about every company. When Bill Ackman bought Nike,
this wasn't one that I was considering buying.
I never jumped into it. I never really wanted to own
Nike, even though Bill Ackman just purchased a big position.
I like Uber stock a lot more than Nike, and it's one that I'm
still seriously considering. That's going to be it for this
episode. Hope you enjoyed.
See you in the next one.