Welcome back everyone today on the Joseph Carlson Show.
We just got through a busy couple of weeks.
First of all, just yesterday we had Google and Tesla report
their earnings. Google reported incredibly
strong earnings, and I have a lot to say about this.
We've had so many opinions on Google, both the big bearish
thesis that Chachi PT was going to destroy this company.
But Google's not only persevering, they're going
higher. The stock is trading up today
after trading up into earnings. It's now at a price of $193.00
per share. Google stock is up 13% over the
past month, doubling the performance of the S&P 500.
And I believe that this one is going a lot further.
In fact, after this report, it's become clear that Google's
headed higher. The green days don't end today.
It is going to continue. I believe Google's headed
towards a stock price of $240 per share.
We'll see how it goes from the current price to that number.
In this episode. With Tesla stock, things have
been a different story. Now this is a stock that I've
been critical on and outspokenly critical for a couple years now.
Tesla is a stock that trades with an incredibly high
valuation, and it trades in many cases off of the back of Elon
Musks commentary. He paints a bright picture, but
despite the picture he tried to paint yesterday, even despite
his best efforts, the stock is still down 9% on the day.
We'll be looking at what went wrong in this earnings report,
why Tesla is down so much on the day, and some of the realities
that Tesla investors are facing. So we have a ton to get to.
Now. To kick things off, we start off
with Google. The big earnings of yesterday
was between Google and Tesla. And when we look at Google, this
is a company that I've been very bullish on for quite some time.
If we look at it, it's been in both of my portfolios, in the
passive income account, it's in the tech category and I have
$54,000 worth of Google in this portfolio, 5000, 700 of that
being gains, so moderate 13% increase in this portfolio.
But in the passive income portfolio, Google is a new
holding. So if I bring up the story fund
here, this is my smaller secondary portfolio.
We have Google as one of the five positions now it's a
$41,900 position, but it has bigger gains in this portfolio
because again, it's been here a little bit longer, $18,400 in
gains. So if we look at both of these
combined, Google's around a $90,000 position with a around
$23,000 in the green. So far, it's been a great
investment based on when I've bought the company, but I
believe there's a lot more to go with Google.
Let's go ahead and just bring up the stock here and we can take a
look at a couple things. First of all, if we look at the
most recent earnings report and the summary of what actually
happened, it outlines what's going on with this company.
Qualtrum gives us a summary of the most recent earnings called
Transcript, and this really outlines everything that just
happened this quarter. If we look at the overall
company performance, we can see them highlighting stuff like
Google grew record robust double digit revenue growth across
search, YouTube, cloud, subscription and devices in Q2
of 2025. Now that's a lot of different
business lines to grow double digit growth, but that can't be
accurate, right? We've heard that search is in
trouble, that search is a dying business, it's under threat.
How could it have grown double digit revenue if it's in
decline, if it's being disrupted?
If we go back to the insights page here, we have a section
where we can look at the revenue by segment.
This breaks it all up into the different factions of Google we
have here Search. Let's go ahead and just outline
this one alone. And search grew year over year
by 11.71%. Now that's an acceleration from
the previous quarter. So not only did search grow
double digits, but it grew double digits, accelerating its
growth sequentially. Google search is actually
growing at an accelerated pace. If we smooth this out to a
quarterly trailing 12 months, Google search is continually
growing quarter after quarter, after quarter after quarter
after quarter, so on and so forth.
For around 10 quarters in a row, Google search has grown
continually at a pace of above 10%.
In most cases it's growing around 12%.
Now you've heard this again from different analysts that Google
search is in trouble, that's being disrupted.
But when you look at the data, you do not see any of that right
now. Now, if we go and look at this
on a quarterly basis just to see this most recent quarter, we can
go ahead and take a look at YouTube.
This is another thing they outline that had robust double
digit growth. YouTube grew by 13%.
So we have Google Search growing 12%, we have YouTube growing
13%, we have subscriptions growing 20%.
So subscriptions counts things like YouTube Premium.
So it's a little bit of an overlap between YouTube and the
subscription category. But the subscription section of
Google, which encompasses lots of businesses, all the
subscriptions they sell, is growing 20% year over year.
That's high margin revenue and again, it accelerated from the
previous quarter. We have Google Cloud, one of the
most preeminent businesses in the world, growing 31 year over
year, accelerating sequentially from last quarter.
So again, we have massive growth in key businesses in Google.
These businesses, cloud subscription, YouTube and search
make up the vast majority of Google and combined they're
growing at 15.6%. Now, of course, we're leaving
out the relatively tiny business, which is Waymo
encompassed in other Bets. You can see it as a tiny sliver
here, but we'll talk more about that one in a minute.
So we have a differentiation of narrative here.
We've heard from many top analysts, many people that
Google is this aging business. It's like an IBM it no longer
has meaningful growth drivers, but then the first thing that
Google outlines in their earnings report is that they're
having double digit robust growth in every core category of
their business, including search, which is supposed to be
being disrupted. Not only that, but Google is
leading in artificial intelligence in many meaningful
verticals. AI is driving major momentum
across all business lines with a rapid product releases
leveraging alphabets, full stack AI infrastructure, research
models and consumer platforms. Alphabet processed over 980
trillion monthly tokens with its AI models doubling the figures
announced a few months prior, so doubling the amount of AI tokens
in only a few months. Investments in AI optimize
infrastructure, TP US GP, U.S., data centers, world class
research. Notably the Gemini 2.5 models
and the product integrations are credited as pillars of
Alphabet's competitive position in AI.
So they have some of the most technologically advanced
artificial intelligence infrastructure and models.
At the same time, Google controls the entire full stack
from hardware to software and distribution.
Along the way. Google is a structurally
advantage company, not one that's under distress now.
One thing that investors may have argued is that Google's
only growing the top line revenue in search because
they're just pumping you full of ads and that's all they're
doing. They're just increasing the
number of ads even though search volume is declining.
And that's not the case either. Google management was clear to
outline that search delivered double digit revenue growth with
strong expansion in both query and commercial activity.
They had strong expansion in query volume, meaning more
searches, not just more ads or more monetization per search,
but a greater number of searches.
This is something of course we've known about for a while
because Google has been saying this quarter after quarter after
quarter. A few months ago, they released
a blog post saying that they've reached all new highs and search
query volume. So anyone that's been bearish on
search because of volume declines or advertising declines
has not been paying attention to the numbers.
Google is growing this business quarter after quarter.
Now they highlighted that this new mode, which I'm sure you've
tried on Google, you type in a search and if it's a product
search, they'll just show you the products.
But if you type in a deep question in Google search, one
with nuance and context, all of a sudden you'll get an AI
overview. It'll be a text answer that will
specifically answer your question.
That's AI overviews. Then if you want to dig deeper
and have a conversation with Google, you can go into AI mode
and ask follow up context questions.
That's a new thing that Google just released to everyone and
they say that that's driving higher engagement.
With over 100 million active users in AI mode in the US and
India, that number is going to grow tremendously over time.
So AI mode is really just getting started.
The multimodal search experience Lens Circle to Search are
rapidly adopted, especially by younger users.
Lens search grew by 70% year over year.
Circle to Search is now on 300 million Android devices.
Virtual try ONS and AI power translation in search is seeing
positive user engagement, particularly amongst Gen.
Z. They have AI overviews, and this
is important to understand what they're saying here.
Anywhere where there's AI overviews enabled, they're
getting 10% more queries globally.
So anytime that they put this feature in, people increase
their usage of Google Search, not decrease it.
And that's another narrative that bears thought that AI
overviews would cannibalize search.
It would reduce the total numbers of searches because you
no longer have those 10 blue links.
And it's doing just the opposite.
People are actually engaging at an increased number with Google
Search, with AI being enabled. So overall, what we're seeing
with Google Search, especially with the AI enhancements, is the
complete total opposite of what the bears have been telling us.
They've been telling us that this is going to cannibalize the
business or that the business would shift over to ChatGPT and
other LLMS. But what we see in the data
quarter after quarter, after quarter, so on and so forth, for
10 quarters in a row for years after ChatGPT has been released
is continual search volume growth, continual engagement,
more customers, more revenue, higher ad rates.
Everything has grown since these threats have appeared.
And this is consistent with Google's long term history.
Google has not faced LLMS as the first competitor to search.
They faced many competitors to this business for decades of
time and have still grown. Now moving on, we get to
YouTube. I've said repeatedly based on
Google stock price today, YouTube and cloud, these two
businesses combined give you an immense amount of downside
protection. To put this in perspective, if
we go down to Google's revenue, we could completely erase search
and just looking at the other business lines of Google, this
company would likely still be worth its current market cap in
around five years. Now obviously in practicality,
if Google search really went to zero, the stock probably
wouldn't perform well. But if you actually look at the
numbers and what these companies are actually worth, Google Cloud
and YouTube are massive businesses.
Each one of them are incredibly huge businesses.
If you look at what they're producing in and of themselves,
they're producing 10s of billions of dollars of free cash
flow every year. In five years, YouTube is likely
to be twice as big as it is today.
Google Clouds likely to be 3 or 4 times as big as it is today.
So both of these are going to be even much bigger businesses in
the future. So this gives you a lot of
downside protection looking at these two companies.
Now, if we look at YouTube's performance specifically, we
also saw very strong performance.
YouTube saw strong growth, ad revenue up 13% and continued
momentum in subscriptions with Shorts becoming a major success.
200 million daily views. I remember when there used to be
a bear case that Tiktok was going to steal all the creators
and content from YouTube to Tiktok when in reality all it
did was encourage YouTube to move into shorts and now
Schwartz is a major growth driver for the company.
We have monetization of Schwartz now on par with traditional in
stream ads in certain regions. YouTube has been leading the US
in streaming platforms by watch time for two plus years,
accounting for a record 12.8%. If you listen to Netflix's
earnings call, they highlight YouTube as their biggest
streaming competitor because by total engagement, YouTube is
their biggest competitor. Netflix is trying to figure out
ways to take craters from YouTube, but it's very difficult
to do. YouTube has a commanding
position in streaming on the television, not counting mobile
devices, which YouTube is obviously the biggest streamer
on mobile devices. Then we have new AI tools,
enhancing recommendations, translation, creative assets,
generating for shorts. And you might think these little
enhancements are just small things, but many of them are
very big meaningful things. For example, in translations now
my podcast and my YouTube videos are translated into like 15
different languages, and we have many viewers now listening to
this podcast in those different languages automatically dubbed
through AI. That is an incredible
enhancement with artificial intelligence.
It can grow the audiences of Youtubers internationally
without any additional work, without any frictional cost.
I don't have to hire translators because AI is doing that for me.
YouTube is now also a massive subscription business.
We know that they have well over 100 million subscribers to
YouTube Premium, and that number is growing every single quarter.
Now we move on to Google Cloud, which is another incredible
asset that Google owns. In many cases, Google has done
some things that I didn't expect them to do.
I knew that AWS and Microsoft's Azure would likely be in #1 or
#2 and I thought that Google Cloud would grow rapidly.
But I will admit, I've underestimated how fast Google
Cloud would grow, how well positioned they were to take
advantage of AI Cloud. Google Cloud posted revenue
growth up 32% to 13.6 billion with significant margin
improvement, operating margins of 20.7%.
These numbers are massive. Let's go ahead and take a look
at them visualized. We can again cross out the other
segments and take a look at Google Cloud here.
The growth of 31.67% quarter over quarter last quarter and
notice the big jump up. This is meaningful growth
quarter over quarter. The sequential growth is
tremendous. Cloud is truly accelerating
because of Google's AI offering and some of the commentary leads
me to believe that Google Cloud may actually continue to
accelerate growth in the future. Again, this is a business that
Google invested heavily in for a long period of time.
It's a very expensive business to start cloud even with the
pre-existing infrastructure that Google had.
If we look at the amount of employees that Google has hired
over the years from 2015 they had 60,000, then they had a peak
of 190,000 employees. So massive growth in the number
of employees, the huge majority of incremental additional
employees were because of cloud. These employees were here to
grow Google Cloud, to build out the infrastructure.
And when we look at the profitability, specifically the
operating margins of Google Cloud, back in 2019, many
investors looking at this company would have seen it as a
huge problem for Google. It had -60% operating margins
losing billions and billions of dollars, a massive loser for
Google. But what does this company do?
They invest heavily in cloud because they can likely predict
the outcome over time. They move margins up continually
from -60 to -47 to -35 -, 30 -, 20 - 10, and it floats around
here for a couple years. And then we enter into positive
margin category in Q1 of 2023 from there.
Google Cloud finally flips to making profits and now the
margins are continually racing up from 17.8% last quarter to
this most recent quarter being at 20.7%.
Now it's a high margin, profitable business and most
companies would love to just be at 20% margins, but Google Cloud
isn't done. This is going to go up to 30%
margins and higher. Management noted continually how
much demand they have for their cloud products.
They said there's high demand for AI products.
The number of $250 million or greater deals doubled year over
year, multiple one plus billion dollar contracts signed in the
first half of 2025. So we're halfway through the
year and they've already reached the record of deals signed that
they had in all of 2024. Not only is Google Cloud
growing, but the demand is accelerating beyond their
growth. They have 85,000 plus new GCP
enterprise customers on board in Q2, led by demand for Gemini
powered products. The figure cited Cloud now has
surpassed $50 billion in annual run rate revenue backlog of 106
billion, up 38% year over year. They are gaining customers
faster than they can even fulfill them.
Investments in AI infrastructure, optimized
software, agentic tools and deep integration across industries is
also highlighted. Now, one thing I noted right
after the earnings report was that GUI initially posted the
beat on the top and bottom line and then immediately the stock
fell 2% because they weren't generating as much free cash
flow because Google is spending so much on CapEx.
So Google is now spending a fortune on capital expenditures.
And I want to just mention this for a minute.
If you sell a company like Google, because they're
investing in more server capacity, they're building out
more infrastructure for cloud, I believe that is one of the
dumbest reasons possible to sell a company.
That would be as though you go to something like Texas
Roadhouse. Let's bring up this company
here. Let's say that Texas Roadhouse
had an earnings report where they said that we have so much
demand for our restaurants. We want to build 10 more of
them. We want to build them this next
quarter because we just have too many customers.
They're lining up out, out the doors.
We can't, we can't serve all these customers.
So we need more restaurants to build those restaurants.
We need $100 million of CapEx, so we're going to invest $100
million of CapEx and build 10 more restaurants.
It would be as though investors heard that news and decided to
sell the stock. They said, Oh no, I don't want
to own a company that has so much demand.
They need to invest more so they can serve more customers and
become more profitable. That's essentially what Google
investors initially did. They sold the company because of
the CapEx headline, not really looking into the reason that
Google's investing more CapEx. Google's CapEx was increased not
as maintenance CapEx, but as investment CapEx.
They're investing far more specifically into Google Cloud,
and these highlights here show how much demand this company
has. The capacity growth is ongoing,
but the environment remains tight and CapEx is being
increased to accommodate demand. So selling Google because the
free cash flow has taken a temporary hit due to increased
CapEx investment, is just like selling Texas Roadhouse because
they have so many customers. They want to open up more
restaurants or selling Costco because their warehouses are too
full and they want to build more of them.
You don't sell companies because they have too much demand and
too many customers. Now Google is a vast business
with many different meaningful segments.
The next one we get to here is Waymo and other Bets.
Waymo expanded operations to new markets.
We have Atlanta, increasing coverage in Austin, Los Angeles
and the Bay Area and introduced teens accounts in Phoenix.
Waymo's autonomous vehicle surpassed 100 million miles
driven in public routes. The plans are in place to test
and eventually serve 10 U.S. cities in 2025.
So they are testing currently 10 more cities.
Investment remains focused on scaling high potential projects
with other bets. Every week it seems like Waymo's
testing a new city or opening up or expanding new territories,
hitting new metrics of the amount of customers served every
week and we see this continued expansion.
Waymo is the real deal. They are getting people from
point A to point B without any type of driver assistant in the
vehicle. Their records are public.
Their safety record is public. It is an incredibly safe and
expanding operation of a real robo taxi network network.
This is the leader in this category.
They're expanding quickly with 10 new cities being tested.
This company should be worth dozens of times their revenue
multiple based on the potential of this business.
But if you look at the numbers, Waymo's essentially not getting
any bid at all. It's not really factored into
the valuation of Google, even though it's real, it's working
and it's growing rapidly. Now when we look at the outlook
with Google and what to expect ahead, we just got through
another quarter, another one of 14% year over year revenue
growth. So a fast growing business.
Operating income was up 14%. We have net income up 19% and
earnings per share up 22%. These are great numbers after
great numbers after great numbers when we move
specifically in the CapEx, this is the number that caused a few
investors a little bit of concern.
They bumped up their CapEx to $85 billion for 2025.
Their prior guidance was 75 billion.
So they're bumping up their CapEx guidance by $10 billion.
And they noted this is likely to increase in 2026, primarily to
expand technical infrastructure supporting cloud and AI.
When you have a cloud business like Google growing 32% year
over year, gaining multiple $1 billion deal contracts, growing
the amount of contract volume by 38%, that is something that you
have to build infrastructure for.
This is an incredibly important business, and Google's doing
right to invest in this business for the future.
It's the same thing I want to see with Microsoft and the same
thing I want to see with Amazon. We have free cash flow for the
quarter being impacted by this higher CapEx and a tax payment
ending with $95 billion in cash and marketable securities.
So they have a ton of cash on hand and they had someone time
expenses, specifically legal expenses.
So we have all of that going on with Google.
Overall, this was a master class of an earnings report, yet
another earnings report where Google shows that it's not a
distressed company. It's not one that's going
through immense amounts of trouble.
It's one that's off to the races.
They are moving ahead. They're growing revenue in key
territories. They're investing for the
future. They're leading an AI.
They're maintaining their market share.
They're producing more and more net profits.
They're the most profitable net income company on the planet.
Yet there's many people, many investors and analysts, they
still have tried to portray this company's struggling for the
past six months. In fact, they've tried to stoke
fear in this company, repeatedly telling you that Google's
distressed, that it's in trouble when it's not.
And many of these investors have different motives.
Here I want to highlight a couple investors and analysts
that have continually trashed Google over the past six months,
stocking fear in the company, talking about how ChatGPT is
going to kill the business. The first one is Gene Munster.
He was interviewed closely after Google's earnings report and he
completely swapped his thesis on Google after spending months on
end appearing on TV stocking fear in Google, investors
talking about how you should avoid this company at all costs.
Here's what Gene Munster has to say.
So that was a surprise. They also mentioned on the call
that paid clicks were up 4% year over year and just a really
shocking number. If we rewind back to the first
part of May when you know Apple, what EQ is talking about, this
decline in search within Safari, it would be hard for me to have
imagined that paid clicks are going to be up 4%.
So when I put all this together, Melissa, somebody like myself
who's been bearish over the last six months, I'm in the camp that
this stock is probably going to move meaningfully higher over
the next few days, 510% higher, in part because we should have
seen something this quarter given everything that's going
on. And what we should have seen
something happen this quarter given everything that's going
on. But we didn't.
And when he says we, he's referring to the Google Bears,
the ones that have been espousing how the search
business is in trouble, the ones that have been warning you about
Google despite all the positive qualities of it.
Gene Munster has now flipped his thesis on Google, and he's
bullish on the company now, saying that it's going to go up
another 10%. Based on this report, the bears
are giving up. The thesis that they have that
ChatGPT is the destroyer of Google is simply just dying.
It's dying in front of our eyes. That thesis has lived for years
now, and we're finally seeing the tail end of it.
We're seeing the biggest bears, the biggest promoters of that
thesis start to give up and capitulate.
They're starting to turn on a dime now, going from bearish on
Google to bullish. And Gene Munster is not the only
one. One of the biggest bears on
Google, someone that has repeatedly stoked fare in this
company is also an investor in Open AI, which is the owner of
Chachi PT, is Brad Gerstner. Here's some of the things that
he told us over the years. Google has been a monopoly, a
tax collector on everything on the Internet for 20 years, OK.
And they have monopoly pricing on search and so that they are
the verb that collects the tax. And what I said was that the
culture at Google had evolved in such a way that it had become
more of a research institution than a product LED growth
institution. They weren't delivering products
and as a result of that, people were leaving the organization.
So what is the verb in the age of AI?
Do you Bard or do you ChatGPT? GPT has become the default verb
for all things AI. And to relinquish that spot by
letting open AI go first. When you had the technology, you
had the supercompute and you had the capabilities to release that
product, I think was a mistake. This wasn't only one appearance,
or even a couple appearances. Brad Gerstner went on to mini
shows over and over again, repeatedly pumping open AIA
company he's personally invested in at the expense of Google, in
the process sowing concern and fair with Google investors.
Google was the only game in town.
Now we know search is being replaced with a new form of
information discovery and all. I'm saying because even if they
emerge as the leader in this thing, they will not have as
much share of the pool of profits as they have in search.
It's almost impossible for me to see how they replicate that.
Now I also have concerns about how they're operating the
business, how they're slow and releasing products, the cultural
challenges they have. I think they have challenges
around the TPU versus the GPUs of NVIDIA, but I, I will
stipulate that they get all of that fixed.
I still don't think they can replicate the monopoly.
This is at a price point of $130.00 per share and Google's
currently right on the verge of passing $200 per share.
Even more recently, Brad Gerstner has continually done
things on social media like said how many people in a classroom
use ChatGPT or Google Search? Every kid raises their hand
saying that they use ChatGPT. He used these anecdotes as
evidence that Google Search was dead.
He also continually and incorrectly referred to Google
Search as a 10 blue link website.
Always speak the truth, right? I don't think 10 blue links is
the future. Do I think it's going away
tomorrow? No.
But I just look at the behavior of people.
We do lots of survey work on this, Scott, people are turning
to ChatGPT, they're turning to Claude, they're turning to why
are we so excited about Apple Intelligence?
Because people are going to turn to Apple Intelligence instead of
10 blue links to find answers to the questions they have.
Multiple times he references Google as a 10 blue links
website when Google hasn't been a 10 blue links website for
years. You can search almost anything
into Google, whether it be travel information, looking at
movies, finding destinations, looking at stores, and Google
provides you vastly more information than 10 blue links.
This false portrayal of Google search compared to ChatGPT was
what was continually shared online by many of the most
preeminent tech investors. But even during the time that
this was shared, Google search continued to grow in query
volume and in revenue. We also have Qatal Management
with Philippe Lafont, one of the preeminent tech investors.
He's ran this massive fund for decades now and they released a
list called the Fantastic Forty. The Fantastic Forty Growth and
Innovation Index is the Qatar curated list of 40 companies
best position to lead an artificial intelligence
technology driven in the world by 2030.
So this is a list of 40 of the top AI companies in the world
according to this leading tech investor group.
When you look through the list, you'll see many great companies,
Microsoft and NVIDIA. You have Alibaba, you have
Salesforce, you have Spotify, Shopify into it.
I own a lot of these stocks. We have ASML, we have Netflix.
These are great AI companies. But there's one notable
omission, 1 notable company that's just simply missing from
this list, Google. Google is the most meaningful
absence from this list a company that has the leading AI models
is not in the list of leading AI companies to 2030.
Now we can speculate on the reason that Google was omitted,
but I can't imagine that their investment in open AI didn't
play a specific role. Google's being left out of many
of these lists. They're not being mentioned on
many podcasts. Many retail investors are
getting the wrong impression that Google has been in trouble
for a long period of time when none of the data has shown that.
Now, after Google posts another incredible earnings report
showing that none of the concerns about their disruption
or problems have existed in the numbers whatsoever, we have to
tell social media trying to play revisionist history another AI
inflection point. Googles monthly token usage just
jumped 480 trillion to 980 trillion in two months.
That's the same growth it took 12 months to achieve prior.
We're not linear times anymore. Now suddenly Cattell is all for
Google. And in the comments section,
after being called out for this many times, they're now asking
other people if Google should be on the list.
No longer are they the experts. The people in the Twitter
comments are now the experts. And now that the company is
irrefutably performing well and the fundamentals prove that,
without a doubt, you're going to see a lot of them pretend like
the past six months never happened, like they never held
any bearish stance on the company, that they've always
been invested in it. But don't let them paint the
revisionist history on this company.
Retail investors overwhelmingly have been bullish on Google, and
they've been correct. Retail investors do have an edge
in many cases over institutional investors, and top analysts
don't get the impression that because they have more
resources, they can make better judge decisions than you.
Anybody that's been able to look at a revenue breakdown of Google
has clearly seen that the ads business has been just fine for
a long period of time. All we're doing is pulling
together and extrapolating growth from a business that says
it's continuing to have increased usage and engagement.
The people that rely on anecdotes saying that because
their nephew only uses ChatGPT, therefore everyone in the world
is switching from Google to ChatGPT haven't been correct.
Anecdotes are just that. They're anecdotes.
Data, Simply put, is just a lot of anecdotes.
When we look at Google search continued usage and growth, that
is hundreds of millions of anecdotes being put together in
a line chart. And that's what we're seeing
here. Now, while I've highlighted a
lot of investors that have got Google wrong over the past six
months, I do want to give credit to 1 investor that's been spot
on with a company, 1 rare analyst that's been continually
bullish on the company despite his peers being bearish.
Mark Mahaney has gone out on a limb and been very bullish on
Google. Even when the company's stock
price is going down and it appeared as though Chachi BT was
gaining a lot of market share, he still withheld through the
pressure of that and continue to be bullish on this name when few
others were. This is this is this has been
and remains our top pick in large cap Internet.
It's still trading at 18 times earnings.
So it's trading at like 7 multiple points cheaper than
Meta and it's still at a slight discount to the market for the
search leader, the YouTube, you know, the, the company that owns
YouTube Cloud has got this Waymo asset.
I, I, I still think it's the, the evaluation is highly
attractive. Fundamentals came in better than
expected and expectations were rising.
I think there's, I think it's, there's two kind of broader
things that are the three things that are happening here.
First is the ad market is kind of held in better than we all
feared 3 months ago. Second, cloud market just
continues to get stronger with all of this AI, generative AI
demand. And then third, did Google is
just executing well, give them credit for it.
They're at record operating margins even though depreciation
is rising because of this big Capec cycle.
They've been very consistently managing down or flattish their
headcount and so they're showing a lot of cost discipline.
I think the story is just getting stronger and I continue
to like the stock. The thesis is Google's cheap and
it has a lot of great businesses, something that many
retail investors have inherently understood for a long period of
time. Mark Mahaney's simple thesis was
right, and I believe he deserves some credit for that.
Now looking at Google, this is a company where again, we can look
at it moving up. Over the past month, it's moved
up around 13%, doubling the returns of the S&P 500 for the
past 30 days. So Google's going through a nice
recovery from the lows of 146 earlier this year.
Now we're getting back up to around $200 per share.
Investors that bought the dip are doing well, but I believe
there's more to go with this one.
First of all, the PE ratio based on next year's earnings is a 20
multiple. Now what I believe is going to
happen is analysts will move their expectations up for next
year's earnings over the next four quarters.
So when they move their expectations up for earnings per
share, the Ford PE is actually going to go down.
It's going to be closer to an 18.
You should see that reflected in Qualtrum in the next day.
So you'll see around an 18 Ford PE ratio for a company that's
having this much growth, this growing 14% per year, growing
earnings 20% per year, that is far too cheap for a company.
The stature of Google. When I do analysis on different
companies, I believe ones like Google should be at a 25 PE
ratio minimum. So if we bring up Google here on
the DCF tool, we can take a look at some assumptions.
If we assume Google will grow its earnings per share growth at
a 15% earnings per share for the next 5 years, which is far
slower than how they have been growing, and we assume the
appropriate PE ratio is a 25, which is not unreasonable,
Google should trade at a 20, 25. That leaves us with an 18.3%
compounded return over the next five years.
The share price would be $451 in Q1 of 2030.
With these very conservative assumptions, that is an
incredibly good return for a five year period with very
conservative estimates. Now we don't know exactly how
fast Google will grow. Maybe it's a little bit below
15%, maybe it's a little bit above 15%, but either way, we
have market beating returns with this stock, which is why I
believe Google stock deserves to trade much higher today based on
its outlook and the fundamentals of the company.
I believe today's share price should be around $240 and I
think there's a chance we get there by the end of this year.
There's no guarantees in investing, but there's every
reason to conservatively believe that the stock is worth this
price. So I'm going to hang on to my
shares. I'm very bullish on Google.
I'm getting more bullish every single earnings report, and I
look forward to the next one. Now moving on, we get to Tesla,
which is a stock I don't own. And in fact, I've been
criticized as hating on the stock for years.
And that's true. I have been highly critical of
Tesla stock for a number of years because I don't believe
that Tesla investors have fully come to terms with the situation
of fundamentals of this company. Now, Tesla did give us more
insight into the fundamentals of their company yesterday when
they reported earnings. The stock is now down 9% after
earnings. And if we split Tesla in the two
different categories, we can look at the fundamentals, what
actually happened, the numbers of the company, and then we have
the narrative. The narrative is what's going to
happen in the future. All the promises and bright
future that Elon Musk has painted.
We have those two different parts of the company.
Well, first take a look at Tesla's numbers and just focus
on the numbers for a minute. Total revenues of the company
was $22.49 billion, which is a 12% decline year over year.
Let me just repeat that. It was a 12% double digit
decline in revenue year over year.
So we have a company like Google growing revenue 14% that trades
at a 18 PE ratio. Then we have Tesla that has
revenue declining 12%, trading at APE ratio currently of 136.
That's the tale of two different stories here and that is my
problem with Tesla stock. It is a comparison of the
valuations, the future expected returns and the current numbers
they're posting. When we look even closer at
this, we see more problems that Tesla's facing with their
business. We not only have total revenues
declining by 12%, but we have operating expenses remaining
about the same business that has flexible cost structure.
We should see the total expenses decline as well.
This means that the operating margins went down by 219 basis
points, a 42% decrease in income from operations this quarter was
$923 million. We have four quarters ago 1.6
billion. So we have declining revenue,
declining margins, declining income from operations and these
aren't small declines, these are massive declines.
We have the Adjusted EBITDA of the company, this declined by
7%. We have the earnings per share
gap of the company declining by 18%, the non GAAP earnings per
share declining by 23%. Every single number so far is
moving in the wrong direction. We have the income from
operations down by 30% and the free cash flow down to $146
million. You may chalk this up as
temporary. The problem with Tesla is these
numbers have been relatively the same for a number of years.
We have Q4 of 2022, the trailing 12 months of revenue of around
$80 billion. It went up to a high of around
90 billion, and now it's traded back down to just above 90
billion. We have the same revenue today
that we had in early 2023. This is flat revenue for over 2
years now. Tesla investors are waiting for
that parabolic spike in revenue like they had in 2020.
Maybe that's just around the quarter, but so far we haven't
seen it. And there's also reason to
believe it's not happening anytime soon.
We can see the same thing with Tesla's free cash flow, with
their EBITDA numbers, with lots of different metrics that look
around the same as they have for the past couple of years.
With Tesla investors knowing that the fundamentals are moving
in the wrong direction, that leaves them with the narrative.
The narrative is what you're investing in if you're buying
Tesla. The narrative is what justifies
the 100 plus PE ratio. The narrative that Tesla will be
the biggest robotaxi company in the world, having massive market
share and profitability, and it will be the company that designs
the humanoid robot that the rest of the world uses.
On the call, Elon Musk tried to push this narrative as much as
possible. The autonomy and robotaxi
launch, Tesla said, was successful.
It launched its first robotaxi service in Austin with paying
customers experiencing fully autonomous rides.
While that's true, many of their paying customers, in fact almost
all of them, are Tesla influencers, people specifically
sent there to take videos of it and kind of show off the
service. These weren't everyday people
using it as a normal service like you see in California with
Waymo. These were investors in Tesla.
The service area in Austin is expanding rapidly with plans to
cover more than 10 times the current region soon, and the
company aims for hyper potential growth in both service areas and
vehicle count. They're aiming for hyper
exponential growth in both services and vehicle count.
That's what we've been told is that they're going to grow
exponentially. All of a sudden, Tesla robo taxi
will be everywhere fully operational.
The regulatory approval process are underway in states including
California, Nevada, Arizona and Florida with the goal of
covering half the US population by year end subject to
approvals. Now again, this is a very
bullish part of the narrative. They want to cover half the US
population by year end. That's a very short amount of
time, six months. To cover over half the
population is is very ambitious. There's one little caveat which
is subject to approvals. So if this doesn't happen, they
can always blame the regulators that they're just not giving
them permission. There's a lot of red tape and
it's the bad approval process from the government.
Now when we go on with this, we see safety being a priority over
speed of roll out with initial deployments closely supervised
and gradual relaxation of driver attention requirements as
confidence in safety grows. O right now Tesla has employees
in each of their robotaxi vehicles.
The employee sits in the passenger seat, but the employee
has the ability to stop the car at any point, and they have
exercised that ability multile times, which could have revented
many accidents. Tesla wants to get to a point
where they can get rid of that employee, where the car can
drive itself without the need of such oversight.
They haven't done that yet, but again, that is the narrative in
the future. And they also had the first
delivery of a vehicle that autonomously drove itself from
the factory to the customer's house.
I think that's a a cool thing, but I don't believe that's a big
growth driver for the stock. Overall, we have the narrative
of the autonomy. We have very ambitious goals,
but lots of caveats and exceptions.
Things are subject to approval. Things are subject to confidence
in safety growing. They're aiming for hyper
exponential growth, but there's just a few things that may get
in the way. Next we get to the other big
bullish point of Tesla, which is the optimist humanoid robot.
Optimus Version 3 is nearly finalized with no major design
changes anticipated. Prototypes are expected by year
end in 2025, Production to start next year.
Ram U will be slow due to new supply chain process
uncertainties, but Tesla's targeting production of
1,000,000 units annually within five years.
We have another five year timeline by a brand new product
of Tesla, which have been repeatedly wrong over the past
decade. Tesla has continually pushed out
things much longer than they're given timelines.
You can look at Full Self Driving and Robotaxi as an
example, but Tesla's saying they'll have the humanoid robot
in production 1,000,000 a year. In five years.
Optimus will eventually contribute to maintenance and
cleaning of autonomous vehicles and broader factory
applications. Tesla believes that Optimus will
become its largest product line and is an exquisite design,
applying lessons from real world AI and vehicles to humanoids.
So they're talking about the Optimus humanoid robot, which
we've seen examples of this, but so far the Optimus robots have
been teleoperated, meaning there's someone in AVR headset
or something similar moving the robot around like you would
control a tractor with hydraulics.
So Tesla has a lot to accomplish with this ambitious goal.
And they're not the only ones working on humanoid robots.
There's other companies that I believe are far better position
than Tesla, like Amazon, currently working on humanoid
robots. So there's more than one company
that can benefit from this, but Tesla is trying to portray the
vision that they're going to be the preeminent leader in
humanoid robots. When I look at Tesla, I think
this is just a very, very difficult stock.
Investors in Tesla will say that I hate on the stock, that I hate
Tesla, and that's not the truth. I don't hate Tesla.
It is a stock. It doesn't know that you own it.
If you're a Tesla investor, that's not your identity.
Investments are to make money and we should invest in things
that have good risk adjusted returns.
When I look at Tesla, my honest opinion is that it's an
incredibly difficult, unpredictable stock that has a
lot of downside risk. That's the way that I view it,
and I look at that through a lot of different metrics.
When we look at a company like Tesla, the bowl case for the
stock, the bowl case that people like Dan Ives and many other
people on TV have outlined for this company, the bowl case is
to ignore the PE ratio. Just forget about it.
Don't look at the 100 plus PE ratios.
Ignore the price to sales, just forget about that.
Ignore the amount of free cash flow the company generates
relative to its share price and the market cap price.
Completely ignore the fact that Tesla generated $146 million of
free cash flow last quarter, which is about as much as Texas
Roadhouse, a $10 billion company, generated.
So you have Tesla, a $1 trillion company, generating as much
money as a $12 billion restaurant every single day of
the year last year. All 365 of them.
Google generated more in free cash flow than Tesla did last
quarter, and the bull case is to ignore that.
The bull case is to ignore the fact that deliveries are
declining year over year. They've been in a downward trend
from Q4 of 2023. The bull case is to ignore the
EV tax credits and other incentives that have buoyed the
stock for the past couple of years that are now going away.
The bull case is to ignore the operating margins of the company
that are lower than most restaurant operating margins.
The bull case is to ignore the fact that Waymo has a bigger
commanding lead in robotaxi, the very business that Tesla's
supposed to be the leader in, and that Amazon is better
positioned in humanoid robots than Tesla.
The bull case is to ignore all of that data and just hope that
Tesla does well in the future. Just hope that the company can
have astronomical growth. I don't invest in things based
off hope. I invest in them based off of
well grounded fundamental research and reasonable
valuations. I invest in compounding machines
that can grow year after year, very predictably.
There's no hope involved, and there's no ignoring all
fundamentals related to the company.
So if you want to invest in Tesla, that's fine.
No one's going to stop you. And I certainly don't hate you
for choosing a different investment than me.
But my perspective is investing in highly predictable companies
with reasonable valuations, strong fundamentals, and a
proven track record of growth. I also like investing in
companies that outperform expectations, not ones that
continually come under expectations with Tesla.
Maybe this company will make it all worth it.
Maybe the bulls will eventually be correct and Tesla will become
the biggest winner of the robotaxi and humanoid robots,
and it will generate trillions of dollars of wealth.
That could possibly happen. But I think the chances are very
small. And I think there's a lot of
risk inherent to this investment.
Risk of continued trudging water for year after year, quarter
after quarter, waiting for the narrative to play out, which
eventually doesn't come to fruition in the same way that
investors imagine now. If the circumstances and data
changes, if I see new evidence that makes me change my opinion
on Tesla, I'll let you know. That's going to be it for this
episode. See you in the next one.