Welcome to the Schmoozeletter Blog. Your source for weekly water cooler wisecracks from the world of finance. If you have an opinion different than mine or a topic you want to hear about, let me know!
This week, we’re talking about:
Boo-gle and the Scary Halloween Earnings Report
It’s tech wreck week!
The Nasdaq is getting slaughtered worse than barefoot Bob going against Michael Myers.
The Day of the Dead hit the stock market early, with the tech-heavy QQQ down almost 10% from its highs early this month.
Let’s break down one of the spooky earnings reports that led to the sell-off.
This is…
Boo-gle and the Scary Halloween Earnings Report
One of the stocks leading the charge in the Halloween bloodbath was Schmoozeletter favorite:
GOOG – Alphabet Inc.
Their quarterly earnings report dropped Wednesday night, and investors found it spookier than Wednesday Addams.
I’ll show you two slides from their earnings presentation, and you tell me if you can spot the Candyman, Candyman, Candyman, Candyman, Candyman.
Did you see?
The first one is pretty easy.
They have negative free cash flow.
They are spending more than every cent they net with their operating activities. And they are just getting started. Google is forecasting bigger and bigger spending over the next few years.
So super spooky issue number one:
They’re spending too much damn money!
The second issue may have been a bit more subtle. Let me give it to you again:
Google Search only grew by 12%. It grew by 16% last quarter. That is deceleration. And boy, does Wall Street’s head spin on its shoulders when growth slows down.
Hit me with the headlines:
Cool growth? That ain’t cool.
“AI is taking a bite out of search.”
Not again!
We just got over ChatGPT killing Google Search, and now the Search killer is…
Google.
More people are using Search. They are running more queries, but they are using AI mode more, which isn’t as profitable yet as basic web search.
The keyword there being yet.
So everyone is still using Search in AI mode, and Search revenue is growing at 12%.
I’m searching to see where Search is in such a lurch. Maybe the business bringing in $250B in revenue and growing at double digits per year is perhaps a bit over-besmirched. But that’s just the view from my perch.
It is funny what gets the narrative of spooky vs. what gets the narrative of sweet. Search is dead, but YouTube is the belle of the ball.
YouTube is the best. Nobody has a negative thing to say about YouTube at the moment. It’s a Netflix killer. It’s a juggernaut.
And oh yeah…
It is growing at 9% while Search is growing at 12%.
Hey Search…
Okay, just double-checking.
But none of this matters because:
They’re spending too much damn money!
We’ll be looking like Norma Bates by the time we get a return on all this CapEx spending!
Easy, killer. I present you with another slide from their earnings.
Google Cloud revenue more than doubled to over $30B in a single quarter. Another way to phrase that would be “All-The-Money-SpaceX-Brought-In-Over-The-Past-Twelve-Months.” And Google did it with one business segment in one quarter.
A meaningful contributor to that was their chips.
I mean…
Cloud is doubling, and yet they still cannot keep up with demand. The cloud revenue backlog is over half a trillion dollars. Most of that will become real revenue over the next two years.
To not continue investing in this rapidly growing, highly profitable, red-hot portion of the business would be dumber than spending the season at the Overlook Hotel. Here’s Johnny!
So with the chips, Gemini, the cloud, Search, YouTube, subscriptions, and other bets like Waymo, all this adds up to $128B in revenue over the quarter for 25% annual revenue growth.
That is insanely fast.
They will reach right around $500B this year and are expected to cross the trillion-dollar mark by 2030.
Why are they spending so much money? Because they can.
But go ahead and have your day, bears. Call for the downfall of Search and question the capital allocation abilities of Alphabet again and again.
Maybe this time Jason Voorhees won’t come out of the lake.
Final Thought
Complete devastation this week and… still up 13% on the year.
