AI Spending and Market Dynamics: Winners & Losers in the AI Arms Race | Earnings Watch Party

Happy Friday, everybody. Welcome to our Earnings Watch. It's been an exciting week. It feels like almost every week we're getting some sort of new data point on AI. And what I love about AI is that the spending is so big that it's moving the needle even for these mega-cap companies in a way that we're really seeing winners and losers emerging. Almost every week, every moment, because the stakes are so high and the competition is so fierce. And we're also, I think, running into a wall in terms of like how much spending can we do as a government, as a country, as corporations. And there's no longer this sense that there's an infinite amount of capital or money to go around. And that means on the margin, I feel like the markets are getting a little more efficient. People are being a little more discerning. Oh, we just can't throw— we don't have so much money we can just throw it at everything we want and then still have some left over. And that's exactly what's happening in AI. These companies, some big companies that were really profitable, are running out of money. And I think the best way to, to really to visualize this is take a look at this report we did back in November, The Losers in the AI Arms Race. And really the message here was Look, the spending is so high, some companies can afford it and some can't. And by the way, some of the companies that can't afford it have historically been super profitable companies, super profitable. But the spending is so high, they're getting run into the ground. Oracle, right? We put this out on Oracle well before they hit the wall and the stock imploded. We just point out, listen, they're free cash flow negative. Lo and behold, they've been taking on a lot of debt all year, so much so that that when they wanted to go get some more to try to keep up in the spending race, what happened? Anybody remember? Stock got crushed because the debt holders said, well, we're not so sure we want to continue to fund this. And then people don't realize that Meta can't keep up. They're cash flow negative. The biggest surprise often is Amazon. Look, this is— again, this was in early November we wrote this. Since then, Amazon has what, cut 30,000 jobs? Why? Oh, AI is improving. Oh, maybe that's partly true. They can afford to cut them, but they need to because they're free cash flow negative. They've been free cash flow negative for as long as I can remember. Nobody realizes that. Everyone thinks, oh, Amazon, great company, makes a lot of money. Sorry, no, they lose a lot of money. And that's what Jeff Bezos— from the beginning of time, it's been a business that's lost money. He's always got people to effectively bet on his ability to innovate his R&D and to fund that. I don't think that's the case anymore. And then Microsoft here on the border, they've got the cash flow to afford to keep into the race. And I think the big reason that they've put so much money into OpenAI is they're going to need that next generation solution because these AI solutions, including our AI, Finsights. It's gonna put a lot of traditional businesses out of business, whether it's spreadsheets or even websites altogether. Why go to a website at all if you can get an AI to go out there and pull all the best from all the good websites? And in fact, wouldn't we all be better off in a world where there weren't some infinite number of websites? there were only, let's say there was just one really good website for every topic. Now there's a lot of topics out there and there's a lot of nuance around what makes a topic. But just imagine there's one really reliable website where you could go get answers that you could trust about any particular topic. Would you wanna surf all those or would you wanna go to interface that you could just say, hey, tell me what you think about topic X and what should I do? And you'd rather go to one place that could reach all those places. Anyway, I feel like that's a vision for the future. And that's why Google Cloud chose to build the only AI agent that they built. They're not in the business of building their own agents. They help clients build agents, but they built one on New Constructs data because we're that kind of website. We're that kind of database. with that kind of data set. And I think they made a wise choice. We started working with them last summer because they believed in the data and they love the transparency. They love the papers, they love the performance of our picks. Lo and behold, the Core Earnings Leaders Index for the year absolutely validates their decision to trust New Constructs. It's up 27% while the S&P's up 18%. I think that's safe to say there's some pretty good data in our numbers, pretty good signal in our research. All right, let's jump into the Earnings Watch. As always, folks, I want to hear from you in the chat. I want to hear from you in the Q&A. You got questions, let's go. A lot of cool stuff happening here with us at New Constructs, and happy to talk about all that. But let's go in here. I'm in an institutional subscriptions. I'm going to create a new portfolio. It's called Earnings Watch. January 30, 2026. And then I'm going to copy and paste on here. January 30. Watch. There it is. I'm going to copy and paste tickers we're supposed to talk about. Let's get going. We'll go in order of market cap. So let's take a look at Apple. What's happened here? Last 5 days, mostly up. They got an AI startup. So, you know what, part of the reason that I'm confident about Apple being okay for the AI race, they can buy their way in. A lot of times when you're a company this big, it's better to buy than build. Yeah, you could afford to build whatever, but you don't have the right people and they've had to fire some people. Look, it's hard to find talent. I'm sure there are plenty of people that can tell you that they read the footnotes. And they can build a good core earnings model. Probably tell you they'll do it even better than new constructs. And guess what? You won't know until after you've paid them whether or not they'll tell you the truth. Unless they've worked at new constructs at some point, or unless I know them, I wouldn't trust them. I know most of the people that know how to do this because when I was on Wall Street, there wasn't that many of us. We're the last group, and we've all remained friends. Because when you do this kind of work, once you see how to do it the right way, it's hard to unsee it. I had that conversation with 2 big clients and the guy that actually was the seed investor in our ETF and another longtime client here just this morning. And it was funny, we all talked about, hey, once you see how to do it the right way, once you see how core earnings works, once you see what's in the footnotes, once you see how reverse DCF models work and how understanding price implied expectations, once you see that, you can't unsee it. It's just a better, smarter way to go through. All right, so let's stop pontificating and start talking about earnings. So Apple, yeah, a lot of the news is about this AI, and then Q earnings tops estimates on record-breaking iPhone sales. Sales surge on staggering iPhone demand. The iPhone is a status symbol, right? It may not be the best, coolest phone or the most functional phone, but it's for sure the coolest. Everyone's got to have one. Right. Even my kids joke about how people are shamed if they're on Android and they got a green text. Apple, what do we say about Apple? It gets an unattractive rating. First time in a long time we've seen this because it's always been at least neutral. It's been expensive for a while, but at least neutral. So we're seeing false positive on economic earnings. And we're seeing this across a lot of the tech companies. Where the balance sheet is really ramping up and it manifests only in economic earnings. You're not going to see that in accounting earnings. You won't see it in core earnings either. Let's see what core earnings is. Okay. That's because that's a balance sheet look. But if we want to check and see what's going on the balance sheet, see return on capital is flat. Interesting. Down a bit, right? From 2024 and definitely down a lot over the last 5 years. And if you look back even farther, it's down a ton. Like this, this company was regularly in the 300s of return on invested capital. So look, margins looking good, capital turns not so good, right? All those iPhone sales and yet capital's growing faster. Why? Apple's spending a lot of money on AI. They still got plenty of cash flow. They can afford it. That's why they're in a position they're in our chart over here. Like this is, it's a lot of money to be able to do a lot of things, including going and buying someone else who's doing it outside of your firm. We've seen S&P McGraw-Hill, right? They've done that many times, right? They go buy a company and the company they buy takes over, right? That happened with Capital IQ, right? They had an old data set. They bought Capital IQ, a new fundamental data set, and the Capital IQ people take over. And then it happened more recently with the other data firm they bought out of Charlottesville, Virginia. Blanking on their name. Oh my gosh. Anyway, similar thing. The company they buy, new young company. S&P's big and old and has the tough stuff. And anyway, Apple could do that with the AI group. I think Walmart did that with the online e-commerce company Jet, I think it was, right? Brought those folks in, bought them, brought them and let them run it on their platform. So that's a way to acquire talent and capabilities. But yeah, Apple, despite a great report. We're not seeing the stock in the 5 last 5 days do too much. How does that compare to the S&P? Flat. So good earnings number, but not kind of performance that you'd say go through the roof. And why is that? Expensive. Not a great rating. And I think that while most people are looking at the balance sheet, clearly if you look at the performance of our Core Earnings Leaders Index. People care about fundamentals. Look, last year up 26 versus 15, that's pretty good. And then if you just even year to date, still beating it, right? People care about fundamentals and they're going to care about balance sheets a whole lot as the world moves forward here as well. Microsoft, okay, I think this is the one that That surprised a lot of people. Big drop-off. What was this? This was earnings. Not good. Eight-month low. How low can they go? So what are they talking about earnings? Data center spending overshadows earnings. So what's that message? Let me boil it down for you. So these two companies, Amazon, Microsoft, on the edge here. I don't know. I'd say Amazon is pretty much a loser here. I think they're gonna have a real struggle. coming up with the capital. They're going to have to keep firing a lot of people. But Microsoft, of the winners, is the weakest. They got the least room for error. And compared to Apple and Alphabet in terms of hundreds of billions of free cash flow over the last 4 or 5 years or so, and Microsoft and Meta, not so much. Microsoft's made a lot of acquisitions, right? They don't have quite the war chest that Apple and Alphabet have. So the spending is an issue. Now you're going to ask me like, oh yeah, is this a Microsoft issue? Probably not. I think a lot of firms are struggling. Let's see, revenue target amid accelerating AI cloud demand and Copilot seat growth. So yeah, I'm more prone to be bullish here on Microsoft than anything. Honestly, it's been one of my favorite stocks for a long time. Just too expensive. Great company, not such a good stock. And I think this probably just dropped. Yeah, upgraded from unattractive just recently. Lower market expectations. Interesting. Treating OpenAI as operating and on balance sheet. Cool note. They're able to do that. But this model just got updated right after earnings, I guess, came out. So we got the latest and greatest data. Economic earnings still heading up. It's not really that healthy seeing a divergence between Reported earnings and economic earnings, but we do the shares going down, return on invested capital up a little bit. So yeah, I'm, I'm of an opinion to say this earnings report got misled. This is potentially a good buying opportunity if you think Microsoft is cheap enough. We're not there yet. See, free cash flow zero. Let's go take a look at free cash flow. So maybe free cash flow has come down. Oh wow. Okay. So, you know, this was an acquisition and then negative $18 billion. So maybe after all, Microsoft is struggling a bit on the free cash flow front. Big number here in 2025, big negative number in 2024. Lots of money in OpenAI, but that's what it's going to take. Yeah. Yeah, a lot of big bets placed on this AI stuff. And I think it's just in terms of the magnitude of the numbers, It's hard to believe that incremental returns on capital are going up. They got to be going down. Just the denominator is too big. The number is too big. Yeah, Gerard, good question. 45% of the backlog RPOs is OpenAI, and we don't know how big Anthropic is. So Apple, Microsoft, interesting stuff. Meta, same thing, balance sheet deterioration. Note, we did not see that balance sheet deterioration as much in Microsoft. Quite interesting. Let's take, actually, let's take a look again at I always like to look at margins, capital turns. So like, I guess margins doing well enough, decline in capital turns is okay. Wow. Interesting. Love to look at both. 38.8, that's a pretty good margin. And then the capital turns is a really pretty small decline. So we're seeing return on capital go up. So like this balance sheet stuff, I don't know. I'm not so worried. And then Meta, yeah, we'll see the balance sheet deterioration here. Also more expensive. Okay, accounting earnings coming down, economic earnings not looking so bad. Interesting. What do we get? We get the new filing. Yeah, this filing should be coming in any day now. Okay, it's probably— okay, this will be updated with new information tonight. Margins, capital turns coming down here. Same sort of thing. Yeah, I think we know Meta had a good Good, really good report here. They needed that. They're going to need to show return on the AI investing as soon as anybody here. This is Oracle, I think may already be out of the game. They got cut off. Debt investors like Meta, it's going to be a struggle. I'm really interested to see what the free cash flow looks like whenever we get the newest numbers, because you can see free cash flow trailing 12 months. The first three quarters of 2025 is a big negative number here, and really puts their free cash flow negative for the last five years. Pretty close to negative for the last five years. So will be interesting to see what that new number is. I think that would be very telling. I can't wait to we get that new 10K processed. Visa Mastercard. So. Blockchain rails coming. Credit card rails, not as good. Look, honestly, the transparency, speed, security of tokenized assets and tokenized asset exchanges, I think, are the new thing. The New York Stock Exchange is looking to be a tokenized asset exchange. They announced they're going to build out blockchain trading. Why not? Instant settlement. You got anonymity, you've got traceability, you've You've got all the things you want and it's way better than— I was joking with a vendor partner this week about Trading Places, the movie, and they couldn't believe that there used to be floor traders like that. I was telling them that blockchain is going to be to the current brokerages like electronic trading was to floor traders, that they're just going to go away. And this could be true for Visa, MasterCard. Look, these have been amazing businesses for a long time. Amazing. Just tremendous return on capital, tremendous margin, and but an expensive valuation. This is coming down a little bit. This got me interested. And then MasterCard, I think it's almost the same exact profile. Green, green, green, light green. Yeah, I mean, it's almost exactly the same. Great return on capital, great economic earnings. How do we compare to V? Compare to S&P 500, 5 days. All right, MasterCard and Visa, quite a divergence here. Not a lot of divergence between these 2 companies, almost identical in the last 5 years. Last 5 days, pretty significant. What's the news say? Mastercard cut a bunch of employees but exceeds expectations set to lay people off. Interesting. Looking to get efficient. Things are coming. We got some interesting stuff in the chat here. Instant settlement without the exchanges requiring large institutions owning the stocks that are leased to investors. Yeah, it's destabilizing to the status quo 100% and should be because these institutions have exploited positions of power and influence and better data for a long time. It's just, I was joking with my friend about trading places. I'm like, all that manual ticket writing meant that there was an enormous amount of power attributable for people who are analyzing all that stuff manually without an ability really to be audited. And we got the same thing to a lesser degree with the exchanges, all that trading going through this one spot. Some of it manual and some of it, it's not 100% automatic, right? That's why it takes 2 days to settle. And that just creates risk for exploitation, AKA order flow. Why don't we give some people access to other people's trading intentions so they can make money on that? It's stablecoins that we're doing the credit card companies and the banks. I think that's a good point. When you buy a stock, you're actually leasing it from Goldman and a cohort of other large stock banks. That's right. We don't need that anymore. So I think that's potentially true for Visa, Mastercard, but maybe it's a good question. Who else is going to give us the short-term credit? And that's what these credit card companies do and not likely to go away anytime soon, but the valuations reflect that in my opinion. All right. Caterpillar. I like Caterpillar because it's like a bellwether for big international stocks. So let's take a look at— how about CAT? Just put it in here. Ooh, good move by Caterpillar. So it's up 4.5%. Let's see here. Caterpillar revenue and earnings beats, looking good. Yeah, this is a company pretty well positioned in the continued industrial development of the world, which for sure is being accelerated By AI and building out these huge data centers and huge factories. I don't know if any of you guys done any driving on the interstate recently, but you look over to the side, you see these buildings that just go on forever. Got to move a lot of dirt around to make that happen. Caterpillar helps that. And look, I would tell you, it was one of those early AI stocks in terms of this been expensive for a while. If you like to take a look at the rating, investment summary, let's look at the rating history. Yeah, you can see for, say, going back into here, there's a couple pockets of attractive when it came down here, right here. But mostly for the last couple years, it's been a pretty expensive stock. Good company, bad stock. So not surprised to see great earnings, but a lot of that's priced in. Boeing. Now we added this to the list because I just think it's interesting because this is quite a story. If you're going to own this one, you got to believe in a turnaround. So let's see how good the balance sheet is. Not so strong. So I don't know how many people are going to want to sell at equity. Got a neutral rating here, which is not so great on the credit rating side. And then you got expensive and bad economics. Even with stocks done great here recently, I guess what I'm saying is that price turnaround is pretty well priced in and they're having to sell a lot of shares here to get the capital they need to stay alive along to hopefully Get this thing turned around. Is it a sort of national security strategic importance company? Do we does the world need more airplanes? Yeah, looks like the airlines they're buying they're still buying these things. Are they going to turn to get the business turned around? It's a good trend here. This is a good trend here. I would say this is where reverse DCF analysis would be really interesting to get a sense of what kind of turnaround is baked into the stock. And maybe we'll take a look at that. Let's keep moving here. But this would be a great exercise to really take a look at. All right, where are cash flows today? What do they got to look like to justify the stock price? Because my sense is looking at this valuation here, there's more than a strong turnaround already baked in. Gerard's going to do the work for us. Okay. Do you have access to the reverse DCF model? Because I think it's hard to do the work without the You can do it. You just can't do it at the same level of precision. HCA Healthcare. Let's see what happened to these guys because we got that bad news about Medicare spending. HCA Healthcare. Look, Greens. That's a long-time focus list stock for us. We've written about it 3 or 4 times. Highly recommend you take a look at these reports. Look, people getting sicker. Living longer, more healthcare needed. It's one of the most defensive industries of all time, healthcare. So we like it. And look, it's still cheap. I don't know what to say. We rarely see businesses this good and this cheap. This has got a lot of like those of you who have been subscribers to some of our special stock bundles. I'm not going to give away on this free call what some of the sort of Primo criteria that don't even get captured in this rating. This guy checks a lot of boxes and has been a great performer. I guess 3 months been up and down. I believe it's been a great performer like over the last year. Yeah, great performer on our focus list. So that's super cool. All right, Gerard, I didn't know you had access to the reverse DCF models. That's awesome. You're an institutional customer, is that right? I should know this, but that's tremendous. Oh, we'll soon be okay. And then let's see here. GM, another longtime focus list stock. New 10-K upgraded from neutral, even more profitable than expected. Still looks cheap. This is another— it doesn't check quite as many boxes as HCA, but let's talk it. Let's talk cash flow, my friends. Let's talk about cash flow. One thing that Tesla does not have or has ever had is real free cash flow. Ten billion, eleven billion, four billion, eight billion negative here, right back in the COVID time. Okay, whatever. But it's making money, folks, and returning a lot of capital to investors. Look at the shares going down, right? The Mary Barra. I was just on Bloomberg Canada this morning talking about GM, also one of the core holdings in the Core Earnings Leaders Index, an ETF. And so that's like a— why? Because their earnings are awesome. Core earnings distortion score beat. We like this. We like this. Great business. All right, let's take a quick run at Boeing. I got 2 scenarios in here, realistic and optimistic. So default is just consensus, basically. And honestly, when they're expensive like this, we will put something better than consensus in there just because we want this line to be upward sloping. Because we obviously— the stock price is going to be somewhat reasonably in the ballpark of valuation. Not always. But We think it makes sense over time. Cash flow grows. Otherwise, then what's the point? But when we really jack up the growth rates, which we got to do for Boeing, that's when you see what it takes to justify the current stock price. So what this is saying, you've got negative in the past here. Let's see what consensus is. Okay. 30% in EY1. All right, let's put this into our optimistic. Let's go 30%. Let's update this because it's been a long time. You can see I haven't updated my own model in a long time since 2018. All right, so let's go 30/11. This is interesting. Wow, 9.5, 8, 7, 6, 5, and then margins. Okay, wow, that's a pretty significant turnaround in margins. I don't know if I'm going to go 15. What's their best margin? 9, 12, 11. Okay, I think 7 seems— let's see what happens when we put in 7, 5 years, and let's say it goes up to 10, because I don't want to— and then we can see what kind of turnaround we're looking at here. Hard coming in with some zingers. Boeing will no longer suffer the expense of paying off the FAA. I guess that's how they got some of those planes through that where the door blew off. Yeah. All right, let's go, baby. All right, Amazon, what's taking so long? This is on them, not on me. Computing power at Amazon. Maybe they fired too many employees over there. They're not shoveling enough coal into the turbines to generate the power to crunch the numbers. All right, let's look at optimistic. All right, so you guys saw we put that really strong revenue growth numbers in there. And we're still only getting to $100. Wow. All right, let's do this one more time. So this is strong revenue. I think that's plenty strong. Let's jack up. Let's go. 10 doesn't do it. Let's go 10, 11, 12, 13, 13, 13, 13, 13. What's the best ever margin? 12.1. Okay. So what we're going to see here is like Consensus growth rates and best-ever margins. What does that show us about what this company has to do to justify the current stock price? And this is one of the things, it's a process. When I say once you do this kind of work, you can't unsee it. And we've got people picking us up on the marketing side that they're making videos about. Is this a— this is unreal. Like, the work you get from New Constructs, forget the price. You can't pay anyone else to do this. You don't find it. We could charge $100,000 and we'd still have no competition. We do charge some people over $120,000, $130,000 a year. Those are big institutions, but for individuals, right? It's priceless. There is no competition. All right, let's take a look optimistic here. Wow. All right, looks like I had an error here in the model, but one of these numbers is— oh, I put 10 in here instead of 13. All right, so we got to do better than that. So let's go. 13, let's go 15, 15, 15, 15, 20% margins. But I think you get the point, my friends, is that this company is effectively already priced to have a great turnaround in sales and have better margins than it's ever achieved in its life. I would say the best ever margin to be in the 20s as it was in the late '80s and '90s. Okay. Then we put in 20. Let's see if 20% does it. The cool thing about this process is we check it out. You want to see what it looks like? You put in a 20% margin, we can tell you. And then if that's good enough to justify the price. By the way, if it justifies the price, that's great. That just means it's fairly valued. Doesn't mean it's a good stock. It means your expectations match the market's. So far, what this has shown us is that the market's expectations are higher. Okay, 20%. Now you're getting somewhere. And look, if you think they can do this revenue growth rate for longer and you think instead of 11 years, it's 20 years, 15 years, now you're looking at $258, in which case you might like the stock. And so, you know what? They're going to be able to grow like this for 15 years, Boeing's going to be around for a long time. Let's do it. The other cool thing to do is compare past revenue to implied future revenue. Here is what this model implies. When we model out the revenues in the DCF, we look at historical going back to 2010, and then we compare that to what the company's got to do. That's a pretty good hockey stick. Let's do the same thing for profit. Yeah, let's do the same thing for free cash flow. That's, that's an up and down. That's pretty good improvement. Yeah, a pretty good turnaround priced in. Pretty good news already priced in. Back to historically all-time great margins. You may or may not want to buy into that. Okay. Thanks for the great questions and comments. Gerard, welcome to the real world of investing. It's like The Matrix. You're going to wake up when you get institutional Membership, you're going to wake up and your life will never be the same. You can't unsee really good analysis once you see it. Once you know how good the work should be done is, then it's time to stick with that. Anyway, thanks for being with me today. Have a great weekend and we'll see you next week. We'll be doing another Earnings Watch.