Earnings Recap: Market Bellwethers Alphabet, Tesla, IBM, Intel, and More

Welcome everybody to our July 24th earnings watch. Glad to have you with us. I am running the show here from beautiful Monteagle, Tennessee. See my background? That's not a fake. It's pretty cool. Excited to be with you guys. We thought about skipping this one, but too many interesting things happening this week. So let's talk about it. And we're glad to have a lot of you folks here that are new with us and new to the New Constructs platform. It's good to see our reach growing. We do good stuff and we do a lot of great free stuff like today's Earnings Watch. All right, let's talk about some big stocks today. Let's see, here's what is on our list to talk about. Let's go with the biggest cap stuff first. Google. All right. You guys have been following me for a while. I think Google is one of the greatest companies in the world, maybe the greatest company in the world, because I don't know anyone who can say they have huge cash flows, make their own chips, provide their own compute, and have an AI model, one of the best AI models, like a top AI model. Who else can check all 4 of those boxes? Nobody. So they seem to me to be in a particularly strong position. Also, when I look at leadership and I hear them talk about their long-term plans and the way that they've strategically positioned themselves to own real estate, to own data centers, obviously to own compute, to make their own chips. You gotta say it's a really pretty impressive situation. But look, didn't have a great report yesterday. Mostly the issue had to do with the fact that they are going to be spending so much on AI. Let's take a look real fast at how all this went. Let's look at Google. And so what happened yesterday? Earnings. So they had a good number. They had a beat. We were wrong. We had them in as a miss because they had a lot of non-operating stuff in there. I don't know if the clean number is there, but really the story around Google this week, friends, was CapEx. I think they went up to $100 billion. Anybody know why they're doing that? Anybody have any sense of what the heck is Google trying to prove here? Anybody want to talk to me about that? Let me see here if I can get the— how do I get the chat? Here we go. Anybody in the chat talking? No, no answers. Why is Google spending so much? Because they can. Who, who, who all of you guys have kept up with our stock research and the work we've done on the AI winners and losers? Anybody on this call familiar with that and what we've been predicting for probably 8 months and 9 months now since early November? A lot of people are going to lose the AI race. Maybe that sounds obvious, but it's just something— it's a level of spending that most people cannot maintain. And so Google's one of the few that can. Now, I keep saying it's a great company, and it is, and we're excited about how strong this company is, but the valuation is still a bit high. And The spending now is going to really, I think, hurt this business in the places where it's been most strong and where it's been so impressive. And that's in the returns on invested capital. And that's where we're just seeing return on invested capital in the next couple years we expect is going to probably take a big dive. It's up here at 38%. We can go over, you can see Economic earnings already flattening out. Now, this is why we're seeing some missed stuff here, right? We're seeing net income and core earnings and net income versus economic earnings diverge. So they're making— look, they're in the business now of trying to get their stock price back up. So they're going to make the headlines look better than the actual underlying economics of the business. So we're still seeing expensive valuation. Yeah, it's come down a lot. This price-to-economic book value, still pretty low, but it's come down a lot. And now they're investing $100 billion a year. That's even going to push free cash flow negative for a company like Google whose cash flows have been humongous. So you can see here, free cash flow: $49 billion, $27 billion, $54 billion, $48 billion. Boop, down to $3.3, and now negative $36. Now the reason we say they can stay in the race is because these huge numbers over many years of free cash flow have built up a big ability to subsidize a lot of spend, but also a lot of cash and the ability to raise debt, which they have. And this amount of cash is comparable only to Apple. Everyone else can't hold a candle. So we're thinking Google is in— is really— I don't want to say it's in trouble, but it's expensive, and we're not really seeing any upside here in the stock. And again, accounting earnings are overstating economic earnings. Which is why we saw a strong beat. All right, let's talk about Tesla. Who's a big fan of Tesla? If you're a big fan, give me a thumbs up if you're a big fan of Tesla out there, like a wave or something. And who knows what our stance on Tesla is? Anybody? How many reports? Anybody have any sense of how many reports we've written on Tesla? There's a lot of new people here on the call. Usually I'm talking to folks who know us way too well and know our stuff backwards and forwards, but I'm not recognizing many names. On here today, or as many names. A lot of new folks. I seen my good buddy Don. Don, good to have you back. Hope you're doing well. Don knows what we think about Tesla. I think Don and I have talked about it a few times over the years. Yeah, Tesla is finally having its comeuppance. And here's the problem: if SpaceX is having a comeuppance at the same time, SpaceX can't bail out Tesla. If SpaceX can't bail out Tesla, the house of cards implodes, my friends, in a big way. Some reason I don't think that's going to happen, just because it seems like Elon's got so many great fans, but look, the bottom line is the Tesla business is not looking good, folks. At least with Google and a lot of these tech companies, you're going to see high returns on capital, decent economic earnings, and then an expensive valuation. But look at Tesla, it's not making money, people. This is a free cash flow negative business for a long time. I think there was one blip. Look, it's just been in decline for a long time, even in the accounting earnings, right? Losing market share. Returns on capital coming down, margins down, capital turns down, free cash flow negative, a slight positive here. Maybe they're harvesting something on the balance sheet to just get something out of— get some cash going from somewhere. But look, the robotaxi thing, a joke. Please someone give me an alternative argument, a counterargument. Robotaxi has been a joke. Waymo is crushing them. I don't understand. I really don't understand how like Tesla is even going to compete. Waymo's crushing everybody. And I wonder how Uber competes. How are they going to compete with Waymo? Waymo's just got, it's going to be a better business model. They can run the cars without people. That takes away a lot of cost, probably a lot less insurance eventually because the Waymos will be safer. Cheaper, just as good. I don't know how Uber keeps it up. Same with Tesla. Tesla, the robotaxi is a joke. Now they're talking about robots, Optimus, like they're going to get into the robot racer companies in Japan and in the US that have been building robots for decades. And Tesla's robots can all of a sudden be better? Oh, they're into AI. But I thought SpaceX is into AI. Oh, they're both in AI. They should just merge. But you've got 2 huge amounts of market cap all betting on success of each company's AI. And the AI together maybe is strong enough to justify that valuation. Anyone seen our work on SpaceX to get a sense of just how expensive that valuation was or is and what the company's got to do to justify the price? And have you all read the stuff that we've done on Tesla over the years? Kyle, do you mind going in there and sharing a link to some of the Tesla reports from the blog? If you just go to the blog and maybe go to Tesla, 26 reports on, on, on Tesla, folks. Take a look. Most of those are free. Tons of great stuff for it. And we, our free stuff is the same stuff we publish to our paying customers. We just tend to make a few of them free every now and then so that more people can see the quality of the work we do. And that's why we do the free stuff, because it's, there's no better way to understand how good a product is than to test drive it for free. That's what this Earnings Watch is about. That's what the free reports we do. We want you to see how much, how good our stuff is before you have to pay us. That's how confident we are that people will want to buy and subscribe because they'll see the quality and the rigor of the work is unmatched. Absolutely unmatched. Tesla had a bad report, stock got crushed. Nobody's surprised except for you crazy Tesla bulls out there. And if you're on this call, welcome, you're welcome to the good side. The Force is with us, the good Force. All right, Intel. This is a tricky one, folks, because we're seeing a lot of red here, but this is a business that's in turnaround. I think most people would agree with that. All right, so the Google Finance has switched over. There's no beta. We're stuck on this new one. I like the old one a little bit better because I knew how to get news and everything. But yeah, Intel down here, 5 days down, had a 21st to 20% over the last month. What's going on with Intel, folks? So smashes estimates. Doing great. Robust guidance and CapEx hikes. Everything's looking good. Why did the stock drop? Here's why, folks. It's super expensive. So if we were to do our reverse DCF model, which we do a lot of times at our long idea dinners with our pro clients, I think we just did one this week, an awesome dinner. We had great questions about a big takeout, a buyout. Hey, is the price too high, too low? We talked about a couple long ideas that we just put out that were just, that are super powerful. Hey guys, can you tell me, am I missing something? Because this looks too good to be true in a market where everything's expensive? Have we really found a diamond in the rough? Great conversation. What we do in a lot of these meetings is go through the reverse DCF modeling capabilities, which are super cool. As one of our pro customers put it, it's a truth serum for the markets. And then another guy said something really funny. What did Ryan say? He says a reverse DCF is for investors what an advisor should be for investors, which is a bit of sanity and some encouragement. And the reverse DCF model is just great because it just, it shows you what the cash flow cycle has to be to justify the price. I think that's super interesting. So here's an example of what that looks like. Well, it's still coming up. There it is. No, not yet. These models can sometimes take a long time to open, especially when you're in Mineagle and you're on Wi-Fi in a cottage that's 200 years old. We'll come back to it in a minute. Takeaway is when you see red over here, especially when you see red with these 2, you're talking super expensive, super expensive. And we have the models to explain exactly why that is. But look, when your profit has to grow 292 times, let's put that into perspective here. We'll go to this page, we'll sort, we'll sort by price to economic book value. All right, Raytheon, Google's at 2.8, Philip Morris, Schwab. If we put in something like Nvidia, just so you can see it in the stack here, 4.5 times. That's a super expensive stock. Intel. The takeaway, folks, is that the turnaround is priced in. I think I've got a few scenarios in here. Optimistic. This is my most optimistic scenario. Even with our optimistic scenario, it takes more than 100 years to justify the price. So if we're just looking out 50 years, the interesting thing to do here is you can look at past performance. Okay, there we go. So we just look at the next 25 years, optimistic scenario. This is past revenue. This is what's baked into that scenario, folks. And keep in mind, that optimistic scenario can't get to the stock price even with 100 years of growth. That's what this is saying here. So with 100 years of growth at 4.7%, now keep in mind that 4.7% is the compounded rate over 100 years. In the optimistic scenario, we've got 20% for the first 10 years. And then it drops to 4.5%. So that's 20% compounded annual growth for 10 years with margins going from 4.6% to 30%. That's what's in the optimistic scenario, my friends, right? And that's why you see this huge increase in price for this optimistic scenario compared to the neutral scenario. And that's also why we see this huge improvement in Revenue, and then if we wanted to do something else, let's try net operating profit after tax. Right? Look, just gargantuan improvements compared to where they were before. Hockey stick for many years. Better than ever profits. So that's what we mean. That's what the rating system in New Constructs is telling you. There's a ton of sophistication behind this rating and the details that give you. The truth behind the numbers. All right, who we got next? How about Philip Morris? This is an all-time great stock. Good profits, mediocre valuation, folks. Look, when we're dealing with a market where the Fed has been supporting it, we've been printing money for a long time and pouring money into the economy for many years, you're just not going to find many good stocks. That's the bottom line. And anyone who's been to any of our training sessions, you know that What is it? 96% of Wall Street covered stocks get a buy or hold rating. Maybe it's 92%, right? Everything's a buy, folks. Why? Because they're in the business of selling stock. What does that mean? It's hard to find something that people haven't found that's already— that's not already overpriced. Philip Morris is a great example. Profitable business and it's getting expensive too. Not nearly as sexy, you'd say, as any of these tech stocks or tech-related or even energy companies. Right, they're in the good old business of selling tobacco. Not exactly impressive business, and even they are pretty expensive. That's my point. That's my point. How they do earnings-wise, let's take a look. Pretty good week. Zens— make this difficult. There we go. Outperformed on top line, but estimates were a little bit low. So a beat and a miss. That's— I guess that kind of calls Falls into in line. All right, how about Raytheon defense stock? This is one you'd hope— or RTX Corp. This is one you'd hope maybe can find with world affairs becoming more and more— what drove earnings beat and guidance raise in July 2026? Let's see. AI and raised its full-year guidance behind this robust global defense demand. Yeah, Raytheon, 18% organic sales, commercial aerospace aftermarket surge, a lot of stuff going on there, supply chain normalization, manufacturing productivity. So business doing great, but the stock's already expensive, folks. Again, you got to be there before someone else. You want an edge, you want to be successful, you need an edge, stock market included. I just did an interview this morning with a lady from Fortune. She's like, so besides looking at core earnings, how can I help my readers outperform? Think about just people who don't look at filings, they just look at the internet every day. And I'm like, I think the answer to that question flatly is that you can't expect to outperform if that's your strategy. If all you're doing is looking at information that hedge funds and other people have processed hours, maybe days ago, yeah, you are, you're behind the 8-ball, to say the least. There's not really any hope. I said, listen, if you want to speculate, which is what it is, if you're not doing any real research, then take it to the casino. Or to poly markets. That stuff's more to spend more fun to speculate on than stocks, in my opinion. So yeah, Raytheon people like oh defense stocks let's load in. Here it is, and profitability looking pretty good. Obviously had a great report, but not great. This is not a highly profitable business yet. Yet what we're seeing here is that the stock price is already baking in a high level of profitability. IBM. All right, still attractive. This is one that I think— look, it got beat down a lot here recently, up and down. And this is also a big holding in the Core Earnings Leaders Index. So this has of course got a beat. It's one of the larger holdings in that index. We still like it, attractive rating, and it got cheap. So this is a tech company that I think is worth taking a close look at. You're not going to see these very often. Folks, and what I mean by that, what you're not going to see very often is this much green on the screen for any tech stock. And look, I think IBM is taking more of a Palantir approach to AI, which is not to go out there and try to build a better model, not to go out there and try to build a better technology, but to help corporate clients make the most of that technology by basically building them private systems. We at New Constructs have a private system. We don't put any of our data into any of these Open source, even private models. We're not giving our data up. Our data is our advantage. That's what Alex Karp at Palantir keeps saying. All these enterprises spending all this money in token maxing to get no real value add while giving away their proprietary data to the frontier models. It's crazy. It's absolutely crazy that any major enterprise would be using Anthropic or ChatGPT. Silly. It's dumb. You're giving away your secrets. Oh, they're not. They're only using it for training purposes, or they're going to get rid of it afterward. Whatever, man. Look at how many new products or skills they publish every month. Where are they getting that information from? Their clients, because they need it, folks. The thing— the second thing I want to tell you about AI, first of all, how hallucinations are on purpose, is number one, they're there to monetize your attention. And number two, how do they do that with good information? The internet is not good enough by itself. What did ChatGPT-2 do? Was it yesterday? Oh yeah, our AI is so powerful it broke out of its cage and robbed the data from another company, Hugging Face. Can you believe it? Come on, guys, that's a publicity stunt. It's so powerful it broke out and stole data. Oh, isn't that cool? Come on. A publicity stunt with an apology stapled on the front of it, as one of my friends put it. Let's see here. Actually, I can pull that article up. Yeah. Great article from my buddies at Coal Fire. Yeah. What, how did he put it? The lesson is boring and I'm going to say it anyway. Have a capable self-hosted open weight model vetted and ready before you need it. Basically he's saying, look, you need to have something that is not captive. You need to have your own AI you can trust to do what you need it to do, not what Anthropic or ChatGPT wanted to do. What OpenAI did today was to take a page out of Anthropic's marketing guide. Whoa, look how powerful our model is, while saying, oh, our bad, out of the other side of their mouth. Axios noted the same thing, that the post leans on passive voice and carefully avoids taking direct responsibility. It's a real incident dressed up as a capability ad with an apology stapled to the front. Dropping the mic on that right there. So IBM, I think they've got a better angle in this business. I don't think they're going to try to compete with AI models. China's doing great. Anthropic, they got billions they're spending on their models. Why don't you help clients make the most of them by building them private networks? All right, let's get into some tech, some telecom. T-Mobile, it's kind of a dying business, folks. Like cell phones or cell phone capability or data capability, it's a commodity. The electric companies or utilities, why is the phone line or this kind of spectrum line that different? We don't have a lot of high expectations for these guys. Neutral rated. Look, neutral rated just means it's not interesting. Not particularly bad, not particularly good. A little cheaper on the valuation, but not necessarily a good stock by any means. How do they do here? Wow, doing great. All right, it plunged in the past month following its recent earnings report. This week, bad overall, but one-day performance looks like it's really good. Interesting. What's going on here? Can I get an update on— let's do this for Temu. What about Temu? What do you got for me there? A notable earnings per share beat and raised its full-year cash flow guidance, though the results drew a mixed market reaction due to a slight revenue shortfall. Yeah, yeah. And I'm going to say the same thing. AT&T is just— it's like Temu but with a And Verizon, they're just, they're all doing the same thing. Similar businesses, cheap for a reason. T, like in the history of the world, is like one of the biggest accounting shenanigan firms ever. The case studies go way back on them. One of the original case studies I read in the business with Michael Mauboussin when we were drawing the distinction between pooling acquisitions and purchase acquisitions, and AT&T spent something like $100 million This is maybe 20, 25 years ago. Maybe it was $10 million, but they spent a lot of money to get the accounting treatment changed. The economics of the transaction were never changing, but they wanted to get it counted as a pooling as opposed to a purchase, just so they wouldn't have to report goodwill expense. Anyway, that was a long time ago. Similar profile to T-Mobile, poor business, cheap stock. But as I said before, I'd say it's cheap for a reason. Schwab. Now this is a different kind of business. This is attractive, and I think this has been something that we've liked in the past. Danger zone back here, but more attractive here. Schwab, it's a money-making business, folks. A lot of green here, a little green here, just a little bit of yellow. Strong balance sheet. You know, as long as they're going to evolve And continue to advance the technology and advance what they're able to provide investors, I think Schwab can be a good business and could be a good stock. And so we've been generally more bullish than negative on Schwab, especially when it got beat down back in the, even the financial crisis and around then. Let's see here, 5 days, how'd we do? What about Schwab? Record-breaking performance that exceeded Wall Street expectations of the stock experienced a mild post-release decline due to rising corporate expenses. Unprecedented trading. And yeah, Schwab is like a mini Wall Street firm in that sense. We saw ridiculous numbers come out of Wall Street on their trading and equities business. Wasn't Goldman Sachs equity business up 80%? I think JP Morgan was 80% up. This was off the charts. And that's going to trickle down to Schwab. So I think there's no big surprise there. The real question is how well they're going to retain clients. And retain assets in a world where I think Kraken and Robinhood are going to make real inroads, especially with younger investors because they're AI-friendly and crypto-native. I think the tokenization of assets is coming and it's going to be interesting to see how Schwab, big slow Schwab, is going to— if they can cross the chasm like they did many years ago to go to online trading, cross the chasm into crypto and AI-friendly stuff, they're going to be in much better shape and they've got the asset base to do it. So for them, it's more like They don't need to build out a moat. They got to be able to protect their moat. And the stock is not giving them a lot of credit for being able to do that. So I would say that's— this is an attractive rated stock for good reason. And Interactive Brokers, similar situation, but they've been more tech forward than Schwab and taken a lot of share and they're more profitable, right? So you look at Schwab has got a return on invested capital of 15% and these guys are 24%. Economic earnings higher than accounting earnings. Damn, you know that's good. And honestly, free cash flow being low, not a bad thing because I think Interactive Brokers has been super free cash flow strong in the past. But I'm glad that they're investing because I want to see them pour money into technology. You can see not a lot of strong free cash flow, just a low free cash flow business because they've probably always been investing in technology. They've got the best stuff. Our most sophisticated users love Interactive Brokers. Our research used to be on Interactive Brokers. Maybe someday we will work with Interactive Brokers again. We got to make sure we have a good handle on what's happening with our data for that to happen. But the point is, look, this has been a great business, one of the more profitable businesses in the entire market that's not a tech company. 24% return on capital, that's up there with the tech companies, and it's still relatively cheap, folks. And economic earnings greater than accounting earnings. All right, we're at 30 minutes. Do we have any questions, comments, or requests? I gotta jump to another meeting here. But if not, great to see all you with us today. Excited to see so many new folks coming on board. If you're not that familiar with New Constructs, and if you are, I still want to lean in here. Look, we have the best AI with the best data in the world and the best fundamental research in the world. And a market that's as expensive and overbought and full of as much noise as ours is today, I don't think there's been ever time in the history of the world where valuable research like ours could be more helpful and meaningful, especially to non-institutional investors. We have our institutional investors pay us a lot of money. That should be a signal to you that we're onto something good here, along with the fact that we have the Core Earnings Leaders Index that's outperforming, that Google built their AI on us, their AI for investing on our data. And then papers from Harvard Business School, the Journal of Financial Economics, Ernst Young, MIT Sloan. There's not a more vetted firm out there. All right, folks, thank you very much. I appreciate you being with us today, and see you next week.