Watch Our Earnings Recap: Market Heavyweights Apple, Microsoft, Amazon, Meta, Visa, and More

Welcome everybody to our latest earnings watch party. This is a free show for our audience and clients. We are excited to have you here with us today and to go over what was a really exciting week. How about Microsoft? I know we've got some clients out there that have been big Microsoft fans for a while and been a little bit Bummed out by recent performance, but hey, you stuck it out and you're doing great now. Seen a lot of new names in our community today. This is great. I think we're really stepping up some of our outreach and communication. I hope you guys are all enjoying that. I've been putting together sort of a daily email with some thoughts on how the market's going and stuff like that, and I hope you guys enjoy it for sure. You know, I read all the emails you send, so. Keep them coming. Let us know what you like and don't like, and we'll be happy to accommodate. All right, let's get to it. Put your questions into the chat or the Q&A, and we'll start talking about some stocks here. Let's go to Earnings Watch, July 31st. Let's sort by market cap. And look who's up there now, Microsoft. Let's talk about Apple. Apple had a great quarter, but people weren't too happy about the outlook. I think people are thinking that Apple, some of its best days might be behind it. I think that'd be the takeaway, and that's why you see the stock suffering as it has here in the last 5 days. It's a 10% drop. You haven't seen anything like that in a long time. Let's see what AI has to say. Selling off due to several headwinds highlighted in earnings week. Next quarter guidance, severe supply chain, surging memory costs and margin compression, segment misses. And all that really is another way of saying that you're looking at a dangerous stock because the valuation is so high. And honestly, it's the first time we've really seen a false trend in a long time for Apple in terms of economic versus accounting earnings. Returns on invested capital have been amazing, but in a pretty significant decline for a while. You can't see it because it's so high, but we're going from 90 down to the mid-70s. A little bit of a pop here, but these guys were up in the 150, 300 range for a long time going back over history. So it's been a long-term decline. You can see accounting earnings kind of popping up above economic earnings. That's what we don't like. Even though economic earnings still look pretty good. But yeah, what you're seeing here is a stock priced pretty close to perfection. There was a time when Apple was pretty cheap. That's not the case anymore. Let's look at Microsoft. Neutral rating. So cheaper. What happens when it blows the doors off of earnings? The stock, I think what it had the single largest market cap Gain for a company ever. Is that right, folks? I think I saw that in the headlines. No company in the history of the world has increased their market cap as much as Microsoft did here yesterday, I believe it was. This jump right here on a percentage basis is huge. We're talking almost 20%. And let's see, $462, and we're still looking at the stock at What did it close? $451. Yeah, it's still up quite a bit. We'll see how these numbers hold. And I don't know what to say. Microsoft, good business. I've said it. We said it's great for a while. We think it's in a weaker competitive position than Google and Apple with respect to AI, just because of the cash flow generation situation. But they had a great quarter. The Azure business appears to potentially be Growing at a significant rate, and I would tell you that a big part of the reason that Google is where it is in terms of better free cash flow, you can see here, right? They're positive. These guys and our reports have effectively been saying that Google and Apple have been in a class by their own because they've been able to generate so much cash flow that they're going to be able to spend it on AI. Apple's not. competing as directly, and they're in a kind of envious position of being like, hey, we own distribution, so you guys go battle it out and we'll put the best AI on the iPhone and we'll talk about that later because you're not going to get to your clients except through us. We'll talk about that later and we'll just— we'll get a good deal that makes us happy. And that's an enviable position for Apple, and they've got a lot of cash flow to execute on that. Google has been a huge cash flow generator. We said that they were in an advantageous position, but a big part of that is because the money they make, not just in search, but in Google Cloud. It's a mega cash flow machine to fuel the spending that these firms are all going after, as we've talked about in these reports. If you've not seen these reports, Kyle, please drop some links in there to those folks. These reports are way ahead of their time, by the way. Everything you're seeing about off-balance sheet debt for the AI that people are talking about, we were talking about that in the beginning of November last year. 8 months ago. So our clients have been well prepared for this, assuming you've read the research. Some of you guys every now and then email me, it's clear that you've not been reading all of it. Definitely pay attention to everything we have in this section of the site, AI Winners and Losers. There's a ton of good stuff in here around AI, including a new piece here on Anthropic and OpenAI and why those business models are doomed. We've been talking about data moats for a long time. There's not a lot of value in the AI model, which sits at the top of the stack. You've got power, you've got data centers, you've got chips, memory, compute, and design of chips. And then you've got the top, you've got the AI model. And Kimi, DeepSeek, they're doing just as well for a whole lot cheaper. I don't think there's gonna be a high margin in the AI model part of the stack. I'm not sure where it will be in the stack, but I do know that there's a piece missing in that stack, and that's data. And I've been telling you guys for years, nobody appreciates the power of high-quality data. And I would say the importance, the critical importance of high-quality data to driving a meaningful— and that's really what this piece gets to in a lot of ways. This section in particular, I want to point you to because now people are echoing our argument. Larry Ellison says it flatly. All these AI models are the same because they use the same trash internet data. And then Alex Karp and Shyam Shankar at Palantir The ontology is the body. AI is the brain. The brain can't work without the body. And then Chamath is saying the same thing when he compares the cost of a barrel of intelligence. Yeah, thanks, Doug. Good comment there. Yeah, we were way ahead of the curve on that. So back to Microsoft. Great business. Let's take a look and see where their free cash flow situation is because perhaps free cash flow. Yeah, it's a big bad number right here. That was the K. That was the fourth quarter that just came through. But no, we don't have the Q yet. New 10-K forecast just came through, so we just got updated. So yeah, we're going to get all this off balance sheet debt for these guys. I wonder if on a quarterly basis the model is looking a little bit better, and we can look at that in the model there. And by the way, I'm not saying that Microsoft is out of the woods, but I think with the performance of the rest of the business, there could be higher cash flow generation to support a higher AI spend. Because right now, no one can really come close to the Google AI spend they can afford. And that's why they went out and raised a bunch of debt, because they know there's a limited amount of liquidity in the world. And Google's— they're thinking strategically. And these guys are really good about thinking 2, 3, 4, 5, 10-year steps ahead of everybody else. Saw an interview with the head of Google Cloud talking about how 15, 20 years ago they started buying real estate and acquiring better sources of power to support cloud and compute. So these guys are smart. And a power move here was going out and raising a huge amount of debt, soaking up all the remaining liquidity or as much of it they could so there would be less left over for anyone else because they had the ability to To attract the capital because they got the cash flow, the better credit rating, and all that comes with it because it's a better business. So power move by them. Power move. And we'll see here. Let me see. Let's go into the model here for Microsoft. Taking a while to generate still. And so we'll see maybe on the margin, either the improvement in Microsoft's bottom line and top line beat, the Azure reacceleration and milestone. Popping 43%, showing the company's enormous artificial intelligence successfully driving top line. So they're doing well. I do think Copilot's doing well as well. Controlled CapEx outlook. They remained high at $35 billion. Their expectations came in low. Kept its broader calendar year forecast at $175 billion. Okay, that's part of it too. People are like, all right, these guys aren't going nuts. Like everybody else. Interesting move by them. I think in many ways, part of the signaling of the super high spending by Google is to intimidate. Just MMA fighters before a match flexing. Google's out there going, I can spend more than you can. And if you're gonna keep up with this, you're gonna feel the pain. Oh, you want some of this? That's what my kids used to say to me when I came home from work. They'd be flexing from upstairs and then, and looking down at me going, oh, you want some of this? And so that's the thing what Google's been doing here. And because Google's doing it, Microsoft doesn't have to. They can still keep a really high rate. They don't need to signal that they're overspending. So that might help them with market sentiment in a way. Let's go here. Free cash flow quarterly. All right, maybe not. So you can see it's been a little bit more lumpy. Let's go annual free cash flow for these guys. You can see, I'll make this screen a little bigger. You can see they've good free cash flow generation, strong. It's an acquisition here, strong. 2026, big time negative. But let's see, did they start trailing off here in the fourth quarter? Not really. So I think this is all about projecting. Maybe they feel like their investments are good enough; they can throttle back or at least signal that they're going to throttle back. And also these numbers here are yet to be scrutinized. This $35.8 needs to go through the lens of off-balance sheet debt because I can actually show you right now, folks. We can go in and take a look at off-balance sheet debt for these guys. Debt, off-balance sheet debt adjustments. Boom. $190 to $330. And that's— is this quarterly? Yes. This is quarterly, folks. So yeah, they— oh, we only spent $75 billion. Yeah, but we added $113 billion to off-balance sheet debt. I don't know what that was for. Let's not talk about that. So I don't know. I'd be a little bit wary about Microsoft and what they say they're spending versus what they are spending. I would say maybe this big bump we saw, getting a little ahead of ourselves. Any questions on that? I know we went through a lot there. I hope that was helpful. Anybody want— anybody have any questions about the off-balance sheet debt? No. Hey David, I think you're making it up. Show me where you got that number. Sure, be happy to. But you want to see some of this? Oh, you want some of this? Here we go. Balance sheet adjustments, future minimum operating leases. So folks, this is where we go in and we get the real debt numbers, and then we make an adjustment for their discount rate to make sure that they're using the right discount rate. And so yeah, we're going to get a better number for off-balance sheet debt. Let's see, they have any These are the lease costs, not yet commenced leases. Oh, there we go. Oh yeah, here's our lease payments that we're supposed to report, but there's a whole another $329 billion that we need to talk about here for not yet commenced leases, which we'll just leave those off because that's for a data center that's still being built, so technically hasn't commenced yet. It's just another way to draw a line in the sand that allows them to skip over and be like, we don't have to report it because Because of this rule, thank you, FASB. That's where it comes from, folks. Everything at New Constructs, 100% auditable. No one else can do that. That's why we have the greatest data moat in the world for fundamental companies. All right, Amazon. Let's talk about free cash flow for Amazon, folks. Who knows what Amazon's free cash flow is? Who can remember, or who remembers from prior? Calls what we think about free cash flow for Amazon. You don't want some of this: negative forty-five billion, negative forty-nine billion, negative fourteen billion, negative twenty-eight billion, negative eighty-three billion, negative hundred and thirty-three billion. Folks, I don't know where they're gonna get the money. Look, shares going up, off balance sheet debt going up, total adjustment for leases. Keeps going up. They don't have the cash flow pedigree that Google has. They can't go out and borrow as much money. This is why they've been doing layoffs. So I question their ability to stay in the race. It's a weaker company. Let's see what happened this week with respect to earnings. We're happy. 15% today. What does AI say? 9% yesterday. Massive 2nd quarter beat accelerating cloud expansion. Top of line beat aided by— all right, they're investing a lot in Anthropic. I don't know if that's a great idea, folks, based on what we told you before about the Anthropic models and where they sit in the stack. Now Google can help with that in a lot of ways because they own some of that underlying stack— chips, compute power— but The cloud stuff, that's going to help. That's going to give them money to spend. They did have a big high CapEx outlook, $220 billion. They raised it. So interesting. $220 billion. Let's see, like, what are we looking at here? Excess cash, about $105 billion. I don't know where they're going to get it. They're going to have to borrow some more money and sell some more shares. Meta, another weaker player in the space, more expensive. What happened to these guys? Down 10%. Yeah, they're spending— I feel like people are not giving these guys as long a leash because look, Meta's cash flow, folks, has not been as good either. Shares going down. It's been good, right? Been running the business, have been running the business well, and free cash flow has generally been pretty darn good until boom. But you notice these numbers are way smaller than what we see in Microsoft or Google. Not as negative as Amazon, mind you, but they don't have the cash saved up. You can check that too. Excess cash and a $97 billion. That's not bad. It's a pretty good war chest. But I think we did the analysis in one of our reports. I don't remember which one where we looked at the Cash runway at the current spending rate, and Microsoft couldn't last that long. So we looked at it and said, hey, if they're going to spend at this rate, how long can they do that with existing cash and profits? And when they're spending at the rate that people are spending these days, it's like Amazon. I don't know where they're going to— how they're going to be able to afford to be able to continue to spend at this super high rate. Their costs, like these other firms, are rising. But these numbers are not— these are kind of paltry compared to what the big problem is. And that's Massive $31 billion for the quarter alone. Narrowed their guidance. Persistent Reality Lab losses. So yeah, what we're seeing here is these guys, they're just not executing so far, right? You have the metaverse, now we're going to AI. And I think I've said this for a while, these guys are swinging for the fences, man. They're throwing haymakers at AI. They got to, because if they're not in the race, if they're not in the business of AI, what are they? Facebook over time, it's just, it's not going to cut it. I think there are things that maybe the Facebook community will be around forever and people love it. I don't know. But I think that there are probably going to be AI-related things that subvert that and other models over time. It's like Google Search. Facebook is just an online yearbook kind of thing. That's, are there, are there margins, huge margins in that forever? Advertising margins in that forever? I don't know. I don't think so. So Meta. Meta in the race is not— is one of the weaker players as well in the AI race. Visa, MasterCard, good company, bad stock. This is pretty simple, I guess. Good earnings, up a percent for the week, better than expected. Not much of a reaction. Why? Because stock's already pretty, pretty well priced. Super profitable business. How long does it last? I don't know. Mastercard, we're about to get the Q, but same profile, folks. It's really the same profile. These are almost the same company. I don't really even know what the difference is, to be honest with you. I know there's some differences, right? But I don't, I couldn't tell you how significant, how many significant differences there are between the 2 stocks. Don't think there's a lot. Up 5%, stronger earnings. That's pretty good in a week when I think the market's been down most of the time. Let's see, what is, what has the market been? Compare S&P 500. I should know for the week what the market has done. Yeah, the S&P for the week is flat. And so that's pretty strong outperformance for Mastercard. So more power to 'em. Did a little bit better than Visa. But I don't know if there's a lot of meat on the bone there. Good company, expensive stock. Coca-Cola, one of my favorites and one of the market's favorites as well. Good business, expensive stock. What happened there? This is a tough one. The consumer brand companies, especially just consumer food companies, there's just still going to be some good stuff from— they're going to— people are going to keep drinking. Cokes. I don't drink Cokes, but there's other healthier alternatives they have out there. They're moving into that. Strongest volume in 17 years, up 5% on the week. That's a big move for Coca-Cola. That's great. It's huge. Good for them. Strong fiscal earnings, probably helped with the World Cup. Strongest volume, margin expansion. Things are going well. Raises full-year guidance. That's a good quarter for Coca-Cola. 5%, that's a good move versus the market, especially in an already expensive stock. We're in a pretty, you know, we're in a heady market, folks. You do well, people are going to love you. And I think as money's coming out of AI, it's got to go somewhere else. These guys getting a little, a good boost here. Procter Gamble. All right, a little greener around here. Down 2.65%. This is a little bit more commoditized business, I'd say, right? A lot of these products are— you say the same thing about Coke, but they got such a broad offering. They got unique things. There's not as many players. It's not quite as much of a commodity. It's a little more of a treat, so people pay a little bit more. I don't know, making up stuff here, honestly. These stocks that get a neutral rating, there's not a lot necessarily to talk about here except that it's neutral. It's middle of the road. The market's pretty much getting it right. We want to focus on the fat tails. Overpriced and overstated earnings. Underpriced and understated earnings for the buys. Dangerous, attractive. Under, attractive. Over, dangerous. All right, ARM. We've seen this profile before, folks. Expensive. And look, guys, 26.4, folks. Right? 100 is big, but 26.4, that's, that's crazy expensive. What happened? Let me guess. These guys, I think I saw this in the headlines. Yeah, down 6. I would not be surprised. Let's see, what are the— what's the last month? Yeah, 31%. And it's still that expensive, my friends. Right? And I can tell you, Nvidia, Google, Microsoft, we can look back on this page. They're not this expensive. Record-baiting financial results. Market headwinds. Smartphone market weakness. Record-breaking results. Robust outlook. Stock still down because it's crazy expensive. Because it's crazy expensive. 26.4. Where does it rank on price-to-economic book value? Crushes all these other guys. It's almost 10 times as much. as Microsoft. That's— and we know Microsoft's got a lot of expectations baked into the price. This is burning hot, folks. Don't touch this with a 10-foot pole. Qualcomm. This one looked cheap in our system for a long time. And, you know, attractive and got expensive. Attractive again. There it goes. Attractive, go. So yeah, good company, bad stock. That's what we call that. These are these guys are like Arm. I think they got a lot. They got a lot going in the in the mobile phone area. Yeah, Apple Cliff. So they're not yeah, they're not as much in there. Mixed results for the week, down twelve percent. You got to do really if you're going to get anything positive from the market these days, or you're going to get positive results or a boost because. There are a lot of expensive stocks out there and you're going to have to do something pretty darn good. But yeah, handset deceleration, that's a thing. Internet of Things, Qualcomm's trying to move into other territory, like to get out, diversify away from just handset stuff. I think they're doing a good job of that, but the market's giving them credit for that, folks. That's what we're seeing here. 1.9, that's not like 26.4, but we're still seeing a lot of high expectations baked into the stock. All right. We are over time, but I'm going to take one request here. BFH, same category as MasterCard or Visa? Very attractive. Bread Financial Holdings. Not in the same category, DL. Not in the same category. And Roger, your question about the tech debt held by APOBX, BLKOWL, I think there's a lot of questions around that. I don't know the quality of those portfolios. I'd love to go through and run our system on their debt portfolios or the companies to whom they've loaned money and see how those companies look. I think there's going to be some gaps though, friends. I think that there's been an enormous amount of growth in private credit and stocks, credit, everything. People lending, investing, throwing as much money as they possibly can. I got friends who are lawyers. telling me for years that all these private equity firms were just opening funds and doing just as much, but they just couldn't do it fast enough. And I know a lot of investments were made without due diligence. And we saw yesterday that big AI fund blew up yesterday. I can't remember the name of it off the top of my head, but Citadel bought it. Multibillion-dollar fund, $40 billion or whatever, blew up because of leverage. It's a lot of leverage in the system. So, it's not going to take a lot of downdraft to knock some people out, which could have a cascading effect on the downside. So I think we're in a precarious spot here. The Fed's not going to be in any way lowering rates. On the margin, they're probably raising rates. We got global economic turmoil, oil prices up. It's a lot of things coming together that have typically indicated recession in the past. So I would avoid expensive stocks. I would avoid expensive stocks and I'd focus on companies that get attractive ratings, risk-reward. That's been a good recipe for a long time. All right, folks, thank you. Hope you've enjoyed this. Yeah, we've got SpaceX coming up here, folks. I don't know if you've read our SpaceX report, but we called it. We called everything about that. You're welcome. Hey, we do good work because we care about our clients and we believe in the value of good work no matter what. We want to do what's right for the right reasons, and that's a big part of what New Constructs is about. Always has been. Thank you and have a great weekend.