Why Everyone Is Selling Big Tech

It was only two weeks ago that Deepseeks sparked an AI sell off. The whole idea behind this sell off is that AI's becoming so efficient that we don't need compute, we don't need these expensive GPU's. Well, this week all three hyperscalers reported their earnings and all three of them confirmed the same thing, that gigantic amounts of CapEx spend on AI infrastructure is still on

the menu. Satya Nadella said that they're going to spend $80 billion in 2025 on CapEx, primarily for artificial intelligence infrastructure. Sundar Pichai of Google noted that they're going to spend $75 billion on CapEx, well above investors expectations. The big boss of AI CapEx spend, the company that has the biggest cloud server by far, is Amazon. Everyone awaited their report yesterday and Andy Jassi came in far above expectations.

And now they're saying that they're going to spend $108 billion in 2025 on CapEx. Andy Jassi gave a lot of context and nuance into what to expect. Now. Each of these companies sold off after their report. Microsoft, for example, is down 1.6% on the year to date. They had strong year to date returns until the report. The report wiped it away. The same thing with Google. As soon as investors heard the amount of CapEx they were spending, Google traded down 5% and another 3.4% today.

Amazon shares a similar story, down 4% today after earnings. It's holding up a little bit better. Amazon, again was up 10% and now it's only up 4.5%. Why are investors selling down these stocks, wiping away their year to date returns? Because of the CapEx spend. Investors are concerned about this CapEx spend and the returns to expect from all this spent money.

What we're going to be doing in this episode is getting a little bit of context into whether or not this CapEx is good or bad, whether it's going to make these companies richer and investors richer, or whether this is the chase to the bottom at a point in time where these companies get lower return. We'll be going over all of it in this episode. Now we also have some other news. Expedia Group reported their earnings yesterday.

It was up 18%. Now I don't own Expedia Group, not a lot of people own this company, but there is a decent amount of people that own Booking Holdings and Expedia Group is like a mini earnings report for Booking Holdings. So we'll look at Booking Holdings and see the read through to this company. And then finally, we also got some exciting news. We have another validation, another endorsement from Bill Ackman on Uber.

As of today, he reported that he owns 30.3 million shares that they've been buying early this year. I'll be going over Uber giving some thoughts on Bill Ackman entering into this position and what I plan on doing in the future. So as always, we have a ton to get into in this episode. Let's go ahead and jump in now. First of all, I do own all three of these companies, but one of

the major reasons I've been invested in these companies since the beginning is the cloud, the public cloud story, which has shifted over time to an AI story. So let's go ahead and talk about the public cloud for a minute. We have three different companies here, Microsoft, Google, and Amazon. These three companies form the massive majority of the public cloud right now. The largest of the three by far is Amazon.

Another important thing to mention is out of the three, Amazon and Google are more transparent with how big their cloud actually is. Now, Microsoft's cloud is a little bit more ambiguous. They're not at the same level of transparency of breaking out their cloud like Google does with Google Cloud or Amazon does with AWS.

Microsoft groups theirs in with a couple other things which makes it a little bit more opaque, but either way we know by some level of accuracy through deduction that Microsoft is by far in 2nd place ahead of Google behind Amazon. What does this public cloud do? The public cloud is a place that other companies use for storage, compute, databases, load balancing, servers, security, and now developing applications on top of IT and artificial intelligence as well as a host

of other tools. But an easy way to summarize this is the public cloud is basically like taking almost all the IT needs of an organization and having all of that trouble of running server racks, of having security, having redundancy, having server capacity which can transfer data across the world seamless for every customer. All of that's taken care of by these public cloud companies. Now, Jeff Bezos realized this before anyone else.

He realized that they're not going to live in a world where every individual organization tries to become an IT company and host all the data themselves. And even though some will stubbornly stick to that antiquated model, most companies are going to move away from that. They're going to use IT as a service, which Amazon was early to start. After Amazon got an enormous head start in this, Microsoft realized that this should have been their game.

They thought that they were the tech company. How did Amazon get to this before Microsoft? Once Microsoft realized this, they started to build their own cloud and they used their massive distribution network, already having a lot of business with the Fortune 500 companies to integrate their cloud into their substantial offerings.

So Microsoft had the advantage, even though they weren't first place, they had distribution, and that's how they were able to grow Microsoft Azure at a rapid speed. It was primarily through migration. Google had been working on artificial intelligence and algorithms before anyone else. That's one of the key parts of their algorithm for YouTube and for Google Search. Google also had distributed servers across the world to host Gmail, to host Google Search, to host YouTube.

They already had all the infrastructure in place. They just never thought about lending it out like Jeff Bezos did. So Google as well jumped into this race knowing that they could try to play catch up. And that's what Google's done. They've played catch up in some ways. They've had to negotiate specific deals with start up companies, even invest in them in order for them to use Google Cloud. But Google has managed to make this a profitable business and it is a very profitable business.

Not only do each of these companies grow the cloud at a rapid speed, if we look at Google's, for example, it's growing rapidly, 30% year over year growth, but it's highly profitable. This has been one of the best ROI businesses in existence. The cloud business requires immense amount of upfront CapEx, a lot of capital to build out the infrastructure for customers. And that started off with a -, 62% margin at its worst margins. Then it's steadily hiked up over time.

The most recent quarter, it came in at 17 1/2 percent. So now Google Cloud moved from being highly unprofitable to highly profitable and it's not going to end here for Google. Amazon Web Services is currently at roughly double the margins of Google Cloud. And again, Amazons Cloud is much bigger to begin with. So at bigger scale, the margins seem to be going up with Microsoft. We don't have quite as much clarity with this again, but we can assume that it's highly profitable.

Even Satya Nadella has said that he's not going to make these investments unless they get a return for the investor. So as it turns out, hosting the world's IT infrastructure is a decent business. It has immense growth, high amounts of lock in of customer and immense scale.

So companies like Amazon, Google, and Microsoft not only have user growth with their cloud business, they also have high lifetime value with these businesses using these clouds typically for the entire life of the business after they sign up. To describe the cloud hosting business as exceptional is an

understatement. It's by far one of the greatest businesses to ever exist, and that's why all the companies with this scale and the capacity to be able to do it entered into this market as quickly and aggressively as possible. Now you may be wondering, if it's so exceptional, then why are investors concerned about additional spend and investment

in this exceptional business? Over the past week, all of these businesses have been expanding on their cloud business, specifically with artificial intelligence. The main thing out of Google's report that rattled investors is the announcement that it will significantly expand capital expenditure in an effort to maintain any competitive lead it has an artificial intelligence sector.

In the announcement of their fourth quarter results, Google said they expect to invest approximately $75 billion in capital expenditures in 2025. As Reuters pointed out, most analysts had expected Google to grow capital expenditures to 58 billion. Those are sizable differences. Investors expecting only 58 billion and they come out with a number of 75 billion. This isn't just a modest increase in capital expenditure. This is a massive step change. And Microsoft said the same thing.

They're stepping up CapEx by over 45%, a massive rise in the AI CapEx. And then we have Amazon, who we also had expectations for rising CapEx that was already baked into the price and the earnings. But all of a sudden, Amazon hit us with a number that we didn't expect. Amazon plans to spend $100 billion this year to capture once in a lifetime opportunity in AI. Most investors were expecting a modest rise, maybe $90 billion.

But Amazon says we are going to spend 26.3 billion in CapEx in Q4. And I think that is reasonably representative of what we expect on an annualized CapEx rate that's around $104 billion per year. So we're A above $100 billion, again catching investors off guard. And the reason the big step up in CapEx catches investors off guard and causes the stock to go down is because spending on CapEx does have some immediate

implications. First of all, the way that we look at a company's value long term is through free cash flow. Free cash flow is calculated by the cash from operations minus capital expenditure. The more CapEx you have, the lower free cash flow you have, at least in the short term. So Google's free cash flow has hovered around the same area of around $70 billion per year. If they were not increasing this CapEx spend, their free cash flow would rise dramatically.

The same thing can be said for Amazon. Going into 2025, my prediction, my analysis was that Amazon would have around $70 billion of free cash flow. Yet here they are only generating around 50 at the peak. So they're not even close. They're $20 billion away from my estimate. And the reason why is rather clear. Amazon is investing far more into infrastructure and CapEx than previously estimated. They've changed their direction, and investors are nervous about this.

Wall Street is selling off the stock because of it. So in this situation, we have 3 massive cloud computing companies all in agreement that they need to dive in deeper and build out more infrastructure that will cost 10s of billions of dollars of incremental spend on CapEx above what was previously estimated. Investors are nervous about this because of the immediate impact on the financials and because of the predictability of the long term returns.

And that's where that brings me to framing this question of whether or not these companies are better off or worse off with this spend. I think it's important to give a little perspective on how I view CapEx or any big investment that a company's making. I typically try to focus on companies that are capital light, that's preferably companies that don't require immense amount of CapEx spend to

be able to run their business. The companies that can run super efficient like MasterCard, S&P Global, Moody's, FICO, those are the Holy Grail. They're companies that can make high returns without any investment. That almost seems unfair. There's only a few companies that can do that and they're ones that have monopolistic networks. So that's the ideal situation, high returns without significant capital expenditures.

Again, although it's my preference to have capital light companies and can earn high returns, I don't invest in only companies that have no CapEx or have no reinvestment needs. For example, one of the best investments I've made is Netflix. I'm up a lot on this company and they have significant reinvestment needs. They have to build out a content library and constantly be reinvesting into it. So I don't believe you should never invest in a company that requires significant investment.

What it really comes down to is how risky those investments are and your expected return you're getting on the reinvestments the company's making under the unattractive attributes category. I say that I don't invest in companies that have a risky reinvestment. They have high amounts of CapEx or R&D with unpredictable return

on investment. The reason that I was willing to invest in Netflix knowing full well that they spend $17 billion per year on content was because I believe they were going to get a predictably high return on that spend. And they are. They're generating $7 billion per year in free cash flow due to the spend on content.

In most cases, a business does need to have some level of reinvestment, and it's not a matter of how much reinvestment it needs, it's a matter of how unpredictable it is and what the expected returns are. The calculation here is very simple, and it works the same for every company. Companies that earn high returns on their reinvestments, they should reinvest as much as possible. Companies that earn low returns on their reinvestments should avoid reinvesting as much as possible.

A company like Amazon reinvesting back into AWS has earned significantly higher returns than the cost of the investment, the cost of the capital, whereas other companies like AT&T buying Warnermedia and other companies have owned very low returns on those investments. So they should never have done them in the first place. They destroyed shareholder value. The combination of earning high returns on invested capital and investing a lot of capital leads to significant performance.

So when I look at Microsoft and Google and Amazon, even though a lot of investors are reacting super concerned today about the step up change in CapEx spend, the real question here is not that they're spending this additional money. It's if they're going to earn predictably high returns on this additional incremental spend. And they've given us some hints

on the earnings call. Google noted that a big part of the reason they're increasing spend on their cloud service is that so far they've seen demand outweigh available capacity. They said, quote, we exited the year with more demand than we had available capacity. They have customers right now demanding greater spend on all of their infrastructure. And Amazon noted the exact same thing.

They said their internal forecasts and every bit of data they have shows there's much greater demand from their customers, customers and new customers for this infrastructure. So they're investing on a very predictable basis of future demand. The investments in this cloud infrastructure are not risky and unreliable. They're highly predictable.

And all three of these companies are in agreement that they have significant demand in the future and they need further capacity to fulfill it. So in terms of how I feel after these earnings reports for all three of these companies, I believe the fair value and intrinsic value of each one has increased. And for Amazon, I think it's closer to 260. I think all of these companies should be meaningfully higher, while at the same time investors

are selling them down. So as far as I'm concerned, this is a buying opportunity for all three of these companies. The one that I think is the most fair valued is Microsoft. It's trading closest to its range. I think that Google is still meaningfully undervalued, especially after this trade down and I still believe that Amazon

is meaningfully undervalued. Again, both of these companies I own significant stakes in, but I think the future is brighter today than it was before this earnings report. And the fact that they feel so confident in reinvesting into a very predictable CapEx investment with expected high returns should make investors more bullish, not less. Even Andy Jassi on the earnings call said.

I think that both our business, our customers and shareholders will be happy medium to long term that we're pursuing the capital opportunity and the business opportunity in AI. I'm in agreement with that. Outside of just Amazon Web Services, Amazon is also on track with everything they're

doing, reinvesting into all aspects of their business. 8 out of 10 times they come in at the higher end of their guidance range and they're still growing incredibly fast for a company doing as much revenue as they are, Amazon is officially at a higher run rate of revenue than Walmart, making them the highest revenue company in the world. They're optimizing their delivery fleet, building out automated warehouses with artificial intelligence and robotics.

They're building out drone delivery. They're putting satellites in the air similar to Starlink. This company has so much opportunity and optionality. And right now it trades at a 36 Ford PE ratio, a 29 PE ratio on next year's earnings. So I think Amazon is a buy today. I continue to hold my full position. Now moving on, we get to the news that Expedia Group reported their earnings yesterday.

This is a company that I don't think there's that many people invested in, at least that I talked to. It's a company that has struggled to grow because it's mostly confined to the US market. But it is a little bit of a read through from Expedia into Booking Holdings. Booking Holdings is a company that I am invested in. I have a large stake in this company, so I am interested to some degree in Expedia. Now, I won't go through all of it, but just to highlight a few

things. Expedia's reporting on travel, generally speaking, they reported a strong Q4 result with double digit growth in room nights, gross bookings and revenue. The CEO noted that they had better than expected travel demand in Q4. And then in terms of future outlook, they said they're growing their gross booking range to around 4 to 6%. The results were strong for Expedia. Now, Booking Holdings is a much stronger company than Expedia.

They've capitalized on the European travel market, which is much more segmented and in need of an aggregator. And that's why Booking Holdings today is up 2 1/2 percent. It's doing well in a red market. I already expected a strong report from Booking Holdings this quarter, but the Expedia

report further solidified it. Now moving on, we get to the news that Bill Ackman has revealed a new position in his portfolio and that is none other than Uber. This is really exciting to see. I'm actually happy about this because it's just a fun thing when a big time investor, someone that's very public, someone that has a history of, of really good returns, buys a position in a stock you own, It's just a really fun thing. It validates your position.

It, it creates a little bit more opportunity for discussion. And in some cases, Bill Ackman will also release really good research on the company. Now, he's done this before. In fact, one of the companies he entered into was Netflix. Netflix was one of my highest conviction picks before Bill Ackman entered into it. But having him enter into the position when the company was in question, when things were uncertain, gave a bit of validation.

It felt good to have him be part of the group and be part of the the shareholder members for Netflix. So I felt a little bit validated with him being there and as well as entering into the position, Bill Ackman released really good research on Netflix. I thought it was spot on. In fact, everything he said in his original research of Netflix was correct. Now with Netflix, we know the

story. Even though Bill Ackman did incredible research on the company when first initially entering into the position, unfortunately, he got cold feet. He sold out after a really bad quarter at almost the complete low of the company. He sold Netflix at a stock price of $220 per share, and he lost around $300 million on that position. It was such a sad thing. I so wish he didn't sell Netflix.

It would have been such a cool thing had he just kept in the position or even better yet, doubled down. Netflix would have been a crown jewel. Currently in Bill Ackman's portfolio. So that was a big bummer for me when he sold, but I understand it. He became a little bit nervous about the future and decided to jump ship.

Now, regardless of the mishandling of the Netflix situation, I believe that Bill Ackman is an incredible investor and overall he makes some mistakes like any other investors, but he's had good performance in aggregate with his portfolio. And generally speaking, I really like the research he does on companies. So I'm excited to see when he dives into Uber technologies more. But here's what he said so far.

Beginning early January, we begin acquiring a position in Uber. Today we own 30.3 million shares. I've been a long term customer and admirer of Uber, beginning when Edward Norton. I believe that's the movie actor. Showed me the app in its early days. I was also fortunate to be a day one investor in the company through a small investment in a venture fund. While a great business, Uber suffered from erratic

management. The CEO, Dara has done a superb job in transforming the company into a highly profitable and cash generative growth machine. We believe that Uber is one of the best managed and highest quality business in the world. Remarkably, it can still be purchased at a massive discount to intrinsic value. This favorable combination of attributes is extremely rare, particularly for large cap companies. We will have more to share about our thinking on the company shortly.

So right there, he lets us know that he's going to release one of his Bill Ackman presentations on the company's fundamentals. And I love diving through those. I'll be going through it as well on this channel now. Uber's up around 10%. It was up around 4% before this news and then another 6% when Bill Ackman released this. So it's having a great day, but Uber's a rather volatile stock at trades. It's up and down pretty erratically over time.

I want to share a few thoughts on Uber generally speaking. I've talked about this company a number of times and have continually highlighted that I believe Uber does well in nine out of 10 scenarios. That's the equation. That's where I put this company. I think in nine out of 10 cases, this one does really well. So the odds of Uber investors making money, I believe is really good. When the odds are either equal or working against you. That's gambling. An investment in Uber is not

gambling. You're more than likely going to make money. Another thing that I want to comment on, investors will look at this move today. They'll see the 9% and they'll think, Gee, I, I want to get in this company. I'd like to follow Bill Ackman, but I just need to wait for a dip. I need to wait for it to go back down so I can feel like I'm getting a deal. And I think that's the complete wrong way to look at these moves. We know it's up 21% year to date, but Uber is flat.

It's only up 7% over the entire previous year. If you're buying it today, you're not buying it at some significant spike. You're not getting a terrible deal. And furthermore, as investors, we shouldn't be looking at the historical price to determine whether or not we're getting a good deal. It's true that Uber is up a lot since the lows of early 2020, but Uber is far more profitable, far bigger today, far more established than it was during this time period.

The risk has gone down substantially. Every key performance indicator of Uber shows substantial growth. The revenue is growing at 20%. The monthly active users on the platform grew to 171,000,000 last quarter. That's percent. This isn't just a ride sharing application. It's like a fully blown massive ecosystem similar to a social

network. In the last 90 days, Uber completed 3.07 billion trips, 3 billion with AB Comparing the scale that Uber operates at this something like Waymo currently is like comparing a drop in the ocean. Even though Waymo and Tesla can potentially scale up over time, there's going to be significant challenges and hurdles in that type of heavy CapEx scaling before it gets anywhere. They're close to a $3 billion trips per quarter.

Stocks don't have memories. And as we look at the price of Uber compared to the valuation, we see a company trading at a 30 PE ratio growing earnings rapidly, a 23 PE ratio on 2026's earnings. So the PE is going down dramatically year by year because the expected growth rate is so high. When we look at the free cash flow yield, Uber trades at a free cash flow yield in line with the S&P 500, but it's growing its free cash flow per share far faster than the S&P 500.

The big question for this stock is how it's going to handle the robo taxi developments that will happen over the next 10 years. That is a major concern to the terminal value of this company. And we've had some more clarity and at least more explanation from the leader of the company on what he expects with the developments of Robotaxi that there's still belief.

Even though Waymo's doing 150,000 a week, which I'm still thinking is not all that big, that there is an existential threat from autonomous vehicles away from you, and that that could be some sort of overhang where people are saying I'm scared, well, I think. Autonomous introduces both uncertainty and a huge opportunity for us.

If we look at the US market for example, we think autonomous alone in the US can be a trillion dollar market and the tech is definitely get there, getting there, but the commercialization is going to be much more challenging, right, to be able to deliver autonomous at scale. For perspective, we're doing 33 million trips a day, right? Those are the kinds of scale that we operate at. Did you catch that? He just said we're doing

133,000,000 trips per day. Now again, I want to reference where Waymo is at, which I'm very bullish on Waymo. I think they're doing a great job. They're doing 150,000 trips per week, 150,000 trips per week, compared to 33 million per day. But what he goes on to explain even further stresses and emphasizes the difference in scale and operations of what Uber is doing and a bunch of stuff. Has to come together first. The regulatory environment has to get there, right?

And it's national regulation, state regulation, city regulation. It's going to take some time because regulators need to get comfortable with this new technology that's operating in the streets. Cost of a mistake is is really high. 2nd, what you need is a superhuman safety record. Like the opportunity that you have with these robot drivers isn't just to be better than humans. They could be multiples times

better than humans. And I think the industry should take that opportunity and increase the bar on safety appropriately as a result of this incredible opportunity. Third, you need to mass produce these cars affordably, right? It's not about 100 cars or 1000 cars. You need hundreds of thousands of cars. That is going need to take a while and the OEM industry is definitely taking notice. They're investing, but you know these vehicle platforms takes years to develop.

Then once you have the vehicles, you need to operate them on the ground. Fleet operations. It's a ground kind of game. We're very familiar with that. We already have fleets all over the world. And then you need really high utilization because the cars are expensive. You need to operate them at high utilization both during peak times and during trust as well. The only way you bring all that together this commercialization is with Uber and the AV industry.

It's going to take a while. As that time passes, you're going to see a lot of autonomous players coming in with these big transformer models. With the deep seek moment that we that we saw the development of this technology is going to be cheaper and cheaper and cheaper. But we think that with the safety promise and with a partnership like ours, we can build autonomous to be a very, very good whether it's. Assessing demand, fleet management, navigating local laws, Uber is a key ingredient

in all of that. So the way that Uber's positioning themselves is to be at such significant scale that they are going to be a requirement to work with to make autonomous vehicles successful and profitable. And an attempt to circumvent Uber will be very difficult to compete with their scale. Whether you're a robotaxi or not, the story behind Uber is a good one. Massive network effects, dominant scale combined with a

low valuation. And if investors can work their way past the threat of robotaxi, an autonomous vehicle, the stock will meaningfully move higher. So I'm still considering whether or not I should enter into a position, whether or not I should follow Bill Ackman into the SPY and make some money on Uber. I think in most cases, investors that buy here are going to make money, and I don't say that about every company. When Bill Ackman bought Nike, this wasn't one that I was considering buying.

I never jumped into it. I never really wanted to own Nike, even though Bill Ackman just purchased a big position. I like Uber stock a lot more than Nike, and it's one that I'm still seriously considering. That's going to be it for this episode. Hope you enjoyed. See you in the next one.