Will Meta and Microsoft's AI Investments Pay Off? | Pivot

1. KSKara Swisher0:00

   We've got more tech earnings to discuss. So much going on. Let's start with Meta, whose shares jumped in extended trading Wednesday after the company beat estimates for revenue and profit in the second quarter. Advertising revenue was 22% from a year earlier, and the strength of that business seems to be offsetting concern about heavy spending on AI, which I think is necessary for them. The AI spending will be increasing with Meta upping its expected 2024 capital expenditures to at least 37 billion. We're done with the Metaverse, now we're spending the money on AI. Um, Meta shares did sink on the AI spending news last quarter. Um, the market seems more optimistic because they've got a really good business to get them there, I guess. Um, there's not, still not a lot to show for these AI investments and a lot of investors are worried about where the payoffs are. Um, how long will investors wait to get a return from Meta? Um, and I'll just go through Microsoft earnings really quickly. Microsoft was less, they were less enthusiastic about those, which were a mid of a, bit of a mixed bag. Overall sales and profit growth beat expectations in the latest quarter, but revenue for the company's Cloud business rose 27%, slightly below the prior quarter and analyst expectation. Shares were down about 3% on Tuesday after the earnings report, but rebounded for the most part the next day. Um, so talk a little bit about the, about the two companies. Thoughts?

2. SGScott Galloway1:10

   Yeah, there's just no denying it. Meta, (sighs) I mean, uh, Meta, their earnings were up, their earnings per share were up 73% year on year. Their ad impressions and average price per ad both increased 10% year on year. I mean, that's incredible. The average price and the number of impressions up 10%. Three and a quarter billion daily active users. So 40% of the planet is on a Meta platform every day? Uh, the only thing that's giving anyone any pause, and it depends how well they're positioned, is they said, they warned that CapEx growth for AI will grow significantly, and they've said that the amount of compute needed to train LLaMA 4 will likely be almost ten times more than we used to, uh, what was used to train, uh, LLaMA 3. And people are sort of, when they get a little insecure about this, they immediately go to, similar to what they did in '99 when they went to Cisco, they go to the infrastructure place. Because if you look at the CapEx for the software layer, Microsoft, Meta, Google, and Amazon, their CapEx is up 31%, but their revenue's only up 19, whereas the hardware layer, you know, where you go first, NVIDIA, AMD, Arm, their CapEx is actually flat to even maybe down 8% depending on how you calculate it, but their revenue's up 146%. So it feels like a safer, a safer play right now, because since reporting their earnings, Microsoft and Google, the software stack or part of the stack, have declined two and 6% respectively. When AMD reported, it was up 8%, but the, the software layer, although it, is that true? Meta was up but Microsoft was down. But the thing that freaked everybody out on the Microsoft call was, uh, just their, I think it was like they announced something like a 78% year on year increase in CapEx to 19 billion, which is a staggering increase. And get this, the entire tech industry is in such a spending spree, the capital expenditures of Amazon, Meta, Microsoft, and Google this year will be about $200 billion. That's double what the US government spends on homeland security. I mean, this is, these numbers are just staggering.

3. KSKara Swisher3:16

   They are. They're staggering. Whether they're going to get the money back is a real question. There's, I think pretty much OpenAI is making money, but who else is? You know, this, and this irritating VC, I'm not even gonna name him, was, was asking, um, I was having lunch with Sam Altman, was asking like, "Is anyone gonna make money here essentially?" And I think everyone's worried about that, is, uh, is, is this spending going to result in, you know, growth that, that, that meets the amount of money they're spending? I don't see they have another choice but to spend, correct? Uh, it's, this is not the Metaverse. This is a really critical shift in computing. I don't know how... They can't not invest.

4. SGScott Galloway3:48

   This is, I mean, all systems are go here. This is, this is, I mean, as ex- as much excitement as there was about the web, even though the revenue is scant relative to the investment, it's dramatically greater than the revenue anyone was getting from the web in the '90s. So everybody is going all in. And also, it plays to their strength in this, in the sense that they already have a captive audience to, to roll out AI applications to. And also, they've learned from the father that if you have the advantage of cheap capital, you leverage that advantage and you go hard at CapEx to try and pull away from everybody else. So they're doing that. They're like, "Look, our advantage is we have access to cheaper capital because of our market cap and our PE, so we are going to turn on the spending jets." Here's a fun stat. 40% of S&P 500 companies discussed AI in their earnings calls. I mean, for, (laughs) you know, what is it? Only like 20% are tech companies. So even non-tech companies are talking about AI in their earnings calls. That's up from 1% of them five years ago. So this is, this is a tidal wave that is just sort of, this is the tail wagging all dogs.

5. KSKara Swisher4:53

   So money well spent or we don't know yet, or impossible not to spend?

6. SGScott Galloway4:58

   Uh, I think it's money very well spent for some players. Unfortunately, existing players who are running away with it. I do think there's a, a, a jump on the bandwagon. I, I don't think... I, I think a lot of analysts are gonna say, and I don't know if Nestle's doing this, but I think a lot of analysts are gonna say to some of these second-tier or consumer companies, "Okay, rent AI, uh, um, spend money on it, but you shouldn't be spending CapEx on it." 'Cause I've heard about some companies that are trying to develop their own LLMs and going very hard at this, but the stat I've seen that just absolutely blew me away, we tried to pull together some data on this, is that if you look at the actual amount of revenue that AI applications are generating right now, you know, OpenAI or ChatGPT, the subscription, things like that, it's about, um, $20 billion and it's inspired a market capitalization increase. And this includes the amount of money that companies are spending on GPUs. But it's inspired a three trillion dollar increase in market capitalization. So right now, the industry notionally is trading at 150 times revenues. And that just does not feel sustainable. That means the revenues these applications are garnering has to, you know, double every year for the foreseeable future, which is a, you know, that's a big ask.

7. KSKara Swisher6:08

   I don't see how they avoid those, these spends. I just don't see how they avoid them.

8. SGScott Galloway6:11

   Yeah, it's an arms race. They have to do it.

9. KSKara Swisher6:14

   It's an arms race.

Episode duration: 6:19