Google: Strong spending outlook clouds strong earnings

00:00:00: Alphabet's earnings, and more precisely the market reaction to them show that booming cloud growth just isn't enough if it comes with an event.

00:00:09: bigger AI bill.

00:00:10: So both Alphabet and Tesla sold off yesterday in the after-hours trading, that despite delivering strong quarterly results In Alphabet's case free cash flow turned negative Screaming that additional AIs spending that A announced will have to be financed through debt & equity issuance.

00:00:31: and with borrowing costs moving higher these days funding, this massive investment plans is becoming increasingly expensive.

00:00:39: So welcome to Swisscoats daily market talk.

00:00:42: it's Thursday the twenty-third of July.

00:00:45: I'm Ipekos Kardeskaya.

00:00:46: we will talk about what emotions are first set off.

00:00:48: big technology earnings triggered yesterday across a global financial markets in Watson store for central banks but before own.

00:01:00: and this is not financial advice.

00:01:08: So I'm not going to beat around the bush, The first earnings from big technology companies came in strong but spending was even stronger.

00:01:18: that made some investors feel tense When the case of big technology, it was rather tense because Tesla reported a twenty-three percent revenue rise in second quarter this year compared to same time last year when the revenue had taken a dip due some political controversies around Elon Musk.

00:01:38: But this time round, record vehicle sales boat and money.

00:01:42: but AI spending also ate into margins.

00:01:46: so operating margin of Tesla fell from four point one per cent Four percent only.

00:01:52: The company reiterated plans to spend around twenty five to twenty six billion US dollars in Capex this year on AI infrastructure, robotaxies, optimist robots and custom chips.

00:02:04: And investors did not like what they heard and sat in shares down by four percent in the after hours trading over an alphabet.

00:02:12: The picture was pretty much the same.

00:02:14: Google parent Alphabet reported strong numbers at twenty-four per cent rising total sales to nearly one hundred and twenty billion us dollars.

00:02:21: that operating profit rose, thirty four percent over forty billion US dollars and this is the big number.

00:02:28: The cloud business revenue sort eighty two percent has well above the sixty three percent cloud growth that the company reported in.

00:02:38: It somehow came to support the idea that Google is rightfully investing in this AI infrastructure because the business growing and it's growing fast.

00:02:48: What was really interesting, even with these stellar results investors refused to come back on board as a company raises full-year AI spending plans by USUSD USDs to USUSRD R&B to USRD S&P while its free cash flow turned negative!

00:03:06: Yes, Alphabet's free cash flow turned negative in the second quarter of this year.

00:03:12: In other words, the company has burned all its cash and the extra spending will have to rely on stock and debt sales.

00:03:19: And unfortunately The rising interest rate expectations make that cake quite unappetizing for investors.

00:03:26: So despite an eighty two percent growth in cloud sales, a metric that would excite the hell out of investors year ago while Alphabet shares sold off three percent and after hours trading.

00:03:39: So the knee-jerk reaction to Alphabet earnings yesterday sets a tone for the upcoming big technology earnings down the road.

00:03:46: Investors will indeed going be more focused on mounting costs of AI ambition rather than revenue beats, they don't want more spending from Big Technology companies and that even though their spending helps boosting revenue behind the AI race.

00:04:02: On the other side, the big technology perhaps sees this as a short-term paying for long term gain.

00:04:08: but at end of their investors say last word.

00:04:12: But As I was predicting yesterday The higher spending outlook from Alphabet has echoed positively across Asian chip makers pockets.

00:04:23: and here I will bring up again this impressive chart showing the free cash flow flowing from the pockets of big technology companies right into chips to these big technology companies.

00:04:39: So no wonder the Korean Cosby Index which is heavy in chip makers, it's up by three point seventy seven percent at a time.

00:04:45: I'm talking here this morning!

00:04:47: The Nikkei is up also despite the rising pressure on the yields front while TSMC in Taiwan actually having quite hard times this morning catching a bit perhaps as investors are getting increasingly uncomfortable with pressure from Washington in the United States, a move that will obviously increase costs and squeeze margins at TSMC.

00:05:12: Overall more spending announcements coming days and weeks could eventually throw floor under the chip stock sell-off we saw over past week but downside correction in big technology valuations looks set to continue.

00:05:25: Today Intel will release second quarter earnings after closing bell in US looking for strong results positive market reaction to Intel's results as the company sits in the right side of table among those who actually amass big technologies money into their own pockets.

00:05:46: Zooming out though, The global macrocon picture isn't looking any better today than it was a few days ago.

00:05:52: Healthies reportedly targeted two Saudi Arabian tankers at Red Sea in an effort to curb and stop countries' oil exports from the Yanbu port.

00:06:03: The traffic in the Strait of Hormuz remains near a standstill as US and New Ireland continue to exchange attacks on threats, so this situation is not looking any better.

00:06:11: U.S.

00:06:12: crews spiked past the dollar per barrel level yesterday while Brent Crews sold past the dollars per barrel and it's consolidating there.

00:06:20: today that's around thirty six percent higher than July dip And rising oil prices filled inflation expectations and push yields higher globally.

00:06:29: The US two-year yield that best captures the Fed's expectations advanced to a four point thirty percent level, a fresh high since February.

00:06:37: twenty five on rising bets at the Fed will have to raise interest rates in upcoming meetings to fight for its price stability.

00:06:44: The Japanese ten year yield on the other hand console days near the two point seventy five per cent level which is near multi decade high as well as BOJs also expected to normalize its rates of counter-inflation in Japan.

00:06:57: And same is true for the European economies, a benchmark for the EU.

00:07:01: Ten year yield returned to the highs levels since the Iranian war started and rising oil prices pushed the benchmark yielded at three point twenty percent level.

00:07:11: on the positive pressure on the yields front will likely continue along with the positive pressuring energy crisis because not that full point eighty two percent in yesterday's trading session and they're up by around fifty six per cent since their June dip.

00:07:29: All that is obviously being reflected in rising government bond yields.

00:07:32: so today the european central bank is expected to announce no change to its rate policy but chief christen lagart will likely leave the door open for another interest-rate hike, if the geopolitical and macroeconomic situation deteriorates.

00:07:49: Interestingly though, the Eurodollar rebounded yesterday despite rising oil prices.

00:07:53: That was curious, while Cable saw a limited reaction to a set-off softer than expected.

00:07:59: CPI read in the United Kingdom as traders look past actual data knowing that next CPI reading will look hot if nothing with a thirteen percent increase in energy cap in July.

00:08:11: As such rising energy prices remain at the center stage and continue to boost Harkish central bank expectations In very immediate future.

00:08:19: A harkish stone today from European Central Bank could eventually And the reason is that growth outlooks in Europe and Japan are very much dull compared to US is benefiting largely from the AI and huge government spending.

00:08:56: Therefore, any price advance in major payers against US dollar could see a limited upside as long as war in the Middle East and Ukraine drag on!

00:09:05: This episode of Market Talk has been helpful and it's been insightful to you so please do not hesitate.

00:09:21: To leave your comments, reactions and questions below.

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00:09:44: So I will meet again tomorrow and until then good day trading!