This is an audio transcript of the Unhedged podcast episode: ‘Magnificent 7 report’
Robert Armstrong
Just in the last week or so, four of the largest companies in the world have reported quarterly earnings: Alphabet, Meta, Microsoft, Tesla.
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Today we’re thinking about the Magnificent Seven, those four, and three more. We’re rethinking the whole category.
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged world headquarters in beautiful and unseasonably warm New York City. I’m joined today by a new colleague, John Foley, who is the new Lex writer here in New York, covering technology. He’s a man of deep wisdom and wide experience. Welcome to the show, John.
John Foley
Thank you for having me, Rob.
Robert Armstrong
So I propose that we take these in descending order of size, and I talked about the ones that just reported. But let’s talk about the big daddies first. Nvidia and Apple are both $3.5tn, numbers so large I can’t even conceptualise them. Where are we at on those two?
John Foley
Those two are the easy ones to start with. This story is all about AI. It’s all about who’s spending what and who’s making money and Apple and Nvidia are the two . . . They’re probably it’s easiest to say that they’re making money out of real stuff. But these are the two that sell objects, which distinguishes them from the others that we’re gonna talk about.
Robert Armstrong
And the object with Nvidia we talk about is they’re selling the shovel in the gold rush, to use everyone’s favourite metaphor. Everybody wants to be in AI, and to be in AI you’ve gotta buy bits of kit.
John Foley
You have to buy silicon. You need datacentres with chips and the chips are made by Nvidia and all of the other companies that we’re talking about basically to varying degrees are buying stuff from Nvidia today to build these enormous datacentres.
Robert Armstrong
I find Nvidia the scariest stock for a number of reasons. It’s run up in the last five years something like 2,600 per cent. It’s like when does the gold rush end with them? You’re kind of guessing either when do people stop trying to super-invest in AI or when does somebody else have a chip that’s almost as good as an Nvidia chip so their monopoly is broken?
John Foley
That is a great question. And there are companies that are trying to build chips that are decent rivals to Nvidia. They’re just not doing very well at the moment because chips, it’s just one of those businesses that the more you do, the better you are obviously. And Nvidia, which kind of got where it is by accident, used to make these chips that were used for graphics, basically.
Robert Armstrong
Yes. It was a videogame chip company.
John Foley
It was a videogame chip company. And then they . . . Well, they didn’t even discover, other folks discovered that these chips were perfect for the kind of repetitive calculations that you need to do AI. And Nvidia is now, as you say, a $3.5tn company. But there are companies that are trying to nibble away at the edges. They’re just not making much impact.
Robert Armstrong
It’s weird that the two biggest of the Magnificent Seven, Nvidia is by far the fastest growing. You know, it’s just, you know, like sales over the last three years are like plus-60 per cent a year, 70 per cent a year. The other biggest company, Apple, same market cap, is by far the slowest growing. So it’s going along at single-digit growth levels and it’s worth $3.5tn. It’s sort of an interesting contrast.
John Foley
And if you think that Nvidia is the purest play investment in AI right now, Apple is kind of, in very broad terms, it’s like the opposite of that. I mean, it’s obviously deeply connected to the fortunes of AI through its handsets, through its smartphones, which will be AI-enabled. But at the same time, it’s not investing quite as much in these kind of very speculative large language models that Meta, Alphabet, Microsoft they’re kind of tossing tens of billions of dollars into this pot, hoping that something will come back in future, but not really knowing for sure how much that’s gonna be. Apple at least is, like we said, selling objects, admittedly at a slower rate.
Robert Armstrong
And you can kind of see a world where this turns out to be a brilliant strategy for Apple in that they’re like, we’ll let you guys cut each other’s throats for a few years and whoever comes out on top, we’ll let you put our AI on to our handsets, which everybody uses. So you’re gonna have to deal with us. And so they kind of can reap some of the investment without having to make it.
John Foley
Yeah. And we’ll still buy their pretty items.
Robert Armstrong
Yeah. In a couple of years, we’ll know if that was the brilliant strategy. Moving on. At $3.2tn, Microsoft. Investors seem to be a little disappointed with their earnings. The stock is down, it was last night, and the stock is down a couple of ticks this morning. What’s going on there?
John Foley
Lunacy is what’s going on, Rob, here, I have to say. (Robert laughs) For Microsoft, it’s the first quarter. Strangely, their year goes and stops at a funny time. But they came out with what actually looked like really good earnings. They had very strong earnings growth. Their revenue was growing very quickly. Their cloud, their Azure sort of cloud product is growing at 33 per cent a year. You know, if you invested in Microsoft five years ago, you would have tripled your money now.
But there were these kind of tiny disappointments. But the disappointments, the short-term disappointments are things like, as you’re growing at 31 per cent next quarter instead of 33, for example.
Robert Armstrong
Yeah, it’s crazy.
John Foley
Like, there is still a lot to be very positive about in these results.
Robert Armstrong
It’s often not appreciated what incredible things happen when you are growing at a rate like that. When you’re growing at 30 per cent, you’re doubling like every two-and-a-half years, right?
John Foley
Right.
Robert Armstrong
You know, it’s like, what that can create financially is just incredible.
John Foley
They’re doing OK.
Robert Armstrong
(Laughter) Yeah, they’re doing OK. You are paying up for it. They’re at 33 times earnings and their total growth is in a kind of mid-teens range if you include all the other products. So you’re not getting all this growth for free exactly. By contrast, say, Alphabet is at like 20 times earnings — a bunch cheaper. But man, it is still an incredible growth story at Microsoft.
John Foley
Yeah, other stuff going on Alphabet and I’m sure we’ll get to that too. But 33 is not crazy if you think that Microsoft has such a sort of chokehold on the market for corporate software.
Robert Armstrong
Yeah, no, I think that’s right. I just feel like of these seven companies, they are one of the most entrenched, you know. You know, I always use this metaphor, but after the apocalypse, when there’s only cockroaches, the cockroaches will be running their office software on Microsoft products. Nothing can dislodge them.
John Foley
That’s true. They might have iPhones as well.
Robert Armstrong
(Laughter) They might have iPhones. But that is going to be what it is.
OK. We are moving briskly onward. So disappointment at Microsoft, but disappointment from a point of extremely high expectations.
Moving down to the smaller companies, both Alphabet and Amazon are about $2tn companies. Which would you like to talk about?
John Foley
Well, so Amazon, at the time that we’re recording this, has not reported its results. People will be focused on Amazon Web Services, which is the cloud-y kind of bit.
Robert Armstrong
The equivalent of Microsoft, as it were.
John Foley
Basically, yeah. And it seems that analysts are expecting growth of about 20 per cent there, which is, again, for a huge company is no mean feat.
Alphabet, we have those numbers. Again, like Microsoft, the numbers were really good and actually the market was a bit more favourable towards Alphabet.
Robert Armstrong
More pleased.
John Foley
Yeah. And the thing with Alphabet is that Alphabet obviously owns Google. Alphabet is developing its own AI models. Gemini is its big AI product. It’s also starting to integrate them into the stuff, the advertising and search that it does on which it has effectively a monopoly. And so it’s kind of showing — and actually this is a theme for the whole sector, that all these companies are now trying to show that AI is actually doing stuff, that they’re making money from actual real AI things, that it’s not just like a kind of weird tech bro fantasy world.
Robert Armstrong
Bet on the future.
John Foley
Yeah, exactly. And so they’re all coming out. What’s been interesting this quarter so far is that they’re all coming up with these little snippets, these factoids about things that they’re doing with AI. Google is quite good at that. The one that stuck out to me was the fact that a quarter of the new code that they’re producing is now written by AI, which obviously sucks if you are a developer who spent the pandemic going through boot camp to become a coder. (Robert laughs) But it’s great for Google and it’s great for their investors. You know, Meta, which we’ll get to too, had lots of little snippets.
Robert Armstrong
Just lingering on Alphabet/Google a little bit, I think it’s interesting that it is now — and almost always is — on most valuation metrics the cheapest in the group. And I don’t know how you, why you think it is. One explanation that is often given for this is ultimately they are in a cyclical, economically sensitive business. You know, ultimately what makes all the cash? There’s a lot of technology. What makes all the cash there is: selling ads. And advertising spending is cyclical so you’re exposed to the economy. So that goes, investors like stocks that are steady earners. There might be a little more cyclicality, but I wonder if that’s kind of the whole story why that stock is cheaper.
John Foley
I think that is part of it. There is also some other stuff that is quite hard to quantify, like the worries about a break-up. And obviously, Google is facing various antitrust challenges. It doesn’t seem to me like Google is going to be broken up in any meaningful way and they will just appeal and appeal and appeal and they have lots of money to spend on lawyers.
Meta though, Facebook is also advertising-reliant, so . . .
Robert Armstrong
Yeah, they are sensitive too and we’ll get to them in a second. But one word about Amazon. I mean, my favourite thing about Amazon, both as a consumer and almost as an investor, is they do have this very real-world business of bringing things to your house that you want, and I use it a lot as a consumer. And the thing that’s nice about that business is that it’s not a bet on the future. It’s a low-margin, capitally-intensive business with actually good returns and its meatiness, its real-worldliness is a huge competitive advantage. Like, whatever happens to the world, I’m still gonna get crap sent to my house and it’s probably Amazon that’s gonna be sending it.
John Foley
Yeah. And these two businesses are kind of not mutually exclusive by any means, but you can have one without the other. If anything goes wrong in AI, Amazon will still be a big retailer that ships stuff you don’t need to your house.
Robert Armstrong
I don’t know about you, but I need all that stuff.
OK. Now we are approaching the smaller companies — Meta, one of my favourite stock charts. Mark Zuckerberg spends a year or two rattling on about the metaverse, whatever that is. He cuts his stock in half, but he’s gotten religion and the stock is more than back. What’s the story? What’s the comeback story there?
John Foley
Meta typifies for me the real story about AI, which is about massive, massive investment in things that don’t yet exist but might be amazing. And Meta stock stumbled a bit after it came out with its earnings for this very reason. So they came out with earnings that were great. Everything’s pretty good. Growth is really rapid. Revenue’s good. It’s getting more efficient, margins are going up. But Zuckerberg also said, I’m paraphrasing, but he basically said you investors aren’t gonna like this, but I’m gonna spend a metric tonne more money on AI. I’m not gonna tell you how much, but it’s gonna be a lot more, so . . .
Robert Armstrong
It’s gonna be whatever. It’s a number that you are not going to like. (Laughter)
John Foley
He literally, that was the gist of what he said. And investors don’t like that because these valuations are all very vibes-based at the moment. We’re talking about these kind of short-term disappointments and Meta had a couple of tiny disappointments, I think. Analysts are saying that the user growth was not quite what they . . . Well, for next quarter it’s not quite what they want. But we’re talking about 3.3bn users. So again, lunacy to think that is a significant valuation driver.
Robert Armstrong
How enduring do you think their social media businesses are? Facebook, Instagram; you know, I don’t know if they even make money from WhatsApp or whatever, but are these businesses in danger of disruption by the next big thing?
John Foley
I don’t . . . So the thing that would suggest that’s not a worry is just the sheer size of the universe of people who are using their products. So if you think about the number of people who are using Facebook, just the Facebook app, it’s not easy, but it’s possible for Meta to shovel those users into its other products. So it’s launching things like Threads, which is a kind of Twitter/X-like product which now has 275mn users. Once you’re in that universe, they can point you in different directions. And it’s very difficult for others to really get a look in. And I think Facebook is really good at social media. It’s channelling a lot of its AI investment into making the feeds that you see more sticky. Addictive is not a word they would use, but it’s definitely what I would use. And that’s actually working. And one of their factoids from their earnings was that people are spending 8 per cent more time on Facebook as a result of the AI curation of the feeds. So they’re getting better at keeping us hooked.
Robert Armstrong
Good news for them, bad news for humanity.
John Foley
Yeah, bad news for brains, bad news for attention spans, great for Meta investors. But the investors are struggling to really buy into that at the moment because a lot of it is so uncertain. The financial returns of it, I should say, are quite uncertain.
Robert Armstrong
All right. We have just run through, John and I, the six largest publicly traded companies in America and I think the world. There might be some like Chinese bank or something globally that’s bigger somehow. We’re going to skip to a sad little company that’s not even worth $1tn, namely Tesla. However, on the way to Tesla, we are going to pass and wave at a company that is larger than Tesla, which is a little conglomerate called Berkshire Hathaway that has utilities, railways.
John Foley
Makes cowboy boots, doesn’t it?
Robert Armstrong
Yeah. Makes candy, makes running shoes. One interesting thing about Berkshire Hathaway that we should note in the current context in passing is that it used to be about a third Apple shares. They had this huge bet on Apple, but they’ve actually been making it smaller lately. They’ve been selling Apple shares. I don’t know why, but this is interesting. So wave at Berkshire Hathaway in passing. And we arrive at Elon Musk’s car and robotaxi and robot company Tesla. They had a good quarter and the stock went up. What do you think?
John Foley
So if Tesla were a car company — let’s imagine that it were a car company — it would be doing quite well. And what we saw from its earnings was that the car business is actually, it’s doing pretty well.
Robert Armstrong
It’s growing.
John Foley
Like, you know, it’s growing. It’s doing the things investors would want it to do. The thing about Tesla, though, is that it isn’t really a car company. Elon Musk is not really even pretending it’s a car company any more. The valuation, which is the last time I looked about $750bn, is definitely not that of a car company of Tesla’s size. So Tesla is now an enormous VC-style bet on something — I think like robotics; also maybe AI a bit, like sort of in a kind of indirect way because AI will power a lot of the robots and the robotaxis.
Robert Armstrong
I’m gonna force you to give the bull case on this huge VC thing, and I’m gonna do that by giving you the bear case. So first of all, the car company’s in trouble eventually because it’s not gonna be the low-cost producer of electric vehicles. That’s gonna be one of these companies in China. That’s problem number one.
Number two, on the robotaxi business, they’re miles behind Waymo in terms of their technology, which is owned by Google. And on the robot business, I don’t want a robot. They’re creepy. I don’t want one of these human-shaped things skulking around my house, menacing me.
John Foley
Strangling you in the night.
Robert Armstrong
Exactly. (Laughter) So tell me why I should put my money into this massive VC fund led by a mercurial genius.
John Foley
So one reason is that the robotaxi business, while the technology is different from the technology Waymo is using and they have many regulatory hurdles to jump in order to be allowed to drive around on the streets of the cities that we live in, that doesn’t mean that it’s necessarily a worse technology. Tesla’s approaching this in a slightly different way. And it could . . . We’ll see. We’ll see. It’s all up for grabs. No one, you know, Elon Musk says things, promises things and they don’t happen. We will see.
But certainly the idea of robotaxis is a very compelling one. Musk is talking about turning the whole national fleet of Tesla’s global fleet, I guess, of Teslas into a robotaxi fleet. The idea being you buy your Tesla; when you’re not using it instead of just sitting in your garage it drives around picking people up and you hope that they don’t like, drop a Big Mac in the back seat and like, spill the, you know, Shake Shack shake all over your dashboard. But in theory this is a really interesting idea.
Robert Armstrong
And you get paid, so you can use the money cleaning your car.
John Foley
Yeah, exactly. So there’s the Optimus, this humanoid robot from Tesla. Like, I too worry about Optimus killing me in my sleep. But it’s certainly an interesting idea of humanlike androids that can do stuff that we need them to do. Like, I dread this world that we’re heading into, but you can see that it could potentially happen. And it’s plausible that Tesla is further ahead on this than any other big company that is currently investing in it.
So Musk has agreed with other people who’ve said that robotaxis could be a $5tn business for Tesla. He’s also agreed with people who’ve suggested that Optimus the robot could be worth more than $10tn. Put those together and even if the car company goes to zero, you’ve got a $15tn company, which would instantly go to the top of the list of companies we’ve been discussing today.
Robert Armstrong
Elon Musk is full of hyperbole. He acts weird, but he has been known to get a lot of things done. You know, he makes things happen.
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And we will make some things happen after the break.
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Welcome back. This is Long and Short, that portion of the show where we go long things that we like and we go short things that we don’t like. John, would you like to buy or sell something?
John Foley
I would like to buy — not in a strict investment sense — but I would like to buy Reddit. I’m just obsessed with it.
Robert Armstrong
So do you skulk around there?
John Foley
All the time.
Robert Armstrong
Yeah. And what kind of things you learn on Reddit?
John Foley
Just what do I not learn on Reddit? Like, everything. There are so many hot takes. And you can also learn anything, like science stuff, recipes. But I’m also fascinated by the business model where basically people just do work for free moderating these subreddits, and then Reddit makes an absolute pot of money off advertising and selling the data. It’s so uncapitalist.
Robert Armstrong
What’s your favourite subreddit and what happens there?
John Foley
Public freak out.
Robert Armstrong
Wow. Is it just people screaming? (Laughter)
John Foley
Yeah. It’s where people post videos of people who’ve reached their Michael Douglas Falling Down moment and they just freak out. And it’s awful. It’s so painful to watch but it’s also completely (inaudible).
Robert Armstrong
I’ve had a couple of those moments. No one was filming at the time.
I am also gonna be long something. I am long consumer sentiment. There’s been a narrative out there that American consumers, American households are very down about everything. And I spent yesterday talking to people who run the big consumer sentiment surveys and they kind of walked me through it and they pointed out sentiment is not that great, but it’s getting a lot better.
And depending on how you cut the data, Americans actually feel OK. Basically, if you don’t mention the word inflation and you ask people, how’s your job, how’s your income, how do you expect things to go next year, as long as you . . . You know, inflation is this big monster in the background. But if you keep the conversation on other topics, on how things are right now, Americans feel OK.
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And on that note, we hope our listeners feel OK, and we will be back to enlighten you further on Tuesday.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
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The Magnificent 7 make up seven of the eight largest stocks on the S&P 500 and they are reporting earnings this week and last. Today on the show, Rob Armstrong and guest John Foley, who covers technology for the Lex column, take a look at all seven – with a nod to Berkshire Hathaway – and ask where they’re headed. Also we go long Reddit and long consumer sentiment.
For a free 30-day trial to the Unhedged newsletter go to: http://www.acphonor.com/interactive/https://www.ft.com/unhedgedoffer
You can email Robert Armstrong at [email protected] and Katie Martin at [email protected].