00:00Josh, good to have you on this morning.
00:02Timely, after those results that we've seen yesterday,
00:05quite a divergence between Microsoft and Meta.
00:08So I guess my first question is,
00:09when do investors stop rewarding CapEx
00:14when it comes to AI and actually start looking at results there?
00:18Or has that already started happening?
00:22Look, I certainly think it's already started happening,
00:25and I think we've seen that with the divergence
00:27between Microsoft results and Meta's results today,
00:30I think that's the biggest divergence you're going to get.
00:33If we look at Meta, ultimately,
00:35they're spending hyperscaler money
00:37without the hyperscaler business behind it.
00:39They don't really have that cloud business.
00:42And yes, there's promises of compute being sold down the line,
00:46but at the moment, pretty much the only way
00:48they're making returns off of their CapEx
00:51is through the ad business.
00:52Whereas when you look at the Microsoft results,
00:55it's a completely different picture.
00:56Essentially, it was the template for what markets wanted
00:59from the AI spending right now.
01:02CapEx was up 70%,
01:04but cash flow was beat by 40%.
01:07And that told us it's a business
01:09that can comfortably keep spending on this build-out
01:12without bleeding cash to do it,
01:14and whilst growing Azure at the same pace,
01:16accelerating co-pilot adoption.
01:18And I really think the market rewarded
01:20that disciplined CapEx.
01:21So I think, look,
01:22we're certainly looking at those numbers,
01:24but it's got to come from a place of, yes, growth,
01:27but also not eating into those cash flows.
01:31And Josh, I was taking a look at your notes from this morning,
01:34and you say something about Meta.
01:35I think you alluded to it just now as well.
01:38You say that the core business is not broken,
01:41but we're still seeing investors not reacting very positively
01:44to those earnings that have come out,
01:46especially when you contrast it against Microsoft.
01:49Do you think that Meta has a crisis
01:51when it comes to its vision,
01:54long-term vision,
01:54when it comes to AI
01:56and all these products that they've launched?
02:00Look, I think the problem is
02:02is they know they need a second engine.
02:03As I say,
02:04nothing in the core business at the moment
02:06is a problem.
02:07Revenue was up 28%.
02:08Ad impressions were strong.
02:10Pricing was up 12%.
02:11So the machine that's funding all of this
02:13is working as it should be.
02:15But as you say,
02:16the problem comes from margins down,
02:18cash flow falling,
02:19and capex rising,
02:20and markets want to return.
02:22And when you've got
02:23sort of third quarter revenue outlook
02:25that came in slightly below forecasts,
02:27it's essentially saying,
02:29look,
02:30Meta is asking the market
02:31to fund this increase
02:33without sort of a clear acceleration
02:35in near-term growth.
02:36And I think that,
02:37look, let's remember,
02:38we've also got this slight hangover as well
02:40when it comes from spending at Meta, right?
02:43We've still got this sort of worry
02:45that Zuckerberg spent billions of dollars
02:47a long, long time ago
02:48on the Metaverse.
02:50And Zuckerberg still seems pretty determined
02:53to keep spending,
02:53which, look,
02:54we're okay with,
02:55but it becomes hard to justify
02:57when capex keeps being revised higher.
02:59I guess the positive is that,
03:02yes, you can slow down your capex,
03:04but if you're missing on revenues,
03:06that's when the fundamental issue comes through.
03:09And I think that miss on guidance
03:10is what the market is focusing on.
03:13Yeah, but it also shows
03:15the market selectivity,
03:16really,
03:17when it comes to AI spending the capex.
03:19I mean,
03:19as you have just mentioned,
03:21so when it comes to that selectivity
03:22and the market really rewarding capex
03:25in the first quarter of the year
03:27and then a little bit,
03:28we saw that into the first month
03:31of the second quarter or so.
03:32But now the market
03:33is really looking at capex
03:34as a sign to punish those companies.
03:37So I guess the question here is,
03:39do you see that will,
03:40do you think that we'll see
03:42a rotation out
03:43of those hyperscalers
03:45into smaller names perhaps?
03:50Well, I guess the focus
03:51is what we've maybe seen
03:53from the likes of your Samsung
03:54and your SK Hynix, right?
03:55Those capex bills
03:57usually find their way downstream
03:59and into those sort of memory names
04:01and wherever we're seeing the bottlenecks.
04:03So a lot of the trade
04:04over the last sort of few months
04:05has been the infrastructure
04:06of this AI build out
04:08and maybe not in those hyperscalers.
04:10I think Meta was a good example,
04:13again, in terms of,
04:14you know,
04:14they talked about several ways
04:15to monetize,
04:16you know,
04:17compute over time,
04:18but they don't really have that
04:20at the moment.
04:21I think what we're seeing
04:21from the likes of SK Hynix,
04:23Samsung,
04:24Micron,
04:25we're seeing huge numbers printed
04:26and huge returns
04:28and that's coming
04:29from the hyperscalers.
04:30Yes,
04:31the market is maybe punishing
04:32a little bit of that capex
04:33at the moment
04:34because we haven't seen
04:35some of the return
04:36the market expects.
04:37I think Microsoft,
04:38though,
04:38is a good example.
04:39Very early into AI
04:41and is now sort of being rewarded
04:43through that,
04:44through CoPilot,
04:46you know,
04:46and through that Azure growth.
04:47But yeah,
04:48look,
04:48I think that ultimately
04:49we're seeing the money
04:51flow downstream
04:52and, you know,
04:53we are seeing some rotation
04:54into those names,
04:55but also the market
04:56is just genuinely worried
04:57about if there's going
04:58to be oversupply
04:59and yes,
04:59we're hearing a lot
05:00about demand talk,
05:02but again,
05:03we want sort of cold,
05:04hard numbers
05:04and it's really hard
05:05just to look at that
05:06forward contracted revenue
05:07because there's a lot
05:08being spoken about it,
05:10but we're maybe not
05:10seeing it right now
05:11and that's what's unnerving
05:12investors a little bit.
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