We Have a MASSIVE PROBLEM for AI Stocks... (Googles Surprise)

these dirty freaking dogs. I mean, Google's executive team waited over an hour after the earnings results came out to tell us that, yep, we are in fact raising capex guidance for this year. Google stock is down 4% following this quite small guidance raise. It honestly I thought it was going to be bigger, but it highlights we've been correct on this channel. The more Google spends or the more other hyperscalers spend on capex, the more their stocks will decline and the more that brings the AI trade itself or the hardware trade I should say to an end. And in this video, I will explain exactly why that is and why you should be quite nervous about hyperscalers right now and AI stocks. And I do challenge you to watch this video from a neutral perspective and try to understand what I'm going to tell you in this video because it's probably the most important thing that you need to know right now. Do me a quick favor for the YouTube algorithm's sake and hit that like button. Consider subscribing to the channel if you found value or perspective out of today's episode. Okay, so first and foremost, I will tell you these [ __ ] Google's executive team, they waited freaking an hour after the actual earnings came out to raise guidance. So on capex, I should say raise guidance on capex. We had all the other numbers, just this came out way later. And this is really what was going to move Google in the first place. Google, they now see fullear capex between 195 billion and 205 billion. They previously saw between 180 billion and 190 billion. Honestly, I'm a little surprised that it didn't go up more. I was expecting around 220 billion in uh capex for this year. Now, that that just means Google's probably going to come out every quarter and raise capex a little bit instead of giving you the bad news all at once. This is a guidance raise of about $15 billion at the midpoint on capex. They're basically forecasting now $200 billion of spending on capex at the midpoint for this year in which as I've already shared with you guys, Google's numbers just did not look impressive. for a company that's expected to spend over $300 billion of capex next year. The numbers are not justifying that spend. And just in case you missed it, let's run through some of the numbers here. Revenue came in at 119.8 billion, estimate 117 billion. Operating income came in at 40.77 billion, barely meeting estimates of 40.55 billion. Google uh services revenue 94.54 billion. estimate 94.32 billion. Cloud revenue was really the only area that looked decent at 24.77 billion. The estimate was 22.46 billion. Other than that, everything else kind of met expectations. Besides Google search and other revenue that actually missed expectations a little bit and capex came in about $700 million higher than previously forecasted. So really just a unimpressive quarter. for a company that spent $44.92 billion in three months on capex. But the problem with the AI trade and with hyperscalers and AI stocks actually has nothing to do with the numbers that were reported today. It has to do with how the markets are viewing hyperscalers. Number one, how sustainable the capex trade is. Number two, and the fundamental rerating that you are seeing at hyperscalers. And then fourth is the debt problem that is coming. So let me bottom line this before we break it down individually. As Google spends more, Google's stock falls. And you could do this for any of the hyperscalers, right? If they come out and raise guidance, any of them, their stocks are going to fall. That makes it harder to raise capital because Google's going to have to raise over a hundred billion dollars of selling stock of of money next year by selling stock or raising debt. A big way they've actually raised capital is not by adding debt to the balance sheet, but doing shady accounting practices and taking out loans from private credit. And that doesn't work if your stock continues to decline. Google is currently down about 18.5% from all-time highs. It's not really a problem right now, but if Google starts to fall 25, 30%, 40% from highs, it becomes almost impossible to raise hundreds of billions of dollars and continue to spend. Now, the problem with this offbalance debt issue is it doesn't come up on the balance sheet. So, you think the company you're looking at looks great, right? You you think they have very manageable debt. In all reality, it shows up in your operating income. It shows up in your bottom line profitability. And this could be one reason why Google barely met expert expectations on operating income. So, let me bottom line that for you as well. The debt doesn't show up on the balance sheet. kind of shady, but it shows up in operating income, which is going to be under pressure for years based on the$1.8 trillion of off balance sheet debt. So basically, these companies are turning into debt bombs. And if we put it like this, AI is going to bring in about 400 billion or $40 billion worth of AI revenue, which is only about 7 to 10% of the total spending you're going to have for this year on AI. The return is not there to be spending hundreds of billions of dollars on AI. you literally have to be successful with a high margin software-l like tool to justify the spending. So again, outside of all of that, the real problem is if Google and other hyperscalers continue to spend as aggressively as they are telling you they're going to spend, Google today reiterated that capex will significantly rise next year without really telling us what that number is going to look like. Probably means over $300 billion. The stock's going to fall. Google's going to be down 40 or 50% by the end of next year if they continue to spend at their planned trajectory. It is impossible to raise hundreds of billions of dollars, nearly impossible if you're down 40 or 50% from all-time highs, which ultimately adds pressure as well to AI stocks because AI hardware investors, they're trying to figure out how sustainable is the capex trade. And while yeah it it looks great today, the more hyperscalers get punished, the more doubt creeps in about the longevity of the capex trade and the the you know how long are hardware stocks going to do well. Now I bring up Oracle on screen here because do you think Oracle wants to spend $500 billion next year? Probably. Would they spend $500 billion next year if they could or $200 billion if they could next year? Absolutely. Oracle's actually expected to see capex fall next year from about $90 billion this year down to a high of 85 billion next year, kind of a low-end range of about 67 billion next year. Why do you think that's because Oracle wants to slow down capex? Absolutely not. It's because their stock is down 62% from all-time highs. If other hyperscalers fall like this, which they will if they continue to spend because the ROI is just not there in physical AI, right? The ROI will only justify the spending if you are wildly successful in high margin AI tools in which none of the hyperscalers are actually pursuing that. They're just pursuing building the data centers. topic for a totally different video. But that's the point. We already know this is happening with a company like Oracle. They would love to spend. They can't physically raise the amount of capital that they would like to spend because their stock is down so much. And whoever follows a similar Google path is going to look like Oracle stock eventually. The bottom line to this is look, Google, you know, if if they're we'll see we'll see what Meta and Microsoft and Amazon say, but if Google is going to continue to double down on their spending, Google stock's going to continue to fall. You want to stay away from Google stock at all cost, right? You don't you don't want to put any money into Google. But the more Google falls, the harder it is to raise capital and the more pressure also gets put on hardware stock. So, it's kind of a vicious cycle that just doesn't end great. Now, if I bottom line this even further, this could mean that stay away from hyperscalers, stay away from AI hardware stocks because the longevity of that trade slows down and gets worse as hyperscalers stock prices fall. But it could be a positive for the rotation of the markets. You could see other areas of the markets do better. I will also tell you it is a midterm election year. You are heading into your seasonal period of volatility late July, August, September where you do tend to get a correction in the markets before the midterms. Then you tend to rally from like October until July of the following year. So really you want to be positioning for this postmidterm rally. And look, I just don't think we're going into a market environment where more spending is going to be rewarded. you're going to be punished for spending more. And then, you know, eventually some of these companies will be successful in AI. Their spending will slow down and some of the high margin software tools will uh do some of the heavy lifting. But between now and then, Google could fall 50% from highs and it's well on its way to doing that eventually if they continue to spend. It's not my opinion. That's factual. Okay? I'm not a financial adviser, not a financial planner, but look at Oracle, right? Just look at the guy that already did this. Okay. Um, that doesn't mean I'm bearish on the markets. I'm actually really bullish on the markets, but I think it's one of those weird scenarios where you don't want to be bullish on the hyperscalers until they slow down spending, which so far no signs of that. And you don't want to be bullish on hardware stocks either until there's so much pessimism in that space that it makes sense to be bullish on those stocks. I think this is good for the broadening trade, good for other areas outside of hyperscalers and AI stock. You can see the triple Q's are trading lower, down about a third of 1% following these earnings. And yeah, I think this could very well cause that typical premidterm election correction. But again, we do have Meta, Microsoft, and Amazon next week. If Amazon holds their capex guidance steady and they don't signal some kind of massive rise in capex next year, Amazon's going to go up. That's going to offset some of the weakness that you're getting from Google, right? Maybe the same is true for Microsoft. Who knows? We still have other hyperscalers to report. But yeah, you definitely want to stay far away from Google right now. And for now, hardware stocks as well. And I apologize if this hurts anyone's feelings out there. We're not in this for feelings. We're in this to make money. And sometimes the truth sucks to hear, especially on companies that people are really excited about. Like Google, outside of their spending, Google's a great stock to own, but not until they stop spending. Google's going to look like Oracle one day if they continue to double down on spending. And you will have a much better buying opportunity. Again, same for hardware. The more Google gets punished, the more hardware is going to get punished because you can only spend as much as the markets allow you to because people will stop giving you money. And it's fine if you want to run down your cash pile. That's great. Who cares? It's a different story when you are relying on raising capital. and capital markets, they only lend tens of billions of dollars, hundreds of billions of dollars to companies in which their stock is going up, not down. So yeah, my thoughts here, I know this is not a popular kind of a thing to say, but I think it does bode well for software, right? Service Now did very well. Software, I think, is going to come alive uh over the next couple of months, the next year or so. Again, not a popular opinion for a lot of people, but software is a great area to be in. Yeah. Cyclicals, industrials, outside of the AI names, financials, small caps, right? There's other great opportunities out there with much better riskreward profiles. So, heed the warning. Don't let me know your thoughts on this down below in the comment section. Hit the like button as well as subscribe to the channel if you guys have not done so already. Have a fantastic rest of your day and I will see you in the next