Is Google Throwing Money Away on AI?

205 billion dollars. Caught some people on the street by surprise and it looks like they are not as willing to kind of make the long bet. Talk through why you are, why you think that this is a place that you would put your trust and your money. >> That's right. Good morning, Becky. You we're entering this new phase where people are starting to really worry about over you know, over investment in AI and just the surge of competitors coming in. I think the answer to why we remain bullish is found in I asked yesterday the CEO Sundar Pichai, what are your moats, right? It feels like everyone's moving models to the frontier. And every week there's another, you know, model launch. When you think about what Google has as their moats, it's it's pretty impressive, right? They do have a model that's going to keep getting better. It's the infrastructure. You know, it's the diversification of revenues from advertising, it's their balance sheet. So, I think we're entering a period where you're going to start seeing some of of their competitors start to tap out because the capital markets won't fund their growth. I think, you know, over the next 12 to 24 months it'll be obvious that, you know, we know that Alphabet's an AI winner, but the strength of their offering is so much better than their competitors that there'll be some people falling by the wayside, right? So, I can't predict when you'll see people tap out, but the capital markets are starting to, you know, show some doubt on their ability to fund all these ideas. >> Okay, that's interesting though. That That the capital markets think, wait a second, we're not sure we want to see as much capital expenditure go into some of these things. We We may not want to see that investment. Your point is that this is a race that's worth winning even if we don't know entirely what's on the other side. >> Right. So, So, Becky, you know, we've covered a lot of different markets and sectors in our time. A couple weeks ago Oracle's debt was was downgraded to just one level above junk, right? And S&P stepped in and said, "Look, you know, their biggest credit risk is Open AI and we don't think, you know, they're on the brink of getting downgraded again." That's what we've seen in other types of over builds, right? We've seen that in the telecom build, the streaming wars, the dot-com bubble, where basically the debt markets said, "We're not paying for this anymore." I think just given the growth last night you saw at Google Cloud and their backlog, it's and the revenue growth of 24% for the company, it's it's obvious that they're benefiting from this. Um the question I have is at what point will people like Oracle or Open AI have to scale back their ambitions and others will as well, right? But I think when you look at the totality of what Alphabet has here, um I'm you know, I'm I'm not hiding from the fact it's going to be bumpy, but on the other side of this, you know, they come out stronger uh than almost anyone else. >> That's really interesting that you look at some of the giants like an Open AI and an Oracle and think they're going to be the ones who have to tap out. It It's because they have to ask for help from others to borrow this. Alphabet just did this big um stock offering, its private stock stock offering itself, too. So, building up its war chest, you like that move? >> Well, they they issued you know, over 80 billion of equity, which is, you know, was a fraction of their overall market cap. Very few companies can ever do that. The stock was down 2% after that. Um I don't love issuing equity, but I get why they're doing it, right? They're taking money out of the market as best they can and they're putting pressure on people who can't do that, right? So, I think what you're going to hear earning this entire earning season will be just the step up in CapEx into '27. Um that'll be the you know, everyone's everyone's talking points. Some of it's due to memory um inflation, but I think, you know, that by the end of the year people will have to look at the '27 forecasts and question how we're going to pay for all this. And Alphabet will be fine. As will Amazon, as will Meta, right? They These guys have a balance sheet. There's some of the upstarts that I think we'll really pay attention to. >> The target price you have for Alphabet, $380. That stock was at 342 yesterday. This morning it's at 325. You still convinced that that's your price target for the next 12 months? >> Yeah, when you look at you look at a you know, 12 more months wait. This stock is trading near a market multiple, Becky, right? It's putting a 24% growth. Uh you know, it's it's margins unlike others are rather stable, right? Other people see margins compress as they invest through the cycle. Alphabet's doing a good job in managing through margins. So, I'm paying a market multiple on two years out for an AI winner uh that has a you know, pristine balance sheet and has multiple ways to win. I think it's a pretty good risk-reward, but I know look, I'm not we're not ducking from it. This is going to be a bumpy earn