00:11 Speaker A
It was a big week for Big Tech, with five of the seven MAGs reporting earnings and a strong rebound from the lows leading the market higher. Check out this earnings report from EY. We asked Dan Niles, founder and portfolio manager of Niles Investment Management. Call Google here, Dan. Apparently that’s the name of his favorite Mag 7. Why Dan? What are the reasons behind that? Is it simply Dan, listen,
00:40 Speaker A
Google, they control the entire AI stack. is that so?
00:43 Dan Niles
Yeah, I mean, I’ve had me on this program before and I said that at the end of the day, Google is going to be the biggest winner from AI a few years from now. Because Google has this full stack. That means they have chips. They have been producing their own internal chips for over 10 years. Therefore, they are not new to the party like other players like Ameda. It also has the ability to fund this with significant cash flow from its core search business. They’re getting their end devices through the Android ecosystem, right? There’s smartphones out there, and there’s also their own Pixel phones. And between that and the major Gemini large language model in my head, we have everything we need to make this a success and a big winner. That’s why I continue to love this service. A look at the results proves that Google Cloud accelerated from 48% growth to 63% growth from December quarter to March quarter. If you look at Amazon, its growth has only accelerated by 4%, and if you look at Microsoft and Azure, their growth has only increased by 1% from December to March. Google rose by 15 companies. You can see that in the numbers and the guidance. That’s why stock prices reacted the way they did. I think the stock price will continue to grow stronger, so I think it will stay that way. I think so as I get older.
01:54 Speaker A
Let’s talk about Microsoft. Well, I’d like to dig a little deeper into that name, Dan, it seems like you’re not a fan of that name. And it sounds like your point here is that Microsoft could become a victim of its own AI partner strategy. is that so?
02:14 Dan Niles
Yeah, so this comes down to what you think about Open AI. I’ve been saying this for about a year now, and it’s almost a year now. Open AI is in a very tough position in terms of its focus on the consumer, so it will be a surprising loser when we look years from now. Well, consumers won’t pay, right? We’re used to typing something into a search bar and getting something for free. Human people were focused on businesses to begin with. And they’re capturing a lot of market share, and they’re competing with Google on the consumer side. As you know, this is very difficult to do with the huge amount of cash flow that Google gets from search ads. If you look at Microsoft, they own 27% of Open AI, but the deep blue numbers show that they’re not really running it. There’s this relationship between the two companies, and I think it puts Microsoft in a very tough position, even though Anthropic has a lot of market share with Open AI. Add to that the fact that Microsoft is a software company, and obviously one of the big themes in the market is that we know that any revenue growth in open AI and Anthropic will come at the expense of some of the software companies that don’t adapt. So the question is, do we see that at Microsoft as well? During the call, they talked about the fact that because of what’s going on right now, they’re going to switch to this hybrid model where you’re going to pay for the seat, but you’re also going to pay for the usage. But that can cause problems with your reservation. When this came out on the conference call, investors really didn’t like it either. And obviously, they guided the June quarter earnings below consensus. If you look at the other names, Google is guiding, Google is not guiding, but the June quarter numbers are up. Amazon’s June quarter sales increased as well. Microsoft was an outlier that underperformed the road in the June quarter. That means all the data points point in the same direction that we should be nervous about Microsoft.
