00:11 Speaker A

It’s been a big week for Big tech with five of the Mag 7 names reporting earnings and leading the market higher with a powerful rebound off the lows. Join me now for this earnings report brought to you by EY. Got Dan Niles, founder and portfolio manager at Niles Investment Management. You call Google here, Dan. You say it’s your favorite Mag 7 name. Why Dan? What’s the reasoning there? Is it simply Dan because listen,

00:40 Speaker A

Google, they control the whole AI stack. Is that it?

00:43 Dan Niles

Yeah, I mean, you’ve had me on this program before and I’ve said that at the end of the day, couple of years from now, Google is going to be the biggest winner from AI because they do have this full stack. And by that, I mean they have the chips. They’ve been producing their own internal chips for over a decade now. So they’re not new to the party like some of these other players like Ameda is. They’ve also got the ability to fund this with massive cash flow coming from their core search business. They’ve got the end devices through the Android ecosystem, right? Of smartphones out there and they have their own pixel phones as well. And so between that and the leading in my mind, large language model with Gemini, you’ve got really everything you need to drive this to be the big winner as you come out of it. And so that’s why, you know, I continue to like it and you look at the results and it really proved that where Google cloud accelerated from 48% growth to 63% growth from the December quarter to the March quarter. You look at Amazon, that growth was only uh accelerated by 4% and you look at Microsoft, Azure, that growth only went up by 1% from December to March. Google’s went up by 15. So you can see it in the numbers, you can see it in their guidance and that’s why the stock reacted the way it did and I think you just stay with it because it’s just going to get stronger, I think as you go through the year.

01:54 Speaker A

Let’s mention Microsoft. Uh I want to drill down on that name a little bit more because you’re not a fan of that one, Dan, doesn’t sound like. And it sounds like what you’re kind of saying here is Microsoft could be a victim of its of its own AI partner strategy. Is that it?

02:14 Dan Niles

Yeah, I mean, this really comes down to what do you think of Open AI. and I’ve said this for about a year, we’re getting close to a year at this point, which is I think Open AI is going to be one of the big surprise losers when you look out a couple of years from now because they’re in a really tough spot in that they focused on consumer. Well, consumers won’t pay, right? We’re used to getting things for free when we type in something into the search bar. Anthropic folks focused on enterprise to begin with. and so they’ve been picking up a lot of share and you’re competing against Google on the consumer side, which, you know, is a really tough thing to do when they’ve got tons of cash flow coming from search advertising. So you look at Microsoft, they own 27% of Open AI and you’re seeing it in the azure numbers where they’re really not moving. Despite the fact they have this relationship and you see Anthropic gaining a lot of share against Open AI and I think that puts Microsoft in a very tough spot. Then in addition to that, you have the fact that Microsoft’s a software company and obviously one of the big themes in the market is you know that all of this revenue growth at open AI and Anthropic is going to come at the expense of some of these software companies that don’t adapt. And so the question is, do you see that in Microsoft? And on the call, they talked about the fact that because of what was going on, where they’re trying to switch to this hybrid model of, you know, you’re going to pay for seats but you’re going to pay for usage, but that would cause them issues with their bookings. Investors really did not like that when that came out on the call as well. And obviously they guided revenues below consensus for the June quarter. And if you look at the other names, Google guided, well, Google doesn’t guide, but the numbers went up for their June quarter. Amazon’s revenue numbers went up for the June quarter as well. Microsoft was the outlier where they guided below the street for the June quarter. So all of the data points kind of point in the same direction where you should be nervous um with Microsoft.