Alphabet & Amazon Earnings Preview with Gene Munster
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Welcome to the Tuesday edition of the Risk Reversal Podcast. I'm Dan Nathan, joined by Gene Munster. He is the managing partner at Deepwater Asset Management. Gene, welcome back to the pod. Great to be here. All right, Gene, I don't know if you noticed this, but you've been on with me probably a

couple dozen times over the last four years. We started the podcast in early 21. We're streamlining things. We renamed the pods. You used to come on OK Computer and On The Tape. Well, now it's just going to be the Risk Reversal Pod. For those of you who are subscribed to those prior podcasts, all you got to do is just kind of wait and see this thing drop in your podcast. You don't have to do anything. So we appreciate you sticking with us here. Gene, what do you think of the new name?

I love it. It's tight. It kind of embodies your investing approach too. So I think it's a big win. Well, there you go. So we're trying to streamline things again. We appreciate you guys all sticking with us. But again, you don't have to do anything. It's just going to drop in the podcast store on your phone. All right, Gene, we're going to do three things today. This is...

Right before noon-ish on Monday, we woke up to some downward volatility in the equity markets, some big names moving to the downside significantly because of the Trump administration announcing these tariffs, 25% on Mexico and Canada, 10% additional on China. We've seen things come back a little bit. Trump already has kind of walked back that February 2nd date that would have been

as of last night for imposing the tariffs on Mexico. Again, this is a tactic. We get it. We're also going to hit the major earnings from Alphabet and Amazon this week. And then we just kind of wanted to do a week-on-week conversation as it relates to DeepSeek, who you think the winners and losers are, if anything really changed. So let's start with tariffs trade. Generally, this is not a

huge thing for mega cap tech. Thoughts when you saw these announcements? We know these have been signaled. We didn't know to the extent as it relates to our allies, but China is the real one with 10%. Well, my biggest reaction was the reaction with the market and seeing the market kind of trade off was a little bit of a surprise given just

how well this has been telegraphed really over the past, call it six, seven months. And so at the core, I think what is going on, there's the individual companies that we can talk about, but also there's this topic about just what does it mean for inflation? Of course, that is deeply related to the impact of interest rates. And so I think as a tech investor, we keep close eyes on kind of that cutting edge about where the interest rates are.

And if in fact these tariffs stick around for a little bit, I think that it's going to be something that tech investors should be focused on. And ultimately, I think that this can kind of weigh on these names. This bigger picture, I suspect that this is going to sort itself out over the next few months and not be anything that's material over the long haul. But I think it is this interest rate question. I remember my professor of economics

Econ 101 and the topic of comparative advantage. And he said it's the I remember this is the one of very few things that economists can agree on is the concept of companies should excel at what they're good at making and kind of trade globally. And so I do think that this topic around tariffs and the impact of inflation is pretty widely held. And I think that's what the market's reflecting here. Yeah. As a tech investor, how much do you spend on the macro in general? You obviously focus on interest rates. We can go back to late 21.

Right, yeah, it's a bit of a lot at that point. Yeah, I mean, you know, in low interest rate environment has seems to help these kind of high valuation, high growth sort of names in the moment that obviously Fed Chair Powell signaled that they were going to raise interest rates to battle inflation. You know, that's when these kind of whatever you want to call them, long duration assets, you know, they really started to sell off. And by the lows in 2022, when interest rates went up, the Fed funds rate much greater than a lot of folks expected.

expected, you had lots of stocks, whether it was Nvidia, Tesla, Netflix, Meta, they had lost almost two thirds of their value right now. There was a whole host of other things going on. Bitcoin was in there. It was just a lot of things where there was probably some very frothy sort of speculation. But again, is it really just, you know, interest rates for you? Because if we're in a higher for longer sort of situation because of the potential for higher inflation and lower growth could be the other side of it. How do you think

tech stocks, especially with the valuations where they are and possibly lots of different headwinds as it relates to geopolitical and the like, how do you think they trade in a stagflationary environment? We think about this, call it 10% of our time. We think about the macro. One important distinction that we're having today when we think about interest rates versus a couple of years ago coming off of zero, that second derivative, that pace from zero to 5% interest rates, that is something that just

shocks the market. The current rates that we're at right now in the 30-year is kind of similar to where they were actually a little bit below than they were from 95, the average from 95 to 2000. And so we're, I think, an environment where as long as the rates don't go 6%, 7%, as long as we don't see kind of acceleration, I think that the broader AI trade is going to remain intact. There's going to be some concerns, obviously, given headlines, but I think more, the big picture is it's

I think looking at some historical context, I actually feel okay relative to how the market has performed in past cycles with this level of interest rates. We just can't see them going up from here. That would be a measurable negative. And just to kind of play it forward, I think the one thing that could really crack this AI trade historically has, has been going into a recession. And so on the table is the potential that higher rates could potentially impact us into a recession. Again, thinking way down the road, but that's all within that 10% bucket.

Yeah. And I think that's an important point. Last year, Fed Funds Futures and even the Fed itself, when they started cutting interest rates, I mean, they started doing so because they were worried about a weakening jobs market. Now, that changed a little bit over the last few months or so. But then when you think about this new administration and what they're hoping to do as far as cutting costs, I mean, they're already sending out pink slips to thousands and thousands, maybe tens of thousands of government and

And who knows how that progresses if Elon Musk is at the kind of helm of this process. We remember what he did with Twitter a couple years ago. And so I say to myself, you know, as far as the employment picture was concerned, you know, government had been a huge part of that. We know that the CapEx cycle, as far as the AI trade, was also a big part of that. So when you think about some of the headwinds that we are facing right now from a macro standpoint, whether it be trade or tariffs or whether it's the doge and the need to kind of

cut costs. I mean, I think there are risks here that are not being priced in the market. And then when you think about, again, what the Fed funds futures are pricing, there is just as much of a likelihood is that rates stay here or go higher than us having 100 basis points of cuts like we saw in the fall. So again, it seems about as clear as mud. But my takeaway also is that you don't think a bunch of the mega cap tech names are

are that adversely affected by a trade war. But let's just kind of put a bow on this conversation with NVIDIA because a big part of this is increased export sort of controls on high-end GPUs. Now, this hasn't changed. Like you said, this has been signaled or like the other stuff for a very long time. Does the weakness or the continued weakness in NVIDIA cause you any concern or do you think that's more of a bit of a technical thing?

Well, it causes concern because given what happened last week, I think it was really encouraging from obviously Microsoft and Meta in terms of what they're expected to spend. They basically said that our scaling laws are intact and it's not going to change how we think about implementing this. Microsoft did have a little bit of a nuance in terms of talking about the infrastructure build-out versus some of the quicker turn things like adding GPUs, but that GPU commentary was positive for NVIDIA. And so...

The market is reacting different than how I would have anticipated. And I understand that going into Wednesday's earnings with Microsoft and Meta, that the consensus was that they're going to say reassuring things about NVIDIA. And so there's maybe a little bit of buy on the rumors on the news, or not that there was a ton of buying of NVIDIA going into those too, but there's maybe a little bit of a what's the next catalyst topic. But that to me was

a little bit concerning. Like, where's the market's mentality at right now? Because I think as far as, you know, we're investors in NVIDIA and from our perspective, you know, this story is intact. And when we talk about intact, we think that they can grow in 2026 at closer to 30% and the streets at low 20% growth.

And so that did surprise me about how kind of NVIDIA has reacted to some of that commentary from the mega caps. Yeah, I guess the most important thing, if you just think of the concentration of that trade and some of the early beneficiaries of the excitement in around generative AI, it was clearly NVIDIA and Microsoft because of Microsoft's arrangement, investment, whatever you want to call it, with OpenAI.com.

Real quickly before we get to the earnings this week of Google and Amazon, because I think it's tied to this whole conversation too. Apple, when the deep seek news came out, and again, this is news that was kind of out there in the markets, but for some reason, investors paid a lot of attention to it last Monday. A lot of those stocks that were hit early in the week had rebounded by the end of the week. Apple was one of the early rotation beneficiaries, right? On that Monday afternoon. But here it is today, right?

On the trade news, down 4%. I think it gained maybe 7% or 8% from its lows last week. What do you make of this? Because a lot of Apple products, specifically the iPhone, were carved out from that prior sort of tariff trade situation in 17-18 or in the prior administration. Thoughts there in general? Because, again, this is a little surprising. Today, we've seen a lot of these tech names hard hit on the opening come back a great deal.

after the headline about the one month delay in the Mexican tariffs. The consensus going into these tariff conversations was that Apple is going to be spared. I think most investors were on that page. And so ultimately, I think that what's happened here is I think just how aggressive Trump has been, not only just with what's going on with Canada, Mexico, China, but talking about Europe. I think there's just kind of this sense about, well, what if there is a tariff? What is the impact? And just to kind of quickly to Apple.

And just to quickly frame in what those numbers are. So kind of fun with numbers here is that the overall about 50% of Apple's product revenue. Now, of course, services is a 20% that's not impacted that, but about half of their product revenue is still manufactured in China. And the topic of tariffs when it comes to Apple really orbits around what's going to happen with the iPhone. Investors generally don't care because the iPhone and services aren't going to be impacted by tariffs.

That's 70% of the revenue. They're really trying to figure out what's going to happen with that 50% iPhone piece. And if you take into effect, they're going to have a 10% tariff. So let's just say they don't get the exception that they had, call it eight years ago. They do end up having that 10% tariff. Effectively, it has a negative impact on a 4%. Now, this is something that I've posted on about this. And I just mentioned that because the stock's down 4%, just seems like a convenient number, but that's the reality of what the math, how it would impact.

Apple's earnings. And so it's a measurable piece, the 10%. Now the China tariff could be five, it could be 15, could be 20. We don't know. And I think kind of that uncertainty piece is really gnawing at Apple investors here. And then of course we had last week in Apple earnings and we had that punky December, this inventory topic around China that just, I think there's some lag effects there too. But specific to the tariff question, Dan, is think of this as probably, I think I'll put it in the category of worst case for Apple is a negative 4% earnings over the next fiscal year.

Yeah, I was really surprised to see that gap that Apple had following its results. It was trading up 3%, 4% in the aftermarket while the call was going on. It opened up, I think, 4% or 5% early Friday morning. And then Guy and I were on a pod and we were talking about it. I was like,

A, why is this stock up? Based on, you know, the results and the guidance and, you know, for those inclined to kind of look at that guidance and feel better about it, getting to kind of high single digits, you know, earnings growth or whatever, just at the multiple it's trading at, not particularly interesting to me. And you know that I've been a huge skeptic of Apple intelligence. And when you throw in all of those iPhones in China, and for a whole host of reasons, we talked about it last week, why this might not be the phone of choice for Chinese consumers going forward.

forward for two reasons, nationalistic interests and the like, but also Apple intelligence is going to look very different in China than it does here in the US. And third, I think it's a bust. I just think it's a product that has a long way to go to cause an upgrade cycle like we've been discussing or like a lot of analysts are bullish.

investors were over the course of the summer. You see the reversal over two days from that opening high on Friday. It does tell you there's some trepidation about this kind of name going forward. And so I look back, if it gets back towards that 220 level and we're not that far off,

let's see how this thing trades. And I know you don't give a crap too much about technicals, but to me, those are the sorts of things that when you marry what I thought was a questionable sort of fundamental setup in the near term with the technicals and the over exuberance based on what we saw earlier in the week, I don't just don't think this sets up particularly well in the near term.

There's another piece I would add to that too is on Friday, Mark Gurman, who does an amazing job of kind of getting scoop on what's going on inside of Apple, reported that there's a Vision related product. So something that kind of stands next to Vision Pro that got canceled. And it just, again, fueled this conversation around, you know, is Apple innovating?

And I just want to highlight, I understand this mix is not good for Apple stock. I also want to put some historical context here too. And we think about the reality that Apple intelligence has not done what I expected it to have done at this point. I would have expected iPhone growth and run 5% last quarter. I would have expected that it's a product that I would be talking to my friends about and, and given recommendations. And so it has fallen short of what Apple

I think that where it should be, the mark should be. And I think that more broadly, I'm still willing to give the company some time here because history would say that even in some of the most profound areas of growth, they have missed the mark. There's been times the iPod photo was hailed as this kind of next generation catalyst to iPod sales when iPod was half their business. That was the iPhone back in 2006-2007.

And so I think that that product ended up being a dud. The iPhone mini was a dud. There's other products, the iPod high five, there's other products that got killed. So I just want to kind of remind myself, people that, you know, this is kind of part of being innovative. And I think the core question that people who are thinking about investing in Apple should ask is, do they still have that DNA mojo around products? And if the answer is no,

It's getting tired and long in the tooth. Then there's no reason to own Apple stock. And the reverse is true, too. Yeah. I mean, listen, this seems like a debate that we've had year after year after year. The products are evolutionary. They're not revolutionary anymore. And the company, you know, continues to grind it out that it's a cash flow

you know machine they have this tremendous moat there's other products like max that are doing very well you know the services business is great for mcshift we talked about how you know that gross margin has been increasing which basically you know fortifies uh that valuation to some degree

But again, if the iPhone is the driver and then it's going to be this service-based situation that is going to be, you know, Apple intelligent fueled, right now there's no evidence that they are going to be able to kind of compete with some of the other stuff, definitely outside the U.S. too. So who knows? You know, again, I just don't find it a

particularly interesting story until they come out with something that is just whiz bangy, you know, to the tune of, you know, AirPods, which became a massive, massive business. And so I just don't see it out there. And if you're telling me they're killing a low end sort of spatial computing, AR VR sort of thing, that gives me less confidence because, you know, I started to wear an aura ring recently and I wear the meta AI glasses and I never thought, and obviously I wear the AirPods. Um,

there's a lot of really cool wearables out there that are gaining a lot of steam. And other than AirPods, you know, Apple just doesn't seem to be there. And I also think with the proliferation of wearables, it actually makes the device in your pocket less important, right? So the ASP that they have, the margin that they have

on smartphones, what you tell me, is it 80% of the global gross margin for handsets right now that Apple owns? It might even be more than that. Yeah. And I just see that as something that's going to be really hard to defend going forward as some of these other devices gain more and more of our mindshare as it relates to computing in general. Love it.

So you and I are in agreement on that. So let's talk. Yeah, I do. I don't want to spend too much time on it, but Apple needs to do more on Apple intelligence. I think they've got it in them, and time will tell. You know me. I tend to be a bit of a contrarian, and I think of things sometimes through the lens of the stock market as opposed to the tech. I think I like to dig into the tech. I don't have the technical capability, the

that you have, which I think makes you just, you know, a one, two punch as it relates to, you know, being an analyst, but also an investor. But I do my best. And, you know, you and I were chatting yesterday on text because, you know, this guy, Ben Thompson from Stratechery, I just think he's a brilliant tech mind. He was a former engineer. I know you read him. A lot of people in the tech environment read him. You know, less and less do I hear folks in the investment world who actually read him. He's got this podcast, Sharp Tech, with a guy named Andrew Sharp. And, and,

It was a really brilliant basically Q&A about DeepSeek and just the kind of generative AI landscape and some of the takeaways I just thought were great. They seemed non-consensus and we'll put that in the show notes that you and I were both talking about yesterday.

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podcast today. This brings me to two names that report earnings this week. And so it's Alphabet on Tuesday night after the close, and it's Amazon Thursday after the close. And just bring it back a little bit to Microsoft Intelligent Cloud growth that people were disappointed with. Thursday after results, the stock was down

And when you think about, let's just talk about Google Cloud, let's talk about Amazon AWS. And if we were to see uninspiring sort of growth from those names, do you expect them both to have the sort of reaction that Microsoft did? Because the implied move in the options market, maybe you don't give a crap about this stuff too much,

About five and a half, six percent for each of these names. Both of these stocks are trading within a percent or two from all-time highs. As I'm looking at the markets today, again, this is noon or shortly after noon on Monday, Amazon's flat to up, Google's flat to up. So they're bucking the trend of a lot of these other names in the market today. I mean, the A-topic, this is, by the way, these are two really fun names just to, not only on the investment side, but just the trajectory of tech. And of course, the cloud numbers are really important. The

bar is a little bit lower based on what Azure said. I mean, they still need to kind of stick growth rates similar to what they each did last quarter. And think of Google kind of in that low 30% range and AWS and kind of the high teens range. But the range doesn't matter. It's like down to the decimal point of growth. That's how hyper focused investors are on this. And I would just say that's what the stock, that's going to drive how the stocks are going to trade

the next day is just what their cloud numbers are and why cloud is so important. It's a nicely profitable business and it's just an exciting growth area. And so investors want to see those highly profitable, fast growing segments continuing to do just that. But from my view, what I'm actually more focused on between both of them, I think the A topic for me is what's going to happen with search. And this of course is the fundamental question about how generative AI impacts our search behavior.

And as I think of my own behavior, it has changed dramatically. My own search behavior has changed dramatically over the past two years. And then I think the whole world's doing that. And then I realized that the daily active users for at least GPT is probably now approaching 200 million a day. And Gemini is probably...

maybe a quarter of that, something like that. So we're still very early. And just to give some numbers to your listeners about what to expect is that search in the March and June quarters grew at 14%. It was 12% in September.

The street's looking for 11% in December. And if that number is soft, let's say, I would say soft would be anything lower than 10 and a half percent. That's going to be a problem because that's going to really stoke fears that generative AI is having an impact. This is the quarter where they added 44 regions where AI overviews started to impact that before it was just basically in the US. And so I think this, the stock the next day,

Google and Amazon are going to trade on their cloud numbers. I think Google a week, two weeks, three weeks from now is going to trade on what happens with that search number.

So this is purely anecdotal. And you and I have been talking about this, I think, for like almost two years now with from the first release of Bard and then Gemini. And, you know, nice. Yeah. But, you know, some of the, you know, kind of some of the fears that this is going to really cannibalize, you know, that kind of search business that you just kind of described. So my own behavior and this could be purely anecdotal. I use perplexity.

most of the time and I have it defaulted to chat GPT. Okay. So, which is open AI. So I like the perplexity interface. I don't use the GPT interface, but I think it's far superior. Again, this is anecdotal for someone who's been using these now for almost two years. Let me ask you a question on what is it? I think I know the answer to this, but what do you love about perplexity?

I like the ability to kind of change the models if I so choose. I also like what they're doing with the interface. They're making it look like more of a dashboard for stuff that I might be interested in. I also noticed very quickly last week they had the R1 reasoning model from DeepSeek already in there. I feel like they're moving fast.

And they're moving faster. Like what's going on with Gemini in my Google search, I just, again, anecdotally, I just don't think it's nearly the response that I'm getting as good as GPT and the perplexity interface. And the last thing I'll just say is like, if I'm going to pay, and I am paying $20 a month for Gemini through Google,

Google just because I want to try the pro versus what I'm paying for perplexity and I have the ability to use GPT or Anthropic or the like there. I just think that it's a better mousetrap over there right now. So that's the thing that I worry about Google is they set out, they know they're going to cannibalize themselves. But if folks like us who were very used to that behavior of going to Google don't like what the Gemini response is and they're going more to GPT or perplexity or something like that, that's a real problem for them.

I think what is driving perplexity and is a bigger challenge relative to Google and we own Google. So we're still optimistic about the verb of Googling things and, and that they're going to be able to innovate around this. But I think it does two things. Number one is that,

You can pull from multiple models, so you don't have to pick. You don't have to say, okay, GPT is going to be better here, Gemini is better there, or R here. And second is that just, you talked about the dashboard. I would translate that as that the kind of the UI is just cleaner. It's just, it's a great way to consume information. And if you look at Google search results, it's like a high school science project that just went awry and just blew up. I mean, it's...

it is messy and we're just used to it. So we don't, people don't think anything about it, but when you start experiencing perplexity and seeing that distinction about just the clarity of thought that something like perplexity would have, I think it's, it's notable. And Google has got to get their act together when it comes to, I mean, they got to basically replicate. They're not going to replicate the multiple models when it comes to Google search in the future, but they got a lot of cleaning up to do. And so,

Right now, they've got AI overviews. We'll see how that impacts their search business. But even if the search business hangs in there, there's still this bigger question. I think consumers are going to start demanding more of an overhaul on the results page. Yeah. And again, with a stock within a percent or so of its all-time highs, with expectations where they are, I just don't see how the stock moves higher from here, given what we think of the headwinds to their search business. And if there's any weakness in their cloud, we're going to get a reaction much like Microsoft and

really quickly on Amazon before we get out of here. AWS, again, is gonna be a key driver of this, but what about tariffs here? I have a note, 50% of Amazon sales in terms of gross merchandise value came from China-based sellers.

And then more than 70% of the products sold on Amazon are manufactured in China. And then again, this is purely anecdotal. We're probably like, you know, almost every other American. We get an Amazon package almost every day to our doorstep. And more and more, these third-party sellers, the, the, the, the,

the quality is crap. There's a lot of fakes, there's a lot of damaged things or whatever. And so I really feel like, you know, that Amazon take it to the bank one day delivery, free returns, you know, you know, getting what you expected, great suggestive sort of things. You know, I,

I feel like there's like some kinks in the armor there a little bit. So how much do you think is far as going to be AWS versus conversations in and around products and tariffs? The tariff question is largely going to come down to this $800, $850 exception threshold that has held up in the past. What I understand as of this recording is that that is now being debated whether or not the Trump administration is going to allow that exception still. If that exception gets pulled away, that's going to have a material negative

negative impact. I don't have the exact numbers in front of me. I think more broadly, if I can, so that's related to Amazon. I mean, I think as we've talked about some of the mega caps, I'm going to use this as an opportunity to plug some of the kind of the shift in our thinking about some of these companies as we continue to believe that there are mega cap companies that people should own. We've talked about some of those today.

But I think that this shift towards more frontier tech, investing in these kind of earlier stage companies is going to become a bigger opportunity. We have the Deepwater Frontier Tech Index that basically marks towards that. But I think that we can see more performance. I think the outperformance is going to come from these smaller companies over the next couple of years versus the fateful eight.

All right. I love that. Thanks for using that. We got to find the Deepwater Frontier Tech Index. We're going to put that in the show notes. Because again, I think to your point, I mean, that's where the opportunity lies, that the faithful aid is so concentrated. Everyone knows the stories. It's one of the reasons why we spend so much time on CNBC or on podcasts and your podcast and the like here. So let's find some of these other names to kind of take us to the next leg of this

trade. Gene Munster, Managing Partner at Deepwater Asset Management. I appreciate you coming back to the Risk Reversal Pod. Thank you.