Gene Munster's Mag7 Review: AI Enthusiasm & Tariff Impacts
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Welcome to the Risk Reversal Podcast. That's Gene Munster, Managing Partner at Deepwater Asset Management. I'm Dan Nathan. Gene, welcome back to the pod. Hi, Dan. Great to be here. Yeah, you're matching my excitement, but we do appreciate you being back.

We did a preview of, let's call it the Mag 7. The Fateful Eight is done, Gene, by the way. Broadcom is just done and dusted here. It's no longer a trillion. I don't know when it's going to be back a trillion. So we did the preview. Let's do the review. But first things first, if you are watching this on the YouTube, you see right over Gene's right shoulder is Apple's

first foray, I think, into the speaker business well before they bought Beats for $3.2 billion over 10 years ago. What did we call that thing? It was actually this big speaker. You put your little iPod in it.

That's right. It was the iPod Hi-Fi. It was announced at, they're on one in infinity and they're, they're small, like they're small studio. They're small town hall meeting area that they used to host some events at for the smaller ones.

This may have been the same event where they came out with iPod socks, which is famously the worst Apple product ever. No joke, they actually had those for like a- I have no recollection of that. One just quick funny story behind it. When I was sitting next to somebody in the media at the time that they announced this, and Steve Jobs got up there and says, I'm a huge-

uh, hi-fi like, uh, audio file. And, and this, I've got spent all this money on all this audio equipment over the years. And I can tell you this, this, this, uh, iPod hi-fi is as, as, uh, the best sound, uh, much better than any of this other equipment that I have. And I remember the guy next to me said, um,

basically BS under his breath when Steve said that. It was a great product in its time. I'm thrilled to have it above my shoulder now. That's awesome. And I had one too. So I was the other guy who bought it. And I don't know, at some point it's found its way into landfill. But I also have, at some point I'll show you, a very impressive... I have every iPhone that I've ever bought.

going back to the first one. I have tons of iPods that I bought back in the day. You keep your old iPhone? Yeah. I just thought it would be really cool. I probably have at least 10 of them. I probably have at least five or six iPods. I also have, I have my very first iPhone.

cell phone from 1995. It's an Oki. It probably weighed like OKI. It was probably Korean or something like that. And it probably weighs three pounds. So I just like to keep that stuff. I think it's kind of interesting. You know, someday we'll compare notes. How's that? So let's talk a little bit. First of all, I just pulled up the iPod sock. I had no recollection of this, by the way. So, yes, it did exist one way or another. But

Pretty interesting stuff. Let's do a little review and maybe we'll start with Microsoft because this is a stock that we've talked about on many occasions. One of the early beneficiaries of their investments that they made in generative AI, obviously largely to do with OpenAI and the link up there, that stock made an all-time high in July of 2024. It's since massively underperformed, not just the S&P and the NASDAQ, but also many of its large cap peers.

Interesting enough, right now it's up on the year, you know, and every other Mag7 name other than Meta, which is basically flat on the year, are down at least 20% from their highs and many of that on the year. So something's got to give in Microsoft that had that nearly 8% gap after earnings. That's not something we've said about Microsoft in a very long time. And by the way, the stock closed down 8% the day after their Q4 earnings when it reported 7%.

late January, early February. So help us make some sense of what you saw with Microsoft, because to me, going through a little bit of the transcript here, it looked like some of the, I don't know, the benefits that they saw in generative AI were not exactly something that you could put your finger on. It was more something that was bundled to consumers at a slightly higher price point.

Yeah, bundle-dude consumers are starting to see better uptake in terms of co-pilot within office. They talked about that being up 4x year over year, the number of users. So it's a big number year over year. The

challenge with that number is we don't know what the base number was so forex off of a low number isn't as impressive as off of a bigger number of course so i think that that's played part of uh i think part of what what the stock was reacting to i think also their guidance and that kind of plays into this in higher engagement higher uptake of the pay for co-pilot that's helping their guidance be fractionally better than what people were expecting so that was a plus

You had this tariff conversation. If you look at the Mag7, they're probably in the best place relative to tariffs. The business side is going to keep spending or be less resistant to pulling back spending. That was a positive. Then I think the investors are also coming to this new realization about what Microsoft's future is when it comes to AI.

I've about a year ago, you and I were talking about this question about is AI, is that future in the hands of Microsoft? Apple also has this question. And at the time it was no, it was clearly an open AI. And what we've seen and it's been pretty widely reported is that the companies have been kind of inching away from each other. And I think that that's given that's been stressful for the stock at certain points. But I think now investors are generally on the same page that

they're probably going to coexist, but Microsoft's going to do more on their own when it comes to large language models and partnering with other people. And therefore, I think that that realization is now at least a net neutral where it's been a negative to past quarters. All right. So who is Microsoft most likely to partner with if you think of LLMs, right? You know, again, OpenAI gave them a bit of the platform

poll position, you know, going back to early 2023 and a lot of folks that, you know, thought there was nothing close to, um, you know, chat GPT and, you know, Bard was a bad launch by Google and then Gemini, you know, not a lot of great reviews until maybe, um, just recently who,

What sort of announcement, if Microsoft, if Satya was to come out at some user conference or some sort of event and say, you know, we are partnering with X and such to expand our capabilities, expand our offerings as we push further into the enterprise with Copilot and this and that, whatever, I'm just kind of spitballing a little bit.

Who would you like to hear that from? You know what I mean? From a competitive standpoint too, what is the smartest decision that they might make if they're kind of battling Google or whoever, you know, is it Anthropic? Is it Claude? I'm just curious what your thoughts are there. The short answer, it's something around Anthropic and also more of these open source models, which that's going to be one of the big

themes going forward this year is just related to more open source and OpenAI has talked about opening up more of their models. Of course, Lama, not as good of a model, but that's open source. But I think you'll see something around those edges. It doesn't necessarily mean that Copilot, what I'm talking about here on this partnership side, it doesn't necessarily mean that Copilot is going to be powered by something different than OpenAI. I think that that piece is largely in place for the foreseeable future for the next, let's call it three years.

but there are opportunities for them to, there's other products that don't use Copilot. Microsoft has many products that we don't think as much about, but they could be using things like Anthropic or some open source model. And then last is just continuing to make Azure friendly to working with third-party models. And that of course is a key metric in terms of the valuation of Microsoft. And so

which companies would I see them doing more with? It would be like the Anthropix and Lama and other open source models. You know, it's interesting. I don't know if it was a month or two months ago when Google announced that $32 billion acquisition of Wiz. And Wiz is a security company that allows, you know,

to basically scan security across multiple clouds, right? So you could have workloads on Azure, you could have workloads on GCP or AWS, and as a customer who's deploying this technology, you'll be able to kind of, you know,

kind of commit these security resources across all of them. And I wonder if that is kind of an acknowledgment by Google that or Alphabet that this is going to be a very competitive space as you know, the cost of compute comes down as these models become more commoditized, as you know, customers are looking to kind of not have this kind of single point of failure on one cloud. Does that make some sense? Is that kind of giving us a little bit of a thought where this might be going? Yeah, I think that

The way that Microsoft and probably big companies and the medium-sized companies are thinking about this, like where's the value creation around AI is kind of twofold. It's this IQ question around what is the AI actually doing? So there are certain tasks that AI is going to do that I think you need just a super high IQ for. And that would be, think about like,

science development and think about physics, these areas where drug development and physics. And I think that those are going to be pieces where you're going to see more leverage in terms of how pricing is. And I think Microsoft can kind of tweak some of its products to some extent to benefit with that. And then there's going to be other things that are really rudimentary, like

basic stuff like email generation, like text generation. And so that side I think is going to be where you're going to see some of the compression on it. But when you put it in together, you're going to see these companies, Microsoft included, start to gravitate its pricing models to things where they feel their higher value tasks getting done. And I think that those, that price, and even though the cost of the input, the token price is going to go down,

I think that the ability for people to package, like Microsoft, to package up and sell it at a premium for these more advanced problems, I think is going to remain attractive.

- Question on the CapEx, and we're gonna hit this with a bunch of the names. So if you think about Microsoft after the last two and a half years or so, they probably spent maybe a quarter of a trillion dollars on CapEx, or at least earmarked from here to let's say the end of their fiscal year. Does that make about, maybe 200 billion or something like that. Do you think a company like this, and we know why they've been spending building out data centers, not just here, but also abroad and kind of support Azure and really be a platform

that can be all things to all people. And because you think of their reach in the enterprise and obviously consumer, this is a build in anticipation of that richer experiences and that sort of thing, obviously for coding and a whole host of other things also.

Is it disappointing to you that this company who spent, let's say a couple hundred billion dollars also has not developed their own large language model, understanding the fact that all of these to some degree are going to be commoditized, but it also gives the companies that develop them, you know, a couple, you know, leg up in certain situations. So I'm just curious how you think about that. I think it's been a disappointment. And part of that belief is one of the reasons why we weren't invested in Microsoft over the past year and a half. And,

That was a good thing. And more recently, I wish we would have been invested, but that is generally still part of it. I talked about Microsoft and investors kind of coming to this better understanding about where they're at and trying to, they're not going to be having open AI is kind of there for them at all times.

and how they move forward in that. And so I think that there's still, I think that trade-off and they still need to build, Apple has the same challenge with them. They still need to build out some of these models, whether it's themselves or add additional partners. And so to answer your questions, I think it is in the category of genuine disappointment. It's just remarkable when you take a step back and look at what these companies have done, Microsoft and Apple,

over the past 20 years and think about this paradigm shift and the fact that both of them partnered at the early stage of it, I think is remarkable. And I think it is telling that to build these models is more difficult than it looks.

And so if it was that easy, they could just throw resources at it. They've tried to do that. They're going to continue to try to do that. They'll have some form of success, but it's in the camp of broadly a disappointment. And I guess with that point about, you know, now it's down 7% from its all-time highs.

made last summer relative to many of those other large competitors, if you will, that are down more than 20% on the year, at least 20%, all of them from the recent highs. Does that mean anything? I know you don't care about from recent highs, but it does say something about like sentiment. It went from being a real underperformer after, you know, a year and a half or a year or so to now, you know, relative to the highs being an outperformer.

So it's come back. I would say that when you put all this together, the disappointment that they've had, some of the positives, even though the stock has come back, I mean, this is one that we currently don't own, but I can say that we're

even before they had reported their quarter, it has come back up in the, our, our research meetings as one that our funds, uh, should own. And those conversations are still going on. So I'm not saying that we're going to buy it in the future, but I am saying that like, despite all the things that have gone on, uh,

put it all together, it's one that we're considering now versus six months ago we weren't even considering. - All right, last thing on Microsoft. So expected fiscal 2026, so there's only one more quarter left in fiscal 2025. So in 2026, expected earnings and sales growth about 13%, trades at about nearly 29 times earnings, 10 times sales, less important here.

Thoughts on valuation, because it seems like at the lows in the market a few weeks ago, people were very focused on a 21 times multiple for the S&P 500. Then we're starting to pick up out some of these other names that might have been trading at huge premiums. Is that something that you care about right here?

I think that the valuation is still in the more attractive versus less attractive. I don't think it's like expensive either. And part of it is that that 13% number that's consistent. I don't know off the top of my head exactly, but that's about what it's grown here every year for like the past four years, six years. I mean, it's just like,

It just defines steady. And of course, definition of steady means investors can sleep well at night. Sleep well at night translates to higher multiples. And so, I mean, versus a 21 comp, an industry comp, a 29, it still feels attractive. And if I'm right on what's going on with AI and that the substance is going to outpace the hype or will clear the hurdle of the hype,

that what's going to happen with Azure in the next few years could or should accelerate that revenue growth, that 13% number that we've been kind of orbiting around for the last several years. It should be a higher number than that, which to me justifies either the stock goes up because you get a higher earnings or maybe a higher multiple on top of it. All right, let's look at Google here. This is one that initially looked pretty decent, or at least, you know, on the...

you know, on the surface, you know, for this year, 2025 expected earnings growth of maybe 20%, 11% sales growth, trading at 17 times this year, you know, 16 times next. So this is a very different story.

than Microsoft, despite very similar sort of growth expectations. And then also, you know, from a margin standpoint, I mean, Microsoft's margins have come down a little bit. Google's has come down a bunch over the last few years. How are you thinking about this? What you heard about GCP, what you heard about, you know, obviously that ad business is really important. And then we'll go to meta after this. But I'm just curious, like what were your takeaway was? How are you set up into it? And do you have any differing thoughts on the way out?

So just kind of consistent with what we talked about in the preview is before they reported a quarter, we had sold our Google position, a company that I've known for a long time as an analyst who has always had a positive rating on it. We've owned it in our funds as an investor. And I think that we just started to get a better understanding of the pace of generative AI's growth and how that's going to impact the search experience. And so I think we learned like everything.

The story of Google, I think as far as the stock, not the business, is I think look no further than what the stock reaction to after the quarter is that it opened the day up, I think four or 5%. And then it just kind of faded throughout the day. I think the NASDAQ was relatively flat through the day, but it faded through the day. And I think what was going on is that there are people who've owned this for a long time who are looking for

opportunities to sell. They recognize that it's relatively inexpensive, but why the opportunity to sell? I think that this narrative around how are they going to grow is a new search paradigm is becoming louder with the buy side. Said another way,

is that Google has had all the tools, they've had all the data, they've had all the money over the past two years to start to make major progress. And AI overviews, even though Gemini is a great product, AI overviews is not the answer to the future of your search results page. And I think for you to invest in Google at this point, you're making a bet essentially that something's going to change.

that there's going to be some sort of a breakthrough in terms of how they solve that monetization transition.

And I think that it's, we haven't seen that there's glimpses of that breakthrough coming anytime soon. And so to answer your question is, went into it with that view and there was nothing on the call, despite the fact that the ad numbers are a little bit better, there's nothing on the call that changed our view that they still have this existential threat they have to navigate. Yeah. And it's interesting because I,

there's two there's two components of that right it's just like the performance of gemini and their ability to kind of partner outside you know when we first heard you know the apple intelligence story back in june at wwdc you know initially uh investors cheered the fact that they were going to be partnering they didn't give too much detail about that with open ai right and they have integrated some of that into um siri and the like but it's obviously a bit of a bust

And then they came out shortly afterwards and you were on the pod and we're talking about it as like they were open to partnering with Gemini and they already have this big deal, right, for exclusive search on iOS devices through Safari. And it just seemed like that was a real logical sort of thing. But that never caught any steam, likely because, you know, Apple, a their A.I. group is in disarray and they've obviously just done some rejiggering of that. But they must have made certain technical

You know what I mean? Like assessments about Gemini, you know, in the lead up to WWDC and even afterwards. And so, you know, I'm just curious that, you know, some of the performance benchmarks and some of the stuff that's coming out is basically maybe a little bit more favorable for Gemini than it had been a year ago. But what's the most important component of this story?

I mean, there's, they've, they've made progress. I mean, Gemini, I give them credit from back to what was some pretty frustrating days around six,

some of the kind of the, some of the safety pieces that they put in about a year and a half ago, this is around like founding fathers types of questions and the generative images. And, and then I think just people just questioning, like, is this a model that just leans so hard one way or another way that, uh, and I think that they've done a great job of quickly fixing that. And I think Gemini is a standalone. It's one of the three models I use. I use all the time. I just, unfortunately I just pay them $20 a month and, and, uh,

uh and don't look at ads on google much anymore but the uh so that that is one option is that they just essentially go to a paid for service on so i think that they've made a lot of progress on that to answer your question as far as uh like you know what is their opportunity with people like apple on that i mean that's going to happen apple has said as much that they're going to they're going to allow gemini to plug into

They're allowing Gemini to plug into iOS just like OpenAI is today. And the reason why they made the original decision a year ago to go with OpenAI is because it was further along, but Gemini has made a lot of progress over the past year.

And then there's the question about, well, then how does Google make money or Apple make money in that scenario where there's kind of a plugin aspect where you can, you can essentially go on, on your phone and you could toggle on. I want to use Gemini as my intelligence here, or I want to use GPT. That's essentially, and they'll probably have other models you can turn on and off too. But so they've made progress and should definitely give them credit. It still doesn't answer the question about how you change the,

search results page to make it so they continue to make a lot of money. By the way, that argument, you know, that you just made about toggling just brings me back to something you and I've been talking about for over a year is that Apple should have bought perplexity before they ever rolled out Apple intelligence, you know, something like that, that gives you the ability to toggle. It's got a great UI in my opinion. So for whatever that's worth, they don't listen to us. You're an investor analyst. You're not a banker. He's got a great founder too. I mean, I think that as far as like,

One of the key elements that these companies have, the ones that are really successful, if you think about Perplexity, Andro, XAI, OpenAI, they all share this power of the founder to communicate a really exciting story. We see a couple thousand in our venture business. We see a couple thousand startups a year. And

Very few have those founders that are super combined. I just want to give a shout out to Perplexity for they do a great job of telling their story. Yeah, Arvind Srinivas, he's been on the pod in the past. He's been on Fast Money. Very impressive guy. I'll just put one caveat here. I have a friend who is a tech CEO without getting specific. He's been...

in and around the tech space as an operator for years and years adjacent to some of the digital advertising, um, you know, uh,

markets and the like and he thinks it's vaporware and he's like said to me well why is that guy tweeting all the time and this that whatever you know what i mean i just think maybe he's got a bit of an axe to grind but you know i like to hear both sides of a story but i do like their product an awful lot a few weeks ago when you and i were talking about it i tried just using chat gpt for like a week or so i don't like the interface um you know it's got

great results. And so I went back to perplexity for whatever that's worth. And I still pay for Gemini because I use Gmail and some of the other stuff. But again, if I don't like the overlays, and I've also said this, if perplexity comes out with a browser, if open AI comes out with a browser, it could be lights out for Alphabet. Like if people have a reason to stop using- But that's open AI is going to have a browser. They're going to either

acquire a browser or have a browser. Right. And they talked about that with the Google suit and the breakup. But if Chrome gets further away from the fabric of the Google platforms, think about it from a search standpoint. I mean, I am generally going 90% of the time to perplexity to do searches. Sometimes on any device that I have, whether it's my laptop or my phone or my desktop, if Chrome

Chrome's open, I might search there because I'm using Chrome. So if all of a sudden I have, and I won't have an OpenAI browser, but let's say a Perplexity did or something like that, I would just use that browser and the integration there would be kind of important. And then you think about what that looks like

on mobile, it's basically Apple intelligence. You know what I mean? For, you know, if you think about it. So who knows there? I just want to read you one thing and I don't mean this to be a curveball. This was an article from Venture Beat a few weeks ago, I think a couple of weeks ago. The new AI calculus, Google's 80% cost edge

versus OpenAI's ecosystem. It kind of fits in a little bit of what we're talking here. So compute economics, Google's TPU secret weapon versus OpenAI's NVIDIA tax. And I think this is really interesting here. So it's quoting this VentureBeat article. The most significant yet often under-discussed advantage Google holds in its secret weapon is its decade-long investment in custom tensor processing units, TPUs,

You've discussed this a bunch over the last year or so. OpenAI and the broader market rely heavily on NVIDIA's powerful but expensive GPUs like the H100, the A100. Google, on the other hand, designs and deploys its own TPUs like the recently unveiled Ironwood generation for its core AI workloads. This includes training and serving Gemini models.

talk to me about that. That's kind of interesting. You don't hear a lot of folks talking about that. You've been talking about, you know, these tensor processing units for a while. I do hear a lot of other smart folks do it, but they don't. It's not something that you hear analysts talking about after an earnings call or after some user event, that sort of thing. Does that resonate a little bit with you?

Part of it. So this custom, this is under the broader headline of custom silicon, which is a theme that we heard, started to hear more about towards the back half of last year. And it is a theme that orbits and is part of the fabric of the CapEx topic too.

And so the reason why it's part of the CapEx topic is when Google and Microsoft and Amazon, they all have their own custom silicon. When they talk about those CapEx numbers, that includes money that they would basically be spending with themselves to build these chips.

And the question so far, what we have seen is that even though they've made a lot of progress, these chips are, of course, like any tech, they're advancing quickly. NVIDIA is also advancing quickly too. And so I hadn't seen that venture beat story, but I would still guess that

But the vast majority of compute that's done and the vast majority of incremental going forward compute is still coming from NVIDIA. And there is a portion that is not. And that portion is growing, which is negative for NVIDIA. But still, that's a big piece that's growing. All right. So Microsoft was on your buy list. You didn't own it into the print.

Alphabet Google, you did own, you sold it before the print. You're disappointed in the price action. It sounds like you didn't hear a whole heck of a lot that made you feel more confident about the Gemini story. Is it on your buy list for valuation? If you saw a retest of the lows from early April in the broad market and a stock like this was trading below 90 bucks, it got, I think intraday, you know, just below 90 bucks at some point.

is there a discount for you that you're willing to kind of hold your nose and take a shot with this one? Yeah, it's probably closer to 15 times, you know, another call 10 down 10, 15% from where we are at now is something that, and it's, it has to be within the context of what's going on with the rest of the portfolio too. And so all things equal with the rest of the portfolio. I mean, we would go back to at a certain price,

you add some stability and you get some downside protection. The risk of owning it is, you know, if you end up playing at a 15x4 multiple on it, it's less about a risk of it going to a 7 multiple. It's more that the rest of the AI trade works and Google just kind of underperforms. Yeah.

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Let's talk meta for a second. We've kind of, you know, worked our way around some of the themes that I think are important to this story. Like I said before, it's basically up a percent on the year. At one point in early April, it was down 35% from its highs. And now it's down about 20% from its highs, which says a lot about just the kind of relative outperformance of this name. It did have that big run up in January. I think it made like, you know, I don't know, it was up like 20%.

20 consecutive days, something like outrageous, you know what I mean, in January into early February. But it seems like of all the results, people felt pretty good about these. They didn't mind the CapEx increase. I think they minded the CapEx increase three months ago. They don't seem to be particularly worried. This one obviously has a valuation component that makes folks feel good about it. How are you positioned into it? How are you thinking about it on the way out?

position long going in, feel great about what's the outlook. A couple other things I would add to the broader meta story is that a couple weeks ago we had our Deepwater AI Summit and we had people from Anthropic and OpenAI and Databricks there. We asked them all the question about what are the

what are the true use cases of AI today? Let's cut through all the noise. Everybody's wondering what the use cases are. And I was sitting back and hoping that we'd hear these really compelling use cases that I'd never thought of. And the two that came up were customer service and coding.

And I was so disappointed. These are the people who are selling, selling, selling it, and that's all they got. That's stuff we've been talking about a year ago. So to myself, Gene Munster, you just have this thing wrong. And my takeaway on it is we're just still early. I still fundamentally believe in all the power because I'm seeing where people are starting to test these in AI native ways.

But the meta results were the most encouraging piece when it comes to a base case of AI at scale, an actual use case of AI at scale. And I put a couple points on it. Number one is that their user growth.

Up 6% year over year, that's 3.4 billion people. There's eight plus billion people in the world. There's about 6 billion people who are on the internet every day. And you got 3.4 of those use a meta property up 6%. It was up 5% in the previous two quarters. So, I mean, call it an acceleration.

But part of the reason why is they put meta AI in there and as much heat as people give it for being a gimmick, the reality is it's improving engagement and how that impacts their output on the other side where their revenue growth, the street was at like 9% for June and their guidance was, they're going to hit the high end of their guidance, takes it to 16%, which is a similar growth rate we saw in June. And so what does that tell me is that...

like this meta is actually seeing the benefit of AI. We talked about the Microsoft numbers earlier. They're pretty modest. Like it's hard to like really see it in the numbers, but meta, you can actually see it. And I think that,

You can see it and then we're still early. Like the addictiveness of these products, the ability for it to trigger you to want to go back to them, it's only going to get stronger. Of course, the tools for advertisers, what Zuckerberg talked about, the platform just go in there and say, I want to sell toothbrushes and this how much I want to pay for each conversion. And it just figures it out. Like that is exactly the kind of euphoria that advertisers have been hoping for on attribution for the last 100 years.

And so there's a lot of opportunity, I think, about it. So we're really excited about that. Yeah. And they've demonstrated that to your point. You know, it's interesting, Ben Thompson writes to Techery, so widely followed, you know, tech blog. He actually- Awesome blog. Highly recommend it. He's amazing. He just interviewed Mark Zuckerberg late last week after the earnings. I have not listened to it yet, but I did read Ben's analysis of the

quarter and I thought there was a couple things that stuck out to me. So he had a section called Meta's deteriorating ad metrics, the leveling out of impression growth, even as daily active person's growth increased slightly. What this means is that the real inventory growth tailwind might be over. So I thought that was interesting because

The Reels tailwind as it was ramping over the last couple of years and as they were doing exactly what you said, using this technology to serve better ads and the like and giving advertisers tools, right, to kind of evaluate that sort of thing. I do think it's interesting that he mentions that. The other side of this thing is

I think it's really interesting. He was talking about CapEx. So the range of 64 to 72 billion increased from 60 to 65. You were on Fast Money that night. You were talking about that. Okay. And so that's basically, I think they explained it away, you know, increased data center investments. But this is the thing I found really interesting. So I'm quoting Ben here.

This increase is particularly notable given Meta's deteriorating cash flow. While revenue increased 16% and expenses only increased 9%, the latter was aided by the extension and the useful life of Meta's servers. Absent that, expenses would have increased 13%. The more pertinent point about depreciation is that it delays the appearance of

CapEx increases on the income statement. Thus, he pointed out the cash flow, which decreased by 17.6% from $12.5 billion in Q1

2024 to 10.3 billion this quarter, it seems likely that the decrease is going to increase even as meta lapse already outsized spending on AI infrastructure. So the point here is about depreciation. And there's a lot of folks who are skeptical about these capex increases that we're seeing year over year relative to normal depreciation of technology like this. And so we're talking about the cash flow implications.

Does that all make sense to you? And I'm just curious how you think about it. - Let me play back in slightly different language is that there's a view that Meta is overstating their earnings because they are changing how they account for depreciation. And that essentially, if you extend the life of depreciation of an asset, it means less depreciation in any given quarter and therefore earnings will be higher.

And if you look at kind of the, just the broader impact of, of, of what this depreciation by my math, it probably has somewhere between a five and a 10% negative impact or has had a five to 10% positive impact on earnings. So it is something that it's measurable. It's there. And if,

if we kind of rewind six minutes and I outlined why I believe Meta is one of the best companies, the best example of a company that's benefiting from AI is I didn't talk about the earnings piece.

in part because of there's this depreciation dynamic to it. But also I think that the standard right now is more about like seeing that top line grow. And so everything you talked about with reels too, just going back to that point is that yes, the reels,

tailwinds over. That's what happens when you start anniversaries. Good news is the tailwind ends. I think the output of all of this is still revenue growth that is going longer than people had anticipated. And I think that to me should be kind of the guiding principle in terms of evaluating whether Meta is doing a good job in terms of their capital allocation.

Yeah, this is just purely anecdotal. So so again, you like that you were long that in the print. You're still long. You feel really good. I just want to kind of, you know, kind of put a bow and all this sort of stuff. This is purely anecdotal. I have a pair of the Meta A.I. Ray Bans. OK, and I brought them to a concert the other night.

Arcade Fire at the Brooklyn Paramount. - Oh, nice. - So, Winn Butler of Arcade Fire, lead singer, comes out into the crowd and he happens to make his way right toward us. And right in front, everyone's got their phones out in the center. Rather than enjoying this in the moment, I'm gonna send you the videos. I just pressed the button, I had my glasses on, like maybe a third of the people in that room had glasses on their face, right?

And I filmed it right in front of my face and I could actually enjoy the whole moment. I didn't have to look through it three and a half inch sort of screen or whatever. And it was pretty cool. You know what I mean? So I think there's like, I don't know if that's an AI use case, 'cause it's not, it's just a hardware sort of thing. You know what I mean? Like if I had said, hey Meta, what am I looking at? Maybe it would have told me something. I don't need that. I can see with my own eyes.

I just thought that was interesting. Yeah, it's a starter. It's a feature within wearables that I think people are going to progressively want. I hope that we're going to see a day when you're at an event and your view is not going to be blocked by people

fill me in with their phones yeah well there you go i'm in your camp um all right let's rip through two more let's do apple and tesla and uh we'll finish on tesla as we usually do um so what did you find disappointing in the apple quarter the stock sold off you know four percent the day after it sold off um yesterday i think two three percent or so so it's had like a three day slide um if you will um

And expectations in and around AI have not been particularly high, right? So they pushed out indefinitely Apple intelligence. So we saw a pull forward in demand for iPhones. We saw a disappointing demand in China, which kind of makes a lot of sense. They gave okay guidance.

for Q2 yet China continues to be a problem because a big part of this story and you know Apple intelligence when it was launched in June and you and I've been talking about this for a while the analyst community was like there are 300 million iPhones in China that

need to be upgraded. They're at least three years old and Apple intelligence is only going to be, you know, the icing on the cake will never happen, you know, and it's not likely to happen. And if you think about the headwinds about tariffs, even if the 145% tariffs go down to, and Paul Tudor Jones said this on CNBC this morning, even if they go down to 50%, just think of where we were, you know, three months ago, we were at 10%. You know what I mean? Like this is still

You're talking about for not just Apple, you're talking about just for everything in general. I'm talking about for everybody. And, you know, maybe there's a chance that Apple gets some exclusion, that sort of thing. But again, I don't think there's going to be any clear cut exclusions, you know, anytime soon. So this is something that a lot of these companies are going to be dealing with through the balance of Q2, at least. Definitely. And I mean, just to...

put in its full context, I think, let's talk about Apple intelligence. Let's talk about a super cycle that I predicted. You've been really generous, Dan, in saying good job, Gene, when you kind of saw this kind of coming and this opportunity. But the beautiful thing about the market is here we are a year later and we can play it back. And I've been largely wrong. I've

I had made a prediction that these features are going to be something that people wanted and that they would trigger an upgrade cycle. And I define that as at the time Apple was over the last eight quarters previously, the iPhone was basically flat. And I thought it would go to an 8% to 10% growth. And it's going to finish the year because now we have June guidance. So we're going to finish the 16 cycle. It's going to be about 3%.

So three is very different than eight to 10. And the piece that I miss is I was running off an old playbook that when Apple says that they're going to do something, they do it. And they basically launched a product that was half baked and they're continuing to bake it. And so I just, I want to just take a minute and go back and just make sure that the record is straight. I want to answer your question too, if I can just quickly jump into that, is that in terms of

What's the takeaway from the call? It's a similar takeaway to what happened with Google and how the stock kind of faded after the next day. What does it tell you where investors' heads are at? In the case of Apple, I actually thought the results were solid. Despite all this craziness, they still grew revenue by, what was it, 5%, which is higher than what they've grown at in the past. They guided...

i i think they actually guided fractionally up by a percent in terms of growth rate for june the china number was was a decline but it was better than at least what i was expecting i think some analysts were expecting it to be flat i don't know where they ever came up with that given everything that's going on there but in in general like it was it was uh i think it was like objectively it was for apple standards it was solid quarter solid guidance stock trades down by four percent five percent and i think it comes down to

like the Google piece, like Apple still has a risk in terms of navigating China much greater than what other companies do because you got 15% of your revenue, you got 40%, 45% of your revenue is manufactured there. And I think that this commentary, six of the 20 questions on the call were about the beyond the June quarter. And I don't know what it was in previous calls, how often analysts ask

outside of the current quarter. Apple, of course, doesn't talk about outside of the current quarter. And so I think the stonewalling that was the perceived stonewalling from Kevin, the CFO and Cook, I think was something that really stung investors. And I think it just begged the question, like they still couldn't, they couldn't get up and say that their tariff is 10 or 20%, even though that's where it stands today, because they know that things can change week to week. And that is

Not something that investors like to hear. And I think that was the problem with a quarter is that it's a very simple reality is that Apple has a lot going on in China right now. And there are a lot of moving parts and investors don't like that.

yeah so even if they're moving a lot of their production i think the number was 40 to 45 or something that indicated um you know to india and almost all iphones that are shipped into the us um are going to come from india that's not happening anytime soon right like if anything half of them are coming from india i mean they ramped it much faster than what i think most had thought over the last three months okay and so what

What sort of price increase do you think that the company is willing to absorb, you know what I mean, as it relates to just to keep market share and the like here? I'm just curious how you think about that. So the...

As it stands right now, it's like around a 10% tariff. If it stands at 10% tariff, Apple's going to basically take the whole hit there. They won't raise pricing. I think they will not raise pricing. They'll take it on the margin. We saw the impact on the margin. It had a negative impact. They talked about this $900 million and the tariff costs that in part is related to some of that pricing dynamic. And so it was negative 4% in a given quarter. So think about like a 4%, a 10% margin, right?

excuse me, a 10% tariff equals a 4% hit to margins, not for percentage points, but 4%. And then separately, I think that they probably maintain pricing. I mean, that's what Apple's want to do. The question, like how much are they going to carry? How much are they going to, the reality is Apple's going to do whatever they can to try to keep

prices as low as possible because they want to optimize for top line. They want to optimize for customers continuing to lock in because that lock-in is really important because the more you keep locking people in, the more time it gives them to solve for Apple intelligence and build other products that they can keep selling into that base. Yeah, and it goes back to what you're saying about your...

the summit that you had, you're like, wait, what are you guys telling me? The use cases are just coding and customer service. I don't think to consumers right now it's that clear other than, you know, using these GPTs and the like, right. Which anybody could use for free and you could do it on a browser on your, your phone or that sort of thing. So I think Apple has actually given a bit of a reprieve from the fact that, you know, Gemini inside of a, you know, a Google pixel on

Android is really not doing a whole heck of a lot for you. You know what I mean? So I think that- - There hasn't been like a killer use case on some Samsung phone where people say, you gotta go out and own it. Even if that happened, Apple's, those users are gonna give Apple probably two or three years to figure it out. - Yeah, but it doesn't say much if you think about in North America, like how many folks have iPhones here and they're not bitching and moaning about the lack of AI capabilities on the phone. It doesn't say much.

in my opinion, for consumer applications of the technology. I mean, think about it. - My expectation is much higher. So I think it's still. - Yeah, no, it's a split. - I think there's a lot of challenges with the iPhone. It's the best phone out there, but there's a lot of ways it can be improved. - Yeah, listen, and last thing on Apple is that, you know, when you said I've been generous, I mean, you got the price, you nailed it. I mean, like the stock went up.

You know, think about it. It's not just always about what shipped. It's not a lot of times it's about sentiment. You know what I mean? And I think the sentiment was very high in a lot of the other names, whether it was in video, whether it was time on semi, like in the ecosystem, you know, you know, Amazon and Google even, you know, caught a little bit of a bid.

So people were waiting for an opportunity to buy Apple for something related to generative AI. And they did on that announcement. But the main point, and this is the thing I would almost try to extrapolate a bit more to where Apple is right now on the product front, is that maybe that thing, that old playbook that you used to be able to take it to the bank, if Steve Jobs or Tim Cook, if they walked out on a stage and they did one of those big presentations, it was going to ship that way.

You know what I'm saying? And, you know, if you think back to the products over the last 10 years, the big blockbusters, it's AirPods, right? It's watch. I mean, I can't even think of any others. Those two, right? They've delivered on those fronts. Those are products that Apple customers have come to, you know, appreciate as far as from a quality standpoint. But it's the phones that have been purely evolutionary. And then the other thing is, you know, there's all this talk about, you

But look, can I interrupt on that phone thing? The evolutionary phone thing is what's wrong with it being evolutionary? It's a great business for them. They've raised prices by 40% during that period of evolution.

Yeah, no, I mean, it's fine. But we live in a world where whiz-banging technology is in front of our face all the time and we want to be wowed. You know what I mean? Yeah, the whiz-banging factor. Yeah, you know, so like that's something that I think the Tim Cook age is very different. I think Tim Cook has been better for shareholders than he has been for their consumers, in my opinion. You know what I mean? Like I've had a MacBook Air for 16 years since the day it came out and they're not that different.

You know what I mean? I can make the argument that the hardware was much sleeker 10 years ago than it is right now for whatever that's worth. Second derivative relative basis. I understand where you're at. And sleekness is a huge part other than that hunk of junk, that brick above your right shoulder. I mean, sleekness is, you know, been a big part of their story for 20 years since they introduced the iPod. You know what I mean? Or something like that or longer than that. So that is what it is. All right. So positioning into the print, positioning out on Apple.

So as a firm, we were along it, uh, personally, I was long it and no change in our position. Awesome. All right. Last one here. And we'll be much shorter. I promise you people, um, Tesla. Um, we talked about this sentiment was super poor. I can't remember. Uh,

a quarter or going into a quarter where the sentiment is, was as bad as it was for Tesla from Elon. I mean, listen, for years, there's been a lot of stuff in and around Elon. You know, people forget that four 20 bit, that was like seven years ago. You know what I mean? Like, right. Like, so like yesterday. Yeah. And you know, there was, uh,

You know, SolarCity was a goofy. There's been so many goofy things over the years that like we've just been conditioned to expect it in and around him. I think things obviously went a bit haywire over the last call it nine months or so. And it clearly has had an impact greater than most analysts and most shareholders thought it would. Let's be very clear on that six months ago. Okay. Now the fundamentals of the business are bad.

Okay, not the optimist not the robo taxi because there is no business right now There's just investment and there's some big showy sort of things but the fundamentals of the core business the stuff that pays for Optimists and pays for robo taxi or as bad as they ever been you literally have to go back to 2010-11 to think about that and up it was just all white space at that point

So talk to me about what you think of the auto business right now. Because as far as I'm concerned, I don't want to hear about Optimus contribution and RoboTaxi contribution because whatever year any of these bulls say it's going to be, I'm taking the over.

So the, I mean, maybe one way to think about, I'm just going to kind of rift off of our conversation with Apple a minute ago, is that we talked about like what's, I was thinking it's fine if we have an iPhone business that just kind of chugs along and there's no whiz bang. In the case of Tesla, it's like the opposite. You've got their core business is not chugging along. It's down, the auto business, I think it was down 19% in the quarter. Deliveries are down like 15%. And

I mean, that's rough. And I think the vast majority of that was related to brand damage. I think the EV market's actually stable and starting to grow again. But so like in the case of the analogy to Apple, like that's the iPhone and it's struggling. So they've got the whiz bang stuff, which

I'm going to go with the guidance there and we're not going to talk about that. But the substance of the auto business, it's rough right now. And I think ultimately this year, I think I'm down. I've got deliveries down. I haven't checked it in the past week, but I was down like 12% for the year or 9% for the year. And the street was still like flat or down too. I mean, there still needs to be

there still needs to be changes again maybe they've all come in by now but so i think if if we just call the fundamentals is the auto business it's going to be a down year and there's still this question about

on the fundamentals of the auto business. What are they doing about new models and cheaper and all that? And how to tax the tax credits going away? How does that impact demand? That's going to be at the end of this year. How does that impact 2026? Safe to say a lot of moving parts, most of them on that side of the business are moving in the wrong direction. The numbers are moving in the wrong direction.

But on an absolute basis, they still are doing like a great job. They've got,

45% of market share of EVs in the US and I don't know what it compares to like Ford or highest market share is 15%. I mean, it's declining. When you say that the EV business is starting to kind of turn a quarter, you know, I'd say... I meant the market. Yeah, the market, but I would say that's China and that's Europe and that's where the numbers are absolutely getting destroyed for Tesla. You know what I mean? So the more success that BYD has and their ability to ship outside...

of China and then you think about what the Germans are doing with, you know what I mean? So like, listen, you and I could go back and forth on this. I think we always have this conversation right now. I love having it. No, I know. But last last year, you know, Tesla delivered basically 1.8 million cars.

um analyst consensus for this year is 1.73 and then troy tesla i don't know if you follow him um yeah he's really good he's at basically 1.6 and so let's call it we're midway through the year can we can we say that right now for all intents and purposes right um they're likely to come in at 1.5 and if they come in or 1.55 or something like that okay because i don't think

Elon leaving Doge, I don't think that fixes any of the problems with demand issues as it relates to their product, their brand in some of these regions that we just talked about. I don't think that crude oil at $57 helps the cause too. If OPEC is going to continue to flood the market with oil globally, I think consumers are going to be less interested, you know what I mean, in EVs, at least in the near term, that sort of thing. So again, I think there's a whole host of things that

I just don't think it's investable right here. I mean, I think that the Elon thing, you saw that, all right, so tell me this and I'll shut up. The article in the Wall Street Journal the other night said that the board had hired a search firm to find a replacement for Elon. Okay, let's say they do it. It's nobody internal. It's either got to be a big tech thinker

Right. To think about Optimus and Robo Taxi and AI, or it's got to be somebody coming in to kind of plug the holes of their EV business. Right. And so how do you think about that? What would you like to see? Let's just kind of let's just say that that's what the board is doing because they have a fiduciary responsibility to their shareholders. You know what I mean? So thoughts there.

So two years ago, when through 2022, when they were going through the compensation trial, it came out that Elon didn't want to be CEO and that the board was looking for other CEOs. And then Elon came out and said, I don't want to be CEO. I want to be techno king.

And then I wrote a piece about 2022 about who the top five potential candidates were for 16 and CEO. And then we didn't hear about it for a long time. And then this is kind of popped back up again. And I think that

uh the you know tesla saying it didn't happen my sense is just purely guessing is that the board probably had some conversation said we got to get you we got to pull you away from some of this government stuff and you got to focus more on tesla it was probably more of a wake-up call i don't think it was a threat and uh the one piece of the reporting that i i'm not quite sure on is this idea about like a firm to do an external search because

it's going to be really hard for Tesla to bring in somebody from the outside. And if you go back and look at my 2022 piece, I had Herbert Dees, the former CEO of Volkswagen, who is a big electrification guy, as the number one candidate to take over. But even that, there still is this nagging question about Tesla as a disruptor. They, by first principles of Elon, want to basically change the rules.

And in the case of bringing someone in as a CEO to bring them in from another culture, and they've got several people who have 10, 15, 16 years, 17 years of experience, they're

I just think it's going to be an internal point, internal person. One final take on all this. I just got totally caught up in all the details, the minutiae of it. The bigger picture is this, is in five years, Elon's not going to be CEO. He's going to be techno king. And today his job says CEO, but the reality is he's techno king. And just like he has with some companies like SpaceX, where he has people who like Gwen at SpaceX who basically are

He has those people who do a lot of the CEO roles today. And so if Elon said, I'm given the CEO role to pick a person and I'm going to be chief techno guy, Tesla's down 5%. If Elon says, I'm actually just going to spend all my time at XAI now because I really believe in this AI thing, stock's down 25%.

And that's just not going to happen. He's eventually Tesla and X probably come together. It makes sense longer term. And well, I think that that's where I was going to go with that. I think they probably

buy X and X AI. And he makes the argument that a lot of the, you know, spend on, you know, AI in general is going to benefit both companies. And that kind of helps maintain, um, the market cap. I mean, listen, you know, I think for him, it just makes it easier. We've seen this playbook. Um, he's done it with solar city. Now he's done it with X, which, you know, solar city and X were, were troubled, you know, there's no doubt about it. And so, um, who knows what's going on in X AI. I think people like, but he fixed in fairness, uh,

Twitter as X, I think is in a better place today than it was when it was run as Twitter, even though

Probably the revenue is less. - Yeah, much less. - Earnings are higher. - Yeah. All right, my man. Well, listen, we covered a lot of ground. I really appreciate it. I love the back and forth. Hopefully you come back before Nvidia in a couple of weeks. That would be really fun to kind of take a look and see where these stocks are trading and what the expectations are as far as, you know, what this CapEx translates into sales and margins and the like for Nvidia. So I appreciate it, Gene. - Let's do it. - Thanks so much, my man. Thank you.