Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Alphabet Is Getting Left Behind in the AI Cloud Race
Transcript
- Lucas: Alphabet is down three and a half percent this week. That is the worst performance in the S&P 500 top five by a wide margin — Apple is up three point seven, Tesla up three point nine. So when I look at that divergence, I think there is one story driving it, and it is not search or advertising. Luna: You are going to say cloud, right? Because that has been the narrative all year. Lucas: Exactly. Google Cloud is the third-place player in a market that is consolidating around two leaders. Microsoft Azure and Amazon Web Services together command something like sixty percent of the infrastructure as a service market. Google Cloud is maybe eleven or twelve. And the gap is not closing. In fact, it may be widening. Luna: That headline about Huawei planning new smartphone chips this fall — how does that connect? It feels like a China tech story, not a Google story. Lucas: It is both. Huawei's chip ambitions are a signal that the entire AI hardware supply chain is fragmenting. Google has been designing its own TPUs for years, but it still relies on NVIDIA for training at scale. If the us china tensions mean restricted access to cutting-edge chips, that hurts every hyperscaler. But it hurts the number-three player more than the number-one, because Google Cloud has less pricing power and less customer lock-in. Luna: So the tariff and chip war is a headwind for all of them, but Alphabet is the most exposed? Lucas: That is my read. Look at the numbers this week: Microsoft is down one percent, Amazon is up a hair. Alphabet down three and a half. The market is pricing in a specific vulnerability. And the APEC headlines over the weekend — the US and China remain far apart on trade — that just reinforces the overhang. There is no near-term resolution. Luna: I have been watching Google Cloud's revenue growth in the earnings reports. They are still growing in the high twenties year-over-year. So why does the market not reward that? Lucas: Growth rate alone is not enough when your competitors are growing faster from a bigger base. Azure is growing around thirty percent. AWS is slower, but its absolute dollar addition is massive. And Google Cloud is still barely profitable — its operating margin is maybe half of Azure's. So investors are asking: is Google Cloud ever going to be a real profit engine, or is it a cost center that happens to generate some revenue? Luna: That is the question. And I think the answer depends on whether Google can differentiate its AI offerings beyond what everyone else is doing. Lucas: Right. And if today's conversation actually helped you think about that question differently, here is the thing — the reason we can have this conversation without a sponsor pushing a narrative is that the show is supported by listeners. If you found this useful, you can keep it ad-free at buy me a coffee dot com slash fexingo. No pressure, just a way to say this matters to you. Luna: Yeah, and it genuinely makes a difference. Even a small contribution helps us keep the research time and the independence. Lucas: So back to the competitive dynamic. One thing I keep coming back to is the enterprise sales motion. Amazon and Microsoft have been selling to large enterprises for decades. Google's cloud sales force is younger, less embedded. And when a CIO is choosing a cloud provider, AI is important, but trust and relationship still matter a lot. Luna: You see that in the contract wins. Microsoft keeps landing these massive government and financial services deals. Google gets the startups and the digital-native companies. That is a smaller total addressable market. Lucas: Exactly. And the startup market is also the most price-sensitive. So Google Cloud ends up discounting more aggressively. That compresses margins. Meanwhile, Microsoft bundles Azure with Office 365 and GitHub Copilot and all these other tools. The switching cost for a customer already in the Microsoft ecosystem is enormous. Luna: So what would change the narrative for Alphabet? What would you need to see? Lucas: I think you would need to see Google Cloud's margin trajectory inflect meaningfully — maybe operating margins above fifteen percent for a couple of quarters. And you would need to see enterprise customer wins that are not just startups. If they land a big retail or healthcare contract, that would signal the sales motion is maturing. Luna: Do you think the market is overreacting this week? Three and a half percent in five days is a lot for a company of Alphabet's size. Lucas: It is a lot. But I do not think it is irrational. The S&P 500 is up one percent this week. The Dow is up one point eight. Small caps, as measured by the Russell 2000, are up three point four. So money is rotating out of the mega-cap tech names into areas that have been lagging. Alphabet is getting hit by that rotation, but also by its own specific cloud concerns. Luna: And you have the Kevin Warsh story about potential changes at the Fed's plumbing — that is a different kind of risk, but it adds to the uncertainty. Lucas: For sure. When the macro environment gets uncertain, investors flock to the highest-quality names. Microsoft and Amazon are perceived as higher quality in the cloud space than Alphabet. That is just the reality of the market's perception right now. Luna: What about the valuation? Alphabet is trading around what, twenty-two times forward earnings? That is cheaper than Microsoft at thirty-plus. Lucas: It is cheaper. But cheap can get cheaper if earnings estimates start coming down. And the risk right now is that Google Cloud's growth decelerates more than expected, or that margins stay compressed. If that happens, the multiple compression could continue. Luna: So you are not buying the dip here? Lucas: I am not saying no. I am saying I want to see evidence that the cloud business is turning the corner before I put new money in. The search advertising business is still a cash cow. YouTube is strong. But the stock's multiple is heavily influenced by the cloud narrative, and that narrative is under pressure. Luna: What about the argument that Google's AI models, like Gemini, are best-in-class and that will eventually drive cloud adoption? Lucas: That is a real argument. And I think there is some truth to it. But the market is skeptical because they have seen Google lead in AI research for years, and it has not translated into cloud market share. The question is whether this time is different. And for now, the market is saying, show me. Luna: It is almost like the AWS playbook from ten years ago. Amazon was the clear leader in cloud early, and it took years for competitors to catch up. Now Microsoft has caught up, and Google is still running behind. Lucas: Exactly. And in technology, being third in a winner take most market is a dangerous place. You need a very clear differentiator. Google's differentiator is supposed to be AI, but Microsoft also has strong AI with OpenAI. So the differentiation is not as clear as it once seemed. Luna: One last thing — how much of this week's move is just noise? It is only five days. Lucas: Some of it is noise. But when a stock breaks a technical level on above-average volume, it can signal a shift in sentiment. Alphabet broke below its fifty-day moving average this week. That is not a reason to sell by itself, but it is a data point that suggests momentum has turned negative. Luna: So for a stock picker, what is the takeaway? Wait for a clearer signal, or start building a position gradually? Lucas: I think the prudent approach is to wait. The risk-reward is not compelling enough yet. If the stock drops another five to ten percent, then you have a better margin of safety. But if the cloud narrative improves, you will have missed the first leg of the recovery. That is the trade-off. Luna: And that is the kind of decision that separates a concentrated portfolio from an index fund. You have to be willing to sit on your hands when the story is unclear. Lucas: Exactly. The best stock pickers I know are patient. They do not feel the need to be fully invested all the time. They wait for the pitch they can hit. And right now, Alphabet is not that pitch for me. Luna: Fair enough. I think the Huawei chip story and the trade tensions add a layer of uncertainty that is hard to model. Sometimes the smartest move is to watch. Lucas: And that is where we will leave it. Next week, I want to look at the small-cap rally — the Russell is up three point four percent this week, and there might be some interesting names emerging. Luna: Sounds good. I will bring the list.