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AI Investment Is Surging but the Numbers Don’t Add Up · The Financial Exchange Show

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Speaker 2: So it is Chuck, Mark and Talker with you here
1:14
Speaker 2: today kicking things off, and again I think obviously all
1:20
Speaker 2: eyes remain on the Middle East, even though look, let's
1:24
Speaker 2: be honest, markets are basically shrugging it off at this point,
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Speaker 2: which may or may not end up being the right
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Speaker 2: thing long term. Uh, But so that's obviously, you know,
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Speaker 2: something that continues to be in the backdrop. Yesterday we
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Speaker 2: had that uh weird little freak out when was it
1:40
Speaker 2: around two two thirty or so, when markets felt like
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Speaker 2: one percent in a span of a few minutes on
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Speaker 2: reports that air defenses were active around Tehran, and then
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Speaker 2: promptly recovered over the remainder of the day when it
1:54
Speaker 2: became apparent that no, there wasn't really anything going on there.
1:58
Speaker 2: So you still have Mark. It's a little bit touchy,
2:01
Speaker 2: but they're they're not really you know, paying attention to
2:04
Speaker 2: this from an energy perspective other than okay, oil price
2:08
Speaker 2: is expected to remain elevated, and that's kind of what
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Speaker 2: markets are pricing in. And whether that's right or wrong,
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Speaker 2: I don't really know, but that's what markets are saying
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Speaker 2: right now is yeah, this is not something that's going
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Speaker 2: to derail the broader economy, not just domestically. You take
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Speaker 2: a look at what we're seeing if you were to
2:29
Speaker 2: look at how international stocks are priced right now, you know,
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Speaker 2: you take a look at what we're seeing on those
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Speaker 2: major international indices, and they're within one or two percent
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Speaker 2: of where they were pre conflict. And so even in
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Speaker 2: the broad scheme of things, markets are saying, yeah, this
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Speaker 2: is not going to be a thing again. Time will
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Speaker 2: tell if that's actually the case here, but that's that's
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Speaker 2: what's being priced in right now. And so we'll turn
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Speaker 2: our eyes to what happened with Intel after the bell yesterday.
3:01
Speaker 2: Intel reported earnings after the close and had a nice
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Speaker 2: little quarter. Quite honestly, it's been a while since we've
3:08
Speaker 2: been able to say that about Intel, that you know,
3:11
Speaker 2: they've put some things together. But you've got the stock
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Speaker 2: now up twenty three percent in trading today at eighty
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Speaker 2: two dollars in change per share. And so the stock
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Speaker 2: is now you know, market caps up to four hundred
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Speaker 2: and thirteen billion dollars. And this is a company that
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Speaker 2: was you know, was recently his last summer worth only
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Speaker 2: around one hundred billion dollars from a market cap perspective,
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Speaker 2: there's still just a touch shy of where they got
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Speaker 2: to in the late summer of two thousand when they
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Speaker 2: closed in on five hundred billion dollars as their valuation.
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Speaker 2: But good just to see a little bit of positive
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Speaker 2: news from the company here. One quarter doesn't mean hey,
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Speaker 2: everything's fine and things are turned around, because this is
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Speaker 2: still a company that has questions about the ability to
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Speaker 2: grow its sales long term, given that its revenue is
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Speaker 2: now down about twenty five billion dollars or about thirty
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Speaker 2: percent from where it peaked in late twenty twenty one.
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Speaker 2: But at least some positive momentum for the company and
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Speaker 2: a good quarter here.
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Speaker 3: Yeah, if you're looking for a pop, I guess maybe
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Speaker 3: this was foreseeable. Some of the deal I like the
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Speaker 3: way you put that they put some interesting deals, he says,
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Speaker 3: something to that effect. Together, the question is are these
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Speaker 3: and you just alluded to it, are these one offs?
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Speaker 3: That's question number one. I think if you're an investment
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Speaker 3: if you're an asset manager say that owns Intel, or
4:36
Speaker 3: even if you're an individual considering buying it. Another is
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Speaker 3: are they going to be good stewards of the capital
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Speaker 3: that investors are entrusting to them. Sure their profit margin,
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Speaker 3: you know, their net incomes exploding, so their profit margin
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Speaker 3: will look really good at least in this short term.
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Speaker 3: As to I guess, if you're asking should I buy it?
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Speaker 3: You want to know is that sustainable? Are they going
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Speaker 3: to be? Are measures of management effectiveness, return on assets,
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Speaker 3: return on invested capital stuff that asset managers who dig
5:13
Speaker 3: into that type of thing and talk to management and
5:15
Speaker 3: get a sense for whether or not. Frankly, they're they're
5:18
Speaker 3: capable of being better stewards of capital for those two
5:22
Speaker 3: and they've been abysmal for intel. Will those improve in
5:26
Speaker 3: the long run? That's the open question. Yeah, is the
5:30
Speaker 3: culture changed to the point where they're going to be
5:33
Speaker 3: I k to keep using the phrase, but better, better
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Speaker 3: stewards of capital, more effective managers?
5:37
Speaker 2: I don't know, And ultimately look in order to be
5:41
Speaker 2: able to make those kinds of determinations, you need to
5:44
Speaker 2: have a sense of the people involved in the management, right,
5:48
Speaker 2: You've got to understand the technology at a very high level,
5:50
Speaker 2: which find being one hundred percent honest, I don't.
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Speaker 3: No no where. I'm personally a generalist, so I know, yeah, yeah.
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Speaker 2: It's I'm very much of the opinion. Look, Intel was
6:00
Speaker 2: one of the great US companies. In the last five
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Speaker 2: to ten years, it faltered. But I'm saying this based
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Speaker 2: on what I see publicly, not on you know, knowing, oh,
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Speaker 2: like they tried to manufacture using this way for process
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Speaker 2: and focus, Guys, I don't know. I see the numbers,
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Speaker 2: and I see the general of the broad strokes of
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Speaker 2: what they're trying to do, and I say, yep, hasn't
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Speaker 2: worked clearly, Like you know, in order to actually make
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Speaker 2: educated informed opinions about Hey, is there something new that's
6:30
Speaker 2: that's going on here, you gotta have a level of
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Speaker 2: understanding that I don't. So I think it certainly is
6:36
Speaker 2: nice that you're seeing, you know, some kind of return
6:39
Speaker 2: to form at least for this quarter here, But as
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Speaker 2: to you know, is there a broader recovery that's going
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Speaker 2: to be able to take place in the subsequent years?
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Speaker 1: Right?
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Speaker 3: So yeah, no one, Right, You've got this surfeit of
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Speaker 3: capital and embarrassment of riches really lately, and that's going
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Speaker 3: to distort measures of not distort, it inflates measures of profitability,
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Speaker 3: traditional measures of profitability. The question again is has the
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Speaker 3: culture changed to me as a generalist and you made
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Speaker 3: this point. I won't underscore it again, but take it
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Speaker 3: with a grain of salt. Has the culture changed sufficiently
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Speaker 3: such that they're going to be able to parley this
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Speaker 3: into the types of consistently productive employments of shareholder capital
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Speaker 3: that other, say, big tech names have been able to
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Speaker 3: to do. And we're going to talk about some others.
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Speaker 2: They've made just capital investments. This is the last ten
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Speaker 2: to fifteen years. The company I'll compare them to in
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Speaker 2: that respect is AT and T. AT and T once
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Speaker 2: another great American company, you know, like the like led
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Speaker 2: the world in terms of, you know, building out connectedness
7:42
Speaker 2: over the course of the twentieth century.
7:45
Speaker 4: Then they say, oh.
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Speaker 2: No, let's go buy direct TV, let's go buy you know, HBO, like,
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Speaker 2: let's do all these things. And they just were not
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Speaker 2: a good steward of capital in the last fifteen years.
7:55
Speaker 2: And it's been reflected in the stock price. You wouldn't
7:57
Speaker 2: go to AT and T and be like, guys, I
8:00
Speaker 2: got twenty billion dollars, let's go do something fun with it.
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Speaker 2: You'd be like, no, I don't really trust those guys.
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Speaker 2: I don't really think that's the best idea. So with Intel,
8:08
Speaker 2: here it's kind of been the same thing for the
8:11
Speaker 2: last not as long of a period as AT and
8:13
Speaker 2: T maybe the last you know, five to seven years,
8:16
Speaker 2: but it's something where you still don't you know, just
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Speaker 2: sit there and say, hey, let me run with the
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Speaker 2: bag of money to Intel, because their track record of
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Speaker 2: managing that capital recently has not been good and this
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Speaker 2: could just be an aberration for a couple of quarters,
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Speaker 2: or this could be the start of a new positive trend,
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Speaker 2: but it's it's impossible to know right now.
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Speaker 3: If a if the frenzy of investments surrounding AI data
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Speaker 3: centers and so forth, Yeah, if that faded over the
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Speaker 3: next few years, that sounds like a preposterous proposition, but
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Speaker 3: just sort of.
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Speaker 1: Go with it.
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Speaker 3: Then how would you feel about Intel?
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Speaker 2: They're not really it's not really their bread and butter though,
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Speaker 2: Like that's not where they're doing a ton of interesting stuff.
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Speaker 3: So is my is my question wrong? Then should I have?
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Speaker 1: How?
8:59
Speaker 4: Well?
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Speaker 2: I don't look at Intel right now and say, hey,
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Speaker 2: like they're a leader in the data center space, Like, yes,
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Speaker 2: they're trying to get into it and do some interesting
9:07
Speaker 2: things there, but ultimately, like as we see with semiconductors,
9:13
Speaker 2: time and time again, like every every cycle is going
9:16
Speaker 2: to end horribly for all of these companies. Like it's
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Speaker 2: not an Intel thing, Like this is not an Intel problem.
9:23
Speaker 2: Like it again, you can make again semiconductors. Right now,
9:26
Speaker 2: we're on their nineteenth straight day of games, nineteen straight again,
9:30
Speaker 2: they're four days away now from doing it for every
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Speaker 2: day in April. It's it's freaking insane. But at some
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Speaker 2: point this is going to end in tears for all
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Speaker 2: these semiconductor companies because it always does with semiconductor companies.
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Speaker 2: That might not be until five, ten, fifteen years now,
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Speaker 2: it might be five weeks from now, Like I have
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Speaker 2: no idea. It's probably not five weeks from now, given
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Speaker 2: what we're seeing in terms of the computing demand that's
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Speaker 2: out there. But it's not an Intel like, this is
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Speaker 2: not an Intel problem. If the AI cap X boom
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Speaker 2: goes goes under, it's an everyone problem for the semiconduction.
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Speaker 3: This is going to end badly, is it? Because the
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Speaker 3: business cycle turns, demand falls off and all of a sudden,
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Speaker 3: you've got this. Okay, I just want to go I.
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Speaker 2: Want to flesh that build this crazy excess capacity because
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Speaker 2: I wanted to say it. You spend years building this
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Speaker 2: capacity and then it's like, Okay, I guess we don't
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Speaker 2: need it anymore. What are we going to do with it?
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Speaker 2: And there's nothing you can do. These facilities are not
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Speaker 2: profitable if you don't run them one hundred percent capacity
10:28
Speaker 2: one hundred percent of the time.
10:29
Speaker 3: Trampoline park, it will be nice bowling alley.
10:33
Speaker 4: You think my painfall.
10:35
Speaker 2: Let's take a quick quick break. When we come back,
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Speaker 2: let's stick with some AI chatter. We've got Oracle and
10:41
Speaker 2: Meta that we're going to discuss next.
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Speaker 2: All right, So we got a piece here in the
11:55
Speaker 2: Wall Street Journal. It's titled Oracles Deluge of AI Debt.
12:01
Speaker 2: It's a good turn of phrase. I like the enjoy
12:03
Speaker 2: the headline writer who put that together pushes Wall Street
12:07
Speaker 2: to the limit.
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Speaker 4: And here's the deal.
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Speaker 2: Oracle doesn't really have much in the way of free
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Speaker 2: cash flow. It's it's just again, their core business is
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Speaker 2: kind of stagnant. It's not really like it hasn't done
12:22
Speaker 2: anything particularly interesting in a while. And so basically, as
12:28
Speaker 2: they've started to ramp up these data centers that they've
12:31
Speaker 2: been building, their free cash flow is gone from around
12:34
Speaker 2: nine point five billion over the twelve months ending in
12:37
Speaker 2: November of twenty four to negative twenty four point seven
12:41
Speaker 2: billion dollars for the last twelve months, which means if
12:45
Speaker 2: you want to spend continue to spend money to build
12:47
Speaker 2: data centers, you need one of two things. A bunch
12:50
Speaker 2: of cash on hand. They've got about you know, forty
12:53
Speaker 2: billion dollars. Okay, But look, if you're gonna keep you know,
12:56
Speaker 2: spending money at that equip and actually accelerate it, which
12:58
Speaker 2: is what they're trying to do with you know, three
13:00
Speaker 2: hundred billion dollars of you know, expansion over the next
13:04
Speaker 2: couple of years, you're gonna need to borrow a bunch
13:06
Speaker 2: of money. And so what you're running into now is
13:10
Speaker 2: the question of, hey, are these deals actually going to
13:14
Speaker 2: be able to come together for Oracle to continue financing
13:19
Speaker 2: this And so it's unclear about some of these future
13:23
Speaker 2: projects that are tied to Oracle as to whether or
13:25
Speaker 2: not they're going to.
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Speaker 4: Be able to build them.
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Speaker 2: So, as I've been saying for a while, I think
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Speaker 2: two things are true at the same time. Number One,
13:35
Speaker 2: as we go through the next couple of years, there
13:37
Speaker 2: is going to be a shakeout where a lot of
13:38
Speaker 2: companies that are in the AI space are going to
13:42
Speaker 2: have real problems continuing to operate because of the dollars
13:45
Speaker 2: needed to operate. And despite that, I think that five
13:49
Speaker 2: years from now, we are all in one you know,
13:52
Speaker 2: some way or another, going to be using way more
13:54
Speaker 2: artificial intelligence in the aggregate than we are today.
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Speaker 4: So I think the when you look at this.
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Speaker 2: Oracle's got a real problem because they just don't have
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Speaker 2: the cash flow to manage this. You can trast this
14:07
Speaker 2: as an example with Microsoft, who still has seventy seven
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Speaker 2: billion dollars in you know, last twelve month free cash flow.
14:14
Speaker 2: They've got ninety billion dollars on hand. Great, they can
14:17
Speaker 2: figure this out. You go and you take a look
14:19
Speaker 2: at Amazon and Amazon again, their free cash flow's always
14:23
Speaker 2: been tighter to begin with, just because Bezos and Jassie
14:27
Speaker 2: you know, by extension, have always been you know, hey,
14:30
Speaker 2: money comes in, we want to spend it expanding like that.
14:33
Speaker 2: That's kind of the whole premise. But even they, you know,
14:36
Speaker 2: this AI kapex boom that they're going through, they've seen
14:39
Speaker 2: their free cash flow drop from you know, fifty billion
14:42
Speaker 2: dollars a year back in mid twenty four around seven now.
14:45
Speaker 2: So the question is like you got to start financing
14:48
Speaker 2: this or the other way that you figure this out,
14:51
Speaker 2: you got to start making way more revenue from the
14:54
Speaker 2: AI stuff that's being done. And granted, what we have
14:57
Speaker 2: seen in the first quarter of this year is companies
15:00
Speaker 2: like Anthropic have gone from you know, low single digit
15:03
Speaker 2: billions of revenue on an annualized basis to like thirty
15:07
Speaker 2: billion in revenue on an annualized basis. So it is
15:09
Speaker 2: picking up, but you've got to continue to grow that
15:13
Speaker 2: revenue in order to help pay for this. And the
15:16
Speaker 2: problem is when you start factoring in all of the
15:18
Speaker 2: depreciation for these assets that builds over time. It's not
15:23
Speaker 2: something where you're like, yeah, we did twenty billion in revenue,
15:26
Speaker 2: like that'll make it work. The numbers that you need
15:28
Speaker 2: to get to for artificial intelligence spending are closer to
15:32
Speaker 2: like a trillion dollars a year, you know, one point
15:35
Speaker 2: five trillion a year, so that like there's a ton
15:38
Speaker 2: of money that needs to get into this. And so
15:41
Speaker 2: it's again we're kind of at a really interesting part
15:44
Speaker 2: in markets right now where it's really clear that there's
15:49
Speaker 2: just not enough artificial intelligence computing power to go around
15:53
Speaker 2: to meet demand today, so there's more that has to
15:56
Speaker 2: be built.
15:57
Speaker 4: Like this is showing up.
15:59
Speaker 2: If you look at like rental rates for in video GPUs,
16:02
Speaker 2: like if you're trying to rent them out for model usage,
16:05
Speaker 2: they've spiked in the last month because it's very clear
16:08
Speaker 2: there's just not enough computing power out there for what
16:13
Speaker 2: the demand is right now. The question is how do
16:17
Speaker 2: you actually go about paying for the build out because
16:20
Speaker 2: it's really hard to get there, and so you've got
16:24
Speaker 2: a couple options. Number one, continue to, you know, find
16:27
Speaker 2: ways to get the debt financing done. Number two is
16:31
Speaker 2: start raising prices, which is I think what you're starting
16:34
Speaker 2: to see. But the problem is a lot of the
16:35
Speaker 2: stuff is also being more you know, it's being commoditized.
16:38
Speaker 2: So this is why you can hold a few different
16:41
Speaker 2: views in your head at the same time, which is, yeah,
16:44
Speaker 2: we're gonna be using way more AI in the future.
16:47
Speaker 2: There's a ton of demand right now that needs to
16:49
Speaker 2: be filled, and so I understand why semiconductor stocks are
16:51
Speaker 2: ripping for the last month. But also I don't know
16:55
Speaker 2: how the dollars end up adding up on all of this,
16:58
Speaker 2: and there's going to be some companies that have a
17:01
Speaker 2: really tough time because the dollars just won't work for them.
17:05
Speaker 3: Oracle doesn't have the breathing. They don't have the income
17:08
Speaker 3: to cover the There are times interester earned if you
17:10
Speaker 3: like that ratio is like five, Amazon's is about forty.
17:14
Speaker 1: Is an example.
17:16
Speaker 3: You got a lot of high quality companies and I
17:18
Speaker 3: won't name them because I'm a generalist, I'm gonna get
17:22
Speaker 3: it wrong, but you get a lot of high quality
17:24
Speaker 3: companies today that are going to be much lower quality
17:27
Speaker 3: companies as this progresses. I don't know how long it's
17:32
Speaker 3: going to take. You've already made this point, really, and
17:35
Speaker 3: you've got others that just aren't going to be around.
17:37
Speaker 2: So again, this is kind of where things sit in
17:40
Speaker 2: this AI space. The follow on story to this meta
17:44
Speaker 2: announcing yesterday that they are planning to lay off ten
17:47
Speaker 2: percent of their workforce in May, about eight thousand people,
17:51
Speaker 2: in order to boost efficiency and offset AI investments. So
17:55
Speaker 2: basically saying, yeah, we know we have to spend a
17:56
Speaker 2: bunch of money and we're going to try to do
17:59
Speaker 2: that through laying people off. The interesting thing to me
18:05
Speaker 2: is what happened with MetaStock yesterday. Did you happen to
18:07
Speaker 2: watch it yesterday?
18:08
Speaker 3: Mark?
18:09
Speaker 2: I did, I had I was just I was like
18:12
Speaker 2: a hawk on a mouse for the entire afternoon. I'm like,
18:16
Speaker 2: I'm not hungry yet, Mouse, but when I am, I'm
18:20
Speaker 2: gonna get you. And that that's what I was doing
18:22
Speaker 2: with Meta stock.
18:24
Speaker 4: It went down.
18:26
Speaker 2: And what's interesting to me is, you know, typically or
18:30
Speaker 2: not typically, but in this cycle, the last couple of
18:33
Speaker 2: companies that have announced large layoffs. Amazon Block was the
18:38
Speaker 2: guys who announced, you know, the forty percent layoff. You've
18:41
Speaker 2: seen their stock pop. And so my my fear is
18:44
Speaker 2: that you get this corporate lemming behavior going on, because
18:47
Speaker 2: my big belief is that CEOs aren't really that special.
18:50
Speaker 2: They're basically corporate lemmings and they see someone else do
18:53
Speaker 2: something and their stock goes up and they say, oh,
18:54
Speaker 2: I'm gonna do that too. Like's there's just not much
18:57
Speaker 2: risk taking behavior in the C suite in general all
19:00
Speaker 2: these days. I think it's a real problem that we've
19:02
Speaker 2: gotten to through the business schoolification of American business is
19:08
Speaker 2: just like everyone's like looking at the spreadsheet. No one's
19:10
Speaker 2: looking at what's actually happening.
19:13
Speaker 1: I digress.
19:14
Speaker 2: So my fear was like, Okay, like all these corporate
19:17
Speaker 2: lemmings are going to be like, oh, if I like
19:19
Speaker 2: lay people off and say it's because of AI. My
19:21
Speaker 2: stock's gonna go up great. Well, Metas said they're gonna
19:24
Speaker 2: lay a bunch of people off in their stock would down.
19:27
Speaker 4: What does that say? We'll discuss when we return.
19:41
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19:48
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19:52
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19:59
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20:00
Speaker 5: All markets are mixed after yesterday's tech sell off. A
20:03
Speaker 5: mid reports that Iranian negotiators are heading to Pakistan, lifting
20:07
Speaker 5: hopes that peace talks might resume. Right now, the Dow
20:11
Speaker 5: is off by about a third of a percent, SMP
20:13
Speaker 5: five hundred is up two tenths of a percent, NASDAC
20:16
Speaker 5: up nearly six tenths of a percent. Ten year treasreeled
20:21
Speaker 5: is down one basis point at four point three zero
20:24
Speaker 5: six percent. Oil is down about seven tenths of a percent,
20:28
Speaker 5: and Russell two thousand, by the way, is mostly flat
20:32
Speaker 5: breaking news this hour after the Justice Department said it
20:35
Speaker 5: would end its criminal investigation into Fed Reserve chair Jerome Powell,
20:40
Speaker 5: clearing the obstacle that has stalled Kevin Walsh's confirmation as
20:44
Speaker 5: his successor. Meanwhile, Intel is the big tech story on
20:47
Speaker 5: the day after the chip maker posted first quarter earnings
20:50
Speaker 5: that beat Street forecast, leading to more optimism that the
20:54
Speaker 5: chip maker is finally starting to turn things around. Intel
20:58
Speaker 5: stock is up over twenty percent actually now up twenty
21:03
Speaker 5: two percent higher. Meanwhile, Meta said it will cut about
21:06
Speaker 5: ten percent of its workforce are about eight thousand workers,
21:09
Speaker 5: to boost efficiency and offset AI investments. Separately, Microsoft announced
21:14
Speaker 5: it is offering voluntary buyouts to about seven percent of
21:17
Speaker 5: its employees, marking a first for the tech giant. Meta
21:22
Speaker 5: up by one percent, while Microsoft shares are modestly and
21:25
Speaker 5: consumer goods giant Procter and Gamble bet earning exam revenue
21:29
Speaker 5: estimates as its products volume grow for the first time
21:32
Speaker 5: in a year. Procter and Gamble stock is up by
21:35
Speaker 5: three percent. I'm Tucker Silva and that is Wall Street Watch.
21:39
Speaker 2: So uh, in the last segment I mentioned we've been
21:43
Speaker 2: talking about Meta and that you've seen you know a
21:45
Speaker 2: number of companies announced the layoffs because of you know AI. Recently,
21:51
Speaker 2: you know, positive things for AIOI oh block saying oh,
21:54
Speaker 2: we're gonna get rid of forty percent of our workers
21:55
Speaker 2: because we think AI can do the job. And Amazon's saying, yeah,
21:58
Speaker 2: we're you know, focusing on AI laying off a bunch
22:00
Speaker 2: of people.
22:01
Speaker 1: Blah blah blah.
22:02
Speaker 2: So Meta comes in yesterday it says, hey, these guys
22:06
Speaker 2: had their stock pop when they announced these layoffs. Maybe
22:13
Speaker 2: we can do that too. Plus hey, like, yeah, we're
22:14
Speaker 2: trying to invest all this money into AI. We could
22:16
Speaker 2: probably I don't know, save a little bit of it,
22:19
Speaker 2: because gee, it's kind of expensive for us to do this.
22:23
Speaker 2: And hey, even though we're sitting at eighty billion dollars
22:25
Speaker 2: in cash, our trailing twelve month free cash flow is
22:29
Speaker 2: gone from you know, fifty five billion down to forty
22:31
Speaker 2: six and it's only gonna worsen because you know, we're
22:34
Speaker 2: really starting to ramp these investments up. Okay, let's do
22:37
Speaker 2: the responsible thing and you know, find some ways to
22:40
Speaker 2: cut headcounts. Not saying you have to agree with them,
22:42
Speaker 2: just saying you have to understand the way they're thinking.
22:46
Speaker 2: And so MetaStock goes from, let's see, they closed the
22:51
Speaker 2: day before at six seventy four, and then the day
22:55
Speaker 2: they announced the layoffs they closed it's six fifty nine,
22:57
Speaker 2: so it's about a two and a half percent pullback
22:59
Speaker 2: on the stock, though at one point was down another
23:02
Speaker 2: one percent from there, but it's not really a Meta thing.
23:05
Speaker 2: Everything else was down one percent more in the middle
23:07
Speaker 2: of the day when some of those Iran conflict fears
23:10
Speaker 2: popped up for like an hour yesterday. So what does
23:15
Speaker 2: it mean when Meta is announcing layoffs and the stock
23:20
Speaker 2: doesn't perform Because the other thing about Meta, remember Tucker,
23:23
Speaker 2: what was the year that.
23:24
Speaker 4: They did that? Zuck did his year of Efficiency? Oh,
23:28
Speaker 4: I don't know when was that.
23:30
Speaker 2: It was. It was like the year after they announced
23:31
Speaker 2: all this crazy spending and the market hated it. And
23:34
Speaker 2: I think it was twenty twenty three, just because that's
23:36
Speaker 2: when the stock ripped again, So it was probably twenty three.
23:40
Speaker 2: They laid off a ton of people in twenty three yep,
23:42
Speaker 2: twenty three, and the stock ripped because they had this
23:45
Speaker 2: year of efficiency in the market loved it great. So
23:49
Speaker 2: Zuck goes back to that well plus the AI well,
23:52
Speaker 2: and yet the stock sells off. So it tells me
23:56
Speaker 2: a couple of things. The first is, no one's really
24:00
Speaker 2: looking at Meta's core business, being like, hey, there's a
24:04
Speaker 2: problem here. Again, their margins right now are like forty percent.
24:08
Speaker 2: They've basically been in that range since twenty twenty four.
24:13
Speaker 2: The problem in twenty two and twenty three, when they're
24:16
Speaker 2: making these big metaverse investments, their margins dropped from forty
24:19
Speaker 2: percent down to twenty eight and so it was okay, like, yeah,
24:23
Speaker 2: I gotta get my margins back up to forty because
24:25
Speaker 2: these metaverse things aren't you know, the metaverse is not
24:28
Speaker 2: working for us.
24:30
Speaker 4: So number one, I don't.
24:31
Speaker 2: Think that investors are looking at the core business being
24:34
Speaker 2: like there's a margin problem here.
24:37
Speaker 4: Number two.
24:39
Speaker 2: Is when we look at the AI side of things,
24:42
Speaker 2: I think meta is still very much unproven there that
24:47
Speaker 2: they can actually compete in any meaningful way. It's just
24:51
Speaker 2: not clear that they can. The other piece is that
24:55
Speaker 2: their business is growing just fine. You know, you take
24:59
Speaker 2: a look at their revenue.
25:00
Speaker 4: It's on a.
25:00
Speaker 2: Nice, steady upward trajectory. There's no concerns there. It's not
25:04
Speaker 2: something where cutting is going to be like the big
25:08
Speaker 2: thing that that changes things. Part of the problem back
25:10
Speaker 2: in twenty two was that revenue had been kind of
25:14
Speaker 2: stagnant for a couple of years, alf so they were
25:16
Speaker 2: just kind of plateauing around one hundred and twenty billion
25:18
Speaker 2: dollars a year in revenue, and so okay, cutting some
25:21
Speaker 2: you know, headcount is gonna you know, help on you know,
25:25
Speaker 2: getting things thinner so that even if we don't grow revenue,
25:27
Speaker 2: we can still see some improvement in margins and stuff
25:32
Speaker 2: like that. So I think that MET is kind of
25:35
Speaker 2: in an interesting spot here where look the core business. Again,
25:40
Speaker 2: I don't really like, you know, I'm not like a
25:42
Speaker 2: Zuck fan, like you're gonna basically not really ever liked
25:47
Speaker 2: the guy.
25:47
Speaker 4: I don't like, you know, intensely dislike him or anything.
25:50
Speaker 2: But I don't know there's a reason why we make
25:52
Speaker 2: fun of him and we don't trust him on privacy,
25:53
Speaker 2: and like we have all these problems with Zuck, like
25:55
Speaker 2: we get it. But the fact is, like they're they're
25:57
Speaker 2: humming on all cylinders right now except for the piece.
26:01
Speaker 2: I think what this is, in my opinion, investors don't
26:04
Speaker 2: trust that MET is going to do anything interesting on AI,
26:07
Speaker 2: and they don't see layoffs as being a key driver
26:10
Speaker 2: for additional profit. It's just not something they see there.
26:14
Speaker 2: I'm curious if you have any other any other thoughts
26:16
Speaker 2: on it. Mark.
26:18
Speaker 3: You know again, I think shareholders should be concerned not
26:22
Speaker 3: with little blips to profit margins, you know, net income.
26:27
Speaker 3: It's going to bounce around, particularly due to business cycle effects,
26:30
Speaker 3: but the longer term question of are they good I
26:33
Speaker 3: hate to keep braising the phrase, but I'll use it again.
26:36
Speaker 3: Are they going to be good stewards of long term capital?
26:39
Speaker 4: Sure?
26:39
Speaker 3: And are they doing a good job of managing You
26:41
Speaker 3: called it the core business. I think that's a good
26:42
Speaker 3: way to think about it. That which has resulted in,
26:47
Speaker 3: you know, consistently good margins, not just net profit, but
26:53
Speaker 3: other margins of of of operating profit and return on
26:59
Speaker 3: capital and equity that point to someone being a good
27:02
Speaker 3: steward of capital. I arguably their track record there is
27:06
Speaker 3: pretty good.
27:07
Speaker 2: Another tech company announcing layoffs. This is gonna be a
27:11
Speaker 2: voluntary one. At this point, Microsoft offering its first ever
27:15
Speaker 2: voluntary buyouts, so not really a layoff yet, but it'll
27:19
Speaker 2: get there if they don't get enough people taking this up.
27:21
Speaker 2: Quota from the Wall Street Journal, roughly seven percent of
27:24
Speaker 2: the company's US employees are eligible, According to a person
27:27
Speaker 2: familiar with the matter. To be eligible, employees must be
27:30
Speaker 2: at a senior director level or below, and there are
27:33
Speaker 2: years of employment plus age must add up to at
27:36
Speaker 2: least seventy.
27:38
Speaker 4: Okay, so let me do that. Let's let's do the
27:40
Speaker 4: math on this, Tucker, just to get there.
27:43
Speaker 2: Sure, So if I'm sixty with ten years of experience,
27:47
Speaker 2: that gets me there. If I'm fifty with twenty years
27:52
Speaker 2: and I don't think I could really be forty with
27:54
Speaker 2: thirty years of Microsoft experience because I probably didn't start
27:57
Speaker 2: working there at ten, probably, you know, unless you're you know,
28:03
Speaker 2: Doogie Howser of the tech space. But ultimately, I gotta
28:08
Speaker 2: be honest. Look, it's it's pretty much this reads as, hey,
28:13
Speaker 2: you fifty year olds who have been here since the
28:15
Speaker 2: tech bubble, get out like that. That's that's who this is.
28:19
Speaker 2: They're not targeting anyone young like the youngest party. The
28:23
Speaker 2: youngest person you could possibly target here is like a
28:27
Speaker 2: forty seven year old who's been there since they were
28:29
Speaker 2: twenty four, right like that.
28:33
Speaker 4: That's as far as you get.
28:34
Speaker 2: So it's pretty much, yep, all you fifty to sixty
28:38
Speaker 2: five ers, we would kindly.
28:40
Speaker 4: Ask that you leave totally typical terms. Yeah.
28:43
Speaker 2: Uh so again, I'm I'm not surprised that Microsoft is
28:47
Speaker 2: moving in this direction either. Again, it's it's not like
28:50
Speaker 2: Microsoft has any financial problems.
28:53
Speaker 4: They don't.
28:54
Speaker 2: In fact, financially they continue to be, you know, in
28:59
Speaker 2: a pretty good spot. But they're gonna have compression in
29:02
Speaker 2: their free cash flow coming as well. Again they're they're
29:05
Speaker 2: trailing twelve month free cash flow is still hanging out,
29:09
Speaker 2: you know, pretty much fine, but things are changing as
29:14
Speaker 2: we look at you know, kind of what's going on there,
29:17
Speaker 2: because they are accelerating capex and so I think they
29:20
Speaker 2: want to you know, reduce headcount to try to get
29:22
Speaker 2: ahead of that. And ultimately, here's the thing. The headcount
29:27
Speaker 2: they're reducing, it's a drop in the bucket, you know,
29:31
Speaker 2: it's not big enough to move the needle.
29:33
Speaker 4: Actually, Like that's the other.
29:34
Speaker 2: Piece is when you actually go and say, okay, like
29:37
Speaker 2: show me what's going on, Like where's the money actually
29:40
Speaker 2: go on this stuff. They're not going to get rid
29:44
Speaker 2: of seven percent of their headcount. Maybe they end up
29:46
Speaker 2: getting rid of like one to three percent, you know,
29:49
Speaker 2: through this voluntary procedure here you'll look at the rest
29:53
Speaker 2: and you say, okay, Like, ultimately, is it going to
29:56
Speaker 2: make you know, a huge difference.
29:57
Speaker 4: I'm not really sure that it does.
30:00
Speaker 3: These are older managers and maybe former engineers who are
30:03
Speaker 3: now managing groups. Ye, who whose skills are.
30:09
Speaker 4: Dated?
30:10
Speaker 3: Is that fair? I don't know, not my area, but look,
30:12
Speaker 3: i'd rather viewed.
30:13
Speaker 2: Talk to any employee in their fifties and they'll tell
30:15
Speaker 2: you that age discrimination is a thing, you know.
30:19
Speaker 3: Yeah, yeah, Look, I think they know who they're targeting.
30:25
Speaker 3: They they know who's on that list. When financial services
30:29
Speaker 3: companies do it, it's very deliberate, yep, and quite well
30:33
Speaker 3: thought out.
30:34
Speaker 4: Let's take a quick break.
30:35
Speaker 2: When we return, we'll talk a little bit about inflation
30:39
Speaker 2: after this.
30:40
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30:46
Speaker 1: This is the Financial Exchange text US six one seven, three,
30:51
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30:54
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30:57
Speaker 1: about the stories we are covering. This is the financi
31:00
Speaker 1: it should Exchange radio network.
31:13
Speaker 4: All right, we got a PC here from Bloomberg.
31:15
Speaker 2: It's titled economists raise US inflation forecasts as Iran war
31:20
Speaker 2: drags on. Obviously, the like active phase of the conflict
31:24
Speaker 2: is no longer going on, but you still have horm
31:26
Speaker 2: moves closed, and so the economists are, you know, kind
31:29
Speaker 2: of looking at this being like okay, like, guys, you
31:32
Speaker 2: gotta get moving because this is going to cause some
31:35
Speaker 2: problems more than just a brief blip if Hormus remains closed.
31:39
Speaker 3: So we had a level shock, meaning the price of
31:41
Speaker 3: oil went up, and that's a one time jumping headline inflation.
31:44
Speaker 2: And if it were to go back down, then if
31:47
Speaker 2: you look at here over your numbers, you'd say, okay,
31:49
Speaker 2: like not a big deal, might look a comfortable.
31:51
Speaker 3: But yeah, I mean we had a couple. There are
31:53
Speaker 3: some parallels here. The seventies is one. There were a
31:56
Speaker 3: couple of oil price shocks, and you can see two
31:59
Speaker 3: big humps in the CPI year over year in the seventies.
32:03
Speaker 3: It's a good thing to acquaint yourself with if you're
32:04
Speaker 3: interested in The key point is that it did come
32:07
Speaker 3: back down on its own. Another key point is that
32:10
Speaker 3: underlying inflation in that period and now, though less so
32:13
Speaker 3: than then, is elevated. This is problematic because the FED
32:19
Speaker 3: can't afford to accommodate, and by that I mean not
32:24
Speaker 3: push back against shocks like oil price shocks like the
32:28
Speaker 3: one we're experiencing today. The question is like, do they
32:31
Speaker 3: have to will it come back down on its own
32:35
Speaker 3: or are we just at a new price level? And
32:39
Speaker 3: is the shock behind us? Furthermore, does the rise in
32:44
Speaker 3: the oil price trickle into We saw the increase in
32:46
Speaker 3: headline inflations that trickle into core inflation, sure via wages,
32:50
Speaker 3: via inputs, via expectations, which have also gone up. This
32:54
Speaker 3: is the most challenging period the FED is faced since
32:57
Speaker 3: the late nineteen seventies, and it took a while for
33:01
Speaker 3: the FED to get things right then, partly because there
33:04
Speaker 3: was no precedent then. There was no nineteen seventies precedent
33:07
Speaker 3: for the nineteen seventies. They were figuring it out, and
33:09
Speaker 3: we were figuring out as a society how much power
33:12
Speaker 3: we wanted to give the Fed to crush inflation because
33:14
Speaker 3: it was painful.
33:15
Speaker 4: Sure are we willing to give.
33:16
Speaker 3: The Fed that much power? Suppose this shock lasts, oil,
33:21
Speaker 3: say stays where it is today for six months, expectations
33:24
Speaker 3: stay elevated. What will the FED do given the sort
33:29
Speaker 3: of unique political pressure on Walsh, the incoming presume the
33:33
Speaker 3: presumed incoming chair. I don't know. I'm asking a lot
33:36
Speaker 3: of questions shock, I don't have any answers.
33:39
Speaker 5: No.
33:39
Speaker 2: I mean, look, there are a ton of different variables here.
33:43
Speaker 2: The single most important one is still going to be
33:45
Speaker 2: whend this horne's open like nothing else matters aside from
33:48
Speaker 2: that when it comes to inflation for the rest of it, and.
33:50
Speaker 3: Where are we today it's closed.
33:52
Speaker 4: Yes.
33:53
Speaker 2: So here's the big thing is again, if you're at
33:57
Speaker 2: the point now where the best case scenario that you
34:00
Speaker 2: can get to is probably somewhere around one point two
34:03
Speaker 2: billion barrels of oil that are not produced because of this,
34:07
Speaker 2: because of shut ins, Like you need to stop even
34:09
Speaker 2: thinking about it in terms of like what ships are
34:11
Speaker 2: going back and forth, and it's it's more, Hey, the
34:15
Speaker 2: countries that produce oil, how much are they producing? And
34:17
Speaker 2: right now we have about twelve billion barrels a day
34:20
Speaker 2: that are not being produced by countries in the Middle East.
34:25
Speaker 2: You're getting to a point again, I keep circling Cinco Demaya,
34:30
Speaker 2: which now is just eleven days away. And if you
34:35
Speaker 2: don't have a resolution to the situation by then that
34:38
Speaker 2: can allow for you know, a reasonable case that production
34:43
Speaker 2: can start to resume later in May. You've got a
34:47
Speaker 2: real problem because when you talk about global oil inventories. Remember, like,
34:52
Speaker 2: here's the thing. People look at the the US Strategic
34:58
Speaker 2: Reserve just as an examp and if you take a
35:03
Speaker 2: look at how much oil is in there. The peak
35:07
Speaker 2: that we had and again this was you know, kind
35:10
Speaker 2: of back at you know, it's again it's high point
35:15
Speaker 2: was somewhere in the ballpark of seven hundred and twenty
35:18
Speaker 2: seven hundred and thirty million barrels. Today you've got around
35:24
Speaker 2: four hundred million barrels, and so people say, okay, that's great,
35:28
Speaker 2: like that there's you know, a lot there and we've
35:30
Speaker 2: we've started to see the draws recently. We i think
35:32
Speaker 2: pulled about four million out last week. The peak that
35:35
Speaker 2: we'll be able to get to from a flow rate
35:37
Speaker 2: perspective is probably around ten to eleven million barrels a week,
35:41
Speaker 2: and we're authorized down to around two hundred and forty
35:43
Speaker 2: million barrels. The big thing is you can't go to
35:48
Speaker 2: zero on this, not that you would want to anyways,
35:51
Speaker 2: but the reason that you can't is because of how
35:54
Speaker 2: these reserves are held.
35:56
Speaker 4: It's in a bunch of salt caverns. It's just like
35:58
Speaker 4: a swimming pool.
35:58
Speaker 2: If you empty it completely, if it stays that way
36:02
Speaker 2: for any extended period of collapses, Like the oil is
36:06
Speaker 2: important to the structural integrity, and the bottom stuff honestly
36:08
Speaker 2: gets all sludgy because it's mixing with the salt.
36:11
Speaker 4: And you know it.
36:12
Speaker 2: Doesn't just work either. See, you don't really have as
36:16
Speaker 2: much cushion as you think because other things that are
36:19
Speaker 2: included in inventory, oil that's in pipelines and things like that.
36:23
Speaker 2: We actually need that in order to provide the pressure
36:24
Speaker 2: to keep things moving. So you're gonna get to a
36:27
Speaker 2: point where this becomes problematic and you need some positive
36:31
Speaker 2: news once that starts happening to say this is just
36:33
Speaker 2: an air pocket.
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37:35
Speaker 2: Let's see what else do I want to touch on here? Oh?
37:38
Speaker 4: Yeah, Avistock.
37:40
Speaker 2: If you happen to be following them recently, you may
37:43
Speaker 2: have caught that the stock went from gee, what was it?
37:47
Speaker 2: It started at yeah, about one hundred bucks a share,
37:49
Speaker 2: and then went up to eight point fifty After just
37:52
Speaker 2: a massive kind of short squeeze, it's back down to
37:56
Speaker 2: two hundred and thirty two dollars per share. Now regular
38:00
Speaker 2: run of the mill, normal stuff, where a stock goes
38:02
Speaker 2: up seven hundred percent in a couple of weeks and
38:04
Speaker 2: then fall seventy five percent in two days. It's really
38:09
Speaker 2: normal stuff.
38:10
Speaker 3: I can't say what I want to say because it's
38:11
Speaker 3: gonna take too long.
38:12
Speaker 2: No, that's fine. Your your lack of saying says enough.
38:15
Speaker 2: Let's take a quick break. Hour two coming up.