
Summary
Written by a model from the transcript; not yet reviewed.
This episode of Better Offline features host Ed Zitron and guest Ed Elson examining the recent earnings reports from major tech companies including Amazon, Google, Microsoft, and Meta. They argue that traditional net income figures for these companies are severely distorted by unrealized paper gains on startup equity stakes, particularly in OpenAI and Anthropic, making financial health appear much stronger than it actually is. Furthermore, they explain how the vast majority of cloud and AI revenue growth is heavily concentrated in compute spending by a couple of financially vulnerable AI labs, creating a circular financing loop that resembles a massive market bubble.
The discussion provides specific data points from financial analysts at Barclays, UBS, and Wells Fargo, demonstrating that up to 74 percent of AI-related revenues for some tech giants come directly from OpenAI and Anthropic. Zitron and Elson unpack the dangerous corporate dynamics of large tech firms desperately trying to project perpetual youth and exponential growth through massive capital expenditures on data centers despite weak organic enterprise demand. They conclude by discussing the systemic risks facing companies like Oracle and the broader technology sector if these foundational AI startups fail to sustain their operations.
- Adjusted price-to-earnings multiples reveal that major tech stocks are significantly more expensive than headline figures suggest. 7:59
- Big tech earnings are heavily distorted by unrealized paper gains from stakes in AI startups. 3:42
- A massive portion of cloud and AI revenue growth relies directly on compute spend from OpenAI and Anthropic. 23:16
- Credit default swap traders are starting to price in the real possibility of default for heavily leveraged infrastructure players. 57:45
Chapters
- 0:00Podcast Intro and Host Introductions
The episode opens with host introductions and a brief overview of the podcast’s focus.
- 3:06Transition to AI Demand Bubble Discussion
Hosts shift to the main topic, introducing Ed Elson and the AI demand bubble.
- 4:05Impact of Unrealized Gains on Earnings
Discussion of how unrealized gains from OpenAI and Anthropic inflate earnings and distort valuations.
- 7:05Price-to-Earnings Multiples and Valuation Adjustments
Hosts analyze how adjusted PE multiples reveal that big tech stocks are not as cheap as they appear.
- 10:30GAAP Accounting and Microsoft’s Net Income
Explanation of why Microsoft’s stake in OpenAI doesn’t boost its earnings due to GAAP rules.
- 16:00Future Outlook and Market Implications
Hosts conclude with predictions about the future of AI, big tech valuations, and potential market fallout.
- 38:25Circular Financing and AI Compute Spend
Exploration of the circular relationship between big tech and AI startups, and its implications for growth.
- 52:31Meta vs. Google: Valuation Concerns
The hosts compare Meta’s reasonable valuation to Google’s high multiples, highlighting worries about overvaluation.
- 54:22Debt Accumulation and the “Botox” Future
Discussion turns to how big tech’s debt loads could jeopardize their future if they chase AI at all costs.
- 57:01Oracle’s Potential Collapse and CDS Market
The conversation shifts to Oracle’s declining revenue, its heavy AI spend, and how credit default swaps signal possible default.
Highlights
- 3:36
Distorted Big Tech Earningsdata
The guest explains that headline earnings numbers for Amazon and Google exploded due to unrealized gains in their equity stakes of AI startups rather than core business fundamentals.
- 6:36
Uncovering True PE Multiplesstrategy
By subtracting paper gains from startup stakes, the true price-to-earnings multiples for Amazon and Google are revealed to be around 30 and 31, proving the stocks are not cheap.
- 10:30
Microsoft's OpenAI Accounting Hitinsight
Because of GAAP principles requiring large stakes to report profit shares, Microsoft had to take a 600 million dollar loss reflecting OpenAI's lack of profits.
- 23:16
Staggering AI Revenue Concentrationdata
Financial analysts estimate that up to 73 percent of Amazon's AI revenues and significant portions of Google and Microsoft's cloud revenues come entirely from OpenAI and Anthropic.
- 29:49
The Circular Financing Loopdebate
Big tech companies invest billions into unprofitable AI labs like OpenAI and Anthropic, which then hand that exact money right back to buy compute, creating an illusion of growth.
- 49:53
Injecting Corporate Botoxinsight
The guest describes big tech's massive AI spending as a desperate attempt to inject Botox into mature companies to convince Wall Street they are innovative growth startups.
Quotes
“What really matters is how is the AI trade actually working out?”
Unnamed speaker · 4:05 “The first problem is the earnings themselves are not really reliable.”
Unnamed speaker · 6:36 “If OpenAI actually died, and if Anthropic actually died?”
Unnamed speaker · 38:22 “The problem is that they are hard to track, they're opaque, they're not reflected on the balance sheets of these companies.”
Unnamed speaker · 9:22 “That is the story that they wanted to tell the markets.”
Unnamed speaker · 50:32 “Apple's trading at nearly 40 times earnings.”
Unnamed speaker · 52:56 “People are beginning to realize in that market specifically, that the possibility is real, that it could actually happen.”
Unnamed speaker · 58:17 “I think we should give credit to one group of people who actually do seem to be pricing in that possibility, and that is the credit default swap traders.”
Unnamed speaker · 57:45 “Oracle is an example of a company where they have done that.”
Unnamed speaker · 54:59
About this episode
In this week's Better Offline, Ed is joined by Prof G Markets’ Ed Elson to talk about the recent slew of tech earnings, how analyst estimates show that 70% of Microsoft, Google and Amazon’s AI revenues come from OpenAI and Anthropic, and the logical endpoint of his AI bubble thesis. Save $10 off a year of my premium newsletter: https://edzitronswheresyouredatghostio.outpost.pub/public/promo-subscription/gzqwkv54e1 - I’d be so grateful! Ed Elson’s Newsletter: simplyput.profgmedia.com https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/simplyput.profgmedia.com Ed Elson’s Twitter: x.com/edels0n https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/x.com/edels0n Ed Elson’s Show: youtube.com/@ProfGMarkets https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/youtube.com/@ProfGMarkets YOU CAN NOW BUY BETTER OFFLINE MERCH! go to https://cottonbureau.com/people/better-offline use FREE99 for free shipping on orders of $99 or more. --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/ Discord: chat.wheresyoured.at https://discord.com/invite/QUUQUP9szv Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/edzitron.com https://www.threads.net/@edzitron Email Me: [email protected] mailto:[email protected] See omnystudio.com/listener https://omnystudio.com/listener for privacy information.
Transcript
11,043 words · 22 speakers
Topics
- OpenAI
- Anthropic
- Amazon
- Microsoft
- Meta
- Oracle
- United Healthcare
- Apple
- Rexulti
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