TIP847: Alphabet (GOOGL): The Megacap That Still Might Be Underrated w/ Kyle Grieve & Shawn O’Malley

In today’s episode, Kyle Grieve and Shawn O’Malley revisit Alphabet nearly two years after Shawn’s original pitch, tracing how the company transformed from a cash-rich, buyback-driven business into an aggressive spender on AI infrastructure. They walk through what changed across Search, YouTube, Cloud, and Waymo, and unpack why the market’s fears around AI disrupting Google were largely unfounded. Along the way, they dig into how Alphabet is funding its buildout, what that means for shareholders, and which questions will determine whether this evolved version of the business is actually better. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:03) Why Shawn’s original Alphabet thesis needed a revisit (00:05:55) How the AI-kills-search narrative played out in reality (00:32:00) Why Google Cloud’s margins surprised skeptical investors (00:45:27) How Waymo went from afterthought to major asset (00:51:27) How Alphabet’s AI spending flows through its earnings (01:09:06) What Berkshire Hathaway’s growing stake signals about the company (01:09:42) Why Alphabet paused buybacks and started raising equity (01:13:11) Which unresolved questions will define Alphabet’s next few years (01:19:06) Whether Kyle & Shawn will add to their Alphabet position in the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠⁠⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠⁠⁠. Our original podcast deep-dive on Alphabet. Check out our previous Intrinsic Value breakdowns: SpaceX, Microsoft, Meta. Follow Kyle on ⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠. Follow Shawn on ⁠⁠⁠⁠X⁠⁠⁠⁠ and ⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠sponsors⁠⁠: ⁠Monarch⁠ ⁠Plus500⁠ ⁠Scribe⁠ ⁠Plaud⁠ ⁠Netsuite⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast, episode 847. Kyle, the last time revisited a company that I had previously pitched on the show, that was with Comfort Systems, where we admired the business, but decided that not buying it, despite it going up 5X was the right decision, because we really couldn't underwrite just how much they were benefiting from this kind of AI capex super cycle. Turns out they're benefiting a lot, but I want to be upfront with everybody that having us revisit a stock is not automatically a happy occasion.

• 0:35Speaker 02

  Well, it won't be all pain for you today, Sean. So the good news is that today, we actually own this name. So whatever we conclude, nobody can accuse us of just, you know, watching from the sidelines. And the other good news is that not only do we own this, but it's actually up over 90% since we added it to the intrinsic value portfolio.

• 0:50Speaker 01

  And I think that does make for a much more pleasant conversation. And I did notice while re-listening to the original episode, I had an entire section discussing how Alphabet's biggest problem was having too much cash and not knowing what on earth they were going to do with it. Well, they seem to have solved that problem so thoroughly that they needed to go out and raise another $175 billion just to be safe.

• 1:13Speaker 02

  And that is exactly why I want to do this episode with you. So let's get into it.

• 1:20Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.

• 2:06Speaker 02

  So I'm really excited about this one, as Alphabet is actually the second largest position inside of the intrinsic value portfolio with a weighting of around 14%. Now, Alphabet has always been a business that interested me, simply because I just use so many of its products daily. And as a user, I just don't really actually see much of a reason to switch to anything else. So on a daily basis, you know, I'm using things like Gmail, I'm using their search engine, their browser, their web-based office applications, and even Google Home. So, you know, I think it's pretty safe to say that I'm a pretty diehard user of Google products, and yet I've never actually owned any Google shares. So it's a bit of a strange conundrum. But what really struck me when I was prepping for this episode is that the Alphabet that you added to the portfolio 18 months ago has actually evolved pretty dramatically in that timeframe. And I don't just mean the stock price.

• 2:49Speaker 02

  The business has made choices that I just didn't really expect, at least in terms of scale. And I have just the person to chat with me to help me understand just how big of a mistake I'm making by not at least having a starter position in my personal account.

• 3:01Speaker 01

  I won't give you too much of a hard time, Kyle, for not owning Google. Maybe I'll just tease you behind your back, but no, all jokes aside, we all have our winners that we wish we had had more of and wish that we were able to get all of our friends to buy into, but it just doesn't always work out that easily. And that's perfectly fine. But, you know, the beautiful part of Google, in my view, is that it's not going anywhere. I mean, this is a company that is a real titan. And that's to say, in five to 10 more years, I think Alphabet, which is the parent company name that we'll use interchangeably today for Google, will have a much higher intrinsic value than it does today. But I've also gotten to know some of your preferences as an investor, Kyle. And that is to say, you typically are not one to invest in large caps, certainly not

• 3:46Speaker 01

  mega caps. So is it fair to say that if maybe we imagined a scaled down version of Google with, I don't know, maybe a $10 billion market cap instead of this being this $4 trillion behemoth, you probably would own shares in it. Is that fair?

• 4:02Speaker 02

  I would say that you're completely correct there. I'm definitely biased towards smaller businesses, mainly because, you know, I'm just really focused on finding multi-baggers. But as Google has gone up nearly 100% since you first added it to the intrinsic value portfolio, I think that it's just simply a really, really good example that you can still make multi-bagger-like returns from businesses with multi-trillion dollar market caps. And Google is an interesting one, because when you look at the top of the tech titans in the S and P 500, it's usually a business that seems to be the most reasonably priced. Maybe, you know, Meta has had periods where it's a little bit cheaper or similarly priced, but Google always seems to have a multiple that I think is not necessarily cheap, but also just not that expensive when you consider the quality and growth of the business.

• 4:44Speaker 02

  So I'd say the thing that surprised me the most when digging into Alphabet was how their capital allocations changed over time. With them set now to spend somewhere around $200 billion on data center just this year, I really wanted to better understand these investments. And how are these investments going to impact their impressive capital efficiency numbers going forward? And we're going to get into that a lot more in detail a little later. But let's just start here with your original thesis.

• 5:07Speaker 01

  Yeah, I think most people are pretty familiar with Alphabet, but just to get everybody on the same page, the bulk of the thesis was built upon the fact that Alphabet is a collection of world-class businesses with literally billions of users, not exaggerating. And whether you're looking at Google Search, YouTube, Google Cloud, or Android, you were and still are looking at some really incredible assets with very high standalone value. And so YouTube, for example, was purchased for $1.6 billion many, many years ago. And now it generates something like $36 billion in annual revenue. And then you get to the venture capital portfolio and their moonshot bets. And Google Ventures manages over $10 billion in assets with roughly 400 active portfolio companies.

• 5:49Speaker 01

  And so that includes, you know, the less popular Google Glass that came out of the moonshot labs, but also their crown jewel, Waymo. And at the time, when I pitched Alphabet last February, the market was pricing Google as if search was the only business segment that mattered. And search was in trouble because of the incoming threat of AI. So basically, the argument was that users would increasingly use things like ChatGPT to answer their questions rather than using traditional Google search. And I think, to be fair, this was really truly the first major threat to Google's search monopoly in probably more than a decade and maybe ever. And that's a business that we have referred to in the past as perhaps one of the best in the history of capitalism.

• 6:34Speaker 01

  And yet ChatGPT, I think, created this genuine uncertainty around what the future of search would look like, especially back in 2024 and early 2025. I would say things are much foggier. And in the time since, it has become clearer how AI can actually drive more search volume on Google and that things like AI overviews and search results could be monetized similarly to traditional search. But we'll probably get into that over the course of the episode more.

• 7:04Speaker 02

  It's funny, because at the time that you recorded, I remember chatting about this with some other investors. So the general consensus was that investors were generally kind of fearful, because it was no longer clear that people would use Google Search Engine to answer their questions anymore. I personally was a very heavy ChatGPT user back then, and I actually cut my Google usage very, very significantly. And so looking at it through the lens of the business of Google, that kind of concerned me as, you know, I just didn't really feel like I would ever really have the need to go back to Google the way that I used to use it. But a few months ago, I realized there was a bit of a shift in how I was using some of these AI search engines as well as Google. So I basically noticed that I was going back more and more towards using Google compared to now I'm more using Claude compared to ChatGPT.

• 7:48Speaker 02

  And with that difference being when I would go to use Google or through Gemini, if I just wanted a very, very quick factual answer to a question, I would get that answer nearly instantly, and I would also get a bunch of sources that came with that answer. Now, with Claude, I still get a pretty good answer, but I sometimes have to hunt to where that information is actually coming from. And oftentimes, it's just wrong. So I feel like when I use Google, at least to some degree, again, I don't want to get too much in the weeds of how I'm using this, but it makes it easier, simpler, and sometimes a lot faster just to get these answers. So, you know, I think the market and even me back then was thinking that search was dead, but to me, at least today, it clearly isn't.

• 8:27Speaker 01

  I remember actually being a bit of a Google Search truther back in 2024, telling folks that ChatGPT was obviously going to disrupt Google. And then actually, my thinking came full circle on that. And I think it's, you know, continued to be my belief that you had this narrative that AI would kill search, but it's just really the opposite is what has manifested. And I think that is what gave us this really special opportunity in the first place to be able to invest in Alphabet as big of a company as any in the world at a discount to the broader S and P 500 index. When we first looked at Alphabet, it was trading at around 17x earnings.

• 9:11Speaker 01

  And, you know, a year before, investors had been paying 30x earnings for shares in Alphabet. And the question to me was whether the core search business faced a serious enough threat of disruption within the context of Alphabet's already pretty diversified business model to justify a rerating of the valuation multiple that dramatically, right? Whenever you do have fundamental increases in uncertainty, the valuation multiple should decrease because the earnings quality has declined. The future is maybe less predictable than it seemed. But again, you're sort of trying to weigh that against your assessment of reality. And, you know, I, again, I felt like the market had seen its sentiment swing a little

• 9:56Speaker 01

  too dramatically toward pessimism about Alphabet overall.

• 10:00Speaker 01

  And in particular, the search business. And interestingly, Alphabet today again trades at 17x earnings. But I think the circumstances are very different. We've seen the stock double since the last time it traded at 17x earnings. And I don't think it's because of concerns on competition, but really more about the uncertainty around the returns on what their massive AI investments will yield. That is really the question of what degree will they be able to justify this spending? And on that point, one of the more tangible impacts of AI is that as Alphabet invests to integrate its LLM Gemini

• 10:41Speaker 01

  across its suite of products, this may help to defend their market share, but due to the cost of AI compute, which lots of news articles talking about how expensive that is, and AI just being more expensive than traditional Google Search, the company could actually become structurally less profitable as they integrate AI more and more into the business. And so I do think that is to me a risk that I take more seriously and definitely more seriously than the idea of just everyone abandoning Google Search. But in reality, since I looked at Alphabet about a year and a half ago for the first time really seriously, margins have definitely improved across the board, except for one area, and that's in free cash flow.

• 11:22Speaker 01

  And the reason so, as you know, Kyle, is that that is a metric that reflects operating cash flow minus capital expenditures. Where capital expenditures are investments in the future of the business. So given all the ongoing commitments to constructing and leasing space at data centers, it's really not a surprise to see free cash flow being dramatically lower and actually swinging negative for some of the hyperscalers and early projected to in the coming years. And yeah, I think it was Bank of America that had this really incredible chart that went viral on Fintwit, showing sort of this profound shift in markets where the hyperscalers, like the Alphabets and Amazons of the world, they were collectively seeing their free cash flow turn negative,

• 12:04Speaker 01

  while semiconductor companies that are designing and manufacturing the chips powering this AI revolution, they're the beneficiaries and their cash flows have correspondingly skyrocketed. So the capital intensity is scaling up. That'll be a theme in today's episode, I think. And you know, much more capital is being required for Alphabet to maintain its business than even was just the case 18 months ago. And it remains to be seen whether that spending is being done defensively, which would be less positive for shareholders as they try to prevent ceding ground to competitors. Or if it's more offensive, where they're looking to capture new markets and new verticals

• 12:45Speaker 01

  that will unlock an even longer runway for Alphabet to keep growing profitably, which is sort of mind boggling to think about for a company with a $4 trillion market cap.

• 12:57Speaker 02

  Yeah. And when I first kind of looked at this, I was actually really, really surprised at just how well Alphabet's margins have held up during this kind of entire expansion phase. And we'll get more into how kind of how they did that later. But another major theme for investors with Alphabet has been this kind of regulatory environment. With Google being quite clearly, I would say, a monopoly in many, many different areas. It's a business that's just basically under constant regulatory scrutiny. The hardest part about evaluating the real risk under this scrutiny is just the sheer number of regulators that you kind of need to understand, at least to some degree. Because you know, it's not just a US issue, it's a global issue and more usually it's more in Europe. And since Google reaches, you know, the entire world, they're constantly, constantly defending themselves in court.

• 13:38Speaker 02

  So as of the latest quarter, they have short-term accrued legal and regulatory fines and settlements of about $16 billion.

• 13:45Speaker 01

  Well, for regulatory body, like the Department of Justice decided that Google had to spin off ownership of one of its business segments to reduce Google's monopolistic power. I mean, that would obviously be a bad thing for Google's shareholders. And the areas most at risk a year ago was their web browser, so Google Chrome. And then there was also some chatter around the Android operating system. But structural breakups have been exceedingly rare in US antitrust enforcement over the past four decades, I would say. Regulators have more often ended up relying on restrictions for how dominant companies can behave than actually going for for breakups. And so that's exactly what we saw with Google.

• 14:26Speaker 01

  The Justice Department actually sought to force Google to sell Chrome, but the court rejected that remedy. And instead it placed restrictions on Google's distribution agreements. And so Google can still pay Apple to make Google the default search engine in Safari, but those agreements can no longer lock up Apple's distribution in the same way. So they're limited to one-year agreements. They can't tie Google's default status across different devices and access points. And they have to allow Apple to promote competing search and AI products, even if it's just done so in theory.

• 15:01Speaker 02

  Right. And I think we should probably spend a little more time here because I think understanding regulations is quite important for understanding the Google thesis. Now, do you think it's fair to say that Google is largely safe for now compared with the more maybe acute regulatory risks that they were facing last year? And if so, that would actually maybe be an argument for Alphabet potentially deserving an even higher PE multiple with some of the more dense regulatory fog now clearing up.

• 15:25Speaker 01

  It's a really great point. And at a high level, as I was mentioning, big tech companies and shareholders in those companies have broadly benefited from regulatory enforcements that are usually pretty far from the worst case scenario, to put it nicely. And whether Alphabet is forced to eventually spin off some of its businesses or chooses to do so on its own, whether that be with Chrome, YouTube, Android, or whatever it is, shareholders in Alphabet today would of course get a proportional stake in these spinoff businesses. So the risk for shareholders is not that one of Alphabet's subsidiaries worth hundreds of billions of dollars is just going to disappear from the picture entirely. But it's that if these businesses are forced to operate truly independently,

• 16:08Speaker 01

  whether they will see their moat shrink because they can no longer benefit from the data and relationships that Alphabet has across their entire enterprise. And for me, when I first began really looking at Alphabet, I came to terms pretty quickly with the reality that these hefty legal expenses and fees are just a cost of doing business when you operate at the scale that Mag7 companies do. Just recently, we saw Meta have a massive settlement with the Department of Justice. And so that really is overall, though, a pretty small percentage of their business, at least for Alphabet. And so another way you could think about this too, is that the fact that they're subjected to this constant litigation is really a sign that they are truly an extraordinary business.

• 16:52Speaker 01

  And so Peter Thiel talks about that famously in his book Zero to One, one of our favorites to recommend. The more time a business spends in court fighting over antitrust concerns and all the efforts they go through publicly to try and downplay some of the monopolistic benefits that they enjoy, that is actually a sign of an incredibly dominant business, right? It's the insecure companies that are trying to brag about their competitive dominance. Those are the ones that are ironically the least likely to yield the benefits of monopoly for shareholders.

• 17:24Speaker 02

  Yeah, and I completely agree with your point there on Thiel. If a company is defending itself as much as a business like Alphabet is, I think it's a very clear signal that there's something going on and they probably have some very, very strong competitive advantages. And of course, they're going to just play them off like there's some sort of minor issue. But in reality, I think they know exactly how strong they are. So you know, they have to kind of try to address their positioning in a way that appears as least threatening as possible. But I think in reality, it's very clear that Alphabet does have these monopolistic benefits. And as of now, it kind of appears they're just continuing to continue to strengthen and not actually weaken.

• 17:58Speaker 01

  Just to continue the conversation here about the regulatory enforcements around Alphabet and Apple's relationship in particular, I think that's a good area for us to focus. Alphabet pays Apple something like $20 billion a year to have Google Search be the default on Apple devices. It kind of alluded to that earlier. And once the conclusion in court was reached about the validity of this, Alphabet's shares actually did really well and increased by more than 50% in over just a year's time. And so it's crazy how much opportunity could still be baked into these kinds of overhang investments for what you would expect to be the most efficiently priced company in markets, basically.

• 18:39Speaker 01

  And so in our intrinsic value portfolio, which we'll have a link to in the show notes for anyone who wants to see our holdings and keep up with their portfolio, we ended up buying more shares when the price dropped down to about $150, where our average cost basis was low enough that I felt the downside was pretty well protected. And so in other words, we had much more to gain than we'd likely lose, or that was the thinking at least.

• 19:04Speaker 02

  Yeah. And the interesting thing about the potential divestiture was the judge that was overlooking it, Judge Amit Mehta, actually ended up with this decision because he actually felt that forcing Alphabet to divest Chrome would have been bad for the entire ecosystem and not just for Google. So he noted that it would also harm Apple, it would harm Mozilla, who depended on that revenue specifically from Google. Now, you mentioned that Alphabet pays a steady stream of about $20 billion in cash annually to Apple as a revenue share based on the amount of advertising revenue that Google generates from those searches on Apple devices using Safari, that their browser specifically. But in other words, the judge decided that the benefits of allowing Chrome to stay under Google's ownership actually outweighed the second order impacts on competitors of forcing a divestiture of that business segment.

• 19:48Speaker 01

  It's actually pretty refreshing to see regulators being mindful of whether their enforcements will do more harm than good. I say that tongue in cheekly, but and so Alphabet doesn't quite enjoy the same level of contractual guarantees anymore around their relationship with Apple and how far that will extend into the future because now they're basically required to renegotiate that deal every year. But what matters most is that the deal is still in place after regulatory review. That was the big question mark. And so having this arrangement with Apple is very much a win win for both sides and it makes it all the more difficult for a challenger to disrupt Google's dominance over informational searches.

• 20:28Speaker 01

  I mean, how do you beat the fact that Google search is baked into every iPhone that people buy?

• 20:35Speaker 02

  Yeah. So you mentioned earlier that the search part of Google was being heavily punished by the market simply because of the AI risk that LLMs like ChatGPT or Claude were offering, where maybe for a time it looked like the future of e-commerce would be doing all of our shopping directly through integrations on ChatGPT. So ordering a basket of goods from Target or Walmart directly would go right through ChatGPT, for example. But the narrative, I think, fizzled out pretty quickly and now you've seen OpenAI kind of scale back some of those ambitions. Now, the promises that they're making to investors have become less grandiose as they've had to make certain competitive concessions, like I was mentioning with them rolling back their instant checkout shopping integration. It's actually Anthropic that seems to be making the really dramatic claims about how they'll change the future

• 21:17Speaker 02

  now. But Anthropic with Claude is much more focused on being a business to business productivity tool than something that hundreds of millions of people or even billions of people use for search on basic queries. Now, unlike ChatGPT, where their early success has put them in a pretty tough situation where the user adoption is incredible, but they're operating with completely unsustainable economics, just because the compute needed to serve the masses is very, very costly, while most customers just aren't willing to pay more than a few dollars for premium AI tools. So at least for the time being, I think Google seems to be vastly more efficient and cost advantaged in answering most inquiries while more of the complex questions tend to get routed to paid LLMs, which is really a separate business model from the volume game that Google's playing in its core search business.

• 22:02Speaker 02

  Now, the company doesn't break out the search business completely cleanly for us, but still, you know, their reporting segment, Google Search and Other Revenue, has continued to grow at a really nice 14% compound annual growth rate over the last two years and doesn't really show any signs of slowing down. So I think the initial fear that at least I had was that users would use less and less of Google Search and their search revenue would suffer as a result. And that just clearly, as the numbers say, is not panning out. And in hindsight, I think it makes sense because Google is still very much the best search engine on earth. So if I just, you know, want to get a quick answer to a simple question, I still find myself just going back to Google, getting started by reading their AI summaries and just if I feel the need, deepening the conversation from there or moving to something

• 22:45Speaker 02

  like Claude, if I want to go super in depth on a specific subject. But I can see why Google, you know, hasn't taken this big hit in search, simply because there's just so many things I do daily where Google is just simply the best tool for what I need. Think emails, calendars, or even maps, which are things that LLMs just don't really change.

• 23:03Speaker 01

  Yeah. The reality is that all types of searches are not equally valuable. So some questions have lots of commercial value, like maybe asking for the best Italian restaurants in your city or for product reviews of sneakers, but other searches really are not monetizable from an advertising perspective. And so the conversations that I'm having with Claude and ChatGPT, for example, I mean, when researching these episodes, it's very technical and niche and they don't directly relate to me looking for information about some purchase or spending that I'm hoping to do that would anchor them into, you know, having an advertising connection. So an advertiser could pay to put up a billboard that I might see during one of those LLM

• 23:47Speaker 01

  conversations if I didn't have a paid subscription, but it's really just not a great model compared to Google Search because you don't have the same targeting at scale. An Italian restaurant can pay to be the very first result that shows up in your town when you Google restaurants near me. And that's very valuable digital real estate because it's linked to real economic activity that may happen, like you going out in the world and ordering food at a restaurant. Whereas like I said, these more abstract conversations with LLMs are really not particularly appealing to advertisers who have lots of better options for more accurately targeting their ideal customer, whether that be via Google Search or Facebook, Amazon or Reddit, whatever it is. They have tons of tools at their disposal. And I don't want to make

• 24:32Speaker 01

  it sound like LLMs are objectively not a good way to do targeted advertising, but we certainly have to put into context just how well they can stack up against something like Google Search and what the limitations are.

• 24:46Speaker 02

  Right. And looking at the growth in search for Alphabet, it's kind of come from two main areas. So we got AI overviews and AI mode. So when I was just speaking there about finding answers to very, very simple questions, this is exactly kind of what I'm talking about. And while I've heard that Google's model Gemini three and a half isn't as good as Claude or ChatGPT, I've actually found the answers to be a pretty equal quality, just delivered in a much shorter time. But when I think about the use of AI overviews and AI mode, my mind still wanders to just how Google makes money from this because unlike a premium subscription to ChatGPT or Claude, Google isn't getting any money from me when I use these services. So, you know, I just kept going down the rabbit hole and I found some very interesting things. First, I think Google has probably done the best job of

• 25:29Speaker 02

  meshing the monetization of search with AI. So I remember when ChatGPT came out, I was just kind of amazed that they just weren't showing ads of some sort, you know? Google, I think, has figured that out very, very well. So whenever you do a Google query for some sort of question, you'll get an AI overview. Google has ads that will show above or below the AI overview as well as just inside of the AI overview. Now, the benefits of the ad inside the AI overview are that the businesses can target customers to what you were just talking about, Sean, using kind of these non-traditional paths during search. If someone wants to use the AI mode to deepen their questions, then ads can be better placed to be the clear next step in trying to figure out that solution. And that exists as a complement to their existing search interface in contrast to something like ChatGPT. And with Google's distribution

• 26:13Speaker 02

  advantage, it's sort of their game to lose because they could immediately just roll out AI mode to over a billion monthly active users, allowing them to collect even more data on how consumers are using AI for things like shopping, which obviously is a great, great help for advertisers.

• 26:28Speaker 03

  Let's take a quick break and hear from today's sponsors.

• 26:31Speaker 01

  Early in my career, I was shipping away at student loans and it felt like it would never end. I'd make a payment, check the balance and it barely moved. What finally changed my mindset was seeing a real finish line, a date I could actually circle on the calendar. That's what Monarch's debt pay down simulator gives you. It uses your real balances and payments to show your exact debt free date. Then you can run different scenarios side by side, like adding an extra $100 a month and instantly see how much sooner you'd be done. Watching that timeline shrink is really motivating and you're the one in control of the plan. Plus, a quick check in on your phone or laptop tells you exactly where your

• 27:11Speaker 01

  money stands. It's so important to manage your finances and I believe Monarch can help you in doing so. Write your own money story with Monarch. Use code WSB at monarch.com to get your first year of Monarch Core half off at just $50. That's 50% off your first year at monarch.com with code WSB. Interested in futures trading and looking for a place to get started? With Plus 500 Futures, you can explore some of the world's most active markets, all from one easy to use platform. Trade futures on popular assets like the S and P 500, NASDAQ, oil, gold, Bitcoin, Forex, and more. Whether markets are moving in crypto, commodities, or indices,

• 27:54Speaker 01

  there's always something to follow. Plus 500 Futures is designed to make trading straightforward with a platform you can access wherever you are, right from your phone. And you can get started with a minimum deposit of just $10. Not ready to trade with real funds? Try the free unlimited demo account first and explore the platform without putting real money at risk. Backed by nearly 20 years of experience and trust by millions of customers worldwide, Plus 500 gives you the tools to stay connected to the futures markets. Visit us.plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus.

• 28:36Speaker 01

  You don't need me to tell you that rent and mortgages are only getting more expensive. That's why Built created three credit cards designed to offer the richest rewards on rent, mortgage, and everything else you spend on. Whether you rent or own, you can earn up to 1.25 X points on every housing payment without the transaction fee, no matter where you live. Points can be redeemed for flights, hotels, Lyft rides, a future housing payment, and much more. Turn one of the most unavoidable payments in your life into the most rewarding. Find the card that's right for you and apply at joinbuilt.com/tip.

• 29:15Speaker 01

  That's J-O-I-N-B-I-L-T.com/tip. Use our link so they know we sent you. Terms apply, subject to approval and eligibility. Built cards are issued by Column NA, Member FDIC pursuant to license from Mastercard International, Incorporated.

• 29:35Speaker 02

  All right, back to the show.

• 29:37Speaker 01

  And actually, on the latest earnings call, Alphabet CEO Sundar Pichai really focused on just how successful this has been. He noted that Google is actually sending billions of clicks to websites each week from the AI features embedded in search. To me, that's a pretty strong counter argument to the bearish fears that AI answers would make it unnecessary to visit underlying websites and then therefore you'd have all these stranded publishers trapped in a sort of exploitive relationship with Google where their sites are being scraped to feed answers into AI overviews at the top of the search results, but they're losing out on a chunk of that traffic that no longer needs to go to the underlying website.

• 30:17Speaker 01

  I mean, to some extent, that is a real phenomenon, but the scale of which I think could be exaggerated. And so the other detail I would probably flag is the cost side. They've dramatically reduced the cost of what it takes for them to generate a response in AI mode to solve a query down to the lowest level since their launch, and that's very promising.

• 30:41Speaker 02

  It is, and one of the most surprising things I learned from you about Alphabet is that the majority of searches basically carry no ads at all. So you mentioned that only about 20% of searches have ads, according to data from Google in 2020, and more recently, Google's Vice President of Search went on a podcast and confirmed that less than 25% have ads still. So Google has spent a long time just learning how many ads it can show without losing users or bothering people or pissing them off. So I think it seems like using AI summaries and AI mode will just help them to continue to leverage these findings longer into the future.

• 31:12Speaker 01

  There's also another twist that I didn't anticipate when I first looked at Alphabet, because it wasn't totally clear yet that Apple would take a more passive role in the AI race and choose these other companies' models. But for context, in January, Apple announced that it would pay Google something about $1 billion per year for access to the technology that underlies Gemini to use that to power Siri for the next few years. And what that also means is that Apple is going to rely more on Google Cloud, too. And so obviously, that $1 billion in cash annually is not material to Alphabet's bottom line, as crazy as that is to say. But I think it's revealing in what it shows about Apple's AI strategy and also in how

• 31:55Speaker 01

  the two companies are becoming even more intertwined and in different ways.

• 32:00Speaker 02

  Yeah, I would say it's a pretty impressive turn of event for Google. And speaking of cloud, that's maybe the most impressive and exciting part of the entire company right now. So the cloud division recently inflected into earning positive operating income, showing that while growth has been off the charts, this is actually a segment that Alphabet can make real money on, because they actually lost money on cloud for nearly its entire existence, that they scaled it, and they've tried to take share from Amazon and Microsoft.

• 32:24Speaker 01

  We're talking about $58 billion in cloud revenue last year at a 24% operating profit margin. And so these are huge numbers, but what's even more promising is that compared to Amazon, Alphabet's cloud business was about 2/3 as profitable last year. And that doesn't necessarily sound like a good thing at face value, but Amazon has been operating in the cloud space for two years longer than Alphabet. And that may not seem long either, but that is a meaningful amount of time in cutting-edge tech. And then it also does about twice as much in revenue, with the point being that we can actually look to Amazon's profitability with AWS as perhaps an indicator of what Google Cloud may be able to approximately accomplish.

• 33:09Speaker 01

  That was something that I really talked a lot about when I first looked at the company last year. So through that lens, Google Cloud is a business that's been compounding revenues at these impressive rates, 40% a year over the last decade. And actually, operating income growth should be more leveraged than revenue growth going forward as margins expand. That's basically an amplifier of earnings growth on top of the revenue growth that you get. And so the crazy thing is that, if anything, I actually underestimated Google Cloud's growth. And so actually, in the first and second quarters of this year, cloud grew at a rate of 63% and then 82% year over year. And if we annualize their second quarter revenue, that run rate on that is in the

• 33:51Speaker 01

  $100 billion range, and that would be a double from where they were early last year. And so on top of that, Google Cloud's profitability is coming in just years ahead of schedule. And so their margins last quarter were nearly 36%, which moves them from being 2/3 as profitable as AWS was in 2025 to being on par with Amazon's 2025 cloud profitability.

• 34:19Speaker 02

  So, you know, in pretty short order, I think we've seen Google Cloud go from being just a secondary competitor with AWS to really being almost on the same level. So perhaps this is an industry where it will be somewhat of an oligopoly, at least in North America. But, you know, Google is growing even faster than AWS is right now. So it's going to be interesting to see how that battle plays out over the next few years. But we actually do have some clues as to where revenue is going to show up specifically for Google Cloud in the next few years, because Alphabet gives us a very, very important figure.

• 34:50Speaker 01

  Yes, that figure is the backlog. Alphabet has more than $500 billion of remaining performance obligations, that's another way to say backlog, for their cloud segment. And so for those unfamiliar with what backlog means, it reflects the contracts Alphabet has signed with customers for future deals where the work has not yet been delivered. And so therefore, the revenue has not shown up yet on their financial statements, but we know with fairly high confidence that it will come in the future, thanks to these order requests. And so it'd be sort of like a bakery, maybe having a bunch of orders for wedding cakes next year. They haven't been paid for those yet, and haven't delivered the cakes yet either.

• 35:33Speaker 01

  And unless the weddings are canceled, that business will come through. And so maybe that's a crude proxy for how to think about Alphabet's order backlog. And just to give you an idea of how fast this is growing, Google's cloud backlog was $106 billion in Q2 of last year. So we're talking about five times growth in the order backlog in about 12 months. I mean, that is, that's just absurd, Kyle.

• 36:00Speaker 02

  It really is, Sean. So just to take the other side of this argument, so when Sean and I were talking about comfort systems, I mentioned that I personally am not the craziest about taking too much data from backlogs, simply because of the revenue recognition issues that I've seen before in other businesses. So an example of that would be where backlog might be realized in, let's say, a year or two, and then maybe you try to extrapolate, okay, well, how much of that backlog is going to turn to real revenue? And then you can kind of back into a number. But from my personal experience, at least, I've kind of gotten to a little bit of trouble doing that. But in Alphabet's case, the fact that cloud revenue is exploding while the backlog grows is still a very strong signal. Alphabet says they expect about 50% of cloud revenue growth over the next two years. So that's another $130 billion or so over the next year, which would be higher than

• 36:44Speaker 02

  the current run rate is showing. Then you have to layer on the fact that the demand for Google Cloud's products doesn't appear to be going away. The fact that they're investing so heavily into that area of their business is a pretty good suggestion that Alphabet believes that the demand for their cloud services is just improving with time.

• 36:59Speaker 01

  The other thing I probably missed in my original pitch for Alphabet is where a chunk of this demand was coming from, and that's specifically for their computer chips. And so Google designs its own AI processors called tensor processing units, or TPUs, and they're already on their seventh generation of the technology. And so for much of TPU history, they were used as an internal cost-saving tool, specifically for Google. And so that has allowed them to bypass buying chips from Nvidia or to at least reduce their dependency on Nvidia. But since the TPU has proven successful, you've had select companies that have actually been offered the opportunity to purchase Google's TPUs outright from them.

• 37:44Speaker 02

  And so that point that you just made about the TPUs going to other companies, I think actually kind of helps with diversifying the backlog because it's actually the concentration inside of that backlog that if I'm nitpicking, isn't really my favorite setup specifically for Google. So, you know, if I had to choose between a backlog with a diverse customer base where no one customer is making up more than 10%, let's say of the total backlog, I take that any day over a backlog that only has a few key customers where let's say one customer is making up 50% of that backlog. Now, it's impossible to say exactly what the structure of Google Cloud's backlog looks like. It's likely very concentrated, given that they just announced a five-year, $200 billion deal with Anthropic to use Google Cloud. So that implies that Anthropic makes up somewhere around 40% of that backlog.

• 38:28Speaker 02

  So, you know, don't get me wrong, the cloud backlog growth is incredible, but it comes with this trade-off in customer concentration where, you know, let's say something were to happen to Anthropic, let's say their business falls off, since, you know, after all, they're still in the very early innings of AI as an emerging industry. And so if an event like that were to happen, well, then a lot of that backlog growth would just appear to be kind of fugazi, to quote Matthew McConaughey from The Wolf of Wall Street.

• 38:52Speaker 01

  What's a great movie and a great quote. And to keep using that bakery metaphor from before, if one customer made up 40% of the value of your wedding cake backlog, that would be very concerning, right? So it's a sort of extreme example because Anthropic is right now on path to do a multi-trillion dollar IPO and will be raising lots of fresh capital. So it's not like they're going anywhere anytime soon, but ideally, your biggest customer would not be burning billions in cash while making up such a hefty percentage of your backlog. But if we can pivot to highlighting a part of the company that I have found to also be very promising, even if it's not as breathtaking as the cloud business, that would be the Google subscription segment.

• 39:36Speaker 01

  And so basically, Google has a bunch of different licensing and advertising fees that it earns on top of paid subscriptions like Google One that allow you to, for example, increase your storage space on Google Drive and in Gmail.

• 39:50Speaker 02

  Yeah, so I think when most people think of a platform, they might think of a business like Apple, which is arguably one of the best platform companies on the entire planet. But Google subscriptions are a very, very strong segment and I use it very heavily personally. So when you're using something like Drive or Gmail and your files and emails accumulate, one day you might get a notification saying, okay, well, you're running out of space. So you have a couple of options here. You can delete things, which you can certainly do, but I've done it before and believe me, it's time consuming and offers a lot of friction. Or you could just take the simple route, which is to just pay Google a little more money for that space that you can fill up again into the future. So, you know, another example would be YouTube. You know, if you're sick of watching ads, well, then you can purchase YouTube Premium

• 40:32Speaker 02

  and just do away with ads while also being able to do offline downloads and background playback. I personally like the background playback a bit as it allows me to watch content while answering text messages, for instance. And the cool part about the subscription business is that they're all relatively low-priced. So when you think of switching costs, they're generally low enough where you just don't really give it that much thought when you think about cancelling or switching. And yet this business generated over $25 billion in revenue for Alphabet in the first half of 2026.

• 41:00Speaker 01

  After years of resisting paying for YouTube because I had just gotten accustomed to it always being available for free, Daniel actually finally convinced me to see paying for premium as not being so different from maybe paying for any other streaming service like Netflix. So I'm now a proud YouTube Premium user and actually opted for the slightly cheaper plan that doesn't include YouTube Music. I don't know if most people know whether that's available, but we talked about that in our Spotify episode from a few months ago, but I use Spotify instead. So I don't need to pay for music streaming twice. And YouTube is now effectively the largest streaming service on the planet where they

• 41:41Speaker 01

  also pay much less for the most popular content on their platform than say maybe Netflix, where they either have to make the hit shows themselves, produce it themselves, or pay a premium to license them. And so YouTube is bigger and probably more profitable inherently with monetization being split across ads and paid subscriptions. And so YouTube ads are seeing nowhere near the explosive growth that other areas of the business are, but I don't think it requires much spending to grow this part of the business either. So as long as YouTube attracts more content creators, that in turn attracts more users, there'll be a steady stream of people to advertise to. And so that's really the beauty of the flywheel behind that YouTube business model.

• 42:25Speaker 02

  Now, believe me, we aren't being paid by Alphabet to push any of their products here, but I've even noticed their ability in making things like PowerPoints faster and cleaner. And that's really, really helped with just giving better presentations and preparing them in a quicker manner. So, you know, the fact that I could just create a template and edit it easily and just get some images up, sounds simple, but it really saves me a lot of time and helps me just to optimize my work processes. And then kind of touching to your point on YouTube there, the thing I love about YouTube is just how the business model works, you know? It's not like Netflix or Disney Plus, which, you know, they're spending billions of dollars to create that content. YouTube has basically empowered its own content creators to handle almost all of that on their own. And then yes, okay, they do pay them about a 55% spread on that advertising revenue, but I think it's just a really, really good lean business model.

• 43:10Speaker 02

  And as you said, YouTube doesn't need things like movie studios. They don't need to find capital to finance. They don't need to produce. They don't need to license movies or series. It's, it's pretty cool. And if you look at YouTube versus public market comps like Netflix, which trades at somewhere around seven times sales, that makes YouTube worth something like $300 billion. And honestly, probably a lot more, maybe as much as 500 billion. So when you put that all into context, that's not too bad for an initial $1.7 billion investment.

• 43:38Speaker 01

  Not bad at all. And YouTube is now also testing out a new feature called Ask YouTube. And so it uses Google's Gemini models to let people ask questions about individual videos. And I guess the idea being you get some fast maybe takeaways or you can use it to help you find the most relevant moments in a video, be able to filter through the video more quickly. I actually think that is a pretty interesting value add. And so Sundar Pichai noted that more than 140 million people have used that service in June of this year alone. And so that doesn't obviously drive revenue directly, but in theory, it makes the user experience better. And so maybe people spend more time on the YouTube platform.

• 44:18Speaker 01

  And so that increases monetization by allowing them to run more ads and really just illustrates the rationale behind how some of these AI investments can improve the entire business beyond what's just obviously directly attributable to AI where somebody's paying, you know, X dollars a month for a Gemini subscription.

• 44:38Speaker 02

  All right, well, let's talk here about one of Alphabet's biggest moonshot bets, Waymo, which I know Sean has pretty strong feelings of. So in your original episode, you noted that Waymo just raised money at an evaluation of about $50 billion, which was actually down considerably from an earlier estimate of about $200 billion. But it actually appears Waymo is increasing in value as it was valued at nearly $130 billion in its last funding round in February of this year. So this piece of Alphabet, which at one point could have been seen as, you know, just a rounding error, albeit with a lot of optionality, has nearly tripled in value over a year and a half. Now, I know that you prefer Uber to Waymo, at least in terms of business models, but Waymo definitely has some pretty strong fundamentals.

• 45:18Speaker 02

  They've now driven 127 million fully autonomous miles and are reporting 90% fewer serious injury-related crashes versus human drivers on that exact same mileage. They did 50 million rides in 2025, three times as in 2024, and they're currently running about 500,000 rides a week with a target of a million rides by the end of the year.

• 45:38Speaker 01

  So for anybody who missed it, Daniel and I just did an episode the other day revisiting Uber. And I think I said that it was pretty obscene for Waymo to have the same valuation as Uber. I mean, Uber is doing tens of millions of rides per day and generating billions of dollars in profits with a very proven and quickly scaling business model. While Waymo is still in the cash burn phase, it's losing a ton of money and its viability as a business model has not been proven. It's entirely speculative and then to some extent, it's also dependent on whether competitors are able to make breakthroughs in AV tech that offset some of the first mover benefits that Waymo may have. So as an Alphabet shareholder, to the extent that they can capitalize on Waymo by maybe

• 46:22Speaker 01

  monetizing their stake partially or fully from a Waymo IPO down the road, I think that's sort of all gravy for us. As an Uber shareholder, I would say I'm pretty skeptical of Waymo being able to grow into this valuation. But objectively, the technology is really cool. I saw it for myself in Austin, Texas. It makes you feel like you live in the future.

• 46:42Speaker 02

  It does. I haven't gotten a chance to use it yet, but Alphabet made another big bet in 2015 for about $900 million in a growing space company. Now, I bet you can guess what that company was.

• 46:51Speaker 01

  I think so. Yeah, I think most people know that it just IPO'd. SpaceX.

• 46:55Speaker 02

  That's the one. So today, Alphabet's 5% stake is worth $95 billion. So between businesses like Waymo and SpaceX, Alphabet has some monster winners in its other bet segment. But, you know, I also totally agree with your points from the original research, especially your point that it's just really difficult to evaluate some of Alphabet's more speculative technology bets. But, you know, at least with a business like SpaceX, we can get some idea of what the market thinks, which can maybe provide a little more clarity on some of its other bets, such as Waymo.

• 47:25Speaker 01

  There is one part of Alphabet that I don't think I fully wrapped my head around and that I still find fascinating. And to be fair, I don't think the market has really wrapped its head around this either. And that's what the ROI from their data center commitments is going to be. That is the recurring question in today's episode. And so if Alphabet is going to part ways with hundreds of billions of dollars to directly and indirectly invest in data centers, I think it's very timely to try and figure out what kind of returns this spending is likely to generate, especially since the magnitude of this estimated spending seems to just get revised higher every quarter. And so I will say, maybe it's more of an exercise of trying to be directionally correct. It's a little complicated to disentangle because the data centers are not only profit centers.

• 48:10Speaker 01

  When we look at Google Cloud's backlog, but they also are a big internal investment inside of Alphabet, helping to power nearly every aspect of the business's overall productivity. So I'm not sure that we're going to get a perfectly clear answer or that it's even possible to get one. But I'm really excited for you to kind of take a shot at doing so.

• 48:32Speaker 02

  Yeah, let me take a swing. So I'll double down on Sean's warning here that my answer is just an educated guess. And hopefully it's a decent guess. So the first thing I want you to do, close your eyes for a second and imagine what is actually being built. Imagine a windowless box, the size of about 50 American football fields. Now, the interesting thing about this data center is that's actually the third largest in the world and it's actually owned by Google. And it's actually located in Council Bluffs, Iowa, which funny enough is actually just a few miles away from the hotel that I stayed at in last year's Berkshire Hathaway's annual general meeting. While the size of this facility is clearly very, very large, that's not even the most important part. What has been a hot topic of late is the electricity usage of data centers. Back in 2024, Google data center's power use nearly equaled the entire country of Ireland.

• 49:16Speaker 02

  And Google's data is much more bigger than that today.

• 49:20Speaker 01

  It's a pretty interesting way of reframing things. And instead of looking at these data centers as just being a pure technology outlet, I think what you're describing is that they're almost like a utility. And clearly AI data centers as a utility have some pretty massive energy consumption numbers.

• 49:37Speaker 02

  They really do. And you know, I'm naturally pretty skeptical of these investments overall. So maybe let's start here with the case against Google's AI data center build out. And we'll get back to that energy consumption part shortly here. So I think there is no doubt that the investment will bear fruit for Google as it requires this kind of growing amount of compute power just to operate the business of Google. Not to mention that, you know, all the capacity that they're leasing out to other businesses is obviously bearing fruit as well. But the problem is understanding, okay, well, what kind of economics is Google getting from these investments? And once they're all complete. So if I'm looking at Alphabet's return on invested capital, that number is kind of trending in the wrong direction. So if we look here at fiscal.ai, which we like to use very, very often,

• 50:20Speaker 02

  in their last 12 months, their returns on invested capital is now the second lowest that it's been since the business went public. But the interesting part about this equation is that Alphabet is still making a ton of money. You know, their operating profit margin has actually gone up. But the reason their capital efficiency numbers are trending downwards is actually this increase in invested capital.

• 50:39Speaker 01

  Given that Google's cap excess year is estimated to be six times more than what they spent in 2023. I guess it's not all that surprising that the incremental returns on some of that capital are not yet manifesting or clearly higher than in the past. But for better or worse, we still really don't know yet. And so Alphabet is going from a company built around the digital world with its software to increasingly being anchored in the physical world to an extent. And so rather than just purely being algorithms and software that are creating most of the company's value and maybe the human knowledge workers that produce those technologies. More and more of what they do is just simply tied tangibly to the physical world.

• 51:20Speaker 01

  Computer chips, electricity consumption, data center, construction and maintenance. And so the implications of that are pretty profound, right? Software has driven the market's returns for two decades now. And the economics of the biggest software companies are changing. And I'm not saying that because of SaaS apocalypse concerns, even though that is a narrative in markets right now, but really just simply that the businesses are becoming a whole lot less digital. So I think it's really important to be humble at this moment and recognize that this is a paradigm shift. And no one knows with much confidence what that is going to mean going forward.

• 51:56Speaker 02

  Exactly. And another thing that kind of obfuscates Alphabet's numbers and cloud in particular, is that Alphabet is carrying some of its assets on the balance sheets that are yet to depreciate in value. So this actually serves to inflate Google Cloud's margins. And as of their latest quarter, Alphabet carries assets not yet in service valued at about $122 billion. Now, I'm not saying that they're trying to do anything that's not above board. But I think if you really want to dig into their financials in depth, you definitely have to account for this to some extent. You know, you can make the argument that these assets will be in service at some point. And then at that point, once they're in service, they'll be added to the depreciation schedule. And perhaps that means that Google Cloud's margins at the current levels are not really sustainable over the long term.

• 52:38Speaker 01

  Let's take a quick break and hear from today's sponsors. You know that sinking feeling when a meeting ends, everyone's nodding along. And two days later, you realize that nobody wrote down who was doing what. That's why I use Granola. Granola is an AI powered notepad that makes your meeting notes useful. It captures what happens in your meetings and it turns it into clean, structured notes with decisions and action items pulled out and made easy to find. On days with back-to-back calls like guest prep and team check-ins, community calls, I used to spend the gaps cleaning up messy notes and trying to remember who owned what. Now I stay in the conversation and weeks later, everything is searchable in one place.

• 53:20Speaker 01

  Once you try it on a first meeting, it's hard to go without. You can try it totally free. Head to granola.ai/wsb. That's granola.ai/wsb to get your time back. Go to granola.ai/wsb and try it on your next call. Interested in futures trading and looking for a place to get started? With plus 500 futures, you can explore some of the world's most active markets, all from one easy to use platform. Trade futures on popular assets like the S and P 500, NASDAQ, oil, gold, Bitcoin, Forex and more. Whether markets are moving in crypto, commodities or indices, there's always something to follow. Plus 500 futures is designed to make trading straightforward.

• 54:04Speaker 01

  The platform you can access wherever you are, right from your phone. And you can get started with a minimum deposit of just $10. Not ready to trade with real funds? Try the free unlimited demo account first and explore the platform without putting real money at risk. Backed by nearly 20 years of experience and trust by millions of customers worldwide, plus 500 gives you the tools to stay connected to the futures markets. Visit us.plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. This September, I was in New York for the Intrinsic Value Conference. The talks were great, but what I kept thinking about is what happened around them.

• 54:48Speaker 01

  On Friday night, about 20 of us crowded around a long table at a family style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Manca. Each week we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person.

• 55:28Speaker 01

  If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. To me, this is probably the biggest black box at Alphabet. And Michael Burry, who listeners will, I'm sure know from The Big Short, has said that depreciation accounting for computer chips in particular is the most common form of fraud and maybe shareholder deception in the 21st century. And so accounting is based on assumptions and assumptions like how long the quote unquote useful life of an asset is. So whether you have to replace the servers in your data center every three or six years

• 56:12Speaker 01

  is a very consequential accounting decision to make. And so if the answer is that they need to turn over every three years, because that's how quickly they get outdated, but you depreciate those costs over six years, then you're going to be hugely underestimating the real economic cost of those chips and artificially inflating earnings in the short term. So we talked about this in one of our YouTube live streams the other day. And Michael Burry has stated that hyperscalers are collectively understating depreciation by as much as $175 billion over the next few years. And no matter how much reading I do on the topic, I will never know enough about semiconductors to tell you what the appropriate depreciation schedule is with any confidence. But what you're doing is you're putting a lot of trust into management.

• 56:55Speaker 01

  And clearly you have some smart people like Michael Burry, at least raising questions about those assumptions.

• 57:01Speaker 02

  Yeah, and you know, I'd also be lying if I said that I'd put that much time and effort into figuring out depreciation schedules for data center lives. So, you know, I think I'll probably leave that argument to people who are more knowledgeable in that area than I am. But I still think it's great that you brought it up. You know, perhaps it means when you're modeling this business, you have to make a few different assumptions on different depreciation scales, which could affect GAAP profits. But you know, I would just add a few other concerns with the data center here as well. So I already discussed how Anthropic appears to be taking up a large share of Google's backlog. But there's also this kind of circular nature of the revenue here, which have been widely, widely shared. So just to give you an example here, a real example of Anthropic's deal with Alphabet. So Alphabet committed up to about $40 billion into Anthropic as part of the deal.

• 57:44Speaker 02

  So, you know, to put it simply, Google invests in the customer, the customer buys Google compute, then Google then books the backlog. So when looking at Alphabet, they've traditionally been a business that has compounded their per share value. And part of this was completed through buybacks, which ran between, say, $45 billion to about $60 billion between the years of 2023 until 2025. But as of the first half of 2026, they're literally zero. And additionally, CapEx has eaten up almost all of Alphabet's free cash flow. And in Q2 of 2026, they actually had their first negative free cash flow quarter in a very, very long time.

• 58:18Speaker 01

  Now we're bashing Alphabet a little bit here, but I do think that it's a productive exercise to do that because after all, we're pretty bullish on Google. Otherwise, it wouldn't be the largest holding in our portfolio. And so it's very important to look at your businesses critically. But just as maybe some more context on the composition of this AI spending. Alphabet's CFO, Anat Ashkenasi, has said the mix of the AI infrastructure investments that they're undertaking is approximately 60% in servers and then about 40% into the data centers and networking equipment.

• 58:52Speaker 02

  Yeah, and that number seems to track quite well, but I'd like to get back to the power consumption side of things. So an important metric that I've seen mentioned for data centers is something called power usage effectiveness, or PUE. It's a standard ratio that measures how energy efficient a data center is by comparing the total energy used by the whole facility to the energy used strictly by the IT equipment. So in Google's case, it has a 1.09 PUE. And this is supposedly much lower than the industry average of around 1.3, meaning that Google is just basically running much more efficiently than the average data center is. Now, it's great that Google is more efficient here, which gives them a number of scale advantages. You know, these are advantages, including cost savings, greater computing capacity per megawatt and a reduced carbon footprint.

• 59:34Speaker 02

  And for anyone wondering what a megawatt is, it's enough electricity to power about 600 homes or so.

• 59:39Speaker 01

  And the interesting thing is that even though power makes up only about 6% of the annual cost of this AI capacity, it is the largest bottleneck to scaling up. And so Alphabet is supply constrained with power and land and supply chain, but everything else is irrelevant if the energy needs cannot be met. And so it does not matter how many data centers exist, obviously, if they can't be powered.

• 1:00:01Speaker 02

  Exactly. And that's why I think SpaceX and Tesla bulls are just so excited about these AI data centers in space, which we discussed on my SpaceX pick. So renewable energy is clearly a massive competitive advantage and having data centers in space also takes care of much of the cooling that must be very, very carefully managed. But let's look at some of the economics of Alphabet's competitors in the AI data center space. So there are a few businesses that compete in the value chain. The two best ones that I came over were CoreWeave and Nebius, simply because they're kind of pure play and don't have financials that are obfuscated by other business lines, such as, you know, an Oracle and Amazon or a Microsoft. Now, the problem with both businesses is that they just today remain unprofitable. So even if you are making a complaint about Google's appreciation being artificially

• 1:00:44Speaker 02

  low, they're still probably much more profitable than either Nebius or CoreWeave is today.

• 1:00:49Speaker 01

  So really interesting data points there for sure, but it's something I'm still reflecting on personally is how come Alphabet does have this large profitability edge over some of those comps? How do you think about that, Kyle?

• 1:01:01Speaker 02

  Yeah, I think the biggest one is probably the vertical integration part. So you mentioned here earlier, Sean, that Alphabet has developed many of its own chips, including the tensor processing units. Now, because of this, it skips to some degree, this kind of Nvidia tax that pretty much all of these other companies are forced to pay. Now, keep in mind Nvidia is a very, very good company. It has 65% operating margins as well as pricing power. So, you know, that's great for Nvidia, but obviously it's not so great for its customers. Now, Google doesn't necessarily have that same issue. So Google's tensor processing units come in at about a 40% discount to the Nvidia equivalent. And as we've seen with Anthropic's deal with Google, it just makes more sense for many of these AI businesses just to rent compute power from Google rather than building it out on their own.

• 1:01:44Speaker 01

  Another simple advantage that Alphabet has as well is they have the ability to fill up their capacity themselves. CoreWeave, for instance, rents by the hour to their customers and Alphabet can allocate compute capacity toward Google Search and YouTube and Gemini as needed on top of the baseline to customers that they have just naturally coming in. So Alphabet really has very little capacity being wasted. They have a lot of flexibility and if there's a brief shortfall in customer demand, that compute can be redirected internally. And it's sort of like a hotel that doesn't have any room occupancies, you know? All the rooms are filled and that makes a huge difference for the incremental profitability of the hotel. And that really is something of a, perhaps a competitive advantage.

• 1:02:30Speaker 01

  And as of now, this probably is not a problem for NeoClouds like CoreWeave and Nebius, but if Alphabet's advantages continue to grow, there may come a time when these businesses find it difficult to keep the lights on with too much unused capacity. But that is a speculative tangent for us to go on. Perhaps on the other side of this AI cycle or bubble or whatever you want to call it, but just getting back to the angle of data centers and their impact and capital efficiency. It all really comes back down to this one question that we have been touching on throughout the entire course of today's episode. And that is, how much does that $200 billion need to earn for those investments to have made any sense in hindsight?

• 1:03:15Speaker 02

  Yeah, I mean, I think that's really all it boils down to, and I'm going to do my best here to break it down as simply as possible. So let's think of the $200 billion investment like buying a giant apartment building. Before you guys argue about whether that's a good buy, you obviously have to work out a few things, such as what it costs you to own it every year. And then you need to also ask, okay, well, what rent do you need to charge in order to make it worth doing? Now, for Alphabet, owning one year's worth of data centers runs about $30 billion in expenses once it's all switched on. And that composes of about $25 billion in chips that are slowly wearing out and the rest in power and upkeep. But just covering your costs obviously is not the goal. You also want a nice profit as well. So if we work backwards from a decent profit, you land somewhere around here, which is

• 1:03:56Speaker 02

  one year's spending has to bring in somewhere between 70 and $100 billion of brand new sales every single year. If you simplify that, the rule is about 40 cents of new annual revenue for every dollar spent. That's kind of where the bar sits. But then, okay, you want to know whether that bar is high or low because, you know, 40 cents by itself just doesn't mean that much. And here I have to be pretty honest because I went looking for a somewhat decent comparison and couldn't really find one. Obviously there's a marketplace for this stuff. Nebius and CoreWeave, you know, they do things, they're about, they're buying AI compute, they're renting it out and then they're disclosing what those contracts are worth. But there's one kind of flag here that makes it really, really hard to really understand. The trouble is they quote it per megawatt and a figure like 20 million per megawatt can mean two very, very different things.

• 1:04:39Speaker 02

  If that's what the customer pays every year, it's $20 million a year. But if that's the value of the entire contract and these deals unfortunately can run four or five years, then it's more like four or $5 million a year. So, you know, you're getting the same kind of headline number, but you don't actually get too much clarity. And I actually unfortunately found it described in both ways by different sources. So it's just not a comparison that I can really put any conviction into. But, you know, we can still use some information from these two businesses to at least develop a number where we are hopefully directly correct. So what we do know is that Nebius's pricing has roughly doubled in the last six months and CoreWeave raised prices by about 25% alone in July. And they actually said that their near term capacity is effectively sold out. So its payback period, or how long it takes until a deal repays, what it costs to build

• 1:05:24Speaker 02

  has actually dropped to under two years. On top of that, Nebius says that it could basically settle its entire 2027 capacity today if they wanted to. Now, you know, you certainly don't get to raise prices this much into a market with spare capacity. So as of now, I think Alphabet is far from guaranteed to making good returns here. But, you know, with all the numbers that we're getting here from Nebius and CoreWeave, I think it's telling us something useful, which is that demand is definitely running well ahead of supply. And that's obviously a condition that Google feels it makes sense for them to justify this amount of spending.

• 1:05:56Speaker 01

  Makes sense. And clearly as an Alphabet shareholder, it's great to see this, but there is another crucial thing to be aware of here. And we have to look at the durability of those price rises. And since this is a product that I think at the end of the day could be mostly commodified, it doesn't mean we can necessarily extrapolate it very far into the future in terms of just linearly drawing price hikes up and to the right. Clearly we're at this moment in time now where capacity is very scarce and because demand exceeds supply so dramatically, the owners of compute power can charge more because there's a willing buyer out there, but supply and demand won't remain this imbalanced forever because, well, we've been talking all afternoon here about the data center investments that

• 1:06:40Speaker 01

  are going into building out the supply side of this equation. And so I've also been pretty uneasy about that 40 to $50 million number you mentioned from Nebius. So we talked about this uncertainty with comfort systems in that episode of how, where we sit in the AI investment cycle, that may be leading to excess optimism about how much more spending will continue to increase by and how profitable it'll be. And that is a company for context that specializes in the maintenance of servicing data centers. So the stock has gone up in a straight line, but we really don't know how good the business will be when things normalize. And to a lesser extent, the same is true for Alphabet.

• 1:07:22Speaker 02

  Yeah, and as Alphabet has become more capital intensive, it really actually surprises me that Warren Buffett, who's kind of known for preferring businesses that don't require much capital to generate these cash flows, has now chosen now to be the time to invest in Alphabet after he first discovered the business, you know, 20 years or so ago while running search ads for GEICO. Now, this is another area where the thesis may have changed a little bit since you first covered it. I remember you highlighting in the original episode how Alphabet just had so much cash that they didn't really know what to do with it. They had so much cash that they were just returning it to shareholders through buybacks, which I think felt right for a company at that time with excess capital.

• 1:07:58Speaker 01

  To your point on Buffett and Berkshire there, not only have they used their own cash palace, but they've increasingly tapped the debt markets for more financing. And now they're turning to selling equity to raise enough capital.

• 1:08:10Speaker 02

  Yeah, that's right. So they said they were going to spend about $200 billion on AI data centers this year. Then they said, we need more money. So they went out and raised many, many billions of dollars. And I think this shows that Alphabet isn't focused on just managing their excess cash anymore, but maybe they found something worth deploying all that excess cash into and even more. So here's what I find noteworthy about all this though. So the share count has declined pretty steadily since 2018 because of those buybacks that I just discussed. But as of Q2 2026, they have 12.3 billion shares outstanding, and that's actually the highest number since 2024. That kind of shift shows you how much they're prioritizing this data center spend.

• 1:08:48Speaker 01

  If you think about it, assuming Alphabet is going to continue to need funding for its AI data centers, there is a good chance that they'll use all avenues available to them, which likely means more net share issuance that increases the number of shares outstanding. And whether that is technically dilutive depends on how effectively the capital raised from selling more shares is deployed. But at a really simple level, you've spread the business's intrinsic value across more shares and shareholders. And that is at a minimum going to put pressure on the stock in the short term because you're increasing the supply of shares to the market. And then you have to be able to justify that raising

• 1:09:28Speaker 01

  of capital longer term. And so while Berkshire invested $10 billion into Alphabet directly, Alphabet's total equity raise earlier this year was $85 billion. And so the market was happy to fund that evidently, but it's the first major equity raise we've seen from them since they IPO'd. And in theory, Alphabet should be at a scale and a maturity where they don't need to rely on selling stock to raise money, right? That's something you associate with startups and unprofitable tech companies because it's a very costly form of financing.

• 1:10:00Speaker 02

  That's right. And the fact they haven't had to issue equity for two decades, I think, is a pretty obvious signal of just how good of a business Alphabet is and speaks volumes about their ability to generate cash. But the share issuance is actually just the beginning of their capital raising effort. So as of Q2 2026, long-term debt is now $98 billion, or about nine times since the fiscal 2024 year ended.

• 1:10:21Speaker 01

  Yeah, with how conservatively financed Alphabet has been, even I was a little surprised at how much this figure has grown.

• 1:10:30Speaker 02

  Yeah, and part of the increase in debt has been from raising money in both domestic and global bond markets. So I guess, you know, if you can't raise it all from home, why not look elsewhere, right? And the appetite for these bonds is very, very high. So in February, they issued about $20 billion of US dollar-denominated bonds ranging from three to 40 years. And this was upside from $15 billion. And I read the offer drew more than $100 billion in orders. And then outside of that, they've also just looked around the world. They've raised over $50 billion in other currencies such as the sterling, Swiss franc, euro, Canadian dollar, Japanese yen, and even Australian dollars.

• 1:11:01Speaker 01

  So between the equity raise and all the bond issuance that we're seeing, maybe you can paint some color for the audience where they sit with the cash position now?

• 1:11:10Speaker 02

  Yeah, so they currently have $242 billion in cash and cash equivalents. So even with all this new debt, there's still obviously net cash, but that $242 billion is probably going to get depleted very quickly, given their current spending rate. And based on what management has said, they're not planning on slowing that down anytime soon.

• 1:11:27Speaker 01

  The Wall Street Journal had a really interesting article the other day about hidden liabilities for big tech companies where they've made these contractual agreements to build data centers or lease data centers or buy XYZ number of computer chips and so on. But these commitments are for 2028, 2029, 2030, and beyond. So we know they're coming, and they're massive, sort of like the backlog. And with Alphabet alone, we're talking about more than $800 billion in off-balance-sheet liabilities over the next few years. And I'm not misspeaking when I say that, literally almost a trillion dollars in liabilities that are not at present reflected on the balance sheet and weren't even conceivable a few years ago, right? They weren't on anybody's radar. So of course, the business is riskier

• 1:12:12Speaker 01

  today than it was in the recent past. There's just no way to get around the fact that a tremendous amount of financial uncertainty has been injected into the business and their future financial prospects because of these different liabilities. But also, I think you could argue that if AI is even remotely as revolutionary of a technology as Silicon Valley thinks it is, then Alphabet's ability to do all this spending is buying them maybe several more decades of dominance and being one of the world's biggest tech companies. That would be sort of like the ultra bull narrative. And so just to kind of look at the facts plain and simple, the risks have increased. They've changed also, right? A

• 1:12:53Speaker 01

  little bit less of a regulatory discussion and a competitive discussion and more about how the returns on this capital will look like. But on the flip side of that, Alphabet's corporate lifecycle has potentially been reset pretty dramatically. And so all of a sudden, Alphabet looks to be a much younger company with more dramatic growth possibilities ahead. Instead of being some kind of stagnant mega conglomerate that was just slowly in the process of hardening.

• 1:13:20Speaker 02

  Yeah, that's a great point. And the problem with these stagnant mega conglomerates is what you just said. Sometimes it gets to a point where it's nearly impossible to find a new growth lever. And then you turn to basically this kind of cash flow generator that just returns 100% of its cash flow back to shareholders. While those can make a decent business in terms of an interesting investment case, at least those that we look for to put into our intrinsic value portfolio is just not that interesting. We want businesses that have hopefully some sort of growth aspect to it because, you know, we're all looking for businesses that have a decent upside and we're not really particularly concerned with businesses that are, you know, just going to grow at the same rate as GDP growth. But I also kind of wanted to look at some of your points here on the risk angle that you just discussed here. So I think the first risk that I'd want to dig a little

• 1:14:03Speaker 02

  more deeper into is probably that you shouldn't give the income statement too much credit right now. So Alphabet reported $112 billion in profits in its second quarter, but when you dig in, $99 billion of that was a non-cash gain from marking up its equity stake in private companies like SpaceX and Anthropic. So, you know, think of it this way. If I told you you could make $100 in profit, you'd probably be pretty impressed, Sean. But then what if I said that $99 of that wasn't actual cash I could spend? It was just unrealized gains on, let's say, a stock that I own that I might be able to sell someday. You'd probably say, well, that's not really a profit. And that single gain added over $6 in EPS, but it's zero actual dollars coming into the business. And with Anthropic planning to IPO at some point in 2026, we're probably going to continue to keep seeing these large non-cash

• 1:14:48Speaker 02

  gains on the income statement. It all just kind of serves to add complexity when analyzing this business. So I think the flag here is simple. Don't get too excited by the headline numbers. Focus on operating income or cash flows when you're evaluating Alphabet.

• 1:15:00Speaker 01

  Yeah, of course, the headlines on CNBC are always going to lead with that net income number. But as you said, accounting gains can make a business look a lot better on paper than it's actually performing. And that's why we talk about quality of earnings. That's why that's such an important concept for listeners to know. But beyond the income statement and depreciation accounting, I would come back to the reality that the cloud backlog sort of epitomizes both the upside here as well as the risk facing Alphabet. So half a trillion dollars in revenue was being committed into the backlog is really great, but Anthropic and OpenAI have to actually be able to afford to pay that money in cash

• 1:15:39Speaker 01

  to Alphabet regardless of whatever they promise today. And so the cash has to come from somewhere. And I'm nowhere near optimistic enough about either of those companies to say with conviction that they will be solid customers of Alphabet for many, many years to come.

• 1:15:57Speaker 02

  Right. I agree with you. And, you know, we're not here saying that these businesses are at the edge of bankruptcy by any means. There's clearly a ton of investor interest in this space. So my guess is that they'll find financing for a while. And with some of these other hyperscalers in there, too, it kind of just raises the floor for committed revenue quality. Now, the next risk that I raise here is on the margins. So the margins obviously look really, really good right now. Operating margins is sitting in the low 30s. But here's where I think many people miss about this massive capex. Every dollar that Alphabet spends on these data centers today is going to become depreciation expenses next year or many years from now. So even if their revenue stays flat, even if they don't grow at all, margins automatically will compress from that added depreciation expense. And when you're spending $200 billion a year, well, that depreciation hit is going

• 1:16:40Speaker 02

  to be quite substantial. Now, the final risk that I'd flag right now is that Alphabet doesn't really seem to me to have a variant perception, as in the stock, not the actual business. You know, analysts currently love the stock and are issuing strong buy recommendations with an average target price around $430 versus the current price of about $340. Now, I think Sean did the right thing, adding this business very, very heavily when it was completely out of favor. You know, this business right now is not out of favor at all at this time. So without getting into the weeds of valuation too much, I will say it was a really useful exercise for me to go through your model from last year on Alphabet, update it a little bit, and think about whether the market is offering us a really attractive bargain with that stock.

• 1:17:22Speaker 01

  Well, in short, I think we'd both say that we see this as an exceptional business, but one that is much closer to being fairly valued today than probably was a year ago. And that that's partly because of the run-up that the stock has had, but also because of the changes, these new uncertainties that are facing the company that personally I have less confidence. And I felt more comfortable saying that I disagreed with the market about ChatGPT being a real disruptor of Google search. I'm really not sure that I have a strong opinion that differs from the market, where I feel strongly one way or another about whether these massive investments that they're making are going to underperform

• 1:18:04Speaker 01

  or outperform expectations. And so if you're searching for something on the internet at the end of the day, there is a very good chance that you're going to touch one of Google's products. I use YouTube pretty much every day myself, and I just can't think of any substitute that would turn my attention elsewhere. And so Alphabet's not going anywhere. This is an incredible company. We're very happy to kind of let our winners run here. And I don't want to overthink things. But yeah, I don't see as compelling of an argument that I can make in good faith that Alphabet's stock is as undervalued as it was this time last year, despite ironically having the same PE ratio.

• 1:18:43Speaker 02

  Yeah, I really don't have any arguments here. I think my stance on Google is quite simple. I just don't think it's the right time to add to the position. If we were speaking strictly rationally, then selling is actually probably the right decision due to the fact that we already made nearly a double. But you know, we are long-term investors. So sometimes the most optically rational decision isn't actually the correct move. And then speaking of maybe potentially trimming, well, we aren't really into market timing. So I think selling pieces of the stake, assuming that we can buy more for later at an even cheaper price, just doesn't really make that much sense. So in my view, I think the best move with Google, given that we already own it, is to just do nothing and let the position play out.

• 1:19:24Speaker 01

  I completely agree with you there. And yeah, you know, it's sort of a weird concept. I remember when I first pitched Alphabet on the show, I concluded that it was about fairly valued, actually. I didn't even make the case for it being super undervalued. So when I say that it was really undervalued, I say that in hindsight. And we had a listener write to me and ask me why we would decide to invest in Alphabet if the conclusion was that it was fairly valued. And back then, mostly it was because I knew I'd been like very, very conservative in the modeling when I said that it was fairly valued. But again, it kind of goes into this idea of just wanting to own wonderful businesses

• 1:20:06Speaker 01

  because they will surprise you to the upside typically and just letting them compound over time and just sitting on your hands and not doing anything about it. So I felt like if I could get a wonderful business at a fair price, that was a great arrangement. Alphabet has surprised me to the upside a number of times in the last year. And that's why I'm sort of take this benign and maybe more like tranquil view on the run-up in the stock in the last year where I wouldn't want to bet on where the stock price is going to go in the next 30 to 60 days. But looking at this with a 10-year, 20-year perspective, if you can even fathom thinking that far out, I think these are rounding errors in hindsight. And the simplest thing is to just sit back and watch because you'll drive yourself crazy

• 1:20:50Speaker 01

  if you're trying to time every single swing in the market and buy and sell and buy and sell. It's just not a winning formula. It's not a recipe for success.

• 1:20:59Speaker 02

  Exactly. So that's all we have for you today. But as usual, I think I'd like to leave you here with a quote, and this one's coming from the oracle of Omaha himself, Warren Buffett, back in 2012. So he said, "The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn't mean that those, the latter two companies, aren't going to do, say, far better than IBM." Now, this is just such a great quote because I think it showcases Buffett's thinking process. In just a few sentences, you can see how he thinks about opportunity cost and why upside isn't the only thing that matters. And of course, he was completely correct that both of those businesses provided much better returns than IBM, but he just didn't have the competence in his understanding of Apple and Google at that time to make an investment.

• 1:21:41Speaker 02

  But now he has invested in both and perhaps you can argue that maybe he feels like he's gotten competent enough or that, you know, at the time that he bought them, the businesses just had been de-risked to some extent and that downside was well protected. That's all we have for you today and see you next time.

• 1:21:58Speaker 00

  Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice.

• 1:22:41Speaker 00

  References to any third-party products, services, or advertisers do not constitute endorsements and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.