How Leverage Turned An AI Boom Into A Crash

Scott Galloway and Ed Elson break down how single-stock leveraged ETFs caused volatility in the South Korean stock market and discuss how leverage can be damaging for investors. Then, they unpack earnings from Microsoft, Meta, Apple, and Amazon, explaining why investors rewarded Microsoft and Amazon while punishing Meta and Apple. They discuss how the AI boom is making it increasingly difficult to value Big Tech. Subscribe to the Prof G Markets Youtube Channel Subscribe to the Prof G Markets newsletter Order "Notes on Being a Man," out now Note: We may earn revenue from some of the links we provide. Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:26Scott Galloway?

  Today's number, 21.4 million. That's how many Americans use marijuana daily in 2025, making it the most frequently used substance above alcohol, at 17.2 million. Ed, I do believe if the entire world got high together for a couple hours, it would be a better place. And then we'd have a global food shortage.

• 1:55Scott Galloway?

  That number blew me away. I mean, granted.

• 1:57Ed Elson?

  It's a great number.

• 1:59Scott Galloway?

  I'm 90% of that, but still, what are these young people doing?

• 2:04Ed Elson?

  It's kind of interesting to me. I feel like none of my friends are smoking weed or eating weed or however they're consuming weed. None of them are really doing it in my friend group. I'm not doing it either. I'm kind of surprised to see it. But I guess it's just the decline of alcohol.

• 2:20Scott Galloway?

  Are they drinking? Are they doing mushroom chocolates? Or are they just trying to pay off their student loans from Princeton?

• 2:26Ed Elson?

  A lot less substance use at this age. I would say like a few years ago, there was a kind of uptick in the mushroom chocolates and the psychedelics and all of that stuff. But it does seem like everyone's trying to kind of getting to that stage where they're getting their shit together. And it's like, okay, do I really want to piss away? Not just tonight, but the several days after with a hangover. Certainly ketamine was a thing back in the day.

• 2:53Scott Galloway?

  Ketamine back in the day. Wow, God, I feel old. I never, I miss that.

• 2:58Ed Elson?

  Yeah, well, I'm saying back in the day means 18 months ago.

• 3:01Scott Galloway?

  Last summer at a party in Mykonos.

• 3:05Scott Galloway?

  Yeah, from the age of, when I got out of UCLA, we spent a lot of pot in college. But from like 22 to 30, I don't think I did much of anything. I was so, I was just, you know, working all the time. And I don't know, just didn't really drink or smoke or.

• 3:22Ed Elson?

  That is my criticism of myself right now. I think I need to be having more fun than I'm currently having.

• 3:29Scott Galloway?

  I've got much better criticisms than that.

• 3:33Scott Galloway?

  I can help out there. I can make that seem like one of your better qualities.

• 3:39Scott Galloway?

  Yeah, there's, I had that kid, Jack Rains, on the Prop G Office Hours talking about. And his whole thing is, you know, make sure you have some fun in your 20s. You don't want to give up your 20s.

• 3:51Scott Galloway?

  But my sense is, my sense is young people will always find time and a way to have fun. I'm not worried about that.

• 3:59Ed Elson?

  Are you still a marijuana user?

• 4:01Scott Galloway?

  I do edibles probably once or twice a week when I'm having trouble sleeping, but I don't smoke. I don't really do. I'm taking down my drinking substantially because I do realize a 51-year-old liver cannot process the way it did at 21.

• 4:17Ed Elson?

  Is the edible, when you take the edible, is it just to go to sleep? Or are you having fun watching TV, messing around? Like, or is it literally just, I'm going to take the edible and then I'm going to go to bed at 4:00?

• 4:28Scott Galloway?

  For me, quite frankly, it just quiets the mind. My mind kind of starts firing at about 11:00 PM. And so if I want to, if I feel especially, not anxious, but just awake, I'll take a small, like five milligrams of an edible. And this, this brand I like called Wild Time that I get at the dispensary in Aspen, pear flavored. And it just kind of quiets my mind and makes it easier for me to sleep. But I don't, I don't ever do, I don't think I ever do drugs outside of the house. I just abuse drugs home alone as I'm playing video games.

• 5:02Ed Elson?

  It's a good way to do it.

• 5:03Scott Galloway?

  No, but I mean, occasionally I'll, you know, I'll watch some stuff on, you know, I'll stream something or watch something on TV. But mostly I just hang out with the dogs and wait till I feel tired enough to get into bed. Because I find if you get into bed and you're not tired, I just sit there and stare at the ceiling for two or three hours. But I don't, you know, when we were younger, we would do things like, like I'm going to see The Odyssey today. When I was a younger man, I'd do it on a Sunday and take an edible and go with a bunch of friends and then watch The Odyssey. And whoa, dude, that scene was amazing. And then we'd all go to In-N-Out Burger.

• 5:35Scott Galloway?

  But now it's mostly just a sleep aid for me.

• 5:39Ed Elson?

  It's interesting you say that. I actually have the opposite experience with marijuana, where my mind starts racing and I feel like I'm having all of these thoughts, all of these ideas, I'm having a lot of fun, but it's not a sedated state. Maybe it's just the type. I guess there's different variations.

• 5:59Ed Elson?

  But yeah, it's, it would not work as a sleeping aid for me, I don't think. But on a side note, I'm very excited for you to see The Odyssey. As I think I've mentioned to you, one of the best movies I've seen in a long time is number two on my Nolan list behind Interstellar, but it beats a lot of his films. And it's the best adaptation of that story I've ever seen. So I'm very excited for you.

• 6:25Scott Galloway?

  Yeah, I'm excited to see it. But more importantly, let's talk about the South Korean stock market.

• 6:30Ed Elson?

  Let's do it. Lots to get into in the markets this week.

• 6:36Scott Galloway?

  Now is the time to buy. I hope you have plenty of the well at all.

• 6:43Ed Elson?

  There's been an enormous amount of volatility in the South Korean stock market. Just last week, the Kospi index fell 22%. And then days later, it rose 15%. One of the biggest culprits appears to be a new wave of leveraged ETFs. In late May, the country launched single-stock leveraged ETFs, tracking two of its biggest chipmakers, SK Hynix and Samsung. These funds used borrowed money to multiply the daily return of their target by two, three, or even five times. That means that the gains are amplified when the stocks rise, but so are the losses when they fall. The products quickly became popular with retail investors looking to capitalize on the AI boom. But last week, when AI sentiment briefly soured,

• 7:27Ed Elson?

  the pressure quickly spread to South Korea's chipmakers. SK Hynix reported weaker than expected earnings, adding even more pressure. All told, Samsung plummeted 32% and SK Hynix crashed 40% and the Kospi index fell into a bear market. So Scott, this is really just a fascinating story here. What happened? The South Korean stock market's down 44%. $2 trillion in market value has been wiped out practically overnight. And the two main reasons for that are, as I said, Samsung and SK Hynix, these two chip companies, which now make up roughly half of the entire South Korean stock market.

• 8:11Ed Elson?

  And those two have tanked in the past month. This stock market crash in South Korea right now, this is the worst they've ever seen since the financial crisis in 2008. So, you know, why is it down so much? The AI trade, as we've been talking about throughout the week, appears to be unwinding. It's not just Samsung and SK Hynix. There's a lot of the other semiconductor names like Micron and AMD and TSMC. Chip stocks lost about $1 trillion in value in the past week, not because of anything that happened with their earnings reports, which were generally pretty good. But the euphoria is beginning to lose steam because there are these concerns that we have discussed at length,

• 8:53Ed Elson?

  like the extreme debt issuance, like the circular financing, like the SPV mania. And everyone's asking, where's the ROI? But in South Korea specifically, there is this other killer ingredient that is crushing their market. And that is the leveraged ETF, specifically the single-stock leveraged ETF, which has become the most popular financial instrument in South Korea by a mile. So that was great when things were good. Now things are bad and it is total chaos. Scott, your reactions?

• 9:27Scott Galloway?

  It reminds me of that Charlie Munger statement where he said, "The way smart people go broke is our ladies' liquor and leverage." Which, by the way, are awesome. I had a dinner with the podcaster and he was saying that he's been shorting the market or thinking about shorting the market. And so, well, you're under the impression then that you can time the market. And as a hedge, I get it. And if you're worried about the markets going down, unfortunately, I think hedging or buying, buying puts, it's very expensive because other people have the same ideas. The more boring way, if you think the markets are volatile or you want to lock in gains, is one, diversification, but also lowering your leverage.

• 10:12Scott Galloway?

  And to a certain extent, lowering your leverage costs something on the upside, but you don't, I don't know if you saw this hedge fund that was all the rage, situational awareness, is basically shutting down because of leverage. And just buying AI stocks at five to one leverage, that's not a strategy or that's, that's just.

• 10:28Ed Elson?

  Strategy until it isn't.

• 10:29Scott Galloway?

  I think of leverage like divorce in the sense that. If you get divorced, the only thing you know about it is it'll happen at exactly the wrong time to sell assets. That you're gonna have to typically, you have to sell a home, you have to sell some stocks, you know, you start dividing shit. And inevitably, it happens at the worst time. The way you go broke and just have huge hits to your financial wellbeing is if you put it yourself in a position, what you need to ask yourself is the following. At what point do I or the investments, what is the likelihood at some point we might become forced sellers? Because the market senses you're a forced seller and gives you a shitty price.

• 11:14Scott Galloway?

  And I mean, the kind of the worst call in history was when Jim Cramer, probably thinking he was doing his viewers a favor, said in the teeth of the crisis, if you can't stand the volatility, you should think about selling your stocks. That was the worst piece of financial advice given in this millennium. Because basically, the Nasdaq recovered within, I think, something like 14 or 17 months. But if you were levered, you had to sell. If you weren't levered, you just didn't look at your phone. And, and, you know, sooner rather than later, the stocks recovered. Leverage on the way up is a ton of fun. It's ugly on the way down. And I, my understanding is talk about a gambling economy, 92% of investors in these products

• 11:59Scott Galloway?

  were retail. And so there were two brokerage accounts for every citizen in South Korea. So it was never institutional risk, it was household risk. And Goldman estimates that 3.4% of South Korea's adult population has received a margin call. I mean, that's insane when you think about it. So the human cost here is so real that South Korea has rolled out a debt counselling hotline as part of its suicide prevention plan. That's a sentence that should give us all pause. And so the lesson here isn't new. It's just very expensive for, you know, for every generation to relearn this. And that is leverage doesn't create risk.

• 12:42Scott Galloway?

  It removes your margin for being wrong. And I think this is, you know, you miss some upside, it does cost you. But I think once you get to any sort of asset base, one, one means of protecting yourself, we keep talking about diversification. But it's a good idea to game theory out, and you can use AI for this. Put in all your assets, what your mortgage is on them, what you have, where you have pledged against them, or if taking money out on margin, whatever it is, whatever qualifies as leverage. What are the scenarios where you might be a forced seller? And you want to give up some upside such that if and when the market draws down, as

• 13:24Scott Galloway?

  it always does through cycles, you can ride it out. Your thoughts, Ed?

• 13:29Ed Elson?

  Well, the Leopold Aschenbrenner, this situational awareness thing is really interesting because for those that don't know, this is this hedge fund that was started by this former OpenAI employee who wrote this paper called situational awareness that was all about how the AI revolution is going to change the world and all of these things that we should be thinking about. It went super viral and like many up and coming asset managers today, it happened because he went viral. And then he kind of launched his hedge fund career off of that. And the fund performed unbelievably well.

• 14:07Ed Elson?

  I mean, just looking at this year, it was from June, it was up 439% on the year. And basically, all he was doing was investing in AI stocks and chip stocks, all of the names that have just gone absolutely crazy over the past few months. By the way, side note, his wife is the chief of staff at Anthropic. So a lot of people have been saying like, oh my God, this guy's a genius. How does he know when to buy all these stocks? How does he know when things change? And the answer is probably like, he's literally married to one of the most inside insiders in Silicon Valley.

• 14:46Ed Elson?

  But last week, we learn a truth bomb, which is that it turns out he was 5X levered up. He was then margin called. And then he decided, well, not decided, he was forced to liquidate his entire public equity portfolio. And supposedly, he's also selling his stake in Anthropic too. And it is remarkable because if you've been online, if you've been on Twitter, and you're kind of plugged into the investing community, this guy was considered AI Jesus. He was like the savant of our time. He could predict the future. He knew everything that was going to happen. And literally overnight, the whole thing has collapsed.

• 15:31Ed Elson?

  And what is it? It's a story of leverage once again. He was levering up into the hottest stocks, into the hottest momentum trades in the world, looked really smart until suddenly he didn't. And it is just so fascinating because we have seen this story over and over and over again. We saw it with Michael Saylor and the MicroStrategy play. We saw it with Kathy Wood and ARK Invest, YOLO-ing and levering up into Tesla. We saw it with Bill Huang. We saw it with Long Term Capital Management. And it's just, it's just hilarious to me how we always kind of fall prey to the same game. We see these gigantic numbers and then we assume these people are geniuses. In reality, they're just taking on a lot of leverage.

• 16:15Ed Elson?

  By the way, interesting side note, he sold his entire position, all of his longs, like SK Hynix, by the way, all of his shorts as well, like Adobe. He sold them all to a single buyer. Do you have any guesses at who that buyer was?

• 16:30Scott Galloway?

  I think I read it was Citadel, Ken Griffin, no?

• 16:33Ed Elson?

  That's right. Ken Griffin.

• 16:35Scott Galloway?

  Yeah, and by the way, Ken's gonna make a lot of money. To be, if you could find a fund that said, we're buyers of nothing but assets from forced sellers. Those are, I think the greatest investment trade was when Bill Ackman, there was a family that owned all of these malls, I think it was called GSCCC. Anyways, they, General Growth Properties, GGP. And they got caught in a down cycle, I think it was 08. And basically, they couldn't make their debt payments. He came in and basically squeezed them and bumped them into bankruptcy. If they'd been able to hold on for literally like three months longer, they would have been fine. And he got something like a 35,000% return on it.

• 17:19Scott Galloway?

  It just insane amount of return. And that's, again, it's really easy in good times to mistake leverage for IQ. I was just with my, I was just talking to my tax advisor and she said, we should put some leverage on your real estate. I, at my age, I'm now just, I've been, I've had my eyebrows burned off and my fingers, like not burned, but chopped off a couple of times in the market. So I don't like any leverage at all. And she convinced me that a little bit of leverage is actually healthy and strategic. So again, it's like, you know, it's like, I don't know what the term is, prescription drugs as taken as prescribed can be very good for you.

• 18:02Scott Galloway?

  Too much of anything is going to kill you, you know? So I, I think leverage is something you need to understand. You need to understand, I was thinking that, like, what could we do at the University of California? How did the curriculum needs to need to change? And I was thinking, going back into high school, how does it change? And I think a course on adulting that spent a decent amount of time talking about leverage, whether it's the mortgage on your house, what margin is, credit cards are essentially leverage on your, on your lifestyle or, or taking leverage out. But understanding the concept and what is the healthy zone of leverage? Very few people can buy a home for cash. I'm in a position of privilege. So what is a healthy amount of leverage?

• 18:45Ed Elson?

  Yeah. And I think the South Korean stock market story is the perfect example of leverage gone wrong. And I think it's a good warning against the downsides because it looks like, I mean, a lot of people in South Korea, a lot of retail investors, probably convinced themselves that they were geniuses. They probably convinced themselves that they were the new Leopold Aschenbrenner. And we saw the inflows into those leveraged ETFs, these single stock leveraged ETFs, which is basically just a levered up version of SK Hynix and Samsung. And that's basically it because those two stocks are the only stocks that mattered in the market.

• 19:25Ed Elson?

  The, the assets under management of those ETFs tripled in one month in South Korea. And I think, as you mentioned, 92% of the, the investors in those ETFs were retail investors. Now we look at the damage. Those retail investors in South Korea have lost $39 billion so far. You mentioned the craziest stat, I think, which is that more than 3% of the adult population has now received a margin call in South Korea. But I think probably most astounding is some of the imagery that we're seeing coming out of South Korea. If you go to the National Assembly Building in Seoul, South Korea right now, and you

• 20:08Ed Elson?

  go on the sidewalk, you will find a pile of funeral wreaths on the street.

• 20:13Scott Galloway?

  Yeah, I saw that.

• 20:14Ed Elson?

  With a sign that says abolish the single stock leveraged ETF.

• 20:20Ed Elson?

  Because suddenly, everyone is realizing that this stuff is extremely dangerous. There are literally thousands of people who have lost their life savings because they convinced themselves that this was the way to do it. This is how they were going to get rich. I mean, if you look at the amount of people in South Korea that are in the red on those two names, on SK Hynix and on Samsung, it comes out to around 70%. That is according to the Korean stock market regulators. The response from regulation, from the people in charge of South Korea's version of the SEC is they're going to just stop allowing these new listings of the single stock leveraged ETF.

• 21:05Ed Elson?

  They realized, wow, this was probably a bad idea. And you listen to some of the quotes that are coming out of South Korea right now. One of their parliament members said that the country has turned into a casino. Another said that the launch of the leveraged ETF was a, quote, "man-made disaster." The chief of the FSS, which is one of their securities regulators, said, quote, "I should have laid down to protest the launch of the leveraged ETF by any means necessary." So they're suddenly realizing, oh, my God, why did we allow this to happen? Why did we encourage this? Why didn't we put out more protections, put out more regulations? All of the things that I think you and I have been advocating for in America, but which

• 21:48Ed Elson?

  we kind of get a lot of shit for because everyone's like, you know, you're patronizing investors, like, let people do whatever they want to do. We're now seeing the downside. We're now seeing that people are taking to the streets and saying, why didn't you ban this? Why didn't you stop me from myself? And it's a really good warning story for America, where we're seeing trends brewing in the same direction. And South Korea is an example of where it went wrong.

• 22:19Scott Galloway?

  Yeah, it's, and I'm curious if you agree with this, but there's a balance between infantilizing people and also protecting them, right? A government has a paternal or maternal feel to it. We don't, you know, we make it illegal for people to take, you know, you can kill yourself by eating ice cream or going to Oregon for assisted suicide, but we put a lot of regulation and friction in between those things, saying that, okay, on certain levels, we do know better than you. And this, to me, feels like an example where we know what's going to happen here. We get, we get regulated backwards. We wait for retail investors to absorb the downside of financial engineering, which likely had really juicy fees for the middleware.

• 23:04Scott Galloway?

  We then apologize and then we regulate it. And the apology should come before these products launch, priced into the approval process with friction that says, okay, retail investors, and this is infantilizing them, should probably not be, have access to products with 5X leverage. That that just presents an existential risk and our population probably doesn't have the maturity, the experience, or the knowledge to realize you're putting nuclear weapons in their hands that are, seem to be endorsed by ads on CNBC South Korea. So it feels to me like this probably is, there probably is regulation that's required

• 23:48Scott Galloway?

  here that says, okay, at some point, when you're putting in place products that are subject to a cyclical downturn, which is, you know, happens in cycles, that would wipe out the household wealth, potentially millions of households, we're not going to let them do it, just as we wouldn't allow certain products, the availability of certain products that are dangerous. I mean, these products are dangerous. And at a minimum, you know, I don't think warning labels are enough here. If you're, if you're selling on the Cosby and by major brokerages with, that have ad campaigns, a five-to-one levered product, it's not if it's going to blow up, it's when

• 24:33Scott Galloway?

  it's going to blow up. So good regulation is prophylactic. So anyway, I'm curious to get your take because at the same time, what you're doing is saying institutional investors have access to more products and more leverage than retail investors. But at the same time, you know, there is a need for protection, if you will. Do you think it's, from your generation's viewpoint, you think it's buyer beware, don't infantilize me, I'm comfortable taking my own risk, you just want to sequester greater returns to yourself with access for wealthy people and corporations for access to a product universe that we don't have access to? Or do you think the government has a role here in kind of being more paternal and saying, no, we're not going to give you access to these products?

• 25:17Ed Elson?

  I think it's a balance. I think that you need to, there are things that you can do to protect investors from themselves. You can limit the amount of leverage that they can actually take on. You can increase the minimum deposit requirements. There are things that you can do, which we used to do in America, but increasingly seem to not be interested in doing because we've swung so far into this infantilization argument, which I think has gone way out of control. But also, the education, as you say, the warning label, we don't have nearly enough of that. And part of the problem is that there is a coordinated campaign by people who make money selling these products and executing the trades on these products to blur the lines

• 26:02Ed Elson?

  as to what is leverage and what is gambling and what is risky and what isn't. And I think what we're seeing is a proliferation of a lot of these financial instruments that are kind of just taking these weird side routes around the law and around regulations. The perfect example would be these perpetual futures, which have become the most popular form of trading cryptocurrencies today. They made up 70% of all Bitcoin trading volume last year. And it's basically a way to lever up by like 100 times, or even in some cases, 1,000 times, on crypto with no actual expiration date. It's basically just a bet on whether the price is going to go up or down tomorrow. And, and it's wiped out a lot of investors.

• 26:46Ed Elson?

  Again, these are the stories that you don't hear because everyone brags when they're up 1,000%. They never brag when they're down and they lose all of their investments. But it's, it's things like that. It's like the perpetual futures, it's the single stock levered ETF, it's the DeFi yield farming, it's all of these products that we are presenting to young people as if they are a legitimate financial product that is very complex and sophisticated. And if you can figure out how to do it, then that means that you're smart. And a lot of people get lured into this stuff. And so I think we could be doing a way better job of describing to people what it really is. Another example would be buy now, pay later. It's a little different.

• 27:30Ed Elson?

  But what we had when that industry exploded was you had these companies going around and saying, hey, this isn't credit. We know that you guys don't like credit cards. We know that you guys don't like debt. This is a new thing where you buy it now and then you just separate the payment up into little increments and you pay it later. And this was the story that they told us. They said that we were the debit generation. We don't like credit, so we prefer to do buy now, pay later, which is literally the definition of credit. And eventually, our regulators kind of stepped up, but honestly, it was a little bit too late. And they said, you need to be, be clear with people about what your product actually is. It is credit, it is debt, it is leverage, it is not a form of debit.

• 28:13Ed Elson?

  It is not just taking it out of your checking account. So it's issues like that. I think we need to be a lot more serious about making sure that people know exactly what they are buying, what the risks actually are. We could actually put these warning labels. Another example would be events contracts in the prediction markets. Are we going to step up and start explaining to people what these instruments actually are? But we've decided, no, we don't want to do that. Or at least this SEC has decided they don't want to do that. So I think there's a lot of work that, that is to be done. I have another angle on this South Korea story, which I think is very interesting. But before I do that, I'll just get your response.

• 28:57Scott Galloway?

  I agree with everything you've said. Don't tease us. Don't be Rachel Maddow-ing me.

• 29:05Ed Elson?

  Well, when you think about why has this happened? Why are all these young people flinging their money into these leveraged ETFs and then praying that the stock goes to the moon and then being upset when it crashes to the ground? If you look at South Korea on a demographic basis, there are few nations in the world that are experiencing a loneliness crisis more severe than South Korea. You look at their marriage rates, which have declined 40% in the past decade. You look at the fertility rate, which hit 0.8 last year. It's the only OECD nation with a fertility rate below one. You look at what the local governments are doing, where they're actually paying people to get married now.

• 29:51Ed Elson?

  I don't think it's a coincidence that they're suffering the same loneliness crises that we're starting to see in America and also seeing the same sense of financial nihilism that is becoming pervasive among young people such that they are levering up on these names and praying and hoping that it'll take them into a state of financial security and success. I think the two are definitely linked. I think South Korea is ground zero for the problems that we're about to see in America.

• 30:21Scott Galloway?

  I think that's really insightful and I hadn't connected those dots. And it seems pretty obvious, the way you lay it out, that that's got something to do with it because 3% of Americans, I don't know what is in South Korea, but 3% of Americans have a gambling problem. It's 10% of young men. And one of the most beneficial things for a young man, if not the most beneficial thing, is a relationship. And one of the most beneficial things for a young man in a relationship is, quite frankly, guardrails. And that is, what the fuck are you doing? I thought we were saving for a house, right? Or no, you don't take these kinds of risks with our money. And sometimes it's the opposite, right? Not as often, but people check each other when they're in groups.

• 31:06Scott Galloway?

  There's not only a wisdom of groups, there's a wisdom of relationships where you check each other. And the fact that fewer and fewer young people are connecting, and it sounds like the trends are... Also, if you're expecting a child, your risk profile goes down. You think, well, maybe I shouldn't be in this five to one levered fun because I've got to, you know, I've got to get a, rent a place with a second bedroom. So there's definitely something. Also, relationships are hard, but they give you a lot of DOPA. They give you a lot of upside. They keep you busy. And when you're lonely and looking for a DOPA hit, I mean, and I'm addicted to this. When I used to buy options or sell calls, it's fun.

• 31:51Scott Galloway?

  And, you know, the more time you have, or the less time you're spending on kids or just focusing on work. And so what do you have? Fewer guardrails, a greater risk profile, fewer people to keep you in check. And quite frankly, you're probably just bored and looking for some entertainment value. But I think that's a really insightful comment. I hadn't connected those dots.

• 32:12Ed Elson?

  Yeah. And hoping that this is the way that you're gonna get rich. And then maybe if you get rich, then that will mean you get a relationship. I mean, if we just look at the relationship inequality in South Korea specifically, only 8% of the men in the bottom decile of earners in South Korea are in a relationship currently. And in the top decile, it's around four times higher. So there is clearly a connection in South Korea and probably just in the world between financial success and romantic success. And I think that a lot of young people in South Korea, similar to what we're seeing in America, they think, I'm not going to be able to afford a home. I'm not going to be able to afford a life.

• 32:57Ed Elson?

  I can't get to where I want to be by just continuing to work the current job I'm in and continuing to do the wage treadmill. And so I need to figure out a way to get 2,000, 3,000, 4,000% returns. And this is my ticket to doing it. And for maybe like a handful of people, it works. And then for the rest of them, we're seeing this in the statistics. For the majority of the people who take that risk, it ends up being literally ruinous. And I think nothing tells that story more than the funerals that we're seeing outside the National Assembly Building in Seoul. Just one final point. This is rising in America.

• 33:37Ed Elson?

  You look at US leveraged ETFs, they've jumped from $120 billion in AUM in April to more than $200 billion today. It's up nearly 70% in just a few months. The number of US leveraged ETFs has more than doubled since 2025. And more than half of them are single stock ETFs, which is the exact same thing that got South Korea into trouble. So it'll be really interesting to see how this plays out in the US. I think the same trend is happening, but it's almost like we're maybe a couple of months behind South Korea, or at least we're less concentrated than South Korea is because of how dependent their stock market is on those two names in particular. But the same trends are beginning to happen.

• 34:20Ed Elson?

  And I think, I think it can only end badly.

• 34:24Scott Galloway?

  Leverage is risk, it's not a strategy. And I agree with you that, I mean, what you basically said, the crossway connecting me to Oxford on Cosby is a lot of young men think that leverage is going to get them laid. And that is, the story is old of time. Only 40% of men throughout history have reproduced, 80% of women. And men don't have the right to reproduce and women aren't obligated to service men. But the reality is a minority of men have had the opportunity to find a mate and to reproduce. The greatest innovation in history, which is not GPS or AI, but the American middle class gave a lot more men agency to build a home and quite frankly, attract mates.

• 35:07Scott Galloway?

  That is a uniquely Western post-World War II phenomenon. 75% of men in the West have had the opportunity to reproduce. And when men feel as if they don't have the, and unfortunately, because our society has become so much about the idolatry of money and we've created a system with weaker social safety nets, you're kind of unviable in the eyes of a potential mate. I mean, essentially, relationships have become a luxury item. And there's, we're regressing to the law of the jungle, where the world is basically Porsche polygamy, where a small number of men, through luck or hard work or inheritance, get all of the mating opportunities. And from 45 to present in the West, we gave a lot more people the opportunity to have

• 35:51Scott Galloway?

  mating opportunities by reinvesting in the middle class. And when we have this sort of income inequality and the general public decides we'd rather have a super class of billionaires than giving more people an opportunity to be millionaires, you end up with returning to the way the world has been through the majority of history. And that is a small number of men have all of the mating opportunities. But the problem is those types of societies collapse on themselves because those men get very angry and upset and a strong man takes advantage of that anger and invents wars or starts blaming people or saying the enemy is within. So this is, I like this framing, but this is a story as old as time.

• 36:32Scott Galloway?

  And again, we don't, I don't think we fully appreciate that the middle class is this incredible innovation that requires investment and is not a self-occurring, or it's not a self-healing organism that's a natural part of history. A middle class and the majority of people having the opportunity to find someone to love and have children with, that's the anomaly. That's the exception to history. And by the way, it's fucking wonderful and a huge achievement on our society and it's worth investing in.

• 37:06Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube and Spotify and wherever you get your podcasts.

• 37:21Speaker 00

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• 38:50Ed Elson?

  We're back with Prof G Markets. Big tech reported earnings last week. We got earnings from Microsoft, Amazon, Meta and Apple. The winners were Microsoft and Amazon. The losers were Apple and Meta. Meta shares plunged 8% after earnings. Apple shares plunged 7%. Meanwhile, Microsoft and Amazon were up 16% and 14% respectively. Scott, I'm going to jump right into these earnings because there is so much to get into here. And I think we should probably start with the winners. Headline numbers on Microsoft revenue really strong, up 18%. Net income up 31%. They beat on earnings per share.

• 39:32Ed Elson?

  You know, that's good, but I think the numbers that actually matter are the AI numbers. Because in this market, AI is the only thing people care about. So their cloud revenue was up 43%, which is really strong. That's the money they're making selling compute. Their productivity and business processes market and that houses their Office 365 product. And also Microsoft Copilot. This is the segment that was supposed to get crushed by AI. That is up 14%. So some strong growth there. They also reached over 30 million paid seats on Microsoft Copilot. There are some nuance there that we could get into. But free cash flow is down, not negative, but down.

• 40:16Ed Elson?

  It fell 23%. It's pretty good compared to Google's free cash flow, which of course turned negative. And also compared to Amazon, which we'll get into, which also turned negative. But the market was really excited about this and the stock has been rewarded pretty massively. Your reactions to Microsoft's earnings, Scott?

• 40:37Scott Galloway?

  Like, it was nothing short of staggering. And I think, I gotta think the reaction to the markets around Microsoft and Amazon make them, make for each of them, some of their best single day gains in history. And they're both sort of proved the thesis that if you can point to actual revenue from AI, Copilot's 30 million paid seats, AWS growing 37%. It's fastest clip in five years. The market rewards you up 16 and 14%. And Meta sort of is the opposite. And that is if you spend billions on AI when they'll clear monetization story. And Wall Street stops giving you the benefit of the doubt. The market is starting to stop giving you the benefit of that is the way I would put it.

• 41:22Scott Galloway?

  Meta's free cash flow fell 91% down to 784 million with zero explanation or visibility into what they expect the payoff to be. It's more, it's beginning to feel, people are starting to say, okay, is this investment or is it faith based spending? And the, the real thing, the tell buried in the Amazon numbers that I don't think the market has digested yet is that 53 billion of their 63 billion in net income came from their anthropic stake. And if you strip that out, the beat is mostly mark to market gain on private investment, not operating performance. And also a similar story at Alphabet.

• 42:03Scott Galloway?

  87% of the combined Amazon Alphabet net income traced back to anthropic and SpaceX gains. So it's really weird. These companies are beginning to trade like less on earnings and more, the people are starting to try and price their VC portfolio marks. The Apple earnings were really interesting. The problem is in demand. iPhone sales were up 22%. I just think that's staggering. I wouldn't have guessed that because I thought the latest iteration was just sort of meh. And that's a June quarter record, right? So record increase in iPhone sales. The, the issue they're having is supply.

• 42:42Scott Galloway?

  The quote unquote, Tim Cook's 100 year flood line on memory pricing is Apple for the first time in a decade, not fully controlling its own cost structure. You know, supply chain has always been, in my view, their competitive advantage. And that's, that's sort of new territory for a company whose supply chain command gave them, gave, gave people the sense that they were the controlling feature in the supply chain and they aren't able to control the memory prices. And then where I'll wrap up here, the real story under the story here, where you'll see articles next week is that markets able to absorb these numbers is, is CapEx.

• 43:25Scott Galloway?

  Alphabet's spending up to 205 billion, Amazon 220, Meta 145 billion. And Apple's spending 11 billion. And so I think one of the reasons Apple's had a pretty decent run up is that everyone else is betting the company on AI infrastructure and Apple's betting the company on not needing to, which I actually think is the right bet. And we'll find, you know, we'll find out in 18 months who was right. But I was sort of blown away by, I wasn't, I wasn't, I wasn't surprised on their, you know, some of the numbers here. I was surprised, I was blown away by the market's response, especially to Amazon and Microsoft. What are your thoughts, Ed?

• 44:07Ed Elson?

  I think the CapEx story is definitely one of those stories underneath the stories. And I think that's something to keep track of. In the case of Microsoft, their CapEx was unchanged for calendar year 2026, which I think the markets were pretty happy about. And then as it relates to the next 12 months, they basically just said that the CapEx would go up. And that's all they said. They didn't really give a dollar amount, which is Gil Luria said when he came on the show last week, was kind of them sort of playing it safe. They're saying, yes, the AI thing was still investing in it, but we're not investing in it like crazy. And I think that was something that the market responded to quite well.

• 44:47Ed Elson?

  I would just say on the AI ROI question, because this is the big question, like, how are you going to monetize your, your AI investments? It's clear that, that Microsoft is doing it through their cloud business, selling the compute to AI companies. It's clear that Amazon is doing that too. The trouble is how much of that is going to, to companies, specifically OpenAI and Anthropic. And the answer is we don't know because they won't tell us. What, what they have told us, what Microsoft told us is that they, they told us something about their remaining performance obligations, which is their future revenue coming down the pipeline.

• 45:31Ed Elson?

  In January, they told us that half of those remaining performance obligations were tied to OpenAI. This quarter, they told us that the 82% growth they were registering in their remaining performance obligations would have been 25% if it weren't for OpenAI. So they're telling us in so many words that they are pretty dependent on OpenAI, but we're still not getting a clear sense of exactly how dependent they are. And I think if we really wanted to understand these businesses, then the big tech companies would tell us, this is how much of our revenue in this quarter was derived from two companies, specifically OpenAI and Anthropic. Maybe we throw SpaceX in there too.

• 46:13Ed Elson?

  And the reality is that Microsoft is the one that's been giving us the most disclosure on this front. Amazon has told us nothing about it. Google has told us basically nothing as well. We really don't know how much they are reliant on these, these two companies or these three companies, which as we have said before, those are companies that are losing tons of money. And it's not really clear how sustainable this business model actually is. Which brings me to something you mentioned, which I think is the realist story of the stories, which is the fact that in the case of Amazon specifically,

• 46:52Ed Elson?

  85% of their net income was derived from their stake in private companies, specifically Anthropic and now OpenAI. And in the case of Google, that number was 87%, but for Anthropic and SpaceX. And so the paper gains that these companies are registering in their private AI investments, and who knows how they're valuing these companies are now being funneled into the bottom line of their earnings. And the real problem is when you look at the price to earnings multiples of these companies. Because you look at Amazon, which is on a tear right now. The stock's up 20% year to date.

• 47:35Ed Elson?

  Google is up around 11% year to date. And yet their multiples have come crashing down.

• 47:44Ed Elson?

  So Amazon's PE multiple right now is nineteen times earnings. Last year it was thirty two. And so you look at that valuation multiple and you think, oh, my gosh, Amazon is really cheap right now. And I'm sure that a lot of investors have looked at their multiple and gone, wow, now's a great time to buy Amazon. Look how cheap the valuation is. Look at the S and P, which is on average, trading around twenty five times earnings. Amazon is at nineteen. What that number isn't telling you is the extent to which the private investment in Anthropic is juicing the net income, which literally like tripled last quarter because of that investment in Anthropic. And the same goes for Google as well.

• 48:29Ed Elson?

  So this is the new problem that we're really starting to see based on these reports here, which is that we now need to create a new price to earnings multiple that reflects the real multiple of these companies. We now need to create like a PE that subtracts out their private investments in Anthropic and OpenAI and SpaceX, because those private investments are distorting the most fundamental valuation metric that exists in markets and that likely many investors are basing their portfolio strategies around. So we're getting some very murky territory here. By the way, we did the analysis. If you took out those investments, Amazon's real PE would be thirty times earnings and Google's would be thirty one times earnings.

• 49:14Ed Elson?

  So they're actually a lot more expensive right now than the valuations would imply or the multiples would imply. But this gets to what we've been talking about with the SPVs and the trouble with the forward earnings, where OpenAI just comes out with these contracts and says, this is how much we're going to make and spend over the next several years. Point being, traditional metrics have been compromised by AI and it is becoming increasingly difficult to get an actual understanding of what these companies are worth.

• 49:42Scott Galloway?

  Yeah, you're just saying, I think that analysts have an obligation and good analysts will do this to have kind of venture adjusted earnings. Right? And those earnings do, that money does flow back to shareholders, but it's a sugar high. It's not anything structural about the business. Maybe they would argue, well, actually, given our position in the marketplace, we're going to have future opportunities to make these types of investments. But that is kind of empty calories from a street standpoint, because it's, it's, it's great for the time being, but we can't, we can't count on that money. The, the lessons I take away from this are the following. So I have an investment in an AI adoption company called Section.

• 50:24Scott Galloway?

  And Section works with big corporations on how to upskill their employees for, for AI competence, so to speak. And one of the things, one of the learnings from them is that Microsoft's Copilot, their AI offering, is not considered one of the frontier models. It's not considered one of the better models. At the same time, Microsoft three sixty five Copilot has over thirty million paid seats, meaning that Microsoft has one of the largest revenue producing AI products in all of tech. And that is, I think the business lesson here is, okay, having the frontier model, the best model, is important.

• 51:06Scott Galloway?

  What's profound is your ability to get mass adoption. And I, I just see the narrative right now from Microsoft salespeople in the field. Well, we're already in the enterprise. You've already checked us for bugs and security risks from AI. Yeah, maybe we're not quite as good, but you know us, you'll love us. We've got billing set up. It integrates into the rest of your Microsoft workflow. This is just, and by the way, we're Microsoft. We're scared, we're a public company. We're the least likely ones to have a hugging bear, like whatever it was, AI jailbreak within your company from our AI. Do you really want to trust all these little AI companies that might have better, a better product?

• 51:51Scott Galloway?

  But we're Microsoft. And it's, I mean, it's just, these companies have such an advantage with their installed base. Microsoft probably has the most consistent recurring revenue business in the world. Something like ninety seven percent of the global ten thousand corporations have a monthly recurring revenue relationship with Microsoft. And, and then the other takeaway for me was the technology will outlast these valuations. You know, the internet outlasted, outlasted the crash of two thousand. And I think that AI will outlast what I think is going to be a crash in these valuations.

• 52:33Scott Galloway?

  The place I think valuations will, will actually increase as it relates to AI are two places. Autonomous, I'm in LA, I've been taking Waymos, I'm just fascinated. I think we're hitting a tipping point where autonomous, autonomous vehicles or autonomous ride hailing is about to go parabolic and, and Alphabet has five thousand operational autonomous vehicles. I think Tesla has twenty four. And the amount of data they're collecting, the trust, AI as it relates to autonomous is a big winner. And then the second place is AI as it relates to industrialized robots. And that's where I think Amazon is going to really, really register incredible benefits.

• 53:16Scott Galloway?

  And then the other, what I'll call AI bet that's going to pay off is not betting. And that is, I think Apple's taking the same approach to AI they took to search. And that is they're saying, okay, you guys fight it out and enter into this capital war and we're just going to wait in the background and figure out a way to charge one of you an enormous licensing fee for access to our billion consumers. But never missing an opportunity to pat ourselves on the back. What was our big tech stock pick for twenty five, Ed?

• 53:47Ed Elson?

  Google.

• 53:47Scott Galloway?

  It was Alphabet, and I think it was up sixty eight percent. It was the best performer in big tech. What was our big tech stock pick for twenty six?

• 53:55Ed Elson?

  Amazon.

• 53:56Scott Galloway?

  So let's just review year to date stock movement. Meta's off fifteen percent, Microsoft's down five percent, Alphabet's up twelve, Apple's up twelve. And survey says Amazon year to date is up fifteen percent. It's the number one performer as of this morning in big tech. This is all, I find it all super interesting. And then the final takeaway is the following. For all of the shitposting, not you, but I do about big tech and its harms. These companies are so incredibly well run. Their ability to balance what, what to let flow to the bottom line in return to shareholders in the form of earnings or stock buybacks

• 54:37Scott Galloway?

  with what is the right level of forward leaning investment based on the ecosystem and the market and what, what, what the, what the markets will register or not register. These companies are just so incredibly well run.

• 54:49Ed Elson?

  But I think that, I think the concern is that that's not true anymore. I mean, Google's free cash flow is negative. Amazon's free cash flow this quarter is negative. Meta is spending tens of billions of dollars on dataset infrastructure. And I mean, you look at, why did the stock plummet? It's because Mark Zuckerberg did not have an answer as to how he's going to generate a return on those investments. I mean, we, we saw the reporting about how he's going to build a cloud business and he was asked point blank, he didn't discuss the cloud business. He didn't address the reports about how Meta was in talks to sell its compute to Anthropic.

• 55:31Ed Elson?

  He, he simply avoided the question and that's exactly why the stock tanked. Now, I think that, that there's an open question as to whether these guys are geniuses when it comes to capex. And they are geniuses when it comes to balance, managing the balance sheet. But that's certainly not a given at this point. And it's certainly the thing that markets are trying to digest and trying to ascertain. I mean, Zuckerberg has a okay track record, like he's clearly a great founder and a great business person, but he did have the metaverse. I did lose eighty billion dollars on that thing and he did change the name of the entire company

• 56:14Ed Elson?

  on a pipe dream and a vision of the future, which did not come to pass whatsoever. So, I mean, I think this is an open question for a lot of these companies. And I think for me, I do think we are getting to a place where you do want to see more responsible spending. You don't want to see free cash flows turning negative. I mean, considering the amount of money that these companies are generating to begin with, the idea that you would spend all of that. And then as we're now seeing, issue debt to finance these plans, that to me does seem irresponsible. And I think the only company out of the list here

• 56:56Ed Elson?

  for whom I feel probably better about in terms of how they are managing their AI risk would probably be Microsoft, whose free cash flow is coming down, but it's still positive and it's still, they're still in a better position.

• 57:11Scott Galloway?

  I thought you were going to say Apple. Apple's mostly on the sidelines in terms of the AI capex.

• 57:14Ed Elson?

  So, so, so Apple, I have a slightly different view. Apple, I'm actually not even putting into this list because it's just a completely different company now. I mean, they are firmly not in the AI race. They have been rewarded for not getting into the AI race. And yeah, that, that, that's what investors are excited about. I have a slightly different view on Apple, which we can get to. I'm not so bullish on the company at the current price at least, but.

• 57:41Ed Elson?

  As it relates to the AI companies, this is an open question for sure.

• 57:45Scott Galloway?

  So I would argue, as if I were on the board of these companies, like use the word irresponsible. These companies, what they're doing is the following, but on a, Apple decided, all right, Zuckerberg's going really big into headsets, into a consumer device. He's probably wrong. All the data shows he's wrong, but let's take one or $2 billion, throw it at a headset, get Tim Cook on the cover of Vanity Fair. And if he's right, and this whole new world of spatial computing is the next thing, we need to be letter D when we find that out, not letter A and be flat footed. I think these companies on a much, on an exponential level have said AI might, may be the next thing.

• 58:27Scott Galloway?

  And I, you know, the level of spend that warrants is up for debate. And that's what you're saying, that the level of spend is out over its skis relative to, and to, to be fair.

• 58:37Ed Elson?

  It felt good lost to you. Now I'm like, what, what are we doing?

• 58:41Scott Galloway?

  Well, to be fair, the market is turning from will AI work to will AI pay? That's the question, right? Having said that, I think their level of capex and the, whatever you want to call it, the efficient frontier of investment, these companies are such cash volcanoes, Ed, that if AI ended up being a giant head fake, or, or the capex does not justify the short and medium term return, they're fine. I mean, Anthropic and OpenAI go out of business or go down 90% and they get bought by one of these companies. But these companies have to play aggressively in this field. And quite frankly, they could, they could see all of their capex, all of these companies that we're talking about here, because we're not talking about Anthropic or OpenAI.

• 59:26Scott Galloway?

  All of these companies could see their capex go to zero. It would impair their stocks for 12, maybe 24 months, and that's it. So now are they spending too much? Okay, I, I think there's a solid argument that they may be. They have to put a lot of chips down on this AI number. They cannot get caught flat footed. And the amazing thing about being a monopoly in your respective field, whether it's social, or e-commerce, or search, or enterprise, enterprise software, is that they can afford to take these types of bets. And if it doesn't work out, you know, it's going to be a bummer for several quarters.

• 1:00:10Scott Galloway?

  But the bigger bummer, it's sort of like when Janet Yellen said, they overdid the stimulus in America around COVID. And she said, the risks of overdoing it were much less than the risks of underdoing it. And I would argue that the CFO and the CEOs of these companies say, Apple's taking a different strategy per your comments. But the rest of them are saying the risk of underdoing AI and being the company that got displaced because we didn't bet in the future versus the risk of having, you know, to take huge write downs over the next six, eight quarters, and then we're back to the fucking cash volcanoes we've always been, that's a good risk.

• 1:00:50Scott Galloway?

  What the efficient frontier or the right place on that line is, I agree with you. That is now, people are starting to say that curve is too steep right now. But these guys, it's, it's good to be king. They can make these kinds of bets. And if they don't work, they're still fine.

• 1:01:11Ed Elson?

  We'll be right back. And for even more markets content, please sign up for our newsletter at profitemarkets.com.

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• 1:02:58Ed Elson?

  We're back with the profite markets. All of that anxiety that I am expressing about overdoing it, overinvesting, that's all being reflected in current prices. And I think a decent argument to make is to think, okay, let's imagine that AI just disappears, that the AI thing doesn't work at all. OpenAI goes out of business if that's the case. Anthropic goes out of business if that's the case. A lot of the names that have become very popular during the AI boom, maybe won't go out of business, but certainly their businesses will be really, really harmed, perhaps ruined. For big tech, that's not the case because big tech was still king before AI.

• 1:03:43Ed Elson?

  So I think an interesting question to consider is how did the market price these big tech companies before the AI boom? And the answer is, we went back and looked, the multiples were higher. So you look at Meta at the beginning of 2023, just a few months after ChatGPT was launched. Meta was trading at 31x earnings. It's currently trading at 20x earnings. So it has been, the, the market, it is not an AI winner based on the multiple. The market has decided that this is a real problem and they are, they are certainly pricing in the risk when it comes to Meta.

• 1:04:24Ed Elson?

  Microsoft is down from its multiple at the beginning of 2023.

• 1:04:31Ed Elson?

  Technically, Amazon and Google are also down. But again, we need to make those adjustments because of the weirdness, because of their net income. But if you look at Amazon, if we find the real PE, it's 31 today. It was 79 at the beginning of 2023. Google is up a little bit. So Google, you could argue, is priced a little bit expensively. But the, the outlier is Apple. It's trading at 38x earnings today. January 2023, it traded at 21x earnings. So the market has attached a premium to Apple simply for not engaging in the AI race. And the question is, do you think that makes sense?

• 1:05:15Ed Elson?

  I would argue it doesn't. I would argue, sure, maybe they've, they've, you know, not gotten involved in this big debt contest of who can build the most amount of data centers, and maybe that's good. But what I would like to see from a company like Apple is, here's what we're investing in instead. We're going to take this other route, and it's not going to be AI. And instead, what they've done is they have literally done nothing. And for some reason, the market is, is communicating to us that they believe that there are huge growth opportunities for Apple. But to me, I don't know what those growth opportunities actually are. It's, I don't think it's growing their share in the smartphone market, because the only way they could do that is to reduce prices.

• 1:05:56Ed Elson?

  They already have a fifth of the global market and they can't do that right now because memory prices are going up. You could say, oh, they'll build the headset, but the headset was a giant flop. I don't think that's going to work. They're not building a car anymore. Like, I don't actually know how they're going to grow into the, into the multiple that they are currently commanding, which is why I think that actually Apple's the most overvalued of all of them.

• 1:06:21Ed Elson?

  And you could argue they, they made the right call, maybe by not getting into AI. But it's like, well, what are you getting into? Are you just going to rest on your laurels and sit around?

• 1:06:30Scott Galloway?

  Well, resting on their laurels, laurels has been the right, Tim Cook, people have been posting Tim Cook for decades around not getting into other products. And get into the car, and they decided, no, it's not working, and they pulled the plug on it. I think their discipline around basically saying the iPhone is the most profitable product in history and continues to be the ultimate signal of wealth and utility, not of wealth, aspirational value. The billion most important people in the world have one thing in common, and that is to use iOS. And so, so your point, and I think it's a valid one, is that Apple trades in terms of a P multiple as if it's a growth stock and it's a mature company. But what they would say is the following, mature bitch.

• 1:07:17Scott Galloway?

  Our revenue is up 16%. We've managed to increase revenue on one of the largest top line tech companies in history, 16%. We are a growth company and deserve a growth multiple. The other thing that is different about Apple.

• 1:07:30Ed Elson?

  Do you think that sustains? I like, I agree, it's, it's phenomenal. Like, the fact that they've been able to grow the iPhone revenue the way they have double digits pretty consistently, like, it's, it's really impressive. But do you think that that lasts for the next? Ten years, sorry.

• 1:07:47Scott Galloway?

  Okay, is it sustainable? I think Apple is the ultimate indicator of wealth and creativity. And what you have globally with demographics and productivity is that income inequality is infecting every nation. And that is the top 10% of every nation, even now in China, is starting to aggregate more and more of the spoils. And it used to be, once you go into the middle class, you buy a car, you get air conditioning, and you start buying beef. Once you get into the top 10%, you buy an iPhone. And I think there are going to be millions, tens of millions of people in India, in Indonesia, and other growth markets, Southeast Asia, that the first thing they do is they buy an iPhone.

• 1:08:29Scott Galloway?

  Also, it is a little more resilient, much more resilient to the vagaries and unknown Wild West of software, specifically AI. Because of all these companies, look at all of the things they offer. Maybe with the exception of Microsoft Office, you would say the most enduring thing and the hardest thing for any of them to replicate is hardware. And that is, none of these companies have been able to produce anything that doesn't get, I mean, what is it? The Microsoft tablet, the Amazon Fire Phone, the, what was it called? Facebook's portrait computer? Hardware, Apple and the iPhone, in my view, have the biggest moats.

• 1:09:11Scott Galloway?

  China is flooding the market with open weight LLMs that pose a real threat to the AI components of these companies. You know, a lot of people were saying Atlassian posed a real threat to Microsoft. Did it or did it not? What's the competitor to Apple's hardware?

• 1:09:28Ed Elson?

  Right.

• 1:09:28Scott Galloway?

  Do I think it's Apple? Apple's probably overvalued right now? Probably. I'm not selling any stock, though, because if there's one company in 10 years that I think will still be producing a product that has gigantic margins and be the ultimate, the best bet, the biggest moat in all of these businesses right now are probably Amazon's warehouses.

• 1:09:50Ed Elson?

  Agreed.

• 1:09:51Scott Galloway?

  Is number two, and number one would be, would be the iPhone. I just think that's going to continue to gush your money for a long time.

• 1:09:59Ed Elson?

  I totally agree with that, but to me, that is an argument as to why their current business and their current market share is protected. To me, it's not an argument as to why it's going to grow. And I look at that multiple, and I think what the market is saying is that it's going to grow dramatically over the next several years. I agree. I mean, and by the way, they, they have accomplished all of the things that you have described. Like, they have 20% market share of this global smartphone market. So all of those rich people, like, they've already got them. And to me, if you want to grow that business, now you have to actually go, not to the rich people, but you have to go down the income stream.

• 1:10:42Ed Elson?

  And to me, I don't think that they should do that, because I think that they should protect their positioning as the premium luxury product in hardware. And, but I could see that becoming a potential route that they want to take. And it could look like, it looked like for Nike, where Nike decided, okay, let's lower prices to expand our market, and it had a bad impact on the brand, and that was a problem. So I agree with you that they have, the things that you've described, they have crushed, and no one's coming close. I just don't know how they grow. And I think the only way that they do it, at least commensurate with the multiple that they are currently commanding, is if, in the next couple of years, they come out with

• 1:11:26Ed Elson?

  the new iPhone of the next generation. Like, a hardware product so incredible that it extends into an entirely new market. And I think that's what they thought that the Apple Vision Pro would be, and maybe it's what they thought that the car would be at one point, and agree props to them for just sunsetting that and recognizing, this isn't our ballgame, we're not going to play in this. I think one potentially good thing for the Apple bulls would be, the new CEO, John Turnus, is a hardware guy. So maybe the plan is like, he's going to come up with something incredible. But I just don't see it right now.

• 1:12:08Ed Elson?

  And I, I think, I think you're preying on John Turnus to be a genius for this to work out.

• 1:12:16Scott Galloway?

  Yeah, I would, I would describe this as less praying and more rational. And I want to acknowledge, the PE may be ahead of itself. And also, on Amazon, the PE, even, even stripping out the returns on its investments, at a P of 30, it's historically traded at an average of 55. I mean, based, because of its growth and its excellence.

• 1:12:38Ed Elson?

  Yeah.

• 1:12:38Scott Galloway?

  So it actually, I don't want to say it looks cheap, but it looks, it looks like it's the best value it's been on in a while. Again, they're saying that, the stat that just, absolutely, I find staggering, is they're planning to double their retail revenues by 2033 without one single incremental higher, because see above AI and industrial robots. You compared Apple to Nike. I don't think that's an apt analogy. Look at the substitutes for Nike. I wear On Running. My sons love Adidas. There's Hoka. My sons just went and spent a ridiculous amount of money to buy shoes that look like they've been worn for a year from this company called Golden Goose, that I had never heard of. There are a ton of really outstanding, I used to wear Puma for a while.

• 1:13:21Scott Galloway?

  There are a ton of outstanding substitutes, really viable substitutes for Nike. What is the really viable substitute for an iPhone?

• 1:13:30Ed Elson?

  Yeah, no, it's true.

• 1:13:31Scott Galloway?

  And you said, you said, it has to produce new products. No. The global economy has to produce new middle-class and upper-middle-class consumers. Because the 100 or 200 million new middle-class consumers that India's going to produce in the next 36 or 48 months, what do they do when they go into the middle class? Do they get a paid LLM? Maybe, maybe not. They all buy a fucking iPhone. So as long as we believe the global economy is going to push more people into the middle and upper-middle class, Apple is good as gold. There's no substitute. There's no, when you want to buy a nice car, oh my God, you get rich.

• 1:14:13Scott Galloway?

  Well, okay, there's BMW, Mercedes, and Porsche, and Audi. No, there's not. Have you seen what the Chinese market is doing to luxury automobiles? There's so many amazing options right now. Yeah, I, I want to send my kid to an elite college. Well, he needs to go to Chicago. Well, okay, he could also go to Wash U, MIT, name a premium brand with this type of aspirational value, these types of margins, these types of self-expressive emotional benefits, that doesn't have a ton of competitors. It, all roads lead to one place, Apple.

• 1:14:53Ed Elson?

  I don't know. I, I, I don't know if they, I mean, we'll see. This is an interesting one. I just don't.

• 1:14:59Scott Galloway?

  You're a doubter.

• 1:15:00Ed Elson?

  They're already at 20% smartphone, global smartphone market share. If we're saying that they're going to do it by selling more iPhones, I think that's going to be.

• 1:15:08Scott Galloway?

  Again, misleading, Ed. 20% of hardware sales, what is their, what is their revenue generation they sit on top of in terms of app and e-commerce? What percentage of dollar volume flows through the iOS operating system?

• 1:15:21Ed Elson?

  I don't have that number in front of me, but.

• 1:15:23Scott Galloway?

  I don't know the number, I just know it's the majority of it.

• 1:15:25Ed Elson?

  No, the majority of their revenue is iPhone. It's selling the iPhones.

• 1:15:29Scott Galloway?

  They also, but the majority of purchases done on, in the e-commerce ecosystem, the majority of money that flows through for any app, any paid app, is flowing through iOS. It has a 20% market share, but that's misleading, because quite frankly, the 20% of the world that owns like the iPhone are the people who matter. The 20% of people who have iOS have 110% of the influence around the world. That 20% number is misleading.

• 1:15:57Ed Elson?

  I'm just looking at the services revenue. They did $54 billion in iPhone revenue, $30 billion in services revenue, which, by the way, missed. And I think that's why the market was upset about this, because I think they wanted to see what you're saying, which is like, the services segment is how they grow.

• 1:16:17Scott Galloway?

  Yeah.

• 1:16:17Ed Elson?

  And it's, it's, I mean, it's up 12%. It's not, it's pretty good, but I'm skeptical, but this is what the markets are. We have different opinions. It's a weighing machine. We'll see.

• 1:16:29Scott Galloway?

  I just want to, I, I hear you, and I, I, I understand and empathize.

• 1:16:35Ed Elson?

  To disagree.

• 1:16:37Scott Galloway?

  I'm listening. I'm listening. I'm listening.

• 1:16:42Ed Elson?

  Okay, let's take a look at the week ahead. We will see earnings from Palantir, AMD, Pfizer, Eli Lilly, Spotify, Disney, Uber, Snap and SpaceX, which I cannot wait for. We will also see the US employment report for July. Scott, do you have any predictions?

• 1:17:01Scott Galloway?

  In the month of August, we're going to see a half a dozen forced sales events based on the downward, the downward trajectory of AI stocks and the leverage. And it's not to say that the party's over. It's to say that, you know, if you don't get leverage puts you flying at Mach three at 50 feet of altitude, meaning if you hit a bump or an air pocket, you might die. And I think there's a lot of people skimming along the surface at Mach two right now with leverage. And this downward trajectory, I just got to think all over the world, there are margin calls and people scrambling who trying to hold on to their assets that aren't going

• 1:17:45Scott Galloway?

  to be able to that this is, this bump is going to, you know, Buffett says, you know, when the tide goes out, we see who's swimming naked. The way I would describe it is these people are going 200 miles an hour and they're hitting their first speed bump and we're going to see who has airbags. So the prediction is in August, a half a dozen, quote unquote, fairly significant headline forced selling events from companies that we mistook leverage for IQ.

• 1:18:14Ed Elson?

  I like it. I think that's a good prediction. My prediction, the first part is a quick victory lap on Microsoft because as I said on this podcast, I bought after the SaaS apocalypse at 400, I bought again after the second SaaS apocalypse at 380, stocks up to 460 after those earnings. So I'm up more than 20% on that trade. But the people, the thing that people will say is, well, what about Meta, which you also bought and it just got crushed after earnings? Yes, it did. The good news is that I bought at the low, so I'm down like 1% on Meta. But my prediction is that this is the bottom for Meta. I think that there are some very real concerns about the company, about how they're building AI, about the debt that they're taking on.

• 1:18:57Ed Elson?

  But all of that is being reflected in the price right now at 20 times earnings. I don't see how Meta goes much lower than this. So I think that this is the bottom for Meta. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalun, Kristen O'Donoghue and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and tune in tomorrow for a fresh take on the markets.

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