Microsoft and Mehta weighing on the S&P and NASDAQ under
pressure despite top and bottom line beats from both names.
That said, our next guest calls Mehta a buy here
and just raised his price target to 700 from 600,
but lowering his price target on Microsoft to 425 from
475 with a mutual rating there.
Gil Lauria DA Davidson Managing Director, joins us now.
Welcome, Gil.
First, if you could just kind of explain your rationale
behind those two moves.
Yeah, if we were to extend the picks and shovel
analogy that we've been using recently, Microsoft is selling a
lot of picks and shovels, but their customers aren't necessarily
finding enough gold yet to justify that.
And so as you're decelerating the quarter in the face
of accelerating CapEx, Meta is accelerating CapEx as well.
But they're actually mining for their own gold and they're
finding it through better ad business.
Their core business is doing better because AI is helping
them generate better ads that are getting better yield.
So Meta is already benefiting from AI and that increased
investment.
Microsoft still needs its customers to find some more gold
every quarter.
Of course, we talk about investors patience with all this
CapEx going into AI versus the ultimate payout.
How would you describe the market mindset right now as
it pertains to that clear ROI and patience levels as
they see, you know, billions of dollars get funneled into
these types of projects?
Well, I think what we're seeing today is the market
is running out of that patience is that even though
the heads of these large companies, these mega caps believe
that the investment is justified because they're going to get
to AGI, which will be an incredibly powerful tool.
They don't want to risk not getting there.
But investors want to see a shorter term payback as
well.
They want to see these applications actually being successful, generating
economic returns that even remotely corresponds to the level of
investment that these companies are making.
The market is telling these companies today, you need to
slow down this CapEx rate until the revenue from these
endeavors catches up.
Well, I mean, from a Microsoft standpoint, the demand is
overwhelming.
They have some supply constraints.
I think they're pretty clear about that.
So how do you factor that in?
And, and frankly, I'm not so sure that the market
is growing tired necessarily with what the spend is and
what it might be, because I think we understand they
have to spend to maintain their enterprise leadership in, in
AI.
Well, the doc just lost a couple of points a
share to Google.
So that's part of the issue with Microsoft is yes,
they're accelerating the spend, but Google accelerated revenue growth by
6 points.
They've, they're going to have a deceleration over a couple
of quarters of three points.
So the narrative on Microsoft was that they had this
huge lead over Google and Amazon.
And now that's that's really changing because Google is accelerating.
Amazon is going to report an acceleration in AWS today.
So Microsoft is doing well again, selling picks and shovels,
but it's not doing as well as Google and Amazon
right now, which is not what the narrative has been.
And then in terms of the supply constraint, let's not
forget Microsoft is entirely beholden to NVIDIA.
All their data center chips come from NVIDIA, where Google
and Amazon have more independence because they have their own
chips that they can deploy.
So they're not having the same supply issue that Microsoft
is.
Again, Microsoft is escalating the data center build out in
spite of the fact that Google Cloud and AWS may
have a structural advantage.
You know you mentioned you expect Amazon's going to report
a acceleration in, in AWS along these lines out.
What's the general setup for Amazon?
I mean is it just going to trade do you
think on the the cloud momentum or or other things?
Well, that's half of it.
We are all, we are going to be very focused
on AWS to see if there is acceleration.
If they added more dollars than Azure did this quarter,
that's going to be very important.
The second part is going to be margins.
Can they sustain and maybe even increase their retail margins
in spite of all the moving pieces?
Is the consumer strong enough to support the e-commerce business?
And is all the investment that they've made in the
distribution and fulfillment centers going to pay off with higher
margins in retail?
As long as they can maintain or maybe even increase
retail margins, then they'll get rewarded for the acceleration at
AWS.
All right, Gil, thank you very much for joining us
on such an important week for these stocks.
Really appreciate it.