TechStockFundamentals

$AMZN qtr was somewhat squishy but “fine”. Story is still getting better. AWS is accelerating and they now expect it to grow >40% in 2027 and 2028 which is pretty wild (and positive for infra trade). Margins for the entire business continue to march higher driven by mix shift towards AWS / advertising and better cost control. Now, this growth is more capital intensive and the company has flipped to -63b in FCF this year, -79b in 2027 and -60b in 2028; and they will have net debt of -147b at end of 2027. Returns thus far seem fine evidenced by 2025 capex of $1 producing 0.49 incremental AWS dollars this year which is less than the 80c-100c they used to get pre-AI, but otherwise the AWS margins are nice and healthy still. Risk / reward pretty attractive. Upside of 62% to 25x my 2028 GAAP EPS for a company growing GAAP operating profit by 35% yy (with offset being this is capital intensive growth). Downside of -7% to 20x street 2027 EPS. Obviously any stock can go down 20% no matter how cheap it is so let’s just go with that. Qtr AWS rev of 46b accelerated to 39% yy w/ 39% margin slightly down qq. Incremental margin yy was still 49% so trend is still higher even as AI is a greater part of the mix. They mentioned they are accelerating capex payback and that inference is well over half of token consumption. Their share does continue to decrease: 42.2% share among AMZN / GOOGL / MSFT down from 46.4% a year ago. Perf obligations only increased by 82b this qtr from 132b add in Q2 and 120b add in Q1. NA retail was slow bc Prime day was in the prior qtr this year. Normalized growth was >12% yy which is consistent w/ prior qtrs. Advertising within this also slowed to 12% which was a big decel relative to 22-26% in Q1-Q2. Reason being Prime day was in Q1, Q3 didn’t have NBA, and lapped some SEM improvements they made a year ago. They anticipated “Agents took the traffic / ad rev” and said that wasn’t it (whether it will be down the road is a different question). Margins of 7.7% was up from 6.9% last Q3 (but apples to oranges w/ Prime Day). Intl retail also slowed to 5% yy also partly due to Prime shift. 3.7% margin up from 2.9% last Q3 (but that included severance).

Few random points on $GOOGL: 1) Clicks grew 8% (down from 13% in Q1 / Q2 against easy comps) w/ pricing growth of 4% (consistent w/ 4-5% in Q1 / Q2 against similar comps). Bulls will say query growth overall is healthy, AI results taking share from regular, and that search will re-accelerate as they turn on ads in AI results (especially for massive discrete regions like intl.) Bears will say 1) Top of funnel search is moving to ChatGPT, AMZN AI, Muse, etc. and 2) Last click moving to agentic interactions like Muse. I'm not really smart enough to figure that out. Definitely more of my top of funnel searches are away from GOOGL, but most of my bottom funnel gets executed with GOOGL. 2) Cloud is doing great. Historically qtrly rev was ~6b ahead of adjusted backlog (total * % recognized over next 2 years / 8). Now, the big signings suggest qtrly rev will be 45b which I reach in ~3 qtrs. Backlog additions are solid (47b vs 52b in Q2 and 220b in massive Q1). 3) One big beautiful bill is very helpful for cash flow. I estimate 2026 CFO of 165b up from 125b in 2025. However, OBBB is likely ~40b of that improvement so CFO really would be flat yy. So, for some reason, CFO doesn't appear to be exploding w/ cloud growth - not really sure why. I estimate 2026 FCF of -10b which would be -50b without the tax benefit. That tax benefit has to be paid back at some point which will be a headwind to FCF growth at some point even when CAPEX starts to fall again.

$MSFT reported an all good in the hood quarter. Office365 accelerated to 18% yy cc driven by people adoption copilot. They now have a cross-surface solution across all the apps and say 90% of queries use the default model. So the bull case is they do to ANT / OAI what they do to all competitors. Had a buddy who worked there and said MSFT is the only company that successful comes from behind once someone else demonstrates a big market exists (see Teams vs Slack / Zoom, Azure vs AWS, etc.). Seats are growing 5% and pricing uplift is now 13% yy cc! Azure accelerated to 48% yy cc and they guided to 49-50% yy cc. No slowdown in the hyperscaler buildout / monetization. OAI was 10b of rev in the qtr or 11% of rev. This is direct Azure contribution but also rev-share. Compares to OA being 24b last FY or 7% of rev. MSFT owns 24% of OAI. O365 and Azure are now 55% of the business and I don’t care about the rest unless it slides into the ocean. OM of 49.8% was up nicely from 48.9% last Q1. They guided to margins being down slightly including all the “Pls don’t show up tomorrow” memos they sent to 60k people. Seems conservative. I’m a bit ahead on revenue so I get margins up slightly. Business is good at $MSFT. Revenue should accelerate this year and next FY w/ margins expanding despite the mix shift to Azure. They are the most responsible of the hyperscalers and staying FCF positive for now. Stock trades at 22x CY27 EPS and 18x CY28. 27x presents 21% upside over the next few months and 51% upside over the next year. Maybe downside of 13% to 22x street CY27 EPS.

$GOOGL reported a mixed quarter. Search is 39b of segment profit in the qtr out of overall profit of 41b so understandably everyone freaks out when search is squishy. Stock trades at 18x my GAAP 2027 EPS which is a bit above street for >30% operating profit growth. Kind of a tough one: Search - who the hell knows, Cloud - doing great, YouTube - doing fine. Search Rev of 63.3b slowed to 12% yy and will likely slow to 10% yy in Q4. Tough comps along w/ China advertisers slowing since the EU stopped tax-exemption for small order e-comm. It was the worst qq Q3 since the 2022 slowdown. Query growth remains healthy and they stated AI queries are mostly additive to traditional. Testing for ads for AI has gone fine and they will turn on monetization internationally soon. Very hard to parse – obviously bears think search is moving to ChatGPT / Muse / etc. while bulls think search pie is just growing, GOOGL users are loyal, and GOOGL will enjoy last-click attribution (last place you search before you buy) (offset by maybe Muse becomes the last place you buy bc you tell it to find you the best deal). Obviously tons of background questions come to the foreground with a miss, but these things don’t die overnight so my bias is probably more towards the upside bc turning on AI mode monetization can move the needle. Margins of 41% were up from 39% last Q3. Cloud Rev of 29.7b (excluding maybe 1b in TPU?) accelerated to 96% yy w/ 5.0b net add vs 1.5b last Q3. They have big deals ramping through this year including the 16b ANT ARR. All good in this business line as the AI buildout continues. TPU sales also are ramping and going well. ANT disclosed their 125-150b contract but that starts in 2028. Margins of 37.4% up from 23.7% last Q3. There will be some pressure going forward as they use expensive SPCX capacity to fill supply-constrained gaps. CAPEX productivity seems to be holding at around $1 of capex producing 70c of incremental forward revenue. I still have that dropping to 0.5x for 2027 rev and 0.4x for 2028 rev which means my cloud estimates might have upside. YouTube Rev of 11.2b grew 9% yy against a tough comp also w/ weak 152m net add vs 465m last Q3. Whatever, this business doesn’t move the needle.

@NotepadFinance @RHouseResearch

Ok, it might be over folks. Anthropic revenue disclosure maps to ~5.8b in September revenue or 70b ARR which means August / September only increased by 2-3b ARR in each month. [There is no way that ARR is calculated using last day of the month as that would be more aggressive than anything I've ever seen out of companies this size (exception: Musk).] Worst monthly numbers by far this year. (Maybe some self-infliction from cleaning up distillation?). My rough math indicates OAI / ANT ARR monthly add softened from 16b in July to 10b in Aug to 9b in Sept. That is no bueno... Supportive of the view that either CAPEX is getting cut or pricing is going to weaken substantially.

OpenAI at 70b net never really made any sense intuitively. Still seems like net ARR added in September was 17b similar to 17b in August. 17b is still pretty ridiculous and suggests we finish the year ~200b gross across ANT / OAI.

@a16z put out a solid deck today on State of AI. Does a good job of just putting it all together - AI capabilities rapidly expanding, AI model revenue ramp unprecedented, semi spend underneath unprecedented and driving earnings growth of the entire stock market, and multiples reasonable due to cyclical concerns. To me, the "elephant in the room" question is simply will AI monetization accelerate over the next couple years from what likely will be ~200b run-rate at the end of this year. Very rough math, but we added ~170b of model revenue in 2026 against 1.4t of capex over the past 3 years and 780b in 2026. Expectations per chart below are for 1.1t of capex in 2027 which then flattens. Maybe that implies the model companies in aggregate need to add ~200b of ARR each year to justify that spend? Is that possible? Sure but also tough to assign probability bc there are a million unanswerable questions underneath (product development, pricing power, etc.). That's also the bear case for semis for a future date: even if model companies plus others can add ~200b / year of incremental revenue, that implies semi spend stagnates after 2027 -> second derivative turns negative and multiples stay low until the inevitable downturn. I personally think 2028 is probably a 20-30% growth year in capex so the whole trade is more likely to up than down from here at these valuations, but just pointing out the risk that the market is pricing in here (and that has to dissipate via continued ARR growth / hyperscaler capex growth commentary to see the trade run). [Btw, I also think it's so fascinating that leading investment firms are also publishing leading news / research. This free newsletter from A16Z smokes independent publications (WSJ, Gartner, etc.), and the sell-side (less conflicted in some ways and more informed)]