We're only at the beginning of the AI buildout, says Constellation Research's Ray Wang

Third quarter earnings season is, as you know, underway. Many big tech companies still going to report. Joining us now for a check on the sector is Ray Wong, Constellation Research Principal Analyst, Founder and Chairman. And there are some big themes, Ray, that you point out. AI may be one of the biggest. Wasn't always, it used to be cloud and ads and things like that, but it's AI. And is it long in the tooth or got a long way to go, do you think? You know, Joe, this one is here for a while. It's not going to change. And it's really because we're just at the beginning of the AI buildout. And one of the big places to see where that buildout is happening is really in the Nvidia earnings. On the backend, what you're actually seeing is Nvidia is seeing about 106.2 billion in capital spending in the first half of the year. And they're expecting another 60 billion in Q3. Who's paying for this? Well, it's actually the big tech companies like Google and Microsoft that have massive capex on their books. And that's really what's driving a lot of this. And the other piece that's interesting is that Blackwell sold out, which means all those orders are still not necessarily going to be fulfilled in time for these big tech companies to be able to build out their AI infrastructure. For those companies that are the big customers of Nvidia, they're spending a lot of money. When does that pay off for, I mean, the big companies are doing great already and they don't want to get behind other big companies, but all that money that they're spending, it seems initially it's just expenses with no payoff. It feels that way. It's like at the beginning, when Amazon was doing the build out to be able to deliver on commerce, everybody feels that there's a need to do that. I mean, take Google, for example, or Alphabet. They did 50 billion in revenue in a quarter, but they did spend 13 billion in capex, right? Microsoft had the similar kind of a footprint where they're spending 19 billion in capex, right? That is some big numbers and it has investors worried. But then again, in AI, it's different than the internet, the internet was open, it was decentralized. Lots of winners and things were cheaper. In AI, it is closed, it is not, it's centralized. It's more expensive and only a few players are going to win. Do you own all Mag 7? Do you own all of them or is there one you don't? You do? I do own all Mag 7. You own all of them and do you have, could you rank them? Yeah, I can rank them. Actually, for me right now, I think Amazon is probably the one, well, Nvidia is sitting on top, then Amazon. Then, of course, looking at the opportunities, it's Microsoft and Google because of the AI play. Apple, because they've got good services on the back end. Tesla is a wild card, mostly because of the robots on the Optimus side, as well as the megapacks. I think that energy piece is important, but the robot piece, I think, is bigger than a robotaxi in terms of those robots in the field. And of course, if you're looking at meta, meta actually, the reason I put meta further down is because we're going to see how long it takes them to get the LLMs and the open source portions to actually pick up, but they're doing really well as well. Some of the other themes that you mentioned, obviously, ad tech, and then I think, well, ad tech is dependent on AI. Even the cloud, which we've talked about for a decade, even longer, and that's an important business, that's informed and how it does is informed by AI as well. So you can't really take it out of any of those, but on their own, what about ad tech? You have to know how the economy is going to do globally to be able to make some determinations about that business. You know, Joe, that is one part of it in one aspect. Google and meta benefit because they're the top two players, but you got to remember, this is really interesting. Google won on search, meta won on social, and Amazon won on commerce, but they all have digital ads, and that's the interesting piece. So Google is twice as big as meta, and meta at this point is twice as big as Amazon, but the next player to compete is nowhere close, right? They're not even at the same level in terms of the amount of revenue. And so with the political season in place, Google and meta are going to benefit a lot more than Amazon, but Amazon has been growing their ad business fairly consistently, about 19 to 23% every quarter. And that's really where we're going to see some massive shifts in the marketplace because now you've got commerce, you've got ads, and of course they have subscriptions and membership. So Amazon has the complete digital monetization models. We don't have time to talk about regulatory headwinds, but since no one is ever going to be able to merge again, and since everybody's going to be broken up, it could be the mag 20 or mag 30. I think it's going to be around for a while, but the challenge is we need regulatory relief. We need regulatory relief, and it might happen in the next... Well, IPOs are stuck, and of course we can't do mergers, and that's why everything is held up. We're going to break up everyone. How many would there be? So I can wait at mag, what, three? Mag 21? Would each one get broken into three? Let's go with mag 50. You probably couldn't break them all into three. Some would be broken into two, some would probably be broken into four or five.