Did Google Just Have Its Worst Quarter Ever?

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Thursday. Today, October 29th. In today's episode, we'll break down the Fed's latest rate decision and the surprise change that Kevin Warsh is making to the Fed calendar. We'll also get into Google and Microsoft earnings and why the market reaction has been so different between the two. Then stick around to the end of the show to find out which company has more cash than Apple and NVIDIA combined. We got a great show for you today. Let's go. Oh. Stocks squeezed out another gain on Wednesday. The S&P 500 and the NASDAQ both added about 0.3%, their third straight day of gains. One of the big winners yesterday was Oracle. Their stock jumped 11% after the company told investors they expect to get back to positive free cash flow in the second half of their 2028 fiscal year. Which was sooner than what Wall Street expected. Now, the big headline yesterday was of course, the Fed meeting. Now, going into this meeting, the market was expecting the Fed to hold rates steady, and that's exactly what they did. The Fed funds rate was left unchanged to be between 3.75 and 4%. Now, it was a 10 to 2 vote. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack both voted for a rate hike. And in his press conference, Fed Chair Kevin Warsh Did leave the door open for a rate hike. At the December meeting, the press conference was kind of interesting. One of the questions that Kevin Warsh was asked in the conference was why the Fed chose to hold off on hiking rates at this meeting when the economy is, for the most part, running strong while inflation is still above the Fed's 2% target. You know, one thing that Kevin Warsh has repeatedly emphasized is that the Fed is committed to getting inflation back down to 2%. So it is a bit confusing on why the Fed chose not to hike at this meeting. Especially since they hiked at the September meeting and are planning to hike at the December meeting. Warsh didn't really have a good answer to that question. In fact, he didn't have many good answers to any of the questions that were asked in the press conference. You know, I watched the whole thing. I feel like he was trying too hard to be funny at times as well. And it just wasn't working. I think maybe he needs to take some aura classes from Jerome Powell because his press conference are kind of a tough watch right now. Now look, one reason the Fed might've chosen to hold off on hiking rates is that a major contributor to higher inflation right now is higher energy prices from the Iran war. You know, the Fed can't do anything about a war and higher oil prices. So maybe Kevin Warsh is hoping that by waiting six more weeks, there might be some sort of resolution from the war and they'll have a better outlook on what will happen with energy prices going forward. That wasn't really communicated that well from Kevin Warsh, but. It does make sense. For now, though, the market is expecting a rate hike at the December meeting, according to the prediction market on public.com. There is a 78 percent chance of a 25 basis point hike in December. But look, a lot can happen between now and then. Now, there was one surprise to come from the press conference. Kevin Warsh is changing the Fed's meeting schedule. See, right now, the Fed meets eight times a year and votes on interest rates at. Every meeting, but starting next year, one of those eight meetings will become a strategy only meeting. And there's not going to be a vote on interest rates or a statement or a press conference. So that means there's only going to be seven rate decisions in 2027. And then in 2028, they're reducing it down to six rate decisions. This seems to be a big push by Kevin Warsh. He He wants to reduce the number of rate decisions. I don't know what kind of impact that's going to have in the market. I guess every rate decision will carry more weight. So we'll see what that does. But, you know, I wouldn't be surprised if we see Kevin Warsh make even more changes. Like he might get rid of the press conferences at these Fed meetings as well. I don't know if the market's going to like that because the market likes to have as much information as they can. Anyways, there's a lot happening right now in the markets these days. So if you're new here, you picked a great time to start listening. Definitely get subscribed to the podcast if you haven't already and tune in every day to stay in the loop. Let's run through some headlines. Live. Starting with Google. Google's parent company, Alphabet, reported earnings last night, and man, it was not pretty. Let's start with the headline numbers. Revenues grew by 25% from a year ago to $127.6 billion. That was slightly below Wall Street estimates. And adjusted earnings per share came in at $2.67. That also missed estimates. So this is the first time that Alphabet has missed on both top line and bottom line. In nearly four years. And here's the thing. The problem seems to be Google's cash cow search business. Search revenues grew by 12% to $63.4 billion. But Wall Street wanted to see closer to $65 billion. YouTube ad sales also came in slightly below forecast. Now, here's the thing. People are still using Google search a lot. In fact, Google said the number of searches are growing at the fastest pace. In five years. But the problem is Google is making less money per search. Because it's harder to monetize the AI results compared to the 10 blue links they used to show back in the day. And you know, this has been a concern about Google for a while now. Many investors were worried a year or two ago that AI could disrupt Google's business. I think many people thought that ChatGPT would reduce the number of search volumes. That never ended up happening because Google also pivoted to AI search results. The problem is those AI search results AI is now starting to have an impact. On their lucrative business model, and that's why the stock is getting crushed right now. Shares are down more than 12% at the time of this recording. If Google stock falls more than 9.77% in today's session, it will be the worst post earnings reaction ever in the company's history. Now, look, it wasn't all bad news from the earnings report. The big bright spot was Google cloud revenues more than doubled to $30.7 billion. That's up 103% from a year ago. And the division made an $11.1 billion operating profit, which did beat expectations. So clearly many businesses are spending money on Google's cloud and AI services. But the problem is, is that Google is also spending an enormous amount of cash to build out the AI infrastructure so they can serve their customers. Google spent $51 billion on CapEx in the third quarter alone, mostly on AI data centers. And all that spending pushed their free cash flow to negative. So Google has now reported two negative cash flow quarters in a row, and until this year, they had never done that as a public company. Google says that spending will increase significantly next year. So Google is planning to spend even more money while their ads business growth is starting to show some cracks. That's not a good combination. Not to mention, the company is also taking on a lot of debt too. Their long-term debt jumped from about $22 billion last year to $125 billion this year. And then to add to all of that, I feel like Google has lost all kinds of momentum when it comes to Gemini. Last year, everyone thought that they had the leading AI model, but now it seems like nobody's talking about Gemini, and they've fallen behind OpenAI and Anthropic. Now, Google did recently release Gemini 4. We'll see if that helps them, but... I feel like OpenAI and Anthropic are kind of running away with it at this point. Now, I don't want to end this on a completely doom and gloom note because Google stock does trade at 20 times forward earnings, which is cheaper than Microsoft, Amazon, and Meta. The company's also sitting on over $250 billion in cash, and they're still the only tech company that has their own frontier model, their own custom chips, and a booming cloud business. But if that's not gonna start producing some cash and profits at some point, I don't know how much longer investors are gonna be cool with the billions and billions of dollars of CapEx spending. Let's shift gears and talk about Microsoft because they also reported earnings last night and investors were a bit happier with this one than compared to Google. Let's start with the headline numbers first. Microsoft's revenues grew by 19% to $92.3 billion. That is Microsoft's 10th straight record quarter and adjusted earnings per share hit $4.89. Both those metrics A big driver for Microsoft's beat was Azure, which is Microsoft's cloud computing business. For the first time, actually, Microsoft reported exactly how much revenue Azure brought in. And in Q3, it was $33.2 billion. That is up 48% from a year ago, and it also beat Wall Street estimates. And what's crazy is that Microsoft says that Azure should grow even faster next quarter. Because demand still exceeds supply. Now here's where the major contrast with Google comes in. Microsoft is still generating cash. Free cash flow came in at positive $18.6 billion last quarter. You compare that with Google's negative $9.1 billion. Now, that number is still down 27% from a year ago because Microsoft is still spending a lot of money on AI. So that's eating into their cash flow. But at least it hasn't gone negative like Google or Metas has. Microsoft said they spent $45.2 billion on CapEx in the third quarter, which was about $5 billion less than expected. But Microsoft expects CapEx numbers to continue to go up moving forward. And look, Microsoft is also trying to cut costs. On Monday, the company offered voluntary buyouts to around 60,000 of their employees, which is more than a quarter of their entire workforce. These employees have until early December to decide. If they want to take the buyout now, the initial reaction to the earnings report was positive. Microsoft stock jumped 4% on the beat, but now the stock has given up those gains and shares are down around 1% at the time of this recording. One reason for that could be because Bloomberg just broke the news that Microsoft is looking to raise at least $25 billion in debt from their first US bond sales since 2017. So at this point, pretty much every big tech company has taken on as much debt as they possibly can. Let's talk about some stocks making moves today and we're going rapid fire style. First up, we have Instacart and DoorDash. Instacart is officially getting acquired by DoorDash for $17 billion. DoorDash announced this morning that they are paying $65 a share in a cash and stock deal. That's 11% above yesterday's close for Instacart, about 26% above where the Instacart Before the merger talks leaked last week, Instacart shares were up in the pre-market again today before the announcement, but trading was halted ahead of the deal. And DoorDash stock is also up this morning around 8% at the time of this recording. This is a pretty interesting deal. DoorDash is already the biggest restaurant delivery app in the US and buying Instacart would give them a much bigger presence in grocery delivery too, which could help them take on Walmart and Amazon. But don't expect the apps to merge anytime soon. The deal isn't expected to close Until late 2027 or early 2028, and I imagine the regulators will take a look at this as well. Next up, we have Eli Lilly. Eli Lilly is up this morning after crushing third quarter estimates. Thanks to the relentless demand for their GLP-1s. Revenues in Q3 were up 39% to $24.4 billion, with Mounjaro and Zepbound alone accounting for over 65% of the company's revenues. The one soft spot in the earnings was Lilly's new obesity pill called Foundeo. That did come in below expectations, but Eli Lilly did raise their full-year revenue forecast to be between $91 and $92 billion. That's up from the previous forecast of $86 billion. The market liked what they heard, and Eli Lilly's stock is up around 4% this morning. the time of this recording. Next up, we have Chipotle. Chipotle reported earnings last night and it was a mixed bag, but the stock is still getting a nice boost this morning. The good news from the report was that sales at existing restaurants were up 2.1% year over year. This was thanks to more customers coming in and also spending more per order. The company also expects roughly a 2% same store sales growth. In the current quarter as well. The bad news from the earnings, though, was that higher beef, freight, and labor costs are squeezing profits. Chipotle's earnings per share did miss Wall Street estimates. But still, I think Wall Street was happy to see a beat on sales and a return to growth. And the stock is up around 7% this morning at the time of this recording. You know, it's been a pretty brutal year for Chipotle. Coming into the earnings report, the stock had dropped 24%. And finally, we have ServiceNow. ServiceNow stock is getting smoked this morning, down more than 18% following their earnings report. ServiceNow is a software company. They make the software big companies use to run things like IT help desk and HR requests. And the quarter itself wasn't that bad. Subscription revenues were up 21%, but adjusted earnings per share did miss estimates. And the company's outlook for subscription sales were roughly in line with expectations. ServiceNow is one of those companies the market was worried could be disrupted or completely replaced by AI. There doesn't seem to be any signs of that so far from their earnings report, but the stock was up 36% over the last three months heading into the earnings report. So the expectations were high and the numbers didn't clear that bar. Let's wrap the show with a fun fact. Anthropic has more cash than almost every company in the US. You know, we've been talking about Anthropic a lot this week because of their S1 filing. And one of the numbers that blew my mind was that Anthropic has almost $132 billion in cash and short-term investments as of the end of June. To put into perspective how much cash that is, That is more than Amazon, SpaceX, Meta, or And by the way, Anthropic's cash pile is going to get bigger because they're expected to raise more than $100 billion. From their IPO, which could push their pile past $230 billion in cash. According to CNBC, no company has ever gone public with anywhere near that much cash. All that being said, I still don't know if I'm going to invest in the IPO. Well, all right, guys, that's the rundown for today. That might have been the most action-packed episode we've ever recorded, so I hope you guys enjoyed that one. I know it's a bit longer than our normal episodes, but there was a lot to cover, so let me know in the comments on what you guys thought. We got one more action-packed episode to close out the week, so definitely tune in for that. Thank you guys again for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes, and we'll see you guys back here tomorrow.