$GOOGL · Jose Najarro Stocks · 2026-10-28

And now with Andre, here's Tom Lee. He's live right now as we get into Google and Microsoft earnings.

so Tom Lee is bullish on Microsoft and Google Mr. Mr. Jose, do you think Google or Microsoft will announce dilution like Meta today?

So, do you think these Google earnings are going to be a little fishy or do you think they're going to put up the right numbers to, you know, keep the street happy? very hopeful about Google getting to potentially 100% year-over-year growth rates on Google Cloud.

And, um, that's going to be like, you know, a key thing that I'm looking for.

I want to see backlog for Azure. I want to see backlog for Google. Um, I expect them both to accelerate. It's just do you think Google and Microsoft can I guess the broader question is what do they have to say to avoid a meta drop?

Obviously, not diluting would be nice, but is there something that the street's not expecting in terms of cloud or search, Microsoft Copilot or Azure that can actually change and beat expectations?

So, Google 100% cloud growth definitely on the table. Margin expansion definitely on the table. Capex growth wouldn't be surprised if we see that because we know also that the TPU businesses is growing a lot.

And we suddenly hear a couple of announcements this week. Oracle and Google's TPUs, OpenAI, Google TPUs. So, I'd be surprised if if they don't go up actually after earnings. The only thing that could pull it down is maybe a weak search number.

Although, I think we should be already prepared for lower growth rates for search just because the past couple of quarters have been so good.

Um, Google did have a nice pullback since Gene Monster became super bullish. So, that's a that's a nice uh nice bottoming soon enough, I guess, today.

I I think with Microsoft, right, one thing that we haven't seen with Microsoft has been a massive acceleration in cloud, right? Like we've seen with Google, right? I think Google's last numbers were north of 70%.

I forget the actual numbers, but for like Neil mentioned, for Microsoft, we've been stuck for the past three to four quarters on the year-over-year growth of like 37, 38, 39%. I want Microsoft to finally have a quarter where we kind of break that barrier that that kind of ceiling that we've kind of hit and I think if we get something like 45 I don't know if we have looked at the numbers but if we get a scenario where you kind of break that ceiling of that Ash are growing a lot faster um I think that would be a very um bullish case

Um we have FedEx, T-Mobile, Google, Microsoft, Forinet, KAC, Ford, Carvana, eBay. So we will be covering all the earnings.

Google, In terms of listening, we'll be listening to Google first and um the last 30 minutes of Microsoft. Google's 4:30 to 5:30.

the past couple earnings over the past few days have been good, but the market hasn't rewarded them. Google and Microsoft, I think, are the biggest along with Amazon tomorrow. So future capex expectations, cloud growth, um capex for 2026, those are going to be all the big numbers we're looking for as the collective market cap of these companies is around 8 trillion.

And so there will be a lot of billions moving here after hours.

pump or dump? What do you guys think? Tanner, Google, Microsoft, both dump, both pump. I don't think too big of a move either direction.

I think both go up with Google going up a bit more. I think both going up with Microsoft going up a little more. Yeah, I think both go up. I think I think if both were to if there's a dump, it's Google because of dilution. There's no dilution. I think Google's fine.

Why Why would Google dilute? Because they need more money. But they have like Don't they have like over $200 billion? Yeah, but they might need more. I mean, they had a lot of money before they did the 85 billion equity race.

Yeah. But like one has a Google cloud business potentially doubling super profitable. I'm not expecting free cash flow by the way for Google this quarter. Microsoft. Yes.

if their cloud business would double they need to spend even more and raise more right unless it's getting self sustaining plus the TPU business. But yeah, if they would like to accelerate, but then again, they they already have so much.

yeah. So, I mean, if we don't get dilution, I think Google's fine. In general, I I if these stocks take a hit, it's not I don't think it's going to be because something's wrong with the earnings.

And so, hopefully they set us off for a good trend with big tech and we can see what happens to the market from there. more to cover on expectations from Google.

We got Google, we got Microsoft, we got a bunch of other companies. Okay, Google is usually very quick after the bell. Google already moving after hours about half a percent.

Maybe a deescalation headline as we get Google and Microsoft here. Google up half a percent. Still no numbers.

Oh no, they Google. What? Is it down? starting to down four. That's the opposite. Microsoft beat by 4% on EPS, beat by 2% on revenue. Again, 6 billion less than the street expected on capex. That is good for Microsoft.

We got to see how the rest of the market reacts to that. Google, she's going down 6%. There's got to be a big headline on Google. Miss on the revenue. Okay. Street wanted 127.9 billion. They brought in 127.5 billion.

Dude, EPS was expected to be $3. They did $212. Missed by 30%. That's a big me miss on EPS. Operating income 40.5 versus 43. So they missed by three billion on operating income as well.

Well, there's got to be a reason why they missed. um what was the Google Cloud Growth 103.

He said Google Cloud 103% growth. It's also a big move to the downside on Google, which is a dollar away from losing 300. Now it's 20 cents. Now it is below 200. 29960 7% down on the Googles.

Uh we'll dive deeper into Google's numbers. Google does not. I have some more numbers on Mr. Google. So again, they missed on EPS, they missed on revenue, they missed on operating income.

search up 12% which is lower than the 19% last quarter, right? that was that was expected. Okay. So search up 12%. YouTube up 9% services up 11%. Gemini app still having a billion users.

Uh YouTube music 150 million subscribers with the premium.

Q3 capex doubled to 51.6 billion. I don't have guide for next year. Net income was impacted by an $ 8.7 billion loss on equity securities. Okay, so they didn't actually miss on EPS. that contributed to 55 cents of the EPS miss.

I don't know what equity securities they had to take a $9 billion loss on, but let's get some more numbers here on Google. SpaceX. At this point, we're not going to compare EPS to estimates on revenue.

It's a miss. 127.58 billion versus the 128.2 billion that was expected.

Now, cloud revenue, this was the segment that we were looking at going into the print. Really, whether they're getting a payoff for all that capex spend, it's coming in at $30.71 billion.

That's up 103% year-over-year. It is a beat against the street, which was anticipating $28.7 billion.

So, this is right in line with what we were seeing with estimates that we'd see something in the range of 90 to potentially up to 120%. That's 103% gain.

The other number I have for you here is Q3 capex. This is actually light of what the street was expecting. So, 51.36 billion of capex spending in the in the quarter. Uh, but at this point, sharers actually pairing those losses down around six and a half%. guys.

it seems as if the high end of the cloud growth, so the cloud is the story here. The EPS miss is I mean, if this is because of their equity investments, I don't know if this is a real drop on Google to be honest.

Well, it's that 51 billion of capex. Um, you know, we're looking at now billion in free cash flow. So, furthering that that negative free cash flow number, $51 billion of capex is insane.

Up 114% year-over-year. maybe Google falls below 300,

So, so maybe this is the start of a larger sell-off, but we've already, you know, come down pretty far from the 360s and you know where they were hanging out with before. There's the sell-off didn't just start today.

Plus, you have a cloud business that has doubled. You have marginists that are expanding to now for the cloud business 36.2%. That's up from 35.6%. Obviously, Google was a better decision given how much it's appreciated versus Nvidia,

but I think there's a lot of people like me that didn't really get a chance to build a Google position. Does this thing go give us an opportunity in the 250 275 range? Maybe.

But if it's going to go down because of the EPS miss after, as you said, Neil Cloud is now at 103% year-over-year growth. I don't know. I wonder how much the street actually hates it or if it's more legit.

Uh, Google operating income up 30% year-over-year.

Okay, so Googles that's the one that's taking the beating here. the question with Google is right, they did beat I think cloud by about two to three billion and they missed revenue by about what was it one or two billion.

Like where did they take that big hit? Like what was did did do we know where the surge?

Oh wow. Yeah, 12 12% growth seemed kind of light. Now, maybe it was expected, but last quarter was closer to 20. I mean, that's a big delta even if it was priced in between the Q overQ growth on search

and you already have fears that are out there, right, about, you know, Muse is a new business model that disintermediates search. If Muse is booking your flight, 30% of search is travel, you know, what does that mean for Gemini? Like the these questions are out there.

And with search declining Q overQ again not the biggest deal but you know perception market made it

search like Google search and other revenue last quarter grew 16.8% two quarters ago 19.1%. The reason why is because the year before it only increased by 9.8 then 11.7 and now we are lapping 14.5% next quarter is going to be 16.7% growth and then the 19.1%.

So the year-over-year comparisons are getting tougher from here.

That's fair. It's a huge business that how much was it? It's over $60 billion. Cannot expect it to continue to grow close to 19% 16% which again is I think what they mentioned last last quarter.

But I'd be surprised if this thing stays down six. I don't know how much it is. Is it down uh after hours after the call? because they're probably say it again, insane demand for TPUs, insane demand for clouds, we're just trying to move as fast as possible, blah blah blah.

But maybe maybe the focus could be on on search, although I'm pretty sure that once all the numbers are updated, search as a percent of revenue and the rest of the business is getting quite close to a 50/50 split.

Um, just looking through Google really quick. I'm taking a look at some of their different line items. Like for example, Google Network has been declining for I don't know how long, three, four years, maybe longer.

Uh, this quarter they ended up showing year-over-year growth.

Um, it just happened on a quarter where Google search was not as exciting, but still they bring in over seven plus billion dollars to this uh line. It's not a small percentage of their revenue and you're seeing an inflection point right here where we might be returning back to growth.

yeah, the Google if they didn't have that 9 billion mark to market. I don't know if the street would be this upset. I mean Robin took a bigger hit yesterday because of the EPS hit that was due to RVI similar to Google and uh they they somewhat rebounded today.

So I wonder how aggressive the street treats it.

Sundar, we had a strong quarter and we are now a half a trillion dollar revenue runway uh run rate. Our deep full stack approach is driving momentum across the business with Alphabet revenues growing 25% year-over-year.

So, look, even if search was only up 12, the company compounded at 25% topline like it's, you know, they're not really having a growth issue. Our AI investments are driving overall search query growth, including commercial queries.

In fact, our year-over-year query growth is the highest it's been in the last 5 years. So, that's their hedge against the topline search numbers going down.

Cloud revenue is 103% powered by huge demand for AI infrastructure and AI solutions. We're also seeing strong demand for our TPU systems across a wide range of customers.

Gemini 4, Argon, and Carbon are now leading at the frontier. Overall, our first party model APIs are now processing nearly 32 billion tokens per minute. We're excited by the range of big opportunities ahead of us.

YouTube's growth is is not that impressive. I would say they still have 150 million YouTube music and premium subscribers including trials. So that number is not real real but the growth for YouTube what do you say is 9% this quarter

for YouTube ads. Yeah. So for every subscription that they get that actually impacts uh it's cannibalistic in a way and they don't separate out just purely YouTube revenue and I wish they did.

Yeah. But still, you would think that YouTube ads would be growing more since it's I mean, it's getting bigger and bigger. cloud is the main I think it's the main player here, which more than doubled.

they didn't say anything about Whimo. I don't know if you see anything, Neil, there, but I don't see anything about Whimo.

There's obviously no buybacks because they don't have money for that. No, but they do have a dividend, which I still don't get why Meta and Google are paying a dividend for now.

Google down eight, Broadcom and AMD taking a dump after hours as well. There's got to be something deeper here that the street doesn't like. Google missing on EPS can't be the reason it's down 9% right now or 8.2%. 2%.

by the way, Google have added 14,000 new employees year-over-year. So, AI taking away jobs. They just they had 190,000 employees last year. They now have 204,000. That's definitely going against the job loss narrative in the context of AI.

But then again, Google doubled capex, so that should balance things out. I I I think that this is a little bit of an overreaction from Google. I think a lot of analysts are going to be talking about agentic like things like Muse.

How does this affect Google search? And why hasn't Gemini come out with something as comparable as Grockbot Muse dots?

Gemini needs this though. And that's a legit question, right? That's a legit concern. Where is Gemini's answer to all these agents? I don't think that's unfair for the street to be concerned about that.

They just showed off a model today. Gemini 4 carbon. It looks like they just pushed the frontier. And once again, the the companies that you think are in last place have the possibility to leapfrog and get right back to the front. Google's very much a part of that.

The only thing is like Google has it. But I think even this new model like it's not for public use. Like I don't I don't know when was the last time we've had a really good model that the consumer world can use, right? Or or like just your average Joe's.

Well, they've they've put out some really good flash models. Um and Argon, I think, is now for public use for some of their higher subscriptions. I think this is similar to like their version of the uh enthropic mythos preview where they believe that it's so powerful that they're giving it to cyber security companies first and that it might be in that phase for either a few weeks or a few months.

It's by 1%. I mean, they're not, Alphabet shares down more than 8%. Now I want to clarify on that GAP EPS number. Part of what's dragging it down is an 8.7 billion investment loss.

And that's something that we haven't seen in a while because of the significant investment gains from Alphabet stake in SpaceX and Anthropic.

On Q3 search and other revenue, that's a miss. 63.35 billion versus the 64.96 billion the street wanted to see. This is a key read both on the ad market at large, but also on the part of Google's business that's most profitable.

This is really how they're able to make up the difference in terms of spending on capex. So, it lost momentum last quarter. It was missed last quarter. uh and this quarter and that's why cloud coming in at 103% year-over-year growth is so key.

Uh in terms of Q3 YouTube revenue, it's a miss 11.21 billion versus the 11.44 billion it was expected. Uh we also have a read on free cash flow. Remember that flipped negative for the first time in Alphabet's history as a public company last quarter.

It came in at 9.1 billion. That's uh versus the loss of 2.7 billion that the street was looking for.

And then that other bets revenue that is where Whimo lives its self-driving unit. That's a miss. Four straight quarterly miss there 372 million versus the 382.4 million that was expected.

Whimo raised 16 billion in equity earlier this year and then just had a debt raise of 5 billion as it looks to scale internationally and across the country.

And those shares still hovering around 8% lower. So is that it? Is it is it just the misses across the board? I I think just the misses across the board. Is that all it takes for a company to sell off is huge misses?

I mean, we're looking at the numbers are incredible. These are a few million here and there that they're losing. No, I I think for real the um if if they only missed by 8 billion or mark gains was $8 billion, I think that was SpaceX.

If you looked to June 30th, I think the company was like 168 and then the September 30th end uh like like when they would report it was 143. So that would be a draw down. I think they have over hundred billion dollars in SpaceX.

So that could definitely be uh you know roughly about you know making up for a good percentage of that and then they wouldn't have seen a new round on anthropic but I bet you by next quarter if anthropic IPOs they are going to see a marktomarket gain

right. Um so quickly what we're writing off today will be replaced with anthropic gains next quarter. Yeah. And again from my perspective I do not have a massive position in Google and I haven't I missed the entire 125 to 350 run.

So I have been waiting for a real opportunity. I am just trying to logically assess right now. Does this make sense? like is there something structural for why they should be taking a hit or are these algos that are upset as Tanner said about a marktomarket gain that when Anthropic goes public they'll have you know up 70 billion and like so it's just is it real or is the search thing more concerned but then Neil your comments about search make a lot of sense so I don't know this one maybe it's just the market's not having any misses right now and if you do you're done and service now Fordinet are a testament to that they didn't miss both of them and they're still down 20%.

um Google is going to be fine and the the current concerns because they don't have the first agent to market right now as people are concerned about Google search I think will become the same worries as what we saw last time with the whole you know chatpt is looking to um replace Google search and remember that whole perplexity was offering to buy Google Chrome home like that was when the fears were peaking.

This is way way more tame than that. But obviously coming with a lot of capex. It's just do you think that that capex is going to lead to more sales? It has so far

and continue. Go ahead. And just an FYI, right now for the first time ever, the rest of the business is now bigger by 2% than search as a percent of revenue for Google.

Say that one more time. Google search as a percent of revenue is now 49.7% whereas the rest of the business is now closer to 50% basically. First time ever. Yeah. And I mean it's I guess it's going to continue because Google Cloud is part of the rest of the business and that's growing much more.

But search I mean Google services revenue operating margin is still 40.7%. It's like the market is treating this as if oh it's like a it's complete it's a bad business suddenly. It's it's a highly highly profitable business.

Jose we got the Google call in three minutes. Why do you think the semis are down after hours? I mean we saw capex being what $4 billion lower this quarter. So I mean in theory that capex was directly going to go to semiconductor companies.

So I guess the market is saying hey if you spend $4 billion less than expected this quarter are we in total for the semiconductor industry expected to see $4 billion less in revenue potentially right so I think that's where uh kind of a little bit for short-term fear might be coming um and and maybe that's why we see kind of like broadcoming all those players down about one or two 1% after hours

yeah uh Google does announce so first of all fair warning once Again these Google calls for the first like for the first like 7 minutes Sundar is entertaining then for the next 25 minutes it's very boring and then you get to the juice with the Q&A.

So it is a rather boring call. Uh we'll have the stock up. Um they do announce capex guide at the end of the call in the Q&A. I don't know if they refrain from doing it this time, but that's going to be important.

If they lower it, kind of like this Microsoft guide or this Microsoft number in 3Q by four billion, even if it's anything smaller than what they should expected, maybe Google pops and the semis continue to go down.

If they increase it, maybe that strains Google a little bit more. So, that's going to be important today in terms of seeing what we get.

and then Google here continue. Google's now down 9% 296 after hours.

has generated tens of billions of dollars in AI revenues yearto date and Google 1 is our fastest growing subscription products driven by demand for AI plans.

Throughout this investment cycle, we expect to generate an attractive ROIC that remains meaningfully above our cost of capital and anticipate generating strong cash flow from operations.

Our sizable investments in technical infrastructure and inventory build of TPU systems as we scale that business will put pressure on free cash flows. Q3 was a strong quarter highlighted by our innovation and disciplined execution across all areas of the business including the launch of Gemini 4.

Sundar. On a recent podcast, you said that 2027 could be the golden age of productivity for Google because of the new class of models and how they'll integrate with your other products.

I would say with 3.8 indeed flash uh internally as our models got better at uh long horizon tasks, agent decoding etc. uh but uh you know I'm definitely uh you know it's seeing a huge point of inflection once we've started deploying organ internally it is one of the most meaningful uh internal uh productivity levers we have seen on software engineering directly tracking high quality code that's getting checked in the rate at which it's getting checked in um you know uh reducing the number of roll backs but more importantly uh people are tackling um you know massive problems as well as uh you know we are beginning to see innovation on the product and the consumer experience side from deploying those models but all this happened only about 4 weeks ago we are now deploying carbon internally and carbon is a meaningful uh step up from Oregon so as we roll it out and make it all widely available to googlers with uh more compute uh I I expect to that's what I was referring to and I I'm even more excited since I said that in the podcast and what I would view as a a golden year ahead in terms of uh us being able to be more productive and so excited for the innovation ahead.

yeah doc on the second part of your question look in Q3 search grew 12% uh year-over-year to 63 billion and uh when you look at the change in growth rate from Q2 to Q3 there were a few drivers here so first there was FX um it was the single largest driver of search deceleration uh relative to Q2 uh second there were vertical specific dynamics uh in retail some of our AP pack advertisers were impacted uh by the EU eliminating its dimminimus exemption uh in media and entertainment and uh spend normalized after an unseasonably strong Q2 uh driven by the FIFA World Cup which had more matches and therefore more advertising budgets allocated in June than actually in July.

Uh it's also to the uh next part of your question. It's worth noting that the strong growth in AI mode queries had an impact because of the lower monetization we're seeing in AI mode.

Uh to be clear, we feel very good about our trajectory here. Our ad experiments have shown promising results and we're now scaling ads within both AI overuse and AI mode to more users and more queries including as I mentioned international markets and multi-turn ads in the US.

Thanks. Thanks Brian. Uh first of all on agents you know what an exciting and dynamic area. uh you know I think uh when I look at our new models and and we see the capabilities of uh the kind of complex tasks they can take in in an automated way and execute uh with very very high quality.

It's clear that the agentic capabilities we've all envisioned, you know, are going to be real and so I couldn't be more excited to bring uh the next generation agentic experiences to our users.

To your question, I would say a few things. I think the Gemini 4 model series has been important. We are uh working on distilled versions of our carbon models uh so that we can deploy it across uh a billion user scale efficiently both from a compute from a latency standpoint and from a quality standpoint.

So that's been uh you know an important area of investment definitely making sure you need more than a capable model at scale. You need a robust harness. You need a highly secure runtime.

And this is where GCP comes in. Being able to give each and every one of our users uh a secure runtime with 24/7 availability in the cloud, the right ecosystem of skills and connectors. So all of that is the foundation.

We have been hard at work and we decided to roll it out to enterprise first which we announced with our Gemini agent for enterprise. uh essentially because they have the highest bar for security, governance and and controls and and it's been wellreceived and we are in the process of expanding that.

Later this year we will bring that same experience to consumers obviously starting with the 1 billion users in our Gemini app. We already see people in the app moving beyond chat to what what our task and agent like uh experiences and so you know the trust users have in our products.

The fact that all their context is right there I think sets us up well but we are really focused as a company on deliver delivering that unified experience across our products and you should expect to see a lot of progress uh you know uh later this year.

And on the second question with regards to my comments, I believe you're referring to the outlook with regards to search a couple of dynamics that I've mentioned. One is on sequential related to impact of FX headwinds which we saw this this quarter as well versus the previous quarter.

So in where we are today with current spot rates, we expect that this will be um somewhat of a headwind to Q4 results. And then when we look at the year-over-year comparisons this quarter, we started lapping the acceleration we saw in search growth in 2025, the back end of 2025.

Uh we left about uh three points uh of growth versus Q3. And then we expect to see that continue in Q4, a couple points of uh lapping that growth acceleration that we saw um at the end of uh at the end of 2025.

uh you know definitely computer allocation is uh is is an area where we are spending a lot of uh time on uh because of uh the forward planning that's needed. Uh I would start with saying uh we feel fortunate to have an extraordinary set of opportunities ahead of us.

You know we are operating a scale consumer business that reaches billions of people a hypers scale cloud business with with a lot of momentum and and of course a range of other highly important areas across Google and Alphabet.

We always take a long range planning uh and so you know each of our business areas submit long range plans with a very disciplined uh ROIC framework and so you know I would broadly think of all of this as a long range planning process not a short-term allocation exercise obviously our AI models underly everything we do from search and YouTube to cloud to Whimo and so on so it's the foundation and and we view viewed as a highly leveraged uh approach.

Um the full stack approach drives a lot of efficiency as well as gives us a lot of optionality across a wide variety of opportunities. So obviously that is the foundation and we plan for that for the long term too and about that as I said uh we really look at our businesses and really take a disciplined long-range planning approach. uh you know to us uh obviously uh you know we are seeing very very robust demand signals across a wide variety of areas and so we view it as an extraordinary set of opportunities and we are investing for that moment.

Eric on the on the demand in cloud we are always managing our portfolio to ensure we have a breath of customers and we have different types of customers from digital natives AI labs traditional enterprises financial and capital markets customers so it's a broad set of customers many of them have either started with using TPU PU systems for example in our cloud.

Uh we have over 100 significant TPU customers uh who start in our cloud. They learn to use TPUs and remember a TPU system is a combination of hardware uh system software compilers the whole thing assembled as a system including optical networking and other things.

uh we've taken a very deliberate approach on how we're bringing TPUs to customers. The first one is to build the right silicon. So we have 8T for training, 8I for inference. They both offer substantial price performance and performance improvements relative to prior generations.

Second, we've optimized the software. the the optimization in the software is not just to make the systems run better and to give you great performance but also to see make portability seamless.

Uh recently we introduced for example PyTorch which opens up a much larger market for us by optimis optimizing PyTorch on the TPU. Third we are broadening distribution. So in the past you could use TPUs in our cloud.

Now we make for customers who want TPU systems in their data centers, we're making TPU systems available in their data centers. We're also broadening availability to other providers.

For example, we announced a partnership with Oracle and we've launched along with Blackstone an agreement for Krux AAI, a joint venture to offer customers TPU systems. We are seeing extraordinary demand and strong growth from both AI labs uh capital markets, financial service institutions and enterprises.

And if you imagine these 100 plus customers growing to many more and also scaling their use in into TPU systems, we see strong demand over the future.

Yeah, let me combine these two questions. Um, first, obviously, we don't provide uh specific financials at the product level, but let me walk through how to think about the financials associated with the TPU system sales.

And obviously just as a reminder and Thomas can elaborate on that as well, a TPU system is not just a chip, but it's a specialized system that combines multiple things including hardware, compute, storage, networking.

So we are selling much more than uh than just a chip, software, training, inference. There is a significant added value that's being provided to the customer that's purchasing a TPU system.

And the way this works, and this is linked to your second portion of the question, when we sign an agreement with a customer to sell TPU systems, once we we sign that agreement, you'll first see that showing up in our backlog.

Um, and then we start building inventory. So, think about this from a capex versus cash perspective. We build the inventory of head ahead of getting the revenue stream in. So, I think I've alluded to this on the previous call. you see inventory balances go up where previously inventory balances primarily were some of our hardware products.

Now those TPU systems that are not yet sold will be showing up. So you see cash going out and we're building up the inventory base and then as we start um delivering and billing customers for these TPU systems then you see cash coming in.

So it's not the traditional kind of capex as you're thinking about this and I think that's the essence of your question but rather a different cycle of cash flow generation now given that we are in the process of building up and ramping up that business.

You're seeing that cash needs um in our in our um uh cash flow statements and you see the in those inventory built. Uh to date, we've had some system sales recorded as revenue, but expect more of it to come in through uh 2027.

We're in the we're in the early days of Agendic. Um, but maybe directly to the second part of your question, but we view a genic experience as clearly additive. Uh our focus is build it uh building trusted secure supercale experiences that users love anchored frankly on agenda commerce foundational blocks like you mentioned it universal commerce u the card the agents payments protocols and so on uh when users shop and that's important u there's a part of the journey they don't like the grunt work uh which is frankly fantastic to automate with AI but we also want to enhance not just automate away the discovery experience that people frankly love in so many cases is uh users like choice uh and they want to consider things uh way beyond price like brand loyalty, customer service and so on.

So we're really architecting these agentic workflows in a way that we can intentionally design the time and the space for users to explore those choices. So simple example um an agent could respond here's the insurance product we found and here's another strong option one of which is a higher premium maybe a lower deductible and they're currently offering a very special discount.

So given that there's almost never only one perfect option for decision. We're actually confident that

You know overall I would I would add and say look I would view it as a you know uh expansion opportunity right anytime just like a few years ago being able to incorporate AI chat use cases in search allowed people to ask more and do more in search which is what is playing out uh in our usage.

I think I think agents would again be an opportunity to expand the types of problems we solve for our users. I think people always underestimate all the components you need to deliver these agent uh these complex experiences for users and and search on the surface looks simple uh but there's extraordinary deep uh uh levels of uh uh investment and things we have built over time like knowledge graph being an example and so our understanding of the world etc. So I think you know I'm excited about agents and I would view it as a new frontier which brings in uh a new set of use cases to search and so we are excited to work through or work through that

on TPU systems and margins. We don't break out margins for individual products or infrastructure components. However, we see several benefits from designing and manufacturing TPU systems.

So first of all to remind you the TPU system is not just a chip but it's a complete system. Given the price performance benefits of TPU systems relative to competitors, growing demand for accelerated compute and the scarcity of accelerated compute.

We're very focused on continuing to improve margins as we scale the business. Two additional points. First of all, when Anat mentioned that we procure components to build inventory, we only do that after we have signed contracts.

So all of the inventory that for TPU systems are associated with committed contracts. Additionally, by putting TPU systems in thirdparty facilities and in customer data centers, it allows us one to broaden our addressable markets. some for some industries they have data in their premise that they cannot move to a cloud and it allows us to bring accelerated compute to where the data sits.

Additionally, it also offsets the need for us to have to pre-build facilities to host these uh these TPU systems.

Look, you know, maybe I'll take the first part on uh what we are observing on these early agent uh style use cases. We definitely seeing it. Uh just recently in the Gemini app uh we've added a task tab and where people are actually typing in uh agentic queries and so we can observe that.

Uh look in all of this users really want they want to be delighted. So they effectively are you know looking for they have a high bar. What encourages repeat use uh is is your ability to you know more handle these longer tasks and actually deliver a satisfactory outcome at the end.

Uh you know just like having seen this in other areas including coding etc. you know when you're doing it at 70% it looks like it doesn't work till you cross a certain threshold and it really takes off.

And so we are closely uh learning from all of it. Uh you know identifying gaps, laying all the foundations I talked about earlier and you know I'm confident it's an area where you will see a lot of progress across our surfaces uh you know as we go through later this year in 27.

The the one thing as we transition to TPUs one of the comment I would make on the TPU systems is look in the semiconductor industry economies of scale matter. So I would look at our ability to do uh you know uh TPUs both uh for uh deploying in our data centers and TPU systems and others data centers as a ability to uh scale up the product which directly translates into uh better economics.

to address the question on the rate of growth of cloud. Uh you know our Google cloud segment delivered record growth in the third quarter uh with cloud revenues up 103% to 30.7 billion.

The strongest growth contributor was Google cloud platform with strength in both AI and core GCP. So GCP accounted for the vast majority of revenue generated in Q3 and cloud revenue growth excluding the impact of TPU system sales was again very very strong.

Demand was also strong across our product lines. So we we see three things going on. One, as people use Gemini, we see revenue growth from Gemini itself. But we also see that as people use Gemini, it drives growth in other parts of a portfolio.

For instance, as they build agents, they use compute to perform a task. And so they buy compute. They use storage to store memories of the agent database to serve up what's called context for the agent to reason on.

And obviously given all this cyber security threats, we're seeing strong growth in our cyber security portfolio. So we are confident about our growth and the diversif diversity in our growth.

We're also seeing new customers buy into GCP uh and accelerating growth and new customer adoption. So we also see that as a growth vector for us and we are always at any point in time we could obviously serve a lot more demand with capacity but we are managing all of these parameters and growth carefully.

Thanks, Michael. Uh great questions on the first one. Look, you know, we have long viewed uh what we build as, you know, categories of things which we build as products and then the there are categories of things which we build as platforms, right?

And and you need to have a clear view on which is which. And when you're building things as platforms, you really work hard to make the platform great and make sure it works for everyone.

We have a long history of operating many platforms be it a browser be it operating system be it a um you know extraordinarily successful cloud platform and in all of that uh you know we we've worked hard to provide it to uh all players and and and be a be a great customer uh you've seen us uh work on our models with other companies including Apple with whom we compete in many many areas uh similarly we view our TPU systems is an important platform we are building.

Uh we want to be world class in how we build it. That means you're uh putting it against market forces, testing it and competing for people who who would have the most demanding workloads on top of it and uh and I think that's what makes sure uh those teams are are continuing to be at the frontier.

So that's how we think about it and know over time I think you know that always ends up in in expanding opportunities and and we've been able to do well taking that approach over a very long period of time.

Second on on on on agentic behavior. I mean to the earlier question and I think I should have emphasized people really when when people are approaching these agentic experiences we clearly see people are concerned about uh you know safety and trust.

I mean the it is a very very high factor in in how they want to use these things and uh you know over decades uh the trust we have built uh by delivering these experiences in a safe way across many consumer products with scale uh in billions of users as well as this putting in uh end to end as we are building our models and agents deploying them both with extensive testing the kind of real-time monitoring we do as we deploy these at scale.

I think all of that will end up being a huge differentiator and we we already hear about it from our users and I think they would vote with their feet as this frontier goes through.

The rest of the semis, Neocloud's memory, they're all tanking because of Google's um slight miss on capex, although it doesn't really matter because 2027 they said will increase significantly.

So it's kind of confusing why those names are down.

Uh, but Google here, the call, I don't know, man. I I don't know if this thing's actually going into the low 280s. I mean, this feels like enough pain. 400 billion in market cap erased.

I don't think we heard anything on the call outside of some margin headwinds in the GCP business that might be an issue in 2027. Uh, yeah, they're increasing capex, but it's not like the street didn't know that. So,

maybe this is where it bounces. If not, then Mark's got to figure out what they want to do here with Google. Uh,

that was a crazy headline to experience in the middle of Google Microsoft. So let's start with Google. Jose, um I mean what did you hear on that call that you think maybe justifies the move or do you think this is way too oversold now?

Yeah, I I don't think um anything justified it. I mean the market is fearful of that search, right? I think we we came into uh we had a few earnings with kind of like the fear of service now dropping.

So now the SAS apocalypse on AI um is coming back. Then you have kind of Google missing a search. We're getting the fear is AI eating back into um is AI going to eat the search market?

And I think even during the call they mentioned that look the one of the reasons is our AI overviews is cannibalizing a little bit um the traditional search market. Uh so you you're you're seeing a shift in that core business but I feel like as Neil mentioned right cloud is and the rest of the part of the business is now over 50%.

I think 50 50.2 is what Neil mentioned. So cloud is still growing.

Um the final thing before I pass it over to you maybe the market got spooked. They mentioned that they almost have a trillion dollars in obligations right a trillion dollars in obligations uh that they mentioned.

They mentioned that some of these things are short-term contracts. they're putting the full contract value, but if they don't kind of go with some of these short-term contracts, uh the price could be a lot lower than that.

Um but $1 trillion is the obligations and now the C the market is like where are you going to get this? Um so I think it's a lot of fear, but as a AI bull, we see Google cloud revenue grew 103% massive.

Um and you're still seeing kind of strong demand uh from everything else as well.

Um I agree with that. I also think that the biggest thing is SpaceX was 8.2 out of the 8.7 billion loss. So the majority of EPS, which means next quarter anthropic will be I don't know how many billions contributing to EPS, but it's definitely going to help in Q4.

No, I think I think it's something completely different. Um there was a trillion dollars that they said in terms of leases, purchase commitments. Um every company is seemingly putting up a bigger number.

So, it's 924 billion of future purchase commitments plus $152 billion of precommencemen leases and other obligations. So, about $1.08 trillion.

The the thing here is is this is a ceiling. Okay, it's a ceiling. We don't even know for how many years this will last because they didn't give us a number. So it is a huge number.

We don't know how many years they can stretch this thing out. Part of the inventory commitments is TPU components related that they told us that is only bought against signed contract uh customer contracts.

So whatever the expense there is, you'll get back through to through revenue and and then some. They have 561 billion in cloud backlog which I believe um they'll recognize, let me check, I think they'll recognize over the next two years $155 billion or so per year of it, excluding new agreements, of course.

And by the way, the free cash flow hit would have been much slow smaller excluding the European Commission fine. So it's negative 9.1 billion, but could be 3.9 billion, which was still a miss, but it's it's a smaller miss.

Uh let's see. It seems like we have an answer for every reason the streak could be upset. And most of these answers either are offset by another part of the business or aren't that big of a deal like a European fine or a SpaceX operating income miss which makes this feel a bit exaggerated.

The the SpaceX thing I think is is a nothing burger and I don't think that the street cares about that. I think the the search one is is maybe a valid a valid question especially when they said that AI mode AI mode monetization is of course behind because that the queries growth is growing much faster than monetization.

They barely launched AI mode ads I think recently internationally. So that's still going to take a while. uh FX headwinds is the single largest driver of this slowdown in search.

Uh there was a EU de minimist change. So that impacted APAC advertisers according to them. Although retail it was just a drag on retail's growth for the business. No, not a a big negative.

The World Cup was also a small headwind because media spent pulled was pulled forward for Q2 than normalized in Q3.

And then the last one is basically the AI mode mix. So faster AI mode query growth with lower monetization as of right now carries the big question of okay what about the future of of search?

Can you still maybe monetize it? Yes or no? As of right now they did say that most of AI mode queries are incremental to what they they've been seeing before. So it is there are reasons why the stock is down.

Is it a valid reason to pull it down 10% or so right now for this quality of a business? In my opinion, no. But uh but yeah, the market will do I think last quarter the stock was also down 7% or so.

So yeah, and and the number is $310 billion that's expected to be converted over the next 24 months for the uh backlog.

Um, no, not much on Google. Like I said, the Google network side flipped positive for the first time in many, many years. Subscription still doing well. Uh, YouTube ads might be a little bit disappointing, but maybe partially offset by subscription growth.

Um, th this is, like Neil referenced before the call, becoming more than just a Google search company. Uh, way more diversified in their earnings and you can see that in in Google Cloud.

So, I guess uh investors just sort of have to measure out how Google can uh be looked at as a holistic offer.

I'm going to actually probably buy into this dip tomorrow. Um I I think Google will remain extremely strong and this selloff will get faded over the next, you know, 18 to 24 months as we see cloud growth surge, TPU sales.

Uh I don't think search is going to fall off nearly as fast as people think. Um but who knows I I I can be wrong.

One one last thing cuz I saw Amit you reacted to this when they said that uh cloud margin there was a small headwind ahead because they are going to use third party uh third party customers basically.

But this is something that they already told us last quarter. So it should not be surprising to us.

Well, here's another question. If Google isn't worth 4 trillion, I think there's some other large caps that the market's going to have a hard time. I mean, is SpaceX worth two trillion if Google can barely hold above 3.4?

Like, if the market's it's less about unless this uh drop gets faded pretty quickly and we get a V-shape. If the market is structurally saying Google deserves to be, you know, three and a half trillion, there's a lot of companies that are trading at a very aggressive multiples right now.

And I feel like it would be weird for that to be the case. Meaning, does the market take down many of those names as well based on this drop?

You know, if Google is only worth a trillion more than SpaceX given the numbers that both do, I don't know. I feel like there's but even Marll and Lmentum and you know the multiples on many of these names across the entire industry I feel like take a break if you know Google's not just a regular stock.

It's a Birkshshire stock now. This is like one of those institutional names.

Is that's what's gonna happen to Google or is Google more of a stock that's a signal that this entire market needs a reset if a company it's not like any of us thought Google was overvalued at 320.

But for example, let's say Google goes down 20% in 2027. Like meta or 15% whatever it's basically now down 5% year to date. It's because of capex, right? Negative free cash flow, increase capex.

Will they allow themselves to have that happen in 2028, aka once again increase capex dramatically and have their shares be flat for a second year, which at that point would be three years in a row.

Google or any of the hyperscalers? You think they care about the share price right now? But again, Google has $265 billion of cash in securities.

They if we do have a crash across the board, Google eats up every small player that's going to suffer like like this.

are they going to be like, "Hey, well, this might end up bringing us down uh or or or staying flat throughout the year, but we know that we could potentially generate, you know, just tens and tens of billions of dollars of operating cash flow off of being able to deliver, you know, more cloud growth, more Gemini subscriptions, more advertisements,

And Google Cloud is growing at 103%. That's market share gains for Google. Google, while bringing themselves down into negative free cash flows, is being more aggressive and they're being rewarded by that.

So for for Google, it makes the most sense to try to grab as much market share because then later on they can upsell you into every other cloud solution that they have.

I mean, I mean, starting 27, we're going to see the TPU business ramp up. And I think the market is sleeping on that as well. That's going to be a huge huge business for them, which is something that the Microsoft doesn't really have.

Yeah, I I still think the Google drop is like just very algorithmic. Like I I I I if it wasn't for SpaceX going down 10%, they wouldn't have missed on EPS and every other part of the business seems to be strong.

Yes, there's some questions around search, but like I mean cloud at 103. Like we thought they would do triple digits, but that's Q over Q growth of 20 uh 25%.

very bullish in both um but both Microsoft and Google did miss get lower capex right Google had like three billion lower capix four billion lower capex than expected

not only did Microsoft and Google miss by about 8 billion on capex expectations for Q3. Uh we didn't get the 2027 guide, but Google also raised 12.6 billion of cash in Q3 by selling shares to the public.

on the days where Google's down 3% like what's happening when there's no headline. It's it's probably the company issuing more shares and you know there's some more pressure on the stock at that point.

Google should not have to do a lot more of that. Like I wonder how the street frames them tomorrow if they're not willing to give Google a multiple here.

And Angie Jasse was on a podcast recently, so I don't think anything should surprise us about what he's going to say tomorrow.

Doesn't Google have 7% of Marll warrants? I think that's Amazon. No, Amazon. They work with them for for for Traium. Google. Oh, yeah. Wait, yes, they just both of them do actually now, right?

Because uh Google just had the recent deal with with Marll. Um, and Amazon has something because of some of their investments.

Do you think there's a correlation there that Google would help Marll do this buyout and ultimately Google wants Lmentum's technology for their TPUs and maybe that's how this gets done if it happens?

I'll probably add to Google over the next like either this week or next as well. What if Google bounces back to 300 tomorrow? Would you be buying or below 300 is your your level for Google?

Yeah. Like what if you don't get a chance to buy tomorrow because it V-shapes at 300? Like is it still interesting there or you want Yeah. Like I I don't know. I want some really good prices.

I already have a good Google position. Um so I hope it keeps falling and if it gets down to like that, you know, 280 mark or 285 or something like that, I I'll probably add some shares.

If it Vshapes and I don't get a chance to, I'm not going to um rush to buy in. I still think that there's fears around uh the Agentic stuff, how that impacts Google search. So, I think that there will be plenty of opportunities to buy.

Uh then yeah then I take a bit more Google at 280 probably. Yeah but 280 for Google is it's one of the best businesses on the planet, and I expect that to stay the same for the foreseeable future.

So, but like Tener, like Google is already a pretty big position purely because I bought a lot last year. yeah, but both both Google and and Microsoft are just a cloud story at the moment. uh not just but that that's what the focus is on.

Google at 100's amazing.

Yeah, I mean I think as a long-term investor, nothing really scared is scary. Short term, you're kind of I I I'm really trying to find ways why the market is punishing certain stocks.

Um but long term, we continue to see Google grow cloud growing. Um you continue to see efficiencies in there. you continue to see um them changing customer concentration a bit and how and who they're selling to these these products and they're still pretty excited about where AI I mean Google is mentions that um AI training is growing rapidly and they're pretty excited of what they're going to show.

Maybe the market is scared of Google not being the product but we saw it like Meta, right? Meta was not seen or Grog was not seen as a pretty cool AI product just few months ago and now that's what everybody's talking about. I think Google's going to have its moment

We got the Fed with no hike. We got Google with a 10% drop, largest in a year. Uh, looks like everything in the business is moving up and to the right outside of the share price based on how the market's thinking of probably the EPS miss.

like Google said around capex and I guess that's why that's up 2%.

I wonder if they just continue their run tomorrow and Google gets back up to like 297. And this is just it's just stupid price action