This is an audio transcript of the FT News Briefing podcast episode: ‘Alphabet’s brutal day on the stock market’
Marc Filippino
Good morning from the Financial Times. Today is Friday, October 30th, and this is your FT News Briefing. Amazon’s growth figures disappointed investors. And Google’s cash flow sent them fleeing.
Stephen Morris
So investors are reacting to this change in thesis for the company. It’s no longer a cash-generative business. It’s a debt-heavy and cash-burning business.
Marc Filippino
Plus, what’s next for the European Central Bank now that its president says she’s stepping down? I’m Marc Filippino, and here’s the news you need to start your day.
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Investors are not happy with Amazon’s latest earnings report. The company’s shares fell in after-hours trading yesterday after it posted figures. Sales at its cloud computing business rose more than Wall Street expected, but overall revenue last quarter was kinda disappointing, and Amazon is forecasting underwhelming sales for the Christmas period. Investors wanna see strong growth at Amazon to justify how much money the company is spending on AI. Amazon plans to devote $220bn in capital expenditure this year. Most of that will be on advanced chips and data centres, and it looks like last quarter’s growth just wasn’t enough for investors.
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Amazon wasn’t the only company that was punished for spending a bunch on AI without the revenue to back it up. Google’s parent company had a brutal day on the stock market. Alphabet shares dropped almost 13 per cent yesterday. It’s the second biggest daily drop in market value in Wall Street history. Here’s how the FT’s San Francisco bureau chief Stephen Morris explains it.
Stephen Morris
There has been a huge amount of scrutiny on the sheer amount of money that so-called hyperscalers — Google, Amazon, Microsoft and Meta — have been spending on AI, with the market really looking for any signs, you know, that they’re overspending and that the vast sums are not translating into new revenue.
Marc Filippino
And Alphabet’s earnings report this week showed evidence of that. It spent more than $50bn last quarter on AI, largely on data centres, chips and training new models.
Stephen Morris
And what we saw this week was an indication that Alphabet’s core search and advertising business is slowing down, and it’s not just slowing down. Executives admitted that it’s being cannibalised by its AI products. Google is finding it harder to serve adverts to people in so-called AI mode or AI overviews, as opposed to its traditional list of links. And investors are starting to be concerned that Google’s cash cow is under threat.
Marc Filippino
But lots of Big Tech companies are spending a scary amount on AI. So why did investors react so harshly to Alphabet?
Stephen Morris
What was different about Google was that it’s traditionally been a very cash-generative business. It just throws off tens of billions a quarter that it can be used to return to shareholders via dividends or stock buybacks. But what we’ve actually seen for the past two quarters, for the very first time since it went public in 2004, was it burning cash, ie, spending more than it earns. It’s also raised a huge amount of debt totalling about $100bn now, and it previously ran basically zero because it made enough cash that it didn’t need to go to debt markets. So investors are reacting to this change in thesis for the company. It’s no longer a cash-generative business. It’s a debt-heavy and cash-burning business.
Marc Filippino
So it’s all about the cash flow. But Stephen says that we shouldn’t be signing Google’s death warrant just yet.
Stephen Morris
There were some bright spots in the earnings. Google’s cloud business doubled its revenue. It’s the fastest-growing cloud business out there, and it’s closing the gap with the market leaders Amazon and Microsoft. If you talk to executives at Google, they’re still very confident in the trajectory of their business. They’re still generating $125bn in revenue in a quarter. They have billions of loyal customers to which they can distribute AI products. They have a fast-growing cloud business. They have YouTube. If you look at their share price, they’re actually still up 2 per cent over the past 12 months. So this is a correction, but I wouldn’t say it’s anything existential or terminal for the company, which is still poised to be one of the big winners from AI.
Marc Filippino
That’s the FT’s Stephen Morris in San Francisco.
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One of the UK’s most valuable AI start-ups is making a pretty big bet. Nscale is banking on a massive US data centre project to underpin its public listing. Here to talk about what’s going on is the FT’s Kieran Smith. Hey, Kieran.
Kieran Smith
Hey, Marc. Good to be back.
Marc Filippino
Good to have you. So tell me a little bit more about Nscale and this reporting that you’ve done about a site that’s underpinning its IPO in West Virginia.
Kieran Smith
Yeah. So, with both my colleague Ryan McMorrow in San Francisco and several others, we’ve been looking into this site in West Virginia. It’s called the “Monarch Compute Campus”. Now, this site is pretty crucial to Nscale, which is a so-called neocloud. It’s a data centre operator that leases capacity to hyperscalers like Microsoft and Anthropic for computing power, to put it in layman’s terms. Now, the reason that this site is so important is because, of the $103bn in total contracted revenue that Nscale published in its IPO document in September, around $45bn is coming from this one site, and that’s one contract with Anthropic. So, the pressure on Nscale to get this site up and running, fulfil that contract, is pretty immense for investors as this company gets ready to try and list in New York later this year.
Marc Filippino
Yeah, but one thing that it has going for it, as I understand, is that it has a lot of big names on board. Kieran, can you tell me a little bit more about that?
Kieran Smith
So to give you a bit of an Nscale 101, this company is, if you can believe it, just over two years old. In March, the company was valued at $14.6bn in a funding round, which saw Nvidia, Nokia and Dell put around $2bn into the company. At the same time, former deputy UK prime minister Sir Nick Clegg and former Meta executive Sheryl Sandberg joined the company’s board. Now, those are pretty big names to join a company that’s a little over two years old. Since then, Sandberg’s been pretty involved, according to our reporting. It’s found that she’s helped appoint several senior figures at the company and has taken on a role as an adviser to the CEO. That’s all part of a preparation to get the company ready to scale and list.
Marc Filippino
Kieran, there have been some nervousness about whether companies will be able to deliver on their promises given how much money they’re spending on AI. How does that play into Nscale’s story as it goes public?
Kieran Smith
Yeah. So, I think this is a really topical point, especially with the sell-off in many of these stocks in recent weeks. I think the big problem here is the sheer amount of capital needed to roll out many of these sites. For instance, the campus in West Virginia, just the first stage of which an EY report commissioned by Nscale estimate will cost around $69bn. Now, to put that into context with Nscale’s balance sheet, it made a loss of around a billion dollars in the first half of this year on revenues of just $141mn. So securing financing to build these sites is extremely important to getting these up and running. Many investors are starting to question the timelines of companies and projects all across the world. However, the people that I speak to say that Nscale is adamant that it does remain on its timeline to list and is very committed to doing so at the valuation that it was targeting $35bn.
Marc Filippino
That’s the FT’s telecoms and tech correspondent Kieran Smith in London. Thanks so much, Kieran.
Kieran Smith
Thanks, Marc.
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Marc Filippino
The European Central Bank decided to keep interest rates on hold, but that wasn’t the big news from yesterday’s meeting. It’s that ECB President Christine Lagarde announced that she will step down early. She’s now set to leave in February, nine months earlier than initially planned. During her time at the central bank, Lagarde has overseen a debt crisis, the first war on the continent in decades, and massive trade tensions with the United States. So what will her departure mean for the ECB? That’s the question I want to put to the FT’s chief economics commentator, Martin Wolf. Hi, Martin.
Martin Wolf
Hi.
Marc Filippino
So you’ve actually met Lagarde. What was she like?
Martin Wolf
I would say it’s more than having met her. I know her rather well. I met her in the ’90s. I think she was agricultural minister after a very distinguished legal career in the United States. Then I continued to know her when she was finance minister of France during the financial crisis, and then when she was managing director of the IMF. And then, of course, I’ve known, met her, interviewed her quite often for the FT during her period as the president of the ECB. So this is one of the policymakers in the world that I know really very well.
Marc Filippino
Yeah, it sounds like almost every step of the way of her very impressive career. What is your read on why she’s stepping down from her role at the ECB nine months early?
Martin Wolf
Well, the honest answer is I don’t know the details because I haven’t yet interviewed her to talk about it. (Marc laughs) There are some obvious reasons. There’s been a lot of talk about the possibility of another job, basically being the chairman at the World Economic Forum. Whether anything will come of that, I don’t know, but that’s certainly in the conversation.
Another reason, which I think could be very important, is that she would like to give the governments of Europe as they are today, including French President Emmanuel Macron, the ability to decide on her successor before the possibility of some relatively far-right politician becoming the head of government in one of those countries. France is the most likely important case. So that might be another reason for her to do so, and she could well feel as well that European policy is rather well established, and she’s not abandoning her post in a difficult situation. Any one of — or all of — these three reasons could be the truth.
Marc Filippino
What are you looking out for next when it comes to the ECB?
Martin Wolf
Well, obviously, the most important thing is that they have a competent, widely respected president who will be able to keep the institution functioning successfully. But of course, beyond that, can the ECB handle the next round of difficulties? In France, there are huge fiscal deficits, very high bond yields, and of course, the president of the ECB and the ECB will be absolute at the forefront of dealing with that. And that could be immensely politically difficult, depending of course, on who the next president of France is. But at the moment, that president is most likely to be Marine Le Pen on the far right.
Marc Filippino
Martin Wolf is the FT’s chief economics commentator. Thank you so much, Martin.
Martin Wolf
Thank you.
Marc Filippino
Tomorrow, you’ll hear more from Martin in this feed. The next instalment of his podcast series, Martin Wolf on the World, will be published right here.
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You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest news from the Financial Times.
The FT News Briefing is produced by Saffeya Ahmed, Sonja Hutson and Josh Gabert-Doyon. I’m your editor, Marc Filippino. Our video producers are Zachary Alfred and Dennis Golin. Our show is mixed by Alex Higgins and Sam Giovinco. We get help from Vanessa Brown, Michael Lello, David da Silva and Gavin Kallmann. Our executive producers are Charles Bell and Topher Forhecz. Flo Phillips is the FT’s global head of audio, and our theme song is by Metaphor Music.