The Prof G Pod with Scott Galloway
00:13:21 · Fareed Zakaria, George Hahn
So I think we can get a bunch of it back. I think we can stabilize the system again, but we can't go back to the way it was. Because once you sow that level of mistrust, that doubt, that sense that we need a bit of insurance, it's hard to see how you get... We did the impossible. You know, for fifty years, the second and third richest countries in the world, Germany and Japan, said, we don't need to have, you know, major defenses. You take care of us. We are basically subcontracting our national security policy to you, the number one country. The idea that the number two and number three economies in the world would subcontract their foreign policy to the number one country, again, historically never happened in the world. And it was it was American genius, and it has now been American stupidity and recklessness that has that has wrecked that system. Ad[00:14:18] S1: We'll be right back.
00:14:26 · Scott Galloway
Ad[00:14:26] S0: Support for the show comes from Odoo. If your business runs on five different apps, 12 browser tabs, and one spreadsheet that everyone's afraid to touch, it's probably time for Odoo. Odoo is an all in one business management software that connects every part of your business into one powerful, easy to use platform. So instead of wasting time switching between disconnected systems, your entire business works together in real time. Your team moves faster, your data stays accurate, and you can actually focus on growing your business. Let one unified system run your entire business. From the first opportunity to the final payment, everything works together in one place. Whether you're a small business or managing a large operation, Odoo gives you one flexible platform built grow with you. Try today for free at odoo.com/propg. That's odoo.com/propg. Support for the show comes from Canva. I've seen many a pitch deck in my life. Word of advice, don't take the visuals for granted. It's a crucial part of first impressions. And frankly, it's pretty easy to discern if it's a hastily thrown together deck or a polished inspired presentation born from real creativity. Canva is just what you need to bring that creative vision to life. That goes beyond pitch decks. It could be an ad for socials, a logo for your side hustle, wedding invitations, whatever it is. Canva makes sure you never start from a blank page. They've got thousands of templates to choose from to get going instantly. And as a tool, it couldn't be simpler to use. Just drag, drop, or swap stuff in. You don't need a design degree. You just need an idea and a few minutes to make it real. Plus, the process can be as collaborative as you need it to be. Multiple people can work together on a project with color coded cursors tagged with everyone's name. No more wondering who changed what or extending a project's timeline by working asynchronously. It's teamwork without the hard work. So ask yourself, what will you Canva today? Try it at canva.com. Support for the show comes from psychiatry. Finding the right mental health care can feel overwhelming, especially when you're not sure where to start. Psychiatry helps you take that next step, connecting you with a psychiatrist who listens, understands your needs, and works with you to create a personalized treatment plan.
00:16:33 · Scott Galloway, George Hahn
AdPsychiatry is a 100% online psychiatry practice offering comprehensive evaluations, diagnoses, and ongoing medication management for conditions including ADHD, anxiety, depression, and more. And unlike platforms and only opt for therapy, Talkiatry connects you with medical providers who can diagnose mental health conditions and prescribe medication when appropriate. Plus, all 800 plus psychiatry clinicians are in network with major insurance providers, so you can use your existing coverage without having to pay monthly subscription fees or out of network rates. Your psychiatrist takes the time to understand what you're experiencing, develops a treatment plan tailored to your needs, and provides consistent evidence based care as you make progress over time. Head to psychiatry.com/profg to complete the short assessment and get matched with an in network psychiatrist in just a few minutes. That's talkiatry.com/propg to get matched in minutes. Psychiatry.com/propg. [00:17:37] S1: Welcome back. The midterms weren't the only reckoning this week. Big tech had one of its own over, you guessed it, AI spending. After reporting earnings last week, Alphabet, Google's parent company, fell nearly 13%, its worst day since going public, and Amazon dropped about 7% the next day. Both companies are now spending more on AI than their core businesses bring in. Stocks bounced back after the midterms and the Dow jumped more than 1,500 points on Wednesday. But on Monday's Prof G Markets, Scott explained why investors aren't letting big tech off the hook.
00:18:23 · Scott Galloway
[00:18:23] S0: I thought it was pretty shocking, and it's sort of the tale tale of two cities. It's the same AI arms race, but entirely opposite verdicts. Microsoft, was up 5% on cash flow discipline, and Alphabet down double digits on cash burn. And the way I would describe it is both companies had amazing, year on year revenue growth and really outstanding businesses, but I think it's two things that punished. Microsoft was able to thread the needle here, and that, as I said, we're gonna surprise to the upside on the top line and the bottom line. And what I think really excited people is their CapEx looked fairly disciplined. Now granted, it's still unbelievable. It's still out of control, but it looks fairly disciplined. Compared to the alternatives. Yeah. And compared to Alphabet. Yeah. And when Alphabet's executive admits on the earnings call that AI mode generates fewer ads, it's like the company confessing its flagship product cannibalizes its core business. So AI is a profit center that needs to be managed well for Microsoft in terms of CapEx. AI needs to be a profit center for Alphabet that needs to be managed well. It doesn't look like the CapEx was managed as as... In as disciplined a fashion. In addition, AI is an existential threat to Alphabet because the world's most profitable, largest tollbooth in history, search, is... It appears like is kind of under attack. I don't know about you, but I think there's probably a lot of analysts listening and hearing seeing... Hearing the numbers. They see the CapEx of a company growing its AI business. But what they don't see or what they also see is that AI is an existential threat to their ability to generate the cash flow they need for CapEx for the arms race. And the anecdotal evidence, I don't know if you find this, I am now doing basic search on on Claude. And at some point, that's just gonna show up in the in the numbers. But my... What Microsoft did here was unbelievable. Microsoft renovated with cash on hand, and Alphabet appears to be taking out second mortgages, you know, for the same renovation, which is gonna result in kind of a different call from the bank, if you will. So really two divergent results here. And the largest market cap erosion, single day market cap erosion in the history of the company, that's a big deal.
00:20:43 · George Hahn
[00:20:43] S1: Alphabet and Amazon aren't the only ones in the red. Ed Elson pointed out that nearly every hyperscaler is now spending more than it makes and explain what that means for investors.
00:20:56 · Ed Elson
[00:20:56] S5: But I do think that the real problem in my view is that negative free cash flow. And to be clear, Google is not alone there because we also know that Oracle's free cash flow is negative. Meta's free cash flow is negative now. Amazon's free cash flow is negative now. All of the hyperscalers have now entered into negative free cash flow because of how much money they're spending on the data centers. It's it's nearly $700,000,000,000 on CapEx in the past twelve months. That's up nearly 90% from a year ago. The only hyperscaler with positive free cash flow is Microsoft, which is great, but it still came down 27%. So the thing that worries me is the fact that these businesses can no longer use their profits to finance their goals, which is in this case to build data centers and build the AI revolution. And so you think about, okay. Well, what can they do then if the most profitable companies in the world can't even use their profits to do whatever it is that they wanna do? Well, then you'd say, okay. They can go to the cash on their balance sheet. And that's what a lot of people have pointed out. And to be fair, these guys have a lot of cash on hand. If you look at their cash and cash equivalents and their short term investments, you got Amazon with more than a $120,000,000,000. You got Google with more than $250,000,000,000. If you add all the hyperscalers together, it's nearly $600,000,000,000, which is great. But then you look at how much CapEx is going to rise next year and the year after that. And if you add it all up among the hyperscalers, the five of them, Oracle, Microsoft, Meta, Amazon, Google, over the next two years, it's estimated to be more than $2,000,000,000,000. So, basically, what you have is is is like a $1,500,000,000,000 gap between how much money they're going to spend and how much money they actually have. Because remember, they can't use the profits anymore because... Or the cash flows because those cash flows are negative. So they have to get the money from somewhere else. And so then you think, okay. Where is that money gonna come from? And the answer is they have to go to the capital markets and raise money. And that's why I was really... Like, yeah, it felt really powerful that literally the day after Microsoft reports their earnings, they also announce a $25,000,000,000, bond sale.