July Markets in Focus: The AI Cash Burn Trade + Financials Upside

**Lance** (0:12)
Welcome in to another episode of the Inside the ICE House Podcast, our Markets in Focus series. And joining us as always to talk market trends and market movements is Phil Rosen. Phil, thanks as always for joining me. Happy to have you here.

**Phil Rosen** (0:24)
Thank you for having me.

**Lance** (0:25)
So, NYSX Component Alphabet reported negative free cash flow in Q2 for the first time in its history, which frankly is a remarkable stat first and foremost. But with these results, do you think investors should view this as a red flag, or is this simply the cost of competing in the AI arms race?

**Phil Rosen** (0:44)
I think that investors took the negative $5 billion free cash flow as a surface level red flag. But if you look beneath the surface a little bit, they did make over $100 billion in the quarter, which is an insane amount of money. And that shouldn't surprise anyone because they've been generating ridiculous amounts of cash for years and years and years at this point. And what Google is really doing is they are building a full stack in-house AI ecosystem. They have the distribution, they have all the apps and tools. Gemini is getting better and better. I use Gemini a lot. I think it's great. But they're also developing their own TPUs to compete with NVIDIA and also try to discount their future from having to rely on other semiconductor names and external chips. So to me, I've been in Google for a long time personally. I like it long term as a investment. The near term negative free cash flow.
Yes, it makes a great headline. I wrote about it myself. I think it's something to pay attention to. I don't think it's necessarily a sell signal unless they were suddenly making way less cash because they were losing money on their other parts of the business. But right now, they're deploying as much capital as possible into this infrastructure build out. So I think we could see more quarters of negative free cash flow.
But at the same time, all their business lines, they're going up 50 to 80% year over year as far as revenue growth. Those are insane numbers for a company as mature as Google or Alphabet.
And even if you saw a company growing revenue at 20% a year, you'd say, wow, this is amazing fundamentals and the story looks great. But at 80% a year for Google's cloud business, for example, that is just preposterous. The fact that they can do that and they're essentially competing on every single layer of the AI ecosystem. I think Google is an amazing company and an amazing investment even with negative free cash flow.

**Lance** (2:42)
Got it. So the negative free cash flow is certainly a headline, but it's those numbers beneath the surface that I would say probably tell a greater story than just that negative free cash flow, you'd agree?

**Phil Rosen** (2:53)
Yes, of course. I mean, anything in the red is going to draw a lot of attention. But if you just look at Google's track record, if you look at their extremely long history of being literally the best moneymaker in corporate America ever, I don't think one quarter out of however many years of existence should suddenly make people sell all their stock and try to find another company that can compete with Google. Because right now, most of what I'm reading and also the investor I'm speaking with, the Mag-7 names to bet on would be Google and Nvidia.
And to me, I actually like Google a lot better than Nvidia. I think they're more diversified. They have a bunch of great business lines that Nvidia is not even touching. Nvidia is a great monopoly for what they're doing with GPUs and chips.
But at the same time, Google's got YouTube, they have Waymo, they have Search, they have all these other components that they've been doing forever and they're essentially a monopoly on a bunch of different verticals. I think that's very compelling from an investment standpoint. And I also own a little bit of Nvidia, but I'm definitely not as long-term bullish on them as I am for Alphabet.

**Lance** (4:03)
So when you just look across the AI landscape, semis are obviously capturing a huge share of the economic benefit, while big tech is spending aggressively on infrastructure. Chipmakers are obviously seeing cash flow and profit surge. Why have the chip companies become such clear winners in this space?

**Phil Rosen** (4:21)
Well, I think if you think about it in the picks and shovels analogy, everyone keeps saying that, but the semiconductor chipmaker names, those are essentially the picks and shovels right now. So they're going to see immediate cash coming in that they can use, invest, deploy, whatever it might be.