Tesla Tanks As AI Gamble Gets Pricier, Alphabet’s CapEx Spending Rattles Investors

**Zaid Admani** (0:00)
Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Thursday, July 23rd. In today's episode, we'll tell you why oil prices and bond yields are surging, and what it means for the Fed's big decision next week. We'll also recap earnings from Google and Tesla, and explain why investors are getting nervous despite decent results. Then stick around to the end of the show to find out why investors need to pay attention to the Japanese Yen. We got a great show for you today.
Let's go.
Stocks basically went nowhere on Wednesday. The S&P 500 fell 0.1%, while the NASDAQ dropped about 0.5%.
Trading volumes were pretty light yesterday. I think everyone was waiting for Google and Tesla to drop earnings after the bell. We got those numbers, and we'll break them down in a bit. Now, despite the stock market being relatively quiet, there was a ton of action happening in the oil and bond market. Oil prices keep climbing. Brent crude is now approaching $100 a barrel, which is $25 more than it was earlier this month. The market is starting to take the escalation in the Middle East more seriously again. And look, with higher oil prices means a likely resurgence in inflation, which brings me to the bond market. The 30 year treasury yield has now been above 5% for 12 straight days. That's the longest run above that level since 2007 So we're talking like financial crisis era. What the bond market is signaling right now is that interest rates may need to stay elevated for longer, or even go higher. So the bond market is kind of freaking out right now, which is weird because the stock market isn't phased by any of it. Despite oil prices surging and bond yields being elevated, and a Fed hike now expected, the S&P is still near record highs right now. So one of these markets is wrong, and historically the bond market tends to be more accurate. We're going to continue to keep an eye on the bond market along with everything else happening. So 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. And we're talking earnings from Google and Tesla. Let's start with Google first. Google reported earnings last night. And honestly, the quarter itself was very strong, but the stock is still dropping today because investors are concerned on all the money that Google is spending on AI. Let's start with the good stuff first because there's a lot to talk about here. Revenues in Q2 came in at nearly $120 billion, which was up 24% from a year ago and ahead of Wall Street estimates. The star of the show was Google's cloud business. Cloud revenue jumped 82% to almost $25 billion. Wall Street was expecting 63% growth, so this was a blowout performance. And then to add to that, their backlog, which is contracted cloud business that Google hasn't collected on yet, grew to $514 billion. And Google says that more than half of that will convert to revenue in the next two years. So what that tells me is that there's clearly a ton of demand for all the AI infrastructure that Google is building out. Beyond just cloud, their search business continues to hold up surprisingly well, despite all the predictions that ChatGBT was gonna kill Google. Search revenue grew 17% to more than 63 billion dollars. Now to be fair, that did miss Wall Street estimates by less than 1%, but that could just be currency related. So overall, Google had a monster quarter, but their stock is still down around 4% in pre-market trading. And I think the main reason for that is that Google's free cash flow last quarter came in at negative $5.9 billion. Google has literally never had a negative free cash flow quarter in their two decades as a public company. But the company continues to burn a ton of cash on AI infrastructure. They spent almost $45 billion on CapEx last quarter. Most of that money went towards data centers, chips and other AI related expenses. And I think that was the key takeaway from these earnings. Google isn't backing off on CapEx spending. In fact, they raised their spending forecast again. They now expect to spend up to $205 billion on CapEx this year, which was up from the previous forecast of $190 billion. The CFO went as far to warn that spending could climb even higher next year and that free cash flow will remain under pressure. So I think that's why the stock is dropping despite their monster quarter. But you know, in this case, I don't really blame Google for not backing off on CapEx spending because they're starting to see the payoff now. Their cloud revenue is accelerating and the backlog is now over half a trillion dollars. So I'm not gonna lie, I was a little surprised to see Google stock fall after these earnings. I think one thing is clear though, Google is not blinking from investor pressure on all their CapEx spending. The pressure is now on Microsoft, Amazon and Meta on what they do with their CapEx. Are they gonna do the same thing as Google and keep raising their number? And how is the market gonna react to that? All these companies are reporting earnings next week, so we should find out pretty soon.