Hi {{first_name}} ,

Two of the biggest companies on the planet reported after the close last night. Google and Tesla. But both got sold off.

Same reaction, completely different reasons. And that difference is really important

Let me break it down simply.

Here are the numbers.

Revenue came in at nearly $120B, up 24% from a year ago. That is a beat.

Cloud was the monster. Up 82% to about $25B, sitting on a backlog of orders worth $514B. Search grew 17%. YouTube ads grew 13%. Operating margin is running at 34%.

But the share price dropped more than 3% after market

So why did the stock drop?

Because management told the market they now plan to spend as much as $205B this year building AI infrastructure. Three months ago that number was $190B.

Look at what the spending is actually buying. Cloud growing 82% with half a trillion dollars of orders already booked is not a company burning cash. That is a company that cannot build fast enough to meet the demand already knocking on the door.
That is not reckless spending but spending because you are winning. I think the market has mixed up the two.

On the surface, Tesla booked record revenue of $28B, up 26% and record deliveries of roughly 480,000 cars. It looks like a monster quarter. And shares are down 4%

Then you look underneath.

Operating profit fell 57%. Operating margin came in at 1.4%. Gross margin slipped and landed below what analysts wanted. Free cash flow turned negative. And a large slice of the reported profit came from a paper gain on its SpaceX stake, not from selling cars.

Tesla sold more cars than ever before and made less money doing it.

Usually with higher volume, we want to see better margins but that is not the case here. Record volume at thinner margins is not the same thing as growth. Tesla is also spending heavily on AI and robotaxi, same as Google. The difference is that the core business funding all that spending is getting weaker, not stronger.

But I am not writing Tesla off. Elon has proven doubters wrong before. I just want to see margins stabilise before I get excited again.

Both companies are spending like crazy. Both posted negative free cash flow this quarter. Both got sold on the same night.

Here is the split.

Google is spending from strength. About $41B of operating profit in a single quarter, margins expanding, a core business printing cash while it builds. For Google, the spending is a choice.

Tesla is spending while the core is squeezed. An operating margin of 1.4% leaves almost no cushion if anything goes wrong. For Tesla, the spending is closer to a bet.

Heavy AI spending is now the cost of staying in the game for every big tech name. The question is never how much they spend. It is whether the business underneath can pay for it. Google can. Tesla is working on it.

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Pete
Invest with Pete

🚨‼️ By the way, I’ll never PM anyone on telegram or any other social media platforms. If you receive any “Pete” messaging you, these are scammers impersonating me. Pls beware!

The information provided in this newsletter is for informational purposes only and does not constitute financial advice. Readers should seek their own independent financial advice before making any investment decisions. Please note that while Pete is a portfolio manager, the opinions expressed in this newsletter are his own and do not represent the views of any organization. Always perform your own research and due diligence before investing.