Bad News for Google and Tesla Is Good News for Chips and Data Centers
Higher capex guidance is punishing hyperscalers while their suppliers celebrate.
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The first big night of mega-cap earnings confirmed investor fears about capital spending. The reports were mostly good but the reactions were mostly negative, due to indications that high levels of spending will continue for years.
Alphabet (GOOGL) beat on revenue with some of the strongest growth in five years. Google Cloud’s operating margin jumped to 35.6% from 20.7% a year ago. However, the stock is down about 4% anyway because the company raised its full-year capex guidance to a range of $195 billion to $205 billion, up from $180 billion to $190 billion, and warned of higher spending in 2027. The big negative is that free cash flow went negative for the quarter.
Tesla (TSLA) stock is down on the same issue. Capex surged 142% year over year to $5.79 billion in the quarter, with more than $25 billion expected this year, and free cash flow went negative. Elon Musk defended the spending on the call, saying this is a massive capex year and that the investments will yield maybe the best returns the company has ever seen. Investors are skeptical.
ServiceNow (NOW) is the exception, up 5% on strong results. The reports that got punished were the ones where the spending dominated the story.
The Other Side of the Trade
The same news that is sinking the buyers is lifting the suppliers. The memory names are up this morning, with Micron (MU), Sandisk (SNDK), SK Hynix (SKHY), and Western Digital (WDC) all gaining after Alphabet boosted its spending plans. Musk added a direct catalyst when he said Tesla has secured a significant memory allocation from Micron for the coming years.
This is the bifurcation I have been writing about for months. Every dollar of capex that pressures hyperscaler margins is a dollar of revenue for the companies supplying the chips, servers, memory, and data-center capacity. The market punished Alphabet and Tesla for spending and rewarded the companies receiving the spending, all in the same session.
The suppliers win in almost every scenario here. If the hyperscalers keep spending, the chips and data centers get the revenue. If the market is wrong to punish the spenders and Alphabet recovers, the spending continues anyway. The one outcome that hurts the suppliers is a genuine capex pullback, and both Alphabet’s raised guidance and Musk’s comments said the opposite is happening.
The Bull Case for Alphabet Is Not Dead
All is not lost for the hyperscalers. The counterargument is in The Wall Street Journal this morning. The bulls are confident that Google has the muscle to overpower the spending worries, with the core businesses strong enough to fund the buildout. The cloud margin expansion supports that view.
This is a business nearly doubling its operating margin. It can handle record investment because it is generating solid returns. The market is pressuring Alphabet because the capex number keeps growing faster than anticipated, not because the businesses are deteriorating.
Oil Is Flying Toward $100
The technology sector will see more rotational action because of the dynamic outlined above but the bigger problem is that the backdrop is getting worse while the earnings play out. Oil is rising toward $100 Thursday morning after Houthi militants claimed attacks on two Saudi tankers in the Red Sea. The Red Sea route is now under attack, which is a new and ugly issue.
Oil at these levels keeps the inflation pressure fully engaged. The Fed is expected to hold rates next week, but the odds of a hike by September are around 70%. This is a difficult situation for a market that faces a strong headwind as oil approaches $100 and rate-hike odds climb.
My Strategy
My posture has not changed. I did not bet on the reactions to Wednesday night’s reports and I am not chasing Thursday morning’s moves in either direction. The memory names are extended after their bounce and the hyperscaler weakness has not yet created the kind of setups I want. I am going to look at a possible entry into Alphabet but I want to watch the price action for a while.
Intel (INTC) reports tonight and Advanced Micro Devices (AMD) holds its AI event today, so the chip sector is going to stay active. The dislocations from this earnings season are still developing, and the best entries usually appear a few days after the reports rather than in the first reaction. Cash and patience remain my focus while the market sorts out whether capex is a problem or an opportunity.
At the time of publication, Rev Shark had no positions in any securities mentioned.
