The AI Debate Gets More Complicated: Microsoft Has a Win, Meta Stumbles — The Weekly Wrap

[00:00:00] Steve Eisman: Investors have displayed their nervousness by selling tech stocks and all AI-related plays. That is why Nasdaq is down 7% from its all-time high. So many companies reported this week. PayPal. Company reported numbers that once again show the problems plaguing the payment sector. Microsoft had a good quarter. I would not characterize Meta's quarter as a good one. It was quite bad. Starbucks has been a turnaround story that finally looks like it's working. Apple was disappointing. Amazon was strong. Migrating from thinking that AI is all positive to AI is all negative is a pretty short emotional road to take. The story is moving too quickly. But here is where I think we are now. Hi, this is Steve Eisman and this is another episode of the Weekly Wrap. This is for the week ending Friday, July 31st, but recorded Thursday night, July 30th. By the way, I have a cold. The best way to support the Real Eisman playbook is to subscribe to Substack and to YouTube. Subscriptions are free and we appreciate your support. The link to join for free is in the description. I just want to flag something that's coming up on Premium. On Wednesday, August 5th, we will release an interview with filmmaker and producer Peter Hoffman. Peter has been involved in the making of iconic films like Terminator 2 and Basic Instinct. We discuss the arc of his career and how the business has changed from old school film production to the current world of streaming. The link for Premium is in the description. On this week's wrap, we will cover number one, Charter. Number two, the war in Iran. Number three, the Fed meeting. Number four, the AI debate in more detail. Number five, a huge week of earnings. And six, one mailbag. Before we get started, let me discuss Charter. The company reported last week. And bottom line, I give up. Simply put, I made a mistake. I recommended the stock in January on a thesis that the stock was insanely cheap and fundamentals would get better. When the company reported fourth quarter numbers, it looked like fundamentals would get better as the pace of broadband losses improved. Unfortunately, when the company reported 1Q26, the pace of broadband losses deteriorated and the second quarter saw more deterioration again with 172,000 broadband losses, which was unfortunately much worse than expected. Management stated that the worst is over and the company paid down some debt, which is important. However, at this point, I'm skeptical. Despite its cheap valuation, this stock is problematic until the broadband story gets better. Two really bad quarters in a row is enough for me. I'm selling. If the fundamentals ever turn, I could come back to the stock. But I hate thesis creep. And continuing to own the stock just because it's cheap, and it is cheap, would be thesis creep. Ironically, the stock is higher than when the company reported. On Friday of last week, the stock closed at $123, a 52-week low. By this Thursday night, the stock had climbed 15% to 142. However, the rally in the stock, in my view, has nothing to do with Charter. At least for this week, investors are reallocating out of AI-related plays, and that is benefiting Charter's stock price. I want to emphasize that I have not yet sold my position. I recommended the stock to my viewers, and I strongly believe that I should not sell until I inform my viewers of my opinion change. I will be selling the stock next week. With respect to Iran, there was a lull over the weekend, but that seems to be over. Iran struck U.S. bases, and the U.S. retaliated. Oil prices climbed above $90. The Fed met this week and kept rates unchanged. However, partially because of the recent jump in oil prices, some investors are afraid that the Fed is behind the curve. So on Wednesday, the market experienced something of a correction, and the 10-year is hovering dangerously close to 4.7%. Also, before we get to this week's news and earnings reports, I want to re-examine something I said last week about AI, that the terms of debate have changed. I strongly believe that this is so. Last year, just about everyone was positive. Every announcement of an increase in AI CapEx was greeted with massive stock price increases. Now, the debate is much more complicated. AI is capital intensive. AI may have no moats. And Chinese AI companies have created great models that are much cheaper, thereby creating the possibility of a price war. Investing is not all rational. It's emotional, too. And migrating from thinking that AI is all positive to AI is all negative is a pretty short emotional road to take. However, in my opinion, anyone who thinks they can confidently predict the ultimate outcome for AI is just kidding themselves. The story is moving too quickly. The facts change weekly. And I really don't know where this will all end up, but here is where I think we are now. Despite the fact that the hyperscalers have become incredibly capital intensive businesses, they do have businesses that have some level of moats. Anyone who wants to do anything with AI, whether it is an LL model or an agentic AI or something else, will have to house it with a hyperscaler. And there are only going to be a few hyperscalers. First, for those who sometimes get confused, and it's easy to get confused, there is a major difference between hyperscalers and LLM providers. The hyperscalers are the huge tech companies that are building the data centers where the LLM models are being housed. Anthropic and OpenAI have created LLM models, which are closed source models. The Chinese LLM models are so far open source. There is overlap between LLMs and hyperscalers. Google and Microsoft are hyperscalers, but they also created their own LLM models. The amount of money it takes to be a hyperscaler is insane, and that expenditure itself is a moat. There are only going to be a few hyperscalers. So the hyperscalers like Google, Amazon, Microsoft, and Oracle have real businesses here. What the returns will look like, I don't know yet, but they have real businesses. The large LLM providers, Anthropic and OpenAI, and partially Google and Microsoft, are much more problematic. Here, the debate has really shifted, because there just don't seem to be any moats, or at best, the moats are shallow. Enterprises are switching between models and using cheaper open source Chinese models in order to control costs. This is a good time to discuss open source models of the Chinese versus the closed source models in the U.S., including the four I just mentioned, Google, Microsoft, Anthropic, and OpenAI. An open source model means you can take the model and change the code to your liking. Closed source means you cannot. At this point, it looks like open source models are just much cheaper. The future for these large LLM providers is very questionable. The Chinese models are much cheaper, and this could eventually cause a price war. Anthropic and OpenAI are also problematic, because they don't have the breadth of revenue streams of Google and Microsoft. Google and Microsoft have multiple revenue streams from established businesses, which are very unlikely to simply disappear. They also have hyperscaler businesses to balance their vulnerability, but their LLM businesses are also questionable. A key thing to monitor to determine a catalyst for a real sustained sell-off is the health of Anthropic and OpenAI. If the lack of moats begins to cause them problems, then the entire AI ecosystem could go through a correction phase because so much of the hyperscaler backlogs are from these two companies. For example, of Oracle's 600 plus billion backlog, around half is from OpenAI. On the other hand, AI is allowing the creation of software and other tech that is much cheaper than existing software and tech. We could be entering an age of massive amounts of startups as young entrepreneurs take advantage of this changing tech. In fact, I do not believe that AI is a job destroyer for the overall economy. This could be a period of job dislocation, but net job creation. In fact, I think that the idea that AI will destroy jobs could be propaganda propagated by Anthropic and OpenAI so that the federal government will step in and regulate AI to the benefit of Anthropic and OpenAI. Demanding regulation based on a false narrative would be a very disturbing way to create moats. As for the software saspocalypse, companies that have not invested in their products I think are in big trouble. That applies to some public companies. In our recent interview with Dan Ives and Gil Luria, Gil stated quite openly that he thought that Salesforce was in trouble. He also argued that the software companies owned by private equity are in deep trouble as private equity has been milking those companies as opposed to investing. In them, but again, the facts keep changing. The argument will go on. I would also point out that investors have displayed their nervousness by selling tech stocks and all AI related plays. That is why Nasdaq is down 7% from its all time high on January 2nd. Also, the Sox index, which is the iShares semiconductor ETF, is down 23% from its peak on June 22nd and is down 4% this week. The change in the AI debate is also impacting fixed income markets. CoreWeave, the AI data center company, is in the process of raising debt of $2.6 billion to fund additional computing capacity. The loan is being priced with a yield of more than, get this, 9%. That is expensive debt. There is something of a credit cycle here as fixed income investors are discriminating between the large companies like Google that they know can pay the money back and smaller, newer companies like CoreWeave that are more risky. And now let's turn to earnings. So many companies reported this week is exhausting and I won't be able to come close to covering them all, so I've chosen the ones I think are the most important. First up is Visa, the stock I've owned for years. Visa reported a powerful quarter. Earnings per share of 331 was up 20% versus last year and versus 323 expected. Net revenue of $11.6 billion was up 14% versus last year and also a beat. Total payment volume was up a strong 10%, so no signs here that the consumer is slowing down. Like Visa, MasterCard also had a good quarter. The company reported earnings per share of 504, up 21% versus last year, and revenue was up 14% and total payment volume was up 8%. Now, while overall consumer spending is strong, signs of the K-shaped economy are everywhere. Take the results of Procter & Gamble. Procter reported earnings per share of $1.43 versus $1.48 last year, so down 3%. Perhaps worse, organic revenue growth was 0%. Bloom Energy. Bloom Energy builds small to medium-sized generators that can create electricity to fuel a data center. The company's technology turns natural gas into electricity. Bloom Energy has been a major beneficiary of the AI boom, and the stock is up over 90% this year alone. Now, we touched on Bloom in our recent interview with Ben Callow, the sustainable energy analyst at Baird. Bloom's results were very powerful. The company reported earnings per share of $0.78, which was up, get this, 680% versus last year. Revenue surpassed $1 billion for the first time and was up 166% versus last year. This is and is not an expensive stock. It depends how you look at it. The 2026 estimated P/E is a high 73 times, but because of the company's explosive growth rate, the 2027 and 2028 estimate P/E's are only 37 times and 23 times, respectively. So if the AI story keeps going, I would expect Bloom's stock to continue to perform. But again, the AI story has to keep going. PayPal. Company reported numbers that once again show the problems plaguing the payment sector. EPS of $1.38 was down 1% versus last year, revenue was up 3%. Both earnings and revenue were better than expected, but so what? The results are still very sluggish. The big news is that PayPal received a buyout for $60 from Stripe and Advent, and the company says that that price is too low. I hate it when management's played chicken. PayPal's business is under assault from large players like Apple and Google. The company should sell. Wednesday night, some very important companies reported, and I'd say the overall results were very mixed. On the positive side, Microsoft had a good quarter. Microsoft has been caught in the crosshairs of the AI debate all year. It's a software company, so some investors are worried that AI software will replace it. On the other hand, it's also a hyperscaler, and therefore its capital needs have increased dramatically. As a result, the stock was down 19% this year prior to Microsoft reporting earnings. But this was another good quarter. EPS of $474 was up 30% versus last year. Total revenue grew 18% versus last year. And most importantly, Microsoft's cloud business, Azure, saw revenue growth accelerate to 43% versus 40% in the March quarter. But not all is great. Free cash flow of $19.6 billion was down 23%. Still, I would characterize this as a very good quarter. And the stock was up very strong after hours. I would not characterize Meta's quarter as a good one. It was quite bad. Meta reported earnings per share of $6.18 versus $7.14 last year. So down, down 13% and a miss versus expectations. Revenue of $60.8 billion was in line. The problem here is cost and margins. Revenue was up 28%, but expenses climbed 55%. The major problem here is that research and development costs jumped from $13 billion last year to $22 billion. For Meta, the current cost of playing in the AI sweepstakes is killing its margins and its cash flow. Free cash flow was a mere $784 million, which is basically nothing and which shows how capital-intensive this AI game has become. Also, Meta gave weak guidance for the next quarter. For the next quarter, it expects revenue of $62.5 billion versus analysts' expectations of $63 billion. For the all-important CapEx, Meta narrowed its guidance for the year to $130 to $145 billion from a prior range of $125 to $145 billion. In other words, it raised the lower end of the range. There is no sign that this spending spree is going to end anytime soon. Quite the opposite, actually. Meta said that it has $279 billion in future lease agreements, mostly related to AI, that are not yet reflected on its balance sheet. That is up, get this, 53% in just three months. Meta was down 9% after hours. In comparing Microsoft versus Meta, it's clear that Microsoft's cloud business is doing great and powering the overall company. Meta does not have that business and is trying to play just in the LLM space, which is expensive and not yet lucrative enough. Moving on, Starbucks has been a turnaround story that finally looks like it's working. Company reported earnings per share of $0.85, up 70% versus last year. While overall sales fell slightly, same-store sales climbed almost 8%. And that's the figure analysts care the most about. Robinhood, the online trading platform, reported that on the surface it did well. Earnings per share was $0.62 versus $0.42 last year and versus estimates of $0.43. So revenue climbed 32% versus last year. However, the stock was down after hours because crypto revenue declined 38% to only $100 million. Overall revenue was up because of trading in options, equities, and prediction markets. But some investors still seem focused on crypto. Nevertheless, by Thursday morning, the stock had reversed and was up. Quanta reported. I've owned Quanta for a long time, and we have spoken about Quanta before. It's the company that utilities hire to build new plants. So it is a major beneficiary of the increased need for electricity because of AI. The company reported an unbelievably powerful quarter. Earnings per share was $4.24, which is 71% year-over-year growth. And way ahead of the consensus. Revenue was $9.6 billion, up 41%. The company raised EPS and revenue guidance for the year. These are really powerful numbers and show how much the demand for increased electricity is impacting certain companies like Quanta. Meritage, the home builder I have been recommending, reported. Meritage's 2Q26 results were mixed. Positively, both gross margin and SG&A leverage came in better than expected, which drove 4% upside to reported earnings per share of $1.42. But earnings were down 30% versus last year. On the negative side, both orders down 9% year-over-year and revenue down 14%, were a little shy of expectations. But I think most importantly, free cash flow was significantly stronger than expected, as the company has begun to dial back land spend in favor of increased share repurchases, given the stock's discounted valuation. During the quarter, Meritage repurchased $100 million worth of stock, which is 2% of outstanding shares. And it has bought back 5% of outstanding shares since the beginning of the year. Moving on, Fair Isaac, a stock I've been short. The company reported. We've discussed this company at length in an interview with Kelsey Zhu of Autonomous. The short thesis is that FICO wields a monopoly in consumer scoring, but that the new Vantage score is going to take big market share in mortgages from FICO. It is still early in that process. Now, FICO reported earnings per share of $1,218 versus $8,57, which is 42% growth. The big EPS growth rate is largely due to FICO raising prices for years. And the EPS beat this quarter was also because of lower than expected expenses. Revenue of $674 million, which was up 26%, was actually a miss. The company also provided soft forward guidance. A company whose entire monopolistic business model is potentially under assault can show no signs of weakness. Missing on revenue and providing soft guidance is weakness, and the stock was down 17% on Thursday. And finally, Apple and Amazon reported Thursday night. Apple was disappointing. Amazon was strong. With respect to Apple, EPS was 202, up 29%, no problems here. Total revenue of $109.4 billion was fine. However, revenue from all-important services division of $30.4 billion missed expectations, and China's sales amounted to $18.8 billion, also a disappointment. Apple shares fell around 4% after hours. By contrast, the market liked Amazon's results. EPS of $5.75 was up huge versus last year. And the most important data point for Amazon remains Amazon Web Services, where revenue growth jumped to 37%. These results are kind of similar to what Microsoft reported, and Amazon's stock was up over 7% after hours. Before we go to the mailbag, I want to highlight recent news about a particular hedge fund. Situational Awareness, the $20 billion hedge fund founded by former OpenAI employee, Leopold Aschenbrenner, has sought to raise fresh capital from investors after suffering heavy losses during the recent rout in AI stocks. Apparently, the fund was on so much margin that because of the recent tech correction, a significant portion of the capital is gone. Aschenbrenner posted powerful results prior to this debacle and was lauded by the press as a genius. Maybe he is a genius. Maybe he is incredibly knowledgeable about tech and AI. But there is more to managing a hedge fund than just being smart and knowledgeable. Risk management is key. In managing a hedge fund, you are the steward of the capital of your investors. You need to be sure that you are not taking risks that way overexpose your investors. Sure, making money on the upside is great, but protecting the downside is just as important, maybe even more so. That clearly did not happen here. The quota to the story is not sweet. On Thursday, the same day these stories appeared, the fund was forcibly liquidated to meet margin calls. And now for the mailbag. In response to last week's wrap, a viewer, William H2594 said, "Compliments on your show and guests. Reminder, there has always been a case-shaped economy, at least for the last couple of centuries." An interesting comment, but whose sentiment I have to say I disagree with. Last year, I interviewed John Cassidy, author of Capitalism and Its Critics: A History from the Industrial Revolution to AI. John Cassidy is a critic of capitalism, but even he admits that the world is better off with capitalism than without it. But at the beginning of his book, he posts a graph entitled, "Global average GDP per capita in international dollars, years one through 2022." This is one of the more fascinating graphs that I have ever seen, and I am putting it up on the screen. For those of you who are on audio, the graph shows that from year one till around the early 1800s, global GDP per capita was basically flat. That means that human wealth in 1800 was not much higher than when Jesus walked the earth. Wealth creation and growth only really got started with the Industrial Revolution in the mid-1800s, and then wealth took off in an upward straight line. That's what the graph shows. Despite the fact that the distribution of wealth could certainly be fairer, everyone, and I mean everyone, is wealthier today by a lot. So yes, we can all complain about the K-shaped economy, but let's not forget that we are still all better off. This last Monday, July 27th, we released an interview with Dan Ives and Gil Luria, two tech analysts who cover the full gamut of tech. We discussed how the debate around AI has shifted from being all positive to a much more nuanced discussion. We talked about capital intensity, the lack of moats, the potential for an AI price war, and how real the threat is to software companies from AI. We also discussed private equity's overexposure to software, so check it out. This coming Monday, August 3rd, something different. We will post an interview in honor of the 250th anniversary of the signing of the Declaration of Independence. The interview was about a book entitled "Capitalism in America: An Economic History of the United States." The authors are Alan Greenspan and Adrian Wooldridge. Obviously, we could not interview Alan Greenspan as he has recently passed, but his co-author was available. We discussed some of the major themes of U.S. economic history, including the great debate between Alexander Hamilton and Thomas Jefferson, the Industrial Revolution and the role of the robber barons, the causes of both the Great Depression and the Great Financial Crisis. So please tune in. The best way to support The Real Eisman Playbook is to subscribe to Substack and to YouTube or your favorite audio channel. Subscriptions are free, and we appreciate your support. And that's the wrap. [00:24:18] Speaker 2: This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed on their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions.