Today's number five. That is the official Rotten Tomatoes score of the new Melania movie, making it one of the worst movies of the decade. Critics have called it a shameless infomercial. They've called it two hours of endless hell, and they've even compared it to Nazi propaganda. However, they all agree it was better than the Emoji Movie.
Welcome to Prof G Markets. I'm Ed Elson. It is February 5th. Let's check in on yesterday's market vitals.
The tech selloff dragged on for a second day, pulling the Nasdaq down one and a half percent. The S&P also declined, though the Dow managed to climb. Uber fell 5% after reporting softer-than-expected guidance and naming a new CFO. AMD was among the worst performers, suffering its steepest drop in seven years after disappointing earnings. And finally, Bitcoin also carried on its slide towards $72,000.
Okay, what else is happening?
Google's fourth-quarter earnings beat expectations with annual revenue topping $400 billion for the first time ever. It was also the company's second consecutive quarter of more than $100 billion in revenue. That was largely driven by strong growth in its services and cloud divisions. Its cloud revenue grew 48% year-over-year. However, the company spooked investors with plans to spend $175 to $185 billion this year. That is at least $55 billion more than forecasted. That would nearly double its capex from 2025. The stock initially fell as much as 7% after hours, but it quickly recovered. Okay, here to help us break down Google's earnings, we're speaking with Scott Devitt, managing director of equity research at Wedbush Securities. Scott, good to see you again.
Hey, Ed. How are you doing?
Very well. We want to dig into these earnings here. Beat expectations. $400 billion in annual revenue. Just mind-blowing at this point. Let's just start with your initial reactions to these earnings.
The growth is very strong. You know, search was up 17%. So, you know, the search business alone, that's almost $300 billion of revenue, and that business is accelerating. And so the infusion of AI overviews into the search results has definitely benefited the platform. In addition to that, you know, the cloud business grew almost 50% in the quarter. Expectations were 38% growth; it did 48% growth. So that's on the positive side, and the growth is outstanding. With that, the company's going to be spending like crazy next year on capex, or this year, I should say, $175 to $185 billion of capex. You know, they effectively almost doubled capex in '25; they're almost doubling it again. So it's front-footed growth, but you know, the market has to digest periods where companies are spending so aggressively ahead of revenue and operating profit. And I think you're seeing some digestion. You've seen it in Meta, you're seeing it in Alphabet, but these are the right investments to be made. And when we get to the other side of the spend, I think there's going to be, you know, quite nice returns for these companies.
The stock fell as much as 7% in after-hours and then it quickly recovered. We'll see how it moves throughout the day. What do you make of the market's, at least initial, reactions? Was there anything in the earnings there that was concerning investors? Perhaps it is that capex number.
It's the capex number. I mean, the market is very skittish right now around AI, and you've seen software companies, you know, multiples collapse. And so we're just at a, you know, I think a bit of a pause in this cycle where investors are re-evaluating how they should be thinking about the growth prospects and the offsetting spend. And so I think this Alphabet, you know, kind of narrative feeds into that. So the initial knee-jerk reaction off of that significant capex number, $180 billion, you know, is relative to $120 billion, which was the consensus estimate for 2026. And so you get that knee-jerk selloff, and then I think investors go back and say, 'Hold on a second. You know, this is very positive for the long-term prospects of the business. We have to digest this a little bit, but growth here is outstanding.' I mean, that 48% growth in the cloud business is pretty amazing.
Yeah, 48% sort of blew my mind, too. I just would love to get your sense of what Wall Street's consensus is at this point on massive capex because, you know, throughout the year last year, these gigantic capex numbers seemed to be a real problem. Whenever you reported capex that was a lot higher than people thought, that Wall Street expected, it usually meant that there was some level of drawdown in the stock, at least initially. It seems that that's kind of flipped depending on who you are. I mean, Meta had a big capex announcement recently. This one from Google is probably the largest we've seen of any of the hyperscalers, at least this quarter. What do investors think about these kinds of numbers at this point? Is this something that makes them feel excited about AI, or is this like, uh-oh, we're in bubble territory?
Well, I'll tell you, for the infrastructure companies, it definitely validates the numbers that have been thrown around, you know, by companies like Nvidia and otherwise, in terms of if this spend is real. That's one point. You know, I think stock performance tends to be best in harvest mode. So, on the back of an investment cycle, when an investor can see the returns and the associated growth that comes on the back of an investment cycle, tends to be when stock performance is best. You have this $180 billion number, you know, by Alphabet. You have $125, I think, by Meta. Amazon's current estimate is $155 for '26. I wouldn't be surprised at all if it's closer to where, you know, Alphabet is. And so we're ending this period where, you know, 2023 was kind of the year of discipline, and that continued in '24. You started to lose it in '25, and now we're getting back into investment mode again. And so with that, I think, you know, expectations have to be a little bit more tempered, that returns will still be decent, but you have to climb that hill. And then, you know, the hardest period on this spend is probably '27-'28. So, you're looking at like a three-year horizon on these stocks.
You mentioned earlier that what's happening in software, software stocks just getting absolutely killed right now. You know, everything from Salesforce to, let's see, ServiceNow. I mean, all of the enterprise SaaS companies, their multiples are kind of collapsing right now, largely because of AI. But it's not totally clear what's happening. Can you just tell us what's happening in software right now and why these multiples are falling?
So investors are concerned about a few things. One is that, you know, the software companies are predominantly seat-licensed businesses. So to the extent that there's fewer seats because there's less labor required as companies incorporate AI, then that's not good for the business models. In addition to that, though, it's that AI itself, with some of the features that Claude, which is Anthropic's, you know, product, has been launching, displace the software companies themselves. I think there's some justification to it, you know, for why the multiples have come down. But I think what you're going to find is, you know, this industry is changing, evolving. You're going to have some mediocre businesses that get cleansed through this system because they weren't great businesses to begin with. And then you're going to have some software companies that incorporate AI features and functionality that validate their competitive position and do quite well. But, you know, again, you're looking at probably a one- to three-year period of investors figuring that out. Right now, the initial response is sell everything, and then I think investors will parse through it, and then you'll get winners and losers. So it's going to be a different software world, you know, in the future, but it doesn't mean that they're all losers.
Yeah, the reaction from the market, at least from my perspective, has been kind of reactionary, where it's like it does seem that there isn't a lot of clarity on which companies are well positioned, perhaps, for an AI-enabled world. They're basically saying, as you say, sell everything. To me, that spells potentially a buying opportunity, just the level of dislocation that we're seeing. I was wondering if you would agree with that as well.
Well, you know, the market hates uncertainty. So it's been many years since we've had this level of uncertainty in so many of these companies in terms of what the future holds. We had a good 10 to 15 years where all the same companies went up every single day, and everybody knew who the winners were. And now we're trying to resort the landscape to determine that again. And so uncertainty leads to, I think, lower multiples for a period of time and buying opportunities, you know, to the extent that you find the right company. Sorting through the rubble in software companies, I think, you know, can lead to some success, but with patience because it's going to take some time to figure it out.
All right, Scott Devitt, really appreciate your time. Thank you.
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We're back with Prof G Markets. Earnings season just revealed a clear winner in the GLP-1 battle. Eli Lilly's fourth-quarter earnings blew past estimates with revenue up 43% year-over-year. The company also raised its 2026 guidance to $80 billion, projecting 25% sales growth this year. The stock closed up 10% yesterday. Those results came in stark contrast to its rival Novo Nordisk, which warned that 2026 sales and operating profit will both fall. Novo cited its pricing deal with Trump to lower drug costs as the main reason for their decline. However, Eli Lilly signed the same deal, but they expect volume growth to offset the pricing pressure. Novo Nordisk stock closed down 18% following its earnings. Here to unpack these earnings and what is going on in the GLP-1 market, we're speaking with Jared Holz, healthcare equity strategist at Mizuho. Jared, thank you for joining us on Prof G Markets.
Thanks so much for having me. Appreciate it.
So, Eli Lilly and Novo Nordisk both report. Eli Lilly closes up 10%. Novo Nordisk crashes down 18%. Take us through these earnings. Why is there such a difference here?
When you've got one company growing very meaningfully in Eli Lilly and really seeming to not be losing any momentum. If anything, the business is getting stronger. And on the other hand, you've got Novo Nordisk that, for so many reasons, is seeing revenue degradation already in just the third year where these obesity treatments have been on the market and FDA-approved. So I think they're just going down two very, very distinct, different paths. One, you know, in a very positive way, and the other not.
What is the reason behind this revenue degradation, as you put it, at Novo Nordisk? Like, what's the issue? They've got the hot product. Why aren't things working?
