Hyperscalers Crash After Earnings. Is it a Sell?

Summary

The presenter argues that negative free cash flow (FCF) at Amazon, Meta, and Alphabet is not automatically a sign of financial distress. He says operating cash flow and core businesses are growing, while FCF has fallen mainly because of heavy investment in AI data centers and other growth-related capital expenditures.

He views the sell-offs as potential opportunities for long-term investors, while cautioning that prices could fall further in the short term.

Market Reaction and Business Results

Alphabet / Google (GOOGL)

Shares fell 13% after earnings. Revenue grew 25%, operating profit 30%, and operating cash flow 19% over the last 12 months.

The presenter attributes a 13% quarterly decline in operating cash flow to an EU fine and inventory built ahead of TPU sales, with customer cash expected later.

• Search growth slowed from 17% in Q2 to 12% in Q3. The presenter says 12% remains within Google’s pre-AI historical range of roughly −2% to 13%.
• He cites currency effects, weaker spending by some Asia-Pacific retail advertisers, and post-event normalization after a strong June. He also acknowledges that AI searches are currently monetized less effectively.
• Google Cloud growth was 103%, and its margin rose from 23% to 36%.
• EPS fell 26%, largely due to unrealized losses on Google’s SpaceX investment, according to the presenter.

Meta Platforms (META)

Shares fell as much as 12%, then recovered to a 7% decline. Revenue grew 26%. Reported operating income fell 37%, but the presenter says it grew 11% excluding a lawsuit-related charge, described in the subtitles as about $9.89 billion.

He also cites a planned $37.5 billion equity raise, which he estimates would dilute existing shareholders by 2.4%.

• Ad impressions rose 10%, and ad prices rose 14%.
• Daily active users reached 3.64 billion, up 3%.
• Q4 revenue guidance was $73–76 billion.

Amazon (AMZN)

Shares fell 7.8% after its report. Revenue grew 13% excluding currency effects, operating profit grew 61%, and operating cash flow rose 29% over the last 12 months.

• AWS grew 39%, its fastest pace in five years. Management reportedly forecast growth above 40% in 2027 and 2028.
• Operating margin reached 13.9%, described as a record.
• Q4 guidance was 12–16% sales growth and $28.5–33.5 billion in operating profit.
• The presenter attributes lower EPS partly to a $9 billion gain from Amazon’s Anthropic stake in the prior-year quarter.
• He says Prime Day’s move from Q3 to Q2 affected the revenue comparison and cites a $0.9 billion foreign-exchange loss.
• Advertising growth slowed to 12%.

How the Presenter Evaluates Negative FCF

FCF is defined as cash flow from operations minus capital expenditures (CapEx). The presenter’s framework is:

• Potentially concerning: FCF falls because operating cash flow is deteriorating, suggesting the business is generating less cash.
• Not necessarily concerning: Operating cash flow is growing, but FCF falls because the company increases investment in growth. He classifies hyperscaler spending on data centers and AI infrastructure as development CapEx, which he expects to expand future revenue, profits, and cash flow.

He contrasts development CapEx with sustaining CapEx, such as ongoing aircraft replacement and repairs at airlines, which he regards as a less attractive use of cash.

He recommends assessing whether a setback is temporary or cyclical versus long-term or structural. In his view, temporary problems may create buying opportunities, while deterioration of a company’s competitive moat could justify selling.

Normalized FCF Valuation Approach

When unusually high growth CapEx depresses current FCF, the presenter says to use normalized FCF instead:

1. Take current operating cash flow and subtract the average CapEx over the prior five years.
2. Project that normalized FCF, then discount it to estimate intrinsic value.

He cites FactSet consensus for Google’s initial forecast of 18% growth for five years, but says he uses a more conservative 15% assumption for years 6–10.

Valuations and Trading Levels Cited

These are the presenter’s estimates, not guaranteed price targets.

• Alphabet: Normalized FCF of about $117.651 billion; estimated intrinsic value around $370 versus a cited share price of $283, or about 24% undervalued. Technical support levels cited: $274 and $243.
• Meta: Normalized FCF of about $79 billion; estimated intrinsic value of $1,000–$1,200, while a more conservative valuation is $900. He calls the shares about 31% undervalued using the conservative estimate. Support cited near $150.
• Amazon: Estimated intrinsic value around $233; support cited near $226. The presenter mentions a possible 6.8% near-term decline but says he cannot predict the price with certainty.

The presenter emphasizes that estimated intrinsic value does not mean a stock will reach that price soon. His stated approach is to buy in tranches rather than invest all at once, potentially adding near support levels and averaging into a position.

AI Investment-Cycle Framework

The presenter outlines three phases:

1. Phase one: AI “enablers,” including semiconductor and AI-power companies, capture a large share of profits. Hyperscalers face heavy CapEx and depreciation pressure.
2. Phase two: Hyperscaler CapEx growth slows, potentially weighing on semiconductor and AI-power companies, while cloud and AI revenue benefit from the larger installed base.
3. Phase three, beginning in 2029: AI-adopting companies in healthcare, consumer products, and industrials may see the strongest margin growth.

Assets, Sectors, and Instruments Mentioned

• Stocks and tickers: Alphabet/Google (GOOGL), Meta Platforms (META), Amazon (AMZN), Microsoft (MSFT), Nvidia (NVDA), and AMD (AMD). Oracle is mentioned in connection with valuation comparisons, but the precise reference is unclear.
• Other companies or investments: SpaceX, Anthropic, and Claude.
• Assets and business areas: TPUs, semiconductors, AI infrastructure and power, data centers, cloud computing, search advertising, social-media advertising, and Amazon retail/Prime Day.
• Sectors: Airlines, healthcare, consumer products, and industrials.
• No bond, commodity, or cryptocurrency investment strategy is discussed.

Disclosure and Sources

No explicit “not financial advice” disclaimer appears in the subtitles. The presenter cautions that his valuations and support levels do not predict short-term prices and that stocks may fall further.

The presenter is Adam Khoo; the subtitles also render his name as “Adam Hu.” He refers to company earnings and financial statements, FactSet analyst consensus estimates, valuation calculations, and technical charts.