Three open recommendations in our flagship newsletter, Stansberry's Investment Advisory, reported earnings after the market close yesterday. So let's take a look...
(Normally, we share these updates with our subscribers in our monthly Portfolio Update. But my editors gave me permission to share them here.)
1) Let's get the bad news out of the way first: Alphabet's (GOOGL) stock fell as much as 14% this morning after the company reported third-quarter earnings. (You can view the earnings release here and slide presentation here.)
Revenue was $127.6 billion, up a remarkable 25% year over year ("YOY"). It was its 13th consecutive quarter of double-digit growth.
But earnings per share ("EPS") came in at $2.12, down from $2.87 YOY and well below forecasts of $3.02. Part of the miss was due to an unrealized loss on Alphabet's SpaceX (SPCX) stake after that stock fell during the quarter. But even adjusting for this, EPS of roughly $2.65 to $2.70 still missed expectations.
Google Cloud had a blowout quarter. Revenue rose 103% to $30.7 billion, and operating income more than tripled to $11.1 billion. The segment's margin rose to 36.2% from 23.7% a year earlier.
Cloud backlog reached $561 billion, up from $514 billion last quarter. And the company expects 55% of this backlog to convert into revenue within 24 months. So the capacity Alphabet's building already has signed demand behind it.
And the Gemini app passed 1 billion monthly users, with first-party models now processing nearly 32 billion tokens per minute – up 40% from last quarter.
But Alphabet's core Google Services had weaker results than expected. Revenue was $96.3 billion versus an estimated $98.5 billion. Search & other grew 12% to $63.3 billion, even though management cited the fastest search-query growth in five years. And that revenue growth is down from 19% and 17% the past two quarters.
Investors are concerned that search queries are accelerating while revenue growth is slowing. That means monetization per query is slipping – perhaps a sign of AI cannibalization. I doubt this is the case, as the company has seamlessly integrated Gemini into its searches. But it bears watching.
However, investors' biggest concern is Alphabet's huge and rising capital expenditures ("capex") to keep up with the other hyperscalers in the AI race...
Capex was $51.4 billion for the quarter, which exceeded operating cash flow of $42.3 billion. That translated into $9.1 billion of negative free cash flow ("FCF") – the second such quarter in a row from a company that used to gush cash.
Alphabet maintained its capex guidance for the year of $195 billion to $205 billion, which implies fourth-quarter capex of roughly $63 billion to $73 billion. For 2027, management said capex will increase significantly – the Bank of America (BAC) analyst expects about $300 billion.
To fund this massive spending and negative FCF, Alphabet is issuing some debt and quite a bit of equity. It has also halted its buyback for this year, resulting in diluted shares outstanding rising to 12.34 billion – up 1.2% YOY.
Alphabet's capex is breathtakingly huge and, frankly, I have no idea what the right number is for the company. But as I've written many times, I think management is smart to spend however much it takes to be one of the winners of the AI race.
As I discussed in my July 24 e-mail, I think the hyperscalers can leverage AI to grow their dominant businesses. So I'm willing to give them the benefit of the doubt. If Alphabet isn't seeing a return on its investment in capex, it can scale it back at any time.
Finally, let's look at Alphabet's current valuation...
With the stock this morning around $288 and normalized EPS expectations for this year at $15.15, it has a price-to-earnings (P/E) multiple of 19 times. That's roughly the same as the S&P 500 Index's current forward multiple... for a far above-average business.
My view today is still the same as it has been for many years: Alphabet is a great stock for conservative, long-term-oriented investors.
In fact, it could be one of the few AI winners that survives the bubble. And my friend Jeff Brown, founder of Brownstone Research, has identified another...
This California company's "super chip" exceeds Nvidia's (NVDA) on every metric. It could change the lives of millions of Americans... and open the opportunity of the decade for investors who get in early.
Yesterday, I sat down with Jeff to discuss all the details. But if you missed our special presentation, don't worry – you can watch a replay right here.
2) Moving on, Microsoft's (MSFT) stock was up as much as 2% this morning after the company reported strong results for its fiscal first quarter. (You can view the earnings release here.)
Revenue was $92.3 billion, up 19% YOY and beating expectations of $90.7 billion. Adjusted EPS was $4.89, up 18% and above estimates of $4.73. Operating expenses only grew 6%, so the company's fabulous operating margin expanded from 48.9% to 49.8%. And the company's backlog – "remaining performance obligation" – rose 73% YOY to $677 billion (though was flat sequentially).
Commercial cloud revenue grew 18% on an adjusted basis, and consumer cloud revenue grew 17%. For the first time, Microsoft disclosed the revenues for its Azure cloud computing business: $33.2 billion, up 48% YOY. That was higher than expected – and the company guided to 49% to 50% growth next quarter.
Like its hyperscaler peers, Microsoft is ramping up its capex – but not to as extreme a degree. It was $39.4 billion this quarter, more than double the $19.4 billion a year earlier, and management projects $50 billion next quarter. But operating cash flow was $58 billion, up from $45 billion YOY, so FCF was still a healthy $18.6 billion.
Revenue guidance for next quarter is $96 billion to $97.1 billion, slightly above expectations of $95.6 billion and representing strong 18% to 19% growth.
As for valuation, with the stock around $542 this morning and estimates of $19.71 for fiscal year 2027, the stock is trading at 27.5 times earnings.
I wouldn't call that cheap, but it's only a modest premium to the market for one of the greatest businesses of all time. So the stock is a comfortable hold here.
3) Lastly, Eli Lilly's (LLY) stock was up as much as 9% this morning to a new all-time high after the company reported another blowout quarter. (You can view the earnings release here.)
Revenue of $24.4 billion was up 39%, far surpassing expectations of $22.6 billion. And 66% of revenue was from the company's market-leading GLP-1 weight-loss drug, tirzepatide, marketed under the brand names Mounjaro and Zepbound. (I've shared many life-changing stories from my friends and readers about this miracle drug – archive here.)
Product volume rose 53%, which was offset by realized prices falling 15%. Lilly is deliberately trading price for volume and share. Yet margins are still expanding because of product mix and lower production costs.
In-process research and development (IPR&D) costs grew 23%, and marketing, selling, and administrative costs grew 14%. As a result, adjusted EPS was approximately $7.48 for the quarter – up 7% YOY.
The company's guidance was very strong, with revenues expected to grow 40% this year. From the press release:
Increased the midpoint of our 2026 full-year revenue guidance by $5.5 billion to be in the range of $91.0 to $92.0 billion and raised underlying non-GAAP EPS guidance for the full year by $4.07 at the midpoint, which was more than offset by $4.57 of acquired IPR&D charges from [third-quarter] business development activity, resulting in an updated range of $35.00 to $36.00.
Lilly is a juggernaut and, if anything, I expect growth to accelerate with the launch of retatrutide, an even more powerful GLP-1 drug.
I've discussed retatrutide in prior e-mails (archive here), and here's the slide on it from my recent presentation, which I shared in last Wednesday's e-mail:
As for valuation, Lilly's stock isn't cheap. At around $1,342 this morning, it's trading at 37.8 times the $35.50 midpoint of management's guidance for this year.
But analysts expect EPS to grow to $47.34 next year, so it's trading at a more reasonable 28.3 times forward estimates.
I rarely recommend a stock trading at these multiples, but I'm making an exception here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.