The AI Race Is Becoming a Cash-Flow War
The Weekend Edition is pulled from the daily Stansberry Digest.
The AI boom (or bubble) isn't popping yet...
Nvidia (NVDA) – the backbone of much of the AI boom – reported another round of quarterly earnings on Wednesday.
Revenue for the second quarter increased 106% year over year, beating Wall Street's estimates. And on an earnings call with analysts, Chief Financial Officer Colette Kress said revenue is forecast to grow 70% in the next fiscal year ending in January 2028.
The stock surged roughly 9% following the release – approaching a new record high and trading at a $5.5 trillion market cap. And other AI players enjoyed a lift.
For example, Salesforce (CRM) and CrowdStrike (CRWD) were up more than 20% on Thursday after citing demand growth in their earnings reports.
The tech sector of the S&P 500 Index was up 3.2%, while the other 10 major sectors were down. It was still enough for a nearly 1% overall gain in the U.S. benchmark and a 1.5% gain in the Nasdaq Composite Index.
As Stansberry's Investment Advisory editor Whitney Tilson explained, Nvidia's report wasn't necessarily a "blowout," nor one without questions. CEO Jensen Huang said the company "never" forecasts revenue a year out but is doing so to indicate long-term demand.
That 70% number is well above previous expectations of 45%, which is impressive. But the mechanics of the math, rooted in future "commitments," make for high expectations that could become a liability "if (or when) the AI bubble bursts," as Whitney wrote.
Elsewhere, Meta Platforms (META) has agreed to a deal...
In March, a Los Angeles jury found Meta and Alphabet (GOOGL) negligent in a case of a 20-year-old woman blaming the companies for her depression and anxiety.
She was 6 years old when she started watching YouTube, owned by Alphabet... and 11 when she joined Instagram, which is owned by Meta.
She was awarded $6 million – relative pennies for a Big Tech company. But it was the first time a jury found the companies liable for design features – like "doomscrolling" and constant notification – that were deliberately engineered to be addictive and harmful to young teens. And it opened the door for more legal action.
This month, 29 state attorneys general tried another, larger case against Meta in federal court. And on Wednesday, the company made a deal...
The Biggest Fine in Social Media History
Meta agreed to pay up to $18 billion to settle claims that it built Facebook and Instagram to keep kids hooked, while sitting on knowledge about the damage to their health. It's the largest settlement payout in the tech industry so far.
Meta admitted no formal wrongdoing, but the deal comes with promises to make some major changes.
Going forward, Meta says users aged 13 to 17 will get a default two-hour daily limit across both Facebook and Instagram. The apps will go dark from midnight to 6 a.m. under a new "night mode," and a "school mode" silences notifications during class. "Like" counts and "beauty" filters will also get switched off.
Adults are the only ones who can undo these settings. Meta has until late February to have everything up and running. And an independent auditor, monitored by the states, will hold the company accountable.
Meta's Bill Comes With a Catch
Only about $12.7 billion of this $18 billion is guaranteed. Meta will only pay the remainder if the company's competitors, TikTok and YouTube, each pay an additional $6 billion and adopt similar rules. Neither has plans to do that right now. Plus, all of this assumes Meta knows which of its users are teenagers.
It doesn't, at least not reliably. The company has committed to better age detection (aided by AI) and audits of how well that might work. But if kids or teenagers are using adult accounts (by, say, signing up with an adult birthday, which isn't that hard), none of this plan is enforceable.
Meta's preferred solution is to make Apple (AAPL) and Alphabet vigorously verify ages in their app stores, but neither does.
Then there's the math...
Meta trades at nearly a $1.5 trillion market cap.
The company warned Wall Street that losing to just four of these 29 attorneys general could cost it more than $1 trillion. Instead, it's "getting off easy" by paying $18 billion at most... and not all at once. The money is set to be paid over 10 years.
As for how much business is actually at stake, nobody outside Meta knows. But it's probably not as bad as it could be.
Some analysts say Meta generates more than $10 billion in revenue from minors. But Citi says teens are less than 1% of the top line. The financial-services business also points out that the average teen spends about an hour a day on Instagram, half of what the new limit allows.
Wall Street appears to understand this math. Shares of Meta finished the week up about 4%.
That doesn't mean Meta is a market success story...
Meta reported a mixed second quarter at the end of last month. Quarterly revenue beat consensus Wall Street estimates, but earnings fell short.
Meta also indicated it will spend more this year. It now forecasts capital expenditures ("capex") between $130 billion and $145 billion. That creates a higher midpoint than Meta's earlier prediction of $125 billion to $145 billion in 2026 capex.
That's more spending in exchange for a lackluster payoff...
Specifically, Meta's cash flow is taking a hit from its heavy AI spending. Meta reported about $780 million in free cash flow ("FCF") in the second quarter... down from more than $8.5 billion a year ago.
To be clear, that's a 90% year-over-year drop. It also marked the lowest nominal quarterly FCF for Meta since the metaverse debacle in 2022.
The AI boom still has room to run... and Meta has survived a big hit to its social media branding before. But the market has changed. It isn't happy with big AI investments alone.
This trend is splitting into winners and losers. Not every company – even among the hyperscalers – is going to come out on top.
All the best,
Corey McLaughlin
Editor's note: Big Tech poster child Elon Musk is already starting his next big venture... and Joel Litman, chief investment officer of our corporate affiliate Altimetry, believes a small group of companies stands to benefit most.
Joel's research has identified a powerful signal that appeared before the biggest moves in Nvidia, Tesla, Apple, and other market leaders. Now, it's firing again. You can learn which stocks he believes could be next – and how to get in ahead of the crowd.