Mad Hedge Technology Alerts!
I am not saying that Google’s (GOOGL) earnings report will save the market; the market isn’t just GOOGL.
However, the company demonstrated there is still some positive performance out there in the tech sector when many out there are having a hard time.
It is clear that we are about to embark on a journey where big tech actively pulls the levers of shareholder returns to get over the low bar of expectations.
It is true that Google has not innovated for years and is still relying on its cash cow called the Google search engine, to drive ad revenue.
At some point, there will be competition as proprietary technology becomes beatable.
Competition is prompting the company and its rivals to spend heavily on infrastructure, research, and talent. While Google benefits from AI startups spending on its cloud and business tools, it’s also racing to present an answer to popular conversational AI chatbots, which consumers are beginning to think of as an alternative to using Google Search.
Google’s beginning of the answer to that threat — its “AI Overviews” and “AI Mode” in search, in which summarized responses are drafted by generative AI and highlighted ahead of Google’s web links — have seen mixed success. Meanwhile, Google’s AI changes to search have decimated traffic to independent websites across the open web.
Google Cloud brought in an operating profit of $2.18 billion, indicating that Google may be nudging out more profits from Cloud even as sales slow.
The cloud unit is so far the clearest indicator of how the AI boom is contributing to the company’s sales, as startups that require more computing power for their work become customers. Though Google Cloud still lags in third place behind Amazon and Microsoft offerings, it’s one of Alphabet’s most important growth areas.
Alphabet’s board authorized a $70 billion share buyback and boosted its dividend by 5%, to 21 cents a share.
With Google’s search business still holding up at a tough time in global business, I must conclude that Google is doing better than expected.
I believe that we will see a consolidated trend in 2025 of big tech dipping into their huge cash reserves to give back returns to shareholders. Google increasing its dividend by 5% is just the beginning, and we expect bigger returns as we move to the latter part of the year.
There is nowhere to invest in innovation right now in technology, which is why management is quick to buy back stock.
If there is some great project out there, management is keeping it close to its vest.
The long-term problem is that when you fire all the Americans with high wages who secured the company’s success to this point, replacing Americans with cost-cutting employees from India won’t deliver the same amount of innovation as the past in a mature environment.
American tech is supposed to set the bar in innovation, and now they are no,t which is why China is rapidly catching up to Americans on all cutting-edge technology, whether it be EVs or chip manufacturing.
Google is no longer a growth company, and that hurts the stock price.
We could experience a bear market rally that could propel Google along, but that depends on the whims of global politics, which Google has no control over.
If you look at the risk/reward scenario, Google is worth a bullish trade after the wild pullback.
Mad Hedge Technology Letter
April 25, 2025
Fiat Lux
Featured Trade:
(THIS TECHNOLOGY IS A FLOP)
(META), (AAPL), (MSFT)
Meta (META) cutting staff in its virtual reality and augmented reality divisions means uncertainty about future products originating from these places.
The juice has not been worth the squeeze.
I think everyone remembers when Founder Mark Zuckerberg had those goofy metaverse commercials depicting him as an avatar when he debuted the company name change from Facebook to Meta.
Well, the metaverse project isn’t working, which is why he’s firing staff from those projects.
The metaverse division has underdelivered and overpromised.
This lethal cocktail of failure is finally forcing management to cut off the fat from its body.
VR and AR are now losing billions of dollars per year, and as the business environment turns more pragmatic, these experimental projects are thrown out for good.
META said its Reality Labs unit recorded an operating loss of $4.97 billion while generating $1.1 billion in sales.
A nice quarterly performance of minus 3 billion dollars has forced management to make some tough decisions.
Now, the AR and VR divisions will be gutted.
Reality Labs is Meta’s unit that makes the Quest family of virtual-reality headsets and Ray-Ban Meta Smart Glasses.
Meta CEO Mark Zuckerberg kick-started his company’s VR endeavors in 2014 when it acquired the startup Oculus for $2 billion. Since then, Zuckerberg has characterized VR and AR as central to his plans to develop the futuristic digital world known as the metaverse, which he has said represents the next major computing platform.
Reality Labs has piled up an operating loss of more than $60 billion since 2020.
The losses cannot just be swept under the carpet.
Meta last week said it would invest between $60 billion and $65 billion in 2025 capital expenditures to expand its computing infrastructure related to artificial intelligence.
Even this AI infrastructure build-out is questionable at this point, as other big tech firms pull back from this type of investment.
Meta released its latest VR headset, the $299 Quest 3S, during its September Connect event and pitched the device as a way for people to watch movies, play games, and work out in VR.
Microsoft (MSFT) has lost at least $5 billion on HoloLens since the launch of the first model in 2016.
The Microsoft HoloLens is a mixed reality headset that allows users to overlay digital information onto the real world, creating a blended experience of physical and digital environments.
Microsoft’s withdrawal from the market for augmented and virtual reality hardware leaves competitors such as Apple and Meta with a less crowded field on which to compete.
Apple (AAPL) is another company that has bet on AR and VR.
In short, VR and AR have been money pits that suck up investment dollars, but deliver nothing in terms of profit.
Whether it is Meta, Apple, or Microsoft, they have all struck out at this technology and will need to embrace the reality that consumers don’t want Google-type technology on their face to interact with a screen.
AR and VR divisions should be buried in the graveyard of attempted technology that people aren’t interested in.
Back to the drawing board…
