The Mag7 earnings season is about to kick off with Microsoft, Meta, and Tesla on Wednesday, followed by Apple on Thursday. Then the focus will shift next week to Alphabet on Tuesday and Amazon on Thursday. The last Mag7 company to report, perhaps the most important by far this time around, will be Nvidia on the 26th of February.
The numbers are going to look great, as usual, and everyone is going to beat Wall Street’s ridiculously low expectations set to make their fat clients look great, as usual. However, this time around, for the sake of keeping a shred of reputation, Wall Street analysts will not be able to refrain from asking uncomfortable questions to Mag7 companies’ management.
After the DeepSeek “shock,” the focus will not only be on the amount of future CAPEX but on how that will be spent to deliver real (not made up anymore) ROI. In 2024 alone, Microsoft spent ~55.7 billion USD, Meta ~40 billion USD, and Apple ~10.8 billion USD for a total of ~105 billion USD. What was the return of all that money that, for the most part, especially in Microsoft’s and Meta’s cases, was spent to acquire Nvidia GPUs? ZERO. However, while before, Mag7 companies could dangle unrealistic projections in front of investors about how much revenue all that CAPEX would generate, the fact that DeepSeek made its model open source and accessible for negligible costs to the public dramatically spoiled their gameplay. Why does CAPEX matter so much nowadays? That’s how large companies can continue feeding investors’ expectations that then translate into forward P/E ratios that don’t look as bloated as current P/E ratios do, hence justifying why investors should continue owning shares at very expensive valuations. However, the trick is hardly going to work going forward, with investors surely more adamant about seeing those billions being redistributed as dividends, allowing them to redeploy that capital in alternatives that have far better growth potential.
The amount of accumulated CAPEX and how it can be realistically monetized will also be under big scrutiny going forward. Why? If those investments end up not delivering the amount of revenues promised in the past, then companies will be forced to significantly write down the value they accounted for in their balance sheets. This will inevitably cascade into billions of USD of losses in the income statement.
Startup investments will also be under the spotlight, especially for Nvidia and Microsoft, which were very active in splurging billions of USD on this front in order to keep expanding their revenues round-tripping scheme:
- MICROSOFT REVENUES “ROUND TRIPPING” PONZI SCHEME IS NOW TOO BIG TO HIDE – THE TRUTH FROM THE CASH FLOWS
- MELLANOX, THE CORNERSTONE OF NVIDIA-MICROSOFT REVENUES ROUND-TRIPPING SCHEME
- THE SMOKING GUN THAT PROVES HOW OPENAI IS MICROSOFT’S REVENUES LAUNDROMAT
- HOW TO FABRICATE REVENUES FOR DUMMIES (A GUIDE)
Will billions and billions of USD of investments in startups with questionable business plans, even before DeepSeek took Silicon Valley by shock, continue to be justified? I sincerely doubt so.
To conclude, even if the vast majority of the Western crowd is still in denial, DeepSeek represented one of those moments that changed the course of financial history, and things will not be the same going forward. Failing to recognize this and continuing to live in a world that doesn’t exist anymore can be very dangerous, which is why I suggest everyone keep an open mind on new developments. Falling into the recency bias (which means expecting the future will be the same as the recent past) can ultimately result in incredible investment losses similar to what older generations experienced during the DotCom bust.
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