Remy Blaire: Today's capital markets segment is brought to you by pocket earnings season officially kicks off next week. Wall Street is still focused on one multi-billion dollar question, and that is one world record infrastructure cap payoff while platform giants you face over massive data centers spending capacity constraints at. And do prove enterprise cloud demand is robust and market jitters surrounding the pace of an adoption are already complicating the picture we saw in video backed AI cloud provider from grid scrapping Australia's largest IPO in decades. Well joining us to break down his outlook as well as a way. And on what we're seeing across markets is Daniel Flax, senior research analyst and Managing Director at Neuberger. Happy Friday, Dan. Thank you so much for joining us. We are counting down to earnings season and Wall Street does remain focused on massive CPE buildouts across hyperscalers. So when does this record in press spending actually translate into sustainable margin expansion?
Daniel Flax: Good morning, Remy. Great to be with you. I think you're, you're going to see this continued multi-year investment cycle uh uh uh uh grow through the end of the decade and into early next decade. What's happening is you're seeing the returns in the cloud businesses. You're seeing Google Cloud accelerate, uh, Amazon Web Services, Microsoft, Azure, and of course you have AI labs investing aggressively as well. And so the returns are appearing in the enterprise world. You're able to Quantify them there. In other areas, for example, digital advertising, you're seeing those get those platforms get infused with AI. You're seeing, for example, meta with the Muse agent, and so a lot of that remains very early, but we, we like select names like Meta, like Nvidia, like Google or Alphabet as they continue to innovate, uh, invest, and I think that translates into healthy growth over the next 1 to 2 years.
Remy Blaire: Yes, and I'm glad you mentioned some specific names. I do want to expand on what you just said, Dan. So the question also is can Google Alphabet sustain its core search monetization as well as cloud momentum, especially when it comes to some names that Have yet to go public including OpenAI as well as anthropic and while we're on this topic, opaque revenue reporting from some of these startups is raising questions about how true enterprise AI demand is measured. So what do you make of this?
Daniel Flax: So when I look at the search market in general, what's happening is this is actually an expansionary period because if one thinks about what you can do now with search on Google or other platforms, you can ask longer, more complicated queries and you get value from that. And so there's value created on the user side and there's value. Created on the advertiser's side. And so we'll have to see how it all shakes out in terms of what goes to a bot, uh, like Gemini, for example, uh, versus CoreSearch and clearly this, uh, fierce competition, uh, from OpenAI, uh, from Microsoft and others. But I think that market remains relatively, uh, healthy and, and the key is really the innovation. If I look at some of the other areas, uh, enterprise, uh, specifically, when we talk to buyers, there is a lot of value, but it's incredibly early because a lot of their, their data needs to get, uh, cleaned up and, and, and really, uh, infused with AI to, to realize the value. So that's a multi-year journey on the enterprise side. If you pull it all together though, If you look at a company like Google as one example, this ability to infuse artificial intelligence across core search, across YouTube, across their cloud, really this broadening of their growth drivers, I think that sets them up well. So competition is certainly going to remain fierce, but the key is to innovate, invest, and really execute on product cycles.
Remy: Yes, and a lot of moving parts here. I do want to get your perspective on the cloud front in particular, which you touched upon. You point out that AWS does remain capacity constrained, which also does show these massive investments are paying off. But how quickly can Amazon capitalize on this cloud demand and why is the market still undervaluing its high margin ad business?
Daniel Flax: So, so Amazon has a number of, of drivers inside their cloud business and in fact, if I look at the core business that remains healthy. The, the AI revenue, that remains incredibly robust. And then they have opportunities which they're capitalizing on to use their silicon, uh uh their ranium platform is one example, Graviton is another. And so there's Seeing robust demand, incredibly strong demand for their silicon, and so that platform remains the largest across the and so it does have slower growth relative to some of its competitors, but you're seeing the acceleration. The company is continuing to help customers migrate their workloads onto the platform and really derive value from that on the consumer. Side, their concerns, uh, given the pressure among some pockets of the consumer, and I think that will be with us in the, in the near term, higher, uh, oil, uh, excuse me, gasoline prices or higher interest rates, those are factors. But if I then look at the advertising business, it's actually relatively early at approximately $80 billion run rate growing very strong double digits. They're putting more and more. Tools in advertisers' hands, of course they have video, they have sports, and so they have a whole host of opportunities and their ability to tie that into their data is incredibly valuable for users while of course getting customers their orders the same day in many cases or next day is a very compelling value proposition. So we continue to like that name.
Remy: And Dan on this Friday morning, I do want to shift our focus over to hardware in particular looking at Apple. So in New York morning trade, we're looking at shares of Apple down about 2%, but keeping in mind here to date that stock is up about 23%, and I understand that you expect Apple's expanding install base as well as Siri AI upgrades to drive a healthy replacement cycle, but we have to keep in mind that higher memory costs do remain a headwind here, so. How can the company effectively navigate some of the margin pressures while also driving some premium demand for some of the upcoming devices, including the Duo?
Daniel Flax: So, so we have a different launch schedule underway and so there are reports about uh uh uh demand uh not being as strong and Apple is cutting supply. Typically what happens is, as you move through the fall period, the company works out where true demand is and then adjusts supply accordingly. This year though is actually a bit different. You had the pro models uh launching last month and as you mentioned, the duo is coming later this month, and the base version, the iPhone. 18 is likely to only get replaced next spring and so you have a different cadence around the product cycles with of course higher prices to offset the memory headwind. The memory headwind is something that's going to be with us, I think, for the next several quarters. What you're seeing is that the company is looking to work with its suppliers to offset it where possible. They're raising price. I expect that to have some impact on units. What's important though, if Step back and think about the broader story here as well as the margins. You have a very strong services business. You've got growth in the install base and so even as iPhone sales are not as strong perhaps in the next couple of quarters, they are able, given the higher ASPs to see healthy, healthy revenue as I look at the next few quarters. The key in this story, in my view is The broadening, you're seeing strength in Mac, um, wearables in my view remains relatively early. And so if I pull all of that together, you have moderating iPhone growth, you have services that's healthy. I think they're going to be able to uh uh offset some of the margin impact and at the same time, they should be able to grow earnings per share through this period. And so I think that will help drive outperformance for the stock as I look to the year ahead.
Remy: And speaking of which, I do want to get your perspective on software disruption as well as agentic AI. I know you mentioned this off the top, but when it comes to AI agents creating value for customers across names such as Microsoft as well as Meta, how effectively do these capabilities for these names protect their platforms from software commoditization as well as some of the startups out there?
Daniel Flax: I think the shift to Agentic offers a lot of opportunity for these, for these companies to build on top of what they already have. Now, clearly there's a lot of competition uh from anthropic, OpenAI, and others. And so what I would expect you'd see with the likes of, for example, Microsoft or Salesforce or ServiceNow is that they are taking uh the, these very, very powerful and Valuable enterprise platforms and they're extending them into the agentic era. It's relatively early, but what we're seeing so far is very a lot of innovation and healthy demand for these newer offerings. The general or the question in the debate around commoditization, I don't think it dissipates anytime soon, but what I do expect is that if I take a company like Microsoft, They have their Azure business, their office platform, and they are transitioning their customers very effectively into the future. The ServiceNow is doing a very good job as well, and so this remains early, but to date these companies. In my view, are innovating, they're investing, and I think um Microsoft, ServiceNow, Salesforce, among others are going to navigate this and ultimately come out stronger and more valuable uh partners to their customers as I think about the next 1 to 2 years.
Remy: And finally, Dan, before I let you go, I do want to zoom in on Nvidia. So this is a name that is creeping closer to that $6 trillion market cap club. So on the infrastructure side, I understand you're maintaining that Nvidia's developer ecosystem, as well as software IP preserves its moat as Ruben Ram. So tell us why you have confidence that Nvidia's hardware as well as software lead will hold throughout the upcoming year.
Daniel Flax: When I think about what Nvidia uh has been doing very effectively is that they're executing on their data center roadmap. You had Blackwell, now you have Rubin ramping after Rubin, we'll have Feynman. And so, you, you, you have this acceleration in the product cycles and you have new offerings on the CPU side, for example, Vera. And so that helps them extend into new workloads and really expand the addressable market. What's important is that as they continue to add capabilities into each platform, they bring down the total cost of ownership for their customers and drive returns for those customers that keeps the customers continuing to invest with Nvidia. A key part of the overall story or really the power of their ecosystem is that they have several million developers and the number continues to increase who are writing to their platform and so the libraries, the tools, the software frameworks, that is an incredibly important part of the value that it creates. And so when a developer goes on to the uh Nvidia platform, they're able to harness that and anything they, they work on can be used across Nvidia's platform. So that is somewhat invisible, but that's really part of the glue that, that uh binds their ecosystem together and makes it incredibly powerful. So it's the systems, it's the chips, it's the Whole data center infrastructure with the software and the developer tools on top that really make this an incredibly vibrant ecosystem. The business is still cyclical, of course. They're seeing extraordinary growth and that may well remain lumpy, but I think the company remains extremely well positioned over the next 1 to 2 years.
Remy: Well, Dan, I appreciate your time this morning. We will have to leave it there, but a lot of food for thought ahead of the weekend and of course as we head into the earnings season. Appreciate your insights as well as your time. Have a great weekend.
Daniel Flax: Thank you.
