Michael Burry Warns About The Stock Market Again

Welcome back everyone. Today on the Joseph Carlson show, the famed short seller Michael Burie from the big short is at it again. He recently just revealed that he took two massive short positions against the two companies that most resemble the AI boom, Nvidia and Palanteer. Michael Bur has bought put options against these companies. And his rationale for doing this is not because of a massive market bubble. Rather, it's far more specific.

Back in 2007, Michael Bur thought that the mortgages, the mortgage products, in fact, the CDOS's collateralized debt obligations were going to go bankrupt, that they could not pay on those obligations. And Michael Bur was correct in that case. Now, in this AI frenzy, Michael Bur is betting that the hyperscalers, the companies that you know and love, the big tech companies, that they're overstating their earnings by understating their depreciation. Basically, what Michael Bur has just said in the past week is that these companies are extending the useful life of their GPUs, chips, and servers well beyond when they're actually useful. They've extended them from around 2 to 3 years to now 4 to 6 years. And they've depreciated these assets for longer periods of time. So, by understating their depreciation, they're boosting their net income, boosting their earnings per share, and boosting their stock price. This is a big allegation for Michael Bur. It's a specific accounting allegation and it's one that Michael Bur says is one of the most common forms of fraud in today's market. So he's alleging that big tech and these AI companies are committing accounting fraud to boost their earnings. He has claimed that so far they've understated their depreciation by about $176 billion. So this is a massive impact across these companies and it's led to this massive bull market that we're in. We know that the market today is being led by only a few companies. Outside of the top 10 companies, there's not that many that are doing well in the S&P 500. In fact, most companies are doing poorly. The market is being led by a few big companies, and those big companies are the ones that Michael Bur has targeted.

In this episode, we're going to be looking at this entire case. We're going to be going through it, specifically what Michael Bur's claims are. We'll be examining them. We'll be going over what depreciation is, why these companies engage in this, the difference between net income, the difference between earnings, and the difference between cash flows. We'll be going over the accounting claims that Michael Bur makes, whether or not investors should be concerned about these accounting claims, whether or not there's any truth to them, and especially as an investor that's invested in many of these companies. I own Google, I own Amazon, I'm in some of these companies themselves. How should we view this news? Because Michael Bur is someone that although you might want to ride off as just being bearish all the time, he doesn't make bets like this that often and so far he has a pretty good track record. So we'll be going through everything. What's fact, what is speculation and what Michael Bur may be missing in his analysis.

Now, of course, we have some other news to get to. Mark Mahaney just recently highlighted his top three picks. We're going to be going over all three of them, going over why he's so bullish on these three companies. Amazon Prime Video released a metric of how much ad reach their platform has. It now has 315 million ad viewers. So, Amazon Prime has grown into a juggernaut of a streaming service. We'll discuss these metrics. Whimo has made another big technological advancement, another achievement in robo taxi, being the first one to offer freeway robo taxi rides in San Francisco and Phoenix. We'll be going over this as well. And then finally, we have another fail of the week. In this case, it is a LinkedIn post of an AI founder who admits in a lengthy post on LinkedIn that his business originated with fraud. He basically admitted that he started the company by lying to all of his customers. That's not something that you see people do frequently on LinkedIn. So, he'll be going over it as well. So, we have a ton to get to in this episode, a lot to go over, and we kick things off today by going over Michael Bur's short position and his claims of accounting fraud from the big tech companies.

Now, we know that Michael Bur has not only spoken about this. A lot of people say things and they talk about market bubbles, but it's rare that you see someone back their words with their actions and especially their money. And that's exactly what Michael Bur is doing. He took a short position against Palunteer and Nvidia. And Michael Bur has been short companies here and there throughout the past. So, you may be saying, Joseph, why is this even news? Michael Bur has frequently short different companies. And while that's technically true, the magnitude of this short position is much greater than anything he's done in recent history. This is a massive short position, almost a billion dollars. And you can see the news reaction here. He's not only taking a short position, but he's also very specific and critical and targeted with this short position. He's targeting Nvidia and Palanteer, two companies that are the most emblematic of the AI future. What companies are more loved than Nvidia and Palanteer? They're like the best AI companies in the world. The ones that have pushed everything forward. Alex Karp, Jensen, these leaders are the ones leading this AI push. We've already done videos about how basically Nvidia is the central bank of the AI revolution. They have deals with everyone. They're funding everyone. They're supplying the chips to everyone. They're the one behind this whole thing. Then you have Palunteer which trades at a higher valuation than any company ever representing the fast growth, the operating leverage, the customer growth, the growth of AI being implemented throughout the world. These two companies are not only investments, they're symbols. They're symbols of AI exceptionalism within the United States. And so anytime someone bets against them, says that you're making a mistake if you're invested in these companies, that person's not going to be that popular. In fact, you'll see a lot of criticism launched at Michael Bur continually. People saying that he's never been really right about anything. He got lucky one time with his big short bet. Calling him crazy. A lot of people are still today calling him crazy.

Now, I've gone over Michael Bur's past before, but Michael Bur is an exceptional investor. Even prior to the 2007 crash, even prior to those banks going under, which he made a 7x return on by shorting them. Prior to that, he had a 200% plus return while the market was flat for 5 years. Michael Bur has a long history of beating the market and doing so in a manner where people are highly critical of his thoughts and his opinions on different companies. In 2007, he was ridiculed for betting against mortgages. They seemed like the shest bet that could be made. Why would anybody be crazy enough to bet against mortgages, against people paying their own houses in the United States? Yet, he did so anyways. He lived through this scorn and through all of that heat for a prolonged period of time until those positions paid off. So, Michael Bur is someone that is used to being disliked. He's someone that's used to being criticized. He doesn't mind it. And you're seeing these criticisms come in once again.

When we look at how these leaders are reacting to this news, we can take a look at Alex Karp and his reaction to Michael Bur shorting his company. >> Being short is is a very difficult place to be because you can lose everything, right? You can drive these people into the ground. Michael Bur put a really big bet on. It's almost a billion dollars. It's $912 million. That's a big step for him to put into that. What when you say you redouble your efforts, what do you do? What do you go back in? Um, well, first of all, he's it's like he's actually putting a short on AI. So, the way I read it was us and Nvidia, and it's like he's >> My biggest position is you though. I just Okay. So, and and then by the way, with the shorts, it's very complex. It's not even clear that I honestly I think what is going on here is market manipulation. We delivered the best results everyone anyone's ever seen. It's not even clear he's not doing this to get out of his position. I mean, these people, they claim to be ethical, but you know, like they're they're actually shorting one of the great businesses of the world. And I'm not against shorting as a matter of theory, but I'm just saying pick something that is not doing a noble task. And you know, it's us against them and that's a good position for us.

Alex Karp is taken aback by Michael Bur's short position. He's highly critical of it. He degrades Michael Bur's character. And you'll notice that Alex Karp also hits at one of the core points of Michael Bur short, that he's unAmerican, that he's shorting one of the great American companies. How could you short one of the great American companies? You have a company like Palenter. Don't you want it to succeed? That was very similar to Michael Bur short against the housing market in 2007. Many people came to Michael Bur. They said, "You're shorting mortgages, the US economy. You're shorting America. How could you do that? Are you Aren't you American? Aren't you patriotic? Why are you shorting America?" You hear the same type of thing. Now, Alex Karp continues on to defend his company, highlighting how good of a company it is, the type of metrics they have, and the reason that their high valuation is justified. I I mean, look, when you're printing a rule of 114, again, people who aren't technical, I think roughly a an incredible score, like an Olympic grade score on rule of 14 is like 50. I mean, that's roughly like if you're between 50 and seven, you're an Olympic athlete, a unique influential athlete. This is like Michael Phelps like score like Michael Jordan. Like there are no scores like this there. and and 121 growth off of almost a 1.5 run rate in US commercial and a 77 77% growth in the US and an aggregate off of an aggregate base of of $4.5 billion. By the way, I predicted we'd get here. So, you know, it's like I if you want to short that, be my guest. You go ahead. We're just going to go do our things.

Alex Karp defends his stock. He defends the valuation and he tries to discredit the short sellers. But when it comes down to it, Alex Karp is not really the central target for Michael Bur. Even though he took out a massive short position in Palunteer and Nvidia, even though Palunteer is actually the biggest short position, Michael Bur is doing that more for positioning and more for an emblematic short of the biggest AI company more than which one he actually thinks is breaking the rules. He never really claimed that Alex Carper Palunt is doing anything wrong. He never actually said that they're doing any type of accounting rules. Michael Bur responded to Alex Karp by criticizing him and criticizing his company, but never actually went on to accuse him of any type of wrongdoing. Michael Bur posted on X mocking Alex Karp and Palunteer by saying, "Doesn't surprise me one bit that Alex Carpin is quote unquote ontology. Palenter cannot crack a simple 13F." A reference there that no super investor, not a single one, owns Palunteer. He continues on with this sentence. It's a little bit difficult to decipher, but it reads, "A fundamental principle of any rigorous ontological/epistemological model is whether philosophical or in data science is recognizing when your information set is insufficient for valid conclusions." This one takes a little time to decipher, but Michael Bur is saying that Palunteer is overconfident, that you cannot come to such big conclusions with incomplete data sets. The intellectual rigor is not just using logical arguments, but it's recognizing when you can't make conclusions because you don't have enough information. Michael Bur is a doctor, and that's something that doctors have to recognize. Not just making logical arguments, but recognizing when they don't have enough data to make big conclusions. So, he's essentially accusing Alex Karp of being overconfident and not having enough data to come to the conclusions that he's trying to reach.

But again, even though Michael Bur is going back and forth with Alex Karp and responding on X, he's not targeting Palunteer as his major concern. Like I said earlier in the show, the companies that he's actually alleging are doing wrongdoing or they're doing accounting fraud are the big tech companies. And he's far more detailed with his complaints about these companies. He put another post here, and this is one that he currently has pinned on his profile. Let's go ahead and just read through it. Understating depreciation by extending useful life of assets artificially boosts earnings. One of the more common frauds of the modern era. Massively ramping capex through purchase of Nvidia chips and servers on a 2 to threeyear product cycle should not result in the extension of useful lives of compute equipment. Yet this is exactly what all the hyperscalers have done. By my estimate, they will understate depreciation by 176 billion between 2026 to 2028. By 2028, Oracle will overstate earnings by 26.9%. Meta by 20.8%. etc. But it gets worse. More detail coming November 25th. So, he's not only making these big claims, but he's also giving it as like a preview. This is like a little trailer for what's to come in November 25th. And then he has the following chart to accompany this post.

Here's the chart that Michael Bur shared and it illustrates the core of his argument that these companies are extending the useful life of chips, GPUs, and server equipment more and more. The companies that he lists here are Meta, Google, Oracle, Microsoft, and Amazon. So, these are all the companies that are investing billions of dollars into capex. And we have here in 2020 that you can take an example. We'll take a look at Google. Google said that uh they're going to depreciate this stuff over three years. So at the time it was three years. That's how long a GPU or all this equipment would last on average. And so three years is on average how all this stuff lasts. Then in 2024 they bumped it to four years. Then in 2022 they kept it the same. Then in 2023, Google did a pretty big bump up. They bumped it up to 6 years. And this follows the same trend that all of these companies are doing now. Google's left it at 6 years since then up until 2025. But we have Meta doing the same thing. Back in 2020, it was 3 years. Then it moved to four, then four and a half, now 5 1/2. You have Oracle starting off with five, they bumped it up to six. You have Microsoft starting off with three, going up to four, then to six. Then you have Amazon starting off at four, going to five, and going to six, then back to five. Amazon is actually the only one that I can see that bumped it back down. They went up to six in 2024, then back to five in 2025. But we look at this chart and you see a clear trend. The core of the complaint from Michael Bur is that these companies are intentionally depreciating things longer to boost their earnings today. So their earnings are being heavily overstated today. Bumping up the stock price, bumping up the market.

And this does make sense from a mathematical perspective. In fact, if we understand what depreciation is, we can just take a clear example here. Let's say that I buy computer equipment and I pay $600,000 for it. Let's say that I believe that computer equipment will last 3 years. Well, I can depreciate it over 3 years. And this is where we separate the accounting. There's cash accounting, then there's acrruel accounting. Everyone uses acrruel accounting in accounting. That's what the standard is. So even though right now $600,000 would leave my bank account. I would get all that computer equipment today. That would be the free cash flow of the company. It shows cash in and out today. Then you have the earnings per share and the net income. That happens with acrruel accounting, which factors in things like depreciation. If I take that $600,000 worth of computer equipment and I depreciate it over three years, that means that I could say that it's an expense of around $200,000 per year. So, when I'm recording my income, when I'm recording my net income and my profits, I can act as though that expense that I paid 600 grand is actually a $200,000 expense per year for the next three years. Therefore, I didn't really pay $600,000 for it today. I only paid $200,000 for it. So, I have that $400,000 that can still be retained. And this is the impact that depreciation has. Now, imagine that I depreciate it instead of over 3 years, I depreciate it over 6 years. Well, now it's like I'm only paying $100,000 a year. So, when you look at it again with the free cash flow and the cash accounting, the $600,000 is accounted for immediately. But when you do acrruel accounting and you're looking at it over a longer time period, that can be depreciated over 6 years. Now I'm only paying 100k a year for this computer equipment, which makes it look like I'm making a lot more money today than if we're looking at the cold hard cash. And this is the way that the market works. It's the way that accounting works. It's the way that these firms record their net income, which is broken down into their earnings per share.

Michael Bur is alleging that these companies are lengthening their depreciation schedule primarily as a way to bump up their earnings to make it look like they're spending less money today than they actually are. Now, of course, depreciation done normally and accurately is completely fine and that's how these businesses work. You do want to depreciate expenses over their useful life. So, it's not a question of whether or not depreciation is illegal or not. Of course, it is. It's a question of whether or not their depreciation timeline, the schedule for it is accurate. When they say this equipment lasts six years, does it really last six years? Because if you say that you're depreciating something for 6 years when it only lasts 3 years, that means that you're going to have to replace these costs in 3 years and your earnings today are artificially boosted. And this is where it gets into a difficult territory. Michael Bry notes that these companies have a strong incentive to depreciate things over a longer lifetime. After all, it lowers their annual expense. It makes their companies look like they're making far more money. It makes it look like it's less of a problem when they're spending a lot of money, billions of dollars on all this server equipment. So, they have strong incentive to depreciate these assets over a longer lifetime. So, he believes that this incentive from these companies, their insatiable need for greed and growth at all costs is part of the reason why they're bumping up their schedule for depreciation.

But these companies also have arguments of themselves. There are specific reasons why we could argue that today the server equipment, GPUs, and chips have a longer shelf life than they did 5 years ago. And that comes because of advancements in this technology and the way that they implement it. For example, one thing that's been proved a lot, it's just improved over the past 5 years, is modularity of this equipment. Instead of having to replace entire server racks and just tear everything out when it's done, sell it off to another company at 20% of the purchasing cost. They don't really do that anymore. Now things are far more modular. They can keep the server racks. They can just replace specific parts. They don't have to replace the whole thing. If you're not replacing the whole thing, the longevity, the expense of the entire thing is not as much. So modularity is one big part of this. Another thing is improvements in cooling. These server racks require constant cooling through air and water cooling. And one thing that they've just simply been better at is keeping them cool for longer periods of time with more consistency. When you do that, all these GPUs last longer because heat expansion and the damage that that does is part of the reason why they wear out after three years. So, another argument that big tech could make is the advancements in cooling allows for these parts to just simply last longer. And finally, another thing that they'd point out is that AI is advancing at a rapid pace, but the pace of advancement is slowing down. It's part of Moore's law. Things advance incredibly fast over time, but after a certain time, the advancements kind of narrow out. They slow down a little bit. The best way to visualize this is with the iPhone iterations. Remember when the iPhone 1 came out and then the iPhone 2 and iPhone 3? They were entirely different products. like they were over 10 times better than the previous version. Every new iPhone was like a a Super Bowl event. It was just something that was insanely different. New features, new software, battery life is like five times as long, all these bugs fixed. Like everything was better with every iPhone. But now when you look at it, the difference between an iPhone 15 and 16 and and these different variations, they're better, but they're not much better. The advancements have slowed down. Older iPhones last a lot longer than they used to. I'm on the iPhone 15 and I've had this thing for years and it still works great. The difference between this and the latest model is just not that much. So another argument that these big tech operators are making and the useful life of their servers is even though they're coming out with better chips and better processors, they're not coming out with them at as fast of a pace. And so that means that they can hold on to these older ones a little bit longer. So a factor of more modularity, better cooling, and the fact that new iterations are happening at a little bit slower of a scale means that they can hang on to these servers a bit longer and they can depreciate them over a longer lifetime.

So you have this balancing act. You have real arguments of why these servers can last longer and you have the fact that these companies are driven by greed. They're driven by profits. It is not a perfect science to determine how long you should depreciate an asset. It's a bit of a guessing game. And Michael Bur does have very valid arguments that these companies could be extending the life of their servers a little too much and in doing so artificially boosting their profits today. So this is one of those nuance situations where I believe there's a lot of truth to both sides. There is truth to what these big tech companies are claiming that their equipment lasts longer today than it did 5 years ago. But there's also likely truth to what Michael Bur is saying that they are lengthening the useful life a little bit past what it is only to get short-term profits today. Michael Bur believes that there's ample motivation for that. These companies have leeway and judgment calls in making these useful life determinations. They're not perfectly accurate. And if they're going to be wrong, it's beneficial for the company to be wrong on the long end, not the short end. So when we look at this, again, I believe there's just truth to both sides. And there's a way that investors can observe the reality between the free cash flow, which measures cash out today, and the net income, which goes on the depreciation schedule. It's part of the reason that companies like Amazon and Google look so much cheaper today on their earnings than they do on the cash flow. For example, when we look at uh the PE ratio compared against the free cash flow yield of Amazon, this is what we see on a PE ratio. Amazon trades at a 33 PE. doesn't look so bad, does it? It's not the cheapest company in the world, but a a low30s PE for a fast growing company, one that's a dominant universal company, doesn't look too bad. Then we look at the cash flow yield. Now, the cash flow yield is currently 0.4%. Not factoring in stockbased comp, it's just 04%. Which means that it's over 100 times its multiple on free cash flow. Why is that? Again, the cash flow measures the expense of the servers today, right now. No depreciation schedule. So, the cash flow is just showing you which way the cash is flowing today. The net income and the PE ratio are based on the earnings. It paints a very stark picture. There is a huge differentiation between how these companies look on a cash flow basis and an earnings basis. We can even look at Google as another example. You're paying 27 times next year's earnings. The free cash flow yield is currently just above 2%. So you're paying 50 times on a cash flow basis. So Google's way more expensive today on a cash flow basis, factoring in all the cash they're paying for these servers than on their depreciation schedule and net income. Meta and Oracle are two companies that Michael Bur specifically called out for boosting their earnings to a huge degree. Meta is another company that looks really cheap on a PE ratio. a 21 PE, super cheap, right? Just above the S&P 500. On a free cash flow yield, it's 2.9%. When you factor in the stockbased comp, it's below 2%. With Meta, you see the net income, the earnings per share going to all-time highs. You see the free cash flow struggling to keep up. So, there is validity to his claim. The accounting does back up what he's saying. There's likely some truth to these companies overstating their earnings to some degree.

And the question is, what do investors do? Well, in this case, one thing that I noticed that I think is peculiar, it's an interesting observation with Michael Bur's claim is that he's accusing one group of companies doing this malpractice, doing this wrongdoing. He's accusing big tech and the hyperscalers of overstating their earnings. But he didn't short those companies. The companies that he chose to short was Nvidia and Palanteer. He accused these companies of doing something wrong. And then as a result, he's shorting these companies that are different. And that's interesting. Why is Michael Bur not shorting the big tech companies? Well, I believe that this is the positioning that makes sense. If Michael Bur believes that these companies are misstating their earnings and that eventually the the check is going to come due, their earnings are going to go down. They're going to invest less in capex, that's not going to affect big tech to the same extent it will Nvidia and Palunteer. Just think about it for a minute. Big tech is somewhat insulated from this. Even if their earnings per share go down a little bit in the future, they can simply pull back on their capex investment and their free cash flow will go up to the roof. These companies have lots of tools to work with to make it so that they're earning more or that they're gaining more cash flow. In fact, investors may be happy if they put on the brakes a little bit with their investments. That's one of the concerns investors have. On the other hand, what happens to Nvidia if all the big tech companies have to pull back their capex spend? The consequences of this practice of overstating their earnings of depreciating for longer actually has bigger implications for Nvidia and Palanteer than it does big tech. If this brings steam out of the AI trade, if it fizzles the trade out, if it makes investors be a little bit more critical and a little bit more bearish, Palenter will drop because it's emblematic of the AI trade. It'll drop because it's a highly valued company, super high multiple. So, it has lots of catalyst that would cause it to go down in stock price. Nvidia would drop because all of its largest customers are spending less on capex than they have in the past, affecting Nvidia's earnings even more than these big tech companies. So when I look at this, even though I am concerned about it and I'm watchful of how these companies are investing in the future, I do believe they're going to have a high return on the spend and I think that they're doing the right thing, but I also feel that my portfolio is a little bit more insulated from these problems than Nvidia and Pounder. I feel like those companies are the right ones to target if things go south. I still own Google. I still own Microsoft. I still own Amazon. I will continue to own those companies. I do not have any Meta stock and I have no plans to buy any today. I don't have any Oracle stock and no plans to buy it. I haven't owned Nvidia and I've never owned Palunteer. So, these are all companies that I'm not in currently and they're ones that I don't plan to get in in the future. I've made my bets. I think these companies will do well in the future. And if we do have a falling out, if Michael Bur is correct and November 25th we see some big news, then we could see these companies get affected to some degree. But my guess is Nvidian Palanter would be affected a lot more.

Now, let's go ahead and move on to some news. Now, first off, we have Mark Mahaney going on to CNBC and laying out his top three picks today. These are the three companies that he's the most bullish on, the ones he thinks are the best buys today. Let's go ahead and take a listen. >> Nicely the stocks of both Google and Amazon because I think there were other parts of the story. And then they started really proving in the case, at least in Amazon, that yes, they're probably an AI winner because you got this 20% plus growth for AWS. you can now sort of count on it was very uncertain about a month ago but now you can kind of count on it so it depends look AI spending capex spending is rising above for all is rising materially for all the hyperscalers but these companies are also showing what I call ro AI Morgan it's uh, you know, return on AI spend instead of return on investment it's return on um um AI investments and uh, you can see that in the revenue per employee and their operating income >> right here he has highlighted his overall catalyst for these stocks. Gen AI is very powerful product cycle. Tech names showing rising return on AI spend. Amazon, Google, and Meta in particular. Further Fed rate cuts are good for equities. Underlying consumer demand trends seem relatively resilient. So, lots of good catalysts going into these companies, but again, he focuses on three specific companies per employee. That's really inflected up. There's a lot of different factors in that, but one of them certainly is productivity gains from AI. They can continue to show that. I think some of those stocks can continue to outperform. That's one of the reasons why Amazon's at the top of our list. >> So, right there he mentions Amazon tops the list and I agree 100% with Mark Mahane.

>> Well, I'll throw a couple of things also by you. Uh, you know, some of the other takeaways that'll affect AI companies too is consumer demand. But I look at consumer demand and one of the reasons Expedia is my number two pick is that consumer demand in what is probably the most discretionary of all categories, travel, has actually remained pretty resilient. it's snapped back from the June quarter where there's some softness to the September quarter. I'm not sure it's above trend line. I mean permanently I don't believe that but I think that that that demand is showing that uh a fair amount of resilience from consumer spend that's really helpful to a category like I cover internet which is very heavily levered towards discretionary spend. So there's that element too and then it depends on the product cycle and how big the investment cycle is that each of these companies are. So Meta is not one of my top picks in part because you need kind of a super catalyst for all of that money that they're putting into super intelligence. I think you'll get it, but I don't think that's going to it's it's really hard to predict and I don't think that comes until sometime next year. So there are a few places where I think you kind of hold off a little bit. His second pick he mentioned is in the travel category and it's Expedia. Expedia is a capital efficient, highly profitable stock. It's mostly within the United States. That's their biggest market and they compete with Booking Holdings. I personally hold Booking Holdings. Am I going to sell Booking Holdings to buy Expedia? I'm not going to do that. I feel like I have a lot of access and exposure to the same catalyst he mentions. Consumer discretionary spending, capital light business model that has huge opportunity with booking holdings, but Expedia is also a great option. They're two sides of the same coin, very similar companies.

Now, before we get to his third pick, he lives back and is asked about Amazon once again to clarify, why is this company still your top pick? you've heard my thoughts on it. Let's go ahead and just listen to a little bit more of his explanation of why he's so bullish on Amazon specifically right now. You just got the unlock uh from AWS. You finally got this thing above 20% and that growth could get better than that uh next year. The demand across the industry is super strong. This open AI deal that they did. The capacity is really coming online for Amazon. And then the rest of the business, look, I've got my what I call these u amplification catalyst. Advertising revenue is still clicking well north of 20%. It's wonderful for Amazon's margins. The retail business is doing just fine at about 10 11% growth and those operating margins that have really gapped up for the for the retail business the last couple of years. I think they continue to gap up. It's a reflection of automation, robotization, uh greater efficiencies in their retail business. And then I love some of the newer products that are coming out. Two in particular I'll highlight. One is Kyper. We're going commercial satellite internet access for Amazon next year. I think Starlink has proven that this is a big opportunity. I think Amazon can participate too. >> Lots of good reasons there. Great fundamental story, great thesis for the company. Agree 100%. And if you're a follower of this channel, we covered stories months ago from semi analysis that went over how AWS is likely to reacelerate well above 20%. That happened last quarter. That's part of the reason Amazon stock is so bullish today is because of that reaceleration. That's going to continue. AWS will continue to grow at a very quick pace. Investors were bearish on it. They said that it was losing market share. AWS is still the juggernaut in cloud. But then you have this other big thesis, this real story playing out with Amazon, one of the combination of automation, robotics, and artificial intelligence. I agree 100% with Mark Mahaney. That's why it's my second largest position in my portfolio, right behind Google.

Then we have the third stock here. Let's go ahead and dive in. >> I want to get your thoughts on another name that's had a strong run this year, but you think could go higher, and that's Netflix. It's my number three pick. Uh it's uh I wish it was dislocated. It's not dislocated. I you know, so it's hard to get super pumped beyond the idea. And I guess Morgan, in all fairness, I don't see Mark Mahaney often highlight a company as his top pick that isn't dislocated. Dislocated meaning that there's a wide gap between its current valuation and multiple and where it deserves to be trading. He just admits that right now Netflix is not really dislocated. It's a stock trading somewhat in line with with its uh intrinsic value. But despite that, he recognizes that the fundamentals of the company are so strong that it still justifies a top buy today. But there's two catalysts I really like. So this is kind of a momentum call with a catalyst twist. And the two catalyst twists are I think they have a golden invitation to raise prices if they want. Their two biggest competitors are 50% higher. Disney's 50% more expensive than Netflix for its basic ad supported plan. I mean, yeah. And Netflix's content slate is super strong. So I think they have the ability to raise prices that'll help. And I just think street numbers for next year when they give that guidance for 2016. I think street numbers are too conservative. So in the next three months, I got two catalysts on on Netflix. Is it going to rerate dramatically from here? No. But can it compound and maybe rerate a little bit? Yes. That's why it's one of our top three picks. >> Very interesting. Obviously, I'm extremely bullish on Netflix. I haven't sold a share. I agree with him that I don't see any multiple expansion with the company. I think the multiples will flutter around where it currently is. But Netflix remains one of my highest conviction picks. I think the company is so well established. It's so well prepared that it's their game to lose. And I could see Netflix going to a trillion dollar market cap by around 2031. So I think it's going to be another double in roughly 5 years.

Now speaking of Amazon and Netflix, we also have news from both of them. They're releasing this new metric, a new KPI, something that we can track as investors. Amazon claims that their Prime Video ad reach is at 315 million. The digital giant said Tuesday that its Prime Video streaming service now reaches more than 315 million people around the world, compared with a figure of just 200 million it disclosed in April of 2024. So, they're using this metric and it's gone from 200 million to 315 million in about 2 years. Pretty substantial growth for a video platform in 2 years. Amazon said the count was based on its own internal data over a period of 12 months from September of last year through August of this year. Right now, Amazon Prime Video is at 315 million. But remember, Amazon basically made it so every single subscriber is now on the ad tier. They just did it across the entire spectrum. Everyone suddenly that had an Amazon Prime subscription was now on the ad tier and you had to pay another $3 extra to get off of the ad tier. Netflix is not doing that. Netflix didn't make it so all their existing subscribers that are paying for ad free move to the ad tier. In fact, nobody did. The only people on Netflix's ad tier are people that willingly chose and sign up for the ad tier when it was newly created. So Netflix is starting at a much lower number than Amazon. And regardless, Netflix is catching up quickly. Netflix now says their ads have reached 190 million viewers in October as the company rolls out this new metric. Now, keep in mind again, it does appear that Amazon has a greater ad reach than Netflix, but Netflix has a much smaller proportion of their subscribers on the ad tier. There are hundreds of millions of subscribers on the ad free tears. So, this is a battle for this ad space. The companies that are winning are Netflix and Amazon. The ad tier will be a growing source of revenue for both of these companies.

Now, in other news, we have Google doing it again. This is something that I just see like on a weekly basis. Now, more innovation, more advancements in technology, more expansion from Whimo. They recently announced that they're fully ready to operate in snowy conditions, harsh weather, rainstorms and snowstorms. They won't need to always pull over and not offer rides. Now, they can just drive through it. They have the heating tools. They have the little windshield wipers for their sensors. They have it fully ready for snow. Then, the next news that we get here is that Whimo is beginning to offer freeway robo taxi rides in San Francisco, LA, and Phoenix. They mentioned that the vehicles will generally travel up to a freeway's maximum posted speed limit, which is 65 mph in many cases. The company said, however, that a spokesperson confirmed the robo taxis may sometimes go a few miles over the limit for safety purposes in extraordinary circumstances. This might seem like a simple or smaller thing because freeway driving in many cases is more simple than driving in a busy inner street. You're driving in just a single lane. You're just going and there's not much to it. But for a robo taxi that doesn't have any anybody in the car, there's no employee, the stakes are much higher because the speed the car is moving. If you're driving 65 miles an hour, the consequences for a car crash are far more severe than if you're going 25 m hour down a side road. While has avoided any fatality so far, they haven't caused any massive accident or had any really disastrous thing happen. Driving on the freeway makes that a little bit more likely. And I trust the Whimo team that they're doing this with as much safety protocol as possible. But this is a next iteration for robo taxis. At one point or another, they have to get on the freeways. It's just a part of life. And Whimo is now finally there.

Now, finally, we get to another fail of the week. In this case, we have a post from LinkedIn. We actually don't have many fail of the weeks that are just posts, but this one this one counts. This one, I think, is worthy. We have one here. It's from a guy named Sam, and this is a bit of a journey. Let's go ahead and just read through it here and we'll we'll go through what happened with this post and why why it's getting some attention. He says, "We charged $100 a month for an AI that was really just two guys surviving on pizza." Okay, we're getting some red flags. I have to admit, if I read this, this guy right here, we have it outlined that he's the co-founder and CTO at Fireflies.ai. So, he got an AI URL. uh he you know put it up fireflies.ai. Took some time to pick that out. Good on him. I think everybody should start a business, try things, you know, go and fail. It's it's fun to try and build new things. But when you say that we charged $100 a month for a product that is AI and that it was really just two guys surviving on pizza, that right there raises some red flags. But I'll give him the benefit of the doubt. We'll continue on. He says that we scaled Fireflies, this AI company, to a billion dollar valuation, massive valuation after six failures from our original crypto food delivery idea. Okay, another red flag when anybody their business venture is to start a crypto food delivery company. Right there, I'm getting bad vibes as well. But again, I'll give it the benefit of the doubt. We'll continue on. Nothing motivates you more than the pressure of living monthtomonth with no safety net. That's absolutely true. Uh, before I explain how two broke guys validated a $1 billion idea, you need to understand we were couch surfing while desperately chasing our entrepreneurial dreams. An AI notetaker was our last hope after six ideas our friends claimed were genius. So, he's kind of building up this story as we were just poor and desperate and doing everything we could to build a successful endeavor. great story arc that every single entrepreneur wants to have. The best way to validate our business idea was to become was to become the product yourself. We told customers there's quote an AI that will join a meeting. In reality, it was just me and my co-founder calling into the meeting, sitting there silently and taking notes by hand. Okay. So, if I understand this correctly, he sold the the product under the premise that the AI will be joining the meeting. So, the people buying this product do not think there's going to be any other uh any other human. And then there's just two guys listening to the call, taking notes. Now, we've gotten to the point of straight up lying to your customers. Never a good thing. We get to the worst part here. When customers scheduled a meeting, we'd manually dial in as Fred from Fireflies.ai. We'd sit in there silently, take detailed notes, and send them 10 minutes later after taking notes for 100 plus meetings and falling asleep in many just adds in parenthesis that they fell asleep in many of these meetings. So even when they were completely defrauding customers, lying about what they were doing in the product that was being offered, uh, violating their privacy, they believe that there's just going to be simple AI, a computer listening, but it's two humans listening. He also just throws in that the meetings were so boring, you know, insulting the customers that they actually fell asleep in many of the meetings, possibly missing important details of the meeting that an AI wouldn't have missed. The customers think AI is listening to the meeting. It doesn't fall asleep. Therefore, all the parts of the meeting are going to have bullet points and notes taken, but they just throw that in. It's another way to kind of brag about what they're doing here. we were finally able to make enough money to pay for $750 a month rent for a tiny San Francisco living room. That was a point when we said, "Let's stop and automate everything." So, after a hundred meetings of lying to customers, falling asleep, and doing a kind of a half-hearted job here, not really even trying to do the job that they're being paid to do, even though they're doing it fraudulently from the beginning, they're still not even putting in the work and exercise. After a hundred meetings, they said, "Hey, let's finally actually do the thing that our customers are paying for." It took 100 meetings, a hundred of them, to finally stop and say, "Now, let's do the thing our customers are already paying for that they haven't been paying for this entire time." But he doubles down and says, "The best prototype was two guys surviving on pizza. Validation before automation saved us from our seventh failure." So, clearly, this is an inspiring story. an entrepreneur that was sleeping on the couch coming up with ideas, trying to validate ideas. I think that all of that's great. Uh, but the way that he's presenting it here, and I Sam, I hope that this is like wrong. I hope you just presented this the wrong way. This for sure comes across like you defrauded your customers, the people that signed up for you. You're not saying that that you clearly told them that you're validating an AI idea, that people may be listening in on the meeting. You know, a lot of times you you put that in the disclosures and the agreements that, hey, this call may be listened to by a human to validate our customer service. You have to let the customer know what they're actually paying for. This just looks like you straight up defrauded your early customers. You told them that AI was monitoring the meeting when it was two people. That's different. Having humans listen to a meeting is different than artificial intelligence. There's many use cases where that's different. There's things people wouldn't share with Chat GBT or Gemini if they thought a human was just going through and responding to them, typing back. Can you even imagine if an AI chatbot did that? You ask it questions and there's like a team of people behind it like answering those questions and typing back. I think the AI would say this. Little did they know that was us validating this chatbot idea. That's fraud. That's lying to the customer. And I hope that there's more to this story that was left out. I hope this isn't the whole thing, but this is what we have and that is why it is the fail of the week. Now, that's gonna be it for this episode. Hope you enjoyed.