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Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech
Gil Luria says Microsoft's cash-generative AI strategy gives it an edge, while Michael Gapen says the Fed can wait to assess inflation pressures.
Prof G Markets · Ed Elson
- Gil Luria · Head of Technology Research, D.A. Davidson
- Michael Gapen · Chief U.S. Economist, Morgan Stanley
The best minutes
- 3:06Microsoft limits AI spending to what its cash flow can support4 min
- 6:31Google’s search growth raises questions about AI competition4 min
- 10:57AI infrastructure funding may become harder to secure5 min
Also worth watching
- 23:40Gapen expects core inflation to stay above target into 20275 min
- 19:01The Fed is watching for energy costs to spread into other prices3 min
- 31:21Microsoft's buyout plan could take headcount below pre-pandemic levels4 min
Skip the opening podcast promos and market recap, sponsor reads, and the discussion of Fed chair communication.
Full analysis · 5 min read
Real Alpha · Nov 7
Gil Luria says 48% Azure growth supports Microsoft's AI spending
- Azure accelerated from 43% to 48%, and Luria says positive cash flow lets Microsoft pace AI spending.
- That is a relative funding advantage, not proof every data center will earn adequate returns.
- Track cash conversion, search growth and financing costs before extending that conclusion.
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6 sections, the 5 other voices it tests Luria against, and what it means for you. Every episode we cut gets one.
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Microsoft's cash flow gives it room to pace AI spending
Azure accelerated from 43% to 48%, Luria said, on a $120 billion-plus business. Faster growth matters because the infrastructure bill sits against a larger, expanding revenue base.
Ed said Microsoft's free cash flow had fallen 27%, but remained positive. Luria contrasted that with Amazon, Google and Meta, which he said were not cash-flow positive.
That is an immediate financing distinction, not a full return calculation. Positive cash flow lets Microsoft fund some investment internally, rather than rely on each market window.
Luria described 15-year commitments for a significant portion of Microsoft's buildout. For near-term needs, it can also use short-term neocloud contracts instead of building all the capacity itself.
But the approach is not costless or guaranteed. Rented capacity has its own economics, and a cash buffer alone says nothing about future utilization or returns.
Our read
Our reading is that Microsoft has a pacing advantage, not immunity from a poor return. Cash generation gives it more room to keep investing without immediate outside financing.
Microsoft's advantage is relative, not a license to spend
Luria's comparison is about funding capacity, not proof rivals are spending badly. He said Microsoft could stay cash-flow positive because it combines a more profitable business with flexible capacity.
That does not mean competitors cannot raise money. Luria said Amazon, Google and Meta remain investment grade and can probably raise substantial sums, but only to a point.
On a16z Podcast in October 2026, Andy Jassy described $220 billion in Amazon CapEx. He said that spending would still leave meaningful demand unmet.
For example, demand visibility can support investment, but does not establish adequate returns on every dollar. Microsoft's cash flow gives it more room to test that relationship without immediate external financing.
Our read
Our reading is that demand and funding are separate tests. Investors should compare each company's spending with the cash it generates, not treat demand alone as validation.
Google's cloud growth cannot answer the search question
Google Cloud grew 103%, according to the host's figures, and Luria said cloud alone would have lifted the stock. The weakness investors focused on was search advertising.
Ed noted that search revenue was still growing, not falling. The question was whether users were shifting toward ChatGPT or Claude, changing the value of Google's core ad business.
Yet Luria said one quarter was too early to tell. Search growth had held up for three years after ChatGPT arrived, despite persistent concern about AI competition.
David Friedberg, on All-In in October 2026, also saw cloud potential alongside uncertainty about search advertising. His point reinforces the distinction between cloud growth and search monetization.
Google's 25% overall revenue growth and strong cloud result cannot settle the search question. Investors are testing whether a change in user behavior could eventually weaken the company's main profit engine.
Our read
Our reading is that Google faces a test of adaptation, not proof that AI has hollowed out search. Cloud strength does not show whether the ad business can withstand changed user behavior.
Funding access separates hyperscalers from smaller suppliers
Luria said capital is finite, even though large technology companies have been able to raise substantial sums. He warned that some parts of the market may already be tightening.
His dividing line was position in the value chain. Microsoft does not need capital, he said, while Amazon, Google and Meta can probably raise money to a point.
For instance, Erik Bernhardsson on Latent Space in October 2026 described neoclouds pre-selling GPU capacity to raise money for hardware. Customer commitments can help finance equipment before purchase.
The analogy has limits. Pre-selling capacity and funding investment from Microsoft's operating cash are different mechanisms, so that contrast is our analysis, not Bernhardsson's.
John Foley, on Prof G Markets in November 2026, discussed Anthropic's lack of investment-grade credit. He said that status makes financing more expensive, an example of how funding terms can vary.
Erik Bernhardsson · Latent Space · Oct 22Neoclouds scale by pre-selling GPU capacity- JFJohn Foley · Prof G Markets · Nov 3Anthropic’s enterprise growth may not cover its funding needs
Our read
Our reading is that financing access and its cost matter alongside demand. Hyperscalers may have more options, while smaller suppliers can face tighter terms and greater dependence on customer commitments.
Negative cash flow puts Google's investment economics on trial
The host said Google's quarterly capital spending exceeded $51 billion, while free cash flow turned negative. Strong demand and a profitable buildout are separate questions.
Luria said continued negative cash flow would mean returning to capital markets. Borrowing and share sales can fund construction, but also bring financing costs or dilution.
Danny Moses, on The Real Eisman Playbook in October 2026, used the fiber buildout as a warning. Real demand did not guarantee that deployment and financing would produce workable economics.
Take customer commitments, utilization and cash conversion as separate tests, rather than relying on announced spending. The episode does not supply those project-level measures for Google's new capacity.
Microsoft's positive cash flow reduces one financing risk, but cannot prove future facilities will earn their cost. That requires evidence about the cash the infrastructure actually produces.
Our read
Our reading is that demand validates a need, while project economics determine who benefits. Treat capital spending as a series of investments to test, not proof of durable returns.
Ed says Microsoft's buyout plan points to structural AI job cuts
Ed said Microsoft plans to offer voluntary buyouts to 27% of its global workforce. In July, the company announced nearly 5,000 layoffs and cited AI changing how work gets done.
Ed also noted that Microsoft added almost 60,000 employees in the two years after COVID. That history gives pandemic overhiring a plausible role in the reductions.
But Ed's conclusion was stronger than a generic layoff warning. He said that if the company eliminates 27% of its workforce, headcount would fall below its pre-pandemic level.
He argued that outcome looks like a structural consequence of AI, not merely a correction to overhiring. He also said AI's overall effect on the U.S. labor market remained almost negligible.
A proposed buyout plan does not prove that 27% will leave or that AI caused each departure. Those limits qualify the evidence, even as the headcount comparison sharpens the question.
Our read
Our reading is that Ed's argument points toward structural workforce reduction, but the plan alone cannot measure jobs replaced or productivity gained. The eventual headcount and work automated matter.
What it means for you
- Track cash conversion. Pair Azure growth with free cash flow each quarter. Compare both with capacity commitments instead of judging investment by growth alone.
- Compare capacity choices. Measure the cost and customer demand behind owned and rented compute. Luria's example shows how short-term neocloud capacity can help Microsoft meet demand without building all its capacity itself.
- Test search behavior. Track Google's search-ad growth alongside how customers use AI assistants. One slower quarter is a reason to test, not proof of replacement.
- Model funding needs. Estimate how debt or equity affects financing costs and ownership if cash flow turns negative. Use different assumptions for hyperscalers and smaller infrastructure suppliers.
What to watch
- Microsoft's next Azure growth and free cash flow readings, considered together.
- Google search-ad growth and whether AI changes the source of query traffic.
- Funding costs and customer commitments for smaller AI infrastructure firms.
Send this to the CFO and infrastructure lead reviewing AI budgets.
Watch the minute where Luria says Azure accelerated from 43% to 48%.
Written by Real Alpha from the episode's transcript and the other moments it links, then checked against the transcript. Quotes are the speaker's exact words.
Minute by minute
- 1:05Microsoft's cash flow earns credit
Microsoft reported 19% year-over-year revenue growth, and Azure grew 48%; shares rose as much as 5% after hours. Gil Luria called it a clean beat and raise, noting Azure accelerated from 43% to 48% and free cash flow stayed positive despite falling 27%. He says Microsoft uses short-term neocloud capacity alongside longer-term data-center commitments and can support spending with its broader software business.
- 6:31Google's search business faces AI risk
Google Cloud grew 103%, but Gil Luria says the concern is slower growth in the core search-ad business, not cloud. He says Meta was gaining digital-ad share and growing more than twice as fast, while a shift from Google searches to AI tools could eventually pressure search ads. Luria cautions that one quarter is too little to conclude that user behavior has changed.
- 10:35AI spending tests capital access
Google’s capital expenditures rose to more than $51 billion from $45 billion the previous quarter, and free cash flow was negative $9.1 billion. Luria says continued spending could require more borrowing or share sales; he sees capital as available but finite, with smaller companies more exposed if funding tightens. He says Microsoft is better positioned because it can fund investment from cash flow.
- 18:08The Fed lacks a clear explanation
Michael Gapen says Chair Kevin Walsh did not convincingly explain why the Fed held rates steady despite strong growth, a stable labor market and above-target inflation. Gapen says supply-side shocks such as higher energy prices are difficult for rate policy to fix directly. He sees the Fed’s approach as waiting to assess whether those costs spread into other prices, rather than reacting aggressively to headline inflation.
- 23:40Gapen expects gradual disinflation
Gapen says the 2% inflation target remains feasible, arguing that tariffs and energy shocks interrupted the earlier decline in inflation. He expects core inflation around 3.1% year over year through the first quarter of 2027, then about 2.6% at the end of 2027. He expects rate hikes in December and March, while saying the Fed can move gradually.
- 27:55Gapen sees a shift in Fed communication
Gapen says Walsh prefers the Fed to speak less and views himself as a reformer who wants to change the institution. Gapen expects that approach to create mixed messages with other Fed officials, but says a new chair often needs six months to a year to develop a communication style.
- 31:21Elson links buyouts to AI pressures
Ed Elson says Microsoft is offering voluntary buyouts to 27% of its global workforce and argues the scale could leave headcount below its pre-pandemic level. He acknowledges that Microsoft and other tech companies may also be correcting pandemic overhiring, but says AI spending and automation appear to be contributing to job cuts in the sector. He says AI’s overall effect on U.S. employment remains almost negligible.
Published Oct 29, 2026.
Transcript · 25 min read
Prof G Markets, hosted by Ed Elson, with Gil Luria and Michael Gapen.
Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there. Where the podcast’s audio and the video part ways, some times are a minute or so off.
Welcome to Prof G Markets. I'm Ed Elson. It is October 29th. Let's check in on yesterday's Market Vitals. The major indices climbed following the Federal Reserve's interest rate decision. More on that in a bit. The yield on 10-year treasuries rose. Brent crude remained elevated around $114 per barrel on news that the U.S. may strike Iran again after the midterms. And finally, Oracle shares popped 11% after the company projected a return to positive free cash flow in 2029. Okay, what else is happening? Microsoft and Google both reported earnings yesterday, but investors had very different reactions to the results. Microsoft beat expectations with revenue up 19% year over year. The company also disclosed Azure revenue in its earnings statement for the first time, revealing that its cloud business grew 48% from From a year earlier, shares jumped as much as 5% in after-hours trading.
Google's earnings, meanwhile, disappointed investors, despite posting 25% revenue growth in the third quarter. Advertising revenue fell short of analyst expectations, and the company reported a decline in free cash flow. Shares dropped as much as 11% following that report. Here to break it down, we're speaking with Gil Luria, Head of Technology Research at DA Davidson. Gil, thank you for joining us. I'm more interested in Google, but let's start with Microsoft and then we'll get to Google. What stood out to you? That it was a clean beat across the board. So not only was the Azure business great, it accelerated from 43 to 48%. This is $120 billion plus business. Those are tremendous growth rates at better margins. But also the rest of the business, the non-AI business performed well enough that that translated to overall revenue beat, earnings beat, better guidance than expected a clean beat and raise which is why the stock is up and importantly is the company that still has positive cash flow can't say that about amazon google and meta it is true about microsoft and right now that's what investors want to hear that's what i was going to bring up which is their free cash flow is still positive cannot say the same about amazon
or google or meta which that statement in and of itself is quite striking uh but it came down significantly down 27 percent basically they're spending ridiculous amounts on data centers but
Read the whole transcript
“The reason that's important is that that means they don't have to go to the capital markets, right?”
“We have long been worried that that business would be negatively impacted by AI.”
ChatGPT is the number one chat. And then it's Gemini.
And now we also have a digital assistant category, which is very adjacent. And Muse took the lead there. This is the concern is maybe it is happening. And Google's done a good job of selling a lot of ads in the AI flow. but maybe at some point that's not enough because they are losing in that behavior people are changing their behavior and maybe that's just accelerating right now what about the capex um it jumped again it hit more than 51 billion dollars in the quarter it's up from 45 billion in the previous quarter free cash flow is negative again but now we're at negative 9.1 billion dollars That jumped out to me.
“There's only so much equity and importantly, debt investors are willing to fund this build out.”
After the break, the Fed's path forward. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.
Transcription by CastingWords Washington's Cooked Up that week, and every billionaire misbehaving. That's all of them. And you'll also get to participate in an audience. Q&A, so bring your best questions. Scott will probably answer ones you didn't ask. We also have secret special guests, which you'll enjoy for every city. Get tickets at PivotTour.com. That's PivotTour.com. We are selling out, so don't wait. And we look forward to seeing you. Support for the show comes from Bilt. Do you have a punch card at your favorite coffee shop? Or have you ever bought a plane ticket using miles? If so, you know rewards programs can be a great idea.
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Two officials, Governor Lisa Cook and Cleveland Fed President Beth Hammock, dissented in favor of a quarter-point hike. It was Cook's first dissent since joining the Fed in 2022. Others said the Fed has time to wait and see. Chair Kevin Walsh said that financial and credit conditions have, quote, tightened for some businesses and households. But the Fed said that the economy is growing at a strong pace, an upgrade from solid in September. Walsh also announced a change to the Fed's meeting schedule. Starting next year, one of the Fed's eight meetings will focus on long-term strategy with no rate decision. Traders now put the odds of a December hike at 80% on Kalshi.
So joining us to discuss the Fed's decision, we've got Mike Gapen, Chief U.S. Economist at Morgan Stanley. Mike, good to see you. It was a hold. People expected that. We did see these two descents. Did anything surprise you about this? Did anything jump out? Well, I think what What jumped out for me and probably for others also is that I don't think we got a convincing explanation from the chair as to why the committee decided to stay on hold this month. We heard from many FOMC participants going into the meeting that for a variety of reasons, they didn't feel a sense of urgency to raise rates this month, but we didn't really hear the chair's explanation.
Now, in some ways, that's not a surprise. He doesn't like to provide a lot of information. But I do think kind of the lowest hanging fruit is to talk to markets and investors and individuals about why you did what you did, what decision you took today and why. So to me, that was the surprising part. There are a few other things that were surprising on the margin, but I think that was the most important one.
“So yes, gas prices go up and diesel goes up, but we want to prevent it from spilling over into other parts of the economy.”
So let's say the vast majority think this. We're not entirely sure what Sherwarsh thinks. I guess the confusion then, because I have heard that argument, which is the reason that prices are up is because of what's happening in the Strait of Hormuz and what's happening in Iran. I mean, also the tariffs. But those, I mean, the big one is the price of oil and therefore the price of gas and the price of diesel and the fact that those are inputs throughout the rest of the economy. have heard the argument, which is like the Federal Reserve isn't going to do much about that. I mean, if you raise rates, you're not going to bring down oil prices. That is a function of what's happening in Iran. But they already did raise rates. And so they've already told us, we think this is going to be our strategy. So if now the position is, no, that's not going to work because that's not going to have an effect on oil prices.
I guess I just, I don't fully buy it. And it makes me think maybe this was a political decision. Like there doesn't seem to be enough continuity there. So I would push back on that a little. I would say that, yes, you can imagine being faced with two choices. Inflation is high. It's driven by movements and energy prices that you can't affect directly. So what you could do is raise rates a lot, maybe weaken asset markets, weaken demand, and you could bring inflation down to too quickly, but you'd pay a pretty high economic cost for that. an alternative is is to say that what we want to do is make financial conditions a little more restrictive moderate some of the growth in the economy kind of prevent second-round effects as you said the the the energy effects from spilling through into other parts of the production process and and assume that over time those supply forces go away so it's a strategy it's not guaranteed But I think doing nothing probably, you know, they viewed doing nothing as not the right answer.
The question is, how much do you want to do and how fast do you want to do it? And the committee is saying we need, say, a modest recalibration of policy. Rates should go higher, but it's not clear they have to go higher at consecutive meetings. And we do have some time to assess what's happening. Yeah, that makes sense.
“core is probably a reasonable measure of where underlying inflation trends are that'll probably be 3.1 percent year on year”
What do you make of Kevin Walsh's job so far? He's new to the job. I mean, in terms of how he's communicating, the decisions that he's made, what do you make of him so far? On the point of communication, it's obvious he doesn't want to say as much. He has a view that Fed should speak less. And I think that's perhaps frustrating to a generation of all of us, whether you're an economist, a market watcher, an investor, or, you know, the average American out there who watches the Fed a few times a year. It may be frustrating to not get the information you're accustomed to.
He says so much without saying anything. It's very frustrating. Yeah. But it's skillful in a way. Yeah, you hear a lot. And then at the end, what did I actually get out of that? Yeah. But, you know, the other backdrop is he's coming into the position as a reformer. He views himself as a reformer. He thinks the way that the institution has worked over the past decade or to is incorrect and he wants to change things so it's it's not surprising in that way that he's going to want to do things differently and it may throw some of us off in in the short run um but he he views the institution as having moved away from some of its core principles, and he wants to steer the institution back. So that's also a bit of a recipe for conflict, not just outright conflict, but I mean conflict in the messaging. You have 15, 16, 17, 18 FOMC members who are kind of doing things the old-fashioned way, we'll put it that way, and Warsh who wants to do things differently.
So it might make for mixed messages. But then I'll also say every new chair has indigestion, and it takes time to evolve in the role. And you learn to develop your own style, your own relationship with markets, your own way of communicating to investors and households. That process usually takes six months to a year. So having bumpy moments is not unusual. for new Fed shares. Michael Gapen is Chief U.S. Economist at Morgan Stanley. Michael, appreciate your time. Thank you. Thanks for having me on.
“If Microsoft actually eliminates 27% of its workforce, like they're suggesting, then their total headcount will actually be lower than what it was before the pandemic.”
Miller and Alison Weiss, and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shallon, Kristen O'Donoghue, and Mia Silverio. And our
