Useless!!!
Epic fury about the Q4 most worthless US earnings season ever.
Dear gentle reader,
In past blog posts I have expressed an increasing unease since the summer of 2025 on the “investments” the big names in the S&P 500 are making in AI.
No doubt I am late to that party. More smart people have likely figured this out for a while now.
I have always admired FactSet for the diligent reporting on earnings and used that to see if my valuation assumptions of the S&P 500 roughly made sense.
During the Q4 US earnings season however I felt we are falling in the rabbit hole. We have the reality of the accountants, analysts, GAAP and what-not.
Alice in Wonderland behaviour from management of most of the Magnificent 7 (Mag 7).
Amazon’s Q4 earnings; “We are planning to spend 200 bn dollars on CapEx in 2026”.
Not to single out AMZN unnecessary, but Andy Jassy really pissed me off.
What the fuck? Anybody got a couple of hundred billion more lying around? CapEx like this is not a rounding error anymore. Our collection of Mag optimists plan to increase CapEx by what, 60% or so in 2026? Who is going to pay for that? That is cash out of the door right now.
The hyperscaler’s are caught in a rat race where they all feel the need to spend more on AI than their neighbour.
Have they learned nothing? If everybody invests in a new machine at the same time nobody actually starts making more money.
Amazon build the first global successful cloud AWS and it is supposed to be the pearl in a otherwise conglomerate of low margin businesses. Perhaps with the exception these days of the advertising arm.
Microsoft and Google copied the model and after spending insane amounts of money managed to scale their clouds into profitable bizz as well.
CapEx is supposed to be an investment in a profitable asset that you only need to depreciate over the useful life of the assets according to smart box ticking accountants.
What if CapEx on cloud is now not an investment anymore but an ever and yearly rising cost of doing business.
Amazon’s 200 billion doesn’t all go towards AWS but I bet a big enough chunk of it is.
Holland Park has no interest to invest in loss making stocks. I’m not smart enough to understand them and simply put them in the avoid and too hard box.
Amazon make 717 billion in revenue in 2025. If we are to believe the accountants net profit was about 78 billion dollars. Management is still keen on executive compensation and the outstanding shares increased from 10.72 billion into 10.83 billion. Diluting shareholders is not friendly in my book. Dividend a big fat zero. Not giving shareholders, a warm fuzzy feeling either.
Free cash flow dropped like a rock. 32.88 billion turned into 7.7 billion in 2025 according to the overpaid accountants. CapEx in 2025 was already a huge $131 billion.
Operating cash flow was barely higher than CapEx at say $140 billion. So unless you believe Amazon can increase operating cash flow by 43% in 2026 CapEx will win in 2026.
I think the 200 billion in CapEx should now go straight through the P&l as costs. As we have zero visibility if these investments will return any additional revenues or profits that seems fairer. Nobody knows how this AI adventure will turn out ten years from now. Of course, Nvidia is encouraging them to keep on spending like drunken sailors (or worse).
Jensen Huang produced another rock-solid earnings report. No shit.
“Customers must keep spending to grow.
Well, he would say that wouldn’t he?
Despite record profits Nvidia is barely reducing the outstanding shares. The dividend yield of 0.02% is for all practical purposes zero. Jensen in 2024 reduced the dividend from 4 cent a quarter to 1 cent. What greedy bastards. What on earth is the green logo company doing with all the cash it is making? Capital allocation not exactly shareholder friendly here. At least NVDA doesn’t have a CapEx problem.
But in the meantime, Amazon is now loss making in my world. Same for Microsoft. Et tu Alphabet. Tesla was never in doubt. Meta don’t get me started.
Apple has played AI different. The bargain of the century was to just get AI from Google for a mere $1 billion a year. CapEx of 12.72 billion was only about 11.5% of operating cash flow in 2025. CapEx also added up to a mere 13% of the free cash flow. Still free cash flow dropped by about $10 billion in 2025 so maybe Apple isn’t getting more profitable for shareholders either.
Tim Cook stays shareholders friendly and reduced the diluted average shares by 0.41 billion shares in 2025. Dividend yield is a meagre 0.4% but at least he increased it by 4% last year.
So, the conclusion is no CapEx problem for Nvidia and Apple. CapEx problems made Meta, Amazon, Alphabet, Tesla and Microsoft loss making in my reality.
Maybe SpaceX can buy Tesla soon as well as the cash burn looks unsustainable.
In the past I have said valuations for the S&P 500 and Nasdaq 100 index looked reasonable for the expected earnings growth rates. FactSet had the q4 S&P 500 index earnings growing ten percent plus again.
Epic fury is on my mind when I realise 20% of the S&P 500 index may be loss making. That increases to a cool 36% for the Nasdaq 100 index. Hmm not good.
Officially the forward P/E for the S&P 500 index is a reasonable (for these growth rates) 21.6. The forward Price Earnings ratio for the Nasdaq 100 is about 24. Not too bad either.
If you believe the MMAAT assholes will keep spending your money like drunken sailors, it may be time to push the sell button. At any rate I just did. Amazon at 212 times price to free cash flow. Tesla at 180 times price to free cash flow (never directly owned).
Never sell your winners. Oh well...
This CapEx spending if it doesn’t work could drag the indexes down with it now. Like a sinking ship. The rats might all drown.
Adjusted for the loss-making companies I have the Nasdaq 100 at a forward P/E of about 50. That about halves the forward expected return. Equal weighted Nasdaq 100 ETF here I come!
The S&P 500 loss-making adjusted forward P/E is around 35. Equal weighted S&P 500 ETFs come and rescue me!
In one of the best scenes of the Wolf of Wall Street movie there is talk about a “Fugayzi, fugazi. It’s a whazy. It is a whoozie. It is fairy dust.” Whatever. Management of MMAAT stonks have been very good at building mirages and castles in the sky.
Fugazi just to make sure all is clear is Wall Street slang for something that is fake, or damaged beyond repair.
MMAAT is damaged beyond repair indeed. What a shame of perfectly fine companies.
Meanwhile in another reality far from Wall Street in Omaha a new chap wrote the annual shareholder letter this year.
CapEx? Not a problem. Cash on hand? Plenty. Compounding? Check. Culture? Never in doubt. Capital Allocation? Prrrfect. Leverage? Nothing to worry about. SPV of balance sheet bullshit? Nope. Risk management? Got it.
Some folks think BRK could continue to compound at about 10% a year in the long term. We will see…
Berkshire Hathaway I am so so sorry that I was unfaithful in 2025. I am back baby!
Thanks for reading. May the force be with you. Please leave likes, comments and feel free to re-stack.
Paid publications have been turned on recently as my Substack passed its second birthday now and some writers think that the Substack algorithm prioritizes paid blogs over free publications. The free content will stay similar as to how it was. For free subscribers I usually aim to publish one blog a month on things that keep me occupied in the stock market. I will just write more posts for the paid subscribers going forward as well.
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