Alphabet (GOOG/GOOGL): GOOG reported mixed results and guidance for 4Q24 and 1Q25 relative to Wall Street and expectations.  The shares dipped about 7% in response but remain up about 1% this year after gaining 14% in 4Q24 and 35% last year.  4Q results were strong and exceeded expectations in the advertising-supported business at Search and YouTube.  Cloud grew 30%, but that was below expectations and a deceleration from 35% in 3Q24.  Guidance indicated that slower growth lies ahead in the first half of 2025 due to strength in the dollar and tough comparisons at Search and YouTube and capacity constraints at Cloud.  Given the intense scrutiny faced by GOOG and secular concerns about the impact of AI on Search and the debate over the return on massive investment in AI infrastructure, GOOG shares are likely to take time to recover and resume upward.  However, that is what we expect and despite the new controversy, we think there were many items in the earnings report that support sustained and superior secular growth for GOOG.

First, management offered detail on the impact of Gemini AI search summaries accompanying the usual search queries.  Engagement is improved and, importantly, there appears to be strong monetization of Gemini summaries with no discounting.  AI summaries are also opening up more ad opportunities, particularly in shopping queries.  The secular bear case for GOOG is that AI will undercut the company’s dominant and highly profitable search business.

Second, the Cloud shortfall raises questions about growth and the eventual return on the massive capital spending on AI infrastructure.  Even after big capex guidance increases from Meta Platforms and Microsoft, GOOG’s announcement that 2025 capex would rise to $70-75 billion (vs. expectations for low $60s) was a big surprise.  Management stated that the Cloud shortfall was due to a lack of capacity.  Their argument was supported by the fact that Cloud operating profit margins rose even though revenue was below budget.  Furthermore, the more AI intense areas of the Cloud business saw the fastest growth with more mundane cloud services lagging.  Capacity constraints and high margins strongly suggest that increased investment is warranted.

Finally, YouTube had another great quarter and there is little to complain about.  Recent third-party studies show YouTube has the largest share of video viewing and is extending its lead.  Only Netflix is keeping up with YouTube’s usage growth.

Disney (DIS): DIS shares initially rose following better-than-expected 1Q25 results.  EPS came in well ahead of estimates with segment level profits ahead of estimates in each division.  Revenue matched expectations at the corporate and segment level.  Management reiterated its recently issued full-year guidance that was part of a well-received three-year outlook given just three months ago.  Investors found fault with the lack of guidance increase given the big beat, worrying it implies below target growth for the rest of FY25 and lower confidence in the three-year outlook.  The shares subsequently retreated and now sit down a little from pre-earnings release levels.  This seems overly pessimistic to us since management was asked about the lack of a 2025 guidance increase and noted that it was just too early in the new fiscal year and too soon since the guidance was established to increase the outlook.  Management also admitted the current guidance could be conservative.  A few estimates were raised above current guidance, an unusual occurrence for brokerage-employed analysts.  Supporting the view that management is just being conservative is positive bookings for the Orlando theme park even as Universal’s Epic theme park in Orlando is opening a major expansion in May.  Theme Parks represent over half of Disney’s profits and have endured slower profit growth recently on the combination of hurricane impacts, expenses for new cruise ships, and a modest softening of demand.  Trends in other divisions also look solid with the run to profits in streaming appearing stronger than expected, ESPN growing steadily, and the linear TV networks business weak but no longer worsening.  Northlake maintains high confidence in DIS shares and thinks the stock could be a big performer later this year as earnings estimates rise.  At less than 20 times earnings for one of America’s most beloved brands, the shares look very attractive.

SONY (SONY): Earnings announcement expected on 2/13.

GOOG/GOOGL, DIS, and SONY are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.