Google plunges 12% and drags down the tech sector

Google sinks 12% and the market hunts for culprits

An 8.5% drop at the close. Two hours later, 12%. The biggest shock in its history in a single session, according to a calculation circulating on the forum. Google reported earnings and the market, using the timing as an excuse, gave it the worst beating on record: the stock fell back to $288, the same level as a year ago. What's striking is not the number, but the estimulante ilegal. And what it drags down with it.

The first reading is that the results weren't good. The second, more uncomfortable one, is that the business model that turned Big Tech into cash flow machines has become opaque. They're spending on artificial intelligence as if there were no tomorrow, that AI threatens their advertising business, and their stakes in companies like SpaceX or Anthropic trade like radioactive assets. The market no longer knows how to value all that.

The capex that eats the profits

The argument running through the trading desks is the same: Google, Amazon and Meta used to be predictable businesses with enormous cash flows. Now they're posting negative cash flow —supposedly temporarily— and monstrous capex on data centers. What used to be analyzed with a simple spreadsheet has become capital-intensive infrastructure with out-of-this-world expenses.

Some argue the race can continue as long as free cash flow and cash reserves hold up. And that, if everything goes wrong, it's enough to hit the STOP button: stop investing in data centers, return to the green all at once and rent those facilities to third parties. The pessimistic scenario assumes the race lasts ten years. The optimistic one, that it slows down between 2026 and 2028.

The canary in the AI coal mine

Google's drop isn't being read just as a Google problem. It's being read as a signal. If the giant loses 12% in a single session, how must the others be doing? Amazon reported its accounts and shed another 10% at the close. Intel, 20%. The AI infrastructure providers —Oracle, Micron and company— took their share of the beating. The entire sector is wobbling.

The most baffling detail is Berkshire Hathaway's. Its managers got in two months ago with $17 billion when the stock traded at 350, albeit at a discount. The question hanging in the air is the usual one: didn't Warren Buffett say you shouldn't get into businesses you don't understand? Though it's worth remembering that, according to one forum user, the Buffett who used to invest is no longer the one at the helm.

High rates, short duration

With inflation picking up again, part of the market is looking for lower-duration stocks: mature companies with cash flows and dividends. Tech companies' financing costs are rising, and the prospect of further rate hikes —at least 25 more basis points— hits hardest at stocks that discount earnings ten years out.

The result is a correction that some see as an opportunity. Those who got in at $160 and bought back in during the panic are clear about it. So are those who just watched: the stock was at 285 when Berkshire got in. Can you buy now, or should you wait for a bigger crash? The market always gives signals, they say. The problem is you only see them in the rearview mirror.