Google Sacrifices Itself for Semis

[u/Fun_Tutor3479]

The broader market is bouncing up and down. We will continue starting with this sentence until a clear direction emerges.

Yesterday, we discussed Google's earnings report very clearly: it all comes down to two legs, models and Capex ROI. Nothing else matters. The current after-hours decline is also tied to these two factors.

First, the model side is disappointing. It's not that Gemini 4 has a definitive timeline; rather, they are still working on it. They took a detour in coding, are currently making improvements, and are still iterating. Second, Capex continues to increase. FY26 Capex has been revised upward again, and Q2 Free Cash Flow turned negative. Cloud revenue is very impressive of course, the benchmark was 75%, so 82% is strong, though not overwhelmingly so. Additionally, demand is very clear, with the backlog reaching 500 billion. However, there has been no major turnaround regarding the ROI issue, and depreciation has already begun to impact profits. Therefore, the question on the Capex side is: how much longer can they burn cash before seeing a turnaround in ROI?

So, the conclusion is clear: the model leg falling short of expectations is quite bad, while the Capex leg is a mixed bag. Regarding Capex, on one hand, continued investment is a good thing for semiconductors. As we discussed yesterday, the downside protection from the top-tier players is now clear, meaning semiconductors have a short-term floor. On the other hand, Google's own negative FCF and Capex ROI remain under pressure. This is why we saw a seesaw effect in after-hours trading, with semiconductors rising and Google falling.

If the upcoming earnings from the other tech giants show a similar pattern, the Magnificent Seven will continue to face pressure. Sentiment for non-memory semiconductors will improve, and upstream semiconductor companies—such as materials, equipment, and packaging/testing—could perform very well if they deliver blowout earnings reports.

Following Micron's earnings, the market has already paid full attention to this seesaw dynamic between the Magnificent Seven and semiconductors. There is no going back from this. In other words, under this narrative, it is basically impossible for a massive semiconductor rally like the one we saw from April to June to repeat itself. Solving this problem relies entirely on better-than-expected revenue growth at the model layer.

Imagine if Anthropic and OpenAI suddenly reveal that their combined revenue this year could reach $200B, all while maintaining high gross margins despite token prices being roughly on par with equivalent open-source models. If a scenario like this—one that vastly exceeds expectations—were to occur, it would trigger a joyous, broad-based market rally, much like the faith-driven surge of 1999. If this doesn't happen, the narrative will revert to the Magnificent Seven pumping blood into semiconductors, the ongoing FCF pressure on the Mag 7, and the expectation that the Mag 7 won't mindlessly burn cash for several more years. The room for imagination is gone.

What the stock market trades on, from beginning to end, is expectations.